Monday, August 29, 2005

Signs of the Economic Apocalypse 8-29-05

From Signs of the Times, 8-29-05:

The Dow Jones Industrial Average of the United States stock market closed at 10,406.20 on Friday, down 1.5% from 10,559.23 a week earlier. The NASDAQ closed at 2123.99, down 0.5% from last week's close of 2135.56. The yield on the ten-year U.S. Treasury Note was 4.18%, down four basis points from 4.22 at the previous week's close. The dollar closed at 0.8140 euros, down 0.9% from 0.8217 euros at the previous week's close. The euro closed at 1.2285 dollars up from 1.2177 a week ago. Oil closed at 66.13 dollars a barrel on Friday, up 1.7% from $65.05 on the previous Friday. In euros, oil would be valued at 53.83 euros a barrel at Friday's close, up 0.8% compared to 53.42 at the previous Friday's close. Gold closed at 441.80 dollars an ounce on Friday, up slightly from the previous week's close of $441.60. That would put gold at 359.63 euros an ounce, down 0.8% from 362.65 a week earlier. Comparing gold to oil, an ounce of gold would buy 6.68 barrels of oil, down 1.6% from 6.79 the week before.

The University of Michigan's Consumer Confidence report for July/August came out Friday and the numbers were worse than expected, which helped drag the stock market down and increase anxiety among economic analysts and players.

With the price of energy rising, with wages falling or stagnating, with the price of health care in the United States rising rapidly, and with the price of college educations rising rapidly, it should be no surprise that everyone outside of the elite think that the economy is in bad shape. Recently there have been attempts by the elite to understand why the rest of us feel that way:

Why a booming economy feels flat

Personal income is one key area where workers have fallen behind, compared with past periods of strong wage growth.

By Mark TrumbullStaff writer of The Christian Science Monitor

Think back to the last time the American economy was rapidly rolling forward: output growing more than 4 percent a year, millions of new jobs were created, and unemployment on a downward slope.

Yes, the 1990s was a golden economic era. But the description refers to the performance that began last year.

Despite continued strong economic growth, this expansion is clouded with enough complications and uncertainties that, for many, it doesn't feel like good times.

The reason? A boom in corporate profits has not yet created a job market that makes workers feel secure, economists say. Hiring hasn't skyrocketed. Worse, wages are stagnant. This paycheck squeeze may prove more worrisome than soaring oil prices and concerns over a housing bubble. Some experts worry that wage stagnation may prove more permanent this time, because of an increasingly global market for labor.

Few economists claim that today's economy matches the late 1990s, when unemployment was lower and job numbers seemed to rise as easily as the Dow Jones Industrial Average.

There are real differences - higher oil prices are just the most obvious. But the current expansion is also occurring against a backdrop of worries.

The pace of job growth, for one thing, was almost imperceptible during two years of concern about a "jobless recovery." Now that the economy has some momentum, the financial press is focused on threats to consumer well-being, such as the burden of energy costs and a soaring real estate market.

"Surveys show that even though the economy is growing reasonably strongly, a lot of households don't feel that," says Nariman Behravesh, chief economist at Global Insight in Lexington, Mass.

He points to two key reasons. First, since the last recession ended in November 2001, job growth has been weak until last year, when the Labor Department's employer survey showed a gain of 2.2 million jobs. Second, wage growth has been lackluster, despite strong gains in worker productivity.

Normally, as employees are able to produce more in each hour of work, the result is greater cash flow that can be divvied up between workers and owners or investors. In the long run, rising productivity means rising wages and living standards.

But in the short run, "most of the gains in the economy have gone into profits rather than wages," says Mr. Behravesh.

The latest numbers from the Labor Department, in fact, show average weekly earnings for US workers have fallen by 0.5 percent in the past year, after adjusting for inflation.

The divergence between productivity has sparked a debate among economists. Some say the gap is temporary, and will narrow as the labor market tightens and workers get more leverage to bargain. Others worry that it's a sign of new realities in the global marketplace that are pushing down US wages as workers compete with increasingly educated rivals in places such as India, China, and South Korea.

Whichever view proves more valid in that debate, many Americans are feeling the combined pinch of slow wage growth, jobs that still aren't as plentiful as many would like, and a stock market that's snorting pretty softly for a bull.

Only 37 percent of the public thinks the national economy is in good shape, according to a June poll by the Pew Research Center poll. That's higher than two years ago, but down from 2004. Perhaps more ominously, the percentage of the public rating their own financial situation positively fell to 44 percent, down from 51 percent in January. Sixty percent say jobs are too scarce in their community.

This analysis exemplifies one of the worst aspects of neo-liberalism: a complete blind spot when it comes to exploitation. Notice the "not-yet" wording: "A boom in corporate profits has not yet created a job market that makes workers feel secure, economists say." Notice also the resort to that old chestnut of economists, the "long run," regarding the contrast between rising productivity and stagnating wages: "Normally, as employees are able to produce more in each hour of work, the result is greater cash flow that can be divvied up between workers and owners or investors. In the long run, rising productivity means rising wages and living standards."

Paul Krugman, under fewer illusions, depicts the situation more clearly than do the experts quoted in articles like the one above:

Summer of Our Discontent


August 26, 2005

For the last few months there has been a running debate about the U.S. economy, more or less like this:

American families: "We're not doing very well."

Washington officials: "You're wrong - you're doing great. Here, look at these statistics!"

The administration and some political commentators seem genuinely puzzled by polls showing that Americans are unhappy about the economy. After all, they point out, numbers like the growth rate of G.D.P. look pretty good. So why aren't people cheering?

Some blame the negative halo effect of the Iraq debacle. Others complain that the news media aren't properly reporting good economic news. But when your numbers tell you that people should be feeling good, but they aren't, that means you're looking at the wrong numbers.

American families don't care about G.D.P. They care about whether jobs are available, how much those jobs pay and how that pay compares with the cost of living. And recent G.D.P. growth has failed to produce exceptional gains in employment, while wages for most workers haven't kept up with inflation.

About employment: it's true that the economy finally started adding jobs two years ago. But although many people say "four million jobs in the last two years" reverently, as if it were an amazing achievement, it's actually a rise of about 3 percent, not much faster than the growth of the working-age population over the same period. And recent job growth would have been considered subpar in the past: employment grew more slowly during the best two years of the Bush administration than in any two years during the Clinton administration.

It's also true that the unemployment rate looks fairly low by historical standards. But other measures of the job situation, like the average of weekly hours worked (which remains low), and the average duration of unemployment (which remains high), suggest that the demand for labor is still weak compared with the supply.

Employers certainly aren't having trouble finding workers. When Wal-Mart announced that it was hiring at a new store in Northern California, where the unemployment rate is close to the national average, about 11,000 people showed up to apply for 400 jobs.

Because employers don't have to raise wages to get workers, wages are lagging behind the cost of living. According to Labor Department statistics, the purchasing power of an average nonsupervisory worker's wage has fallen about 1.5 percent since the summer of 2003. And this may understate the pressure on many families: the cost of living has risen sharply for those whose work or family situation requires buying a lot of gasoline.

Some commentators dismiss concerns about gasoline prices, because those prices are still below previous peaks when you adjust for inflation. But that misses the point: Americans bought cars and made decisions about where to live when gas was $1.50 or less per gallon, and now suddenly find themselves paying $2.60 or more. That's a rude shock, which I estimate raises the typical family's expenses by more than $900 a year.

You may ask where economic growth is going, if it isn't showing up in wages. That's easy to answer: it's going to corporate profits, to rising health care costs and to a surge in the salaries and other compensation of executives. (Forbes reports that the combined compensation of the chief executives of America's 500 largest companies rose 54 percent last year.)

The bottom line, then, is that most Americans have good reason to feel unhappy about the economy, whatever Washington's favorite statistics may say. This is an economic expansion that hasn't trickled down; many people are worse off than they were a year ago. And it will take more than a revamped administration sales pitch to make people feel better.

The missing piece of the puzzle here is exploitation. As Krugman points out, the reason wages are falling (in real terms) while productivity is rising is that the difference has gone to corporate profits, which are divided between the owners and high ranking corporate officers. CEO compensation is still shooting upward. This has been a conscious decision to stiff the average working person. They will claim that, given "global labor competition" it is inevitable, but if the elite truly wanted to avoid increasing exploitation, they could easily do so. Or, as John Cooper put it:

To what extent is organized piracy, theft by taking, deception and illusion, bands of brigands conspiring to take from the general population for their own interests responsible for the income spread? Capitalist economic mythology perpetuates a comfortable rationale for the most unjust behaviors and conditions, allaying the doubts and guilt of the unjust and suppressing the retributive desires of the oppressed. Fair and equal chance plays a miniscule role: that economic success is a lottery is surely a myth. Another is that market economics fairly and equitably distribute the wealth and wellbeing.

Markets and the market place are NOT governed by laws of nature but are a carefully contrived con to cover and justify the transfer of wealth from those with too little to those with already far too much. The invisible hand of the marketplace does not achieve the general good, fairness or balance, but rather the exploitation of the poor, ignorant and gullible by the avaricious, greedy and insensitive. The purpose of markets is to focus and concentrate wealth, not distribute wellbeing: the wealthy get more and better; the impoverished, less and must do without. What would an economic system be like that - rather than transferring wellbeing from the poor to coddle the rich - provided equitably for all?

Meanwhile, anxious working people in the United States are rushing to declare bankruptcy before the new, more stringent personal bankruptcy rules take effect and elites are looking for new ways to park their money outside the U.S. and the dollar before the crash comes. Despite all the free-floating anxiety, most people you meet have a disconnect between what they fear might happen and what future scenarios they base their actions on. In other words, most people still behave as if the situation in the future will be similar to what it is today. That people would cling to the belief that things will be fine is not surprising. Fewer people alive can remember the Great Depression. But it goes deeper than that:

Heavy clouds, no rain

by Doug Wakefield

August 25, 2005

"He looked in the sky but he looked in vain Heavy clouds, but no rain"- Sting

"Because the market has not dropped sharply, it will not drop sharply."

If there is one thought that will cost investors billions in the near future, it is this one. The price action of the major US indices over the last year appears to have anesthetized investors into a lethargic state making it improbable that they will prepare their investments before the next major move. I am not talking about hundred point moves on the Dow, but thousand point moves. Why is this happening? Why is this lethargy so instinctive in our behavior?

First, let's start with the human brain and how we are wired as human beings.

Robert Prechter's book, The Wave Principal of Human Social Behavior and the New Science of Socionomics, allowed me to understand why all investors, including myself, have such a difficult time preparing for future investment opportunities and spend most of their time reviewing the most recent numbers on their quarterly statements. In his book, Prechter notes that "Dr. Paul McLean, former head of the Laboratory for Brain Evolution at the National Institute of Mental Health, has developed a great deal of evidence that suggests we have a 'triune' brain, one that is divided into three basic parts. The primitive part of the brain stem, called the basal ganglia, controls the impulses essential to survival. The limbic system controls emotions, and the neocortex, which is significantly developed only in humans, is the seat of reason. Thus, we actually have three connected minds: primal, emotional, and rational."

The basal ganglia controls the brain functions that are instinctive, such as the desire for security, the reaction to fear, the desire to acquire, the desire for pleasure, being accepted in our social circles, and even choosing our leaders. More pertinently, this area of the brain controls behaviors such as flocking, schooling, and herding. The limbic system is the seat of emotions and guides behavior required for self preservation. It operates independent of our reasoning capabilities, and therefore, has the capacity to generate out-of-context, affective feelings of conviction that we attach to our beliefs regardless of whether they are true or false.

...And, what about the neocortex? It is in a far inferior position. The neocortex is involved in processing ideas and using reason. However, it is trumped by the limbic system in that the limbic system is faster, controls the amplitude, or intensity of emotions, and unfortunately has no concept of time nor learns from experience. Truly, for the afore mentioned reasons, we are not hard wired to make good investment decisions.

Since herding is a natural instinct, and money decisions are one of the most emotional charged areas to handle, then it only makes since that, without understanding the power of these instincts, investors are not even aware of their incapacity to take action to prepare for a sharply declining market. (As an aside, if you still have a hard time believing that the markets could decline sharply, read my articles, "Surfing the Tsunami" and "An Asset Allocator's Nightmare.")

...While we can all read this article with our minds engaged, away from the distraction and noise of Wall Street and Washington, when we meander back into the milieu of daily life, it becomes very hard to prepare for something that appears as though it will not occur. Since no one desires to see the financial and social changes that accompany a bear market, it becomes even easier to push off until tomorrow what we do not want to address today. The more times we don't make a decision to change, the more we are emotionally rewarded with the fact that so far nothing happened. Fifty point declines are met with fifty point rallies. The sky is blue. The grass is green. No rain comes.

...Dr. [Benoit] Mandelbrot, discoverer of fractal geometry, is known as one of the greatest math minds of the 20th century. While his work was not widely accepted through the 1960s and 1970s, after the crash of 1987, his work on fractals and market risk brought him to the forefront of the financial world. He has contributed greatly to Monte Carlo simulation models, which are used all over the world today.

One aspect of his work was the discovery of what he calls the Joseph and Noah Effects. Sometimes markets, like nature, reveal patterns of movement that stay within a certain range, like Joseph's seven years of preparing for the famine and seven years of living through it, as recounted in Genesis. There are other times when the data moves violently outside its normal range. These violent reactions, much like a tsunami or hurricane, are referred to as the Noah Effect.

While we can all see the Joseph and Noah Effects in weather patterns and other life experiences, amazingly, many in the financial world still espouse theories that focus only on the Joseph Effect. They assume that changes that occur from a Noah Effect cannot be seen ahead of time, and are thus to be ignored. They reason, that since no one can time the day and hour, the season becomes unimportant as well. The focus of all numbers becomes the "average." Unfortunately, historical, real world losses are not as forgiving as the "average."

Traditional asset allocation models deal with portfolio fluctuations only within two to three standard deviations. Traditional economic models hold that for an event to occur within a deviation of two means it occurs 95% of the time while a deviation of three would reflect events that occur 98% of the time. Mandelbrot notes two problems with this line of thinking. Moves beyond 2 and 3 standard deviations occur much more frequently in the historical record than allowed for in traditional models. And additionally, these extreme moves, accounting for large percentage changes in price, occur in miniscule amounts of time. So rather than a steady flow of asset prices, we see jerky action followed by stasis.

So, how frequently have investors seen changes beyond 3 standard deviations?

Since we will more fully expound on the second half of Mandelbrot's work, for the sake of space, please allow this summation: "Prices only rarely follow the predicted normal pattern. The Brownian data shows 98% of the changes in the markets occur within three standard deviations and no changes greater than five. However the historical record shows that changes of more than five deviations happened two thousand times more often than expected. Under normal rules such an event should occur only once every seven thousand years; in fact, it happens once every three or four years. Statisticians call this a "fat tail" and it means the standard model of finance is wrong."

So, how costly has it been to investors who ignored deviations beyond 3%, hoping that the Noah Effect will have not impact on their finances?

Let's look at three examples. First, a currency study by Citigroup in 2002 revealed a deviation of 10.7. This equated to a one-day drop of 7.92%. Traditional finance would say the odds of this happening were the equivalent of one day out of 15 billion years. To make this even more compelling, consider another study on currencies that revealed that in the 4,695 trading days from 1986 to 2003 half the decline of the dollar to the yen occurred in just ten (10) days. Put another way, half the losses occurred in .21% of the trading days. My last illustration reflects the S&P 500 during the secular bull market of the 1980's. Fully 40 percent of the positive returns from that ten year period occurred in ten days, or .5% of the time. And for the curious, let's look at the Crash of '87. This one-day event took markets to a deviation of 22. Remember, standard asset allocation models only address 2 to 3 deviations.

Are we as investors condemned to be blind sided by these Noah Effects? Is the safest way to invest in these periods to follow the crowd and buy an index or basket of indices? History and science does not support this "random walk" mentality.

If there are hundreds of logical arguments for the Noah Effect occurring in the markets today, why is it so hard to make changes now to address this issue?

The Journal of Behavioral Finance had a great article recently called "Self is not Neutral". In this piece Gao and Schmidt write, "Rationalization doesn't mean, 'acting rationally.' It means attaching desirable motives to what we have done so that we seem to act rationally. In other words, people seek justification for their behavior. Rationalization makes people feel good."

With the millions of marketing dollars spent on teaching advisors how to help their clients "feel comfortable," is it any wonder that so many investors and advisors, surrounded by the emotional comfort of the herd and blinded by what we want to see, would ignore all the warning signs of a Noah effect until after the event costs them dearly.

...In our current placid market environment, it may be tempting to dismiss this article for its "extreme views." However, a study of history and science suggests that the longer the Joseph Effect continues, the more violent the Noah Effect will be when it occurs.

As you put down this article and go back to your day-to-day life, I hope you will force yourself to override your emotions and logically consider your surroundings. Make sure you are thinking and preparing for future events and not rationalizing your ways to the "comfortable" music emanating from the Wall Street and Washington rhetoric.

It is hard for most of us to act on the basis of future disasters, though. While many people can see future declines in, say, stock prices, housing prices or the value of the dollar, most cannot foresee severe drops. In other words, many people would not be surprised to see housing prices drop 10% to 20% in the next couple of years, but few people expect an 80% drop.

Some people do manage, however, to act on a clear view of what is to come economically and politically: the people who are most responsible for making those future disasters! For these people, herd instincts and a clear-eyed view of what's in store for the rest of us work together seamlessly. They just expect that their herd will prevail. Al Martin has been tracking where the top 10% wealthiest Americans have been putting their money. As he points out, they are more than 70% Republican and have good connections with the ruling regime. In other words, they are in the know. Following the money in this case might give us a good idea of what's in store for the near future. Not surprisingly, the conclusions are disturbing.

In the last 12 months there have been some significant changes in the investing patterns of the top 10% of the nation. ...As we have reported since 2003, when we started the Smart Republican Money Index, the top 10% of the nation, continue to be heavily invested in gold. They continue to be net sellers of gold stocks. In other words, what they're doing is increasing the percentage of their holdings in gold. How they are doing that, however, is what is more important.

They have been, and continue to be, net sellers of gold stocks and buyers of the new gold ETF, or electronically traded fund, which we have mentioned before, which trades under the symbol GLD.

...ETF or electronically traded funds has several meanings. In this case, what we are talking about is a fund that actually holds and trades the direct metal. It's not a company that digs it out of the ground then refines it and sells it, as in a mining company. The only thing the gold ETF does is simply hold and trade the metal.

...Metal stocks in general pay a tiny dividend. We've noted this before that, for instance, the dividend of the Philadelphia XAU (gold and silver index) is now less than .6% per annum.

In other words, what the top 10% are saying is that "We are prepared to sacrifice this small dividend to eliminate political, economic, military risks, etc. We now want to own the bullion directly."

... What's important for the average investor to understand is that the top 10% have said that the dividend that gold and silver, etc. stocks pay no longer compensates the investor for the risk.

Also, what the top 10% of the nation are saying is that: Since these ETF's, although they trade in the United States, are all formed as offshore entities in jurisdictions, which have not signed on to any collateral Patriot Act restriction or potential confiscation vis-a-vis the government and the U.S. Treasury, they are also a way to hold bullion and be immune from any potential confiscation in the United States in the future.

You can ultimately take delivery of the bullion if you wish to do so. And you can take delivery of it offshore – outside the jurisdiction of the United States, in other words. And those are the primary advantages.

Why has this become an advantage? Because if you know that the Bush Cheney Regime has set the nation on a path of no return, not in an economic sense, but in a political sense, then you know what's coming. Whatever regimes follow, they're going to follow, effectively, the same path because Bushonomics has precluded any other option. Whatever subsequent regimes may follow, they, too, are going to become increasingly more hostile to citizens holding gold. They, too, will become ever more hostile to citizens expatriating assets.

...Therefore what the top 10% is saying -- We are prepared to accept a potentially lower return for the security of owning the underlying metal. But we also want to own the metal in such a fashion where A), we do not have to report direct ownership of the physical metal, B) where we can take delivery of the physical metal in a jurisdiction outside the United States, and C) the metal is not potentially confiscatable even if we remain U.S. citizens with a primary residence in the United States, so long as we maintain a 'secondary domiciliary' in the jurisdiction in which we are going to take delivery.

...Hence, we would note, the top 10% of the nation, what are their favorite places to maintain second residence and/or some sort of corporate, and/or trust domiciliaries. They are the Cayman Islands, the Netherland Antilles, Switzerland and Tahiti – all jurisdictions which have absolutely no collateral agreements with the United States Treasury.

What is more important are the changes that have occurred in the last 12 months within the Smart Republican Money Index. We are seeing, for the first time ever new publicly traded corporations, new publicly traded master limited partnerships, publicly traded pools and funds, etc. are becoming available wherein they were not available before.

But we are seeing now a substantial flow of money, which had been previously negligible, wherein the top 10% of the nation are now having as much as 20% of their portfolios invested in non-renewable and/or semi-renewable resources, principally food production, water production, other non-precious, non-industrial, but nonetheless valuable and necessary metal and mineral production, forest production, etc.

We would note that, for years, the top 10% of the nation was not heavily invested into this area, for two reasons.

The first reason is that publicly traded corporations who dealt in these areas, resource-related stocks, never paid very much of a dividend. And they were also price-sensitive to the underlying value of the commodities. In other words, in times of inflation and a declining dollar, resource-related stocks did well, but in other times, they did not. You could not point to a 20-year period wherein you could say there was a reliable return of X.

And this is what's different in the last two years. First, it is the realization that the planet is falling apart. The realization that the people living on this planet have already used up 95% of its non-renewable resources and the likelihood that semi-renewable resources, for a variety of reasons, including changing climate, pollution, changing governmental attitudes, etc., are going to become more uncertain in the future.

Furthermore, the planet is facing, as the World Resource Council has pointed out, a water crisis starting in the 2020's. Also the World Food Council had a study done in concert with the governments of Sweden and the Netherlands, which financed the research study. They found that the planet is going to undergo a shift, starting in the 2020's, wherein food production in the northern hemisphere of the planet will fall sharply, as much as 80%, over a period of 20 years, and food production in the southern hemisphere of the planet, which is where most of the Third World nations are located, is going to increase.

This has spurred, in recent years a variety of new publicly traded corporations that didn't exist two years ago. These are new publicly traded master limited partnerships, pools, funds, etc. that have now purchased agriculture production and water production in south-of-the-border countries, particularly the case in South America, where the largest purchasers of Brazilian agricultural land are US-based pools and funds.

These are unlike the huge agri-business firms like ConAgra or Archer Daniels Midland. This is what confuses some investors. These are not companies that are formed to profit or to have a business based on the processing, storage, transportation of grain, etc. In other words, they are purchasing the actual land. They are having the land cleared. They are having it planted and they are building their own processing, storage, transportation facilities in partnership with the Brazilian government.

The reason you would want to buy these companies is because they actually control the food. The value is not even necessarily in the land. The value is what the land can produce; namely, the actual food, the cereal grain, etc. that the land can produce. They're not looking to profit in other ways. In other words, they are at the very beginning of the so-called agricultural pipeline. This is being done because of the belief, that in 20 years' time, we are going to be looking at potentially $100/bushel for soybeans, and potentially $30/bushel for corn. That's the reason this is being done.

Then there will be a softer dollar and world paper currencies will be effectively declining in value relative to the amount of commodities they can buy. We're not talking now about paper currencies fluctuating in value amongst themselves or against each other. But there is a general decline now in what the global paper currencies will buy in terms of hard commodities.

Who's going to buy it? People are still going to eat, and they're still going to buy it, and they're not going to care how much they have to pay for it.

...Not only are the top 10% of the nation now investing more than ever before in newly created public companies, partnerships, pools, funds, etc. that are now direct producers of agriculture; not processors, not transporters, but the direct producers of agriculture, but you can find this also true in the water business, where the top 10% of the nation is now investing in companies, and these are reasonably recently formed companies, through the same vehicles–partnerships, pools, etc.–that have purchased the direct water. Privatization of water is also in the plan.

...So, this is the second track: the purchase of direct food and water production.

The third track that we have seen through the Smart Republican Money Index is a dramatic reduction in the number of shares owned of defense contractors.

We have seen the top 10% being large net sellers of what we tend to think of as the traditional large-system defense contractors– Boeing, Martin Marietta, Northrop Grumman, Lockheed Martin etc.

This is an interesting shift. The money they have been raising out of the sale of large-system defense contractors has largely been reinvested in small publicly traded so-called specialty military police and defense subcontractors.

These are small companies which produce highly specialized weaponry and/or high-technology, specifically aimed for the government market – the identification of citizens with microchip technology, surveillance technology, as well as companies that produce small non-lethal or so-called semi-lethal higher-technology weapons systems which are specifically used to control protests and riots.

These companies are involved in manufacturing products for high-tech surveillance, law enforcement, specialty firearms and weapons, etc.

This also includes the new genre of prison construction, which really isn't even prison construction anymore. They're moving away from that old Correction Corp. of America model into a newer, high-tech, or third generation model of modular prison building, which isn't prison but detainment centers.

In other words, they're meant to house a specific category of so-called non-categorized detainees that can now be held forever under the Patriot Acts. These are what could be termed seditious or treasonous population segments.

The construction methods use modular construction, which is cheap and can be put together quickly and lasts virtually forever. Much more high technology in terms of control and management. And these are facilities that are purposely meant to be built very discreetly.

So we are seeing a shift by the top 10%, interestingly enough, out of large-system defense industries into what is called quasi-military population control management stocks. If you put this all together, it gives you an idea of the future. The top 10% already know what the future's going to look like. Why? Because they're making it happen.

...The top 10%, by their investments and the changes in those investments, are telling you what the future of this planet is going to look like. Gradual destabilization of governments and economies. Increasingly destabilized currency bases. Collapses in future governmental programs because they can't be funded and they're not being funded now. Disruption and shortages in food and water production. Rising civil unrest that will need to be controlled. Potential confiscation of hard assets. This is what the future looks like.

These bets placed by the most well-connected people in the power hierarchy provide the best insight into the real plans of the world's elite as well as a counterargument to those who think that things are fine economically, and that free-market economics are all we need to ensure future growth and prosperity. If that were the case, why would they need all those detention centers?

Monday, August 22, 2005

Signs of the Economic Apocalypse 8-22-05

From Signs of the Times 8-22-05:

Oil closed at $65.05 a barrel on Friday, down 2.8% from last week’s close of $66.86. The U.S. dollar closed at 0.8217 euros, up 2.2% from last week’s close of 0.8041. The euro, then, closed at 1.2177 dollars, down from the previous Friday’s close of 1.2436. Oil in euros, then would be 53.42 euros a barrel, down 0.6% from 53.76 on the previous Friday. Gold closed at 441.60 dollars an ounce, down 2.3% from $451.60 an ounce at last week’s close. In terms of euros, gold closed at 362.65 euros an ounce, down 1.4% from 363.14 a week earlier. At Friday’s close, an ounce of gold would buy 6.79 barrels of oil, compared to 6.75 a week earlier (0.6% rise for gold against oil). In the U.S. stock market the Dow closed at 10,559.23, down 0.4% from 10,600.31 on the previous Friday. The NASDAQ closed at 2135.56, down 1% from 2156.90 a week earlier. The yield on the ten-year U.S. Treasury note closed at 4.22% down three basis points from 4.25% at the previous week’s close.

There were also signs that the housing bubble is coming to an end. Paul Krugman of the New York Times points to some of these signs in a column published a couple of weeks ago:

That Hissing Sound
By Paul Krugman
This is the way the bubble ends: not with a pop, but with a hiss.

Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

So the news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

In the nation as a whole, housing prices rose about 50 percent between the first quarter of 2000 and the first quarter of 2005. But that average blends results from Flatland metropolitan areas like Houston and Atlanta, where prices rose 26 and 29 percent respectively, with results from Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96 and 118 percent.

Nobody would pay San Diego prices without believing that prices will continue to rise. Rents rose much more slowly than prices: the Bureau of Labor Statistics index of "owners' equivalent rent" rose only 27 percent from late 1999 to late 2004. Business Week reports that by 2004 the cost of renting a house in San Diego was only 40 percent of the cost of owning a similar house - even taking into account low interest rates on mortgages. So it makes sense to buy in San Diego only if you believe that prices will keep rising rapidly, generating big capital gains. That's pretty much the definition of a bubble.

Bubbles end when people stop believing that big capital gains are a sure thing. That's what happened in San Diego at the end of its last housing bubble: after a rapid rise, house prices peaked in 1990. Soon there was a glut of houses on the market, and prices began falling. By 1996, they had declined about 25 percent after adjusting for inflation.

And that's what's happening in San Diego right now, after a rise in house prices that dwarfs the boom of the 1980's. The number of single-family houses and condos on the market has doubled over the past year. "Homes that a year or two ago sold virtually overnight - in many cases triggering bidding wars - are on the market for weeks," reports The Los Angeles Times. The same thing is happening in other formerly hot markets.

Meanwhile, the U.S. economy has become deeply dependent on the housing bubble. The economic recovery since 2001 has been disappointing in many ways, but it wouldn't have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing. Did I mention that the personal savings rate has fallen to zero? Now we're starting to hear a hissing sound, as the air begins to leak out of the bubble. And everyone - not just those who own Zoned Zone real estate - should be worried.

In a subsequent column, Krugman elaborates on the consequences of a collapse of the housing boom. According to Krugman, housing construction in the United States during the Bush II years created 2 million new jobs, increased house prices created 1.5 million more and the military buildup created 1.3 million jobs. Now, given the shaky employment situation the United States finds itself in, where would we be without those 4.8 million jobs created on quicksand?

Safe as Houses

By Paul Krugman
I used to live next door to a Russian émigré. One day he asked me to explain something that puzzled him about his new country. "This place seems very rich," he said, "but I never see anyone making anything. How does the country earn its money?"

The answer, these days, is that we make a living by selling each other houses. Since December 2000 employment in U.S. manufacturing has fallen 17 percent, but membership in the National Association of Realtors has risen 58 percent.

The housing boom has created jobs in two ways. Many jobs have been created, directly and indirectly, by a surge in housing construction. And rising home values have fueled a simultaneous surge in consumer spending.

Let's start with home building. Between 1980 and 2000, which was before the housing boom, spending on the construction of new homes averaged 4.25 percent of G.D.P. In the most recent quarter, however, the figure was 5.98 percent. That difference is equivalent to about $200 billion a year in additional spending, generating roughly two million extra jobs.

Then there's the jump in house prices. Over the past five years housing prices have grown much faster than the overall cost of living, adding about $5 trillion to the public's wealth. Typical estimates say that each additional dollar of housing wealth adds about 3 cents to annual consumer spending, as families reduce their savings and borrow against their newly valuable homes. So we're talking about an additional $150 billion in spending, and roughly 1.5 million more jobs.

Does anything else in the U.S. economy rival housing as a source of job creation? Well, there's also the military buildup. The Economic Policy Institute estimates that increased military spending over the past four years has created 1.3 million private-sector jobs.

And, yes, there are the Bush tax cuts, which the administration insists are the source of everything good in the economy. And it's true that some portion of the tax cuts, which amounted to $225 billion this year, must have been spent in ways that created jobs. Given reasonable estimates of the effect of tax cuts on spending, however, they were probably a smaller force for job creation than the military buildup, and dwarfed by the housing boom.

So it's an economy driven by real estate. What's wrong with that?

One answer is that it has been a pretty disappointing recovery. Two new reports, one from the Center on Budget and Policy Priorities and one from the Congressional Budget Office, compare the current economic expansion with other postwar recoveries. By any measure except corporate profits, which have done very well, this one comes up short.

Even the good months would have been considered subpar in the past: the administration hailed last month's job growth as something wondrous to behold, yet there were 68 months during the Clinton years when employment grew faster. Still, the economy is expanding.

But because that expansion depends so much on real estate - without the housing boom, the economic picture would look dismal indeed - you have to wonder how much to trust it.

I've written before about the reasons to believe that current house prices in much of the country represent a bubble. When that bubble begins to deflate, so will housing-related employment.

Beyond that, there's the disturbing point that we're paying for the housing boom (and the military buildup and tax cuts) with money borrowed from foreigners. Now, any economics textbook will tell you that it's fine to borrow from abroad if the money is used to expand the economy's productive capacity. When 19th-century America borrowed from Europe to build railroads, it was also enhancing its ability to repay its debts later. But we aren't borrowing to build productive capacity. As a share of G.D.P., investment other than housing construction is below its average between 1980 and 2000, and way below its level at the end of the 1990's.

In other words, a fuller answer to my former neighbor would be that these days, Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn't seem like a sustainable lifestyle.

How solid, then, is America's economic recovery? The British have a phrase that applies: "safe as houses." Our economy is as safe as houses. Unfortunately, given current prices and our dependence on foreign lenders, houses aren't safe at all.

We wrote last week of the rigged nature of most markets. Mike Whitney lays the blame for the housing bubble on the rigging of Alan Greenspan and, in the process, answers the question of “who benefits?”

Pop Goes the Weasel
Greenspan and the Housing Bubble

By Mike Whitney
It's strange that Alan Greenspan hasn't been blamed for the housing bubble. After all, he set the "easy money" policies that put the whole thing in motion and he's the one who should be held responsible when it goes up in smoke.

Let me explain.

Most people expect the Federal Reserve to lower rates when business is flagging to stimulate the economy by making loans more available for commerce, home buying, recreational spending etc. But, just as higher rates can stop the economy in its tracks by making money too expensive to borrow, so too, lower rates can have equally adverse consequences.

For example, when Greenspan lowered rates to 1% in 2002 he knew that money would surge into the economy and create the appearance that everything was hunky-dory. Predictably, the economy sputtered along from the economic activity generated by the housing boom and from the 30% increase in government spending.
But, what else did Greenspan's lower rates achieve?

Well, they achieved the results for which they were designed; they kept the economy humming along while Bush dragged the country to war, they kept the American people asleep while $400 billion per year in Bush tax cuts were siphoned from the US Treasury, and they generated what the "The Economist" calls this "the biggest bubble in history"; the housing bubble.

All of these were purely political choices made at the Federal Reserve under the auspices of Fed-chairman Greenspan.

Thanks, Alan.

Now, of course, Greenspan has signaled that the Happy Days are over and that the Fed will continue to ratchet up rates to strengthen the dollar. So far, the Fed has raised rates 10 times in the last 14 months. This eventually will strain the resources of all the poor slobs who took out ARMs (Adjustable Rate Mortgages) trusting is the soundness of the system. They will inevitably see their monthly payments go through the roof.

…The Fed seduces the public with cheap money, so that credit spending increases and, then, "presto", millions of Americans slip inexorably into indentured servitude.

Isn't this what's happening right now?

The American public is presently mortgaged up to the hilt with most of their personal wealth invested in their homes and with the highest level of personal debt in any period since the Great Depression.

Not good.

Especially when we consider that the current bubble 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)." Or, when we consider that "over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP." (The Economist")

Or, when we consider that 2 out of every 5 jobs in America are now related to construction. One blip in the housing market and we'll all be hawking pencils on the street corner.

Regrettably, this Greenspan-generated pyramid scheme is headed for the dumpster. The fundamentals for securing a loan have all been abandoned; putting traditionally unqualified applicants in a position to buy a home. 42% of all new home buyers cannot even come up with a few thousand dollars for a down payment. Equally disturbing is the fact that "nearly one third of all new mortgages this year call for interest-only payments (in California, it's almost half)" (NY Times)"

The Fed's "cheap money" policy has spawned a "creative financing" monster and the speculation in the housing market has grown accordingly. A full 36% of homes are bought either for investment or as second homes; "the very definition of a financial bubble." (Economist)

"Speculation"? Not according to Colonel Greenspan. According to him, it's just a bit of "froth" in the market.

"Froth"? The biggest bubble in history!?!

Of course, none of this even vaguely resembles the activities of a "free market". The market is not free when a privately owned banking system like the Federal Reserve sets the prime rate according to its own political-economic agenda.

Most people have no idea to what extent Greenspan has abandoned his principles to carry out his task as the country's foremost class-warrior. Earlier in his career, Greenspan proclaimed, "Deficit spending is simply a scheme for the confiscation of wealth".


That, of course, was when deficits were used to pay for exorbitant social programs, like Welfare or Medicaid that benefited the broader American public. Greenspan has revised his thinking now that the deficits are a means for lining the pockets of his rich constituents.

Greenspan fully grasps the danger of his current strategy of flooding the market with, what he once called, "easy money". As he noted in an article he wrote in 1967 "Gold and Economic Freedom":

"After a mild business contraction in 1927 the fed decided the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed."

Let's see if we got that right?

"The excess credit which the Fed pumped into the economytriggered a fantastic speculative boom.which collapsed the American economy".

Sound familiar?

…Greenspan has worked exclusively to serve the interests of American elites. He has helped shape the policies on taxation, minimum wage and Social Security that have enriched the wealthy and battered the middle class. His lowered interest rates have perilously expanded credit and produced the "largest speculative market of all time". Whatever economic calamity befalls the American people certainly bears his imprimatur.

The nation now faces the end of the Greenspan epoch and the very real prospect of an economic tidal wave greater than 1929. The bubble was manufactured by Greenspan and his colleagues at the Fed to swindle millions of working-class Americans out of their life-savings and to facilitate the greatest transferal of wealth in American history.

The lesson of the housing bubble is simple: whenever monetary policy is put into the hands of privately owned institutions like the Federal Reserve, those policies will invariably reflect the narrow interests of the men who own them and the members of their class.

That's why Thomas Jefferson warned, "Banking institutions are more dangerous than standing armies."

He undoubtedly had the Federal Reserve in mind.

Thursday, August 18, 2005

Signs of the Economic Apocalypse, 8-15-05

From Signs of the Times 8-15-05:

Oil closed at 66.86 dollars a barrel on Friday, up 7.3% from what was already a record weekly close of $62.31 a week earlier. The Euro closed at 1.2436 dollars, virtually unchanged from the previous week's close of 1.2437. Oil in euros would be 53.76 euros a barrel, up 7.3% from 50.10 euros a week earlier. The dollar, then, fell from 0.8099 euros to 0.8041 for the week. Gold closed at 451.60 dollars an ounce, up 2% from $442.90 on last Friday's close. Gold in euros would be 363.14 euros an ounce, up 2% from last week's 356.11. The Gold/Oil ratio closed at 6.75 barrels of oil per ounce of gold, down 5.3% compared to 7.11 on the previous Friday. In the U.S. stock market, the Dow closed at 10,600.31, up 0.4% from 10,561.14 a week earlier. The NASDAQ closed at 2,156.90 down 1% from 2,178.92 on the previous Friday. The yield on the ten-year U.S. Treasury note closed at 4.25% down 14 basis points from 4.39% at the previous Friday's close.

Again, the big story last week was the rise of the price of oil to record levels. I think we need to be sceptical about this rise. Sure, the supply of oil is finite, but is it any more finite than it was five or six years ago? Do we really know how much oil there is? And, even if oil is limited, is energy in general limited? Currently it would seem very much so - but we really don't know. People point to the growth of the Chinese economy as reasons for the rise, but the growth of China has been in the works for a long time and it is proceeding at rates that could have been and were predicted years ago. Remember that analysts are saying there is plenty of oil at the moment, but what is lacking is enough refineries in the United States. We should ask who high oil prices benefit and then ask why haven't enough refineries been built in the United States. The invasion of Iraq and the consequent chaos has taken much of that country's production offline. Could that have been intended? Could the oil interests behind the Bush regime have intended this chaos and these high prices? They are getting ultimate possession of Iraqi oil (or at least they think they are) without the disadvantage of putting it on the market and depressing prices.

We make a mistake if we assume that the markets for various commodities act as markets do in economic textbooks. Here is an excellent account by Robert Bell of how, by whom and for whom markets can be rigged, worth quoting at length but too long to quote in full. The article helps explain why those of us who thought the dollar would have collapsed by now were wrong. A major reason for this was the consequence of the law passed by Bush in the fall of 2004 allowing U.S. corporations to "repatriate" profits parked overseas and to have that money taxed at a much lower rate. According to Bell, that had the effect of propping up the dollar.

The Invisible Hand (of the U.S. Government) in Financial Markets

Robert Bell

Summary: The U.S. government is manipulating all major U.S. financial markets - stocks, treasuries, currencies. This article shows how it is possible and how it is done, why it is done, who specifically is doing it, when they do it, and where they get the money to do it.

Most people probably believe that the major capital markets in the U.S. are basically true markets with, occasionally, maybe very occasionally, a little bit of rigging here and there. But evidence shows that the opposite is the case - the rigging is fundamental with a little bit of true markets here and there. I have discussed how this works concerning U.S. and some other stock markets in an earlier article. Here I will primarily discuss the rigging of currency and U.S. Treasury markets.

Perhaps the main reason for the urban legend that major markets are not generally rigged is that they are assumed to be too big; the millions of independent buyers and sellers, worldwide because of globalization, make effective and sustained coordination impossible. The implicit assumption is that any market could be systematically rigged if it were small enough, or at least small enough at some critical choke point.

Little Markets

In the case of the market for U.S. Treasuries, the Financial Times summed up exactly how small it really is in two major stories, one just under the masthead on page one, on 24 January 2005. One story began, "During the past few years the US has become dependent, not so much on millions of investors around the globe but on a few individuals in a few of the world's central banks." In 2003 these central bankers bought enough treasuries to cover 83% of the U.S. current account deficit, and 86% of those purchases came from Asian central banks.

The two main sources of money for U.S. Treasuries are the central banks of Japan and China. Japan held about $715 billion in U.S. Treasuries, as of November 2004, and China held about $191 billion. All the other nations' central banks hold altogether, about the same amount again, roughly another trillion.

As the total of all obligations is about $4 trillion, two central banks obviously hold about one quarter of the total. They are in the position to pump or dump the Treasury market all by themselves. They can sell what they have or simply stop buying when the Treasury sells.

Since the money comes from a handful of foreign central banks, the possible rigging of the Treasury market equals the possible rigging of the foreign exchange markets. These central banks have to buy dollars before they buy Treasuries. Even Alan Greenspan has acknowledged that the two go together, admitting that Asian central banks "may be supporting the dollar and U.S. Treasury prices somewhat."

U.S. stock markets are also capable of being systematically rigged, and for the same reason - a handful of players can dominate if they coordinate their actions. The key choke point is in the number of mutual funds, which themselves hold about 20% of all the stock in the major markets. Of the over 8000 all-stock mutual funds, a mere 497 hold roughly three-fourths of the stock. This is easily a small enough number to pump the market, whether through coordinated buying disguised as programmed trading, or simply a follow-the-leader mechanism. All the other thousands of funds and the millions of individuals around the globe putting their money into these markets can do little more than follow the momentum. No major U.S. stock market writer, advisor or player seems to publicly acknowledge this, as far as I know. But the CEO (PDG) of the French insurance giant AXA has acknowledged it: Claude Bebear wrote in his 2003 book Ils vont tuer le capitalisme (They are going to kill capitalism):

"… today, shareholders are relegated to the role of quasi-spectators. The small shareholders that are now called 'individual investors' know that they have little weight. All together, they only represent a small percent of capital because the investments of households are more and more in the form of mutual funds, pension funds (fonds communs de placement) or life insurance funds. The shareholders today are thus the institutional investors."

Bebear, in charge of one of the world's biggest stock portfolios, adds:
"We are no more, in effect, in a world that one reads in the economic text books, with innumerable investors of various characterizations, choosing each in his own way the stocks that he'll put in his portfolio; the results of their millions of decisions generating a sort of changing market equilibrium, but a stable one. The truth is that for several years, the reasoned investment on a stock has almost disappeared in favor of more and more mechanical behavior."

Plunge Protection

Programmed trading in an utterly concentrated stock market pretty much guarantees the possibility of systematic and continual market rigging. But to accomplish this, and coordinate it with the currency and Treasury markets, some sort of orchestrating mechanism would need to exist. It does; it is known as the President's Working Group on Financial Markets, occasionally referred to in the business press as the Plunge Protection Team. Then President Ronald Reagan signed it into existence on 18 March 1988, with the specific intension to avoid another stock market crash such as that of 19 October 1987. The Working Group's existence is no mystery. See for yourself. Go to Google and type in Executive Order 12631. You will find the Executive Order, and even a 14 November 2003 statement from Secretary of the Treasury John Snow giving a brief history of the Working Group, describing its policy advisory activities, and concluding with these words: "It also is a forum used to exchange information during market turmoil through ad hoc conference calls and meetings."

Presumably Plunge Protection doesn't hold these ad hoc conference calls and meetings just to be passive bystanders. Executive Order 12631 specifically authorizes them to coordinate buying: "The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible."

So not only is the fix in, it is legal.

In a 1989 Wall Street Journal article, then Federal Reserve board member Robert Heller even suggested a market intervention strategy: "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole."

Guess Whose Money is Used to Buy Stock Market Insurance?

There is even a potentially unlimited source of money to do this pumping. Federal government contractors operate under a special law, CAS, in their defined benefits pension plans. This gives them stock portfolio insurance, something which small fry players would obviously like to get, but can't find anyone willing to issue. Should the pension funds of the federal government contractors lose money in their investments to the degree that they fall below minimum reserve requirements imposed by other federal laws, they can simply make up the difference by adding it on pro-rata to subsequent items sold to the federal government. The vast sums of federal tax money devoted to plugging the holes in the pension fund for the largest Pentagon contractor, Lockheed Martin, were discovered by Ken Pedeleose, an analyst at the Defense Contract Management Agency. He was concerned about staggering cost increases for the C-130J transport but a chart he made public showed the mind boggling per plane cost increases for a number of Lockheed Martin airplanes. The chart amounted to a Rosetta Stone for the military-industrial complex. It showed, essentially, how the military-industrial complex linked to the stock market through the Lockheed Martin pension fund, and by extension through all the others covered by the same law.

No doubt a lot of government money has been flowing through Lockheed-Martin and others in the last four or five years!

Is there a corresponding source of tax money to pump the currency and Treasury markets? There is an official one for currency, the Exchange Stabilization Fund. It was established in 1934 to prop up the dollar in foreign exchange markets. But it can be used for any purpose determined by the Secretary of the Treasury. In mid-1995, the fund contained $42 billion. The actual amount varies depending on how well the Treasury does on its currency transactions. The money originally came from the sale of U.S. government gold, but the Treasury kept the money as a private fund, not under Congressional control. Since it is a finite amount of money, not appropriated by Congress, it probably is not often used to pump the stock market or even the market for Treasuries.

The markets for Treasuries, and also currency, are being pumped using the tax code and pension fund laws. But to understand this we have to first look at why pumping might be necessary.

Treasuries Exchanged for Jobs

The U.S. Treasury holdings of Japan and China are essentially a consequence of a trade imbalance between the U.S. and these two countries, with the balance heavily tilted to the latter. To maintain the imbalance, which they both clearly want to do, both countries must keep their currency pegged against the dollar at a lower rate than it might otherwise be. If they did not do that, the Toshiba computers, Toyota cars and other quality items made in Japan would be more expensive, and so Japan wouldn't sell as many of them in the U.S. A similar case holds for vast numbers of Chinese manufactured items sold pretty much everywhere, but notoriously at Wal-Mart. To keep the items relatively cheap, the central banks of those countries keep their currencies cheap by buying a corresponding amount of dollars, thus supporting the dollar against their currencies. The dollar may essentially collapse against the euro, but not against the yen and the yuan.

With the dollars the Japanese and Chinese central banks have bought, they can buy something denominated in U.S. dollars; the item of choice is U.S. Treasuries since it is like holding dollars that pay interest. So this has the effect of pumping the price of Treasuries too. Because the items made in China and Japan are cheaper than those of corresponding quality made in the U.S. (in the case of many Japanese items, there may not be U.S. items of similar quality), the effect is to create manufacturing jobs in those countries while simultaneously losing them in the U.S. In effect the jobs are exported and foreign currency is imported to buy dollars and then Treasuries.

This has an advantage for the Bush administration, which has the ruinously ridiculous policies of simultaneously cutting taxes and waging wars or building up for them. In effect, the basic racket is: the Bush administration exports jobs to these countries, and in turn they finance Bush's fiscal deficit so he can continue his wars and cut taxes for his friends. The deficit for 2005 will be at least $400 billion, according to the Congressional Budget Office. The Pentagon budget for 2005 was about $400 billion. Add in two supplemental requests for the costs of his Iraq war and the Pentagon figure is roughly $500 billion. "It is interesting to note that the military budget is about the same order of magnitude as the fiscal deficit," said veteran Pentagon waste fighter Ernest Fitzgerald.

…But won't the Japanese and Chinese central banks ultimately get burned by holding vast quantities of dollar denominated assets? Sure, if the dollar ever collapses against their currencies too. The dollar having fallen roughly 30% against the euro since the beginning of the war in Iraq, the same fate or worse could await these Asian currencies. With currently issued Treasuries paying a coupon rate of no more than 4%, they would be materially shafted on their investments in U.S. Treasuries. Then why don't they bail out?

The Emperors' Revenge

For the Chinese, the basic racket is too delicious and too ironical. They industrialize their country at the expense of the de-industrialization of the U.S. Not only is it sweet revenge for more than a hundred years of humiliation at the hands of Europeans and Americans, but also at the end they are relatively strong and the U.S. is relatively not. What do they care if the deal isn't quite as good as it would be in a perfect world and they lose a third, half, two-thirds of their savings in U.S. Treasuries? Besides, in an even mildly less imperfect world, the U.S. President would not make such a blatantly corrupt bargain against the people of the U.S. Billionaire investor Warren Buffett calls this system of indebting U.S. citizens to foreign governments "a sharecropper's society," to distinguish it from Bush's supposed "ownership society."

Plunge Protection's New Cash

In late October 2004, the U.S. public was looking the other way when the tax cut was passed. Most people were obsessing over who would win the presidential election. Few were paying much attention to what the Republicans in Congress were doing, which was giving billions in tax cuts to U.S. corporations which had profits parked in tax havens around the world, such as in Ireland or Singapore. Bush signed the law enabling this tax giveaway on 22 October 2004…

The law Bush signed in late October 2004 goes by the obscenely false name, the American Jobs Creation Act. If there is one thing it will not do, it is to create jobs. It will instead create takeovers, which nearly always produce losses in jobs - in the name of synergy. Takeovers are on the limited menu of activities companies are permitted to do with the money they can "repatriate" under this law. Not that the limited menu makes much difference, since the money brought in does not have to be fenced off in any way. So if $10 billion were spent by a company on takeovers, that frees up another $10 billion to do whatever was prohibited under the law, such as paying dividends, buying back stock, or filling the pockets of executives with extra bonuses. Normally such profits earned in foreign subsidiaries of U.S. companies would be subject to a tax rate of 35% if they were brought home, which is why the money had stayed parked in the tax havens. But the law gives companies a one-year window for the "repatriation" of this cash at a tax rate of only 5.25%. Nobody knows how much will be brought in. When the law was passed in October, the general expectation reportedly was that the figure would be about $135 billion. But one player has estimated it at $319 billion. "This has some investment bankers salivating," wrote David Wells in the Financial Times. But how much would be converted into dollars from other currencies? According to two different investment banks, the figure is somewhere around $100 billion. That would be the minimum available from this source to pump the dollar for one year. Recall that the Exchange Stabilization Fund has less than half that for eternity.

The Bush administration's use of repatriated foreign profits to pump domestic markets shows that they are not going to let "thin ice" signs stifle their version of the economy, at least not without a fight. However, the underlying weakness of the economy because of the twin deficits remains, so basically all that Bush and his Plunge Protection team are doing is moving the "thin ice" sign out onto thinner and thinner ice. The weight of the Bush team will eventually crash through that ice into exceedingly cold water…

Panic Buying

One short-term thing the money has already done is to pump the dollar. The mechanism by which this is accomplished is quite simple and is signature Plunge Protection. It is the device of the short covering rally. This is what happens when speculators sell an asset - stocks, Treasuries or dollars - short. With stocks, this means that they sell the asset without actually owning it. They borrow the shares they sell, betting the stock will fall. They then buy it at the reduced price and return those shares. Another way to accomplish essentially the same thing is through options. The risk in a short sale is that the stock will not go down but instead go up. The short seller literally is exposed to unlimited losses in this case. This is the basis for a short covering rally. Non-shorters buy in sufficient volume to force up the price. The price rise scares the shorters into buying right away before the price goes too high and they lose too much. This results in panic buying as large numbers of short sellers feel compelled to buy to limit their losses. Often when the stock market suddenly blasts up out of a long slide for little or no reason, we are watching a short covering rally. There have been several such rallies in the currency and Treasuries markets so far this year, and there will probably be quite a few more.

According to a J.P. Morgan survey, the year 2005 began with most U.S. and international speculators holding short positions on U.S. bond markets. Obviously this is because they had foolishly looked at the underlying economic reality, and failed to understand the profound import of the American Jobs Creation Act.

…How big are these chunks of cash? Johnson & Johnson announced in February that they would bring in $11 billion. Pfizer put its planned figure at $37.6 billion. But are these figures big enough to pump the dollar? You bet. An ABN Amro currency strategist, Aziz McMahon, has been quoted as saying, "The sums are so large that if even a small proportion is transferred from other currencies, the positive impact on the dollar could be substantial." According to that bank's calculations, each $20 billion pumped in from other currencies pumps the dollar against a broad index of currencies about 1%. So the announced amounts would be sufficient to trigger both momentum trading in the dollar and trigger short covering rallies which themselves would trigger further momentum trading.

Even the announcements of the currency repatriations can trigger short covering rallies. ABN's McMahon added, "The psychological impact a wave of announcements could have on structural short-dollar positions should also not be underestimated."

…All who imagine that the mythical market forces will prevail seem to deliberately avoid actually looking at what the so called markets really are, including their concentrations, Plunge Protection mechanisms, and Plunge Protection's extensive access to a variety of pools of other people's money. The mechanisms and the market concentrations permit the Bush administration to systematically sell off U.S. assets to pay for its more wars/less taxes policies. The Bush administration is comparable to a group of corrupt trustees for the family fortune of a lazy and incompetent heir. They siphon the money out by selling off the inheritance while the heir is too stupid or drunk to notice. He still has his mansion, his fleet of big cars and his monthly check, and he doesn't notice that the assets are shrinking. He may not for a while. This family's fortune is big and there are a lot of assets still to sell off.

Reading between the lines about the role of the military-industrial complex in "managing" the markets, it's not too hard to see why some in the Bush administration might be tempted to see this Global War on Terrorism (and Iraqi civilians) as successful. The Deconsumption blogger, Steven Lavagulin, wonders why, with the preeminence in brand marketing that the United States holds, that it has done such a poor job lately in generating good feeling world-wide for the "America" brand. He concludes that it was no accident:

I don't think the ball was dropped...I think the marketing campaign is in effect. In fact, it's a raging success. It's just that it was decided that "anger" and "resentment" were a better brand to market. The campaign was rolled-out, a campaign entitled: War on Terror™

Think about it...War on Terror™ It says "War. War with no boundaries. War with no goals. War with no rules. The enemy is anyone, anywhere. Live in fear. The enemy might be you... Don't get out of line."

If you'll allow me to draw water from the [William] Kotke [in Final Empire] well once again:

"Although industrial investment in the colonies generally returns large profits (25% per year being the standard), super-profits since World War II have come from guns and drugs. The U.S. has been the largest armaments producer, with other countries now catching up rapidly. Alliances and militarization have been encouraged all over the world and this has seen the militaries take power (overt or covert) in most societies. The petroleum industry is the largest planetary industry but it is closely followed by the armaments industry in size and production. The armaments industry mushrooms as all forms of colonial exploitation grow. A modern example is the [1989] Iran-Iraq war, where 42 arms-exporting countries sold weapons to the combatants and 36 sold to both sides.

"…The quest for power (military and other) through science has become the central focus of the industrial empire. In the broad view, science is the means to power whereby the empire culture more efficiently extorts the life force of the planet. (Scientific agriculture does not concentrate on building the life of the soil; it concentrates on producing heavier tonnages for market). The reality that science is an integral component of the imperial social system is shown by the fact that more than half of the working scientists of the U.S. are employed in the military-industrial sector. This is hardly a dispassionate search for truth, as the propagandists would have it. The scientific establishment is deeply implicated in the social apparatus of coercion and death as a means of political control."

Keep in mind this was was written in the early 1990's, so Kotke is not merely striking an indictment against the neo-con agenda. He identifies "coercion and death" as the "product" in the general system of empire. So is it reasonable to conclude that marketing in America might consist of selling "goodness and light" on every scale and level save the very pinnacle one, Brand America!™ itself? Strangely, that may be precisely the case.

Clearly, economic analysis alone will not enable anyone to predict the markets. It may make more sense to observe where the power is flowing.

Monday, August 08, 2005

Signs of the Economic Apocalypse 8-8-05

From Signs of the Times 8-8-05:

The dollar closed at 0.8099 euros last week, down 1.3% from last week's close of 0.8208 euros. That puts the euro at 1.2348 dollars compared to 1.2184 dollars the previous Friday. Oil closed at 62.31 dollars a barrel on Friday, a record weekly close, and up 2.4% from the close of $60.83 a barrel the previous Friday. Looking at oil in euros, a barrel of oil would cost 50.46 euros, up from 49.93 euros a week earlier. Gold closed at 442.90 dollars an ounce, up 1.6% from $435.80 on the previous Friday. Gold in euros would be 358.68 euros an ounce, up 0.3% from 357.68 on the previous Friday. The gold/oil ratio closed at 7.11 down 0.7% from 7.16 last week, meaning the price of oil rose faster than the price of gold. In the U.S. stock market last week, the Dow Jones Industrial Average closed at 10,561.14 down 0.8% from last week's close of 10,640.91. The NASDAQ closed at 2.178.92, down 0.3% from last week's close of 2184.83. The yield on the ten-year U.S. Treasury Bond was 4.39%, up ten basis points from the previous Friday's close of 4.29% continuing a steady climb in long-term U.S. interest rates.

While the sharp drop in the dollar and U.S. stocks and the sharp increase in the price of gold and oil would seem to be ominous signs for the U.S. economy, the media was taking it in stride, at least, attributing the fall in stocks to the strong U.S. employment report for July and the rise in oil to a lack of refining capacity:

Oil nears record on US refinery snags

Oil climbed within pennies of its all-time high on Friday as U.S. refinery outages hampered efforts to meet strong demand in the world's biggest consumer.

U.S. light sweet crude settled up 93 cents at $62.31 a barrel - the highest settlement on record - after climbing as high as $62.45, which was 5 cents shy of the all-time record set just Wednesday.

London Brent crude gained 95 cents to $61.07 a barrel.

"It's no secret that refineries are the problem. There wouldn't be a problem if there was any slack in the system," said Tony Nunan, a manager at Mitsubishi Corp.'s international energy business in Tokyo.

A half-dozen refineries in the United States have been forced into unplanned shutdowns since late July and some have had to delay planned restarts, leaving the market on edge after U.S. gasoline stocks fell a sharp 4 million barrels last week.

Gasoline inventories have fallen into the lower half of their seasonal average, while demand is running 1.1 percent stronger than last year with a month left in the summer season.

U.S. supplies of distillates, which include heating oil, rose 1.5 million barrels last week to stand almost 3 percent higher than a year ago, but even stronger demand growth for these fuels coupled with refinery trip-ups could dent supplies before winter.

"Demand is so high and capacity is so low, we can go from comfortable to uncomfortable inventories within a month," Nunan said.

Adding to concerns was news of a pipe bomb attack at PDVSA's Maracaibo headquarters in Venezuela, the world's No. 5 oil exporter. PDVSA said the three pipe bombs that exploded caused no damage or injuries.

Additional disruptions could come from an unusually active Atlantic hurricane season, which has already produced eight named storms and could culminate in as many as 21 tropical storms and 11 hurricanes, U.S. government weather forecasters have said.


Prices have rallied more than 40 percent this year despite OPEC pumping at its highest rate in more than 25 years, with traders fearing the cartel's thinned cushion of spare production capacity may be insufficient to compensate for any unexpected outages.

Total OPEC production rose 290,000 bpd to 30.24 million bpd in July, the highest since December 1979, as Iraq boosted exports and the United Arab Emirates restored output at oilfields after maintenance, a Reuters survey showed.

OPEC is due to meet next month to discuss its output policy, where some members favor suspending quotas to allow a production free-for-all, Nigeria's top oil official Edmund Daukoru said on Thursday.

Most members, aside from Saudi Arabia, are already pumping flat out.
Daukoru said OPEC might decide to keep production quotas unchanged or raise them, but would not cut output.

What was that about a pipe bomb attack in Venezuela? Who would order an attack on the headquarters of Venezuela's national oil company except CIA backed rebels? Why were the refineries shut down in the United States? Why isn't Saudi Arabia pumping "flat out" like the article says the rest of OPEC countries are? Could it be that the United States wants high oil prices? High oil prices certainly have helped Bush-connected oil sector corporations. Something to keep in mind when listening to the Peak Oil chorus.

The consensus about the July U.S. jobs report which showed a rise of 207,000 jobs was that it showed the U.S. economy is growing at a healthy rate and that it will lead the U.S. Federal Reserve Board to keep raising interest rates.

Jobs growth unexpectedly strong in July

By Tim Ahmann

Fri Aug 5,12:10 PM

U.S. job growth picked up last month as employers added 207,000 workers to their payrolls, a healthy gain that led Wall Street to increase bets on rate hikes from the Federal Reserve.

The unemployment rate held steady at the 5 percent reached in June, the lowest level since September 2001, the Labor Department said on Friday.

"This is a crystal clear indication that the labor markets are very healthy and it reinforces the notion that the economy is growing in a healthy, sustainable way," said Dana Johnson, chief economist at Comerica in Detroit.

The Fed, which has raised the benchmark overnight lending rate at each of its last nine meetings, is widely expected to bump it up another quarter-percentage point to 3.5 percent when officials gather on Tuesday.

"The Fed is going to keep chugging along," said Robert MacIntosh, chief economist at Eaton Vance Management in Boston.

Financial markets see the rate hitting 4 percent by year end, although the jobs report had some betting it could move even higher.

The payrolls gain, spurred on by service-sector hiring, was stronger than expected by economists who had looked for an increase of 183,000 with the jobless rate steady.

Prices for U.S. government bonds fell sharply on the data, pushing yields higher, the dollar strengthened and stock prices fell as markets braced for further Fed interest rate increases.

The Bush administration hailed the report as a sign of the economy's vigor. "This shows that the fundamentals of our economy are strong and that we are continuing on a positive path of growth and prosperity," U.S. Treasury Secretary John Snow said in a statement.

While some economists thought the report might be skewed by Hurricane Dennis, which battered the Florida panhandle in mid-July, the department said the storm appeared to have no discernible impact on the figures.

A net upward revision of 42,000 to the combined job count for May and June contributed to the report's solid tenor. U.S. employers added 166,000 workers in June and 126,000 in May.

The pickup in job growth last month pushed this year's average monthly payroll gain to 191,000, a pace economists see as strong enough to slowly tighten the labor market.

The factory sector, which shed 4,000 workers last month, was one of the only weak spots. However, the Labor Department noted that an 11,000-job drop in auto manufacturing reflected larger-than-normal temporary plant shutdowns for retooling.


The report was the latest in a string of strong data and the last significant piece of economic news before Fed policy-makers meet next week.

Average hourly earnings shot up six cents, or 0.4 percent, in July -- the biggest rise in a year. However, earnings are up just 2.7 percent over the past 12 months, suggesting wages have yet to become a big inflationary concern.

"As far as the Fed is concerned, payrolls growth is probably just about right -- not too hot and not too cold," Paul Ashworth of Capital Economics told clients in a research note.

Job growth was tepid at construction firms, which brought on just 7,000 new workers, but was strong on the service side of the economy.

Retailers added 50,000 workers, the biggest gain in that sector since April 2000. The strong retail hiring in part reflected job growth at automobile dealers coping with a surge of shoppers enticed by special incentives.

Professional and business service firms, education and health service employers and the leisure and hospitality industry all exhibited robust hiring.

In another spot of bright economic news, the independent Economic Cycle Research Institute said on Friday its leading index of the U.S. economy rose to a 12-week last week. ECRI said the index suggested prospects for U.S. economic growth were improving gradually.

The long-term interest rates which have been rising steadily lately have started to affect the mortgage rates which have also risen lately. If the United States economy were a closed system, these interest rate hikes would be nothing to worry about, but given the unpegging of the Chinese Yuan from the dollar, which will add considerable upward pressure on U.S. interest rates, this is bad news which could lead to the bursting of the housing bubble, thereby bringing down the world economy. Notice in the above article that the rise in the construction sector was very small, only 7,000 jobs. Notice also that the strongest sector was retailing - people spending money they shouldn't on new cars, having been lured by incentives for 2005 models that have hurt profits for auto companies while calling into question the sales for 2006 models which will be introduced soon.

Mortgage rates continue upward climb

30-year benchmark rises to 5.82 percent, Freddie Mac reports

The Associated Press

Updated: 1:21 p.m. ET Aug. 4, 2005

WASHINGTON - Mortgage rates continued their upward climb this week, with rates on 30-year mortgages rising to their highest point since the middle of April.

In its weekly survey, mortgage giant Freddie Mac reported Thursday that rates on 30-year, fixed-rate mortgages rose to a nationwide average of 5.82 percent, up from 5.77 percent last week.

It marked the fifth week in a row that rates on 30-year mortgages went up. This week's increase left rates on 30-year mortgages at their highest since they averaged 5.91 percent for the week ending April 14.

Yet rates on 30-year mortgages are still considered good and have stayed below 6 percent for all but two weeks this year. That has helped to propel home sales to record levels in June.

Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing a home mortgage, averaged 5.38 percent this week, compared with 5.34 percent last week. This week's rate also was the highest since the middle of April.

"Long-term mortgage rates will more than likely rise over the next few months, albeit modestly compared to shorter-term rates," predicted Frank Nothaft, Freddie Mac's chief economist.

Given all this supposedly great economic news in the United States, why do polls show that most people think the economy is in bad shape? The following wire service article provides a clue:

US workers struggle to cope in new economic reality

By Alister Bull

Thu Aug 4, 2005 1:58 PM ET

ST. LOUIS (Reuters) - Laid off from an auto factory assembly line two weeks before Christmas, Gary Asnell is still jobless and doesn't care to hear about the virtues of retraining as he struggles to keep a roof over his family's head.

"They say it's a great opportunity to go back to school. But I've got to juggle to find a job to pay the bills, make the house payments and feed the children," said Asnell, a 44-year-old father of three.

In the face of rabid global competition and outsourcing of work to cheap-labor countries like China, nearly three million American manufacturing jobs have been lost since 2000.

Those at the sharp end of this process now often face serious pay cuts or retraining to qualify for jobs in industries that have vacancies which may still not pay as much as they were making before.

In the heart of the U.S. Midwest, St. Louis, Missouri was an archetypal factory town. Twenty five years ago, 40 percent of all of its high-paying jobs were in manufacturing, according to a March study by the Federal Reserve Bank of St. Louis.

But in the last 10 years, it has lost 63,000 manufacturing jobs. Today, the industry provides just 3 percent of all job vacancies, a recent Job Openings Survey from the University of Missouri found, while health care, social assistance and the hospitality industry deliver 60 percent.

Getting a well-paid position in any of these areas could easily demand a trip back to the classroom. Even for the young, the process is tough.

Jessica Fitter was lucky. Just 22 years old, she worked at the same plant as Asnell. She is now taking a two-year accounting course and expresses optimism about her future.

Yet even once she graduates, Fitter said the pay will only just match what she made before, at least until she gains more experience. Meanwhile, the loss of income has been hard.

"Our budget took a big hit. We have to move, we can't afford our place anymore," she said. Her partner was laid off with her and is now making much less building houses.

They were among 237 workers cut at Lear Corp. in St. Louis when the company, which makes seats for Ford and Lincoln SUVs, halved the assembly line shifts last Dec. 17 as Ford slashed demand from a nearby plant. As it happens, Ford Motor Co. is in the process of shedding another 900 St. Louis workers.

Everyone who lost their job at Lear was offered the chance to retrain. But this option does not appeal to everyone.

"The curriculum, you need to do it, you just don't have it anymore," said Asnell. "I had the prerequisites 15-20 years ago, but I don't now."

With his schooling a distant memory and bills to pay right now, Asnell knows his well-paid union job has vanished and the work that remains will pay barely half as much.

"We were up to $19 an hour (at Lear), but most of the jobs now pay $7-$8 an hour. Ten bucks is considered the upper limit and if you make $12 you're on top of the world," he said.

Of the 8,000 entry-level jobs identified in the University of Missouri study, 45 percent paid less than $8 an hour and the next 25 percent paid less than $15 an hour.

Even if he wanted to take a lower-paid job, Asnell finds that prospective employers don't want to take the chance of hiring. He said they usually look at how much he earned before, inform him that he wouldn't be happy making less and close the interview.


Officials from President Bush on down somberly acknowledge the process of globalization is sometimes painful and demands a national effort to improve education and skill development.

But among people dealing directly with the fallout of this upheaval in the U.S. industrial base, the truth for older workers is that their standards of living may never recover.

At the state level, dedicated teams are working hard to ease the transition back to work and can claim some success.

"It really is walking someone through a grieving process," said Donald Holt, executive director in the St. Charles County, Missouri career center, where many of the state's job losses from the and auto industry have fallen.

His staff offer all manner of support for displaced workers and will also pay for retraining up to a point.

Yet even with jobs available in the St. Louis area, high demands for math and English literacy means that workers who left school several decades ago often have problems.

"It's an issue and we have to deal with it. You run into it with your older clients... who went in (to the factory) aged 18 and stayed for years. It is very hard for them to go into just about any occupation now without computer skills," Holt said.

Any new job in modern manufacturing demands some level of math and computing skills that many older workers just do not possess. Not that there are many manufacturing jobs out there.

Well-paid opportunities exist, particularly in health care, but they demand a solid grasp of math, physics and biology.

"In Kansas City, we had a pilot who went into radiology -- we paid for the retraining -- and he's started at $24 an hour. That's compared with $20 an hour as a pilot," said Don Rahm, a work force development specialist with the Missouri Department of Economic Development.

Still for those who see little prospect of making such a transition, there is a powerful sense of abandonment and anger at a culture that has chewed them up and spat them out.

"How much money do you have to make to make you happy?" demanded Asnell. "Sure, I understand how our economy works, but how many people do you have to crush for your company to be happy with what it is making?"

And, lest you think that these displaced workers don't know as much as the experts, here is an expert with his eye on the big picture:

Strength and Subjectivity

Max Fraad Wolff is a Doctoral Candidate in Economics at the University of Massachusetts, Amherst.

August 4, 2005

As second quarter numbers are digested and expectations are ratcheted up, selective focus reigns supreme. The Peoples Bank of China (PBoC) decision to delink exclusively from the US Dollar, and the most recent profit and personal income numbers have gone unexamined and largely unpriced. Despite all this, our dominant three indexes have all underperformed our sub-accurate leading inflation measures. That must be why so many are so confident in their up revised prognostication. Just in case major macro events still interest you, I have cobbled together some thoughts on epic making recent developments that are particularly hard to spot through rose colored glasses and froth.

Personal income data, reported by the Bureau of Economic Analysis (BEA) on August 02, 2005 was terrifying. No, I don't mean that we have valiantly reached a national savings rate of 0%, although that is truly frightening. I mean that what everyone thinks of as personal income went up .2% not .5% in June. Wage and Salary disbursements went up a whopping .2% and supplemental income went up an astonishing .3%. Ouch! Where did the feds get that .5% headline number? Proprietors' income with inventory valuation and capital compensation adjustment was up a strong 2.0% in June. Proprietor's income grew at 400% its three year average rate while wage and salary income grew at 50% its anemic three year growth rate. Buckle up American Business the public is flush. Well, perhaps the next best thing, they spent like they were. Perennially undeterred by affordability, America went shopping for expensive durable goods. June spending on these expensive items came in just under 300% of its three year average growth rate. I guess folks are bullish given housing's great returns. Adjusted rental income was down 5.5%.

Now that the usual reports of beating expectations are in for better than three quarters of the S&P500 we can do some taking of stock. Yes, most firms (60%) beat expectations as they now do every quarter. Although earnings growth was strong in the second quarter, profit growth rates are decelerating and are expected to continue to slow for the rest of this year.

No one is talking about an ominous but interesting series of recent reports and polls on Brand America. Business for Diplomatic Action, a consortium of concerned business leaders, has been raising concern and warning about a global turning away.

Several recent polls reveal a growing hostility toward the US and this seems to be beginning to affect the perception of our businesses. The Anholt-GMI National Brands Index shows declining regard for the US outside simply our foreign policy. Most recently the US ranked 11th for overall perception thanks to low opinions of our culture and populace. A recent poll of 1004 Americans conducted by Foreign Affairs and Public Agenda discovered that a clear majority of Americans have become worried about the way America and her citizens are perceived around the world. Will earnings estimates remain immune to such sentiments?

Last but not least, the prestige and position of the US dollar declined last month. The much anticipated and quantitatively anti-climactic revaluation of the Yuan slipped into the past tense on July 21, 2005. While a modest 2.1% revaluation against the dollar failed to impress many, the real story is China's delinking, rapidly followed by Malaysia's decision to follow suit. Although China's move was much trumpeted as beneficial and a sign of our influence, I beg to differ. China is almost as influential an importer of raw materials as it is an exporter of finished goods. I see no reason brutal internal competition and the mortal need to grow exports may not result in the pass through of import cost savings to lower export prices. Where is that discussion? China and other nations must now change the composition of their currency reserves. They and Malaysia clearly need to reallocate reserves away from the dollar. Who else will follow? In addition, following on the rancorous dispute- with much political involvement in both nations- over Unocal, China's desire for contested global assets and acquisition currency will only grow. What does that portend?

In short, with just shy of the 70% of 2005 in the history books, the consensus is that all is well and getting better. Will this subjective view soon be subject to revision?

Wolf has put his finger on the crucial issue: subjectivity versus objectivity. People, cultures, and empires come to grief if they remain in the grip of subjective thinking. One symptom of this is the focus on oneself and the ignoring of others. Subjective thinking can also lead to wishful thinking, where bad news is discounted and power leads one to conclude that things are the way one wants them to be. The Thomas Friedman-type globalization cheerleading is a good example. James Howard Kunstler points out that 21st century globalization depends on peace and cheap energy. Steel and cars are very heavy. Transporting them halfway across the world used to cost more than it did to produce the goods. According to Kunstler, taking either leg of globalization away would eliminate it:

Globalisation is an anomaly and its time is running out

Cheap energy and relative peace helped create a false doctrine

James Howard Kunstler

Thursday August 4, 2005

The big yammer these days in the United States is to the effect that globalisation is here to stay: it's wonderful, get used to it. The chief cheerleader for this point of view is Thomas Friedman, columnist for the New York Times and author of The World Is Flat. The seemingly unanimous embrace of this idea in the power circles of America is a marvelous illustration of the madness of crowds, for nothing could be further from the truth than the idea that globalisation is now a permanent fixture of the human condition.

Today's transient global economic relations are a product of very special transient circumstances, namely relative world peace and absolutely reliable supplies of cheap energy. Subtract either of these elements from the equation and you will see globalisation evaporate so quickly it will suck the air out of your lungs. It is significant that none of the cheerleaders for globalisation takes this equation into account. In fact, the American power elite is sleepwalking into a crisis so severe that the blowback may put both major political parties out of business.

The world saw an earlier phase of robust global trade run from the 1870s to a dead stop in 1914. This was the boom period of railroad construction and the advent of the ocean-going steamship. The great powers had existed in relative peace since Napoleon's last stand. The Crimean war was a minor episode that took place in backwaters of Eurasia, and the Franco-Prussian war was a comic opera that lasted less than a year - most of it the static siege of Paris. The American civil war hardly affected the rest of the world.

This first phase of globalisation then took off under coal-and-steam power. There was no shortage of fuel, the colonial boundaries were stable, and the pipeline of raw materials from them to the factories of western Europe ran smoothly. The rise of a middle class running the many stages of the production process provided markets for all the new production. Innovations in finance gave legitimacy to all kinds of tradable paper. Life was very good for Europe and America, notwithstanding a few sharp cyclical depressions and recoveries. Trade boomed between the great powers. The belle époque represented the high tide of hopeful expectations. In America, it was called the progressive era. The 20th century looked golden.

It all fell apart in 1914. Historians are still baffled about what really brought on the first world war. What did France or Britain really care about Austrian archduke Franz Ferdinand, heir to the throne of a country already in deep eclipse? There were no active contests over territory at the time, not even in the Asian or African colonies. And yet the diplomatic failures of that fateful summer led to the great slaughter of the trenches, the death of a substantial portion of the younger generation, and a virtual nervous breakdown of authority in politics and culture. It would take a depression, fascism, and a second world war to resolve these issues and a new round of globalisation did not ramp up again until the mid-1960s.

It may be significant that the first collapse of globalisation occurred as the coal economy was transitioning into an oil economy, with deep geo-political implications for who had oil (America) and those who might seek to control the other major region closest to Europe that possessed it (then the Caspian, since Arabian oil was as yet undiscovered). The first world war was settled by those nations (Britain and France) that were friendly with the greatest producer of oil most readily accessed. Germany was the loser and again in the reprise for its poor access to oil. Japan suffered similarly.

We are now due for another folding up of the periodic global trade fair as the industrial nations enter the tumultuous era beyond the global oil production peak, which I have named the long emergency. The economic distortions and perversities that have built up in the current era are not hard to see, though our leaders dread to acknowledge them. The dirty secret of the US economy for at least a decade now is that it has come to be based on the ceaseless elaboration of a car-dependent suburban infrastructure - McHousing estates, eight-lane highways, big-box chain stores, hamburger stands - that has no future as a living arrangement in an oil-short future.

The American suburban juggernaut can be described succinctly as the greatest misallocation of resources in the history of the world. The mortgages, bonds, real estate investment trusts and derivative financial instruments associated with this tragic enterprise must make the judicious goggle with wonder and nausea.

Add to this grim economic picture a far-flung military contest, already under way, really, for control of the world's remaining oil, and the scene grows darker. Two-thirds of that oil is in the possession of people who resent the west (America in particular), many of whom have vowed to destroy it. Both America and Britain have felt the sting of freelance asymmetrical war-makers not associated with a particular state but with a transnational religious cause that uses potent small arms and explosives to unravel western societies and confound their defences.

China, a supposed beneficiary of globalisation, will be as desperate for oil as all the other players, and perhaps more ruthless in seeking control of the supplies, some of which they can walk to. Of course, it is hard to imagine the continuation of American chain stores' manufacturing supply lines with China, given the potential for friction. Even on its own terms, China faces issues of environmental havoc, population overshoot, and political turmoil - orders of magnitude greater than anything known in Europe or America.

Viewed through this lens, the sunset of the current phase of globalisation seems dreadfully close to the horizon. The American public has enjoyed the fiesta, but the blue-light special orgy of easy motoring, limitless air-conditioning, and super-cheap products made by factory slaves far far away is about to close down. Globalisation is finished. The world is about to become a larger place again.