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‘If you really want a fiscal problem, look at the UK’

  
Analysis, Economy, Education
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uk crisisInvestors are asking if Britain may soon face its own sovereign debt crisis if the government fails to slash its growing budget deficits quickly enough to escape the contagious fears of financial markets.…

“If you really want a fiscal problem, look at the U.K.,” said Mark Schofield, a fixed-income strategist at Citigroup. “In Europe, the average deficit is about 6 percent of G.D.P. and in the U.K. it’s 12 percent. It is only just beginning.”

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the government and its citizens have been able to continue to borrow at interest rates that do not reflect their true financial situation.

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As for the British government, it has been able to finance a budget deficit of 12.5 percent of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.

David Rosenberg of Gluskin Sheff also referred to the piece in his morning missive, noting:

Britain is probably one of the few countries in the world where political uncertainty, a renewed round of house price deflation and a sinking currency can manage to elicit a bounce in consumer sentiment (the country has a Greek-like 12.5% deficit-to-GDP ratio, which is double the European average and a household debt-to-GDP ratio that, at 170%, makes the U.S. household sector downright frugal at 130%

Lessons from Richard Bernstein, David Rosenberg,Bob Farrell

  
  Education
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Richard Bernstein’s Lessons
1. Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important than are capital gains.
2. Most stock market indicators have never actually been tested. Most don’t work.
3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.
4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.
5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations
between the asset classes in a portfolio.
6. Balance sheets are generally more important than are income or cash flow statements.
7. Investors should focus strongly on GAAP accounting, and should pay little attention to “pro forma” or “unaudited” financial
statements.
8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.
9. Investors should research financial history as much as possible.
10. Leverage gives the illusion of wealth. Saving is wealth.

David Rosenberg’s Lessons
1. In order for an economic forecast to be relevant, it must be combined with a market call. (more…)

Japanese Public Debt 2X GDP With Deflation Threat

  
Analysis, Economy, Education
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In summary, Japan has “$9.5 Trillion in public debt”, 2x GDP (192% 2009 estimate, #2 behind Zimbabwe at 3x from CIA.gov) with threats of deflation and falling wages. This is after 2 lost deflationary decades and a loss of 75% on the NIKKEI index since 1990 (39,000 to 9,700 today, 1st chart below). The good news is, most of Japan’s public debt is held domestically in Japanese Yen. Some analysts believe US Treasuries could end up like Japanese Government Bonds (JGBs) and catch a bid even with hardcore reflationary policies (see David Rosenberg’s debate on March, 2010). What about the S&P, would it follow the NIKKEI’s footsteps in a deflationary environment?  Or is the US economic machine too strong for that to happen.A 75% drop in the S&P from the October 2007 peak would be around 400, which is David Tice’s S&P target. What are the odds. Paul Krugman had an op-ed in the New York Times today titled The Third Depression. Hopefully Gold and the S&P move in tandem from here if more $ printing is coming. The 10-Year US Treasury Note is trading at $122 resistance in an ascending triangle (Chart 2) and I’m going to see what happens with the $USD at its 50 day moving average tomorrow.


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