Monday, June 27, 2005

Signs of the Economic Apocalypse 6-27-05

From Signs of the Times 6-27-05:

In the U.S. stock market, the Dow closed at 10,297.84 on Friday, down 3.2% from the previous week’s close of 10,623.07. The NASDAQ closed at 2,053.27 on Friday, down 1.8% from 2,090.11 the week before. The yield on the ten-year U.S. Treasury bond closed at 3.92, down from 4.08 the previous Friday. The dollar closed at 0.8263 euros, up 1.5% from its close on the previous Friday of 0.8142 euros, or 1.2102 dollars to the euro compared to 1.2282 the week before. Oil closed at 59.84 dollars a barrel up 2.3% from $58.47 on the previous Friday. In terms of euros, a barrel of oil would cost 49.45 euros compared to 47.61 the week before, an increase of 3.9%. Gold closed at $441.60 an ounce, up a half percent from $439.50 on the Friday before. Gold in euros would be 364.90 an ounce on Friday, up 2% compared to 357.84 a week earlier. Comparing gold to oil, an ounce of gold on Friday would buy 7.38 barrels of oil, compared to 7.52 the week before, a rise of 1.9%.

Gold has been rising steadily of late. What has some observers puzzled is gold’s rise in the face of the dollar’s rise:

Gold on the cusp of 2005 peak, more gains seen
By Veronica Brown
LONDON, June 24 (Reuters) - Gold was poised to hit a new 2005 peak above $445 an ounce on Friday as fund and trade buyers ignored the traditional link between bullion and the dollar.

Gold has built steadily this month, with the market gaining just over seven percent to sit under $4 away from the March 11 high at $446.70 -- the highest level seen this year.

The move has been all the more remarkable given the dollar's strength against the euro, which would normally tend to make dollar-priced gold more expensive for non-U.S. investors.

"Can we get through $446.70 - I think we can. I think we will be testing $450, this will be a short-lived rally but will push higher still," Barclays Capital analyst Kamal Naqvi said.

Spot gold moved to $443.40/444.15 per troy ounce by 1020 GMT from $440.85/441.60 late in New York on Thursday. The market earlier hit $443.50 -- its highest since March 17.

"The market has found a great momentum, and this is providing great potential. An upside correction in the euro today could take gold even higher," MKS Finance analyst Frederic Panizzutti said.


The euro fell briefly below $1.20 for the first time in 10 months against the dollar on Friday, buckling under the weight of expectations of lower interest rates in the euro zone. It was last at $2.2071.

Already at 2 percent, a cut in euro zone rates would further bolster the dollar's yield appeal as the Fed is expected to raise interest rates again next week to 3.25 percent.Although a softer euro would normally scare-off foreign investors, analysts said bullion was merely reflecting a market feeding off its own momentum.

"I think it's not the start of a grand new era where gold moves up no matter what happens," Naqvi said.

"Should we see some sort of approach towards normality in the euro-zone then it's all over," he added.

Analysts also said gold's move higher was significant against a backdrop of falls in base metals, with copper futures seeing a five percent drop on Thursday.

"Despite the weakness in base metals, which has proved the old adage that seems to have been forgotten by many of the bulls that the value of an investment can go down as well as up, gold prices have remained firm of late, with dips very well bid," HSBC metals analyst Alan Williamson said in a daily report.

The rise of gold in the face of drops in other metals and strength in the dollar is not a good sign for the world economy. High gold prices don’t cause problems, but they are indicators of problems in the economy. What are those problems? Geopolitical instability, for one. With the Neoconservatives still in power in the United States, who can bet that the United States won’t invade Iran and Syria, even as they are losing the wars in Afghanistan and Iraq? They want to win back what they have just lost with one more reckless throw of the dice. Second, there is the economic instability with the twin deficits in the United States budget and balance of payments. Either new wars or a burst of the housing bubble can send everything crashing down, and I think people are sensing this.

Al Martin has this to say about the housing bubble:

The Federal Reserve pointed out in its study last Thursday, which Greenspan referred to in his testimony before the joint economic committee, although he didn’t refer to it in detail and I could understand why – that the current speculative bubble in real estate, even if it were to unwind in the same manner as all other speculative real estate bubbles have unwound in this nation, wherein there was experienced, over a 3-year period, an average 17% decline in median home prices, which is the average for the unwinding of a speculative bubble and is, indeed, the decline we saw from the 4th quarter of 1989 to the 2nd quarter of 1991 when the real estate bubble of the late 80's unwound–even this unwinding, would, according to the Federal Reserve, lead to 20 million mortgage defaults in the nation.

To put this into comparison: the speculative bubble of the late 80's, when that unwound from `89 to `91, there were 3.6 million mortgage defaults.

What the Federal Reserve is now saying is that there would likely be 20 million mortgage defaults. Because in the unwinding of the speculative bubble in property from `89 to `91, the debt-to-equity ratio was still 37% -- meaning the people had 37% of equity.

Now, the median debt-to-equity ratio of property in the United States is only 14%, a record low, due to the $3 trillion that has been taken out of property equities since 2001 in order to sustain consumer spending.

What the Fed pointed out is that even an unwinding of this speculative bubble to the extent of the historical average would wipe out $2 trillion of equity of the GSE’s: Ginnie Mae, Fannie Mae, Freddie Mac, more specifically.

How would that happen? Because of the enormous amount of mortgage defaults, which are going to occur in an unwinding of the speculative bubble because the debt-to-equity ratio is so low.

What the Fed is saying is that $2 trillion of capital would be taken out, would essentially evaporate within the GSE’s. Further, the nation’s commercial banks and mortgage lenders, which are indirectly guaranteed by the U.S. Treasury through various pools (FDIC, FSLIC, FSCL and so on), would potentially be exposed to a $2 trillion hit, if, and this is only assuming, if this current speculative bubble in real estate only unwinds to the extent of the national average of unwinding of speculative bubbles in property, a la 1989 to 1991.

This is the scenario as opposed to what others believe, including the Economic Policy Institute and Remember Fed Governor Susan Beis remarks about a potential 40% loss in the national median home price average over 5 years when the bubble begins to unwind. A 40% loss, which is privately calculated by the General Accounting Office and the Office of the Comptroller of the Currency and the Federal Housing Administration. That is what those three institutions actually believe is going to happen. A 40% decline over 5 years of the median home price in the United States would collapse the economy of the United States, to use Walker’s words.

It would be an unprecedented debacle, and the only remedies are (and, unfortunately Alan Greenspan, I think, is the impediment) for the General Accounting Office, the OCC and the FHA to take action now to begin to pressure the speculative bubble in real estate by ending the availability of interest-only mortgages in what they call hot zones, where there is the greatest depreciation, in regions like California and Florida.

You know the reason why Alan Greenspan is against this? According to the Federal Reserve, real estate hot zones now include 68% of all of the transacted real estate in the nation. That’s how widespread the speculative bubble has become.

Thus the Fed is in yet another conundrum of its own creation. The Fed is literally frightened to go along with the OCC and other government agencies in imposing regulation that they know would lead to the collapse of the speculative bubble. Because they don’t want to be blamed for the economic consequences of it.

Think of what a conservative estimate of 20 million mortgage defaults means, in both human and economic terms. Then think of the fact that the Bush regime has taken steps to seal the entrances of the sweatshop before setting the fire, not only with the new personal bankruptcy law but also, quietly, they are making it harder for average people to take money out of the country.

The blogger at Cryptogon wrote about trying to get some money out of the United States:

Now, which of the following do you think would involve the most red-tape?

A. Getting a driver’s licence

B. Buying a gun

C. Setting up a corporation

D. Establishing a daytrading account to trade stocks and bonds on margin (that is, with money you don’t have)

E. Having the ability to send your money out of the U.S. at will
Hmmm?? Any guesses?

E is the correct answer.

Commenting on this is the Deconsumption blogger, who wrote:

As you may know, I work for a major financial firm, and the last three years have seen an unprecedented flurry of regulations being brought down on the industry. Various reasons are given for these regulations, all of them nominally being to "protect the public" or to "prevent crime/terrorism"--and certainly that is true. But at some point, like Kevin at, you perhaps begin to wonder whether the over-arching reason is nothing more than simply to establish greater and greater control over individuals. And if you actually come to realize that you want to draw the line somewhere for yourself, you discover you may be too late....

Everyone has probably heard the term "offshore hedge fund"--these are "investment accounts" established outside of U.S. tax and governmental jurisdiction, sort of like hyper-active versions of the legendary "Swiss bank account". The amount of money in them is unknown, but without doubt it is in the hundreds of billions, if not trillions. And this doesn't even address the actual 'corporate' money which has gone into overseas investment and holding companies, ne'er again to return....

This is the money of people who did pay attention to the direction things were headed, who did draw the line somewhere. This is the so-called "smart money". And so maybe this gives you a little bit of an insight into the future that they are betting on....

Usually the dominant power in the world is also the largest lender of money. Never has the dominant power been by far the world’s largest borrower, but this is in fact the case now. What this tells me is not that the rules have changed, but that the United States will not be the dominant power very soon. That is why the smart money has already bailed. Once the crash happens, they will be able to step in and buy everything at pennies on the dollar. This is why they are locking the exits and are still spreading cheap credit around: to make the crash harder, the pain worse for the average person in the United States.

The United States' super-elite and the corporations think that they can maintain their position even if the U.S. economy crashes. Remember that the inhabitants of the Italian peninsula became much poorer as the Roman Empire became richer during the imperial period. Rome had the more heavily urbanized East do what it did best (trade, make things and be more wealthy and urban) impoverishing the bulk of the people in Italy, where they fell under the domination of a very few, super-rich elite (the Senatorial class). The population in the West then was assigned to do what it did best: join the Roman legions, be poor, and be dominated by a soon-to-be feudal elite. Sound familiar?

Charley Reese has this:

Third World, Here We Come

Many Americans are living in a state of delusion, fed by the politicians who keep telling us we're the greatest, the strongest, the freest, the wealthiest, etc., etc., and so forth. Actually, we are heading toward becoming a Third World country.

The difference between a First World country and a Third World country is this: First World countries manufacture finished goods and import raw materials; Third World countries export raw materials and import manufactured goods.

Why does this account for a difference in standard of living? It's easy to explain. A skilled machinist adds more value to a product than someone who flips a burger with a spatula. Therefore, the machinist can demand a higher salary. Unfortunately, our manufacturing base is rapidly diminishing, and the villains are none other than our own corporate executives, who are moving production to cheap-labor countries.

The law of supply and demand works this way in regard to labor. Countries that have a surplus of people can bid the price of labor way down. India, China and Central America have a surplus of people. The alternative in those countries to taking a job with stingy wages and no benefits is to face no job and no income.

That was the old way of looking at economics, but there is a new factor that makes the old economic theory break down. That new factor is the multinational corporation. Much of what the U.S. government classifies as "exports" and "imports" are really nothing more than intracorporate transfers.

Under the old theory, if, say, all the bluejeans sold in America were manufactured in El Salvador, then El Salvador would prosper. After all, it would be exporting manufactured goods. Unfortunately for El Salvador, under the new theory all of the bluejean factories would be owned by American corporations. Thus, the multinational corporation screws both the people of El Salvador and the American consumer. The Salvadoran gets a low wage, and the American consumer pays an inflated price for a very cheaply produced garment. The capitalists pocket the profits.

But in the meantime, what happens to the Americans? Well, as their income is reduced by the loss of high-paying manufacturing jobs, they will at first take out second mortgages and max out their credit cards in a vain attempt to maintain their standards of living. This will eventually, however, result in bankruptcies and foreclosures. Interest will eat them alive. Then there will be a shrinking market for the high-priced goods no matter where they are manufactured.

Poverty will also affect the services sector. Poor people can't afford a doctor, a lawyer, an architect, an interior decorator, life or medical insurance, a nursing home or a funeral. The idea once touted by the wet-behind-the-ears gurus in Washington that we could easily replace manufacturing with services is false. A consumer economy only works if the consumers have money to spend, and they can only have money to spend if they can find jobs that pay a decent wage.

You can see the signs of the gradual impoverishment of America if you think about what is happening. First, supermarkets started accepting credit cards; then fast-food joints did. Many car dealers are now reduced to "sign and drive" promotions - nothing down, low monthly payments. What all of that tells you is that more and more Americans are squeezed for income.

All of this damage has been done under the guise of free trade. That is a false label. It's actually managed trade, and it's designed to facilitate the off-shoring of American jobs. The evidence of the failure of this policy is plain, but ignored. It has produced nothing but huge trade deficits and turned us into a debtor nation. The amount of U.S. dollars held by Asian countries is about $1 trillion. We will eventually be tenants in our own country if we don't change course.

President George Bush likes to talk about an "ownership society," but what he and his predecessors are creating is a "sharecropper's society." The only consolation Americans will have when everything goes south is that they will have done it to themselves.

It now is becoming clear that the successor power to the United States will not be Europe, it will be China. The U.S. Neocons and the Israeli Likud strategists think that there is a shot that Israel can be the successor power if it gets control of oil and more land, but their pursuit of this most likely will do no more than hasten the demise of U.S. power by entangling the U.S. in expensive, losing wars in southwest Asia. Certainly Israel is hedging their bets by selling advanced weapons systems to China over the objections of the United States.

Surfing the headlines, I came across this item which has not generated much commentary:

Chinese Oil Giant in Takeover Bid for US Corporation
By David Barboza and Andrew Ross Sorkin The New York Times

Thursday 23 June 2005

Shanghai - One of China's largest state-controlled oil companies made a $18.5 billion unsolicited bid Thursday for Unocal, signaling the first big takeover battle by a Chinese company for an American corporation.

The bold bid, by the China National Offshore Oil Corporation (CNOOC), may be a watershed in Chinese corporate behavior, and it demonstrates the increasing influence on Asia of Wall Street's bare-knuckled takeover tactics.

The offer is also the latest symbol of China's growing economic power and of the soaring ambitions of its corporate giants, particularly when it comes to the energy resources it needs desperately to continue feeding its rapid growth.

CNOOC's bid, which comes two months after Unocal agreed to be sold to Chevron, the American energy giant, for $16.4 billion, is expected to incite a potentially costly bidding war over the California-based Unocal, a large independent oil company. CNOOC said its offer represents a premium of about $1.5 billion over the value of Unocal's deal with Chevron after a $500 million breakup fee.

Moreover, the effort is likely to provoke a fierce debate in Washington about the nation's trade policies with China and the role of the two governments in the growing trend of deal making between companies in the countries.

This week, a consortium of investors led by the Haier Group, one of China's biggest companies, moved to acquire the Maytag Corporation, the American appliance maker, for about $1.3 billion, surpassing a bid from a group of American investors.

Last month, Lenovo, China's largest computer maker, completed its $1.75 billion deal for I.B.M.'s personal computer business, creating the world's third-largest computer maker after Dell and Hewlett-Packard.

After years of attracting billions in foreign investment and virtually turning itself into the world's largest factory floor, China appears to be nurturing the growth of its own corporate giants into beacons of capitalism. China wants to be a player on the world stage, and it is eager to have its own energy resources, its own multinational corporations and its own dazzling corporate names.

And some of China's biggest companies are now on the hunt, trying to snap up global treasures.

Monday, June 20, 2005

Signs of the Economic Apocalypse 6-20-05

From Signs of the Times 6-20-05:

The euro gained some ground back from the dollar last week, closing at 1.2282 dollars, up 1.5% from the previous Friday's close of 1.2106. That put the dollar at 0.8142 euros compared to 0.8261 the week before. Gold closed at $439.50 an ounce on Friday, up 3.1% from last Friday's close of $426.40. Gold converted to euros would close at 357.84 an ounce, up 1.6% from the previous Friday's close of 352.22. Oil closed at 58.47 dollars a barrel, up 9.8% from the previous week's close of $53.23. Oil in euros would be 47.61 a barrel up 8.3% from last week's 43.97. Comparing oil to gold, at Friday's close an ounce of gold would buy 7.52 barrels of oil, compared to 8.01 a week earlier, a rise of 6.5 percent for oil compared to gold. In contrast to commodities, the U.S. stock market was quiet, with the Dow closing at 10,623.07, up 1.1% from 10,512.63 a week earlier. The NASDAQ closed at 2,090.11 up 1.3% from 2,063.00 the previous Friday. As for long-term U.S. interest rates, the yield on the ten-year U.S. Treasury bond closed at 4.08 up four basis points (hundredths of a percent) from the previous week's 4.04.

With the price of oil hitting a new record on Friday before falling back a bit and with gold increasing sharply as well, as well as a record-high current accounts deficit (in a nutshell the difference between the money coming in the U.S. and the money going out) for the United States in the first quarter of 2005, it is not hard to see trouble ahead in the very near future.

We have written about both the "conundrum" described by Alan Greenspan of falling long-term interest rates and rising short-term rates and the potential problems with the rapid rise of hedge funds. Nick Beams ties the two together nicely:

Greenspan first raised the issue in his testimony to the US Senate Banking Committee on February 16, noting that long-term interest rates were lower than when the central bank began its series of tightenings. Noting similar declines in the rest of the world, he pointed out that the greater integration of the world's financial markets had increased the "pool of savings", while there was a lower inflation risk premium. However, these developments were not new and could not be the reason for the long-term interest rate decline over the previous nine months.

"For the moment," he continued, "the broadly unanticipated behaviour of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience."

Nearly four months on, the Fed chief seems no closer to an explanation. In an address to a bankers' conference in Beijing on June 6, he pointed out that the "pronounced decline" in the return on long-term US Treasury bonds - down by 80 basis points, while the federal funds rate increased by 200 basis points over the same period - was "clearly without recent precedent".

Greenspan put forward several possible explanations for this unusual behaviour. Among them were: the possibility that the market was signaling future economic weakness; that pension funds are making significant bond market purchases and pushing down interest rates; that the accumulation of US Treasury debt by foreign central banks is lowering long-term rates; and that the greater integration of financial markets has increased the supply of savings, thereby lowering the interest rates. However, none of these explanations seemed to provide a satisfactory answer.

Whatever the cause of this unexpected development, Greenspan made clear it was one of the factors behind increased risk in financial markets as investors reached for higher returns.

"The search for yield is particularly manifest in the massive inflows of funds to private equity firms and hedge funds. These entities have been able to raise significant resources from investors who are apparently seeking above-average, risk-adjusted rates of return, which, of course, can be achieved only by a minority of investors. To meet this demand, hedge fund managers are devising increasingly more complex trading strategies to exploit perceived arbitrage opportunities, which are judged - in many cases erroneously - to offer excess rates of return."

In other words, the falling rate of return on long-term risk-free Treasury debt has lowered rates of return all along the line. Consequently, to obtain the same rate of return as in the past - or to increase it - financial investors must undertake riskier investments, often through hedge funds which trade in increasingly complex financial instruments.

This process, Greenspan warned, could mean that "after its recent very rapid advance, the hedge fund industry would temporarily shrink, and many wealthy fund managers and investors could become less wealthy." Such an outcome would not pose many problems for the financial system as a whole were it not for the fact that hedge funds often enjoy large support from banks and other financial institutions.

Here Greenspan struck an optimistic note, suggesting that "so long as banks and other lenders to these ventures are managing their credit risks effectively, this necessary adjustment should not pose a threat to financial stability." That is, so long as things are going well, they should continue to go well.

But this upbeat assessment does not sit well with Greenspan's admission towards the conclusion of his remarks, that "the economic and financial world is changing in ways that we still not fully comprehend."

Cheap credit

Significantly, Greenspan did not point to one development that some observers regard as playing a central role in the present peculiar situation - the rapid increase in financial liquidity over the past five years fueled by the accommodative monetary policies pursued in the US, Europe and Japan.

The reason for this omission is not hard to find - the policy of increased liquidity has come to occupy a central place in the policy platform of Greenspan in the face of growing problems in the US economy. In fact, his first major decision as Federal Reserve Board chairman was to open the lines of credit from the central bank in order to prevent a global financial and economic crisis following the stock market crash of October 1987.

When the stock market began to rise rapidly in 1995-96, Greenspan acknowledged, in the confines of meetings of the Federal Reserve, that a "bubble" was starting to develop. But even after issuing his famous warning of "irrational exuberance", nothing was done. In fact, Greenspan became one of the chief boosters for the so-called "new economy" of the late 1990s, where increased productivity, globalisation, information technology were said to have produced an ever-rising market.

Following the bursting of the bubble in March 2000, Greenspan initiated a series of cuts in the federal funds rate, eventually bringing it to an historic low of 1 percent in 2003-2004. The sharp reduction in official interest rates has led to the growth of so-called "carry trades" - the process in which investors borrow funds at the low short-term rates in order to lend at higher rates. But the longer it continues, the greater the dangers this process poses for the stability of the financial system. This is because so long as the flow of funds continues, rates of return on less risky ventures start to come down and consequently increasingly riskier financial operations have to be undertaken to achieve the same return as previously.

It would be wrong to conclude, however, that the mounting problems of the global financial system can simply be attributed to the "wrong policies" of Greenspan and the other central bankers. Rather, the fact that the world's central bankers have fueled an increase in the money supply is indicative of deeper problems. Above all, it is a sign of falling profit rates and the ever-present recessionary tendencies within the global economy.

In parallel to the increasing instability and ominous nature of political news lately, the economic situation seems increasingly precarious. Keeping everything afloat by allowing massive debt can only work so long. Strains are beginning to show. It appears that housing foreclosures are up 57% from a year ago in the United States. Given the popularity of interest-only loans lately, we can expect to see a lot more foreclosures and bankruptcies in the near future. And, now that the housing bubble has spread from the United States to much of the rest of the world, the bubble is now being called the largest in history by the Economist:

The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.

NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000. What if the housing boom now turns to bust?

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stock market bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.

…And after the gold rush?

The housing market has played such a big role in propping up America's economy that a sharp slowdown in house prices is likely to have severe consequences. Over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private-sector jobs created since 2001 have been in housing-related sectors, such as construction, real estate and mortgage broking.

One of the best international studies of how house-price busts can hurt economies has been done by the International Monetary Fund. Analysing house prices in 14 countries during 1970-2001, it identified 20 examples of "busts", when real prices fell by almost 30% on average (the fall in nominal prices was smaller). All but one of those housing busts led to a recession, with GDP after three years falling to an average of 8% below its previous growth trend. America was the only country to avoid a boom and bust during that period. This time it looks likely to join the club.

Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. Yet the rise in prices in Japan during the decade before 1991 was less than the increase over the past ten years in most of the countries that have experienced housing booms (see chart above). And it is surely no coincidence that Japan and Germany, the two countries where house prices have fallen for most of the past decade, have had the weakest growth in consumer spending of all developed economies over that period. Americans who believe that house prices can only go up and pose no risk to their economy would be well advised to look overseas

The rise in foreclosures, a sure sign of the impending end of the housing bubble, in the face of massive infusion of debt-driven consumption money into the economy shows that the fundamentals of the economy are much worse then mainstream commentators are letting on. If the economy was not so weak, they wouldn't need to pump so much money into it. Max Fraad Wolf isn't fooled:

Which Macro Economy?

"Despite the uneven character of the expansion over the past year, the U.S. economy has done well, on net, by most measures" - Federal Reserve Chairman Alan Greenspan June 09, 2005

The above assessment suffers from one problem, it is not really true. The remarks are important as a stark reminder of a powerful sea change in thinking and talking about the economy. For many on Wall Street and at the Fed, the macro economy has been reduced to Fortune 500 profitability and asset market performance. These are certainly important metrics. However, the economy they are not!

The IMF has lowered its forecast for global growth and called attention to risks from US imbalances. The National Association of Business Economists (NABE) just reduced its US GDP growth forecast by 0.2% to 3.4%. More sanguine forecasts are increasingly driven by a differently defined macro economy. We are no longer all on the same page regarding the object of analysis. The relentless search for the positive while ignoring asset bubbles and income redistribution from public view has required shifting focus. It has also required equating the health of the macro economy with equity and bond market performance, corporate profits and the housing market. Maybe this is what they really meant by "the new economy"

Broadly the US economy is composed of the actions and decisions of consumers, firms, governments and international trade and financial flows. Enterprises, particularly the largest 500-1000, have been performing well. There are some glaring exceptions like autos, auto-parts and airlines. Heavy financial-ization in a wide range of firms- taking advantage of cheap money and debt hungry consumers- has reached a fever pitch as a profit driver. Thus, profits remain strong notwithstanding serious risk of profit deceleration from a flattening yield curve, over exposure to highly leveraged consumers and strengthening dollars. One might pause to note that leading American firms have worked ceaselessly over the last 30 years to diversify away from excessive reliance on what used to be called the US economy. BEA estimates suggest that more than a quarter of American corporate profits were earned outside the US in 2004. There is consensus that this number will continue robust growth in the years ahead. This might suggest the dangers of conflating profits with domestic economic health.

The news on the other three fronts, representing over three-quarters of the American economy, is terrible! Our general public, larger by over 10 million since 2001, is just recovering the jobs lost across a short and steep recession followed by a protracted and painful "recovery." In May 2005 we finally recovered March 2001 employment numbers. The stunning growth in employment that has so many crowing is net 0.03% private sector employment growth over 50 months. Since WWII, it has taken an average of 23 months to regain pre-recession employment levels. This time it took 50 months to generate growth not statistically different form 0%. Real median wage and salary growth has under-performed badly. Miraculously consumer spending has risen by several percentage points as a GDP component while wages and salaries have fallen as a national income component. Consumer debt, particularly in the housing area, has grown at super-exponential rates. 2004 marked the all time high water mark for corporate profits as a percentage of national income and a 40 year low for wage compensation as a national income share. Before the new economy, when macro economics referred to more than assets, bubbles and profits, this was called redistribution and viewed with some nervousness. Fortunately our leading lights are busy taking the dismal - and perhaps the science - out of the dismal science.

The Federal Budget, despite recently ballyhooed excitement about mere $350 billion projected shortfalls, is dismally in the red. Long term commitments, prescription drug coverage, $354 billion in under-funded insured pensions and changing population demographics beg for skepticism regarding these projections. In addition, the supplemental spending games and likely high future costs of foreign and domestic security operations mock rosy forecasts. Rapid growth in non-discretionary spending and proposed tax cut extension, render ebullience absurd. So goes another pillar of that strong macro economy. Perhaps, the Fed and many on The Street prefer to focus on Fortune 500 profits and asset markets because they are macro economic high points. However, calling them the macro economy requires jettisoning the presumptions that economic models are based on. Dropping more than half of the measures formerly known as 'the economy' seems to do wonders for bullishness- in many senses of the word.

The Anglo-American branch of the Powers That Be have been as desperate in their patching of the weak economy as they have been in the patching of the failing wars in southwest Asia. That is because the one (the war) was supposed to prop up the other (the economy) and vice-versa. See this, for example, from Stirling Newberry in Newtopia and Truthout:

[In the nineteenth century]the British would fight wars to secure resources, cheap labor, and to open markets. But it meant they had to find gold for currency, and coal for their industry, and later, their navy. The navy built with gold, and run on coal, was used to find more gold and coal. India and Ireland were used to grow food and cotton, allowing more people in Britain to be employed supporting "The Empire" without creating inflation. On the contrary, Victorian England was under deflationary pressure.

This "first era of globalization" expanded trade, but it also created misery in Britain, as wages raced down to parity with colonial wages, and it caused famines in Ireland and India, as the price of food raced upward to the price that the British were willing to pay for it. The Irish potato famine was one example: even as people starved, food continued to be sold to Great Britain. Famine is not caused by a shortage of food for people, but by the people having a shortage of money to buy the food they need.

In the wake of World War II, America set up its own system of triangular trade, because we had most of the working industrial base of the world. In the 1960s and early 1970s, the modern post-war triangular trade system fell apart, in no small part because the exporters of cheap resources rebelled against it. OPEC is the most well-known example of this, but the entire era was one of colonies that had had triangular trade imposed on them rebelling against the nations of Europe. As with the British system of triangular trade, its disintegration left behind high inflation and the collapse of the monetary basis of the old currency. What happened to the pound in the 1790s happened to the dollar in the 1972, with the failure of the Bretton Woods agreement.

As with the British before us, when triangular trade failed, we turned to hegemony, and the implementation of it came to have a name, "The Washington Consensus." This system used the dollar, and the access to oil that it brought, as a lever to open the capital markets and economies of developing nations. The profits from this would be used to keep the dollar as the gateway to a commodity which was both the gold and the coal of the new system: petroleum.

In the larger picture, Iraq was to be our India, not merely a client state, but the place where Americans would go to earn high wages in turning a country into a mirror of ourselves. We were to build hotels, oil infrastructure and other assets.

…The Neo-Victorian world now trying to emerge is being driven by "Conservative" parties that are much like the "Conservative" parties of the late 19th century. Social conservatism creates society that concentration of economic power through hegemony requires. Every prop that people might have that is not part of the hegemonic enterprise is taken away; instead, incentives to buy land and to pour retirement money into the stocks of large corporations are being given, so that each individual is bound to it by personal interest.

Thus, the political fights over Iraq, Social Security, and now the filibuster are not isolated, they are about whether we are going to create the kind of society that a military hegemony requires to sustain itself: filled with people who are desperate for work, a stone's throw from poverty, and feeling themselves surrounded and beset by terrors and disaster. People who, therefore, cling zealously to arbitrary rules and partisan passions. Each fight is not about the margins of a few court decisions, nor a few dollars in a monthly check, nor over how much testing to do in schools - instead, it is over what kind of people we are to become, and what kind of nation we are to be, now, and for a century to come.

Even if things in Iraq had gone according to plan, average Americans would have found themselves in much worse shape economically. Now, however, disaster looms, as failure in the war exacerbates economic failure.

Monday, June 13, 2005

Signs of the Economic Apocalypse 6-13-05

From Signs of the Times 6-13-05:

The euro closed last week at 1.2106 dollars, down 1.1% from 1.2236 the prior week. That would put the dollar at 0.8261 euros compared to 0.8173 the previous Friday. In the U.S. stock market the Dow closed at 10,512.63, up 0.5% from the previous week's close of 10,460.97. The NASDAQ closed at 2,063.00 on Friday, down 0.4% from 2,071.43 the week before. The yield on the ten-year U.S. Tresury Bond closed at 4.04% up from 3.98% the previous Friday. Oil closed at $53.23 a barrel, down 4.1% from last week's $55.40. In terms of the euro, oil would be 43.97 euros a barrel down 3.0% from 45.28 on the previous Friday. Gold closed at $426.40 an ounce, up 0.07% from the previous Friday's close of $426.10. On Friday and ounce of gold would buy 8.01 barrels of oil compared to 7.69 (up 4.2%) a week earlier.

The past few weeks have seen two remarkable rebellions against globalization and the neoliberal project. That of the EU and that of Bolivia. If anyone is looking for a definition of neoliberalism, this one's good:

Building on simulations of traditional precepts of liberal democracy, neoliberalism has forged a new synthesis or hybrid that effectively rationalizes, celebrates, and promotes the globalization process and the increasing globality of industrial production, commercial trade, financial integration, and information flow. It has brought to the fore a new global class of economic and political entrepreneurs who operate not only transnationally but also at the national, regional, metropolitan, and local scales to foster those conditions that facilitate the freedoms of global capitalism: increasing privatization of the public sphere, deregulation in every economic sector, the breakdown of all barriers to trade and the free flow of capital, attacks on the welfare state and labor unions… And it is carried forward in a series of familiar spin-doctoring slogans having to do with the magic of the market, the ineffectiveness of Big Government, the triumph of capitalism, the emergence of a borderless world, and a whole slew of "end-ofs" - of history and geography, of socialism and the welfare state, of ideology itself. (from Edward W. Soja, Postmetropolis: Critical Studies of Cities and Regions, Malden, MA: Blackwell Publising, 2000, p. 216)

In Bolivia, the government was brought down by massive protests calling for the nationalization of that impoverished country's natural gas reserves. According to Tom Lewis:

Ordinary working Bolivians are fighting to get rid of the stranglehold that transnational corporations have on Bolivia's economy. They are also fighting to strip power away from a political elite who they view as in bed with the transnationals--as vendepatrias (corrupt officials willing to sell off Bolivia's patrimony on the cheap).

Ever since the popular victory achieved during Cochabamba's Water War in April 2000--when mass struggle defeated a plan to privatize the city's water system--the struggle of the Bolivian people has focused mainly on reclaiming workers' and citizens' control of Bolivia's natural resources. The experience of throwing U.S.-based Bechtel out of Cochabamba--and of then turning the city's water service over to the elected representatives of a citizens' and workers' self-management team--inspired the confidence and determination of Bolivia's disenfranchised majority.
Here's Bill Van Auken:

There is hardly any need for an outside spark to ignite the social powder keg existing in Bolivia, South America's most impoverished country. According to Bolivia's National Institute of Statistics, 64 percent of the urban population lives in poverty, while in the countryside conditions are even worse, with 80 percent in poverty. More than one-third of the country lives on less than two dollars a day, while the infant mortality rate - 95 for every 1,000 births - is worse than much of Africa.

The conception that the country's wealth should be utilized to benefit its people rather than fatten the profits of foreign oil conglomerates has gripped the masses. This is not - to use the words of George W. Bush at his speech at the OAS this week - the product of a "false ideology," but rather a conclusion drawn from intensely bitter experience with free-market policies and wholesale privatization.

The conception that the struggles that have shaken Bolivia in recent weeks are the product of "outside agitation" by Chávez is an echo of the longstanding US view that every movement against social oppression and every challenge to the interests of US-based multinationals represents a "communist conspiracy." This police-state ideology guided a US policy of support for military dictatorships and savage repression in Latin America for over 50 years. Noriega's comment is a warning that the Bush administration is prepared to resort to these methods once again.

In Europe, the populist revolt against the reforming (neoliberal) Brussels bureaucrats was both a blow for democracy and a blow against the neoliberal project. In the words of a neoliberal sympathizer, Marshall Auerback:

Jean Luc Dehaene, a former Belgian PM, exhibited comparable contempt for popular opinion: In a BBC interview last Monday, Mr Dehaene made the extraordinary remark that the results in France were meaningless because the electorate was not voting against the constitution, but against the French government. Common
sense suggests that on the contrary, they were voting precisely against the constitution, a project of politicians such as Dehaene who are determined to pursue an unpopular agenda with or without popular consent. This notion also appears to be confirmed by the British newsmagazine, The Economist, which noted that five of the top 10 best-selling non-fiction books in France were about the Constitution. Millions of people watched television shows discussing it. A huge percentage of respondents in public opinion polls were familiar with its content. There was huge voter turnout (70 per cent) and people had a very good idea of what the issues were.

This obliviousness to public opinion has been the flaw at the heart of the whole "European Project" right from the start. It is scarcely remembered now that France only barely ratified the introduction of the euro in a vote so tight that its adoption by a few tenths of a percentage point gives lie to the word, "democracy" that lifts so carelessly off the lips of the most undemocratic of politicians.

The dirty little secret of European Monetary Union is that there has never been a proper debate on the pros and cons of the single currency union within the member states. Like so much else in regard to the EU, it was imposed from above. Yet this is a debate that must occur because the European Monetary Union and its attendant institutions, such as the European Central Bank, ultimately cannot succeed in the absence of open, public discussion and acceptance, in lieu of bureaucratic imposition.

It is said that politicians in particular and the democratic process in general cannot be trusted with economic policy formulation because they lead to decisions that have stimulating short-term effects (for example, reducing unemployment via higher government spending) but are detrimental in the longer term (a notable example is a rise in inflation). But comprehensive rejection of the constitution has proved to be an outlet for discontent extending well beyond this particular issue; French and Dutch voters have now shown us the limits of pure technocratic economic management in an environment divorced from political reality.

On the other hand, to debate the appropriateness of a single currency union at this juncture may engender unintended results. It is extraordinary to consider, for example, that the German people never had the opportunity to express their views in a referendum as to whether they ought to abandon one of the most successful post-war monetary regimes in favour of an untried and untested currency. Even if one makes allowances for Germany's traditional post-war phobia of being perceived as "bad Europeans", it is almost certain that most would have voted to retain the D-mark, had they been given the opportunity to express themselves in a proper democratic forum.

Already, there are stirrings of euro discontent emerging at the margins in Germany as well as Italy. The referendum results in France and the Netherlands appear to have lit a match on a tinder box of huge continent-wide disenchantment. Consider what is happening to the now discredited EU constitution in the wake of the French and Dutch referendum results: Four separate polls in Denmark and a survey in the Czech Republic indicated the two countries could both vote No in referendums on the constitution. Bild, a leading German tabloid, showed overwhelming hostility in Germany to the constitution. Of the 390,694 readers who responded, 96.9% said they would vote no if a referendum were held there.

In the United States, the elite, led by U.S. Federal Reserve Board Chairman Alan Greenspan, are trying to present an optimistic view of the United States and the world economy. They are able to do this thanks in part to the recent rise in the value of the dollar compared to the euro. There are a couple of questions to ask, however. First, is the dollar rising or is the euro falling? Second, if the dollar is rising, is the rise the beginning of a new trend or just an interruption of an existing one?

Taking the second question first, here is Stephen Roach, lead analyst of Morgan Stanley:

The interest rate conundrum is challenging enough. But now the dollar is springing back to life in the face of America's record current account deficit. In my view, this defies both the history and the analytics of the classic current account adjustment. Is this just another example of a world turned inside out, or is it a head-fake likely to be reversed?

Despite rebounding nearly 3% from its low this January, the broad dollar index is still down about 13% from peak levels hit in early 2002. The dollar's descent is a logical outgrowth of America's massive current account deficit. The only problem is that it hasn't fallen nearly enough to make a dent in the US external imbalance. A comparison with trends in the late 1980s underscores this conclusion: During that earlier period, America's current account deficit peaked out at 3.4% of GDP and the broad dollar index fell nearly 30% over the three-year period, 1985-88. With our estimates placing the US current account deficit at about 6.5% in 1Q05, it is hardly a stretch of the imagination to see the external shortfall rise into the 7-7.5% range over the next year. In other words, today's current account problem is easily twice as bad as it was back in the 1980s but the US currency has fallen by less than half as much as it did back then. On that simple basis, alone, the dollar has plenty more to go on the downside.

I have long maintained that the dollar can't do the job alone in correcting America's current account imbalance. Two reasons come to mind -- the first being that the impact of currency fluctuations on real trade flows and inflation seems to have diminished over the past decade. Trends over the past three years underscore this observation: The US trade deficit has continued to widen fully three years into what had been a 15% dollar depreciation, whereas inflation has remained generally subdued over this same period. By this time in the dollar's downtrend of the late 1980s, both trade and inflationary impacts were evident. I suspect that the diminished impact of currency swings in the current climate stems importantly from the increasingly powerful forces of globalization, as low-cost offshore price setters (i.e., China) constrain domestic pricing leverage -- even in the face of currency swings and concomitant fluctuations in import prices. That suggests, of course, the impacts of currency fluctuations could show up more in corporate profit margins than in generalized inflation.

But the second and far more important reason that the dollar can'tsolve America's trade and current account problem is that it doesn't get directly at the most critical ingredient of the imbalance -- excess imports, which are, in turn, an outgrowth of excess US domestic demand. One number says it all:

In March 2005, US imports were fully 54% larger than exports. In my view, there is no conceivable dollar adjustment -- or should I say no politically acceptable dollar adjustment -- that would eliminate America's excess import problem. The only effective way to temper an import overhang of this magnitude lies in a real interest rate adjustment that would squeeze excess consumption --and its import content -- out of the system. At a minimum, this would entail a normalization of real US interest rates -- both short and long. Specifically, I believe that would require the term structure of real rates to move upward by about two percentage points from present rock-bottom levels. Not only would that hit the interest-sensitive components of domestic demand -- consumer durables, capital spending, and residential construction -- but it would also cool off frothy asset markets and the wealth-dependent consumption (and imports) such market excesses are fostering.

In this context, America's current account adjust requires a combination of currency and real interest rate adjustments -- both a weaker dollar and a normalization of real interest rates. This underscores an important tradeoff: To the extent that one of the ingredients in this external adjustment equation doesn't deliver its fair share, the burden of rebalancing should then be transferred to the other part of the equation. Therein lies the case for a significant further weakening in the US dollar. In my recently revised view of US interest rate prospects, America's long overdue normalization of real rates is likely to be aborted (see my 30 May dispatch, "Rethinking Bonds"). In the face of the coming China-led slowdown in global growth and its collateral impacts on reduced inflationary expectations, a decidedly pro-growth and market-friendly Fed is unlikely to have much of an appetite for additional monetary tightening. Moreover, the combined impacts of a global growth shortfall and further declines in commodity prices point to a likely compression in the inflationary premium embedded at the long end of the yield curve. As I now see it, given the urgency of a US current account adjustment, further dollar depreciation is a logical outgrowth of such a benign climate in the bond market.

Of course, precisely the opposite is now happening. After an orderly three-year descent of about 5% per year, the broad dollar index has been edging higher over the past four months. This momentum has accelerated in the days immediately after the French and Dutch rejection of the EU constitution. Market participants have taken this political verdict as negative feedback on the future of European integration and the reforms and efficiency enhancement such convergence was long thought to deliver… However, given my concerns over the US current account deficit and my reassessment of the US interest rate prognosis, I do not agree with Stephen that the dollar's structural decline is over. By my count, this is the fourth trading rally in the dollar's recent 39-month downtrend. Like the first three, I believe this one will also fade as the power of the US current account adjustment regains its prominence as the dominant macro theme shaping foreign exchange markets. In the absence of an upward adjustment to US real interest rates, I believe this possibility is even more compelling than might have otherwise been the case.

The next downleg of the dollar should be very different from the first one. The euro has borne the brunt of the dollar's decline over the three years ending January 2005. Most Asian currencies -- especially the yen and renminbi -- were completely unscathed. If the dollar resumes its downward descent, as I suspect, that will have to change. Not only do I look for a politically driven change in Chinese currency policy that would allow for an RMB revaluation, but I also suspect that the yen-dollar cross-rate could move into the mid-90s. The Japanese currency has been virtually unchanged on a broad trade-weighted basis over the entire span of the dollar's adjustment. If the Japanese recovery is finally for real, as official Japan seems to be signaling, then yen appreciation should be a natural outgrowth of that healing. If the Chinese and Japanese currencies strengthen, most other Asian currencies should follow suit -- with the possible exception of the Korean won, which has already moved a lot. I've said it from the start: Global rebalancing is a shared responsibility. It is high time that Asia participate in the adjustment process.

…Of course, currency markets are also highly sensitive to swings in investor sentiment. And with the benefit of hindsight, we should have known that the dollar was about to surprise on the upside. …Nevertheless, I think this counter-trend rally will be short-lived. The imperatives of global rebalancing -- underscored by America's massive current account deficit in conjunction with an aborted adjustment in US real interest rates -- points to nothing less. If I'm wrong and the dollar continues to defy
gravity in a low interest rate climate, you can forget about global rebalancing. In that case, global imbalances will continue to mount and asset markets could become all the frothier. Sadly, the endgame would then be ever more treacherous.

Addressing the first question (Is what we are seeing a strengthening of the dollar or just a weakening of the euro?), there does seem to be a piling on of attacks against the whole concept of the euro after a couple of years of euro-enthusiasm (which I confess I have shared). Now people are looking at the EU and the Euro on their own terms, not in comparison to the United States, and, in the aftermath of the defeat of the proposed EU constitution in France and the Netherlands, many of the assumptions behind the EU and the euro have proven questionable.

The roots of euro-enthusiasm lay both in the hope of the gains to be had in harnessing and coordinating the advanced economies of western Europe with the cheaper labor and more flexible work arrangements in eastern Europe and in the hope for a political counterweight to the American Empire (as well as in plain old pessimism about the prospects for the dollar given the suicidal policies of the Bush administration). The problem is that for the fulfillment of the economic promise of the EU depended on the member countries adopting the neoliberal agenda: cuts in social benefits, increases in work hours, offshoring of jobs to the periphery, etc., all of which would understandably not be supported by the public in the advanced economies of Europe. On the other hand, the fulfillment of the political promise of the EU depended on it following its own path, distinct from the neoliberalism of the United States.

Marshall Auerback concludes that the rise of the dollar recently can be attributed to the fall of the euro bull-market sentiment. More importantly, though, he concludes that all paper currencies are vulnerable. So far, the price of gold has risen ony in terms of the dollar, not so much in terms of euros. According to Auerback, this could change:

In the past we have described the problems of the US economy ad nauseum. We have also highlighted the problems of the yen and the structural problems inherent in the existing European Monetary Union. Although the euro zone as a whole suffers
less from the debt disease prevalent in both the US and Japan, it has largely "earned" its spurs on the foreign exchange markets as a consequence of being the least bad major paper currency alternative. Its acceptance has, until recently, continued unabated, largely by virtue of not being the dollar, as opposed to any intrinsic merits.

Generally speaking, most currency choices faced by market practitioners today are comparable to Keynes's notion of market speculation: to paraphrase Keynes, one is not seeking to adjudge the most beautiful currency in absolute terms, but merely seeking to guess what the market's will judge to have the best relative merits . In other words, paper currencies are only "relatively" attractive vis a vis each other and not genuinely attractive as ultimate stores of value. The current problems of the euro (as well as the longstanding problems of the dollar) illustrate that phenomenon.

This points the way toward a potential major paradigm shift in relation to gold, long viewed simply as another variant of the "anti-dollar" theme. Symptomatic of this shift in thinking is the Financial Times, a publication which has usually been viscerally hostile to gold as a legitimate reserve currency asset. In an editorial last April, however, the FT came to a fairly stunning conclusion:

"In truth, there are good reasons for selling all three of the world's main currencies. But could they all fall? Yes, against either gold or the Chinese renminbi. In recent years, gold has been a useful hedge against the dollar, but not against the euro or yen. Meanwhile, the U.S., Japan, and the EU would all like to see the renminbi revalue, but so far, the Chinese are not playing."

The current travails of the euro may change the perception of gold as a barbarous relic from a bygone era For the FT, which has been known asa very anti-gold publication, to come to this conclusion means that many people who have long viewed bullion as economically irrelevant are likely reassessing their viewpoint. This could well point the way forward for gold, notwithstanding the many travails its holders have experienced over the past two decades. Often, seismic shifts in thinking unfold in slow-motion, and are often masked by other "noisier" events, such as the French and Dutch referendums. The "noisier events", however, could well be catalysing a far more profound change in financial thinking. The rejection of the EU's constitution in France and the Netherlands, therefore, may well have initiated something well beyond the control of today's paper currency custodians, much to their ultimate horror no doubt.

As for our watch on the timing of the popping of the real estate bubble in the United States, there was a disturbing article published last week on MSNBC, disturbing because it is so reminiscent of articles published in the late 1990s during the peak of the dot com bubble. Only this time the article is about someone making lots of money trading real estate in Florida at home rather than a stock day-trader making lots of money trading tech stocks at home:

Buying into 'virtual realty'

Investors go online to buy into hot housing markets

By Scott Cohn, Correspondent

CNBC June 9, 2005
Location is the most important thing in real estate, they say, but if you're looking to invest in real estate, but don't want to travel to any of the hot markets, the Internet has created a "virtual realty" just in time for the housing boom.

Take Mike Bozzo, for example. He owns a successful welding business in Dayton, Ohio. But every day, when he gets to his office, the first place he goes to is Florida.

"I like to spend about an hour looking at different properties," Bozzo says, adding that he visits a number of different real estate sites every day. "This is something I'm looking to do for the future of my family."

Bozzo says his Florida Web surfing is paying off. Over the last four years, he has made well into six figures by buying and selling Florida real estate online, and almost all of it has been sight unseen.

Indeed, a condominium Bozzo bought four years ago for about $220,000 is now selling for two and a half time that amount. One he bought earlier this year for $279,000 is on the market today for $379,000.

Mike Bozzo isn't alone. With the housing market booming, 22 million people are visiting real estate Web sites every month. But before you jump on the Internet and start buying, beware - this is still a risky business, and it's made even riskier by doing it on the Internet.

Bozzo confines his surfing to Naples, Fla. Not just because housing has appreciated 93 percent there in the last five years, but also because he's been going there since he was a teenager and he knows the area.

"I'm a very detail-oriented person, and that's the way I approach it," said Bozzo. "I think that's important - that you understand the area that you're getting involved with."

And Bozzo doesn't only use the Internet to find properties through the Web sites of several local realtors. He also uses it to research tax assessments and recent sales - information that's readily available online. And he always gets a properties inspected, and has a realtor he trusts in Naples who'll check out the property in person if necessary.

Real estate expert John Reed says that's important.

"The due diligence still has to be done," said Reed of Real Estate Investor's Monthly. "And if you're going to trust somebody else to do it, you better know that person really, really well." Bozzo hopes to retire on his real estate profits, which may be another benefit to investing this way…

Articles like these are a sure sign of an impending bursting of the real estate bubble.

Monday, June 06, 2005

Signs of the Economic Apocalypse 6-6-05

From Signs of the Times 6-6-05:

The euro closed at 1.2236 dollars on Friday, down 2.5% from last week’s 1.2542. That puts the dollar at .8173 euros compared to .7973 the week before. In the U.S. stock market, the Dow closed at 10,460.97, down 0.78% from the previous Friday’s close of 10,542.55. The tech-heavy NASDAQ closed at 2071.43, down 0.2% from 2075.73 a week earlier. The yield on the ten-year U.S. Treasury bond fell again to 3.98% at Friday’s close compared to 4.07% a week earlier. Oil closed at $55.40 a barrel, up sharply (6.8%) from the previous Friday’s $51.85. Oil in euros increased even more sharply, closing at 45.28 euros a barrel, up 9.5% from the previous week’s close of 41.34 euros. Gold closed at $426.10, up 0.8% compared to $422.70 an ounce the week before. Comparing gold to oil, an ounce of gold would buy 7.69 barrels of oil on Friday, down 6.0% compared to 8.15 the previous Friday.

The big news, then, from the past week was the expected drop in the value of the euro following No votes against the proposed EU constitution in France and the Netherlands and the sharp rise in the price of oil. The United States also released the jobs report for May and, although spun positively, was not good news. Only 78,000 non-farm jobs were added in May, a number half as large as expected, with the gains coming in construction and health care. Construction jobs, of course, are heavily dependent on the increasingly fragile housing bubble. There was also a lot of talk about the “conundrum” mentioned by Alan Greenpsan: rising short-term interest rates coinciding with falling long-term rates. Here’s Mark Gilbert on Bloomberg:

Greenspan's Bond Conundrum Ripens Into an Enigma

Mark Gilbert

June 3 (Bloomberg) -- The 10-year U.S. Treasury note was a “conundrum” to Federal Reserve Chairman Alan Greenspan in mid- February at a yield of about 4.10 percent. After cracking the 4 percent barrier this week, it looks more like Winston Churchill's Russia: “a riddle, wrapped in a mystery, inside an enigma.”

The median forecast of 62 of the finest minds in finance, surveyed by Bloomberg News in December, was for the 10-year bond to yield 4.78 percent by mid-year. Instead, the note pays about 3.9 percent, the lowest in more than a year. Barring a market crash in the next four weeks, that's quite a margin of error.

Bond mavens are now lining up to call for lower yields. Morgan Stanley Chief Economist Stephen Roach said earlier this week he's turning bullish on bonds, with a 3.5 percent level possible in the coming year. Bill Gross at Pacific Investment Management Co., never shy to predict an increase in value for the securities he owns, said May 18 that the 10-year rate could drop to 3 percent by the end of the decade.

Gabe Borenstein, managing director of global investments at Investec Holdings Ltd. in New York, predicts a 10-year yield of 2.5 percent in the current business cycle, which has 18 months or less to run. Higher energy costs, renewed wariness among indebted consumers, and continued recycling of dollars into Treasuries by overseas investors will help drive down yields, he says.

‘Serious Recession’

“All of the economic forces point to a dramatic slowdown ahead which will turn into a serious recession, with almost no tools left to abort that possibility,” says Borenstein, whose firm manages $100 billion globally.

What they are saying is that things are going to get worse and more frightening, so people with money will invest them in something safe with guaranteed returns and will bid up the prices, thereby decreasing yields (because, for example, if someone purchases a ten-year bond for $1,000 at 5.00%, say, and sells it to someone for $1,200, the person paying $1,200 will still get the same return, that is $50 a year, only, since they paid $200 more, the yield has now dropped to 4.17%). Remember that these long term interest rate drops fuel the housing bubble, since they keep mortgage rates low. Remember also, that these drops come after a year of the Federal Reserve Board trying to increase interest rates, to cool down the increase in consumer debt.

Does this mean that the financial elite, who, after all, are the ones bidding up long term debt instruments, are losing faith in the economic future? It looks that way.

CFOs' Optimism Declines, Study Finds

Corporate financial chiefs express concern over the continuing surge in the cost of healthcare and energy.

From Reuters

June 3, 2005

Optimism among U.S. chief financial officers tumbled to a three-year low this quarter as executives struggled with high fuel and labor costs, rising interest rates and pricing pressures, according to a business outlook survey released Thursday.

In the survey, 40% of company financial chiefs were more optimistic about the economy than they were in the previous quarter, down from 46% last quarter and 70% a year ago, the survey of 365 U.S. chief financial officers by Duke University and CFO Magazine showed.

"In a situation like this, where the optimists barely outweigh the pessimists, we can expect to see sluggish economic growth," said John Graham, professor of finance at Duke's Fuqua School of Business.

The survey, which also polled hundreds of Asian and European corporate finance chiefs, showed Asian CFOs were as cautious as U.S. CFOs, while almost a majority of European financial chiefs were explicitly pessimistic.

American CFOs were most concerned about the cost of healthcare. They expected those costs to rise 9% in the coming year, on average, the survey showed. They also were concerned about high fuel prices, particularly in the face of limited pricing power.

CFOs also were nervous about the effects on the economy if the Federal Reserve continued to raise its key short-term interest rate, now 3%.

"Right now, the CFOs say we're kind of at a tipping point, where further increases in interest rates would start to put a drag on the economy," Graham said.

Of CFOs surveyed, 83.2% said a Fed rate of 4% would slow U.S. economic growth overall, but far fewer — 43% — said it would slow growth at their own firms.
As rising interest rates contribute to higher costs, many CFOs said they would reduce their capital spending plans.

To make matters worse the Bush administration this past week gave the green light for white-collar crime by replacing the head of the Securities and Exchange Commission (SEC), the main regulator of the stock markets and corporate finance in the United States,

Bush picks anti-regulatory hard-liner to head Wall Street oversight board

By Joseph Kay

4 June 2005

On Thursday, President George Bush nominated Christopher Cox, a Republican congressman from southern California, to head the Securities and Exchange Commission (SEC), the main government regulatory agency for Wall Street.

Cox’s selection is a brazen move by the Bush administration to shift the SEC toward an even more openly pro-corporate policy. It portends an end to the probes into corporate fraud that have occurred in the wake of Enron, WorldCom and other business scandals, and the effective reversal by administrative means of the limited regulatory reforms put in place over the past three years.

Cox has made a name for himself as a partisan of unfettered capitalism, à la Ayn Rand. He is an unabashed defender of big business and an adamant opponent of corporate regulation and taxation. In Congress, he has pushed for measures to cut back or eliminate taxes on capital gains and dividends, championed the repeal of the estate tax, and opposed the mandatory expensing of stock options. He sponsored a key piece of legislation in the mid-1990s that limited the ability of investors to file lawsuits over corporate malfeasance.

Cox’s nomination has been universally hailed by business groups as heralding an end to “regulatory excesses” at the SEC under its outgoing chairman, William Donaldson, also a Bush appointee. Donaldson, a Rockefeller Republican, is considered a turncoat in Republican and corporate circles because he has on numerous occasions sided with the two Democratic members of the five-member SEC in implementing new regulations and fining corporations for wrong-doing.

Marc Lackritz, president of the Securities Industry Association, responded to Bush’s announcement by noting that Cox “has a particular sensitivity to costly and unnecessary regulation.” Lackritz continued, “He understands that the increased costs of regulation put an unnecessary tax on investors.” The Wall Street Journal editorial page, which has long championed Cox, declared on Friday, “We assume the appointment marks the end of the era of post-Enron regulatory overkill.”

Cox entered politics as a staunch anti-communist in the Reagan administration. He served as a legal adviser for Reagan during the Iran-Contra scandal, and later took a position at the elite corporate law firm of Latham & Watkins, serving clients such as Arthur Andersen and Merrill Lynch. He was elected to the House of Representatives in 1988, and since that time has promoted the interests of his major campaign contributors: Wall Street, the technology giants of Silicon Valley, and the major accounting firms.

More than anything else, his role in pushing through a 1995 bill known as the Private Securities Litigation Reform Act has won him the backing of Wall Street. The act, which was passed with bi-partisan support over the veto of President Clinton, significantly raised the standard of proof required in investor lawsuits against corporations and executives.

…Cox has been a strong critic of class action lawsuits in general, helping to push the bill passed into law earlier this year that severely limits the ability of ordinary Americans to use this legal mechanism as a way to challenge the actions of big business.

…Cox is expected to reverse a period of mild regulatory actions taken by the SEC under the leadership of Donaldson, who stepped down on June 1. Wall Street has opposed a measure that had been supported by Donaldson and the two Democrats on the commission—Goldshmid and Roel Campos—that would have given shareholders more power over corporate boards of directors.

Hedge funds—the elite investment companies that cater only to wealthy investors—are strongly opposed to a measure proposed by Donaldson that would have required the funds to register their advisors. This was part of an effort to increase the transparency of hedge funds, which are notoriously opaque to investors and regulators.

While Donaldson cited family reasons for his decision to leave the SEC, the fact that his departure was so quickly followed by the Cox nomination is a clear indication that he was pushed out by the Bush administration. In recent months, actions he has proposed have been publicly criticized by Bush administration officials, including Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan.

…After the wave of accounting scandals that began three-and-a-half years ago with the collapse of Enron, the Bush administration made a show of implementing measures to curb corporate criminality. These measures included the passage of the Sarbanes-Oxley Act, which requires corporate executives to personally certify the accounting books of their corporations. The administration has also prosecuted a handful of corporations and executives for their role in scandals at Enron, WorldCom, Tyco and elsewhere.

The appointment of Cox is an unmistakable signal that even these limited measures will be rolled back. His appointment comes the same week as a Supreme Court decision overturning the obstruction of justice conviction of accounting firm Arthur Andersen for its role in accounting fraud at Enron. The ruling will likely make it harder to charge companies with obstruction of justice, frequently used against white-collar criminals.

There is a degree of extraordinary recklessness in the Bush administration’s policy, which will eliminate even the minimal forms of accountability that had been put in place. The Democrats and sections of the Republican Party—including Donaldson—have pushed these measures as a means of restoring investor confidence in American corporations, a confidence that was severely undermined by the corporate scandals of 2001 and 2002.

That these measures could be characterized as “regulatory overkill” is an indication of the determination of the administration and its backers to eliminate all constraints on the most wealthy and corrupt sections of the American ruling elite.

Are they opening the gates for one last orgy of theft before the whole system comes crashing down?