1. Is June 30 America’s Debt D-Day?
Pimco’s Bill Gross wrote in his March 2011 Outlook, “Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets.” He presented the following three charts illustrating how Treasury ownership has changed, and asking where it will go next:
Gross writes: “If on June 30, 2011 (the assumed termination date of QE II), the private sector cannot stand on its own two legs -– issuing debt at low yields and narrow credit spreads, creating the jobs necessary to reduce unemployment and instilling global confidence in the sanctity and stability of the US dollar -– then the QEs will have been a colossal flop.”
Peter Peterson seconded the concern, writing in the FT that America has “become dangerously dependent on foreign lenders; already, they hold almost 50 percent of US federal debt, up from only 5 percent in 1970. A debt-induced crisis could take several forms: a collapse of the dollar, a sharp rise in interest rates, a significant increase in inflation and protectionism, and a sharp rise in unemployment.”
2. The Economy Keeps Improving
The Federal Reserve’s Beige Book released yesterday reported that “overall economic activity continued to expand at a modest to moderate pace in January and early February,” with 11 of 12 districts experiencing “solid growth in manufacturing production.”
Such evidence, along with a strong ISM reading and a cyclical recovery in corporate profits that’s been “so strong as to offset some of my concerns,” led Doug Kass to declare: “over the past 12 months I have been far too cautious and dogmatic in my ursine outlook.” He’s worried now, however, that some improvement is due to simple “recession fatigue” and sees nontraditional threats as “a cloud over intermediate-term growth.”
3. Apple Extends Its Lead with iPad 2
Apple (AAPL) unveiled its second-generation tablet, the iPad 2, yesterday. It’s 33 percent thinner than its predecessor and, at just 8.8mm, even thinner than the iPhone 4. It weighs 1.3 pounds, less than its predecessor’s 1.5 pounds. It packs front and rear facing cameras, a new A5 dual-core processor that zips through images 9 times faster than before but consumes the same amount of energy, and a battery that lasts 10 hours.
Apple CEO Steve Jobs said, “While others have been scrambling to copy the first generation iPad, we’re launching iPad 2, which moves the bar far ahead of the competition and will likely cause them to go back to the drawing board yet again.” Quickly, too, because the new model goes on sale March 11, much sooner than rivals expected. Apple sold 15M units of its original iPad in Apr-Dec 2010 — more than every tablet PC ever sold — generating $9.5B in revenue and capturing more than 90 percent market share.
Rivals appear to be “flummoxed,” as one of Jobs’s slides put it. Motorola’s (MMI) Xoom is the first tablet to run Google’s (GOOG) Android 3.0 for tablets (aka Honeycomb). Like the iPad 2, it packs a dual-core processor, front and rear facing cameras, and HDMI out. However, it’s heavier than both the iPad 1 and 2, more expensive, and currently lacks the number of apps that Apple boasts for its iPad. More Android devices are rushing to market, but CNET’s David Carnoy thinks that works in Apple’s favor because “it creates confusion for the consumer (which Android tablet should I get?) and makes the iPad 2 stand out even more as the simple, safe choice.”
Have a great day!
The Kelly Letter
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You wrote yesterday about the 2 possibilities for the resolution of the massive national debt: careful, deliberate action on the part of Congress, or continued spending until the system spontaneously collapses. I think we all know which scenario is most likely to happen.
My question is: what should we be doing now, if anything, to prepare for this eventuality?
Jason, along Ron’s inquiry. I am considering moving more into precious metals, commodities or other tangible investments based on your newsletters advice to wait for Tier 1 and Tier 2 entry after a correction. It seems like a correction may be months, or longer away. Do you have a recommendation for recent subscribers who are sitting on cash?
Timing is the key, of course. These kinds of imbalances can build for years, even decades, as Japan’s experience is proving. The worry now is that America has already gone through decades and seems to be on the parabolic spike part of the imbalance path.
Remember, Debt D-Day doesn’t necessarily mean an implosion. It will probably mean the shell game will continue for another time frame because, against their better judgment, buyers show up at the Treasury auction. I recall $1T, $5T, and $10T national debt all looking insane and like the end of times to me and other financially sensible onlookers. Yet, here we are at $14T and we’ve been through many fantastic periods in the stock market along the way. While $20T sounds insane, we might have to get that far into la la land before anything matters. Maybe $30T. Maybe $100T. When money gets funny, funny things happen, and we’ve been spending funny money for most of my adult life.
Thus, while we need to keep an eye on the growing imbalance, we also need to tread carefully in whichever direction we decide to go. Commodities, yes but that’s hardly a novel idea now that they’re up hundreds of percent in recent years. My own personal favorite commodity is oil. It’s the best-connected sector politically, is nowhere near disappearing due to alternative energies, and is managed by the best businesses on Earth. I realize that investing in oil requires moral considerations, but since we’re discussing investments and profit here, I vote on that sector as one likely to thrive regardless of what economic disaster unfolds. No matter what the world is spending in the near future — dollars, IMF SDRs, seashells — you can be sure a lot of them will get allocated to oil.
Frankly, I think we’re cruising for a major war over oil. Small countries may squabble over food stores, but big countries go to war over oil. With China, et al. working around the clock to shore up their share of the remaining reserves, it’s just a matter of time until demand exceeds supply to such an extent that price alone is no longer sufficient for determining allocation. When the market fails and politics fail, warships come to the fore.
I’ll be covering these and similar subjects in the letter, so stay tuned there.
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