From Porter Stansberry in the S&A Digest:
It's one of those numbers that's so unbelievable you have to actually think about it for a while... Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?
How did we end up with so much short-term debt? Like most entities that have far too much debt - whether subprime borrowers, GM, Fannie, or GE - the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss." What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt… at ever shorter durations… at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.
When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."
The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.
So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.
According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months - an amount far larger than our reserves.
Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.
So… where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central bank, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.
So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.
One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.
I examined these issues in much greater detail in the most recent issue of my newsletter, Porter Stansberry's Investment Advisory, which we published last Friday. Coincidentally, the New York Times repeated our warnings - nearly word for word - in its paper today. (They didn't mention Greenspan-Guidotti, however... It's a real secret of international speculators.)
Crux Note: The S&A Digest comes free with a subscription to Porter Stansberry's Investment Advisory. Porter says his latest issue is the most important he's ever written. If you don't act right now to protect yourself from the dollar, he thinks the odds are very high you'll be wiped out over the next 12 months. To learn more, click here.
SAN FRANCISCO/CHICAGO (Reuters) – Consumers spent significantly less per person at the start of the holiday season this weekend, dimming hopes for a retail comeback that would help propel the economy early in 2010.
The lackluster spending could pressure retail stocks on Monday as some investors were looking for a stronger showing compared with a year earlier, when consumers were being hammered by the recession and credit crunch.
"There may be a bit of a pullback, a little disappointment," said Patricia Edwards, chief investment officer at Storehouse Partners.
While shoppers turned out in force as early as U.S. Thanksgiving Day on Thursday, many said they had zeroed in on highly discounted items, would buy only what they needed and would walk out of a store if they did not find a good deal.
"Shoppers proved this weekend that they were willing to open their wallets for a bargain," said National Retail Federation Chief Executive Tracy Mullin in a statement on Sunday. Retail chains "know they have their work cut out for them to keep people coming back through Christmas."
Store chains that may have done better than their peers include discount retailers like Wal-Mart Stores Inc and Target Corp, teen apparel retailers Aeropostale Inc and American Eagle Outfitters and higher-end chains like Saks Inc, analysts said.
A clearer picture of retail performance will be seen when many U.S. retailers report November sales on Thursday.
Consumers said they will have spent nearly 8 percent less on average, or about $343 per person, over the weekend that includes Thanksgiving, Black Friday and runs through Sunday, according to the NRF.
Traffic to stores and websites rose to 195 million people from 172 million in 2008, but shoppers were focused on buying low-priced items, like $10 toys and $9 books, the NRF said.
Total spending for the holiday weekend rose to an estimated $41.2 billion, up 0.5 percent from a year earlier, NRF said. For a graphic on U.S. holiday sales trends, click on http://graphics.thomsonreuters.com/119/US_RTLXMS1109.gif
HOW QUICK A RECOVERY?
Consumer spending makes up roughly 70 percent of the U.S. economy and will help determine how quickly the country can recover from a recession that began in December 2007, said Torsten Slok, an economist at Deutsche Bank.
"The good news this weekend is that consumers are no longer hibernating like they were a year ago, and that in itself is important for the economy," Slok said, referring to the higher traffic.
The NRF has forecast a 1 percent decline in holiday sales this year, which would mark an unprecedented drop for two straight years after a global financial crisis erupted in 2008.
Total retail sales edged up just 0.5 percent to $10.66 billion on Black Friday, which is often the single-busiest day of the holiday season, ShopperTrak said.
Online retailers, however, enjoyed an 11 percent jump in Black Friday spending to $595 million, with Amazon.com and Walmart.com enjoying the biggest surges in traffic, according to comScore.
Retailers had warned investors they would take a conservative view of holiday sales and have cut inventory and reduced expenses to compensate.
"You're clearly down on a two-year run rate," said Bill Taubman of mall operator Taubman Centers Inc. But he added, "margins are going to be extremely good because (retailers) have been careful about what they bought."
DISCOUNTERS ATTRACT
Shoppers interviewed across the country by Reuters over the weekend said they were lured by bargains, but would stick to pared-down budgets.
"If they don't have rebates and sales before Christmas, I don't think people are going to go back shopping after Black Friday," said Joel Wincowski, a higher education consultant shopping at a Best Buy store in Plattsburgh, New York. He bought an Xbox 360 game console for $299.
In fact, 71 percent of consumers who planned to shop over Black Friday weekend said they expect prices to fall further before Christmas, according to a survey for Reuters by America's Research Group.
Discount chains like Walmart, department stores and higher-end chains like Saks Inc seemed to have lured more spending and avoided steep discounts, retail consultants and executives said on Sunday.
"The market has had a negative bias toward the state of consumer spending," said Bill Dreher, senior analyst at Deutsche Bank. "We continue to believe that there are pockets of strength with discount retailing doing very well, with select luxury retailers doing very well, like Nordstrom and Saks, which have brought down their price points."
Specialty apparel chains, however, may face another tough year as they relied on heavy promotions to draw shoppers.
"Going through the mall on Friday, the stores that had not been doing as well -- AnnTaylor, Limited, Gap -- were very aggressively promoting," said Jeff Edelman, director of retail and consumer advisory at RSM McGladrey.
Edelman expects holiday sales to be flat this year, but he said he expected profits for most retailers to be higher.
The NRF said shoppers' destination of choice appeared to be department stores, with nearly half of holiday shoppers visiting at least one. A little more than 43 percent of shoppers said they went to a discount retailer this weekend.
(Additional reporting by Jessica Wohl in Chicago, Emily Kaiser in Washington and Phil Wahba in New York; Editing by Michele Gershberg, Matthew Lewis and Maureen Bavdek)
