Marc Faber thinks US Govt could go bust

Investment guru Marc Faber says the financial system must be cleansed to save capitalism.

"I think the final low in markets will occur when the system is cleaned out," Faber told CNBC.

Unless that happens, "the way communism collapsed, capitalism will collapse," he says. "The best way to deal with any economic problem is to let the market work it through."

He sees the Federal Reserve and other central banks continuing to print piles of money. And the outcome won’t be pretty.

"The U.S. government for sure will go bust,” Faber says. “That I guarantee you. Not tomorrow, but it will go bust."

He isn’t optimistic for the fate of the global economy either.

“I don’t think that the global economy will recover anytime soon,” he says. “And we have to define what a recovery is.”

If economic output drops far enough, a mere revival of inventories can push growth up a bit, creating a mild rebound, Faber says.

“I take 2006 and early 2007 as the peak of prosperity in this long cycle, and I don’t think we’re going back there anytime soon.”

Many other experts share Faber’s bearish view of the global economy.

“The debate will continue on whether it’s going to be a V, U or L-shaped recession,” former World Bank president James Wolfensohn said at a recent conference.

“My own judgment is that it’s more likely the latter. I don’t believe we’ll get a quick fix any time soon.”

More is Coming.....Be ready

I agree..more the risk is on the downside. Be ready.

From Money & Markets...

The easy monetary policy from 2001 to 2005 induced the biggest real estate bubble of all time to develop. As forecast by Mises and Rothbard’s theory of the business cycle, it was the bursting of the housing bubble that has done all the economic and financial damage you’ve witnessed during the past 18 months.

The Bigger the Burst Bubble … The More Devastating the Recession to Follow

The Best Short-Selling Opportunity of the Year

I'm getting tempted to jump in on the market....however, it is that time of year which is sell in May and go away. Market is over brought and due for a correction. So I will wait.

From Jeff Clark of GrowthStock Wire

Buying into these conditions, however, is rarely a smart move. The risk/reward weathervane is blowing strongly in the direction of risk. In fact, we're rapidly approaching the best short-selling opportunity of the year.

Omaba! - Places new taxes on US Corporations

Omaba! announced new taxes on US corporations. I think their earnings will get hit with these new taxes. If earnings are affected negatively, then stock prices will fall. I do not think that the market will continue with its recent rally given that corporations are facing higher taxes.

Weekly Market Briefing

From TSG Stock Market Letter
Week Ending April 24, 2009

Market
It has now been seven weeks since this rally began and this week
stocks took a break. Since hitting its low in the first week of
March, the S&P500 is up nearly 28%. Last week we mentioned that
the S&P500 index was 9.6% above its 50-DMA and that is about
where it stayed this week (9.5%) so stocks remain overbought.
But indexes are also still banging up against key resistance
areas that taken together with how overbought stocks are across
the board, increases the chances for a correction. And now this
rally is losing momentum. If prices hold up it will show that
investor demand for stocks is increasing despite the technicals
pointing to a drop. But that must be considered a long shot.

Interest Rates
US Treasuries with a net drop (redemption) of $97 billion in Treasuries by foreigners in February in the latest Treasury international capital flow (TIC) data. This followed a record net redemption of $148.9 billion by foreigners in January.

The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to an recent estimate by UBS. How does this compare with past Treasury sales? From October through December, the Treasury sold a record $569 billion, up a whopping 693% from the $82 billion it sold during the same period a year earlier, and auctioned another $493 billion in the last quarter up from $156 billion the year before according to Bloomberg, as the government increasingly finds itself squeezed between rocketing expenditures and collapsing tax revenues

Obama plan to raise tax revenues 40% by 2013 and the impact it will have on taxes and the economy. Unless the economy experiences a miraculous recovery, increasing the tax burden amid a declining economy is not only an extremely bad idea, it turns Treasury’s gargantuan task of financing the rapidly rising debt burden as spending soars into Mission Impossible.

What does this mean for traders and investors? First, this is inflationary because if history is any guide, the government will print more money and employ more helicopters from which to throw it into the economy, a methodology euphemistically labeled “quantitative easing.” The next all-too predictable development will be strong upward pressure on interest rates as U.S. Treasury investors demand higher returns to offset their losses due to increasing inflation.

In this increasing hostile investment environment, any investment strategy will need to take rising interest rates and increasing inflation into account.

Insiders are Unloading Shares

April 24 (Bloomberg) -- Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.

Federated’s Tice Says S&P 500 Is Poised to Plunge 62%

April 16 (Bloomberg) -- The Standard & Poor’s 500 Index’s 28 percent rise since March 9 is a “sucker’s rally,” and the overvalued measure may plunge 62 percent as earnings continue to shrink, according to David Tice of Federated Investors Inc.

Quote of the Week

“When we look at the systematic financial system we’re in, and it affects every country in the world including Canada, I think staying bearish is the route to go,” Economist Nouriel Roubini.

Jim Rogers says...we're in trouble

In an interview with Bloomberg TV, aired Tuesday, Rogers says the US risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, and urges Washing to let AIG - which notched up the biggest Q4 loss in corporate history - go bankrupt:

“The US is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and author of books including Investment Biker and Adventure Capitalist. “That’s bad economics”.

In other cheery remarks, there were lots of dire warnings but not many solutions in Rogers’ predictions that the US is repeating the mistakes made by Japan in the 1990s and risks creating “zombie banks” by rescuing failed financial services companies that should have been allowed to go under.

His most useful point is possibly that we should all be buying farms and agricultural producers.

And in a characteristically counter-intuitive tack, Rogers warns that oil prices (now floundering around $47 a barrel after last year’s highs of more than $147), may rise to record levels due to waning reserves and a lack of major field discoveries: “Reserves of oil are going down all over the world…The price of oil has to go much, much higher. I don’t know if the oil price will go up to record level in three years or five years. I don’t know when but I know it is.”

Finally, the spectre of inflation also disturbs Rogers - although he owns gold and silver, he adds, calls to return to the gold standard are “not going to solve our problems”:

“People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure…We’re going to have serious, serious inflation down the road… I wish I knew when.”

Thanks, Jim.

And here are Rogers’ other main points, courtesy of FirstAdopter:
- This is a bear market rally that can last days, weeks, even months
- He is worried about government debt market. In a few months, they have quintupled government debt
- Massive short squeeze on the U.S. dollar from forced liquidation. It’s an artificial rally
- He owns the yen and the dollar, not sure where to put the money. Maybe real assets
- The only asset class that has fundamentals improving are raw materials and commodities
- He owns some gold, but thinks there is more money to be made in agriculture and silver. IMF is trying to sell their gold, which may hurt it for a while
- Central bank is trying to keep interest rates down, but eventually it will backfire and rate will go through the roof
- If you write-off everything in sight, sure you can show a profit [talking about C, BAC, and JPM saying they are profitable in January and February 2009]
- He is short JPMorgan and covered his Citigroup. He thinks they have gigantic derivatives and off balance sheet exposure, also large credit card division which will be bad
- No position in insurance companies
- Best economic sector in the world next 10-20 years is agriculture and farming. Low inventories and tons of shortages

Stocks bear market has years to run: Prechter

Stocks bear market has years to run: Prechter
Fri Feb 27, 2009 12:28pm EST

By John Parry

NEW YORK (Reuters) - U.S. stocks will remain in a bear market for years as company earnings shrink further, and the S&P 500 could fall by half from current levels even though there could be a sharp short-term rally soon, Robert Prechter, who had forecast the 1987 market crash, said on Friday.

"My long term opinion is that the bear market has several years left to run, and stock prices will go a lot lower," Prechter, chief executive officer at research company Elliott Wave International, said in a telephone interview. "So any rally that happens is going to be a bear market rally."

The S&P this week broke below 745 points -- 19 months after Gainesville, Georgia-based Elliott Wave International had recommended shorting the benchmark index down to that level.

Now, Prechter said, the S&P index could fall by half from these levels over the long term, although he declined to give a specific forecast.

"We are less than halfway through it price-wise," he said. "The market is still overvalued, one reason being that companies continue to lower earnings."

But near term, the risk of a kneejerk rebound in stock prices has risen.

This week Prechter recommended closing out the short position recommended on the S&P 500 back in 2007, because too many investors are now betting that prices will drop.

"The bear side has gotten a bit crowded in the stock market," Prechter said, but said this is a short term strategic view only.

On Friday morning, the S&P 500 fell to a 12-year low around 735 points, mauled by deepening worries about the banking system and government data showing the deepest quarterly contraction in the U.S. economy since the early 1980s.

NO GLITTER IN GOLD

Prechter now advocates betting on a decline in precious metals, after investors fearful about the safety of their money amid the biggest global financial crisis since the Great Depression have piled into the classic safe haven of gold in recent weeks, boosting its price.

On Monday, Prechter forecast that gold had just peaked, at $1,000 an ounce.

"Gold and silver should go significantly lower," he said. "Too many people now think owning them is a good idea. Remember when everybody thought owning real estate and stocks was a good idea?"

Gold, which briefly topped the $1,000 mark last week on escalating fears about the deeply impaired state of debt-burdened banks, has since slipped to about $950. Gold hit "an important intermediate term peak," at $1,000, Prechter said.

"Again, nothing is certain, but I like betting against crowds. And we have had so many to bet against in recent years: real estate, stocks, subprime mortgages, The New Economy, oil, collectibles, commodities, baseball salaries, and now silver and bonds. It's been a smorgasbord of opportunity," Prechter said.

In addition, Prechter has a pessimistic outlook on U.S. government bonds.

"Treasury bonds have started a bear market," over the longer term, he said.

"Several scenarios could unfold to explain why: one of them is that government borrowing demands could go up and up and creditors could demand higher yields," he said. The U.S. government is expected to issue some $2 trillion of debt this year.

Fixed-income analysts have been stepping up warnings that over recent months that gargantuan government bond issuance to pay for financial rescue efforts may push yields, which move inversely to prices, steeply higher. The 10-year yield traded one percentage point its five-decade trough on Friday, at 3.04 percent.

But Prechter, as he originally urged in his 2002 book "Conquer the Crash," which warned of the dangers of a U.S. debt bubble and deflationary depression, continues to favor safer cash proxies such as Treasury bills.

"It's a deflationary environment. Safe cash equivalents are still where you want to be," he said. "I am still in favor of (U.S.) T-bills," he said. "The dollar bull market has more to run. That is one reason to hold them."