THE GREATER DEPRESSION
It's been said that if you spend 15 minutes a year thinking about the economy, you're wasting 13 minutes. That's generally true. But as an amateur historian, I can't help myself. And I'm forced to believe that this is a time when the subject is worth some real thought.
My view is that the longest, and certainly most important, trend in history is the ascent of man. I have little doubt that it will not only continue but accelerate. But that doesn't mean there won't be nasty setbacks along the way. As I have said before, possibly the best definition of a depression is a period when most people's standard of living drops significantly. You can also define it as a period when distortions in the economy and misallocations of capital are liquidated.The distortions are almost always the result of government intervention in the economy, through things like taxes, regulation and currency inflation.
Those are the factors that caused the unpleasantness that began in 1929. Since the government is exponentially more powerful and invasive today than it was in either the 1920s or the 1970s, I expect the consequences will be much worse this time around. Things could have come unglued, and almost did, back in the 1970s. I don't see how we'll dodge the bullet this time. Although that's not really a good analogy, in that, for reasons we don't have time to explore in depth, a depression is probably inevitable this time.
The only serious question in my mind is whether it will be essentially deflationary in nature, as it was the case in the U.S. in the 1930s, or inflationary like in Germany in the 1920s. My guess is the latter because the government is so much more powerful today. Or it could actually be both at once, in different sectors of the economy.
How?
Inflation could drive interest rates to 20%. This would collapse the bond and real estate markets, wiping out trillions of dollars of purchasing power - which is deflationary. Meanwhile, that same inflation doubles the cost of food and fuel. In other words, the opposite of what we've mostly had for the last generation, when we had "good" inflation in stocks, bonds and property, but stable or dropping prices in "cost of living" items. This time the pattern could reverse, which would be a nightmare for most people.
And as people become more focused on speculation in a generally futile attempt to stay ahead of financial chaos, they inevitably divert effort from economic production. Which will decrease the general standard ofliving even more.
The situation isn't made easier by the possibility that we're facing PeakOil - the start of a secular decline in world oil production. Or the fact that Americans, both individually and collectively, are deeply in debt and living on the kindness of strangers. The problem with debt is that it artificially increases our standard of living. But when we pay it off, especially with interest, it reduces our standard of living in a very real way.
Wrap this economic environment around the so-called War on Terror, which is rapidly morphing into the War on Islam, which could easily turn into World War III, and you're looking at the perfect storm. The odds of a major conflagration are very high, and it's not being adequately discounted. If Bush starts a war against Iran, or if another incident like that of 9/11 occurs, or even if the trend of the last five years accelerates, the U.S. is going to be locked down like one of its numerous new federal penitentiaries. And that will be accompanied, and compounded, by mass hysteria among Boobus americanus.
At that point, your investment portfolio will be among your lesser concerns. People forget that, in every country and time, there's a standard distribution of sociopaths and misdirected losers. In normal times, they seem like normal people. But when the time is right, they show their colors, and they love to get jobs with the government, where they can lord it over their betters.
You may be asking yourself: Is the Greater Depression really inevitable? How bad will it be? Is there another side to the argument? Can it beavoided?
I suppose it's not absolutely inevitable. Perhaps friendly aliens will land on the roof of the White House and present the government with a magic technology that can undo all the damage it's done. But we live in a world of cause and effect where actions have consequences. That being the case, I expect truly serious financial and economic trouble. And the government will make it vastly worse by trying to "do something" instead of recognizing itself as the cause and backing off. I don't see any way out.
How bad will it be? In historical terms, the last depression was relatively short and mild. The longest depression on record was the DarkAges. Residents of the old USSR and Mao's China suffered through a depression that lasted decades. I'm not predicting it will be that bad, if only because the U.S. has basically much sounder traditions and institutions and vastly more accumulated capital. But it's hard to overestimate how serious this could be. I sometimes joke that it will likely be worse than even I think it will be.
Getting back to whether it's truly inevitable, it's a question of degree. The recession of the late 1970s and early 1980s involved a terrible stockmarket, 15% inflation with interest rates to match, 10% unemployment and a near war with the USSR. But the country not only hung together, it went onto a tremendous rebound. My guess is, however, that the last 20 years of good times will later be viewed as an economic Indian Summer before a harsh winter.
The good news, of course, is that no matter what the economic conditions, technology - which is the mainspring of human progress - will keep advancing. And many individuals will continue innovating, saving and improving conditions for themselves and their associates. Also, it's entirely possible to go through even the worst of times and not get hurt. Indeed to profit from them. If the price of a house you want now but can't afford falls 75% (as outrageous as that may sound at the moment) while your own investments in the high-quality gold stocks we follow in our International Speculator quadruple, you're much better off. That house now really only costs you one-sixteenth of what it did before. Of course it's a problem for the guy who has to sell his house... but I always prefer to look at the bright side of the equation. There's time now to structure your affairs so that you're on the right side of the trade.
Keep your eyes peeled for signs that indicate it's about to get ugly. One obvious indicator to watch is how the price of gold is running. Gold is the only financial asset left in the world that's either safe or cheap. It's also under owned and largely unrecognized, which is why the smartmoney has been moving into it.
Then there's the CPI itself - although I don't think it's very accurate, in that all the adjustments, exclusions, weightings and what-nots the government has insinuated into it over the years makes the CPI as much ofa floating abstraction as the dollar itself. It's funny how the government plays with figures for fear of hurting confidence. They believe the economy rests mainly on confidence, which, ironically, in today's world, is true. Unfortunately, confidence can blow away like a pile of feathers in a windstorm - and we have a class-5 hurricane coming. If the economy were sound and people for some reason lost confidence, the currency and the banks would be unhurt, and the next day things would go back to normal. But that's not the world we live in. So, higher CPI numbers are another thing that could destroy confidence and supercharge the goldprice. They're coming.
Higher interest rates, which we're already seeing, will inevitably burst the real estate bubble, which is floating on a sea of mostly adjustable-rate debt, a lot of it interest-only or even with negative amortization. Higher rates will also crush bonds and probably stocks. And they'll devastate the economy since everybody is deeply in debt. However, I feel the Fed will keep short-term rates - which are really the only ones they control - as low as possible for as long as possible. For one thing,they don't want a recession, which this time could snowball into the Greater Depression. For another, my guess is that they want to gradually depreciate the dollar against other currencies, in part to decrease the chronic, massive trade deficit. And because increasing the number of dollars makes people think they're richer than they really are, it can stimulate some additional spending... but these days that spending is mostly done on credit, so it is only illusionary.
The biggest single problem, however, is that there are trillions of U.S.dollars outside of the U.S. Unlike Americans, foreigners have no reason to hold them. And at some point very soon, perhaps when the Fed finally hits the wall on its ability to raise rates, these overseas dollars are going to start flooding back home, while the products and titles to real wealth flow out of America.
Therefore, when the trade deficit starts turning around - which most people will think is a good thing - that will be the real tip-off the game is over. Trillions coming back to the U.S. will skyrocket long-term interest rates and inflation. The dollar will go into freefall.
But although I think these are the things to watch, to my way of thinking it makes no sense to wait until the stampede starts to try to get out thedoor. If you haven't done so already, take advantage of the current correction in gold to begin repositioning your portfolio for what's next.
Doug Casey for The Daily Reckoning
Editor's Note: Doug Casey is the author of Crisis Investing, which was #1 on the New York Times Best-Seller list for 26 weeks. He is also editor and publisher of the International Speculator, one of the nation's most established and highly respected publications on gold, silver and other natural resource investments
Tuesday, June 06, 2006
Saturday, May 20, 2006
Ten days that shook the world's markets
Great Article: Sunday May 21, 2006 The Observer
From Stockholm to Tokyo, New York to Istanbul, market mayhem swept across the world last week, unleashing violent movements on stock markets and foreign exchanges everywhere, and hammering down the price of commodities such as copper and gold.
In London, the FTSE 100 suffered its worst day for more than three years on Wednesday, before ending the week at 5,672, more than 4 per cent down in five days' trading. After a febrile fortnight, analysts are asking themselves if the turmoil is over - or whether the sell-off marked the end of the three-year bull market and the dawn of a much more volatile era.
Stephen Lewis, of bankers Insinger de Beaufort, says it's too early to write off the risk that the events of the past few days could be the trigger for a full-blown financial crisis. 'Volatility rises, to the extent that it has in equity and commodity markets in recent days, when emotions take over; when actions in the markets are forced; when survival is at stake. In such circumstances, there can be no reliable forecasts of how far markets will move,' he warned.
The worldwide wobble started with the dollar. A warning from G7 finance ministers last month about imbalances in the global economy, and a hint from Federal Reserve chairman Ben Bernanke that he might halt the rise in interest rates, brought the greenback bears out of hiding, and triggered a frenzy of selling.
But over the past few tumultuous days alarm has spread far beyond the currency markets. 'The equity markets were standing rather naively on the sidelines, and suddenly they've woken up,' says David Bloom, currency strategist at HSBC, who has long predicted a dollar shake-out.
'Markets have been looking very vulnerable,' said Julian Jessop, international economist at Capital Economics. 'There have been some bubbles developing, particularly in commodities.'
All investors are waking up to an alarming new world. After five years in which credit has been plentiful as central banks kept the cash taps on, the cost of borrowing has gradually begun to grind upwards. In the US, the Federal Reserve has raised interest rates 16 times, to 5 per cent, from 1 per cent two years ago. The European Central Bank has also raised borrowing costs, and even Japan, the home of the zero interest rate for many years, has responded to a stronger economy by promising to start tightening monetary policy.
In this new climate, with money rapidly becoming more expensive, investors will be less keen to take enormous bets using borrowed cash. The unwinding of some of these risky positions was responsible for some of last week's upheaval.
'Everyone and his dog has leveraged up to the eyeballs buying everything they can get their hands on,' said Charles Dumas, of Lombard Street Research. 'Now liquidity's drying up because interest rates are high; bond yields are high; everyone's finding their funding drying up.'
One extreme example of this is what analysts call the 'yen carry trade': investors have been taking advantage of zero interest rates in Japan, borrowing the money to take bets in other markets. With rates in Japan on the way up, they have been hurriedly extricating themselves: and that has hit risky but high-yielding assets, such as emerging market bonds. Turkey took a pounding last week, for example, as nervous investors pulled their cash back home.
'We think that there's been a very big shake-out in some of the asset classes where people had become very extended, especially emerging markets and commodities,' said Peter Oppenheimer, European head of portfolio strategy at Goldman Sachs.
As if this 'liquidity drain,' as Lewis calls it, wasn't enough to spook the markets, it is happening at a time when the Federal Reserve, the world's most important central bank, is in the hands of a new boy - former Princeton academic Bernanke.
He has to win the confidence of the markets at the same time as deciding on the right time to stop increasing US interest rates. If he pushes borrowing costs too high, the US economy could be plunged into recession; if he stops too soon, the markets will fear that inflation is about to get out of control.
'He's between a rock and a hard place,' said Dresdner currency analyst Sonja Marten. 'It's a very tricky situation. There is going to be that risk of a hard landing, and that's what the markets are not sure about.'
Goldman Sachs analysts call this the 'Bernanke bind' and, at the margins, it could increase the anxiety in the markets over the months ahead. 'They're going to pressure Bernanke, which could be bad,' says Dumas.
Through the fog of market panic last week, analysts said it was important not to forget the underlying economic causes of the upheaval. For several years now, economists have been watching with growing alarm as the US spent more than it earned, running up a record current account deficit with the rest of the world - worth almost 7 per cent of GDP last year.
Funding all that surplus spending has been easy, because foreign investors - notably governments in Asia and the Middle East - have been happy to gobble up American assets, including US Treasury bonds. But, just like an overdraft, the current account deficit can't go on growing indefinitely: something has to give.
Most experts have believed for some time that a devaluation in the dollar would be the best way of helping to bring America's income and expenditure back into line. It should make US goods cheaper, helping American exporters while slowing down imports, which will become more expensive for Americans to buy. The weakening in the dollar over the past couple of weeks could be seen as the first step towards this 'rebalancing'.
All this might sound like the concern of academic number-crunchers. But the US current account deficit has a more homely analogue in the finances of the small-town American household. Buoyed by low interest rates and a property boom, consumers have, quite simply, been spending more than they earn. The savings ratio - the proportion of the average worker's take-home pay that is squirrelled away for a rainy day - has slipped below zero.
With interest rates rising, and signs emerging that the frothy property market is on the turn, American homeowners may respond by acting to put their finances back in order. That could mean a downturn, or at worse a recession, in the US economy.
'If the housing market in the US slows sharply, then that will drag down the economy as a whole,' says Jessop. And when America sneezes, the rest of the world catches a cold: European Union politicians have already started to sound the alarm about the impact of a stronger euro on exporters, for example, and China would be hit hard if US demand for its products plummeted.
For the UK, too, if the rise in sterling against the dollar is sustained, the economic consequences could be painful, particularly when combined with an American slowdown. At the beginning of last week, economists were betting on an early rise in interest rates; but the Bank could find the stronger pound does the same job.
This economic story will play out over months, not at the breakneck speed of the financial markets, and it is hard to predict how its ramifications will ripple across the world. 'There's no new trend established yet,' said HSBC's Bloom. 'It's an unsettled time.' But Bernanke, whose hands are on the world's most important economic lever, will have to hope he isn't forced to win the confidence of the markets the way his predecessor, Alan Greenspan, did - by stepping in to stop the stock market crash of 1987 turning into a global financial crisis.
From Stockholm to Tokyo, New York to Istanbul, market mayhem swept across the world last week, unleashing violent movements on stock markets and foreign exchanges everywhere, and hammering down the price of commodities such as copper and gold.
In London, the FTSE 100 suffered its worst day for more than three years on Wednesday, before ending the week at 5,672, more than 4 per cent down in five days' trading. After a febrile fortnight, analysts are asking themselves if the turmoil is over - or whether the sell-off marked the end of the three-year bull market and the dawn of a much more volatile era.
Stephen Lewis, of bankers Insinger de Beaufort, says it's too early to write off the risk that the events of the past few days could be the trigger for a full-blown financial crisis. 'Volatility rises, to the extent that it has in equity and commodity markets in recent days, when emotions take over; when actions in the markets are forced; when survival is at stake. In such circumstances, there can be no reliable forecasts of how far markets will move,' he warned.
The worldwide wobble started with the dollar. A warning from G7 finance ministers last month about imbalances in the global economy, and a hint from Federal Reserve chairman Ben Bernanke that he might halt the rise in interest rates, brought the greenback bears out of hiding, and triggered a frenzy of selling.
But over the past few tumultuous days alarm has spread far beyond the currency markets. 'The equity markets were standing rather naively on the sidelines, and suddenly they've woken up,' says David Bloom, currency strategist at HSBC, who has long predicted a dollar shake-out.
'Markets have been looking very vulnerable,' said Julian Jessop, international economist at Capital Economics. 'There have been some bubbles developing, particularly in commodities.'
All investors are waking up to an alarming new world. After five years in which credit has been plentiful as central banks kept the cash taps on, the cost of borrowing has gradually begun to grind upwards. In the US, the Federal Reserve has raised interest rates 16 times, to 5 per cent, from 1 per cent two years ago. The European Central Bank has also raised borrowing costs, and even Japan, the home of the zero interest rate for many years, has responded to a stronger economy by promising to start tightening monetary policy.
In this new climate, with money rapidly becoming more expensive, investors will be less keen to take enormous bets using borrowed cash. The unwinding of some of these risky positions was responsible for some of last week's upheaval.
'Everyone and his dog has leveraged up to the eyeballs buying everything they can get their hands on,' said Charles Dumas, of Lombard Street Research. 'Now liquidity's drying up because interest rates are high; bond yields are high; everyone's finding their funding drying up.'
One extreme example of this is what analysts call the 'yen carry trade': investors have been taking advantage of zero interest rates in Japan, borrowing the money to take bets in other markets. With rates in Japan on the way up, they have been hurriedly extricating themselves: and that has hit risky but high-yielding assets, such as emerging market bonds. Turkey took a pounding last week, for example, as nervous investors pulled their cash back home.
'We think that there's been a very big shake-out in some of the asset classes where people had become very extended, especially emerging markets and commodities,' said Peter Oppenheimer, European head of portfolio strategy at Goldman Sachs.
As if this 'liquidity drain,' as Lewis calls it, wasn't enough to spook the markets, it is happening at a time when the Federal Reserve, the world's most important central bank, is in the hands of a new boy - former Princeton academic Bernanke.
He has to win the confidence of the markets at the same time as deciding on the right time to stop increasing US interest rates. If he pushes borrowing costs too high, the US economy could be plunged into recession; if he stops too soon, the markets will fear that inflation is about to get out of control.
'He's between a rock and a hard place,' said Dresdner currency analyst Sonja Marten. 'It's a very tricky situation. There is going to be that risk of a hard landing, and that's what the markets are not sure about.'
Goldman Sachs analysts call this the 'Bernanke bind' and, at the margins, it could increase the anxiety in the markets over the months ahead. 'They're going to pressure Bernanke, which could be bad,' says Dumas.
Through the fog of market panic last week, analysts said it was important not to forget the underlying economic causes of the upheaval. For several years now, economists have been watching with growing alarm as the US spent more than it earned, running up a record current account deficit with the rest of the world - worth almost 7 per cent of GDP last year.
Funding all that surplus spending has been easy, because foreign investors - notably governments in Asia and the Middle East - have been happy to gobble up American assets, including US Treasury bonds. But, just like an overdraft, the current account deficit can't go on growing indefinitely: something has to give.
Most experts have believed for some time that a devaluation in the dollar would be the best way of helping to bring America's income and expenditure back into line. It should make US goods cheaper, helping American exporters while slowing down imports, which will become more expensive for Americans to buy. The weakening in the dollar over the past couple of weeks could be seen as the first step towards this 'rebalancing'.
All this might sound like the concern of academic number-crunchers. But the US current account deficit has a more homely analogue in the finances of the small-town American household. Buoyed by low interest rates and a property boom, consumers have, quite simply, been spending more than they earn. The savings ratio - the proportion of the average worker's take-home pay that is squirrelled away for a rainy day - has slipped below zero.
With interest rates rising, and signs emerging that the frothy property market is on the turn, American homeowners may respond by acting to put their finances back in order. That could mean a downturn, or at worse a recession, in the US economy.
'If the housing market in the US slows sharply, then that will drag down the economy as a whole,' says Jessop. And when America sneezes, the rest of the world catches a cold: European Union politicians have already started to sound the alarm about the impact of a stronger euro on exporters, for example, and China would be hit hard if US demand for its products plummeted.
For the UK, too, if the rise in sterling against the dollar is sustained, the economic consequences could be painful, particularly when combined with an American slowdown. At the beginning of last week, economists were betting on an early rise in interest rates; but the Bank could find the stronger pound does the same job.
This economic story will play out over months, not at the breakneck speed of the financial markets, and it is hard to predict how its ramifications will ripple across the world. 'There's no new trend established yet,' said HSBC's Bloom. 'It's an unsettled time.' But Bernanke, whose hands are on the world's most important economic lever, will have to hope he isn't forced to win the confidence of the markets the way his predecessor, Alan Greenspan, did - by stepping in to stop the stock market crash of 1987 turning into a global financial crisis.
Monday, May 15, 2006
Dollar's Loss of Favor Stokes Inflation, Global-Growth Concerns
May 15 (Bloomberg) -- Central bankers from Stockholm to Dubai, seeking shelter from the falling dollar, may help weaken it further, creating a new inflation headache for the Federal Reserve and threatening growth in Europe and Japan.
Sweden's Riksbank said last month it had almost halved its dollar holdings in favor of the euro, and central banks in Kuwait, Qatar and United Arab Emirates said they were buying Europe's common currency. Russian Finance Minister Alexei Kudrin complained about the dollar's ``instability.''
The reshuffling of reserves adds to pressure on the dollar, already near its lowest in a decade in trade-weighted terms. The slumping currency may push up the price of imports, which account for 17 percent of the purchases Americans make, just as the Fed considers a pause in its two-year war on inflation. A cheaper dollar could also hinder the European Central Bank and Bank of Japan as they aim for sustainable recoveries.
``Central banks are trying to avoid large capital losses that could result from a drop in the dollar,'' says Barry Eichengren, an economic historian at the University of California, Berkeley and former adviser to the International Monetary Fund. ``Likely impacts include an additional fillip to inflation and more pressure on the Federal Reserve to raise interest rates.''
The dollar has been weakening against the euro since the common European currency replaced national bills and coins in 2002. The dollar has declined 28 percent since January 2002 against a trade-weighted basket of seven currencies tracked by the Fed, and is just 1 percent above its 1995 low.
Reserve Currency
A decade ago, the dollar was protected by its role as the world's sole ``reserve currency,'' dominating international accounts and used in pricing oil and gold. The dollar rallied from its 1995 lows, gaining 40 percent in seven years, after a switch in U.S. policy under Treasury Secretary Robert Rubin in favor of a ``strong dollar.''
Now, the euro provides a possible alternative reserve currency and may become more attractive as the advantage of higher-yielding dollar assets is eroded by the U.S. currency's decline. Currently, 10-year U.S. government debt yields 5.19 percent, compared with 4.07 percent for the German 10-year bund and 1.97 percent for comparable Japanese government debt.
``We're seeing an erosion in international conviction about the dollar as a reserve currency and that negative psychology is overwhelming the advantage of holding U.S. assets,'' says Lara Rhame, currency strategist at Credit Suisse in New York and a former Fed economist.
Buying Euros
Almost 60 percent of central banks that changed their reserves last year boosted euro holdings, and almost four in 10 shed dollars, according to a survey by Central Banking Publications Ltd. and Royal Bank of Scotland Plc.
``For central banks, growing dollar reserves also mean a growing risk of losses should the U.S. dollar depreciate,'' says Hermann Remsperger, chief economist of Germany's Bundesbank. ``Their incentive to give more consideration to other currencies in the portfolio may become stronger.''
By making U.S. exports cheaper and imports more expensive, a softer dollar can fan higher growth and inflation. That may keep the Fed raising interest rates even after 16 straight increases since June 2004.
`Headwind'
A weaker dollar also ``creates a headwind'' for expansions taking shape in Europe and Japan, says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts.
Heidelberg, Germany-based Heidelberger Druckmaschinen AG, the world's largest printing machine maker, said May 3 that exchange rates remained a risk to earnings. Hiroshi Okuda, chairman of Toyota Motor Corp., the world's second-largest carmaker, said last week that ``measures may have to be taken'' if the dollar doesn't rise.
One plus for the U.S. economy from a falling dollar would be a narrowing of the current account deficit, which last year topped $800 billion for the first time and is one cause of the dollar's drop. Harvard University's Kenneth Rogoff, a former IMF chief economist, says the dollar might need to fall 40 percent for the gap to shrink. Finance ministers and central bankers from the Group of Seven nations last month said ``vigorous action'' was needed to address such imbalances, compounding pressure on the dollar.
Developing countries, whose reserves are the fastest growing, are also shedding dollars most rapidly. Foreign currency reserves in developing countries have almost tripled since 1999, reaching $2.9 trillion last year, while industrial nations' holdings rose 78 percent, according to the IMF. Meanwhile, the share of developing nations' reserves held in dollars dropped to 60.5 percent from 71.1 percent.
The dollar's share of reserves held globally dropped to 66.5 percent at the end of 2005 from 71.1 percent in 1999, while the euro's share increased to 24.4 percent from 18.1 percent, the IMF says.
No Sell-Off
That doesn't necessarily mean the dollar's status is threatened, says Stephen Jen, global head of currency strategy at Morgan Stanley in London. ``Whether there is diversification in the future remains to be seen, but so far there has been zero,'' he says.
The U.S. Treasury, which is responsible for dollar policy, says there is ``little evidence'' either that the dollar share of foreign central-bank holdings is declining or that banks might sell off dollar holdings in the future. IMF figures show the dollar's share of foreign exchange reserves ``has remained constant for the last few years at around two-thirds,'' the Treasury said May 10 in its semiannual report on international exchange rate policies.
Central banks with the largest dollar holdings and economies that rely on exports, such as China's, have no interest in triggering a dollar sell-off, so any reserve adjustment they make will be minimal, says Dick McCormack, a senior adviser at the Center for Strategic & International Studies in Washington and former U.S. undersecretary of state for economic affairs.
China's Holdings
People's Bank of China Governor Zhou Xiaochuan said March 5 China won't reduce its dollar holdings as it changes the composition of its reserves. China in February overtook Japan as the world's largest holder of currencies with reserves at $853.7 billion versus Japan's $831.6 billion.
Still, shifts in central bank reserves may mark ``the beginning of a trend questioning the dollar's currently undisputed status as the major reserve currency,'' says Thomas Stolper, global markets economist at Goldman Sachs Group Inc. in London.
Even speculation that central banks are mulling sales may harm the dollar. The currency dropped last November, after Russian Central Bank First Deputy Chairman Alexei Ulyukayev said Russia may lift the amount of euros in its reserves.
``Psychology is pretty important in these markets,'' says John Williamson, an economist at the Institute for International Economics in Washington and former adviser to the IMF. ``People can get pretty excited about even small moves by central banks.''
Sweden's Riksbank said last month it had almost halved its dollar holdings in favor of the euro, and central banks in Kuwait, Qatar and United Arab Emirates said they were buying Europe's common currency. Russian Finance Minister Alexei Kudrin complained about the dollar's ``instability.''
The reshuffling of reserves adds to pressure on the dollar, already near its lowest in a decade in trade-weighted terms. The slumping currency may push up the price of imports, which account for 17 percent of the purchases Americans make, just as the Fed considers a pause in its two-year war on inflation. A cheaper dollar could also hinder the European Central Bank and Bank of Japan as they aim for sustainable recoveries.
``Central banks are trying to avoid large capital losses that could result from a drop in the dollar,'' says Barry Eichengren, an economic historian at the University of California, Berkeley and former adviser to the International Monetary Fund. ``Likely impacts include an additional fillip to inflation and more pressure on the Federal Reserve to raise interest rates.''
The dollar has been weakening against the euro since the common European currency replaced national bills and coins in 2002. The dollar has declined 28 percent since January 2002 against a trade-weighted basket of seven currencies tracked by the Fed, and is just 1 percent above its 1995 low.
Reserve Currency
A decade ago, the dollar was protected by its role as the world's sole ``reserve currency,'' dominating international accounts and used in pricing oil and gold. The dollar rallied from its 1995 lows, gaining 40 percent in seven years, after a switch in U.S. policy under Treasury Secretary Robert Rubin in favor of a ``strong dollar.''
Now, the euro provides a possible alternative reserve currency and may become more attractive as the advantage of higher-yielding dollar assets is eroded by the U.S. currency's decline. Currently, 10-year U.S. government debt yields 5.19 percent, compared with 4.07 percent for the German 10-year bund and 1.97 percent for comparable Japanese government debt.
``We're seeing an erosion in international conviction about the dollar as a reserve currency and that negative psychology is overwhelming the advantage of holding U.S. assets,'' says Lara Rhame, currency strategist at Credit Suisse in New York and a former Fed economist.
Buying Euros
Almost 60 percent of central banks that changed their reserves last year boosted euro holdings, and almost four in 10 shed dollars, according to a survey by Central Banking Publications Ltd. and Royal Bank of Scotland Plc.
``For central banks, growing dollar reserves also mean a growing risk of losses should the U.S. dollar depreciate,'' says Hermann Remsperger, chief economist of Germany's Bundesbank. ``Their incentive to give more consideration to other currencies in the portfolio may become stronger.''
By making U.S. exports cheaper and imports more expensive, a softer dollar can fan higher growth and inflation. That may keep the Fed raising interest rates even after 16 straight increases since June 2004.
`Headwind'
A weaker dollar also ``creates a headwind'' for expansions taking shape in Europe and Japan, says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts.
Heidelberg, Germany-based Heidelberger Druckmaschinen AG, the world's largest printing machine maker, said May 3 that exchange rates remained a risk to earnings. Hiroshi Okuda, chairman of Toyota Motor Corp., the world's second-largest carmaker, said last week that ``measures may have to be taken'' if the dollar doesn't rise.
One plus for the U.S. economy from a falling dollar would be a narrowing of the current account deficit, which last year topped $800 billion for the first time and is one cause of the dollar's drop. Harvard University's Kenneth Rogoff, a former IMF chief economist, says the dollar might need to fall 40 percent for the gap to shrink. Finance ministers and central bankers from the Group of Seven nations last month said ``vigorous action'' was needed to address such imbalances, compounding pressure on the dollar.
Developing countries, whose reserves are the fastest growing, are also shedding dollars most rapidly. Foreign currency reserves in developing countries have almost tripled since 1999, reaching $2.9 trillion last year, while industrial nations' holdings rose 78 percent, according to the IMF. Meanwhile, the share of developing nations' reserves held in dollars dropped to 60.5 percent from 71.1 percent.
The dollar's share of reserves held globally dropped to 66.5 percent at the end of 2005 from 71.1 percent in 1999, while the euro's share increased to 24.4 percent from 18.1 percent, the IMF says.
No Sell-Off
That doesn't necessarily mean the dollar's status is threatened, says Stephen Jen, global head of currency strategy at Morgan Stanley in London. ``Whether there is diversification in the future remains to be seen, but so far there has been zero,'' he says.
The U.S. Treasury, which is responsible for dollar policy, says there is ``little evidence'' either that the dollar share of foreign central-bank holdings is declining or that banks might sell off dollar holdings in the future. IMF figures show the dollar's share of foreign exchange reserves ``has remained constant for the last few years at around two-thirds,'' the Treasury said May 10 in its semiannual report on international exchange rate policies.
Central banks with the largest dollar holdings and economies that rely on exports, such as China's, have no interest in triggering a dollar sell-off, so any reserve adjustment they make will be minimal, says Dick McCormack, a senior adviser at the Center for Strategic & International Studies in Washington and former U.S. undersecretary of state for economic affairs.
China's Holdings
People's Bank of China Governor Zhou Xiaochuan said March 5 China won't reduce its dollar holdings as it changes the composition of its reserves. China in February overtook Japan as the world's largest holder of currencies with reserves at $853.7 billion versus Japan's $831.6 billion.
Still, shifts in central bank reserves may mark ``the beginning of a trend questioning the dollar's currently undisputed status as the major reserve currency,'' says Thomas Stolper, global markets economist at Goldman Sachs Group Inc. in London.
Even speculation that central banks are mulling sales may harm the dollar. The currency dropped last November, after Russian Central Bank First Deputy Chairman Alexei Ulyukayev said Russia may lift the amount of euros in its reserves.
``Psychology is pretty important in these markets,'' says John Williamson, an economist at the Institute for International Economics in Washington and former adviser to the IMF. ``People can get pretty excited about even small moves by central banks.''
Sunday, May 14, 2006
Dollar Crisis--World Markets Braced for the worst
Global markets are bracing for turmoil today after an ominous slide in the US dollar and a slump in equity and bond prices late last week sent tremors through the global financial system, evoking memories of the 1987 crash.
Emerging economies have led the sell-off as investors recoil from risky assets, pummelling stocks and bonds in Turkey, Hungary, Iceland and much of Latin America.
The currencies of Brazil, Mexico and South Africa all suffered their sharpest falls in two years as foreign funds rushed for the exits.
In New York, the Dow Jones industrial index fell 262 points over Thursday and Friday to 11381, setting off contagion in Japan and Europe. The FTSE 100 had its worst drop in three years on Friday, falling 129.9 points, or 2.2pc, to 5912.1.
Analysts said there were now clear signs that monetary tightening by the world's central banks was starting to crimp growth. Lombard Street Research warned the US was now heading into outright recession, with China also facing a hard landing.
"Stock markets in the middle of 2006 are confronting a tight Federal Reserve and European Central Bank, sharply higher bond yields, and a downswing in potential profits," it said.
It raised the risk of "an impending financial crisis" caused by excess credit and leverage across the global economy. The group advised investors to liquidate stocks and move into cash yen until the storm has blown over.
The dollar has slumped 6pc against the euro and 8pc against the yen this year as the markets anticipate an end to interest-rate rises by the US Federal Reserve, switching attention back to America's debt mountain and current account deficit of 7pc of GDP.
Volkmar Hable, chairman of Samarium Technology, said the world was now on the brink of a dollar crisis.
"The crash in the autumn of 1987 started with a massive dollar and bond decline in the spring. We are experiencing exactly the same now," he said.
Ominously, bonds are no longer viewed as a safe haven, a sign of fear that inflation is gaining a foothold in the major economies.
Interest rates on 10-year Treasury bonds have jumped from 4.36pc to 5.19pc since February, in part because Asian investors are demanding a higher premium for holding risky dollar investments. The 10-year bond is the benchmark for economic activity in the US, setting corporate borrowing rates and the cost of most mortgages.
The bond slide is exacting a toll on the US property market, where the price of new homes has fallen for five consecutive months. A half-year inventory of unsold houses now hangs over the market.
Goldman Sachs, however, is sticking to its optimistic forecast, banking on a seamless "hand-over" from a slowing US economy to a re-awakening Europe and Japan, while China will continue to be an engine of global growth. The IMF is also bullish, forecasting roaring growth of 4.9pc in 2006, one of the highest rates in half a century.
Emerging economies have led the sell-off as investors recoil from risky assets, pummelling stocks and bonds in Turkey, Hungary, Iceland and much of Latin America.
The currencies of Brazil, Mexico and South Africa all suffered their sharpest falls in two years as foreign funds rushed for the exits.
In New York, the Dow Jones industrial index fell 262 points over Thursday and Friday to 11381, setting off contagion in Japan and Europe. The FTSE 100 had its worst drop in three years on Friday, falling 129.9 points, or 2.2pc, to 5912.1.
Analysts said there were now clear signs that monetary tightening by the world's central banks was starting to crimp growth. Lombard Street Research warned the US was now heading into outright recession, with China also facing a hard landing.
"Stock markets in the middle of 2006 are confronting a tight Federal Reserve and European Central Bank, sharply higher bond yields, and a downswing in potential profits," it said.
It raised the risk of "an impending financial crisis" caused by excess credit and leverage across the global economy. The group advised investors to liquidate stocks and move into cash yen until the storm has blown over.
The dollar has slumped 6pc against the euro and 8pc against the yen this year as the markets anticipate an end to interest-rate rises by the US Federal Reserve, switching attention back to America's debt mountain and current account deficit of 7pc of GDP.
Volkmar Hable, chairman of Samarium Technology, said the world was now on the brink of a dollar crisis.
"The crash in the autumn of 1987 started with a massive dollar and bond decline in the spring. We are experiencing exactly the same now," he said.
Ominously, bonds are no longer viewed as a safe haven, a sign of fear that inflation is gaining a foothold in the major economies.
Interest rates on 10-year Treasury bonds have jumped from 4.36pc to 5.19pc since February, in part because Asian investors are demanding a higher premium for holding risky dollar investments. The 10-year bond is the benchmark for economic activity in the US, setting corporate borrowing rates and the cost of most mortgages.
The bond slide is exacting a toll on the US property market, where the price of new homes has fallen for five consecutive months. A half-year inventory of unsold houses now hangs over the market.
Goldman Sachs, however, is sticking to its optimistic forecast, banking on a seamless "hand-over" from a slowing US economy to a re-awakening Europe and Japan, while China will continue to be an engine of global growth. The IMF is also bullish, forecasting roaring growth of 4.9pc in 2006, one of the highest rates in half a century.
Monday, May 08, 2006
HOW DOES A CURRENCY COLLAPSE? AND THE U.S. $?
I found this interesting article, describing events common to a currency collapse, over at FMNN.
Monday, May 08, 2006
When a currency loses the confidence of its people, its fall becomes exponential, as has happened to the Zimbabwe $, where in 1982 one U.S.$ equalled 1 Zimbabwe $. Today around Z$200,000 buys one U.S. $ if you can find someone idiot enough to sell one for the Z$.
In day-to-day terms, the smallest note in Zimbabwe a Z$500 is the size of a U.S.$. The price of a single-ply sheet of toilet paper is more expensive at around Z$867
The U.S.$ is nowhere near there, but clearly the U.S. Administration has no plan or even desire to rectify the U.S. Trade deficit. Consequently, we are seeing a growing number of Central Banks turning to the Euro for its reserves and away from the U.S.$.
Whilst most observers and particularly U.S. observers like to have tangible facts and numbers with which to mathematically gauge the present and the different possible futures, a collapsing currency situation is not as neatly gaugeable. Indeed it is driven in stages of 'confidence', which are rarely measurable in advance.
For instance we see today the move of the Pension and other long-term funds into the gold E.T.F.' one finds there are no mathematically measurable factors with which to measure the pace of change to these funds. Yes, the number of 'Road-shows' the World Gold Council does affects this move to some extent, but how do you measure the spread of that knowledge and resulting investment in the E.T.F.'s outside of that? How does one measure the forces causing uncertainty and falling 'confidence'.
It is an emotional progression, one that moves in lurches as particular incidents destroy confidence limb by limb. In such a climate a steady degeneration of confidence lead to an effect we shall call a "plateau - cliff" process.
Monday, May 08, 2006
When a currency loses the confidence of its people, its fall becomes exponential, as has happened to the Zimbabwe $, where in 1982 one U.S.$ equalled 1 Zimbabwe $. Today around Z$200,000 buys one U.S. $ if you can find someone idiot enough to sell one for the Z$.
In day-to-day terms, the smallest note in Zimbabwe a Z$500 is the size of a U.S.$. The price of a single-ply sheet of toilet paper is more expensive at around Z$867
The U.S.$ is nowhere near there, but clearly the U.S. Administration has no plan or even desire to rectify the U.S. Trade deficit. Consequently, we are seeing a growing number of Central Banks turning to the Euro for its reserves and away from the U.S.$.
Whilst most observers and particularly U.S. observers like to have tangible facts and numbers with which to mathematically gauge the present and the different possible futures, a collapsing currency situation is not as neatly gaugeable. Indeed it is driven in stages of 'confidence', which are rarely measurable in advance.For instance we see today the move of the Pension and other long-term funds into the gold E.T.F.' one finds there are no mathematically measurable factors with which to measure the pace of change to these funds. Yes, the number of 'Road-shows' the World Gold Council does affects this move to some extent, but how do you measure the spread of that knowledge and resulting investment in the E.T.F.'s outside of that? How does one measure the forces causing uncertainty and falling 'confidence'.
It is an emotional progression, one that moves in lurches as particular incidents destroy confidence limb by limb. In such a climate a steady degeneration of confidence lead to an effect we shall call a "plateau - cliff" process.
- As confidence is whittled away the currency appears relatively stable.
- Then a particular event will occur that triggers a breakdown and the currency drops suddenly, like falling off a cliff, until it finds a short-term bottom and it holds that level for a period as though on a plateau. The process then repeats itself.
- The degeneration then accelerates, so the fall from the cliff to the next stable plateau happens more quickly.
- Then the height of the cliff [the fall] extends until it grows at an exponential basis.
- The final collapse will occur when the currency is completely discredited and used only by those unfortunate to have no other choice. Alternatively the currency is changed to a new one, one whose issue is backed by assets [Such as land - after the Weimar republic] and limited to a fixed relationship to those assets until confidence is restored by a healthy economy and a balanced Balance of Payments. This provides a basis in which to be confident about currency.
However, were the $ heading for a collapse, the U.S. $, a global reserve asset, nothing in the U.S. such as land or any other fixed U.S. asset would suffice. The asset would have to be accessible by its creditors, outside the States who would have to have a willingness to accept that asset in the case of a default by the U.S. The use of the $ domestically and internationally brings such problems that in the final extreme conditions the $ is inadequate as a global reserve currency.
But for the market to whittle away confidence in the $ would take some time. But we believe that it will happen.
- Look back a couple of years and we saw the $ reigning supreme.
- Then warnings were given against it as the Trade deficit began to grow.
- The Fed or the Administration then allied itself to the euro, giving it the respite it has enjoyed over the last year.
- Now there seems to be a breaking down of the $ of late and some Central Banks switching to the Euro out of the $. These were three distinct stages.
- The next stage is for the $ to fall heavily against the Euro and Euro oriented currencies.
- Next will come the defence of the $ until the weight of selling pressure exhausts the $ against other currencies [please note the U.S. has few foreign currencies left in its hands with which to defend the $, but the Fed put in place measures to allow it intervene in the international foreign exchanges.]
- This could delay the fall for some time, but history has shown that when a Central Bank defends a rate in the market, it gives in periodically and devalues. If insufficient it has to defend again and again.
- I have no doubt that Central Banks will use this defence to unload their dollars back to the States.
- At some stage the U.S. will have to impose Controls to prevent foreign capital from exiting the States and rejecting dollars coming home. These are called Exchange Controls.
- When this happens many currencies will begin facing the same problems as their reserves become suspect too and they cannot defend their own Balance of Payments deficits.
- At this point for the global economy to function adequately, a new "Global Currency" will have to be established and be supplied sufficient so as to regain global confidence. We cannot see this happening without gold in there to a greater or lesser extent. Of course this will have to be at prices believed by all nations, not just individuals!
During this process confidence in the currency will be the measuring factor, a nebulous, unstable element in itself. The process of the decay of confidence is described above. But confidence could well go down dramatically from the point we are at now with the $ in the monetary system. Soon the cliffs will extend until the defence of the currency comes, then a long plateau while the dollar is defended, until the heavy falls begin.
The international trading power of the States will dominate just how far the dollar will fall. Of course if the States manages to show it is in the process of balancing the Balance of Payments beforehand [which may not mean the complete elimination of the Trade deficit] the demand for dollars will probably overcome the supply. But inevitably that action will mean a huge recession for the States, which could prove an internal nightmare and cause a global recession of its own.
It is probable that the Administration would isolate the U.S.A. from the rest of the world by severe Exchange Control measures, which will create its own internal boom, sooner or later. We will produce an article, or series thereof, at the right time, on this subject.
Sunday, May 07, 2006
Finding Balance
Finding balance in life is always difficult. I work > 50 hours a week, yet try to find time for my family, find time to exercise, time to take a class here & there, time to find enjoyment in life (riding motorcycles, relaxing, etc), time to manage investments, time for friends, time to Blog, etc. The problem is: there is only so much time in a day and difficult choices & sacrifices must always be made in the attempt to find this elusive balance… There is never really enough time, so the areas of importance today come at the expense (neglect) of other areas in life.
So why am I discussing this? Well, this Blog site (which I truly enjoy) has taken quite a bit of my spare time--at the detriment & expense of many other areas in my life. Therefore, I hope to refocus my efforts and find a new balance point—something that will allow me to spend more time in these other areas (identified above).
With that said, I do plan to update my site with articles of interest when possible, but will probably put far less time/effort into it. I hope all of you can understand.
Anyway, here are a few articles that I thought were interesting this week:
Asia Is Getting Ready to Dump the Dollar Peg
All The Ducks Are Lining Up
Warren Buffett Predicts A Housing Bubble Burst At Annual Meeting
Iran sees oil bourse in two months
More Drivers Feel Pinch at the Pump
The Great Depression, Part II?
Asia Is Getting Ready to Dump the Dollar Peg
May 8 (Bloomberg) -- Li Yong, China's vice minister for finance, said he had heard a ``rumor'' that the U.S. dollar was headed for a 25 percent drop. If the gossip was true, the consequences would be ``shocking,'' he said.
Li's comment, which he made at a discussion on global financial imbalances last week at the annual meeting of the Asian Development Bank in the Indian city of Hyderabad, was aimed directly at fellow panelist Tim Adams, the U.S. Treasury undersecretary of international affairs.
The unspoken message was: ``Don't try to talk the dollar down.'' And Adams knew better than to ask, ``Well, what are you going to do about it?'' The answer to that question has already begun taking shape: Asia may be getting ready to fix its currencies to a local anchor, dumping the region's unofficial dollar peg.
Even as they continue to pile up U.S. debt in their foreign- exchange reserves to keep their currencies stable against the dollar, Asian nations, China among them, are preparing for a scenario where the dollar does indeed collapse under the weight of a record U.S. current account deficit.
At the Hyderabad meeting, finance ministers of China, Japan and South Korea got together with their counterparts from the Association of Southeast Asian Nations, or Asean. The 13-nation group said it would sponsor a research project, titled ``Toward greater financial stability in the Asian region: Exploring steps to create regional monetary units.''
Asian Currency Unit
This is no innocuous academic exercise. Regional monetary units are a euphemism for a parallel Asian currency, an idea that has been around since the 1997-98 financial crisis and is now, for the first time, entering the realm of policy making.
Both Japan and China are extremely serious about it and are vying to take ownership of the project.
An Asian Currency Unit, or ACU, will be an index that seeks to capture the value of a hypothetical Asian currency by taking a weighted average of several of them. The weight for a particular currency in the index may be determined by the size of the economy and the quantity of its total trade.
What's the big deal with the ACU? Given the data, anyone can set up an index. It isn't that Asia is talking about replacing its national currencies with the ACU. A European-style single currency in Asia is at least decades away. The ACU is an accounting unit; it won't change hands in the physical world.
The ACU will start making a difference when it becomes the fulcrum of exchange-rate management in Asia. There is some sign that Asian nations want to do just that.
A New Peg
Korea, Japan and China agreed in Hyderabad to ``immediately launch discussions on the road map for a system to coordinate foreign exchange policy.''
The ACU can help a lot in such coordination. It can become a basket peg against which any Asian nation can fix the value of its currency within a band. The ACU, itself, will float.
Why might the ACU work when the now-defunct European Currency Unit, on which the concept is modeled, didn't? One good reason, as noted by economist Barry Eichengreen of the University of California, Berkeley, is that Europe's need for a parallel currency was satisfied by the dollar.
The ACU may well emerge as a viable currency for denominating export invoices, bank loans and bond issuances if the dollar is no longer perceived as a safe storage of value.
So far, Japan has been driving the ACU concept. Haruhiko Kuroda, a former Japanese vice minister of finance and currently the president of the Asian Development Bank, was vigorously pursuing it. The ADB was going to start computing and publishing several ACUs sometime this year.
China in Control
One such ACU would have comprised 13 members, including the Japanese yen, the Chinese yuan, the Korean won and the currencies of Singapore, Malaysia, Thailand, Indonesia, Brunei, Vietnam, Cambodia, Laos, Myanmar and the Philippines. Another ACU would have included both the yuan and the Taiwan dollar -- and that would have been anathema to China. Nor would China have liked to peg the yuan to an ACU that was overly dominated by the yen.
Now China has taken control. While the research will still be conducted in Japan, Asean will take the decision on the composition of the ACU. While Japan is a member of this club, its influence is in decline. The association is now firmly under China's thumb.
While China continues to exhort the U.S. not to follow weak- dollar policies, it, like everyone else, can only guess about the longevity of the present global imbalances.
If there is a sudden collapse in the dollar, the U.S. appetite for imported goods may vanish. The Chinese export engine may seize up and its fragile banking system may collapse under a spate of new bad loans. The idea behind the ACU is to buy some insurance, however inadequate, against all of this.
Stalemate
With its ``my currency is your problem'' attitude, the U.S. has made a negotiated settlement of global imbalances a diplomatic non-starter. China isn't willing to consider the U.S. argument that quicker appreciation of the yuan may prevent a costly adjustment later.
Once again in Hyderabad, Undersecretary Adams tried valiantly to get this message across to Chinese Vice Finance Minister Li. He was wasting his breath. Li, as Adams noted wryly, ``knows all my talking points.''
All The Ducks Are Lining Up (by Peter Schiff)
In case you were otherwise distracted by a spectacular springtime, April also offered some foreboding signs in the economic skies. During the month, turbulent action in the dollar, precious metals, oil, and bonds market offered clear indications that the supports holding up the US economy have become increasingly unstable. The good news is that since the dangers have been largely unappreciated, wise investors have been granted more time to take appropriate action before the situation deteriorates further.
Gold & Silver
Just two weeks after breaking through $600 barrier for the first time in twenty-five years, gold settled at more than $650 per ounce by month's end. Silver traded as high as $14.50, fell sharply, then finished last week with its largest one day gain since the 1980's, settling at about $13.80 per ounce. Friday also marked the much anticipated debut of Barclays' silver ETF (symbol SLV.NYSE.), which join similar gold ETFs already on the market. Similar ETFs will soon begin trading on other major exchanges throughout the world.
The ease with which physical gold and silver can be bought by retail investors through ETFs will reintroduce an entire generation to an asset class recently thought to be as dead as disco. This soaring demand, when combined with decades of under-investment by mining companies, divestments by central banks, and price hedging by gold producers, will create an explosive environment for metal price appreciation.
Despite the fact that this bull market has been steadily building for the past six years, only recently has the surge caught the media's attention. As a result, cries of "bubble" or "blow-off" have reverberated. One self-professed metals expert was so convinced that a silver "blow-off" was imminent that he publicly promised to "eat his hat" were that not the case. When silver did see a sharp one-day pull back, the same "expert," who has consistently underestimated gold's strength since late 2004, advised investors to sell, declaring that a significant correction in both gold and silver had begun. In reality, the anticipated "correction" ended before the ink had dried on his quotation marks.
As a reminder of just how large bubbles can grow before popping, during the 1990s the NASDQ rose from 300 to 5,000. If the NASDAQ could do it, why can't gold? Sure gold does not pay any dividends, but than neither did the NASQAQ. Plus during the entire NASDAQ rally new shares of stock were constantly being issued, either as a result of IPOs, secondary offerings and option grants. However, the growth in the supply of gold and silver will be far more constrained, creating the potential for far greater appreciation.
It seems fitting that on the first day of trading for the silver ETF, shares of Microsoft, once the quintessential "new era" stock, plunged by 11%. Trading as high as $60 per share in December of 1999, Microsoft shares now trade at about $24. During that same time the price of gold has risen from $290 to $650. Imagine conducting a survey on New Year's Eve 1999 that asked typical investors to predict whether Microsoft or gold would outperform over the next decade. Would even one in one hundred have chosen gold? How many would choose gold today or even realize the extent of its out performance?
For a more in-depth analysis of why the recent action in precious metals is not akin to the technology bubble in the 1990's or real estate today, read my recent commentary entitled "The Top Ten Signs of a Precious Metals Bubble."
Oil
After consolidating price gains below its recently established $70 resistance level, oil broke-out in the second half of April. With prices now surging above $75 per barrel, we have likely entered a new phase in this ongoing bull market. So much for Wall Street's consensus that oil prices had finally topped out, and that relief at the pumps was just around the corner. Higher energy prices will further impair over-leveraged American consumers, and will exacerbate an already enormous current account deficit.
Though many of our favorite energy plays have rallied off their recent lows, I still believe that share prices do not accurately reflect current, not to mention future, oil prices. As a result, if you failed to buy as a result of my "buy the dip" recommendation in the last edition of this newsletter, do not make the same mistake twice. Speak with a Euro Pacific broker to discuss my favorite picks in this sector and to learn which in particular are most appropriate.
Bonds
As the conundrum that wasn't continues to unwind, long-term interest rates have risen to their highest levels in over four years, with ten-year yields rising to about 5.1% and thirty-year yields above 5.2%. The technicals suggest rates could rise to 5.4 and 5.5 respectively before consolidating in preparation for an even more substantial rise later in the year. The jump has severe ramifications for over-leveraged consumers/borrowers, the stock market, the dollar, and the housing bubble; in other words, America's entire unbalanced economy.
The Dollar
Last week the Canadian dollar surged above 89 cents rising to its highest level in twenty-eight years, the Australian dollar rose above 76 cents, also closing in on new multi-year highs, the euro surged above 1.26 and the British Pound above 1.82.
The U.S. dollar Index broke thought major support, closing below 86, suggesting another test of its historic lows near 80 is likely. A failure could send the dollar plunging, with dire repercussions across the entire spectrum of dollar denominated financial assets, the U.S. economy, and the American standard of living. Will the 80 level hold again? I for one certainly wouldn't want to bet on it. The stakes are far too high. Even if the dollar does gain one more reprieve, its fate has already been sealed. My guess is if that if the dollar rallies off the 80 level one more time it will be its final "dead cat" bounce.
Conclusion
The simultaneous break-down in bonds and the dollar, together with concurrent break-outs in precious metals and oil, suggests that the global imbalances could be approaching a key inflection point, one which might finally cause many to remove their rose colored glasses.
Readers of this letter are advised to take decisive action before reality sets in. Call Euro Pacific Capital today to find out how you can insulate yourself from the foul weather ahead.
Warren Buffett Predicts A Housing Bubble Burst At Annual Meeting
Omaha, NE (AHN) - Financial giant, Warren Buffett has given the world his economic predictions at the annual meeting of his company, Berkshire Hathaway.
Buffett and Berkshire Hathaway Vice Chairman Charles Munger held their traditional question and answer session with shareholders in Omaha, Nebraska.
According to Buffett, the U.S. housing market is coming upon a correction, saying, "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets."
Munger adds, "There is a lot of ridiculous credit being extended in the U.S. housing sector."
Buffett says that Miami-Dade and Broward counties are seeing "a rise in unsold inventory and stagnation in price."
Buffett believes, "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it."
Iran sees oil bourse in two months
BAKU: Iran plans to launch an oil bourse on the Gulf island of Kish within the next two months, Iranian President Mahmoud Ahmadinejad said yesterday.
“Our specialists are currently working on the plan and the bourse will start working within the next two months,” he told a regional conference in the Azeri capital of Baku.
Iranian officials have previously said the bourse would be a small pilot operation trading only two or three petrochemical products and it would start before March 2007, a delay from previous plans.
Western media and think-tanks have speculated that Iran’s oil bourse could undermine the importance of the dollar by pricing the world’s fourth biggest exports of crude in euros.
Mohammad Javad Asemipour, adviser to Iran’s oil minister and head of the bourse project, has previously dismissed such suggestions as “propaganda” and rejected reports that the bourse was intended to rival exchanges being set up in Dubai and Qatar.
He has said switching to crude sales would have to be phased in gradually and depends on the success of the petrochemicals trading.
More Drivers Feel Pinch at the Pump
High pump prices are pinching the pocketbooks of seven in 10 Americans, a financial hardship that more middle- and higher-income drivers say they are beginning to feel, an AP-Ipsos poll found.
With gasoline prices topping $3 a gallon for regular unleaded in many areas, people say they are driving less, cutting short vacations and curtailing their use of heating and air conditioning.
The number of people who expect rising gas prices to cause financial problems in the months ahead has jumped from 51 percent a year ago to 70 percent now, according to AP polling. This increase has been dramatic among people who earn more than $50,000.
These concerns are reflected in consumer confidence polling this past week by Ipsos, an international polling firm. Confidence dropped sharply and was the lowest since October, when the country was recovering from the devastation of Hurricane Katrina.
The average price nationally of a gallon of regular unleaded gasoline was $2.92 on Friday, according to AAA, the motorists' club. The record high of $3.05 was set on Labor Day, according to AAA.
According to the poll, just over six in 10 of those who make between $50,000 and $75,000 a year say gas prices are a hardship, compared with four in 10 a year ago.
The Great Depression, Part II?
Learning the good news that, fueled by programs aiming to restore the ravages of Hurricanes Katrina and Rita, our economy grew by a magnificent 4.8 percent this year, we should be as happy as clams. Yet some of us are scared.
We can cheer that our exports, compared to last year, have grown to 12.1 percent. But crossing the page, we see imports -- mostly from China -- are up 13 percent. The symbol for the United States -- once a factory belching smoke -- now is an economy dominated by illegal immigrants living in a mall-dominated culture.
As gasoline prices remain high there is plenty of evidence that "oil shock" has spread throughout the country -- to farmers, construction companies, plastics manufacturers and, of course, delivery and trucking companies. So, in turn, look for higher prices from taxi cabs through school busing programs, trash removal, service calls and deliveries of your favorite pizza.
Farmers are vital to our lives. This year's harvest already is in serious trouble because of the heavy and long rains, flooding and high winds, interspersed by imminent drought. All of which equals price increases. Fuel prices for crop planting are much higher than in 2002, as are fertilizer costs.
Mortgage foreclosures on American homes jumped by 72 percent in the first quarter of 2006 compared with 2005. Easy financing of homes, "no down payment" and adjustable-rate mortgages are difficult to find and housing inventories are larger than they have been since the 1990s.
The middle classes is under attack. Last year, we used our homes as equity and withdrew $600 billion to take care of credit card bills and personal spending. Now, with increased gas prices, a tight housing market and personal debt in the stratosphere, the crunch is on.
Small wonder that the price of gold, around $270 per ounce in 2001, now is more than $660 and expected to move higher still.
The French connection
In July, the G8 will meet in St. Petersburg and there are signs that Alexei Kudrin, Russia's Finance minister, may seek to cause us still more problems.
Last month, he ranted that "the U.S. dollar is not the world's absolute reserve currency," fussed about our "unsustainable" trade deficit and, with the finesse of a suicide bomber, added, "The international community can hardly be satisfied with this instability."
If Kudrin is taken seriously -- and the Chinese certainly consider him a very serious player -- we may then be forced away from our economic underpinning. If Russia, China or the European Community started using euros, rubles or yen instead of greenbacks for oil transactions, the effect would equate to a nuclear bomb on New York City. And, if we stop buying oil, China and India will gulp each drop.
We would have to start paying back our $9 trillion national debt and that is impossible.
The illegals crisis
So that's how the money we don't have may be spent. But we also have an illegal immigration crisis.
Illegal immigrants have taken over agricultural industries from A to Z. They are responsible for cleaning the massive hog and poultry battery farms that provide us with inexpensive food. They work on turf farms, horticulture and lawn services in the suburbs. They are responsible for meat-packing plants, through herding cattle to mushroom farming.
Agriculture is permeated by Hispanic labor.
World Perspectives, a consulting firm, estimates that as many as 75 percent of our agricultural labor force is "fraudulently documented." Moreover, the American Farm Bureau Federation claims that a crackdown on illegals would cause production losses of $5 billion to $9 billion a year.
Adding to a sense of fear about the economy are the words of Ben Bernanke, the newly appointed chairman of the Federal Reserve: "If the dollar declined sharply, it would not necessarily disrupt markets."
With our dollar, that sounds like an invitation for China or perhaps Russia to start a sell-off that would drown us in red ink. In the past four years, the dollar has dropped 30 percent against the euro, consumer spending and housing prices are in retreat and energy prices are skyrocketing.
That's why we are scared.
Are we about to face the challenge of another Great Depression, coupled with the ever-increasing costs of the social safety net (health care and pensions), Social Security and education compounded by war and security issues? And are we willing to remain dependent on illegal immigrant labor filling what President George Bush calls "jobs Americans don't want"?
So why am I discussing this? Well, this Blog site (which I truly enjoy) has taken quite a bit of my spare time--at the detriment & expense of many other areas in my life. Therefore, I hope to refocus my efforts and find a new balance point—something that will allow me to spend more time in these other areas (identified above).
With that said, I do plan to update my site with articles of interest when possible, but will probably put far less time/effort into it. I hope all of you can understand.
Anyway, here are a few articles that I thought were interesting this week:
Asia Is Getting Ready to Dump the Dollar Peg
All The Ducks Are Lining Up
Warren Buffett Predicts A Housing Bubble Burst At Annual Meeting
Iran sees oil bourse in two months
More Drivers Feel Pinch at the Pump
The Great Depression, Part II?
Asia Is Getting Ready to Dump the Dollar Peg
May 8 (Bloomberg) -- Li Yong, China's vice minister for finance, said he had heard a ``rumor'' that the U.S. dollar was headed for a 25 percent drop. If the gossip was true, the consequences would be ``shocking,'' he said.
Li's comment, which he made at a discussion on global financial imbalances last week at the annual meeting of the Asian Development Bank in the Indian city of Hyderabad, was aimed directly at fellow panelist Tim Adams, the U.S. Treasury undersecretary of international affairs.
The unspoken message was: ``Don't try to talk the dollar down.'' And Adams knew better than to ask, ``Well, what are you going to do about it?'' The answer to that question has already begun taking shape: Asia may be getting ready to fix its currencies to a local anchor, dumping the region's unofficial dollar peg.
Even as they continue to pile up U.S. debt in their foreign- exchange reserves to keep their currencies stable against the dollar, Asian nations, China among them, are preparing for a scenario where the dollar does indeed collapse under the weight of a record U.S. current account deficit.
At the Hyderabad meeting, finance ministers of China, Japan and South Korea got together with their counterparts from the Association of Southeast Asian Nations, or Asean. The 13-nation group said it would sponsor a research project, titled ``Toward greater financial stability in the Asian region: Exploring steps to create regional monetary units.''
Asian Currency Unit
This is no innocuous academic exercise. Regional monetary units are a euphemism for a parallel Asian currency, an idea that has been around since the 1997-98 financial crisis and is now, for the first time, entering the realm of policy making.
Both Japan and China are extremely serious about it and are vying to take ownership of the project.
An Asian Currency Unit, or ACU, will be an index that seeks to capture the value of a hypothetical Asian currency by taking a weighted average of several of them. The weight for a particular currency in the index may be determined by the size of the economy and the quantity of its total trade.
What's the big deal with the ACU? Given the data, anyone can set up an index. It isn't that Asia is talking about replacing its national currencies with the ACU. A European-style single currency in Asia is at least decades away. The ACU is an accounting unit; it won't change hands in the physical world.
The ACU will start making a difference when it becomes the fulcrum of exchange-rate management in Asia. There is some sign that Asian nations want to do just that.
A New Peg
Korea, Japan and China agreed in Hyderabad to ``immediately launch discussions on the road map for a system to coordinate foreign exchange policy.''
The ACU can help a lot in such coordination. It can become a basket peg against which any Asian nation can fix the value of its currency within a band. The ACU, itself, will float.
Why might the ACU work when the now-defunct European Currency Unit, on which the concept is modeled, didn't? One good reason, as noted by economist Barry Eichengreen of the University of California, Berkeley, is that Europe's need for a parallel currency was satisfied by the dollar.
The ACU may well emerge as a viable currency for denominating export invoices, bank loans and bond issuances if the dollar is no longer perceived as a safe storage of value.
So far, Japan has been driving the ACU concept. Haruhiko Kuroda, a former Japanese vice minister of finance and currently the president of the Asian Development Bank, was vigorously pursuing it. The ADB was going to start computing and publishing several ACUs sometime this year.
China in Control
One such ACU would have comprised 13 members, including the Japanese yen, the Chinese yuan, the Korean won and the currencies of Singapore, Malaysia, Thailand, Indonesia, Brunei, Vietnam, Cambodia, Laos, Myanmar and the Philippines. Another ACU would have included both the yuan and the Taiwan dollar -- and that would have been anathema to China. Nor would China have liked to peg the yuan to an ACU that was overly dominated by the yen.
Now China has taken control. While the research will still be conducted in Japan, Asean will take the decision on the composition of the ACU. While Japan is a member of this club, its influence is in decline. The association is now firmly under China's thumb.
While China continues to exhort the U.S. not to follow weak- dollar policies, it, like everyone else, can only guess about the longevity of the present global imbalances.
If there is a sudden collapse in the dollar, the U.S. appetite for imported goods may vanish. The Chinese export engine may seize up and its fragile banking system may collapse under a spate of new bad loans. The idea behind the ACU is to buy some insurance, however inadequate, against all of this.
Stalemate
With its ``my currency is your problem'' attitude, the U.S. has made a negotiated settlement of global imbalances a diplomatic non-starter. China isn't willing to consider the U.S. argument that quicker appreciation of the yuan may prevent a costly adjustment later.
Once again in Hyderabad, Undersecretary Adams tried valiantly to get this message across to Chinese Vice Finance Minister Li. He was wasting his breath. Li, as Adams noted wryly, ``knows all my talking points.''
All The Ducks Are Lining Up (by Peter Schiff)
In case you were otherwise distracted by a spectacular springtime, April also offered some foreboding signs in the economic skies. During the month, turbulent action in the dollar, precious metals, oil, and bonds market offered clear indications that the supports holding up the US economy have become increasingly unstable. The good news is that since the dangers have been largely unappreciated, wise investors have been granted more time to take appropriate action before the situation deteriorates further.
Gold & Silver
Just two weeks after breaking through $600 barrier for the first time in twenty-five years, gold settled at more than $650 per ounce by month's end. Silver traded as high as $14.50, fell sharply, then finished last week with its largest one day gain since the 1980's, settling at about $13.80 per ounce. Friday also marked the much anticipated debut of Barclays' silver ETF (symbol SLV.NYSE.), which join similar gold ETFs already on the market. Similar ETFs will soon begin trading on other major exchanges throughout the world.
The ease with which physical gold and silver can be bought by retail investors through ETFs will reintroduce an entire generation to an asset class recently thought to be as dead as disco. This soaring demand, when combined with decades of under-investment by mining companies, divestments by central banks, and price hedging by gold producers, will create an explosive environment for metal price appreciation.
Despite the fact that this bull market has been steadily building for the past six years, only recently has the surge caught the media's attention. As a result, cries of "bubble" or "blow-off" have reverberated. One self-professed metals expert was so convinced that a silver "blow-off" was imminent that he publicly promised to "eat his hat" were that not the case. When silver did see a sharp one-day pull back, the same "expert," who has consistently underestimated gold's strength since late 2004, advised investors to sell, declaring that a significant correction in both gold and silver had begun. In reality, the anticipated "correction" ended before the ink had dried on his quotation marks.
As a reminder of just how large bubbles can grow before popping, during the 1990s the NASDQ rose from 300 to 5,000. If the NASDAQ could do it, why can't gold? Sure gold does not pay any dividends, but than neither did the NASQAQ. Plus during the entire NASDAQ rally new shares of stock were constantly being issued, either as a result of IPOs, secondary offerings and option grants. However, the growth in the supply of gold and silver will be far more constrained, creating the potential for far greater appreciation.
It seems fitting that on the first day of trading for the silver ETF, shares of Microsoft, once the quintessential "new era" stock, plunged by 11%. Trading as high as $60 per share in December of 1999, Microsoft shares now trade at about $24. During that same time the price of gold has risen from $290 to $650. Imagine conducting a survey on New Year's Eve 1999 that asked typical investors to predict whether Microsoft or gold would outperform over the next decade. Would even one in one hundred have chosen gold? How many would choose gold today or even realize the extent of its out performance?
For a more in-depth analysis of why the recent action in precious metals is not akin to the technology bubble in the 1990's or real estate today, read my recent commentary entitled "The Top Ten Signs of a Precious Metals Bubble."
Oil
After consolidating price gains below its recently established $70 resistance level, oil broke-out in the second half of April. With prices now surging above $75 per barrel, we have likely entered a new phase in this ongoing bull market. So much for Wall Street's consensus that oil prices had finally topped out, and that relief at the pumps was just around the corner. Higher energy prices will further impair over-leveraged American consumers, and will exacerbate an already enormous current account deficit.
Though many of our favorite energy plays have rallied off their recent lows, I still believe that share prices do not accurately reflect current, not to mention future, oil prices. As a result, if you failed to buy as a result of my "buy the dip" recommendation in the last edition of this newsletter, do not make the same mistake twice. Speak with a Euro Pacific broker to discuss my favorite picks in this sector and to learn which in particular are most appropriate.
Bonds
As the conundrum that wasn't continues to unwind, long-term interest rates have risen to their highest levels in over four years, with ten-year yields rising to about 5.1% and thirty-year yields above 5.2%. The technicals suggest rates could rise to 5.4 and 5.5 respectively before consolidating in preparation for an even more substantial rise later in the year. The jump has severe ramifications for over-leveraged consumers/borrowers, the stock market, the dollar, and the housing bubble; in other words, America's entire unbalanced economy.
The Dollar
Last week the Canadian dollar surged above 89 cents rising to its highest level in twenty-eight years, the Australian dollar rose above 76 cents, also closing in on new multi-year highs, the euro surged above 1.26 and the British Pound above 1.82.
The U.S. dollar Index broke thought major support, closing below 86, suggesting another test of its historic lows near 80 is likely. A failure could send the dollar plunging, with dire repercussions across the entire spectrum of dollar denominated financial assets, the U.S. economy, and the American standard of living. Will the 80 level hold again? I for one certainly wouldn't want to bet on it. The stakes are far too high. Even if the dollar does gain one more reprieve, its fate has already been sealed. My guess is if that if the dollar rallies off the 80 level one more time it will be its final "dead cat" bounce.
Conclusion
The simultaneous break-down in bonds and the dollar, together with concurrent break-outs in precious metals and oil, suggests that the global imbalances could be approaching a key inflection point, one which might finally cause many to remove their rose colored glasses.
Readers of this letter are advised to take decisive action before reality sets in. Call Euro Pacific Capital today to find out how you can insulate yourself from the foul weather ahead.
Warren Buffett Predicts A Housing Bubble Burst At Annual Meeting
Omaha, NE (AHN) - Financial giant, Warren Buffett has given the world his economic predictions at the annual meeting of his company, Berkshire Hathaway.
Buffett and Berkshire Hathaway Vice Chairman Charles Munger held their traditional question and answer session with shareholders in Omaha, Nebraska.
According to Buffett, the U.S. housing market is coming upon a correction, saying, "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets."
Munger adds, "There is a lot of ridiculous credit being extended in the U.S. housing sector."
Buffett says that Miami-Dade and Broward counties are seeing "a rise in unsold inventory and stagnation in price."
Buffett believes, "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it."
Iran sees oil bourse in two months
BAKU: Iran plans to launch an oil bourse on the Gulf island of Kish within the next two months, Iranian President Mahmoud Ahmadinejad said yesterday.
“Our specialists are currently working on the plan and the bourse will start working within the next two months,” he told a regional conference in the Azeri capital of Baku.
Iranian officials have previously said the bourse would be a small pilot operation trading only two or three petrochemical products and it would start before March 2007, a delay from previous plans.
Western media and think-tanks have speculated that Iran’s oil bourse could undermine the importance of the dollar by pricing the world’s fourth biggest exports of crude in euros.
Mohammad Javad Asemipour, adviser to Iran’s oil minister and head of the bourse project, has previously dismissed such suggestions as “propaganda” and rejected reports that the bourse was intended to rival exchanges being set up in Dubai and Qatar.
He has said switching to crude sales would have to be phased in gradually and depends on the success of the petrochemicals trading.
More Drivers Feel Pinch at the Pump
High pump prices are pinching the pocketbooks of seven in 10 Americans, a financial hardship that more middle- and higher-income drivers say they are beginning to feel, an AP-Ipsos poll found.
With gasoline prices topping $3 a gallon for regular unleaded in many areas, people say they are driving less, cutting short vacations and curtailing their use of heating and air conditioning.
The number of people who expect rising gas prices to cause financial problems in the months ahead has jumped from 51 percent a year ago to 70 percent now, according to AP polling. This increase has been dramatic among people who earn more than $50,000.
These concerns are reflected in consumer confidence polling this past week by Ipsos, an international polling firm. Confidence dropped sharply and was the lowest since October, when the country was recovering from the devastation of Hurricane Katrina.
The average price nationally of a gallon of regular unleaded gasoline was $2.92 on Friday, according to AAA, the motorists' club. The record high of $3.05 was set on Labor Day, according to AAA.
According to the poll, just over six in 10 of those who make between $50,000 and $75,000 a year say gas prices are a hardship, compared with four in 10 a year ago.
The Great Depression, Part II?
Learning the good news that, fueled by programs aiming to restore the ravages of Hurricanes Katrina and Rita, our economy grew by a magnificent 4.8 percent this year, we should be as happy as clams. Yet some of us are scared.
We can cheer that our exports, compared to last year, have grown to 12.1 percent. But crossing the page, we see imports -- mostly from China -- are up 13 percent. The symbol for the United States -- once a factory belching smoke -- now is an economy dominated by illegal immigrants living in a mall-dominated culture.
As gasoline prices remain high there is plenty of evidence that "oil shock" has spread throughout the country -- to farmers, construction companies, plastics manufacturers and, of course, delivery and trucking companies. So, in turn, look for higher prices from taxi cabs through school busing programs, trash removal, service calls and deliveries of your favorite pizza.
Farmers are vital to our lives. This year's harvest already is in serious trouble because of the heavy and long rains, flooding and high winds, interspersed by imminent drought. All of which equals price increases. Fuel prices for crop planting are much higher than in 2002, as are fertilizer costs.
Mortgage foreclosures on American homes jumped by 72 percent in the first quarter of 2006 compared with 2005. Easy financing of homes, "no down payment" and adjustable-rate mortgages are difficult to find and housing inventories are larger than they have been since the 1990s.
The middle classes is under attack. Last year, we used our homes as equity and withdrew $600 billion to take care of credit card bills and personal spending. Now, with increased gas prices, a tight housing market and personal debt in the stratosphere, the crunch is on.
Small wonder that the price of gold, around $270 per ounce in 2001, now is more than $660 and expected to move higher still.
The French connection
In July, the G8 will meet in St. Petersburg and there are signs that Alexei Kudrin, Russia's Finance minister, may seek to cause us still more problems.
Last month, he ranted that "the U.S. dollar is not the world's absolute reserve currency," fussed about our "unsustainable" trade deficit and, with the finesse of a suicide bomber, added, "The international community can hardly be satisfied with this instability."
If Kudrin is taken seriously -- and the Chinese certainly consider him a very serious player -- we may then be forced away from our economic underpinning. If Russia, China or the European Community started using euros, rubles or yen instead of greenbacks for oil transactions, the effect would equate to a nuclear bomb on New York City. And, if we stop buying oil, China and India will gulp each drop.
We would have to start paying back our $9 trillion national debt and that is impossible.
The illegals crisis
So that's how the money we don't have may be spent. But we also have an illegal immigration crisis.
Illegal immigrants have taken over agricultural industries from A to Z. They are responsible for cleaning the massive hog and poultry battery farms that provide us with inexpensive food. They work on turf farms, horticulture and lawn services in the suburbs. They are responsible for meat-packing plants, through herding cattle to mushroom farming.
Agriculture is permeated by Hispanic labor.
World Perspectives, a consulting firm, estimates that as many as 75 percent of our agricultural labor force is "fraudulently documented." Moreover, the American Farm Bureau Federation claims that a crackdown on illegals would cause production losses of $5 billion to $9 billion a year.
Adding to a sense of fear about the economy are the words of Ben Bernanke, the newly appointed chairman of the Federal Reserve: "If the dollar declined sharply, it would not necessarily disrupt markets."
With our dollar, that sounds like an invitation for China or perhaps Russia to start a sell-off that would drown us in red ink. In the past four years, the dollar has dropped 30 percent against the euro, consumer spending and housing prices are in retreat and energy prices are skyrocketing.
That's why we are scared.
Are we about to face the challenge of another Great Depression, coupled with the ever-increasing costs of the social safety net (health care and pensions), Social Security and education compounded by war and security issues? And are we willing to remain dependent on illegal immigrant labor filling what President George Bush calls "jobs Americans don't want"?
Friday, April 28, 2006
LAS VEGAS Housing Inventory Breaks 20,000 Mark
According to Housing Tracker, Las Vegas Inventory has been steadily building for many months, and has now surpassed the 20K mark--while prices have been declining slowly. I can attest to the fact the market is slowing and Inventory is building, as there are 12 homes for sale on my street alone. Some of these homes have gone through 3 separate realtors and are still sitting at reduced prices in a FSBO status.
With this said, I imagine foreclosures will become a significant issue in the future. Already, industry is reporting that rates of foreclosure in LV have greater than doubled YoY:
"In Las Vegas, this appears to be already happening. Foreclosure activity jumped to 3,246 in Q1 of 2006 from 1,480 in Q4 of 2005. Speculators who came late to the party are being washed out of the market."
There is widespread concern over the number of interest only and high negative amortization loans that had been issued by lenders in recent years as homebuyers sought to qualify for ever more expensive homes during the coastal markets' price boom of the last half decade.
Another issue I'd like to point out in this post: The 50 year mortgage has debut in California. Could this be a last ditch effort to keep the bubble alive?
Get Ready LAS VEGAS--the party may be over! (Vegas a house of cards bound to fall!)
With this said, I imagine foreclosures will become a significant issue in the future. Already, industry is reporting that rates of foreclosure in LV have greater than doubled YoY:
"In Las Vegas, this appears to be already happening. Foreclosure activity jumped to 3,246 in Q1 of 2006 from 1,480 in Q4 of 2005. Speculators who came late to the party are being washed out of the market."
There is widespread concern over the number of interest only and high negative amortization loans that had been issued by lenders in recent years as homebuyers sought to qualify for ever more expensive homes during the coastal markets' price boom of the last half decade.
Another issue I'd like to point out in this post: The 50 year mortgage has debut in California. Could this be a last ditch effort to keep the bubble alive?
Get Ready LAS VEGAS--the party may be over! (Vegas a house of cards bound to fall!)
Silver ETF Opened Today
Good news for those of us owning Silver--it's already up 4.3% today:
Updated Price at 10:00AM (Silver is up 10% so far today)
NEW YORK, April 28 (Reuters) - Trading in the first ever investment fund backed by silver was set to launch Friday on the American Stock Exchange, according to Amex and the security's developer, Barclays Global Investors.
The iShares Silver Trust, with the trading symbol SLV (SLV.A: Quote, Profile, Research), was to launch when the market opened at 9:30 a.m. EDT (1330 GMT).
"It is expected to start trading today," said Christine Hudacko, a spokeswoman at BGI, which is a part of Barclays Plc (BARC.L: Quote, Profile, Research).
Members of Barclays iShares group will ring the opening bell at the exchange to kick off the listing of the long-awaited exchange-traded fund.
The U.S. Securities and Exchange Commission on Thursday removed the last regulatory obstacle to the innovative fund, which will let investors track moves in silver bullion without the hassle and cost of storage, insurance and transport.
"Because the silver-backed ETF will be listed on a major stock exchange, shares in it are easily traded like any equity investment," said Michael DiRienzo, executive director of the Silver Institute in Washington.
"This investment vehicle will give a wide-range of investors the opportunity to diversify their portfolio with exposure to silver."
The ETF will be backed by bullion stored in vaults in allocated accounts. Each share will be worth 10 ounces of silver.
Silver prices have risen as much as 67 percent this year on expectations that the ETF would lift demand for the metal, which is used in jewelry, photography and dentistry.
After years of weak silver prices, the market has become one of the best performers in commodities in recent months.
U.S. silver futures hit a 23-year high last week at $14.69 per ounce. In early trade Friday, benchmark July silverrallied 3 percent to $12.99, up 40 cents
Updated Price at 10:00AM (Silver is up 10% so far today)
NEW YORK, April 28 (Reuters) - Trading in the first ever investment fund backed by silver was set to launch Friday on the American Stock Exchange, according to Amex and the security's developer, Barclays Global Investors.
The iShares Silver Trust, with the trading symbol SLV (SLV.A: Quote, Profile, Research), was to launch when the market opened at 9:30 a.m. EDT (1330 GMT).
"It is expected to start trading today," said Christine Hudacko, a spokeswoman at BGI, which is a part of Barclays Plc (BARC.L: Quote, Profile, Research).
Members of Barclays iShares group will ring the opening bell at the exchange to kick off the listing of the long-awaited exchange-traded fund.
The U.S. Securities and Exchange Commission on Thursday removed the last regulatory obstacle to the innovative fund, which will let investors track moves in silver bullion without the hassle and cost of storage, insurance and transport.
"Because the silver-backed ETF will be listed on a major stock exchange, shares in it are easily traded like any equity investment," said Michael DiRienzo, executive director of the Silver Institute in Washington.
"This investment vehicle will give a wide-range of investors the opportunity to diversify their portfolio with exposure to silver."
The ETF will be backed by bullion stored in vaults in allocated accounts. Each share will be worth 10 ounces of silver.
Silver prices have risen as much as 67 percent this year on expectations that the ETF would lift demand for the metal, which is used in jewelry, photography and dentistry.
After years of weak silver prices, the market has become one of the best performers in commodities in recent months.
U.S. silver futures hit a 23-year high last week at $14.69 per ounce. In early trade Friday, benchmark July silver
Thursday, April 27, 2006
Gas, Dollar Concerns & IRAN
Gas prices are on everybody’s mind these days… from the already strapped consumer, to the Fed Chairman and even the Senate. As the costs to fill up the ole SUV increases, people are resorting to desperate actions in order to pay for it, while the Fed worries about increased inflation and the future of rate increases, and Senators try to keep their constituents happy. Meanwhile, Central Banks are becoming leery with the Dollar and Iran is still in the Crosshairs.
Gas Concerns:
Many consumers are resorting to Payday Loan companies or Pawning items to keep their cars on the road—A last ditch effort—what happens when there is nothing left to pawn?
Knowing this will be a big issue impacting future elections, even the GOP Senate is starting to get excited about the issue: Senators are pushing for $100 gas rebate checks: Most American taxpayers would get $100 rebate checks to offset the pain of higher pump prices for gasoline, under an amendment Senate Republicans hope to bring to a vote Thursday.
The Helicopter man (Fed Chairman Ben Bernanke) spoke today and suggested that a pause in rate hikes is near, but he’s concerned about the recent increase in energy costs—impacting inflation and thus possible rate increases
Dollar Concerns
After the Helicopter Man spoke today, the Dollar slumped to an eight month low on concerns of a rate pause.
Many believe we will see a long-term structural decline in the Dollar due to our indebtedness. (I think we’ll easily see $1.40 + this year)
Foreign Central Banks are already ahead of the game, are aware of this structural dollar decline and have either started to or will diversify some of their Dollar Holdings: Sweden, Russia, Qatar, Kuwait and the United Arab Emirates all having either reduced their dollar exposure or plan diversify in the future. Is this just the beginning?
Ok, we all understand that gas and the dollar are concerns, but we’ll get through it… Or will we? IRAN
Tomorrow the deadline expires for IRAN. The International Atomic Energy Agency will present a report Friday on Iran’s implementation of the Security Council demand. If Iran does not comply, the Security Council is likely to consider punitive measures against the Islamic republic.
IRAN has threatened to retaliate and would strike US targets around the world if it is attacked over its refusal to halt its nuclear program: "If the US ventured into any aggression on Iran, Iran will retaliate by damaging US interests worldwide twice as much as the US may inflict on Iran," the Iranian news agency IRNA reported Mr Khamenei as saying on Wednesday.
So, what (in the near-term) will the US do about IRAN
Personally, I think gas prices are too high today for the US to attack IRAN. The government knows any further disruptions could send prices through the roof and kill the US economy… I believe our government will try to get prices down a bit, continue to work the diplomatic channels w/IRAN (through Russia & China), slap on a few sanctions here & there and slowly continue to rachet up the rhetoric.
With that said, I still think we’ll remain close to or above $3.00 a gallon through much of 2006 (expecially w/ ethanol shortages & hurricane season nearing). The impacts of these high gas prices (working in tandem with a depreciating greenback) will slowly work their way through our economy and will: (1) cause inflation all around (2) reduce consumer discretionary spending (3) increase consumer defaults on payments (4) Drag down US GDP (5) cause our trade deficit to increase (more fiat dollars for imported oil) and cause a myriad of other negative factors.
So, when will we go to war with IRAN and what are some of the potential ramifications of doing so?
John Pike, a military analyst at globalsecurity.org, predicts military strikes in the summer of 2007, safely away from the presidential election the next year. He argues, as many do, that Bush already has congressional approval and needs not go back to lawmakers. "It will be a surprise," he says. "There's nothing like dropping bombs on evil-doers to give Republicans some political updraft."
A U.S. strike on Iran could make Iraq look like a warm-up bout and such a strike would likely push oil prices above $100 (U.S.) per barrel, setting off an economic chain reaction that could lead to global recession. He predicts a certain increase in anti-Americanism in Europe, further rage against the U.S. in the Arab and Muslim world, and a questioning of U.S. ties in Russia and China.
Tuesday, April 25, 2006
Obliterating the Dollar and the Middle Class--Preparing for the Economic Typhoon
Found this absolutely superb article (written by Mike Whitney) over at Counterpunch. Couldn't have said any of it better myself! I believe when you read it, you will agree that it was time well spent...
Gold traders love George Bush. They know that his blundering mismanagement of the economy will keep gold soaring well into the future. In the last year alone gold increased nearly $200 an ounce capping off a 5 year run that has taken it from $274 per ounce to $635 at Friday's close.
These are serious numbers and they reflect the uneasiness with the global political situation (Iran, Nigeria) as well as concern about the oceans of debt generated by our Oval Office numbskull.
Is it really possible for one man to single-handedly obliterate the world's most robust economy?
Guess so.
After 6 years of looting the public till, the cupboard is just about bare. Bush has chalked up another $3 trillion of public debt which sounds the death-knell for Social Security, public education, and the social safety net.
Think I'm kidding? Consider what new Fed-master Ben Bernacke said just yesterday, "If the dollar declined sharply, it would not necessarily disrupt markets".
That's right; the Fed is conspiring to reduce its debt payments by driving a wooden stake into the heart of the greenback. In three to six months the dollar will probably be valued at 1.40 to 1.50 per euro. That is, if the bottom doesn't fall out completely. After all, allies and enemies alike are pretty sick of the good old USA, so it wouldn't be out of the question for someone (perhaps, China) to start a sell-off that would end in disaster.
The dollar is now recognized as the empire's Achilles heel and the primary target for any asymmetrical warfare directed at America. If that means regime change at home, count me in. I'll worry about the wheelbarrow-loads of greenbacks for a loaf of bread some other time.
The Group of Seven industrialized nations (G-7) took a few swipes at Washington's profligate spending this weekend; warning that they wanted "more flexibility" in the Asian currencies. This is a clear sign that the path is being paved for a freefalling dollar while the other currencies gain ground.
How do you like the idea that half of your savings will be erased through executive fiat?
Since Bush took office the dollar has plummeted 30% against the euro. The only thing that has kept it from joining the peso is the skyrocketing oil prices which have allowed the Fed to keep the printing presses going at full tilt. That's because oil is denominated exclusively in dollars, so while the price per barrel continued upward, the Fed was able to circulate another $2.5 trillion of funny money. The high cost of oil has kept the dollar reasonably stable even though the twin-deficits have eroded its true value. Maintaining the monopoly on the sale of oil (which forces foreign central banks to hold billions of greenbacks in reserve) is critical to US prosperity. A switch to euros would weaken demand for the dollar and send the American economy into a tailspin.
Unfortunately, other countries are frustrated with the recklessness of the Bush team and are threatening to destabilize the system. First there was the danger of Iran opening an oil bourse that would compete head-on with the dollar; increasing the number of euros stockpiled in the central banks. Now, the Russian Finance Minister, Alexei Kudrin has fired a broadside at his American counterparts saying, "The US dollar is NOT the world's absolute reserve currency". He noted that the unsustainable' US trade deficit is "causing concern" and that "the international community can hardly be satisfied with this instability."
Kudrin's remarks were greeted with the shock one would expect from a dirty bomb on a crowded subway. America's global dominance requires that it maintain the dollar as the world's reserve currency; if that changes then the US will be unable to trade its painted-script for valuable resources. It would also mean that America would have to start paying back its $9 trillion national debt.
Kudrin's comments were interpreted to mean that Russia might ease away from the dollar in its oil transactions; a change that might spread to other countries that are equally skeptical of Uncle Sam's recklessness.
The eroding value of the dollar is just one of the economic crises facing the American people. A 6 month downturn in housing starts signals that the housing bubble, the largest equity bubble in history, is quickly losing steam. With long term interest rates steadily rising (along with energy prices) the shaky loans that were blessed by former Fed-chief, Greenspan, are beginning to unravel. "No down payment", ARMs (Adjustable Rate Mortgages) and easy financing have the over-extended American public teetering towards insolvency. Foreclosures are up, mortgages balances are at unprecedented levels, and inventories are larger than they've been since the early 90s. Last month produced the biggest slowdown in sales in a decade and the real pain hasn't even begun. At least $3 trillion of the $9 trillion equity bubble is built entirely on the cheap money pumped into the system by the Federal Reserve to keep the economy percolating while Bush and Co. stole every last farthing in the US Treasury. Greenspan's low interest rates were nothing more than a carnival-hucksters' scam to shift the vast wealth of America's middle class into the pockets of well-heeled constituents.
Thanks, Alan.
Last year Americans used their homes as a personal ATM; withdrawing over $600 billion to pay off credit card debt and for personal spending. That "presto-equity" is quickly evaporating as home prices flatten out and wages continue to stagnate. Personal debt is currently in the stratosphere and there are some gloomy signs that the American consumer, that great engine of global economic power, is finally tapped out. Consumer spending represents 70% of US GDP (Gross Domestic Product) so, as housing prices retreat and energy prices increase; Americans will face the greatest economic challenge since the Great Depression.
One thing is absolutely certain; Bush will stick by his constituents to the bitter end. It is physically impossible for him to act in the interests of the American people. He won't be deterred by the falling dollar, the deflating housing market, or the skyrocketing energy prices. He'll make his budget-busting tax cuts permanent and plunge the country into a sea of red ink.
Betting that George Bush will do the wrong thing for the nation is not a matter of conjecture; it is a mathematical certainty. He is deliberately destroying the middle class, the prospects for upward mobility, and the currency. The economic underpinnings of American democracy have been demolished in just 6 short years. Smart people will prepare themselves for the typhoon ahead.
Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com
Gold traders love George Bush. They know that his blundering mismanagement of the economy will keep gold soaring well into the future. In the last year alone gold increased nearly $200 an ounce capping off a 5 year run that has taken it from $274 per ounce to $635 at Friday's close.
These are serious numbers and they reflect the uneasiness with the global political situation (Iran, Nigeria) as well as concern about the oceans of debt generated by our Oval Office numbskull.
Is it really possible for one man to single-handedly obliterate the world's most robust economy?
Guess so.
After 6 years of looting the public till, the cupboard is just about bare. Bush has chalked up another $3 trillion of public debt which sounds the death-knell for Social Security, public education, and the social safety net.
Think I'm kidding? Consider what new Fed-master Ben Bernacke said just yesterday, "If the dollar declined sharply, it would not necessarily disrupt markets".
That's right; the Fed is conspiring to reduce its debt payments by driving a wooden stake into the heart of the greenback. In three to six months the dollar will probably be valued at 1.40 to 1.50 per euro. That is, if the bottom doesn't fall out completely. After all, allies and enemies alike are pretty sick of the good old USA, so it wouldn't be out of the question for someone (perhaps, China) to start a sell-off that would end in disaster.
The dollar is now recognized as the empire's Achilles heel and the primary target for any asymmetrical warfare directed at America. If that means regime change at home, count me in. I'll worry about the wheelbarrow-loads of greenbacks for a loaf of bread some other time.
The Group of Seven industrialized nations (G-7) took a few swipes at Washington's profligate spending this weekend; warning that they wanted "more flexibility" in the Asian currencies. This is a clear sign that the path is being paved for a freefalling dollar while the other currencies gain ground.
How do you like the idea that half of your savings will be erased through executive fiat?
Since Bush took office the dollar has plummeted 30% against the euro. The only thing that has kept it from joining the peso is the skyrocketing oil prices which have allowed the Fed to keep the printing presses going at full tilt. That's because oil is denominated exclusively in dollars, so while the price per barrel continued upward, the Fed was able to circulate another $2.5 trillion of funny money. The high cost of oil has kept the dollar reasonably stable even though the twin-deficits have eroded its true value. Maintaining the monopoly on the sale of oil (which forces foreign central banks to hold billions of greenbacks in reserve) is critical to US prosperity. A switch to euros would weaken demand for the dollar and send the American economy into a tailspin.
Unfortunately, other countries are frustrated with the recklessness of the Bush team and are threatening to destabilize the system. First there was the danger of Iran opening an oil bourse that would compete head-on with the dollar; increasing the number of euros stockpiled in the central banks. Now, the Russian Finance Minister, Alexei Kudrin has fired a broadside at his American counterparts saying, "The US dollar is NOT the world's absolute reserve currency". He noted that the unsustainable' US trade deficit is "causing concern" and that "the international community can hardly be satisfied with this instability."
Kudrin's remarks were greeted with the shock one would expect from a dirty bomb on a crowded subway. America's global dominance requires that it maintain the dollar as the world's reserve currency; if that changes then the US will be unable to trade its painted-script for valuable resources. It would also mean that America would have to start paying back its $9 trillion national debt.
Kudrin's comments were interpreted to mean that Russia might ease away from the dollar in its oil transactions; a change that might spread to other countries that are equally skeptical of Uncle Sam's recklessness.
The eroding value of the dollar is just one of the economic crises facing the American people. A 6 month downturn in housing starts signals that the housing bubble, the largest equity bubble in history, is quickly losing steam. With long term interest rates steadily rising (along with energy prices) the shaky loans that were blessed by former Fed-chief, Greenspan, are beginning to unravel. "No down payment", ARMs (Adjustable Rate Mortgages) and easy financing have the over-extended American public teetering towards insolvency. Foreclosures are up, mortgages balances are at unprecedented levels, and inventories are larger than they've been since the early 90s. Last month produced the biggest slowdown in sales in a decade and the real pain hasn't even begun. At least $3 trillion of the $9 trillion equity bubble is built entirely on the cheap money pumped into the system by the Federal Reserve to keep the economy percolating while Bush and Co. stole every last farthing in the US Treasury. Greenspan's low interest rates were nothing more than a carnival-hucksters' scam to shift the vast wealth of America's middle class into the pockets of well-heeled constituents.
Thanks, Alan.
Last year Americans used their homes as a personal ATM; withdrawing over $600 billion to pay off credit card debt and for personal spending. That "presto-equity" is quickly evaporating as home prices flatten out and wages continue to stagnate. Personal debt is currently in the stratosphere and there are some gloomy signs that the American consumer, that great engine of global economic power, is finally tapped out. Consumer spending represents 70% of US GDP (Gross Domestic Product) so, as housing prices retreat and energy prices increase; Americans will face the greatest economic challenge since the Great Depression.
One thing is absolutely certain; Bush will stick by his constituents to the bitter end. It is physically impossible for him to act in the interests of the American people. He won't be deterred by the falling dollar, the deflating housing market, or the skyrocketing energy prices. He'll make his budget-busting tax cuts permanent and plunge the country into a sea of red ink.
Betting that George Bush will do the wrong thing for the nation is not a matter of conjecture; it is a mathematical certainty. He is deliberately destroying the middle class, the prospects for upward mobility, and the currency. The economic underpinnings of American democracy have been demolished in just 6 short years. Smart people will prepare themselves for the typhoon ahead.
Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com
Experts warn of crisis as two U.S. deficits collide
I found this alarming article over at the Kansas City Star--thought some of you may be interested to see what a couple of experts have to say about our deficits.
The biggest unknown about America’s next economic meltdown is not “if” but “when” it will come.
The next biggest unknown is how bad the crisis might be.
The best case, according to public-policy experts speaking Monday in Kansas City, is that the nation’s ballooning debt will be manageable — if we quadruple taxes, slash Social Security and Medicare spending beyond the bone, or find some combination of the two before a meltdown starts.
And the worst case?
“Over the long run, I believe the republic is at risk. It’s that serious,” David Walker, the U.S. comptroller general, said at a business breakfast Monday.
Walker is one of several public-policy specialists engaged in an effort by the nonpartisan Concord Coalition to warn the nation of the consequences of its record-large and growing governmental and consumer debt. In addition to meeting with more than 80 business and community leaders at a Ewing Marion Kauffman Foundation breakfast, Walker and the other coalition participants presented their case to an audience at the Metropolitan Community College-Penn Valley Campus.
The Kansas City stops are the seventh in what the coalition calls its national Fiscal Wake Up tour, co-sponsored here by The Kansas City Star editorial board, the Kauffman Foundation and the Stinson Morrison Hecker law firm.
The U.S. currently confronts a series of deficits that threaten both the nation’s role in the world and its standard of living, Walker said.
One is the federal budget deficit, now a record $760 billion paid or promised single-year expenses and more than $46 trillion with long-term promises for Medicare, Social Security and the like figured in.
“That translates to a tax burden of about $375,000 for every full-time worker in the country,” Walker said.
That’s compounded by a second great deficit, in Americans’ personal savings rate, which last year turned negative for the first time since 1933. That means far fewer aging Americans will have as many resources to fall back on when Medicare or Social Security become stretched.
Foreign investors have been bankrolling the nation’s excessive spending by snapping up U.S. debt, which helps push the nation’s balance of payments deficits above $726 billion, twice the level of just four years ago.
The potential crisis becomes acute when those overseas investors, including China, Japan, South Korea, stop buying U.S. debt, said Bob Litan, vice president of research and policy at the Kauffman Foundation and a senior fellow at the Brookings Institution.
Rapidly rising interest rates and plummeting values for the dollar could send the U.S. into a deep recession, and U.S. policymakers would need to cut spending at a time when consumers need more of it for relief.
The biggest unknown about America’s next economic meltdown is not “if” but “when” it will come.
The next biggest unknown is how bad the crisis might be.
The best case, according to public-policy experts speaking Monday in Kansas City, is that the nation’s ballooning debt will be manageable — if we quadruple taxes, slash Social Security and Medicare spending beyond the bone, or find some combination of the two before a meltdown starts.
And the worst case?
“Over the long run, I believe the republic is at risk. It’s that serious,” David Walker, the U.S. comptroller general, said at a business breakfast Monday.
Walker is one of several public-policy specialists engaged in an effort by the nonpartisan Concord Coalition to warn the nation of the consequences of its record-large and growing governmental and consumer debt. In addition to meeting with more than 80 business and community leaders at a Ewing Marion Kauffman Foundation breakfast, Walker and the other coalition participants presented their case to an audience at the Metropolitan Community College-Penn Valley Campus.
The Kansas City stops are the seventh in what the coalition calls its national Fiscal Wake Up tour, co-sponsored here by The Kansas City Star editorial board, the Kauffman Foundation and the Stinson Morrison Hecker law firm.
The U.S. currently confronts a series of deficits that threaten both the nation’s role in the world and its standard of living, Walker said.
One is the federal budget deficit, now a record $760 billion paid or promised single-year expenses and more than $46 trillion with long-term promises for Medicare, Social Security and the like figured in.
“That translates to a tax burden of about $375,000 for every full-time worker in the country,” Walker said.
That’s compounded by a second great deficit, in Americans’ personal savings rate, which last year turned negative for the first time since 1933. That means far fewer aging Americans will have as many resources to fall back on when Medicare or Social Security become stretched.
Foreign investors have been bankrolling the nation’s excessive spending by snapping up U.S. debt, which helps push the nation’s balance of payments deficits above $726 billion, twice the level of just four years ago.
The potential crisis becomes acute when those overseas investors, including China, Japan, South Korea, stop buying U.S. debt, said Bob Litan, vice president of research and policy at the Kauffman Foundation and a senior fellow at the Brookings Institution.
Rapidly rising interest rates and plummeting values for the dollar could send the U.S. into a deep recession, and U.S. policymakers would need to cut spending at a time when consumers need more of it for relief.
Sunday, April 23, 2006
Greater than $100 Barrel Oil & $10 gas--Economic Depression?
Oil prices swept past $75 a barrel Friday and it looks like there is no relief in sight. Could we see $100 a barrel this year? Personally, I think it’s quite possible—even probable. Could this be the catalyst for the eventual downturn of our economy? The potential is significant, as most Americans are strapped and are currently spending more than they earn just to keep their heads above water.
With consumer spending making up 70% of the US economy, what do you think will happen when people have to make difficult choices? (Choice 1) $60-120 of gas for the car to get back and forth to work this week or (Choice 2) take the family out to dinner on Friday night or (Choice 3) buying that brand new widget they really don’t need. Personally, I think it’s a no-brainer and consumers WILL pull back on their discretionary spending—to keep their cars on the road. This reduction in spending will eventually begin to drag on our economy like boots on a swimmer.
In addition, everything we buy (food, clothing, gadgets, etc) has to be transported via Air/Train/Ship/Truck/etc. As fuel cost rise, these increased transportation costs will eventually be passed on to the consumer. Can you say INFLATION?
So what is going on, why are oil prices so high?
Worldwide oil prices are up due to (1) anxiety over civil unrest in Nigeria, (2) political instability in Venezuela, (3) the fact that major oil-production facilities in the Gulf Coast are still out of commission, and (4) the looming threat of a war with Iran…
OK, I grasp oil thing, but why are gas prices so high?
The reasons for the recent run up in gas prices are many:
(1) The price of crude oil topped $75 per barrel last week.
(2) Refinery maintenance—due to Hurricane Katrina refinery disruptions, routine maintenance was delayed at many refineries to keep supplies flowing. It’s now close to peak driving season and this maintenance is severely overdue. In addition, shutdowns are also in order to allow a switch from winter to summer blends. Bottom Line: some of the largest refineries in the US are scheduled to be shutdown soon. When these shutdowns do happen, US gas inventories will decrease.
(3) Switching from MTBE to Ethanol. An industry shift from methyl tertiary-butyl ether to the clean-burning gasoline additive ethanol is currently in the works because MTBE was found to pollute water supplies. This switch requires refineries to completely empty their tanks to flush out MTBE residues before they begin to use the new additive--which is in short supply. Compounding the problem: Ethanol cannot be shipped in pipelines (due to its water absorbing characteristics) and it must be trucked in to the refineries—this is increasing requirements & utilization of tanker trucks, thus reducing those available for shipping gas to local gas stations.
(4) April and May historically are peak months for fuel prices.
OK, I think I understand now, but how high can gas prices possibly go?
With Iran in the crosshairs, the Sky is the limit. If bombs start to drop, IRAN could create a chokepoint (blockade) off the Strait of Hormuz (where two-fifths of the worlds oil passes through). If this is allowed to happen, $10 + a gallon gas at the pump is not out of the question.
Would $10 a Gallon gas be enough of a shocker to throw the world into a depression?
Your guess is as good as mine, but I'd hate to find out the hard way… What do you think?
With consumer spending making up 70% of the US economy, what do you think will happen when people have to make difficult choices? (Choice 1) $60-120 of gas for the car to get back and forth to work this week or (Choice 2) take the family out to dinner on Friday night or (Choice 3) buying that brand new widget they really don’t need. Personally, I think it’s a no-brainer and consumers WILL pull back on their discretionary spending—to keep their cars on the road. This reduction in spending will eventually begin to drag on our economy like boots on a swimmer.
In addition, everything we buy (food, clothing, gadgets, etc) has to be transported via Air/Train/Ship/Truck/etc. As fuel cost rise, these increased transportation costs will eventually be passed on to the consumer. Can you say INFLATION?
So what is going on, why are oil prices so high?
Worldwide oil prices are up due to (1) anxiety over civil unrest in Nigeria, (2) political instability in Venezuela, (3) the fact that major oil-production facilities in the Gulf Coast are still out of commission, and (4) the looming threat of a war with Iran…
OK, I grasp oil thing, but why are gas prices so high?
The reasons for the recent run up in gas prices are many:
(1) The price of crude oil topped $75 per barrel last week.
(2) Refinery maintenance—due to Hurricane Katrina refinery disruptions, routine maintenance was delayed at many refineries to keep supplies flowing. It’s now close to peak driving season and this maintenance is severely overdue. In addition, shutdowns are also in order to allow a switch from winter to summer blends. Bottom Line: some of the largest refineries in the US are scheduled to be shutdown soon. When these shutdowns do happen, US gas inventories will decrease.
(3) Switching from MTBE to Ethanol. An industry shift from methyl tertiary-butyl ether to the clean-burning gasoline additive ethanol is currently in the works because MTBE was found to pollute water supplies. This switch requires refineries to completely empty their tanks to flush out MTBE residues before they begin to use the new additive--which is in short supply. Compounding the problem: Ethanol cannot be shipped in pipelines (due to its water absorbing characteristics) and it must be trucked in to the refineries—this is increasing requirements & utilization of tanker trucks, thus reducing those available for shipping gas to local gas stations.
(4) April and May historically are peak months for fuel prices.
OK, I think I understand now, but how high can gas prices possibly go?
With Iran in the crosshairs, the Sky is the limit. If bombs start to drop, IRAN could create a chokepoint (blockade) off the Strait of Hormuz (where two-fifths of the worlds oil passes through). If this is allowed to happen, $10 + a gallon gas at the pump is not out of the question.
Would $10 a Gallon gas be enough of a shocker to throw the world into a depression?
Your guess is as good as mine, but I'd hate to find out the hard way… What do you think?
Thursday, April 20, 2006
25,000 HITS AND COUNTING
I started this Blog on Dec 31, 2005 (almost 4 months ago) with the intention of trying to help open eyes to US economic reality.
Many folks have been snowballed into believing all is well in our country, and the majority, it seems, are completely oblivious of the precarious economic position we (our country and people) are in.
Anyway, since starting my site counter in mid-January, my Blog has received over 25,000 hits and the numbers grow by 350-500 each day... More than I could have ever hoped for. Thank you to all my readers.
With that said, I want everyone to understand that I am NOT doing this for profit (although to date I have made a little over $40 through Goodle Ad clicks)... I just enjoy helping others see the bigger picture.
*** Feel free to click on some ads though :>) ***
Speaking of "the big picture"... My very first post (which I spent several days putting together) is probably still my all-time best, but many of my new readers probably have never seen it. Therefore, I would like to share with with you (again) my very first post. I hope that I am successful in helping you all see/understand the bigger picture. Thanks
ECONOMICROT:
The vast majority of American consumers wake up every day completely oblivious to the enormous economic problems at their doorsteps. But why should they care? With two brand new SUV’s in the driveway of their highly appreciating suburban home (located next to a Starbucks where their daily $4 drink can be charged on Visa), and their ability to purchase a cheap, Chinese-made DVD player at Wal-Mart to hook up to their recently financed HDTV Plasma screen, life couldn’t be better. As long as the paychecks can keep up with the minimum monthly payments on their credit cards, autos and interest only mortgage, all is just fine... So is the way of life in America today.
The psychology of average America has changed during the last 15 years. Whereas saving for the future used to be the mantra to live by, it has been replaced by “consume for today”. Living with debt has become the new norm and saving money is out of fashion. Today, consumers rarely even care about an item’s bottom-line price. All they are interested in is a low monthly payment (hey, I can afford that!) and they keep on piling up these payments because they just have to have that brand new widget (which they don’t need). With a big thanks to Alan Greenspan, the lowest interest rates in over 40 years and the capability of using a home as an ATM machine, all of this was made possible. American consumers are graciously spending > 100% of their income today, with no end in sight. Heck… no big deal, they are just following the lead of the US government. With trade deficits running at 6% of GDP, why should anyone worry? Spend, spend, spend… All is well!
Welcome to 2006 & 2007; Interest rates are up, credit card payments have doubled (due to new laws), corporate bankruptcies are on the rise (Delphi, GM, Ford, Delta, US, United and Northwest Airlines, etc), payments have increased on that adjustable rate mortgage, consumer prices are through the roof (food, electricity, gas, consumer goods, etc), Asian Central Banks are losing confidence in the dollar, and the consumer, who was already stretched to the max, can take it no more… How convenient for the US government & corporations to change the bankruptcy laws in November 2005 (a coincidence?) and people are no longer allowed to completely walk away from debt--it’s going to hurt them for many, many years!
The events that follow (due to the above mentioned issues)--will lower US consumer spending, increase mortgage defaults, cause auto sales to sag, increase the number of credit card defaults and will lead to falling home prices, layoffs, falling stock market, falling US dollar, etc. Ultimately, after 2 consecutive quarters of negative activity, we will enter a new recessionary period (probably late 2006, early 2007). The recession will start off slow, will gradually fester/get worse and will eventually set off a chain of events that could potentially lead to complete economic calamity (possibly worse than 1929) a couple of years later. Why do I feel this way? Let me explain.
There are numerous underlying fundamental problems with the US economy. From all exterior angles, to the common man, everything does look fine, but you have to look deeper—at the foundation of US economic rot. The problems we have are so huge, there is little we can do now except to try and individually prepare as best as possible (reduce debt and increase savings liquidity) and then brace for the long-term consequences.
I have identified several areas (below) that I feel are relevant to the current economic quagmire and will try, to the best of my ability, to touch on some of the details. My bottom-line analogy that I’d like for you to use during this reading is this: consider each of the issues below as individual dominoes and each depends on the others to either stay in place or to fall. When the first domino does fall, most of the others will follow suit… a chain reaction that cannot be stopped until all the dominoes are on their sides. Only then (after the calamity) can we begin to start picking up the pieces and reset the dominoes. By that time, however, life will have fundamentally changed and we will be starting from ground zero!
The issues I plan to touch on:
- US Dollar Problems
- Enormous US Debt
- Massive US Trade Deficits
- Rising Inflationary pressures
- Housing Bubble
- Consumer Spending
- Outsourcing of US Jobs/Corporate Bankruptcies
US Dollar Problems: Allow me start with a little history on the US dollar. Throughout the history of the world, there have always been strong currencies, usually held by the superpowers of the day. Theses currencies were/are typically called Reserve Currencies. The Pound Sterling was the primary reserve currency for much of the world in the 18th and 19th centuries. But perpetual account and fiscal deficits financed by cheap credit and unsustainable monetary and fiscal policies used to finance wars and colonial ambitions eventually led to the pound sinking (sound familiar?).
Post World-War II, the US dollar took over the sterling’s dominant position and became the world’s newest reserve currency. The Bretton Woods Accord established a way to value the various currencies of the world relative to each other and tied only the US dollar (as the reserve currency) to a gold standard (meaning the value of dollars circulating must be backed by gold reserves).
The gold standard caused major problems in the 1960’s when France (under the London Gold Pool) called America’s bluff and demanded gold for payment of debt, rather than US dollars. Due to the rapid loss of US gold reserves, Nixon had no choice but to abolish the Bretton Woods accord in 1972 and he took the US dollar off the gold standard (it was $35 per ounce then; today it is > $500).
Once removed from the gold standard, the US dollar became a fiat currency (tied to nothing tangible and backed only by the word of the US government) and the Fed could print money at will. It remained, however, the world’s dominant reserve and was the baseline upon which all other currencies floated and were traded.
As the world’s reserve currency, the US has been able to, year after year, import goods from the rest of the world (for consumption) and pay for it with dollars. These dollars are then used by foreign central banks to purchase US debt instruments (US treasuries and the like) from the Fed. It’s almost comical, as the treasury securities they purchase are created out of nothing, are backed by nothing and require absolutely no savings by any American consumer. The Federal Reserve just prints them at will and “promises” to repay the debt.
To quote a Robert Blumen comment (from the Ludwig Von Mises Institute—an educational center for the Austrian School of economics): “The current international monetary system, like a bad horror movie, is a sort of return of the living dead Bretton Woods. A vestige of the agreement places the dollar at the center of international finance, and securities denominated in fiat U.S. dollars are the most widely held reserve asset. Dollars that were accumulated under the promise of convertibility are now held in such large quantities by most major central banks that they cannot be sold without destroying the value of the remaining asset.” What he said in layman’s terms: Central Banks (Mostly those of Japan, Korea, China and India) are currently holding > $2.4 Trillion dollars in US securities (helping to finance our US debt). If these Central Banks ever try to cash these securities, even just the hint of one of the banks thinking about it (the smell of blood in the water if you will), a rush to exit the dollar cashing door will ensue (a first out mentality) and this will cause a dollar crisis--the dollar will collapse and the worldwide economic system will be in complete shambles. Understanding the potential ramifications, all the foreign central banks can do is hold on to these fiat assets (catch-22). Essentially, they are holding on to US checks they are unable to cash.
Central banks (aware of the quagmire they are in) are already starting to become leery with the huge debt levels and increasing trade deficits (~ 6% GDP) of the US, and are starting to diversify their holdings in Euros. Just the lean toward diversification alone is enough to cause the dollar some problems. So, the question is, what can be done about these dollar problems? Answer: Unless the US begins to reel in deficit spending quickly (which I don’t see happening), a dollar crisis is pretty much a foregone conclusion. It’s not a matter of if--it is when. When the dollar eventually does collapse, the world will probably enter into a depressionary period and when over, another currency (probably the Euro--after being pegged to gold) will have to pick up the reserve currency status, after which the dollar will be relegated to a minor spot in world finance.
Enormous US Debt: Take a look at the current US Debt Clock. This figure is the Total Public Debt Outstanding as owed by the US government. It is money the government owes to others, financed through treasuries, bonds, mutual funds, foreign banks, etc and is backed by nothing except the word of the US government. The huge $8.1 Trillion dollar debt, in and of itself, is a problem, but the bigger issue is how quickly it is growing. In 2004, the total US debt was less than $7.3T. In 2003, it was less than $6.5T. At current rates of spending, US debt will rapidly overtake the upper congressionally authorized debt ceiling of $8.3T and it (the ceiling) will need to be raised again in early 2006. The new upper limit, when set, will probably be somewhere in ballpark of around $9T, but with no slowdown in sight, the US government will reach that new level in ~ 18 months. It’s pretty scary stuff. How high will we (and the world) allow it to go without consequence? For what it’s worth, my bet is: Not for much longer!
Now, if we look at the TOTAL $40T combined debt of US Households, Business, Government and Financial sectors, the picture gets even scarier. How in the world will we ever get out of this pickle? Answer: WE WON’T! We’ll just keep increasing the cumulative debt up to the point that a major financial event (depression, dollar crisis, etc) is experienced. This event will naturally solve the problem through defaults, bankruptcies, devalued currency, etc. Don’t believe for a moment that the Federal government has a “master plan” to solve this. They will try to apply band-aids where possible, but it is far too late for a major fix. All they can do is now is pick up the pieces (like the rest of us) when it’s all over.
Massive Trade Deficits: 2005 looks like another record-breaking year! Too bad it’s not good-news. When all is said and done, the US will have exceeded $700B in trade deficits (over $2B each and every day of the year). This new record exceeds the all time trade deficit record of 2004 ($668 Billion)! These massive debt levels equate to roughly 6% of US Gross Domestic Product (GDP). That figure alone should be scary enough, as no country in the history of the world has been able to sustain this level of debt without some sort of financial repercussion (currency crisis, defaults, rampant inflation, etc). The only reason we haven’t felt the pressure yet is because the US Dollar, as we discussed earlier, is the world’s reserve currency. If/when it fails, it’ll most likely be followed by a worldwide depression. In an effort to hold this event at bay for as long as possible (holding off the inevitable), foreign central banks are continuing to finance this debt through the purchase of US securities (with the inability to cash out—as stated earlier). How long will this trend continue? My opinion: NOT FOR MUCH LONGER
Many folks have been snowballed into believing all is well in our country, and the majority, it seems, are completely oblivious of the precarious economic position we (our country and people) are in.
Anyway, since starting my site counter in mid-January, my Blog has received over 25,000 hits and the numbers grow by 350-500 each day... More than I could have ever hoped for. Thank you to all my readers.
With that said, I want everyone to understand that I am NOT doing this for profit (although to date I have made a little over $40 through Goodle Ad clicks)... I just enjoy helping others see the bigger picture.
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Speaking of "the big picture"... My very first post (which I spent several days putting together) is probably still my all-time best, but many of my new readers probably have never seen it. Therefore, I would like to share with with you (again) my very first post. I hope that I am successful in helping you all see/understand the bigger picture. Thanks
ECONOMICROT:
The vast majority of American consumers wake up every day completely oblivious to the enormous economic problems at their doorsteps. But why should they care? With two brand new SUV’s in the driveway of their highly appreciating suburban home (located next to a Starbucks where their daily $4 drink can be charged on Visa), and their ability to purchase a cheap, Chinese-made DVD player at Wal-Mart to hook up to their recently financed HDTV Plasma screen, life couldn’t be better. As long as the paychecks can keep up with the minimum monthly payments on their credit cards, autos and interest only mortgage, all is just fine... So is the way of life in America today.
The psychology of average America has changed during the last 15 years. Whereas saving for the future used to be the mantra to live by, it has been replaced by “consume for today”. Living with debt has become the new norm and saving money is out of fashion. Today, consumers rarely even care about an item’s bottom-line price. All they are interested in is a low monthly payment (hey, I can afford that!) and they keep on piling up these payments because they just have to have that brand new widget (which they don’t need). With a big thanks to Alan Greenspan, the lowest interest rates in over 40 years and the capability of using a home as an ATM machine, all of this was made possible. American consumers are graciously spending > 100% of their income today, with no end in sight. Heck… no big deal, they are just following the lead of the US government. With trade deficits running at 6% of GDP, why should anyone worry? Spend, spend, spend… All is well!
Welcome to 2006 & 2007; Interest rates are up, credit card payments have doubled (due to new laws), corporate bankruptcies are on the rise (Delphi, GM, Ford, Delta, US, United and Northwest Airlines, etc), payments have increased on that adjustable rate mortgage, consumer prices are through the roof (food, electricity, gas, consumer goods, etc), Asian Central Banks are losing confidence in the dollar, and the consumer, who was already stretched to the max, can take it no more… How convenient for the US government & corporations to change the bankruptcy laws in November 2005 (a coincidence?) and people are no longer allowed to completely walk away from debt--it’s going to hurt them for many, many years!
The events that follow (due to the above mentioned issues)--will lower US consumer spending, increase mortgage defaults, cause auto sales to sag, increase the number of credit card defaults and will lead to falling home prices, layoffs, falling stock market, falling US dollar, etc. Ultimately, after 2 consecutive quarters of negative activity, we will enter a new recessionary period (probably late 2006, early 2007). The recession will start off slow, will gradually fester/get worse and will eventually set off a chain of events that could potentially lead to complete economic calamity (possibly worse than 1929) a couple of years later. Why do I feel this way? Let me explain.
There are numerous underlying fundamental problems with the US economy. From all exterior angles, to the common man, everything does look fine, but you have to look deeper—at the foundation of US economic rot. The problems we have are so huge, there is little we can do now except to try and individually prepare as best as possible (reduce debt and increase savings liquidity) and then brace for the long-term consequences.
I have identified several areas (below) that I feel are relevant to the current economic quagmire and will try, to the best of my ability, to touch on some of the details. My bottom-line analogy that I’d like for you to use during this reading is this: consider each of the issues below as individual dominoes and each depends on the others to either stay in place or to fall. When the first domino does fall, most of the others will follow suit… a chain reaction that cannot be stopped until all the dominoes are on their sides. Only then (after the calamity) can we begin to start picking up the pieces and reset the dominoes. By that time, however, life will have fundamentally changed and we will be starting from ground zero!
The issues I plan to touch on:
- US Dollar Problems
- Enormous US Debt
- Massive US Trade Deficits
- Rising Inflationary pressures
- Housing Bubble
- Consumer Spending
- Outsourcing of US Jobs/Corporate Bankruptcies
US Dollar Problems: Allow me start with a little history on the US dollar. Throughout the history of the world, there have always been strong currencies, usually held by the superpowers of the day. Theses currencies were/are typically called Reserve Currencies. The Pound Sterling was the primary reserve currency for much of the world in the 18th and 19th centuries. But perpetual account and fiscal deficits financed by cheap credit and unsustainable monetary and fiscal policies used to finance wars and colonial ambitions eventually led to the pound sinking (sound familiar?).
Post World-War II, the US dollar took over the sterling’s dominant position and became the world’s newest reserve currency. The Bretton Woods Accord established a way to value the various currencies of the world relative to each other and tied only the US dollar (as the reserve currency) to a gold standard (meaning the value of dollars circulating must be backed by gold reserves).
The gold standard caused major problems in the 1960’s when France (under the London Gold Pool) called America’s bluff and demanded gold for payment of debt, rather than US dollars. Due to the rapid loss of US gold reserves, Nixon had no choice but to abolish the Bretton Woods accord in 1972 and he took the US dollar off the gold standard (it was $35 per ounce then; today it is > $500).
Once removed from the gold standard, the US dollar became a fiat currency (tied to nothing tangible and backed only by the word of the US government) and the Fed could print money at will. It remained, however, the world’s dominant reserve and was the baseline upon which all other currencies floated and were traded.
As the world’s reserve currency, the US has been able to, year after year, import goods from the rest of the world (for consumption) and pay for it with dollars. These dollars are then used by foreign central banks to purchase US debt instruments (US treasuries and the like) from the Fed. It’s almost comical, as the treasury securities they purchase are created out of nothing, are backed by nothing and require absolutely no savings by any American consumer. The Federal Reserve just prints them at will and “promises” to repay the debt.
To quote a Robert Blumen comment (from the Ludwig Von Mises Institute—an educational center for the Austrian School of economics): “The current international monetary system, like a bad horror movie, is a sort of return of the living dead Bretton Woods. A vestige of the agreement places the dollar at the center of international finance, and securities denominated in fiat U.S. dollars are the most widely held reserve asset. Dollars that were accumulated under the promise of convertibility are now held in such large quantities by most major central banks that they cannot be sold without destroying the value of the remaining asset.” What he said in layman’s terms: Central Banks (Mostly those of Japan, Korea, China and India) are currently holding > $2.4 Trillion dollars in US securities (helping to finance our US debt). If these Central Banks ever try to cash these securities, even just the hint of one of the banks thinking about it (the smell of blood in the water if you will), a rush to exit the dollar cashing door will ensue (a first out mentality) and this will cause a dollar crisis--the dollar will collapse and the worldwide economic system will be in complete shambles. Understanding the potential ramifications, all the foreign central banks can do is hold on to these fiat assets (catch-22). Essentially, they are holding on to US checks they are unable to cash.
Central banks (aware of the quagmire they are in) are already starting to become leery with the huge debt levels and increasing trade deficits (~ 6% GDP) of the US, and are starting to diversify their holdings in Euros. Just the lean toward diversification alone is enough to cause the dollar some problems. So, the question is, what can be done about these dollar problems? Answer: Unless the US begins to reel in deficit spending quickly (which I don’t see happening), a dollar crisis is pretty much a foregone conclusion. It’s not a matter of if--it is when. When the dollar eventually does collapse, the world will probably enter into a depressionary period and when over, another currency (probably the Euro--after being pegged to gold) will have to pick up the reserve currency status, after which the dollar will be relegated to a minor spot in world finance.
Enormous US Debt: Take a look at the current US Debt Clock. This figure is the Total Public Debt Outstanding as owed by the US government. It is money the government owes to others, financed through treasuries, bonds, mutual funds, foreign banks, etc and is backed by nothing except the word of the US government. The huge $8.1 Trillion dollar debt, in and of itself, is a problem, but the bigger issue is how quickly it is growing. In 2004, the total US debt was less than $7.3T. In 2003, it was less than $6.5T. At current rates of spending, US debt will rapidly overtake the upper congressionally authorized debt ceiling of $8.3T and it (the ceiling) will need to be raised again in early 2006. The new upper limit, when set, will probably be somewhere in ballpark of around $9T, but with no slowdown in sight, the US government will reach that new level in ~ 18 months. It’s pretty scary stuff. How high will we (and the world) allow it to go without consequence? For what it’s worth, my bet is: Not for much longer!
Now, if we look at the TOTAL $40T combined debt of US Households, Business, Government and Financial sectors, the picture gets even scarier. How in the world will we ever get out of this pickle? Answer: WE WON’T! We’ll just keep increasing the cumulative debt up to the point that a major financial event (depression, dollar crisis, etc) is experienced. This event will naturally solve the problem through defaults, bankruptcies, devalued currency, etc. Don’t believe for a moment that the Federal government has a “master plan” to solve this. They will try to apply band-aids where possible, but it is far too late for a major fix. All they can do is now is pick up the pieces (like the rest of us) when it’s all over.
Massive Trade Deficits: 2005 looks like another record-breaking year! Too bad it’s not good-news. When all is said and done, the US will have exceeded $700B in trade deficits (over $2B each and every day of the year). This new record exceeds the all time trade deficit record of 2004 ($668 Billion)! These massive debt levels equate to roughly 6% of US Gross Domestic Product (GDP). That figure alone should be scary enough, as no country in the history of the world has been able to sustain this level of debt without some sort of financial repercussion (currency crisis, defaults, rampant inflation, etc). The only reason we haven’t felt the pressure yet is because the US Dollar, as we discussed earlier, is the world’s reserve currency. If/when it fails, it’ll most likely be followed by a worldwide depression. In an effort to hold this event at bay for as long as possible (holding off the inevitable), foreign central banks are continuing to finance this debt through the purchase of US securities (with the inability to cash out—as stated earlier). How long will this trend continue? My opinion: NOT FOR MUCH LONGER
So, what has the US government done recently to reign in the spending? Answer: Zilch, Zero, Nada, Nothing. It seems far too difficult a task for Washington to manage. All I can say is: start to prepare yourself now for the bread lines of tomorrow.
Rising Inflationary Pressures: In an effort to stave off a US recession after the stock market collapse in 2000-2002 and the 9/11 terrorist attacks, Fed Chairman Alan Greenspan cut the Federal Funds Rate 13 times (it was 6.5% in Jan 2001) over a period of two years--until the rate reached its lowest point (1% in Jun 03) in over forty years (some argue the Fed kept rates too low for too long). This aggressive Fed action, along with massive printing of money (increasing liquidity) and a lowered tax rate (remember the Bush income tax cuts?) stimulated the US economy and kept the recession very short. With a flood of cheap new money now available in the market, US consumers went on a spending spree. Well, here is where the well-understood law of supply and demand kicked in. Due to high demand of resources (lots of people w/money to buy limited resources), prices rose on nearly everything (homes, commodities, fuel, food, etc). Prices were rising so fast, the Fed had to do something to slow the inflationary pressures… so began the short-term rate increases we’ve seen during the last 18 months. With that said, the Fed was/is also in a pickle. He had to raise rates to: (1) boost foreign investor confidence in the dollar (which had been waning) and (2) slow inflationary pressures, but he couldn’t do it too fast for fear of bursting the housing bubble--created by the extraordinarily low rates (we’ll discuss the housing bubble in detail later).
Now that the Fed is increasing rates, the dollar is beginning to show renewed strength (albeit probably short lived due to our deficit/debt), but the housing market is beginning to slow. If the housing bubble does pop, the US will be in a world of hurt, as consumers have been relying on increased home equity (the wealth effect) for spending, and greater than 25% of US economic growth over the last 3 years has been dependant on the housing market. When this is taken away, an entire industry will collapse and massive ripple effects will be felt across the economy. Do you know any realtors or loan officers? You may want to tell them to start looking for a new line of work.
In addition, we are now nearing an inverted yield curve (where returns on short term investments outperform long-term)—a predictor of numerous past recessions.
What I foresee: The Fed will continue to increase rates for the next 2-3 cycles. This action will cause the US to experience an inverted yield curve and cool the housing market (eliminating the wealth effect). The US will then enter a recession (mid-to-late 2006, early 2007) where consumers will pull back on spending (causing further recessionary pressures). The lackluster performance of the US economy and our growing debt will cause foreign investors to lose faith in the US economy and begin further diversification of their holdings. This will, in-turn cause the dollar to lose value against other worldwide currencies and Americans will lose purchasing power… a downward spiral.
Housing Bubble: As we discussed earlier, the low interest rates brought on by the aggressive Fed lowering actions of 2001-2003 allowed the US consumer to borrow money very cheaply. Consumers took advantage of the situation to refinance their home, or they sold their home to upgrade into a larger one that they could now afford (because of these lower rates). Many others took out low rate homeowner equity loans to pay off high interest credit cards, remodel, buy a pool, new furniture, a new car or maybe even purchase a second home. In addition, many folks who previously couldn’t afford to buy a home (renters) could now afford to do so and decided to enter the market. Because so many people were now doing the same thing (buying new homes, refinancing, getting a second home, speculating on and/or flipping homes based upon future appreciation, etc) the costs of homes increased astronomically (again supply/demand situation). This new housing boon created a bubble that has been the main economic engine of the US economy for the last 3 years.
I would like to point out that another factor is also responsible for the run-up in home prices--new strategies in homeowner lending practices (Interest only mortgages, ARM’s, 40 year loans, etc) and significantly relaxed lending standards allowed more people qualify for homes that they could not otherwise afford and lenders took on much riskier loans to qualify people that had no business being in the market anyway. But it really didn’t matter to the lender, as they were not the ones taking the risk. After closing on the notes, they would sell the mortgages to Fannie Mae or Freddy Mac—two massive Government Sponsored Enterprises (GSE’s). These GSE’s would then repackage the notes as Mortgage Backed Securities, Interest bearing accounts, etc and then sell them on the open market, (to be bought up by your retirement plan investments, etc).
Note: Fannie Mae, the larger of the two GSE’s was recently charged with cooking their books (as many had suspected for years) and had to file a $10B loss in 2004. Some feel it is the 1st step towards its ultimate demise and it will go the way of ENRON—only it’ll have wider implications and could ultimately bring down the entire US economy.
Recent evidence suggests that the Fed’s numerous short-term rate increases are finally beginning to have an effect on long-term mortgage rates and in-turn this is beginning to cool the housing market. Many folks, however, still believe that real estate is a “can’t-lose” investment. My gut feeling about the issue: When your taxi cab driver, hairdresser, co-worker and next-door neighbor all talk about how much money can be made in real estate and how you need to increase your real estate holdings, do you really believe that they are on to something? Do you really believe that real estate will continue to make people money indefinitely? Do you honestly believe the peak hasn’t already been reached? I remember the days before the tech stock market bubble—everyone was talking about how you couldn’t lose—buy, buy, buy. Rest assured, the big-money makers in real estate have already left the market and it’s all down hill now. Take a look at why real estate is different this time. When housing prices do plummet, the economy will follow suit.
Consumer Spending: Americans love to consume to excess (food, energy, appliances, autos, electronics, clothes, latest widget, etc) and they can’t seem to get enough. As previously mentioned, Americans used to save for a rainy day (probably due to personal experience in dealing with hardship—war, recession, depression, etc), but today, most Americans live for the here and now. For the first time in American history, consumers are now spending more than they earn and have a negative savings rate. How can they do that? By charging on credit cards, financing equity out of their homes, spending money they had in retirement savings, and the like.
The problem is: this excessive spending (negative savings rate) can’t go on much longer, as most American consumers are in debt up to their eyeballs. With credit card payments doubling next year, rising interest rates and consumer inflation on the rise, consumers will not be able to take on the additional expenses and eventually will have to pull back on their spending. The added impact of the American consumer being stretched so thin is: defaults on credit cards, auto loans and mortgages (remember all those new interest only mortgages and Home Equity Lines of Credit) will increase, causing corporate financial hardships. This in turn could lead to layoffs, bankruptcies and the like… another downward spiral.
The biggest problem is: the world-economy (China, India, Korea and many others) has become very dependent on US spending (a place to sell/export their goods), so when this spending pullback does happen (an absolute must & very soon), the world will probably end up in a recession… possibly the first domino to fall.
Outsourcing of US Jobs/Corporate Bankruptcies: The US was once a manufacturing powerhouse, but due to the high cost of US labor and in an attempt to compete in a global marketplace, jobs/manufacturing were outsourced to cheaper countries. Those home-bound US companies still trying to compete in the Global marketplace are reeling from higher labor costs, pension plans, union benefits, health care costs and the like. Just take a hard look at Delphi and General Motors. Next, looks at Ford--they are not too far behind. In addition, look at the United States airline sector— United Airlines, Delta Airlines, Northwest Airlines, ATA Airlines, US Airlines and most recently Independence Airlines--all are operating under bankruptcy protection .
Whereas the US used to be a manufacturing powerhouse, we are quickly moving towards a service-based, consumer nation and we currently live far beyond our means--on both a personal and government level. How can the US ever compete in the global marketplace when foreign entities pay cents on the dollar for wages and rarely care about health care and/or worker benefits? Answer: WE CAN’T… and the problems, bankruptcies, plant closings, layoffs, etc, will only get worse!
Summary: The US economy has far too many fundamental imbalances (dollar problems, debt problems, deficit problems, rising inflation, housing bubble, excessive consumer spending, corporate bankruptcies/outsourcing) and WILL experience a MAJOR correction in the not too distant future. I haven’t even touched on some of the other areas I feel put the US at risk for a major event (Credit Derivatives, Pension Crisis, Social Security Crisis, Immigration Crisis, Stock Market Bubble, Terrorism, New Fed Chairman, Bird Flu, Peak Oil, Elimination of M3 publication, Iran Oil Burse--trading in Euros, etc). But what I want you to take away from this reading is this: once that first domino does fall (probably due to a recession mid-to-late 2006 or early 2007), the other dominoes will follow suit, and it will take many, many years for the myriad of complex economic problems to work themselves out. The outcome will be extremely difficult, and life as we know it today will never be the same.
What can you do? Try to prepare yourself mentally for the change (as you will be one step further along than most) and then try to eliminate debt, look at the security of your job (change if need be) and then try to increase your saving (buy Gold or Silver) for that rainy day—or years.
Best regards,
Randy
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