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.


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."


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.


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.


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"?


Out at the peak said...

I understand your balance. Blogging is and should be a low priority activity. I've been slacking on my own posts more and more as time goes on; more interesting things come up.

Great articles. You've been able to explain to your audience why we need to take precautions now for the future.

Have fun, Randy.

lance said...

I have never read a blog before yours. I was looking for some information on silver and ran across it and really enjoyed reading your information . Bad times sure seem at our doorstep.
Thanks for taking the time to write it.I'll check back in the future. Lance from Chicago

Anonymous said...

Randy, you've done a great job pointing out the problems we will face in the very near future. I started a blog a year ago and quickly found out how much time it consumed from my life. Problem is, if you don't ring the alarm bell who will? The majority of people in this country just exist day to day and don't understand or want to understand what's about to happen to them. You did manage to stir up a few people though. According to the news reports, unemployment is down, stocks are up, and everything is just fine. But, look behind the curtain and you'll see a record deficit, a debt that can never be paid off, SS and medicaid teetering on collapse, failing pension funds, a near housing collapse, energy problems, and on and on and on. I've looked forward to reading your posts for the last few months, so I'll still check back from time to time to see what's new. Anyway good luck to you.

Idaho_Spud said...

Heya Randy

Spend time on the things that are important in life, and don't feel guilty about it. You clearly have a sense of what those more important things are :)

Your frequent and insightful posts have (and will) of course be missed. So we'll just have to wait for the infrequent ones. I'm subscribed, so I'll read whenever you choose to write.

And I reiterate, if you ever find yourself in Bako, look me up and I'll buy you a beer ;)


panicearly said...

enjoy your extra time, and try not to look at the realtor signs while out and about, they might make you run back to post something:)

contrarian2day said...

I really appreciate everyone posting up. If it were not for the support of readers like you, I would have given this up long ago.

Peak, You've been around supporting me since I started this whole thing... Thanks

Lance, Glad you stopped in. Appreciate the feedback; I'm not done, just plan to slow down a bit.

Anon, Yes Blogging takes far more time than most people realize. Thank you for the kind words. Good points--I truly hope Americans start to open their eyes--before it's too late

Idaho-- Hey, I stopped in and read your blog...fine job there. Hope you are able to resolve the Oil leaking issue at the job site. I like your analogy--leaking like a Harley--hehehe. Appreciate the beer offer. I may take you up on it some day.

Panice; man are you ever right. Inventory here in Vegas is exploding (>20,500 and growing by the day)--the fuse is lit.

Regards to all... Randy