Niall Ferguson: U.S. Fiscal Crisis in 2 Years

Gold: Long-Term Trend

(Thanks to http://www.chartoftheday.com/20100618.htm?T)

Today's chart provides some long-term perspective in regards to the gold market. As today's chart illustrates, gold has been in a strong bull market since 2001. The pace of that upward trend increased beginning in mid-2005. Following the financial crisis of late 2008, gold surged once again. While gold made another record high today, it still trades significantly below resistance (red line) of its upward sloping trend channel. In the end, with gold currently trading near $1,250 per ounce, gold has more than quadrupled in price during its nine-year bull market.

Global rates of corporate default fall [well...sort of]

A recent article by the Financial Times makes reference to fall of corporate defaults between the month of April and May 2010. However, the authors mention that this may be an aberration, namely that:

measures of corporate distress, which track borrowing costs for junk-rated companies, rose last month amid growing concerns over sovereign debt. While levels are much reduced from a year ago, Moody’s speculative-grade corporate distress index rose to 14.9 per cent at the end of May, up from 14.1 per cent in April in the first rise since February.

Rating agency Standard & Poor’s is finding a similar trend. Its distress ratio, which tracks the number of high-yield securities trading at spreads greater than 1,000 basis points relative to US Treasuries, rose 40 per cent from March to May 14.

A rising distress ratio typically proves to be a precursor to more defaults if accompanied by a market disruption, S&P said.

The article further quotes S&P:

In the slim chance that the economy experiences a double-dip recession, many of the surviving leveraged issuers originated during 2003-2007 could face renewed default risk unless they significantly reduce their debt burdens.

It is not a matter of if, but rather when. We have entered into what i believe is the second leg of the crisis that began in the spring of 2007. Unless drastic changes in the meddling fiscal and monetary policy occur, the Dow Jones and S&P 500 will fall significantly below the March 2009 lows.

European Debt Problems: In Plain English

Signals Still Point To Danger Ahead

This graph comes by way of the Financial Times (6/5/2010 edition). It represents a high level indication of where we are in the market presently. It does not paint a good picture to say the least. Across the board we are witnessing an increasing sensitivity to how volatiles markets can be. This observation is nothing new, yet market participants always (from time to time) ignore the warning sings. Hope is still being maintained; however, when all investors recognize the fact that the world major economies have been artificially propped up, a significant collapse is order.

That said, when that occurs, you should see a rise in prices in the secondary market for U.S. government debt. This provides a buffer to the Federal Reserve to print more money. While in the near term the Fed’s action may prop up the market, it is ultimately doomed.

Pay close attention to the graph of the price of copper. This commodity has been attributed as being the metal with a PhD in Economics, because it is highly correlated to the business cycle. An increase in the price of copper signifies higher demand for other higher order products, which is representative of a booming market. The opposite is true: a lower price signifies lower demand, which is indicative of a depressed market.