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!)

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 silver rallied 3 percent to $12.99, up 40 cents

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

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.

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?

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




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


Tuesday, April 18, 2006

Fed Minute Impacts

Well, just as I suggested in my Saturday post, it's turning out to be a quite an interesting week. The main issue impacting markets today was the release of minutes from the March 27 & 28 Fed meeting. The info released suggests that the Fed may be very close to ending short-term rate hikes. This news impacted nearly everything:


The US Dollar closed at the lowest level in 7 months against Euro
The DOW soared 195 points
Gold closed at new 25 year high ($623.30)
Silver broke $14oz in the world spot market
Oil Traded above $71


My thoughts:

Once the Fed Rate hikes are stopped (too soon?), I believe we will continue to see significant declines in the US Dollar and overall higher long-term rates (due to lack of dollar buyers). I also believe we are on our way to 80+ dollar oil (based on technical indicators alone) and my previous prediction of $3.00 gas this summer was probably far too low... If we (1) bomb Iran, or (2) experience more hurricane disruptions in the Gulf this year, it's quite possible we'll see $100 + Oil & $4.00 + gas...

With that said, all those Petro Dollars we spend to keep our SUV's humming will (1) pull much needed money from our already strapped consumer pockets--increasing mortgage, auto, credit card and other defaults while reducing US GDP--70% of which is based on consumer spending, (2) will add to our already massive trade deficits and decline of the Dollar's purchasing power, and (3) will add to foreign dollar holdings & subsequently their US purchasing power--allowing them to increase the rate of buying away our country's infrastructure--the slow death of America.

Also, I would like to state in the coming months it's quite possible we'll reach new all-time heights in the DOW, but once the economy begins to sour (before the end of this year), I think we'll see MAJOR corrections take place throughout the markets. This eye opening experience will nip irrational exuberance in the rear and will spark the beginning of the great 2007 + Recession/Stagflation.

I'd really like to spend more time on this, but have other pressing obligations.

Good evening to all
Randy

Saturday, April 15, 2006

Numerous Economic Reports Due Next Week

Numerous Economic reports are due next week... These reports (CPI, PPI, Housing, Jobless Claims, Leading Indicators, etc) should provide some indication as to future fed decisions/actions, and will either spook or continue to bolster confidence in the markets.

Though the reports (through skewed data) will try to paint as pretty a picture as possible for the economy (putting lipstick on a pig), I think unexpected data will still leak through and we'll see/experience a wild week in the Dollar, Stock Market, Commodities, etc.


Update as of Sunday evening, 8:30pm PST: Looks like the world spot markets are starting off the week with enthusiasm. Gold is up $8.40 ($605oz), Silver is up .35 ($13.30oz), and oil is >$71 a barrel. Could be a very interesting week.

Numbers Are Getting Redder and $600 Gold

Found a couple of articles I felt may of you would enjoy. The first one is from the folks over at The Daily Reckoning and concerns US Debt. The second article is from the folks over at FMNN and discusses $600 gold.

One of life's few certainties...the numbers are getting redder all the time

America is going broke...in style. We say that not to alarm you. It's just one of those certainties in life that you should point out to your children, such as "the dollar will be worthless" and "we're all gonna die."

There's not even any great shame in it. Going bust is what every great empire does sooner or later. Besides, it may not happen for another quarter of a century - or maybe sooner.

Last month, ominously, the U.S. government registered a record deficit of $85.47 billion. That is, for every dollar the feds sucked in, they managed to burn through a $1.50. But, why run up such hefty losses now? After all, the nation revels in "full employment," does it not? The economy is going like gangbusters, is it not? And, housing and stocks have soared to near all-time highs. If the government can't break even now, when will it ever break even?

If you have to ask the question, you must be out of step with the times.

Every policy wonk, number abuser, and budgetary contortionist in Washington knows the U.S. government will never run a genuine un-manipulated surplus. Every Beltway buffoon in a suit is counting on it.

Every parasitic politician knows that the positive numbers touted during the Clinton years were a ripe fraud, achieved only by pretending that Social Security was not a government program. Now, even that larcenous legerdemain won't change the ink color; the numbers are red from top to bottom, and getting redder all the time.

Among the seven wonders of the modern world is that lenders and merchants world over are still not only willing to accept U.S. paper, but they are positively craving it. Last year, China alone racked up more than $200 billion in its trade surplus with the United States, and what did they do with all that money?

"China is on a buying spree in U.S.," says a headline in the Houston Chronicle.

"See," we can almost hear gorgeous George Gilder whisper in our ear, "the money comes back to us. What's the worry?"

No worry...just an observation. The money leaves home a servant; it comes back a master. The dollars are spent on consumer items. In other words, Americans use paper to buy junk while the Chinese hold on to it as capital and use it to pocket U.S. debt, U.S. factories, and U.S. assets. Americans used to be able to say what they wanted to the Chinese. Now they must say, "Yes sir." And it wouldn't hurt to learn to kowtow; the Chinese like that sort of thing.

Another observation: the dollar is losing ground against the things that aren't junk. The price of oil edged up to nearly $70, yesterday. A headline in the Financial Times tells us, "Gold could reach $850." That is the top price the metal reached in the last bull market, when Jimmy Carter was still president. Well, duh.


$600 GOLD: WE HAVE ONLY JUST BEGUN

Suggest you see link above if you want charts. Post below has none of the attached charts

Even though gold prices have risen to over $600/ounce, investors are still failing to acknowledge that we are in a fundamentally driven precious metals bull market. Instead of focusing on the specific fundamentals(declining US dollar, central bank buying, inflationary concerns), that have driven this bull market from the start, your average investor and Wall Street pundit is attributing this move up to “geopolitical unrest” and unnaturally high” oil prices. While it is true that those factors have contributed to gold prices moving to a 25 year high, they are by no means the reasons why we have seen gold prices double over the last several years. In fact, the same fundamental reasons that have driven the price of gold from its lows in 2001 will continue to drive it still higher in the years to come. As such, it is important for investors to note that we have only just begun, and it is not too late to participate in this gold bull market.

Putting $600 Gold into Perspective

As a point of reference, it is important for investors to realize that the real all time high for Gold is not $850 an ounce. Although the nominal all time high is indeed $850, the inflation adjusted all time high for Gold is closer to $1250. Comparing today’s price of Gold with the price of Gold in 1980, fails to take into account the rise of inflation over the last 25 years. Simply put, $850 could buy you a lot more in 1980 than it can today. In 1980, you could buy a house for under $100,000, buy a cup of coffee for less than a dollar, and put gasoline in your car for under a dollar. Having this perspective, allows you to realize that the price of Gold is still cheap at these levels.

Dollar Decline Will Continue to Fuel This Bull Market

Since the US dollar experienced significant appreciation in 2005, many people have forgotten that we are in a multiyear downtrend in the dollar.

In fact, if you compare it against the Euro, the Dollar is down over 40% from its high. The same factors that initially triggered the US Dollar decline will continue to add towards this sell off. In the past, the dollar was the world’s reserve currency. It signified strength and security in a growing US economy. Investors all over the world where scrambling to purchase our US dollar assets. Today, we are no longer a booming and growing US economy. Sadly, we have become an economy that is driven by consumers that are going further into debt everyday and a real estate market that has been pushed up by artificially low interest rates. Although this has fooled your average American to believing that the economy is strong, it has not fooled central banks around the world that are looking at diversifying out of the US dollar. The United Arab Emirates and other Middle Eastern countries have already switched or are looking at switching some of their US dollar reserves into Euros and Gold. Russia, Korea, and other countries have also reacted in the same manner.

The China Factor

The Chinese government has also stated that they are looking diversifying out of the US dollar into Gold. This news in itself holds tremendous significance towards the overall direction of Gold. Presently, China has under 2 % of its reserves (850 billion +) in Gold. Most of their reserves are US dollar assets. According to the World Gold Council, the world average is 9 % of its reserves. The EU average is at 25 %, and the US holds 60% of its reserves in Gold. In comparison, China’s percentage of its reserves in Gold is unbelievably low. As China continued to become a world economic power, they will continue adding Gold to their reserves. Even if they only reached the 9% average, the amount of Gold that would be taken off the market would have a significant impact on the price of Gold.

In the past year, China has begun laying the groundwork for substantial Gold investments from both its citizens and its Central Bank. Floating their currency and allowing the average Chinese citizen to own Gold were the first steps. The Bank of China will start facilitating US dollars for Gold transactions within recent months. The Bank of China also reported last month that they will slash the spread on gold trading by up to 20 % for a trial period. All of these factors combined with continued demand for Gold jewelry (as Chinese citizens continue to increase their standard of living) will continue to fuel this Gold bull market.

Yes, Virginia...We Do Have Inflation

The question of whether we have or don’t have inflation is a hotly debated topic. On one end of the debate, you have data dependent individuals that argue that the Core Consumer Price Index does not show that we should be concerned about inflation. Therefore, all of this talk about inflation is incorrect and purely speculative. On the other end of the debate, you have the price of Gold (which has always been an anti-inflationary hedge), rising to a 25 year high. So who is right?

Investors can answer the question themselves, if they truly step back and look at what is happening around them. The first aspect to consider is the fact that the Core CPI index does not take into consideration food and energy prices. As a result, even though we have experienced high oil prices, this is not immediately reflected in the Core CPI data. Although $70 oil is not initially reflected in the Core CPI data, it will eventually pass through to the Core CPI index as manufacturers pass through the higher costs of producing the goods to the consumer. Additionally, copper, zinc, aluminum, and other raw materials have steadily risen higher over the last several years. These costs will also pass through to the consumer. It is important to note, however, that this pass through effect will not be immediate. Manufacturers typically have contracts where they are required to sell their products for a certain amount for a fixed period of time. I do believe, however, that we will experience a sharp jump in the Core CPI numbers by 3rd or 4th quarter of this year, as the high energy and raw material prices we have experienced for the last several years finally are reflected in the Core CPI numbers. At that time, I expect another influx of gold buying from investors who finally acknowledge that we do have inflation. The continually higher energy and raw material costs are not localized strictly to the United States. Inflationary concerns can be seen throughout Europe and even Japan. In the same manner that Americans will likely buy more gold as inflationary concerns seep through the economy, the same will be true for Europeans and the Japanese. Magnifying these inflationary concerns is the fact that there has been a tremendous increase in money supply across the globe. Although the below chart shows the increase in money supply for the United States, the scenario is true for a number of different countries.

The immediate implications of Central Banks flooding the markets with excess liquidity, is that it paints a false picture of wealth. The more money that is created might offer an initial stimulus to the economy, but it actually serves in diluting the purchasing power of their currency. In turn, as the decline in purchasing power of fiat currencies is magnified, Gold will start attracting even more interest from individuals that are seeking an alternate “currency”.

Any of the above mentioned factors (and others that I have not written about) would in themselves, increase Gold demand and push Gold prices much higher. A combination of those factors is creating the greatest precious metals bull market in history. Additionally, continued geopolitical concerns further propel this bull market, as investors are naturally drawn to a historical safe haven during times of instability. Going forward, I expect Gold prices to consistently make new highs as the true fundamentals that are driving this market can no longer be ignored. If you have been on the sidelines, the time to act is now.

Gold from a Trend Following Perspective

Even if you ignore the above fundamentals, you cannot ignore that Gold has been in an obvious uptrend over the last several years. A number of our trend following systems, that do not take fundamentals into consideration, have triggered buys on Gold and other precious metals based purely on technical indicators. The basic logic behind long term trend following is that you cut your losses quickly and you let your winners run. This long term trend following strategy can also be applied to other commodity markets. With trend following, you are able to follow trends (both on the up and downside) regardless of fundamentals. Often times, this allows you to participate in markets that move higher in the face of contradictory fundamental data. For example, Gold prices have trended higher even though Core CPI data has not revealed inflation. If you waited for the Fed to scream “inflation”, you would have missed out on Gold prices more than doubling in price.

Another Sign of the Times

An Engineer friend of mine sent me this article. Personally, I would just make the (spoiled?) kid attend the prepaid Public Institution...

Anyway, I thought the article accurately illustrated the state of America: Debt strapped middle class families, livin large and stuck with very difficult choices... ooh, but wait, maybe they aren't so difficult... America's lending institutions are here to the rescue.

Synopsis: As a result of demographic trends (people having children later in life) and in many cases poor financial choices by their parents, kids may start to suffer. On the other hand, of course, there are bankers willing to let middle class families go even further into debt to finance their children's dreams.

Some Parents Let Children Choose College, and Pay

By JONATHAN D. GLATER

Published: April 10, 2006 Alexandra Baldari and her parents have talked a good deal over the past year about how to pay for her college education, and the upshot is this: If she enrolls at the University of Miami in the fall, she will bear much of the cost, which could total $40,000 or more a year, on her own.

"The problem here," said Ms. Baldari, who lives in Parkland, Fla. "is I'm 18 and looking to go to college, and my parents are looking to retire."

Ms. Baldari's parents earn about $100,000 a year, but her mother, Anne Angelopoulos, said little is left after paying for housing, three cars, gas, food and utilities, as well as saving to contribute to Ms. Baldari's 11-year-old brother's education. Ms. Baldari's parents prepaid for her to attend a public university in Florida, but she does not want to go to a public institution. The Florida Prepaid College Program allows parents to lock in the cost of college in the future by paying at today's prices.

/cut/

Financial aid officers also say some middle- and upper-middle class families may not have saved enough in part because they thought, incorrectly, that financial aid would compensate. But financial aid calculations focus on assets (other than a home) and past, present and future income, and while such calculations allow for living expenses, the assumed lifestyle may be more austere than what many families have enjoyed or are willing to accept.

"We can't be awarding financial assistance based on discretionary choices" parents have made in spending their money, Ms. McGuire said. "You say that as nicely as you can: I can't give you more money because you have a large consumer debt. I have got to have an analysis that is not rewarding you for discretionary spending."

Concern about the higher interest rates and other burdens of private loans on borrowers has led Carleton College in Northfield, Minn., through the Associated Colleges of the Midwest consortium, to try to negotiate with lenders for better terms for their students, said Rod Oto, director of student financial services and associate dean of admissions at Carleton. "Our thinking was, joining together we might have a little bit more leverage."

To take advantage of growing demand, big banks are expanding their student loan operations. Chase recently bought Collegiate Funding Services, an education finance company based in Fredericksburg, Va., to be able to service student loans directly, sending out collection notices, processing payments and the like.

"We're viewing it as a very important segment for us," said Brad Conner, an executive vice president. "It certainly is one of the fastest growing."

/cut/

"I've been thinking about it," Ms. Walsh said. "If I don't get any financial aid from such-and-such a college, is it worth going into years and years of debt? It's starting to look like more and more of a bad idea."

Friday, April 14, 2006

Oil, Ford, Interest Rates, Las Vegas Foreclosures

A few issues that caught my attention this AM:


Oil breaks $70 a Barrel in after market trading

BEIJING, April 14 (Xinhuanet)-- Brent North Sea crude oil was traded at 70.20 dollars a barrel for the first time on Thursday evening due to simmering tensions of Iran nuke issue.

"We're just in this terrific Bull Run right now, and the worries just steepen," said John Kilduff, analyst at Fimat USA.

He added that as long as political tensions continue in Iran, crude futures next week are apt to break their previous trading record of 70.85 dollars, reached Aug. 30, 2005, after Hurricane Katrina struck the Gulf coast.

While Bloomberg News survey shows that 26 of 52 analysts, traders and brokers, or 50 percent, said prices will decline next week, 17, or 33 percent, forecast an increase and nine expected little change.


High Oil Prices Widen Global Imbalances

Rising oil prices are fueling global distortions in trade, with oil producers raking in profits while the current account gaps of fuel importers move further into the red, the International Monetary Fund said on Thursday.

In the first chapters of its semi-annual World Economic Outlook, the IMF said that over the past two years, higher oil prices had accounted for one-half, or about one percentage point of GDP, of the deterioration in the US current account.

It said with limited excess production capacity, the medium-term supply/demand was likely to remain "very tight and oil prices will persist near current levels".

The Washington-based global lender said the impact of higher oil prices on global imbalances would likely linger longer compared to similar oil shocks of the 1970s and early 1980s.

This was mainly because producers were saving more of their revenues and because inflationary consequences have been limited and oil consumers have not been forced to adjust as quickly, it said.

It also found the recycling of petrodollars through international capital markets was helping to keep interest rates low in the United States and so was adding to the current account deficit, already 6.5 percent of GDP, by encouraging consumption.

High international capital inflows -- some of them oil-related -- have depressed yields on U.S. government bonds by perhaps three-quarters of a percentage point, the fund said.

It said past oil shocks led to higher interest rates and slowdown in growth and domestic demand, and changes in exchange rates and asset prices.

But this time current accounts are adjusting more slowly largely because interest rates have not risen as much.

"Together with deeper global financial integration and the fact that spending (by) oil exporters has remained relatively subdued, current accounts are adjusting more slowly," the IMF said.

It also pointed out the global environment is very different today than it was in 1970s, when large deficits were concentrated in oil importing developing countries. This time, the deficit was in the United States, aggravated by high oil prices.


Ford to lay off 2,400 and close two plants

Ford Motor Co. announced Thursday that it would shut down its truck assembly plant and end a long history of automobile building here, delivering a crushing blow to plant workers, union officials and city leaders.

The F-150 pickup assembly plant, once considered a darling of Ford’s manufacturing base, was widely expected to survive a round of plant closings by the beleaguered automaker.

Instead, Ford executives said during a conference call Thursday that the 2,433-worker plant would close in 2008, abandoning a facility that dates to 1925 and the Model T.

The Norfolk plant has long been regarded as one of the company’s most efficient. However, analysts have said its East Coast location makes it costly and time-consuming to ship parts to Norfolk from Midwest suppliers. Also, Ford cited the fact that the facility can not produce the larger and more profitable SuperCab pickups.


Mortgage Rates at Highest in Nearly 4 Yrs.

Rates on 30-year mortgages climbed this week to their highest point in nearly four years, a development that could put a further crimp in housing activity.

Freddie Mac, the mortgage company, reported Thursday that rates on 30-year, fixed-rate mortgages averaged 6.49 percent for the week ending April 13. That was up from 6.43 percent last week and was the highest since mid-July of 2002.

Some economists believe rates on 30-year mortgages could reach 7 percent by the end of this year.

There are signs that rising mortgage rates are slowing the housing market, which registered record-high sales for five years in a row. "If the past is any guide, the effect of rising interest rates is likely to be felt most visibly in housing markets," Federal Reserve Governor Donald Kohn said in a speech Thursday.


Foreclosuresup 99% in my little Bubblicious City of Las Vegas

Many homeowners in the Las Vegas valley may be overextending themselves, because
home foreclosures have jumped dramatically in the past year.

The median price of a home is up to $314,000 and that has driven the monthly mortgage payment up as well, which is up nearly $200 a month since this time last year to nearly $1,800.

The sounds of an auctioneer saying "going once" and "going twice." Finally, saying, “Sold back to the beneficiary for $303,487.08." That's what most people will find at daily auctions of what were once peoples American dreams.

Republic Mortgages Scott Gillespie warns the worse is yet to come.

"A lot of people don't fully grasp what is going to happen with the mortgages that are out there," Gillespie said. Gillespie says Congress is considering a bill making certain adjustable rate mortgages illegal becauseFrom January to February the number of foreclosures jumped 99-percent.

A three-bedroom, two-bath house is one of 127 homes on the home foreclosure report where the American dream is going wrong. Gillespie said the trend is expected to continue for years, and investor Rick Korbel recently saw the spike in for closers and started attending local auctions.

Korbel says struggling homeowners need to face reality before its too late.

"They know they are in over their head," Korbel said. "When people are behind on their bills they tend to avoid the phone, put their head in the sand and think that it is not happening."

Experts say that's the last thing a homeowner should do. Lenders recommend facing the problem head on by contacting your mortgage broker or trying to sell. Homeowners who will be hardest hit are expected to be the ones who bought homes above the median price of $314,000. There's more bad news for homeowners. In a list of 100 cities, Forbes Magazine ranked Las Vegas dead last for real estate appreciation rates.

Monday, April 10, 2006

Possible Recessionary Market Indicators?

Oil prices are at a 7-month high

Oil prices held steady in Asian electronic trading Tuesday after hitting a seven-month high in New York the previous day amid concerns that Iran's nuclear standoff and violence in Nigeria could undermine supplies.Light, sweet crude for May delivery rose 1 cent to US$68.75 a barrel on the New York Mercantile Exchange, midmorning in Singapore.

Chief among the oil-market fears these days are Iran's nuclear standoff with the international community and violence in Nigeria that has forced the shutdown of more than half a million barrels a day of supply. Both Iran and Nigeria are members of OPEC.Another source of concern is that more than 300,000 barrels per day of Gulf of Mexico production remains off the market as a result of last summer's hurricanes.

Gasoline prices up 17 cents a gallon in the last 2 weeks

NEW YORK (CNNMoney.com) - American drivers are being socked with skyrocketing gasoline prices and could even see shortages this summer as refineries struggle to switch additives that make cleaner burning fuel.

Nationwide, average gas prices shot up another cent and a half Monday to $2.676 for a gallon of regular, according to a survey by AAA. A year ago the average was $2.272.
The jump adds to a trend seen over the last month or so.

Over the last two weeks gasoline prices have surged 17 cents per gallon, said Trilby Lundberg, publisher of the Lundberg Survey, which tallied prices March 24 and April 7 for its latest survey released Sunday.

Dollar was up—Fed may raise rates more than initially anticipated

April 10 (Bloomberg) -- The dollar advanced for a third day against the yen on anticipation the Federal Reserve may increase borrowing costs twice more this year as the economy strengthens.

Traders have been increasing bets the Fed will raise its main rate to as high as 5.25 percent since a government report on April 7 showed the economy added more jobs than economists forecast. Yields on 10-year U.S. Treasuries near four-year highs may also attract demand from international investors.

Gold Speeds through $600—a 25 year high

SINGAPORE (Reuters) - Gold spiked to $600.40 an ounce on Tuesday, its highest since December 1980, as funds bought on worries about inflation, Middle East tensions and uncertainties over the dollar's outlook.

Silver tracked gold's gains and rose to another 23-year high before retreating, while platinum paused for breath after hitting a record high the previous day.

"We're there mate, we've done it," said Darren Heathcote, head of trading at N M Rothschild in Sydney.

Tensions in the Middle East over Iran's nuclear intentions, uncertainty about the dollar's outlook, worries about rising energy costs and speculation that central banks will diversify into metals have also boosted gold's appeal

Silver also climbs to new 23 year high

Gold prices rose to 25-year highs in Asia, as investors bought the metal to hedge against inflation. Silver climbed to a 23-year high and copper rose to a record in Shanghai.

Reports the U.S. is planning military strikes against Iran, the world's fourth-biggest oil producer, pushed up energy prices and boosted the appeal of safe haven assets.

Investment funds are also pouring money into commodities such as copper, used to make wires and pipes, betting their returns will beat those on stocks and bonds.

``There's a heightened level of funds coming into the metals in the second quarter,'' said Mark Pervan, head of research at Daiwa Securities SMBC in Melbourne. ``The higher oil prices also bode well for'' precious metals.

Central banks are rumored to be buying gold

The upward march in commodity prices picked up even further pace overnight as a combination of geopolitical tensions over Iran, supply concerns, fund diversification and sheer momentum drove prices higher across precious, base metal and oil markets.

Alongside the geopolitical concerns are worries about the US dollar at a time of mounting imbalances in the world economy. Central banks are rumored to be buying gold as a hedge against a collapse in the greenback, while momentum-chasing funds are jumping on the bandwagon.

MY COMMENTS

Something is up in the world and the markets are talking. I believe we will soon see a rapidly slowing economy as higher energy prices and interest rates begin to hurt the already overextended consumer, while simultaneously US housing inventories swell causing home prices to fall--taking away the wealth effect and US consumer spending (70% of our economy).

It's probably a good time to get ready for the looming recession--right around the next corner... IMHO, I believe it'll be a monster this time.

Inflation & Central Bank concerns

Excellent article relaying comments made by Chicago Fed President Michael Moskow regarding Inflation and Central Bank Concerns.

The United States faces a risk that Asian central banks which are still hungry for U.S. assets will one day reach their limit and reinvest at home, Chicago Federal Reserve President Michael Moskow said Thursday.

For now, the U.S. economic outlook looks good, although inflation expectations bear watching, Moskow said in a question-and-answer session after a speech to the European Economics and Finance Seminar.

He said the Fed stands ready to act if necessary but that at the moment core U.S. inflation remains under control.

"We want to be very careful that inflation expectations do not increase," he said, terming price stability a "prerequisite to maximum sustainable growth."

Moskow's comments on inflation and the dangers of the big U.S. current account deficit roiled stock markets and triggered selling in U.S. Treasury debt markets.

The Fed's 7th District president, who is not a voting member of the rate-setting Federal Open Market Committee under this year's rotation, devoted much of his speech to long-term problems posed by the record U.S. current account gap.

In 2005, the shortfall in the U.S. current account -- the broadest measure of trade with the rest of the world -- reached $805 billion, or 6.4 percent of gross domestic product, a level some economists view as unsustainable.

"An economy the size of the United States cannot run large current account deficits indefinitely," Moskow said.

Eventually countries investing in the United States, such as China, Japan, developing East Asian nations and major oil exporters, "will reach their desired allocations of U.S. assets," he said.

"They're going to want to bring back and invest in their own countries," Moskow said, adding that the timing and pace of such a trend was hard to estimate.

Traders, who periodically fret about a messy unraveling of the current account gap that might send long-term U.S. interest rates soaring and trigger a steep fall in the dollar, keyed off this remark.

"He said at some point Asians will bring funds home, which wasn't very helpful ... One response may be the Fed having to raise interest rates to keep the dollar from collapsing as a result," said Michael Panzner, head of sales trading at Rabo Securities in New York.

A gradual contraction in the current account gap, which Moskow and many other Fed officials judged the most likely scenario, "probably would not have a major impact on U.S. price pressures or growth," he said, but added:

"There is the possibility, however remote, that current account imbalances could unwind in a more disruptive way."

Variables such as the current account deficit, the dollar or asset prices should not be targets of Fed policy, he said.

For now, Moskow said U.S. growth was self-sustaining, recent economic indicators were favorable and growth "rebounding smartly" from a weak fourth quarter.

On the eve of Friday's key U.S. March payrolls report, Moskow said it was tough to know how low the unemployment level could go without stirring inflation pressures, a reference to the non-accelerating inflation rate of unemployment, or NAIRU.

In the past a U.S. jobless rate of 5 percent has been associated with full employment, the level below which inflationary pressures can build. The rate has been below 5 percent for three months and March is forecast at 4.8 percent.

Moskow said a probable slowdown in U.S. housing markets "should be an important factor in bringing growth back to potential" as the Fed has forecast for 2006 and 2007.

But if housing remained solid "this would heighten the risk of above-trend GDP growth" and could be inflationary, he said.

DEADLY DOLLAR DOMINOS

Good Article about Gold and the Dollar from Jim Willie over at FMNN:

Giant geopolitical factors have been dominant toward the gold price in the last half of 2005 and the early part of 2006, having eclipsed trade deficits, absent savings, price inflation, and other plebeian economic fundamentals like consumer demand, job growth, or industrial output. Bond yield differentials continue to be important, but lately, writing on the wall clearly paints a picture of US interest rate advantage slowly fading from springtime rains. Gold seems poised for a meteoric rise. A confluence of powerful forces is at work, far more inter-related than we might perceive or admit. Some of the crucially important listed factors lie in the past, while some are in current status. Some factors lie in the future, either on the cusp of tomorrow or just down the road. Political demonstrations and weather storms provide a violent stir of the global cauldron. Trade war serves as the nitroglycerine ingredient within the cauldron.

1. General Motors and Ford Motors undergo debt rating downgrades
2. Chinese govt delinks the yuan currency directly from US$
3. King Fahd dies in Saudi Arabia, and Abdullah takes the reigns
4. USGovt blocks the Unocal deal from CNOOC acquisition
5. Hurricanes Katrina and Wilma devastate the US Gulf Coast
6. Euro Central Bank begins its tightening cycle with two rate hikes
7. Schumer trade tariff bill against China gains support in US Congress
8. Dubai Port World deal to control US ports fails, resolved by compromise
9. Iraqi Civil War erupts, conflict festers with Iran, Persian Gulf destabilized
10. extra USFed rate hikes threaten to pop the US housing bubble
11. Yen Carry Trade is slated for an orderly unwind
12. Russia and China accelerate official gold accumulation
13. key debt rating downgrades continue, such as for Iceland govt bonds
14. master inflationist Ben Bernanke makes his imprint as USFed Chairman
15. the USFed stops publication of the M3 money supply
16. the USFed hikes rate until the next LongTerm Capital Mgmt debacle
17. Asia agrees upon a currency for their new credit market (yuan basket?)
18. coordinated chaos seems orchestrated amidst rising nationalism & protectionism
19. General Motors and Ford Motors suffer a broad union-led
20. US Gulf Coast hit by more hurricanes, after two hit Australia before April

The April report (issued midmonth) for the Hat Trick Letter will tie many of these factors together, in much the same manner as past reports have. Let's step back and take a longer-term viewpoint. Several key landmark events have occurred in the last nine months, as an acceleration has clearly shown itself in the weakening to the USDollar worldwide foundation. The trend is sure to resume. As the dominos have toppled, one by one, renewed momentum has created a significant headwind for the world reserve currency. Taken in isolation, each domino is of minor importance. Taken together, the sequence spells bigtime trouble for the clownbuck. Several listed factors actually are tied together by curious threads. One can learn a lesson in modern day life: there are few coincidences which involve truly large momentous events. The bigger the event, the more likely its planned occurrence, the more likely its integration with other critical events.

Since the year 2001, gold has responded inversely to the USDollar. When the bloated buck falls, the gold price rises, like a children playground teeter tawter. The exception has been since midsummer 2005, not enough to establish a trend. One can actually argue with some justification that the US$ rose in the second half of 2005 from an oversold reaction. At the same time, the gold price rose uninterrupted. Many analysts argued that gold decoupled from the US$, here too in my scribbles, during this time span. It might be more accurate to claim a semblance of continued inverse correlation between gold and the US$ continues. As the bloated buck has stalled versus other currencys in their exchange rates, gold persists in rising.

Gold might be much more driven by background management of foreign reserves than from the marginal value of the US$ versus other major currencys. Asians, Middle Easterners, and others are questioning their vast holdings of USTreasury Bonds. The world has a vested interest in preventing a crash of the US$ on a global basis. There is plenty of incentive in bond arbitrage among speculators to keep the pressure on reasonably strong US$ demand. That bond yield advantage offered by the USTreasurys is not going to go away. It cannot. High US rates are here to stay, with foreigners holding the USTBond as hostage, the victim sure to be the US housing sector and USEconomy itself. Foreigners have changed their reserves management and have given a higher priority and ratio among holdings to gold.

The issue of gold investment as an inflation hedge is always prominent. The manifestation of monetary inflation is so diverse in its forms that confusion reigns widely even as its omnipresent liquidity rains on the entire economic landscape. Banks and the US Congress have proved themselves incapable to rein in this inflation when our status quo depends so critically upon it. To stop inflation, our nation must undergo a depression.

The United States contains massive housing inflation, bond inflation, stock inflation among its asset groups. Concurrently, the USEconomy contains massive cost inflation from higher energy prices and a universe of higher costs tied to living expenses. Asia contains massive expansion of industrial production capacity which has exploited incredibly cheap labor inherent to their sphere. The export of US inflation to Asia, and the conversion of our paper inflation to excess production capacity has essentially created a giant whirlwind of deflationary pressure to the USEconomy. It comes in the forms of reduced import prices of finished products and lost wages, from American to Chinese. We in the United States have a cyclone of rising asset prices and falling real economy prices (product and wage). Some can meaningfully label it a hurricane. As much damage has been levied on our body economic from the abuse and dependence on inflation, as was doled out by the hurricanes on the Gulf Coast.

Officials inside China are grumbling about the bloated USDollar. The ground under their Chinese financial feet is rumbling with public statements that China should use some of its vast foreign reserves to buy gold bullion. A scheiss storm this way comes, as in brown ice.

Thursday, April 06, 2006

Outsourcing, Cheap Imports and Foreign Ownership of US industry

Delta Pilots may Strike, Delphi UAW negotiations have gone sour, GM struggles.

What is going on here and will these trends continue? My feeling...YES!

What can be done about it? Are there any solutions? I wish I knew—you tell me

As I’ve stated before, the problems in our economy are many, and the issues at hand are far more than just a housing bubble losing its steam. Although housing has played a major role in our economy during the last 5+ years (and when it falters the repercussions will be felt far and wide), it is just one of the many issues at play... We also have massive trade deficits, increasing cumulative debt, foreigners holding vast sums of dollars, waning confidence in those fiat dollars, soaring energy costs, skyrocketing health care costs, negative personal savings rates, major immigration concerns, nearly broken Social Security system, nearly bankrupt pension plan system, decaying moral foundation, inept leadership, out of control government spending, irrational market exuberance, completely oblivious consumers, etc… I could go on, but the main issue I’d like to concentrate on today is: Outsourcing of US jobs and foreign ownership of US industries

Open borders, NAFTA/CAFTA, and the like have made it extremely difficult for US industry (within our borders) to compete with the rest of the world, and these agreements have been (to a large extent) responsible for the loss of many well paying US jobs—jobs that were replaced through the outsourcing of foreign workers--to reduce costs and stay competitive. Many of the industries that didn’t want to (or weren’t allowed to) follow these new rules of business (outsourcing) eventually found (or will find soon) themselves unprofitable and had to either change their ways or close their doors… Which brings us to today.

Today, the US still has many home-bound corporations (examples: GM, Delta, Delphi, Dana, etc) who have tried to hold on to their past modus operandi, yet seem to be reeling from the high cost of US labor, health care, legacy pension plans, etc. Most are finding it increasingly difficult to complete in the world marketplace and realize that, without change, they are doomed. And changes are on the way… to the detriment of our country and the US worker.

NAFTA/CAFTA and other free-trade agreements have eliminated and/or reduced many previously existing import tariffs, making imported products much cheaper than home manufactured goods. This has caused many US manufacturing industries to lose large portions of market share, which has increased both the import of foreign goods and the export of US dollars. These free trade agreements have now been in place for so long, it has become of no concern to most that our huge (and ever increasing) trade deficits have now placed trillions of US Dollars into the hands of foreigners… foreigners who use these dollars to buy up the U.S.

This buyout situation is extremely scary, as foreign entities have used (and are still using) many of their dollars, earned through their exports and the never ending US consumption of foreign goods, to purchase many of our own US industries. The numbers here are absolutely staggering and seem to be growing every day.

If you haven't already done so, I highly urge you to take a look at ECONOMYINCRISIS (permanent hyperlink on right side of my Blog). This non-profit site is dedicated to spreading the word about outsourcing, foreign purchases of US industries and similar topics…

I borrowed a few statistics (Below) from their site that I found mind blowing. Hope you feel the same way and can provide a good idea or two on ways to solve this problem…

I’m afraid that if we continue to do nothing about these issues, one day we’ll finally wake up and realize that we are little more than sharecroppers.

FOREIGN OWNERSHIP OF SPECIFIC U.S. INDUSTRIES

INDUSTRY
PERCENTAGE FOREIGN OWNED

Sound recording industries
97%

Commodity contracts dealing and brokerage
79%

Motion picture and sound recording industries
75%

Metal ore mining
65%

Motion picture and video industries
64%

Wineries and distilleries
64%

Database, directory, and other publishers
63%

Book publishers
63%

Cement, concrete, lime, and gypsum product
62%

Engine, turbine and power transmission equipment
57%

Rubber product
53%

Nonmetallic mineral product manufacturing
53%

Plastics and rubber products manufacturing
52%

Plastics product
51%

Other insurance related activities
51%

Boiler, tank, and shipping container
50%

Glass and glass product
48%

Coal mining
48%

Sugar and confectionery product
48%

Nonmetallic mineral mining and quarrying
47%

Advertising and related services
41%

Pharmaceutical and medicine
40%

Clay, refractory, and other nonmetallic mineral products
40%

Securities brokerage
38%

Other general purpose machinery
37%

Audio and video equipment mfg and reproducing magnetic and optical media
36%

Support activities for mining
36%

Soap, cleaning compound, and toilet preparation
32%

Chemical manufacturing
30%

Industrial machinery
30%

Securities, commodity contracts, and other financial investments and related activities
30%

Other food
29%

Motor vehicles and parts
29%

Machinery manufacturing
28%

Other electrical equipment and component
28%

Securities and commodity exchanges and other financial investment activities
27%

Architectural, engineering, and related services
26%

Credit card issuing and other consumer credit
26%

Petroleum refineries (including integrated)
25%

Navigational, measuring, electromedical, and control instruments
25%

Petroleum and coal products manufacturing
25%

Transportation equipment manufacturing
25%

Commercial and service industry machinery
25%

Basic chemical
24%

Investment banking and securities dealing
24%

Semiconductor and other electronic component
23%

Paint, coating, and adhesive.
22%

Printing and related support activities
21%

Chemical product and preparation
20%

Iron, steel mills, and steel products
20%

Agriculture, construction, and mining machinery
20%

Publishing industries
20%

Medical equipment and supplies
20%


FOREIGN OWNERSHIP OF MAJOR U.S. INDUSTRIES

INDUSTRY
PERCENTAGE FOREIGN OWNED

Mining
27%

Information
24%

Manufacturing
20%

Professional, scientific, and technical services
20%

Finance and insurance
11%

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