Crisis Strategy: Coping With Trillion Dollar Deficits 29 comments
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James Dale Davidson provides some essential tips for your investment strategy during this credit crisis. The government had admitted that we face trillion-dollar deficits for years to come. And who knows how much bigger the budget hole could grow with companies like GM lapping up Uncle Sam’s bailouts. But there are always way to protect your wealth… and even make a profit.
The dollar’s down, but it’s certainly not out.
- From mid-July to the end of November, the U.S. Dollar Index rose a whopping 23%. This tracks the value of a dollar against six major currencies.
- Anyone who knows anything about currency trading knows it’s not normal for a currency to move 23% in such a short time. Forex traders consider a one percent daily move to be big news.
- So it would make sense that the U.S. Dollar Index would have to see a rapid price decline after rising 23% so quickly. It has to go back to the mean, after all. And that’s exactly what happened. The dollar fell 11% between mid-November and mid-December.
- But this drop doesn’t necessarily signal the beginning of a new downtrend. As of now, it only signals a correction. We can see this by looking at a chart below
- As long as the dollar stays above its 200-day moving average, the recent uptrend will stick. But that’s not to say we won’t see dollar weakness ahead.
- It’s possible for the dollar index to trade between 78 and 88 for the next two or three years. It could even move past 88. But betting that it will move under 78 is premature. If you really want to capitalize on a drop in the dollar, wait for a confirmation of the downtrend by allowing the U.S. Dollar Index to trade under 78 before shorting.
- At that point, you could make some good money buying up the Rydex Weakening Dollar 2x Strategy H ETF [MUTF:RYWBX] . For every one percent the dollar losses, you gain two percent. And with Bernanke dropping money from helicopters, it is only a matter of time before the dollar starts seeing bigger drops. [Editor's note: For ETF investors, the PowerShares DB US Dollar Index Bearish ETF (UDN) offers a non-leveraged 1:1 short on the U.S. dollar.]
The Congressional Budget Office estimates that the 2009 budget deficit will reach $1.2 trillion.
- That was one day after President-elect Obama said, “Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery that we are working on at this point.”
- The government has already backstopped the financial markets to the tune of over $8 trillion. Now our politicians are starting to spend obscene amounts of money in a failed effort to “jump start” our economy.
- If the markets continue to suffer, the government will have to cover losses for years in the future. This means they will continue to create funny money to cover those losses. And inflation should become a big concern.
According to Bloomberg, General Motors (GM) said it has enough government loans to cover its worst-case forecast for U.S. auto sales and won’t need more if the economy holds up.
- It’s extremely difficult to believe that a one-time loan to GM would be enough to fix their problems. A former Merrill Lynch auto analyst has said that GM’s plan “all depends on a lot of difficult-to-forecast factors, like the size of the market.” And during congressional testimony, another analyst said Detroit would need up to $125 billion to become whole again. This is very different from the less than $20 billion that GM and Chrysler got from the government in December.
- The truth is that GM is taking a big fat guess on the amount of taxpayers’ money it needs to stay afloat. And to make matters worse, it seems GM’s management is far too detached from reality to make a good business decision.
- Considering GM’s current predicament, why would anyone believe GM to be right about its super-ambitious forecast? Don’t believe a word of it. GM will ask the government for more money this year… more losses will force the government to create more money… and the politicians leading us will be “forced” to spend more to try and “buffer” a recession in vain. Buy gold.
Disclosure: Long GM
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As for the banks, they are the ones with their overpaid staff who managed to invent fantastic financial products that were going to keep us rich for ever, but which in fact has pushed us back years in terms of our personal wealth. The money they get had better be used to repair the situation on main street not the Wall Street and similar offices of the fat cats who sit there.
The trillion dollar deficits will result going forward in a fall in the dollar, especially when people worldwide take "quantititive easing" (printing funny money to you and me) into account. Who wants a currency based on the speed with which it can be printed?
Obama and those in power had better pay real close attention to what really happens with our bail-out money: those trillions of dollars have got to be repaid sometime, and it's us, our children and grandchildren who will be making the payments.
The "Full Faith and Credit” of the US government (politicians) is the only inherent value of a dollar.
Now take that "Full Faith and Credit," and divide by (the amount of national debt + non-distributed bailout funds + promised entitlements)
The answer = F.2. [i.e. The dollar is F'd.]
In the denominator, add a military that cannot back out, loss of manufacturing jobs, and hedge the dollar amount of Treasuries bought by Japan + China, then:
The adjusted value of the dollar is F^2. [The dollar is really F'd.]
I have no faith in politicians. And the "credit" of the Fed and Treasury is looser than a Bankok... well, I digress...
"Hope" and perky "optimism" are empty words that will not make the Treasury+Fed+Congress act responsibly.
Buy DXO, DYY, FEED, HOGS.
AS FOR AMERICAN BUYING AMERICA CARS? DON'T HOLD YOUR BREATH...AMERICANS WON'T BE BUYING MUCH OF ANYTHING AT WALL MART WAGES!
Case in Point:
I raked up $200K credit card debts
My total annual household income is $120K before tax
My 1st mortgage and HELOC per month payments are $1.5K
My After-Tax take-home pay is $70K after all deductions including 401(k) contributions per year
My annual expenses including food, insurance, transportation and all other expenses are $50K
Without adjusting for inflation, salary raises, my annual contribution to debt reduction payment is thus $20K per year.
****It will take me roughly TEN (10) years to reduce my credit card debts to zero**** (Assumption: If me and my spouse would have uninterrupted employment in the next 10 years) --- Rude Awakening---
So how long will it take us to repay our national debts in simple English?
The simple answer to your question is: forever, since the debt continues to rise faster than revenues which could be used to pay it off. This is why myself and many others consider currency devaluation or default the most likely events coming.
Thank you for your swift comment that answered well my question. I would agree with you -- things look pretty grim.
Before I become a pest, allow one tiny more question that arises from your answer. Elsewhere in the SA my other comment questioned if nations around the world would "allow" the US to de-valuate the dollar (meaning they would follow suit). But say indeed we "succeeded" in the de-valuation, what will happen to our national debt? Would it get better or worse? And since a lion share of my 401(k) is in TIPS, what would de-valuation do to TIPS? Up or down? I don't mean to get free investment advice, but I' m curious as a non-finance guy.
On the other hand, if de-valuation is indeed coming I see that there might be a mass exodus to exit the U.S. dollar in exchange for another currency. I guess that would probably be the Japanese Yen. Is there a Japanese Yen TIPS or TIPS fund equivalent to buy in the open market; and if so how convenient would it be to trade that?
Note that I have left open your other suggested outcome possibility of "default", as personally I don't believe that we are about to become another "Ecuador" as yet. [No offense for mentioning that country which recently defaulted, just handy]
On Jan 16 03:35 PM SW Richmond wrote:
> Teutonic Knight,
>
> The simple answer to your question is: forever, since the debt continues
> to rise faster than revenues which could be used to pay it off.
> This is why myself and many others consider currency devaluation
> or default the most likely events coming.
>
Get over it GM is here to stay you and your Toyota republicans get that through your head...THIS IS UNITED STATS OF AMERICA... NOT AS YOU WISH UNITED STATES OF ASIA...GET IT?
THE $17 BILLION LOAN IS JUST THAT A LOAN IT WILL BE PAYED BACK... CONTRARY TO THE $3.2 BILLION THAT YOUR TOYOTA REPUBLICANS GAVE TO THE FOREIGN TRANS PLANS THAT MONEY WILL NOT BE PAYED BACK.. SO IF YOU'RE LOOKING FOR YOUR TAX MONEY ASK SEN. SHELBY AND SEN. CORKER...AND GET OFF GM'S BACK.
Yes, the politicians assumed that Americans were too stupid to realized that they lowered the dollar number of "loans" by diverting "grants."
For GM, this was an especially tasty giveaway, because they already sell an Opel diesel-electric hybrid in Europe.
The shouted Toyota Republican insults are unneccessary.
1. This article is about federal deficits. The states that used incentives to lure automakers used *state* money and made it all back.
2.Non-union manufacturing workers contribute just as much as union workers.
3. The new manufacturing sites are essential to the USA's manufacturing ability. They gave American manufacturing jobs to Americans who did not manufacture anything in America. VW is building in my birth city of Chattanooga, TN. It is a crap city, with abandoned foundries and crack whores everywhere. VW is a savior. VW did not take your job, and Toyota did not do anything to you.
4. Constructe did not attack you or your union coworkers. He pointed out that GM management has made continual marketing errors and has been fighting the unions. His comment supported your point of view.
Since Hyundai, Honda, Ford, and GM all produce quality vehicles in the USA, with American labor, what is it about the Asian brands that makes you shout things such as "THIS IS UNITED STATS [sic] OF AMERICA... NOT AS YOU WISH UNITED STATES OF ASIA...GET IT?"
Without these plants up and running, the $1.2 trillion deficit that the article is about would be far worse. There would be fewer Americans in manufacturing, and the ability of the USA to do this kind of work would have eroded more than it has.
To the best of my knowledge, no one is currently selling a diesel/electric hybrid. Too expensive.
LOL.
GM, and all of Detroit, has been sucking off the government's teet for years.
Do yourself a favor and do some research on USCAR and PNGV. Both were simply plans to funnel our money into Detroit's coffers. They funded projects which were supposed to lead to new, more efficient cars, but Detroit instead pocketed the money and never delivered the product.
What are those pills to improve memory? I can never remember.
From www.hybrid-cars-guide....:
"Introduced in the 2005 North American International Auto Show... the Opel Astra GTC Coupe is equipped with a 125-horsepower, 1.7-liter CDTI diesel engine plugged to twin electric motors... The Opel Astra GTC Coupe diesel hybrid will be sold in Europe, but not in the North American market."
This link supports your teat comment and makes me feel slightly less senile. While searching for memory meds, I found some blue pills. I couldn't remember what they were supposedly for, but it turns out that I don't care.
"Hybrid diesel electric car has been under development in the U.S. since the early 1993, but only the Dodge Ram has reached production yet.
The Dodge Ram Diesel hybrid is built on the Ram Heavy Duty (2500/3500) chassis and is equipped with diesel/electric hybrid propulsion."
Now anyone paying attention knows that there is no Dodge Ram diesel electric hybrid in production.
And the same goes for your Opel Astra. Yes, GM has done a concept version and shown it at auto shows, but the cost/payback is just too poor, as I stated earlier. They are not producing the car.
Try this:
"While it has looked like Peugeot would be the first company to market a mainstream passenger vehicle with a diesel hybrid powertrain, it now looks like it won't come as quickly as previously thought. PSA (parent company of Peugeot and Citroen) has been developing a diesel hybrid system in cooperation with suppliers Bosch, Continental, Valeo and Thyssen-Krupp. The system was originally supposed to debut in the compact Peugeot 308 in 2010. The cost of developing the system was to have been partially subsidized by the French government. With the European Commission putting the screws to that plan, PSA and its partners will move forward without the handout. As a result, the company has decided that in order to recover those development costs, they need to apply the system on a more expensive model first, which of course means the volumes will be lower. The change in plans also means the new powertrain won't appear until at least 2011. At the current rate, Peugeot may still be first to market, unless Mahindra's plans for a diesel hybrid version of their pickup come to fruition in 2010."
www.autobloggreen.com/.../