As I mentioned last month in The Weekly Commentary, in my opinion, the US Government has been spending money on their “credit card” thinking it will never receive the credit card bill in the mail. But, that credit card bill is coming. When it arrives, a major financial crisis will unfold.

I am not forecasting the crisis to hit anytime soon. I reckon the crisis will not hit until 2015, plus or minus 2 years. And, I believe the stock market investment environment will be relatively attractive between now and then. But, watch out – investors must be willing to be tactical and shift their investments to a safe haven when the crisis does unfold.

Can the crisis be avoided? Yes, but time is running out. Federal, state, and local governments must take steps NOW to reduce their deficits. And that is NOT happening. In fact, just the opposite is occurring. Just last week, Treasury Secretary Geithner told President Obama debt expense is to rise to a record. Click here for details.

“The willingness to do creates the ability to do.”

Peter McWilliams

President Barack Obama may lose the advantage of low borrowing costs as the U.S. Treasury Department says what it pays to service the national debt is poised to triple amid record budget deficits.

Interest expense will rise to 3.1 percent of gross domestic product by 2016, from 1.3 percent in 2010 with the government forecast to run cumulative deficits of more than $4 trillion through the end of 2015.

While some of the lowest borrowing costs on record have helped the economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration’s adjusted 2011 budget.

“It’s a slow train wreck coming and we all know it’s going to happen,” said Bret Barker, an interest-rate analyst at Los Angeles-based TCW Group Inc., which manages about $115 billion in assets. “It’s just a question of whether we want to deal with it. There are huge structural changes that have to go on with this economy.”

The amount of marketable U.S. government debt outstanding has risen to $8.96 trillion from $5.8 trillion at the end of 2008, according to the Treasury Department. Debt-service costs will climb to 82 percent of the $757 billion shortfall projected for 2016 from about 12 percent in last year’s deficit, according to the budget projections.

Budget Proposal

That compares with 69 percent for Portugal, whose bonds have plummeted on speculation it may need to be bailed out by the European Union and International Monetary Fund.
Forecasts of higher interest expenses raises the pressure on Obama to plan for trimming the deficit. The President, who has called for a five-year freeze on discretionary spending other than national security, sent Congress a $3.7 trillion budget today that projects the federal deficit will exceed $1 trillion for the fourth consecutive year in 2012 before falling to more “sustainable” levels by the middle of the decade.

“If government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe,” Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee Feb. 9. “Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living.”

Yield Forecasts

Treasuries lost 2.67 percent last quarter, even after reinvested interest, and are down 1.54 percent this year, Bank of America Merrill Lynch index data show. Yields rose last week to an average of 2.19 percent for all maturities from 2010’s low of 1.30 percent on Nov. 4.

The yield on benchmark 10-year Treasury note will climb to 4.25 by the end of the second quarter of 2012, from 3.63 percent last week, according to the median estimate of 51 economists and strategists surveyed by Bloomberg News. The rate was 3.61 percent at 10:48 a.m. today in New York. The economy will grow 3.2 percent in 2011, the fastest pace since 2004, according to another poll.

“People are starting to come to the conclusion that you’ve got a self-sustaining recovery going on here,” said Thomas Girard who helps manage $133 billion in fixed income at New York Life Investment Management in New York. “When interest rates start to go back up because of the normal business cycle, debt service costs have the potential to just skyrocket. Every day that we don’t address this in a meaningful way it gets more and more dangerous.”

‘Demonstrates Confidence’

The U.S. needs to manage its spending decisions “in a way that demonstrates confidence to investors so we can bring down our long-term fiscal deficits, because if we don’t do that, it’s going to hurt future growth,” Treasury Secretary Timothy F. Geithner said in Washington on Feb. 9.

The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Soros Fund Management LLC, expressed concern in the Feb. 1 report that the U.S. is exposing itself to the risk that demand erodes unless it cultivates more domestic demand.

“A more diversified debt holder base would prepare the Treasury for a potential decline in foreign participation,” the report said.

Foreign investors held 49.7 percent of the $8.75 trillion of public Treasury debt outstanding as of November, down from as high as 55.7 percent in April 2008 after the collapse of Bear Stearns Cos., according to Treasury data.

Deficit Forecasts

The deficit for the current fiscal year is forecast to hit a record $1.6 trillion — 10.9 percent of gross domestic product — up from the $1.4 trillion the administration estimated previously. It would be $1.1 trillion in 2012, 7 percent of GDP. By 2015 it would decline to $607 billion, or 3.2 percent of GDP.

About $4.5 trillion, or 63 percent of the $7.2 trillion in public Treasury coupon debt, needs to be refinanced by 2016. That gives the government a narrowing window as growing interest expense will curtail its ability to spend.
 
“There is roll-over risk,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 20 primary dealers that trade with the Fed. “It’s a vicious cycle.” (Source: Bloomberg).

Despite a recent mauling by Christina Aguilera, America’s message is still loud and clear: Our Dow Jones Industrial Average has rallied in 11 of the past 12 weeks. Our Standard & Poor’s 500 has doubled off its intraday low from March 2009 in roughly 709 days, the quickest doubling since 1936. Lately, our stock market only goes up. We’re No. 1!

Contrast this with those also-rans called emerging markets, which may have faster economic growth but less-doting central banks. Since early November, the SPDR S&P 500 (ticker: SPY) has shimmied up 10%, but the iShares MSCI Emerging Markets (EEM) is down 5% and the iShares China Index Fund (FXI) is off 10%. Our central bank is printing money; theirs aren’t. Is it any wonder that investors are pulling money from emerging-market stock funds for a fourth straight week—the longest streak since October 2008, says EPFR Global—and have already yanked more than a fifth of the $95 billion they plowed last year into emerging markets?

The love fest with U.S. stocks wasn’t interrupted by Iranian war ships sailing through the Suez Canal, or the more treacherous gulf that is yawning between spending and revenue in the president’s proposed 2012 budget. We didn’t even flinch when Sports Illustrated plopped the Russian Irina Shayk on the cover of its swimsuit issue, defying market lore that says U.S. stocks fare better in years with homegrown gals on display. Talk about a signal—we’ve even devised an ETF for smartphones (ticker: FONE) to herd the throngs lunging at this momentarily hot segment.

How can we top all that? The February survey of global money managers by BofA Merrill Lynch already shows heavy tilting toward stocks and commodities, with risk appetite at its highest level since January 2006, and hedge funds’ exposure at the highest since July 2007. Meanwhile, exposure to emerging markets collapsed from 43% to 5%, the lowest level since March 2009, while cash balances shrank to just 3.5%.

No one expects the U.S. market’s levitation to continue forever, but who wants to pull out early? The consensus seems to think that every dip should be bought, and the game has turned into one of guessing when this surreal melt-up might end.

The flight from emerging markets, however, should turn well before that. Emerging markets become laggards when global growth flops, and that’s hardly the case today. “Earnings remain solid and there are reasons to expect they will improve relative to developed markets,” even as relative valuations approach their lowest level since 2008, notes Robert Buckland, Citigroup’s global strategist. “The pullback provides an opportunity to buy, in our view.”

Stateside, the Dow rallied for a third straight week, adding 118, or 1%, to 12,391. The S&P 500 is up 98.5% since closing at 676.53 on March 9, 2009. The Nasdaq Composite Index gained 25, or 0.9%, to 2834, while the Russell 2000 jumped 13, or 1.6%, to 835 (Source: Barrons Online).

Imagine if an evil genie took some of your very best memories and hid them in a wine bottle. That’s what so many of us do to ourselves. These dear bottles have a special way of retrieving warm and often-forgotten memories, but you have to pop the cork to release them. That’s why some wine enthusiasts invented Open That Bottle Night – the last Saturday in February. So very many of us have that special bottle — from a departed loved one, from a visit to a winery, from a vacation — that we’re always going to open at just the right moment, but, of course, that moment never comes. So the wine sits and sits and sits and becomes more and more precious, so it sits and sits some more.  Mark your calendars – February 26, 2011. 

Here is a “primer” for how to conduct your own “Open That Bottle Night”. 

1. Choose the setting. Many people have dinner parties and others take their bottles to restaurants that allow BYOB (and some restaurants have special OTBN promotions). It takes some planning. I love OTBN because it’s an excuse to open one or two of those killer bottles I’ve been saving.

2. Select the bottle. A huge part of the fun is choosing the bottle, pulling out these revered wines and remembering when, where and why you bought them. Each has a story. The point is not to show off with a great bottle or necessarily open the most prestigious bottle in the house, but to uncork a wine that holds cherished memories, the bottle that — admit it — you will never open otherwise. This is one case where it really is all about you, what the wine means to you, and not necessarily about its taste.

3. Stand it up. If you are going to open an older bottle, stand it up (away from light and heat, of course) for a few days before you plan to open it. This will allow the sediment, if there is some, to sink to the bottom of the bottle.

4. Beware of the temperature. Both reds and whites are often better somewhere closer to cellar temperature (around 55 degrees) than today’s room temperature. Don’t over chill the white, and think about putting the red in the refrigerator for an hour or two before opening it if you’ve been keeping it in a warm house.

5. Practice your technique. With an older bottle, the cork may break easily. The best opener for a cork like that is one with two prongs, but it requires some skill. You have time to practice using one. Be prepared for the possibility that a fragile cork may fall apart with a regular corkscrew. If that happens, have a carafe and a coffee filter handy. Just pour enough through the coffee filter to catch the cork’s fragments.

6. Otherwise, do not decant. We’re assuming these are old and fragile wines. Air could quickly dispel what’s left of them. If the wine does need to breathe, you should have plenty of time for that to happen as you drink it throughout the evening.

7. Have a backup wine ready for your special meal, in case your old wine really has gone bad.

8. Share. If you are having an OTBN party, ask everyone to say a few words about the significance of the wine they brought. This really is what OTBN is all about.

9. Serve dinner. Open the wine and immediately take a sip. If it’s truly, irretrievably bad — we mean vinegar — you will know it right away. But even if the wine doesn’t taste good at first, don’t rush to the sink to pour it out. You may be amazed how a wine became more delicious as the night wore on. Is it the air changing the wine or the company changing the mood? Who cares?

10. Enjoy the wine for what it is, not what it might someday be or might once have been. This is critical. But this isn’t about delicious wine, ultimately, but about delicious memories.

For several weeks, we have been watching closely as events in Egypt unfolded.  First, to sort through all the claimants and wannabes of this revolution, and find out whom the main powers are. Second, to search for signs of Egypt’s crises spreading to other countries.  It is important to not get all wrapped up in what people are saying and look objectively at what has happened so far.  Click here  for more details on Egypt.

“The right information is nine-tenths of any battle”

Abraham Lincoln

Question:
I own a business, a sole proprietor, so I file my income tax return with a Schedule C. My children, ages 15 and 17, help me around the office to do chores I assign to them. Should I pay them?

Answer:
Yes. There are some very important income tax benefits to do so-it is better to put them on the payroll and pay wages to them rather than an allowance. Your net profit from this business is taxed at the highest tax rate of any income; thus, any deductions like wage payments to children will save substantial income taxes. And, you can even set up an IRA or SIMPLE IRA account to benefit them later. Note that the IRS requires the children to perform meaningful work and that you pay them the going rate for such work.