The Week of July 1 2013, in Review

ibovespaKeeping up the Euro - Portuguese Flagdowngrade

Dear PGM Capital Blog readers,

In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of July 1st 2013.:

  • Yield Portuguese 10-year note soared above 8 percent on July 3rd 2013.
  • Gold price stabilizing and ready to soar?
  • Yield of the 10-year US-Treasury note rose to a 22-month high.
  • Polish Central Bank Cuts Interest Rate To All-time low.
  • Brazil BOVESPA at 50-month low.

Yield Portuguese 10-year note soared above 8 percent on July 3rd 2013

Portuguese bond yields surged to more than 8 percent on Wednesday, July 3rd, as a government crisis prompted investors to shun the bailed-out country, insuring Portuguese bonds against default rose to the highest level since November. Ten-year Portuguese yields surged at one point to 8.2 percent – their highest since November 2012 – and were on track for their biggest daily rise since January 2012.

Below Chart shows the yield of the Portuguese 10-year Treasury note YTD.

Portugal bonds

Portugal’s economy will have to grow at a 7-8 percent annual rate to be able to afford servicing its debt at these yield levels in the long run.

The economy contracted 4 percent on an annual basis in the first quarter of this year.

Additionally, the resignation of Portuguese Finance Minister Vitor Gaspar on Monday, followed by the announced departure of the nation’s Foreign Minister Paulo Portas on Tuesday, further undermined the government’s survival.

Bank shares plunged with more than 10 percent on Wednesday, sending the PSI-20, index down with nearly six percent, as can be seen in below chart.

PSI-20 5 day chart

The latest addition to the fear of failure was triggered by the resignation of the two ministers, which was reported to have been prompted by major budget cuts that have drastically reduced living standards in the nation, which is already one of the poorest European states that uses euro as its currency.

Gold price stabilizing and ready to soar?

With the price of Gold closing the week above its Friday 5th minimum and far above the long-term support level of US-Dollar 1,200.00 an oz., reached on Thursday June 27th, we are inclined to believe that the low in this correction may have been posted for Gold.  However, it is still a bit early and we need to see some more positive price action to support this view.

If we are right that Gold prices are currently in a bear trap of a secular bull market, similar with the one of 1976, as can be seen from below chart, we may expect Gold to soar to record highs in the coming second leg of this Gold Bull market.

KWN Fitzpatrick I 7-3

Yield of the 10-year US-Treasury note rose to a 22-month high

The yield of the USA 10-year Treasury bond rose last week to a 22-month high of 2.72%, which was almost 75 percent higher than a year ago as can be seen from below chart.

1 year 10-yearnote

Can we therefore conclude that the bond-market is calling FED Chairman, Ben Bernanke’s bluff that the FED might start tapering its bond-buying program in the fall of this year and that Quantitative Easing might end in the middle of 2014?

We firmly believe that the surge the FED is witnessing right now, is the first sign of the crack in the huge bond market bubble the FED has created.

A rise of the yield of the 10-year note as a consequence of decreasing bond prices, will have a dramatic effect on the USA housing market, the stock market and the USA National Debt, which is now over USD 16.9 Trillion as can be seen from below survey.

USA Debt Clock July 6 2013

As consequence of this the FED will have to keep on buying USA Treasuries in order to push the yield of the 10-year note back down again. But what the FED may have forgotten is, that interest rates, similar with inflation, act like the “Genie in the Bottle” in the sense that once the Genie (Interest rate or Inflation) is out of the bottle it is very difficult to get her back in the bottle.

Polish Central Bank Cuts Interest Rate To All-Time Low

The Monetary Policy Council of the National Bank of Poland lowered its benchmark reference rate by 25 basis points to 2.5 percent at the latest meeting on Wednesday, July 3rd 2013. This followed similar reductions in the previous two rate-setting sessions.

The bank also lowered its re-discount rate by a quarter percent to 2.75 percent, and the deposit rate to 1 percent. The Lombard rate was reduced to 4 percent.

With the latest rate-cut, the Central Bank, has reduced the key rate by a cumulative 200 basis points since November 2012.

We believe that Poland’s rate lowering cycle is in line with the current ongoing currency war, in which countries are debasing their currencies via monetary policies in order to increase their competitive position on the stagnating global market.

Brazil BOVESPA at 50-month low.

The Brazilian BOVESPA-50, Index, tumbled with more than 5 percent last week to close Friday July 5th at a 50-month low of 45,210.49 points, after weak industrial output data for the month of May, darkened the outlook for Latin America’s largest economy.

Since the inauguration of the current Brazilian president Ms. Dilma Rouseff on January 1st 2011, the BOVESPA Index as well as the Brazilian real have tanked with almost 40% as can be seen in below charts.

Bovespa Jan 1 2011 - july 5 2013

BOVESPA Chart from January 1st 2011 – July 5th 2013

BRL - USD January 1st 2011 - July 5th 2013

BRL v.s. USD Exchange Rate History Jan 01 2011 – July 05 2013

Without wanting to meddle with the internal policy of Brazil, above charts clearly show that the once so mighty Brazilian Real and the fast growing BOVESPA have been on the wrong track since the current Brazilian government took office on January 1st 2011.

We therefore believe the acronym BRIC for the fast growing emerging markets and for which the “B” stands for Brazil, will soon be replaced by R(I)C and if the current Brazilian government doesn’t change course and start thinking long-term, by investing in education, ICT infrastructure etc., it will see other South American countries – like Chili, Colombia, Peru, and Uruguay – with visionary and long-term thinking leadership, continue to accelerate their growth, control inflation and increase the value of their currency, while Brazil, on the other hand, will continue to experience a stagnating economy with high inflation and social unrest.

Comments:

The analysis, statement and comments provided in this section of this blog article, are based solely on professional and unemotional analysis of the points discussed here above. By no means is it our intention to interfere in the internal policy of a country, organization or person.

The current situation in Portugal, Brazil and the increase of the yield of the USA 10-year treasury note prove again that, sustainable economic growth and subsequent prosperity of a country, organization or institution, go hand in hand with the level of education, transparency and good governance and that populist management will always fail in the longer-term.

Currently the 10-year note yields of both Brazil and Portugal are in the top 15 countries with the highest 10-year note yields, on respectively position 5 and position 13.

See this link for details.

The soaring yield of the 10-year USA treasury note sustains our point that the current bond market bubble is on the brink of imploding. A bond market crash can be considered the mother of all crashes, because it will wipe out almost all wealth in paper assets and will cause a huge shift of wealth from those holding paper assets like bonds, cash and fixed term deposits to those who have their assets in Gold, Silver and other precious metals.

Note:
The higher a bond-yield the less faith this expresses on the part of the investor, because it means that in order to buy those 10-year notes, the investor (actually the market) demands a higher r.o.i. (return on investment) – which has to paid in order to compensate for the increased uncertainty in receiving interest payment or for collecting the principal when this is due (after 10 years, if it is a 10-year note).

Regarding the price of gold:
In 1976 the Gold correction ended in August and the Equity market began a deep correction in September (27% over 18 months).  During that period Gold rallied by about 78% and over the 1976-1980 period it multiplied in value by a factor of 8 from just over $100 to over US$800.  The final part of that rally saw Gold rise from about US$470 to US$850 an ounce in about 4 weeks.

Last but not least, in order to survive the coming Economic Hurricane it is very important to have your assets, via an asset protection vehicle, in a country with a low debt to GDP ratio, history of good government, secrecy and protection of investors and their deposits.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Gold, Silver and other precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely

Eric Panneflek

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