The economist inteligence unit just wrote in its July Global Economic – update:

“The US real GDP forecast for 2010 from 1% to 1.4%, but has downgraded its US 2010 forecast from growth of 1.4% to 0.8%. It says that in view of the likely continued weakness of domestic demand, a renewed weakening is likely in 2011 when stimulus measures start to fade. It is forecasting that the US budget deficit will be close to 15% of GDP in the next two years.

Chinese growth for 2009 has been revised upwards to 7.8% (from 6.8% previously), but again, the EIU forecasts Chinese growth to ease slightly in 2010, to 7.4%, again as the impact of the stimulus wanes. It says China’s export picture remains subdued.”

One thing that i remember from Macro economics is that the only force driving inflation is deficit. 15% is a hugh deficit! I would expect inflation levels in the US to reach 5%-10% within the next 5 years. This will drive interest up to 5%-10% compared to 0% today and will result in the USD devaluating vs most major currencies. Long term bonds yields can jump from 3% today to 10% within 5 years. Buyers of these bonds today can suffer from the capital loss of 50% on 10 year US bonds. in addition, if we take into account the currency devaluation that i predict, these investors can lose up to 70-80% of their initial investment – if we will measure it in RMB or Euro.

THIS IS PROBABLY THE BIGGEST BUBBLE IN TODAY’S GLOBAL ECONOMY.

How can we make money from this as individuals?

1. Buy TBT index fund which actually short US treasury bonds.

2. Avoid USD investment and hedge the currency risk if we do invest in USD assets (like the great opportunity of real estate in the US).

How can we protect our business as managers and entrepreneurs?

We should hedge the RMB appreciation risk (I estimate that USD/RMB will be at 4.00 in 5 years) by doing annual forward deals in the major banks.