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.


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