Wednesday, January 30, 2008

GOLD -- How High?

Well, as expected, the Fed cut rates again today and Gold took off while the dollar fell.

Bernanke cut rates on December 11th, followed it up with a emergency cut last week, and then a new one today. Holy cow! Sure seems like someone is running scared, as cuts are becomming quite a common occurrence. I even believe we may see another emergency cut before March 18th. Stay tuned...

So, with all the recent rate cuts, what's happening w/regard to our economy and what are the expected consequences for gold?

Let me try to keep this simple and find a good starting point:

If you’ve been keeping an eye on the Gold and Silver Market over the last couple of years, you’re probably well aware of the fact that precious metals (PM) are exploding in price, but (like many) maybe you don’t really understand the PM market, or recognize the reasons why we’re seeing the rapid price increases.

Well, in an attempt to help you understand what is transpiring, I’ll provide a few of the reasons for the price explosion below:

  • The US Housing bubble has finally burst and is expected to get much worse
  • Our financial/banking system offloaded too much toxic paper (mortgage backed securities and derivatives of such) to foreigners and investors who have been burned badly & are not happy about it.
  • Banking system write-downs have been massive thus far and more will follow
  • Credit markets are locked up and mortgage lending standards have tightened dramatically; the negative consequences are expected to cross over to auto loans, credit cards, etc later this year
  • Fed Chairman Bernanke and the PPT team (led by Treasury Secretary Paulson—previously CEO of Goldman Sachs and a Treasury “Plant”) have panicked and have sacrificed the dollar in an attempt to bail out our financial/banking systems -- By lowering rates 125 b.p. in just 8 days, at a time when the dollar is at its weakest point in history, should be proof enough of their priorities and loyalties.
  • Deflation is on the horizon and therefore the Fed will make every attempt to INFLATE (print more money and inject it into the system—continuing to devalue our currency)
  • Foreign dollar holders are working to diversify their holdings—among other things, in different currencies, commodities, energy & gold
  • 43 of the world’s largest stock indexes, from around the globe, have officially entered “Bear” Territory in early 2008
  • There is wide-scale pressure afloat to price oil in currencies other than the depreciating US Dollar
  • OPEC nations are seriously discussing the need to de-peg their currencies from the dollar, as inflation internal to their domestic economies has been raging out of control
  • Investors are fleeing volatile markets and are seeking security in gold

Now, I'm not saying that we won’t encounter a volatile ride w/gold, as we will most likely experience wide swings in the future--some up and some down (maybe even a down-swing back into the low $800's in the not so distant future), but overall I believe the mid-to-long term trend is Up, Up, Up!

Ok, if the long-term trend is up, just how high can the gold price go?

Well, based on the 1980 high of ~ $850, today's > $920 price is a new "nominal" dollar denominated high, but if you were to adjust for government published inflation figures, gold would need to be > $2,200oz to equate to the $850oz, 1980 price.

Additionally, as I've told you before, our governments published inflation stats have been understated for many years, and if the true rate of inflation were to be used in the calculation process (using the same metrics from the early 80’s – metrics that have changed dramatically since--to severely understate inflation), Gold would need to be priced ~ $5,000oz to equate the $850 purchasing power of 1980.

Looked at another way: Gold was $35 oz back in 1971 and soared to ~ $850 in 1980 ($850/35=24.2)—so it increased in price by a factor of 24. Now, if we were to select the bottom of the last Gold bear market in 2001 and multiply $250oz by the same factor of 24, the potential upside target of $6,000oz is not unrealistic—if the same stag-flationary environment were to return (which many predict will happen).

With all that now said, I believe the fundamentals of today's economy are much worse than those in the 70's, as back in the day we were a net exporting country, had a strong manufacturing base, had a positive national savings rate, and very little debt. Today foreigners are holding > $4.4 Trillion of our dollars, we have a $9+ Trillion dollar debt load, are running extensive trade deficits ever year, and have > $60 Trillion in un-funded future obligations.

Bottom line: I feel this Gold bull market is still in its early stages. When gold finally breaks the $1,200 mark, common investors will most likely wake up and the gold market will be flooded with new dollars. Eventually, the gold market will become a bubble itself and when that happens, it may be time to cash out.

Hold on to your hat because it's going to be a very interesting and wild ride…



Thursday, January 24, 2008

Good Videos

Economy in Crisis -- Depression Looming?

Cafferty File: Shaky Economy March 18, 2008

California Economic Crash

Jim Rogers -- Abolish The Fed (3-19-08)

Marc Faber: Bernanke is gold buyers best friend (3-19-08)

Tribute To Peter Schiff -- Well Done -- Watch!

Billionaire Jim Rogers Flees The Coming Collapse

The inevitable collapse of the dollar

Death of the U.S. Dollar

Ditching the Doomed Dollar

Ron Paul on Cavuto: Fed's $200 Billion Injection--a sign of desperation


America: Freedom to Fascism

Wednesday, January 23, 2008

Another very interesting day on Wall Street

I only have a minute to post up before I'm off to work, but it looks like we'll have another interesting day on Wall Street. Futures are down across the board:

NASDAQ Futures down >3%
S&P Futures Down 2.5%
DOW futures Down 205 points ~ 2%.

I imaging the PPT is getting their arsenal ready.


Tuesday, January 22, 2008

2008 Global Outlook--Bill Bonner

Bill Bonner from The Daily Reckoning (recorded in late December 07) nails our current economic predicament squarely on the head. Must watch

Monday, January 21, 2008

Emergency Rate Cut Tomorrow?

Stocks tanked around the globe today.

Shanghai Stock Composite Down >5%
Hang Seng Down > 5%
BSE 30 Down > 7%
Straits Times > 6%
CAC 40 Down > 6%
DAX Down > 7%
Madrid General Down > 7%
FTSE 100 Down > 5%
Swiss Market Down > 5%

Fortunately most US markets were closed today, but Futures were still open. This is how things currently look for tomorrow's open:

DJIA INDEX -- 11,592.00 (-514.00)
S&P 500 -------1,265.10 ( -60.20)
NASDAQ 100---1,773.50 (-76.00)

Will this cause the PPT to panic and implement emergency Rate Cuts tomorrow?

I think it's quite possible...


Saturday, January 19, 2008

Precarious Economic Conditions & Gold

The Dow Industrials and S&P 500 have dropped ~ 14% since the October 07 top. The S&P has started this year worse than ever, and the drastic plunge over the past three days is the sharpest since 2002.

We’re now six months into the greatest credit crunch of the modern era. Defaults on mortgages, have skyrocketed as individuals find it more advantageous to mail the house keys back to the lender rather than make sharply higher reset payments they can’t afford.

It’s not just the borrowers who are suffering. It’s also the banks, pension funds, life insurance companies and individual investors who bought toxic mortgages, repackaged as complex securities from Wall Street investment banks.

But the roller coaster ride of bank and financial system losses has merely just begun:

Ambac Financial Group, the nation's second largest insurer of bonds, lost its precious AAA rating from Fitch Ratings on Friday over concerns that the company no longer had enough capital to guarantee billions of dollars in debt now imperiled by the subprime mortgage crisis.

The move to downgrade Ambac to a rating of AA could further roil financial markets, increasing pressure on Wall Street banks that hold this bad debt and making it even more costly for local governments to raise money for public projects.

This could spark a substantial sell-off by institutional investors such as pension funds that can only invest in top-rate securities, causing their value to drop. That in turn would prompt even more selling. As the securities become less valuable, Wall Street firms could be forced to write down billions of dollars on their balance sheets, restating how much their holdings of these securities are worth. The banks, which have already suffered staggering losses, have relied heavily on bond insurance to reduce their exposure to subprime mortgage debt and other complicated securities linked to these loans.

"Everyone thinks they're looking at the cliff over Armageddon," said Ed Rombach, senior derivatives analyst at Thomson Financial. "If you think the write-downs have been bad so far, the next write-downs could be twice as big."

Insurance company MBIA Inc. (MBI) Friday said it found the move by Mood's Investors Service to review the company's ratings for a potential downgrade, surprising. Moody's initiated a review of the Aaa financial strength ratings of MBIA Insurance Corp. and its affiliates as well as the Aa2 ranting of MBIA's latest Surplus Notes.

The rating agency also contemplates a downward revision of the Aa3 ratings of the Junior obligations of MBIA Insurance and the senior debt of MBIA Inc. MBIA stock is currently trading nearly 23% below the previous close.

End of the Line for Monolines

Just a few days ago Merrill Lynch stunned Wall Street by reporting a net quarterly loss of nearly $10 Billion. It was the worst quarter in company history. This much was well reported.

What didn't get nearly the attention was the largest reason for Merrill's loss. This involves a little known company called ACA Capital and a financial model on the verge of collapse.

Financial institutions that trade in mortgage-backed securities very often buy insurance, in the same way you buy insurance for your car, to protect themselves in the event of a default by the mortgage borrowers.

The problem is that a tidal wave of mortgage defaults are sweeping the nation, creating so many losses that small bond insurers like ACA are getting swamped. As it stands, ACA is expected to go under any day now.

Of course this means that when the bond insurer goes bankrupt all the bonds that it had insured are no longer protected, hence they are riskier. In the world of bonds, price and risk are directly and inversely proportional. Merrill's bonds go down in value the closer ACA gets to bankruptcy. Thus the huge losses.

These downgrades mean a lot more losses are in the works for financial institutions. If all the bond insurers were to be downgraded, that would mean $200 Billion in losses for whoever holds debt that is insured by the monolines. If the monolines all go bankrupt then the losses would be much more.

To put that into perspective, total losses from the entire subprime credit cruch since August that have rocked the financial world and garnered headlines so far have only amounted to a little over $100 Billion.

That's right. The damage from the credit crunch that has worried so many people could triple in the coming weeks.And for these struggling bond insurers, bad news can lead to more bad news. An entire financial model is on the verge of collapsing.

Created by Ronald Reagan back in 1988 through executive order 12631, the Working Group on Financial Markets, also known as the Plunge Protection Team (PPT) was created to respond to events in the financial markets surrounding October 19, 1987 ('Black Monday').

The Current PPT group is made up of:

Treasury Secretary Paulson (Chairman of the PPT)

Ben Bernanke (Chairman of the Board, Federal Reserve System)

Christopher Cox (Chairman of the Securities and Exchange Commission)
Walter Lukken (Chairman of the Commodity Futures Trading Commission)

These four PPT Kingpins, with inputs/suggestions from their numerous advisors, are currently operating in panic mode and are attempting to gin up new ways to thrust new money into the falling markets and US economy. The present situation has become so precarious they are now routinely advising President Bush and were actually the “brains” behind recent calls for tax rebates -- meant to pump up consumer spending. In the meantime (tax rebates will take time), they are using government funds to pump money into the futures markets--in an attempt to "fry" the shorts and make the impression that big money is buying up the falling market. The hope is: if other traders see this, they will start following the big money higher (probably futile).

President Bush acts on PPT Advice:

President Bush yesterday grabbed the headlines with his "economic stimulus" proposal -- it may be a "tax break," or a "rebate check" of $800 to $1600, and/or allow businesses to deduct half the cost of new equipment purchases. The stimulus will be "direct and rapid," "provide a shot in the arm," "lift our economy," and "help the economy create 500,000 more jobs 'more or less' than it otherwise would." (Article Below)

President Bush proposed a series of short-term tax cuts Friday that he said would provide a boost for the struggling U.S. economy.
Speaking at the White House, the president did not give details of his plan but said it would include tax breaks for businesses and individuals worth at least 1 percent of the nation's gross domestic product, or roughly $140 billion to $150 billion.

"By passing an effective growth package quickly we can provide a shot in the arm to keep a fundamentally strong economy healthy," said the president.

He said that his advisers believe the economy can keep growing, but that the risk of a downturn has convinced him to back a stimulus package.

"There are also times when swift and temporary actions can help ensure that inevitable market adjustments do not undermine the health of the broader economy," Bush said. "This is such a moment."

Federal Open Market Committee Rate Decision Due on 30 January 08

What should we expect? I think, due to recent market weakness, a 50bp cut is an absolute certainty while a 75bp cut is looking more probable by the day. My thoughts are: if we don’t see some market improvements soon, we may well see an emergency rate cut before the 30th, followed by another on Jan 30 – a total cut of 75bp or better.

So, what does all this mean for gold

Gold bounced from a one-week low on Friday after this week's climb to a record above $900 an ounce, but the market could consolidate before charging higher, fund managers and analysts said.

All eyes were on a U.S. Federal Reserve meeting on interest rates Jan. 29-30 after Chairman Ben Bernanke told a congressional committee more rate cuts might be required as the economic outlook worsened.

"Gold is consolidating after touching recent highs," said Christoph Eibl, head of trading at Tiberius Asset Management, noting that there had been some investor selling of gold held in exchange-traded funds (ETFs).

"ETF investors ... are holders rather than traders, therefore the recent drop has some strength," he said.

Gold's drop from the record high was partly driven by selling from investors and funds to cover margin calls from losses in stock markets amid fears of a recession in the United States.

Gold's investment appeal was intact owing to flight-to-quality demand on the back of turmoil in financial markets as a result of a mortgage-related crisis and worries about higher inflation.

"External factors such as higher inflation expectations, broader economic concerns, geopolitical tensions and Fed rate easing are likely to drive prices higher," Barclays Capital said in a report.

The World Melts for Gold

Gold-bug fever is spreading.

From China to the Middle East, new ways to invest in gold are rapidly popping up in developing countries. It's transforming the market for one of mankind's most venerable ways to sock away wealth.

The door is opening to a new class of investors who previously wouldn't have had access to gold futures and other tools. Their rush to invest has helped fuel soaring prices -- gold crossed $900 an ounce for a time in the past week, and there are some calls for $1,000 -- while adding volatile new dynamics to the market.

The democratization of gold speculation outside traditional Western financial centers has the potential to magnify the already strong appeal of gold as a hedge against global recession, inflation or just general uncertainty.

The appeal of gold as an alternative investment is increasing in China as its price hits new highs and is forecast to keep rising in the mid to long term.

Stimulated by expectations of U.S. interest rate cuts and soaring global oil prices, gold reached an all-time high earlier this month. Citibank estimated its price is expected to hit 1,000 U.S. dollars an ounce this year.

The strong upward trend has attracted individual Chinese investors such as Yao Yun. The chief financial officer of a Shanghai-based foreign company bought 50,000 yuan (6,849 U.S. dollars) in gold bars and the price has risen by 12 yuan per gram in just half a month.

"I believe the price will keep rising," he said. "The stock market is too volatile, and the real estate sector is subjected to macro-control. Investing in gold is a good choice at this time."

In Caishikou Department Store, a popular physical gold dealer in Beijing, more than 100 people lined up to purchase bullion for the Lunar Year of the Mouse on Nov. 22, the first trading day of the products. More than 200 kilograms of the gold bars were sold within 1.5 hours. Moreover, the total subscription amounted to two tons.

Li Xiang, a manager of the department store, said sales of gold products surged more than 50 percent to 2.38 billion yuan in 2007.

China Gold Association statistics revealed that gold investors nationwide have exceeded 1 million. The number doesn't include speculators of gold futures, which made a strong debut in Shanghaion Jan. 9.

On that day, China gold futures contracts surged to the daily 10 percent limit minutes after trading started at 9 a.m. on the Shanghai Futures Exchange (SFE). More than 6,000 clients traded on the market.

Experts believe the China gold futures market will grow into a leading global market as it was launched at a time when international gold prices have repeatedly been hitting new highs. Global prices jumped more than 30 percent throughout last year, representing the biggest increase since 1979.

Russia’s gold and forex reserves reach all-time high

Russia’s gold and foreign currency reserves have increased by $11.5 billion (2.5 percent) over the past three weeks, to $477.7 billion. This is the highest level since records began.

Bottom Line w/regard to Gold:
Expect to possibly see some more short-term consolidation, but with future (significant) rate cuts in store and growing worldwide demand increasing, the long-term trend will be up, up, up.

Summary of this article:

Major problems are on the horizon, markets are reeling and the mainstream is finally catching on to what we've been predicting for quite some time. The Plunge Protection Team however is working overtime and with an oversold equities market, I expect to see a short-term bounce, but it will fail to ultimately recover or impress.

Additionally, the Fed is certain to cut rates big-time in the coming weeks, and Congress will approve some sort of stimulus plan next week (probably too little too late), but once the Monoline downgrades (w/more to come) start the chain reaction of downgrade/markdown dominoes, we will begin to hear the fat lady sing.

As an aside, these new rate cuts and stimulus plans will most certainly cause the dollar to plummet to new all-time lows, and consumer inflation (already running at > 12%--see blue line on chart below) will soar, causing gold to take off on another tremendous up-leg.

I took the liberty of borrowing this Gold spot price chart below from Axstone.



Monday, January 14, 2008

US Housing Outlook Report

I just read a January 2008, US Housing Outlook report from Deutche Bank’s Global Markets Research team. The ten page report was complete with a myriad of charts, graphs, analysis, comments, etc. A few relevant snippets are included below.

The opening sentence to this report (pasted below) was spot on!

“The housing correction continues to be like a slow motion train wreck"

But I am a bit more pessimistic than the analyst who wrote the following:

“ Residential investment as a share of GDP has declined from 5.5% at the peak to 4% currently. This has been quite a significant move and the bulk of the adjustment in activity is most likely behind us”

Nah, not behind us just yet—we’re merely warming up…

This comment was a bit closer to reality:

“ For house prices, while the inflation rate has come down a long way from the peak nearly two years ago, it probably has a good way further to run into negative territory. Our own models and the futures markets see home prices declining around 10% over the next two years and remaining depressed for a time thereafter.”

Later the article goes on to discuss a mildly negative consumer wealth effect (due to housing) and the market analysts furthermore contend that as long as the US stock market and employment hold up, US recession will be avoided in 2008.

Personally, I'm much more pessimistic and think (especially with the ongoing credit market problems) we are going to see severe equities problems and a > 10% decline in home prices THIS YEAR ALONE.

As far as the wealth effect and recession are concerned: I believe unemployment will increase dramatically, consumers will pull back and Stagflation/Recession--it has already been baked into the cake.

Oh well, at least these highly paid analysts got the first line of their report correct.



Sunday, January 06, 2008

Global Food Crisis--Credit Crunch Could Pale in Comparison

Grains, food inflation give markets a jolt

Soaring world grain prices will keep driving food price inflation in 2008 as China and India carve out a bigger place at the table and a new dinner guest -- biofuels -- threatens to become the biggest glutton of all.

In 2007, Chicago Board of Trade prices -- world benchmarks for wheat, corn, rice and soybeans -- soared despite big U.S. harvests. Wheat prices rose 90 percent, soybeans 80 percent, corn 20 percent. U.S. prices are key because America is still the world's breadbasket, the single biggest grain exporter.

"The fact we're having higher commodity prices here will have an impact around the world on food prices," Lapp said.

Bill Lapp, former economist for food giant Conagra Foods Inc said the U.S. producer prices for food for the first 11 months of 2007 rose at an annualized rate of 7.5 percent, the highest since 1980, with the exception of the year 2003.

"We've only started to see the impact of higher costs translate into higher consumer prices," Lapp said.

One indicator that markets are watching more closely than even U.S. prices is world grain stocks. U.S. wheat stocks in 2008 will hit a 60-year low and world barley stocks a 42-year low. Global oilseed stocks are projected down 22 percent in one year.

Rice Prices Are Steaming, With Many Implications

The global commodities boom that has lifted prices of everything from gasoline to gold is now elevating rice -- a staple food for half of the world -- to its highest level in nearly 20 years.

A particular humanitarian concern is that the world's poorest consumers, many dependent on rice, often have little or no voice. "When they suffer food shortages, they starve in silence," says Joachim von Braun, director general at the International Food Policy Research Institute.

Lowest Food Supplies in 50 or 100 Years

The United States Department of Agriculture (USDA) released its first projections of world grain supply and demand for the coming crop year: 2007/08. USDA predicts supplies will plunge to a 53-day equivalent-their lowest level in the 47-year period for which data exists.

"The USDA projects global grain supplies will drop to their lowest levels on record. Further, it is likely that, outside of wartime, global grain supplies have not been this low in a century, perhaps longer," said NFU Director of Research Darrin Qualman .

Most important, 2007/08 will mark the seventh year out of the past eight in which global grain production has fallen short of demand. This consistent shortfall has cut supplies in half-down from a 115-day supply in 1999/00 to the current level of 53 days. "The world is consistently failing to produce as much grain as it uses," said Qualman. He continued: "The current low supply levels are not the result of a transient weather event or an isolated production problem: low supplies are the result of a persistent drawdown trend."

In addition to falling grain supplies, global fisheries are faltering. Reports in respected journals Science and Nature state that 1/3 of ocean fisheries are in collapse, 2/3 will be in collapse by 2025, and our ocean fisheries may be virtually gone by 2048. "Aquatic food systems are collapsing, and terrestrial food systems are under tremendous stress," said Qualman.

Severe food shortages, price spikes threaten world population

Worldwide food prices have risen sharply and supplies have dropped this year, according to the latest food outlook of the United Nations Food and Agriculture Organization. The agency warned December 17 that the changes represent an “unforeseen and unprecedented” shift in the global food system, threatening billions with hunger and decreased access to food.

The USDA has cautioned that wheat exporters in the US have already sold more than 90 percent of what the department had expected to be exported during the fiscal year ending June 2008. This has dire consequences for the world’s poor, whose diets consist largely of cereal grains imported from the United States and other major producers.

The food crisis is intensifying social discontent and raising the likelihood of social upheavals. The FAO notes that political unrest “directly linked to food markets” has developed in Morocco, Uzbekistan, Yemen, Guinea, Mauritania and Senegal. In the past year, cereal prices have triggered riots in several other countries, including Mexico, where tortilla prices were pushed up 60 percent. In Italy, the rising cost of pasta prompted nationwide protests. Unrest in China has also been linked to cooking oil shortages.

All national governments are keenly aware of the possibility of civil unrest in the event of severe food shortages or famine, and many have taken minimal steps to ease the crisis in the short term, such as reducing import tariffs and erecting export restrictions. On December 20, China did away with food export rebates in an effort to stave off domestic shortfalls. Russia, Kazakhstan, and Argentina have also implemented export controls.

But such policies cannot adequately cope with the crisis in the food system because they do not address the causes, only the immediate symptoms. Behind the inflation are the complex inter-linkages of global markets and the fundamental incompatibility of the capitalist system with the needs of billions of poor and working people.

As the housing market in the United States collapsed, compounding problems in the credit market and threatening recession, speculation shifted to the commodities markets, exacerbating inflation in basic goods and materials. The international food market is particularly prone to volatility because current prices are greatly influenced by speculation over future commodity prices. This speculation can then trigger more volatility, encouraging more speculation.

The rising oil price not only affects the costs of transportation and importation. It also has a direct impact on the costs of farm operation in the working of agricultural and industrial processing machinery. Moreover, fertilizer, which takes its key component, nitrogen, from natural gas, is also spiking in price because of the impact of rising oil prices on the demand and costs of other fuels. By the same token, as oil prices rise, the demand for biofuel sources such as corn, sugarcane, and soybeans also rises, resulting in more and more feedstock crops being devoted to fuel and additives production.

BMO strategist Donald Coxe warns credit crunch and soaring oil prices will pale in comparison to looming catastrophe.

A new crisis is emerging, a global food catastrophe that will reach further and be more crippling than anything the world has ever seen. The credit crunch and the reverberations of soaring oil prices around the world will pale in comparison to what is about to transpire, Donald Coxe, global portfolio strategist at BMO Financial Group said at the Empire Club's 14th annual investment outlook in Toronto on Thursday.

"It's not a matter of if, but when," he warned investors. "It's going to hit this year hard."

Mr. Coxe said the sharp rise in raw food prices in the past year will intensify in the next few years amid increased demand for meat and dairy products from the growing middle classes of countries such as China and India as well as heavy demand from the biofuels industry.

"The greatest challenge to the world is not US$100 oil; it's getting enough food so that the new middle class can eat the way our middle class does, and that means we've got to expand food output dramatically," he said.

Wheat prices alone have risen 92% in the past year, and yesterday closed at US$9.45 a bushel on the Chicago Board of Trade.

At the centre of the imminent food catastrophe is corn - the main staple of the ethanol industry. The price of corn has risen about 44% over the past 15 months, closing at US$4.66 a bushel on the CBOT yesterday - its best finish since June 1996.

This not only impacts the price of food products made using grains, but also the price of meat, with feed prices for livestock also increasing.

"You're going to have real problems in countries that are food short, because we're already getting embargoes on food exports from countries, who were trying desperately to sell their stuff before, but now they're embargoing exports," he said, citing Russia and India as examples.

So, what is the take-away from this post?

Expect 2008 to bring much higher food prices around the globe. The main issue for US consumers (baring any calamity) will, most likely, just be significantly increased costs to feed the family, but we will probably see much more civil unrest and famine around the world.

On the other hand, if we do experience some type of calamity in 2008 or if food stockpiles continue to decline in the out years, we could potentially see one hell of a problem.

As an aside, I spent many months in Somalia back in 1992/93 as Operation Restore Hope (A United Nations Humanitarian Effort--before Blackhawk Down) tried to put food supplies in the hands of the starving (vs the controlling Warlords) and let me tell you, it was the most appalling thing I have ever witnessed... Thousands upon thousands of skeletal shells of human beings, trying to survive any way they could--the smell of death hanging in the stale air as untold numbers of bodies slowly decayed beneath shallow improvised graves baking in the desert sun…

Lets hope/pray we never experience something like this on our continent.


Friday, January 04, 2008

Economic News and Market Downturn

The DOW is down nearly 200 points as I pen this quick message and the S&P has finally broke through key downside resistance. Looks like the markets, this week, have finally woken up to the issues that we’ve been talking about for quite some time.

Some of the major concerns that have come to light over the past few days—several of the catalysts for recent negative market reactions:

ISM Index (Manufacturing Activity) drops to 47—below 50 is bad/contracting

US blue-chip stocks on Wednesday suffered the worst start to a new year in 25 years after an index of manufacturing fell sharply, raising fears that the US economy is slowing more than expected.

Jobless Rate rose to 5%--even w/skewed data from BLS birth-death model

Hiring practically stalled in December, driving the nation's unemployment rate up to a two-year high of 5 percent and fanning fears of a recession.

Employers last month added the fewest new jobs to their payrolls in more than four years, according to the employment report released Friday by the Labor Department. The report showed that employment conditions are deteriorating, strained by a housing slump and credit crunch that are sapping economic strength.

"The economy is getting hit by some body blows. The big question is whether the economy can withstand it or will it take a fall," said Ken Mayland, president of ClearView Economics.

GM, Ford, Toyota December Sales Fall—Worst Year in a Decade

General Motors Corp., Ford Motor Co. and Toyota Motor Corp. said U.S. auto sales fell in December, capping the worst year in a decade, and predicted that 2008 probably won't be any better.

Consumers are curtailing spending after being hammered by $3-a-gallon gasoline prices. Housing starts, a barometer for sales of profitable trucks, are in the deepest slump in 16 years.

``It's going to be a brutal year for autos; we're headed into a recession,'' said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee.

Ford Stock Price @ 22 year low after losing #2 spot to Toyota

Ford Motor Co. fell to the lowest price since 1986 in New York trading after losing its status as the No. 2 seller of autos in the U.S. for the first time in three-quarters of a century.

Ford slid as much as 7 percent to $6 today, a day after posting a 12 percent drop in U.S. sales and forecasting a ``challenging'' 2008. Toyota Motor Corp., which modeled itself after Ford following World War II, has now overtaken the Dearborn, Michigan-based automaker on its home turf.

Past due payments on consumer loans UP—highest since 2001

Americans are falling further behind on consumer loans, with late payments rising to the highest level since the nation's last recession in 2001, data released Thursday show.

In its quarterly study of consumer borrowing, the American Bankers Association said the percentage of loans at least 30 days past due rose to 2.44 percent in the July-to-September period from 2.27 percent in the previous quarter.

The delinquency rate was the highest since a 2.51 percent rate in the second quarter of 2001. Late payments on some types of loans rose to levels not seen since the 1990s.

The ABA attributed some of the summer increase to rising oil prices and the inability of thousands of homeowners to keep up with mortgage payments.

"Those little expenses that keep sucking dollars out of wallets every month are what have the most impact on people's ability to pay their consumer loans," Chief Economist James Chessen said in an interview

So what can we expect the Markets to do next week?

I expect to see a small recovery on Monday, but numerous economic releases due later in the week will probably intensify today’s decline.

Due Next Week:
- Pending Home Sales
- Consumer Credit
- Initial Claims
- Wholesale Inventories
- Import/Export Prices
- Crude Inventories

BREAKING NEWS! Looks like the Fed is becoming more concerned w/Credit Crisis

Fed Ups Auction Amounts to Aid Banks

The Federal Reserve announced Friday that it is increasing the amount of money available to banks through the new auction process it created to ease the nation's severe credit squeeze. The Fed again pledged to continue the auctions "for as long as necessary."

The Fed said that it will increase the amount offered at each of the next two auctions from $20 billion to $30 billion, a 50 percent jump. Those two auctions will be Jan. 14 and Jan. 28.

So, will the Fed cut rates again at the end of Jan?

ABSOLUTELY! My Bet is 50 Basis Points. We may even see an emergency rate cut beforehand.

Post Updated at 14:30--Added new Peter Schiff Video (Discussing Markets); Very Smart guy and I agree with many of his points (even read his book), but don't agree that foreign markets will decouple and withstand the downturn--Decouple yes, but I think it will take many years

Have a great weekend!

Tuesday, January 01, 2008


I think many readers will agree that, with the US housing bubble deflating and credit markets deteriorating, many of the things that we have previously taken for granted (easy money/credit and the ability to roll over debt, rising asset values, cheap imports, fairly strong job market, exported inflation, sound banking/financial systems, etc) will soon come to an end, and our economic landscape will significantly change.

For years, due to US dollar hegemony, a tremendous US appetite for consumption and a masqueradingly sound banking/financial system, our economy was very fortunate to have had the privilege of absorbing nearly 80% of the world’s excess savings. This foreign savings was recycled back through our system, allowing for the creation of new loans, provided the fuel for increased consumption and it permitted us to live far beyond our means.

Recently however, many foreigners (who previously wouldn’t have given second thought to investing their savings in the US) were burned with what they thought were “can’t-lose” investments and the falling dollar has exacerbated their losses… I imagine it will take a long, long time for many to forget the deliberate deceptions that led to their losses and I expect to soon see a large portion of these massive savings inflows diminish.

The eventual loss of this foreign savings component, when coupled with the seizure in global credit markets and increasing financial write-downs/losses, has a good chance of snowballing into a major crisis that could potentially impact each and every one of us in a very serious way.

Some feel the final endgame to our party of excess will be hyperinflationary in nature, whereas others fear a future of stagflation or hyper-stagflation; many more feel deflation and depression will result (personally, I think it will be a combination of the above), but regardless, whatever the outcome, I think we can all agree that it has the potential to be very bad.

With that said and understanding that major change is on the horizon, what can we expect the social implications to be? Almost certainly, consumer spending will fall and layoffs will increase but will we eventually see:

Banking runs

Food Lines

Widespread homelessness of entire families

Food Shortages


Social Chaos

I don’t think any of us really know, but depending on the severity of the situation, I imagine absolutely anything is possible.

Last January, as food-for-thought, I wrote a couple of articles that touched on some of these issues in a little more detail. I hope you have the time to read.

The first one Maslow’s Hierarchy of Needs and the U.S. Economy discusses our five levels of shared basic human needs and how, (w/Katrina as an example) when man has lost all hope and becomes desperate to feed his family, survival becomes the dominant need -- nothing remains sacred... Ethics, Values, Morals and the social fabric of society is thrown out the window.

The second post, American Wake Up Call! discusses my view of America's future. I personally believe we will encounter significant struggles for the next 20-30 years, but think this hardship will make us a better people and the decades of struggle will be followed by a stronger nation.

I hope this info helps you to ponder what our future could potentially hold and assists you in any effort that (1) you may take to secure your family’s future and (2) you may take to help us become a better Nation.

Best regards