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US Bond Market Crash – Be Prepared

I have just attended Dennis Ng’s masteryourfinance.com gathering seminar yesterday. Basically, the talk was about a brewing financial crisis and how the US bond market is leading to a crash in the near future.

If you did some research online, you would realize that are already quite a number of alternative financial websites which are predicting the bond market crash. So far, no analyst in Singapore seems to mention about the possible bond crash yet, except Dennis.

I hope you will get prepared for the financial crisis looming ahead.

Alvin from bigfatpurse.com did a concise summary on yesterday’s talk. I will republish his article here:

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US Bond Market Crash

Dennis began the presentation with a report from PIMCO founder, Bill Gross. Bill Gross is commonly known as the bond king as he was an expert in bond investment and he had made a lot of money from it. His view was that the US bond market would crash. He reasoned that with QE 1 and QE 2, the Fed has been buying 70% of US government bonds. What happens after the Fed stops buying? The demand for US bonds is not sustainable. He had sold all US$28.6 bn worth of US bonds in his PIMCO Total Return Fund and he is actually holding a 4% short position on US bonds. He has 37% of the portfolio in cash which is unprecedented (less than 20% in the past).

How will it lead to a financial crisis in 2012

Dennis added that the US government had only printed US$800 bn in 200 years. But QE 1 alone printed US$2 trillion in 2 years and QE 2 printed US$600 bn in 6 months. He expected that unemployment would remain higher than 8% even after QE 2 has completed. Thereafter, a QE 3 is likely to boost the economy further but it would similarly be futile to solve the problem. Looking at the biggest foreign holders of US bonds, China and Japan, the former declared that she is paring down her position on US bonds and the latter would sell bonds to raise money to rebuild the country after the earthquake. Hence, the demand for US bonds would drop. And once the Fed stops the QE projects, demand would dry up and bond price would fall.

US credibility is of question. In traditional finance, US treasury interest rate is known as the risk free rate, as the assumption is that US will never default as a credible and stable country. However, US Treasury Secretary, Timothy Geithner had just mentioned US required to raise its debt limit (borrowing limit) to avoid defaulting on loan repayments. It is akin to increasing your credit card limit to borrow more money to pay back debts. It becomes a never ending vicious cycle.

With the inverse relationship between bond price and interest rate, once bond price crashes, interest rate would rise rapidly. Housing loan interests would rise in tandem and some people would have problem repaying a higher loan installment (that’s why Dennis always use 4% as a prudent assumption). As economy slows, companies profits will decrease and unemployment will rise. Stock market will crash as well.

Dennis foresees this crisis will be worse than the last one. In 2008 crisis, the US government was able to borrow money to bail out companies, but with US government credibility in jeopardy, no one would lend them money anymore.

Property Outlook

Supply of private condominiums in 2013-15 would be 50,000 units or 16,942 units/year in 3 years. Last year was the highest sales with 15,000 condominiums sold. We can see that the supply would outpace demand very soon. And if the financial crisis in 2012 becomes reality, demand will definitely come down significantly. Historically, an average of 6000 units were sold per year.

Supply of BTO flats was 16,000 last year and 22,000 this year. The demand in 2008 which was a financial crisis year was 9,000 units.

Resale HDB transactions were 40,000 last year compared to historical average of 26,000 per year. Home buyers would buy new flats when they are available and demand for resale would fall as well.

3 possible scenarios may happen. Firstly, if inflation went up high, property prices may drop 10%. Secondly, if inflation is contained, prices would drop 30%. Thirdly, when properties are oversupplied, rental yields would drop 30%.

Gold and Silver

Dennis compared the ratio between gold and silver price to put things into perspective. The lowest ratio was 16:1 in 1980, while the highest ratio was 89:1 in the last 200 years. The average ratio has been 30:1. Taking the lowest ratio, if gold is worth US$1,500/oz, silver should worth US$93/oz.

The demand for silver in 2010 was 878 mln oz while the supply was 735 mln oz. The shortfall was 143 mln oz. Unlike gold, silver has industrial demands and had grown with the rise in population. The concern maybe that industrial demands may drop when economic growth slows, but Dennis expects the investment demands to go up. This is because of the devalution of US dollars and potential inflation in the future.

Silver dropping 30% in 5 days is overdone according to Dennis. As long as silver maintains above US$30, the uptrend is still intact.

Stocks

Dennis reckons the STI would continue to rise. The PE ratio of STI is currently at 11. It has the lowest PE ratio compared to other Asian countries. China at 17 and Nikkei at 17.7. If STI goes to PE 15, STI would be equivalent to 4,268 points.

The blue chips could go up another 20-30% but Dennis would rather invest in strong penny stocks which have greater upside of 50-100% returns.

Asset Allocation is important to minimise risk

Dennis does not put all the eggs in one basket. He diversifies his portfolio into stocks (30%), cash (30%), property + land banking + gold/silver + wine (30%) and Traded Endowment Policies (TEP) (10%). TEP would provide the downside potential with capital protection. The hard assets (property, gold/silver etc) would rise with inflation. Stocks would ride on the last phase of this bull market. Cash would provide opportunity when the market crashes. This is an all weather-proof portfolio as Dennis terms it.

The Best $2000 I Ever Spent

I attended an investing workshop recently on 2nd/3rd April. It’s a 2-day “Secrets to Making Money in Stocks” by Dennis Ng, from masteryourfinance.com. I know the title of the seminar sounds cheesy, but I can tell you, there are really secrets. I will explain later.

Some of you might be asking – Dennis who?

You might have came across him in TV interviews, newspapers etc. That’s how I got to “know” him. If you want to know more about him, you can click here.

By chance, I went to attend Dennis’s preview seminar last month (through BigFatPurse). Don’t ask me why I chose to attend this specific seminar when there are dozens of preview seminars advertised on newspapers daily on making money in Stocks, Forex, Trading etc. I guess it’s because I have seen him on tv previously, so subconsciously I am “aware” of him.

Actually, I just want to take a look, with no intention of signing up any paid course. I have attended quite a few internet marketing preview seminars and I am usually quite skeptical about these kind of seminars.

Well, after attended the preview. You know what. I signed up for the workshop and paid S$1996 on the spot. It includes 3 workshops – stock, property and wealth management.

I signed up for the course, NOT because I got sold. It’s because I want to BUY. During the preview, I realized Dennis is not creating “hype” and he looks very honest and sincere. That’s my first impression of him. He doesn’t look the kind of person with the motive of ripping you off. So, call it my gut-feel for him.  Well, there are internet marketing workshops that are like that, sad to say.

Anyway, I always want to learn more about investing. After doing internet marketing for about 4 years, I feel it’s time to pick up another new crucial skill – that is learning how to invest. That is how the rich get richer. I am not saying I am rich. But I strongly believe you need your money to work for you.

I have read some books on investing previously. But seriously, I don’t know how to apply. Also, there are tons of information online on investing. I don’t know who is right or who is bull shitting. So, I rather spend a few k to learn from an experienced investor and speed up my learning process.

After attended the workshop, I can say my money is very well spent Worth every penny of it. I really learned something. Well, you can say it’s fairly easy for me to “learn” something, because I am a newbie (call me a noob if you prefer) in investing.

Basically, Dennis teaches value investing, that is buying stocks that are undervalued through fundamentals analysis. But he also touches on technical analysis in areas which he thinks is important.

There are really “secrets” in the workshop. Like which are the certain specific indicators to look at, for specific industries. He also talk about the “invisible hand”. He describes that as – if right eye is fundamental analysis and technical analysis is left eye, then “invisible hand” is the third eye. Of course and a lot more.

In a way, those are secrets to me because I am not aware of them. But if you think those information are not valuable to you because you are a seasoned investor or purely because you have some financial/business knowledge background, then you are dead wrong.

Of course, if you are a millionaire investor now, then I have nothing to say. BUT if you have not make your million through investing yet you think you know a lot about investing, then something is wrong. What is it that Dennis knows but you don’t? Think about it.

I can say I picked up solid investing knowledge from Dennis. I know how to analyze a company and its stocks now. I felt more confident with my new-found knowledge. In fact, I have already started investing.

As cliche as it may sounds, but it’s really just the start of my investing journey. I still have a lot more to learn. But I am an action taker. I have been reading a lot and absorbing as much as I can.

This post is getting lengthy… to end it, I can say it’s the best $2000 I have spent so far in my life, because I strongly believe I will earn back x10 or even x100 more in the near future. My NTU degree can never do that! 😛

By the way, if you are interested to attend Dennis’s Path to Financial Freedom Workshop, click here for more information. It’s free.