February 18, 2011

Market Wrap For The Week Ending 18-Feb-2011

Weekly Snapshot
• China raised its reserve requirements by 0.5% to 19.5%, the second hike this year (WSJ)
• China surpassed Japan to become the world’s second-biggest economy at $5.9 trillion (Economist)
• U.S. Consumer Price Index increased 0.5% in December, seasonally adjusted (BLS)
• U.S. Producer Price Index for finished goods rose 0.8% in January, seasonally adjusted (BLS)
• U.K. inflation rate increased in January, to 4% or double the Bank of England’s target (Economist)
• U.S. retail sales in January rose 0.3% from prior month and 7.8% from prior year (ESA)
• China's consumer price index rose 4.9% in January from a year ago, vs. a 4.6% gain in December (NY Times)
• Euro finance ministers agreed to double the Euro rescue fund €500 billion by 2013 (Spiegel)
• Euro area GDP up by 0.3% from previous quarter and +2.0% compared with Q4 of 2009 (Eurostat)
• President Obama’s budget plan foresees a record deficit of $1.65 trillion this year (ESA)
• Deutsche Boerse will take over NYSE Euronext to create the world's largest exchange operator (Reuters)
• Japan's GDP fell an annualized 1.1% in Q4, as exports slowed and government stimulus faded (Bloomberg)

Market Barometers

st-2011-0218   fx-2011-0218

Chart Of The Week
The new U.S. budget proposal for fiscal 2012 is out.  You can download the entire budget here or skip right to the summary tables which is what I did.

Since the last budget and forecast, the state of fiscal affairs has not improved. It’s just more spending with no end in sight and not even an attempt to get anywhere close to a balanced budget - let alone a reduction of the overall U.S. Debt.  I have taken the liberty of displaying the proposed numbers in a graph and added a regression line to the deficit numbers. I realize this may oversimplify things mathematically (sorry Quants) but it illustrates the simple point that there is a trend when it comes to the U.S. budget.  The trend is clearly downward meaning the deficit is not improving. This makes it increasingly difficult to believe that the overall U.S. debt will ever decrease.  Consider that the cost of financing this unfathomable debt burden has been super low thus far.  Now consider what a 2-3% increase in the cost of capital might do.  In such a scenario, the chart below would be wishful thinking.  Japan, all over again…  

US Budget

Putting some of these numbers into context, here’s a unique way of looking at these $ trillion amounts which seem to be thrown around so casually by officials these days.  Courtesy of Political Calculations comes a neat calculator that converts those billions and trillions into an equivalent quantity of Gold.  Take a look at the projected 2011 deficit of $1.645 trillion or consider the proposed $3.729 trillion in government spending for 2012.  The equivalent quantities in Gold are displayed below: 

2011 Projected Deficit


2012 Proposed Spending

Capture1   capture02
Source: http://politicalcalculations.blogspot.com    

Now for a real fun exercise, I would invite you to run the numbers for total public debt outstanding which is $14.1 trillion give or take a few billion.  As Political Calculations concluded:

“Paying off the entire U.S. national debt in gold would take nearly double the entire amount of gold ever found in the world.”


Recommended Read 
Just in case you’re still wondering why the price of gold is so high, consider this excellent white paper by Chris Goolgasian, courtesy of State Street Global Advisors:  In Gold We Trust

Recommended Video 
Speaking of Budgets, please consider this insightful master class for budgeting Aussie style. Enjoy!

 Good luck and good investing!

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