Signs of the Economic Apocalypse, 6-12-06

From Signs of the Times, 6-12-06:

Gold closed at 612.50 dollars an ounce on Friday, down 5.0% from $643.00 at the previous Friday’s close. The dollar closed at 0.7912 euros on Friday, up 2.2% from 0.7741 for the week. The euro closed at 1.2640 dollars compared to $1.2918 at the end of the week before. Gold in euros would be 484.57 euros an ounce, down 2.8% from 497.99 for the week. Oil closed at 71.60 dollars a barrel, down 1.6% from $72.75 at the close of the previous week. Oil in euros would be 56.65 euros a barrel, up 0.6% from 56.32 euros at the end of the week before. The gold/oil ratio closed at 8.55, down 3.4% from 8.84 for the week. In the U.S. stock market, the Dow Jones Industrial Average closed at 10,891.92 on Friday, down 3.3% from 11,247.87 at the close of the previous Friday. The NASDAQ closed at 2,135.06, down 4.0% from 2,219.41 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.97%, down two basis points from 4.99 for the week.

The big news last week was the continued drop in stock prices.

U.S. Stocks Stumble, Ending the Worst Week Since April 2005

June 9 (Bloomberg) -- Inflation concerns sent U.S. stocks lower, ending the market's worst week since April 2005, after May import prices rose twice as much as economists forecast.

The government report fueled speculation that the Federal Reserve and central banks worldwide will stunt economic growth by raising interest rates to curtail inflation. Global equity markets had their biggest weekly losses in almost four years.

“Investors are still trying to sort out inflation and interest rates and how much further they're going to go up,” said Franklin Morton, who helps oversee $19 billion at Ariel Capital Management in Chicago. “Until we get some clarity, markets are going to be flat to down.”

Texas Instruments Inc., the world's biggest maker of mobile-phone chips, led the retreat. Citigroup Inc., citing slowing demand for handsets, cut its 2007 earnings estimate a day after the company raised forecasts for this quarter.

The Dow average dropped 46.90, or 0.4 percent, to 10,891.92, bringing its decline over the last five days to 3.2 percent. It fell 3.6 percent in the week ended April 15, 2005. The Standard & Poor's 500 Index lost 5.63, or 0.5 percent, to 1252.30, the lowest this year. The Nasdaq Composite Index declined 10.26, or 0.5 percent, to 2135.06, a level not seen since November.

The S&P 500 slipped 2.8 percent this week, also the biggest loss since April 2005, as speculation higher rates will push the economy and profits into a recession increased. The index, which briefly gave up its 2006 advance this week, has now dropped 5.5 percent from a five-year high set on May 5. The Nasdaq lost 3.8 percent this week.

Global Drop

Morgan Stanley Capital International's Europe, Australasia, Far East Index, or EAFE, declined 5.9 percent this week. The drop in the index, a benchmark for U.S.-based international investors, was the biggest since July 2002. The MSCI Emerging Markets Index tumbled 8 percent the last five days, as investors fled riskier assets.

Import prices rose 1.6 percent in May, on higher commodity prices, the Labor Department said. Economists expected a 0.7 percent increase. Last month's rise, coupled with April's 2.1 percent jump, was the biggest two-month gain in prices for imports since 1990. A shortfall in trade widened to $63.4 billion from $62 billion in March, the Commerce Department said.

The Fed has raised the benchmark U.S. rate to 5 percent from 1 percent in two years and comments from central bankers including Chairman Ben S. Bernanke this week suggest policy makers may lift them again this month. Bernanke said on June 5 that inflation is accelerating and “unwelcome.”

Central banks for Europe and India were among those that raised lending rates this week…

Gold has dropped sharply from its peak, but it is actually up 5% for the quarter so far. I am not sure why gold has dropped so far recently. A correction was to be expected but this is a sharp correction. Maybe it dropped due to a perceived lessening in the likelihood of a U.S./Israeli/Neocon attack on Iran. Or because the prospect of higher interest rates increases the value of currencies, thereby reducing the value of precious metals and commodities. Putting both things together—the rise in interest rates and the supposed lessening of the likelihood of war in Iran—we can see some reasons for the U.S. dollar’s sharp rise against the euro last week.

Dollar Posts Biggest Weekly Gain Since November Versus Euro

June 9 (Bloomberg) -- The dollar gained this week by the most since November against the euro as Federal Reserve speakers suggested they will raise interest rates this month to keep inflation in check.

Traders pushed the dollar to the highest in a month against the euro after a government report showed U.S. import prices climbed in May. The U.S. currency has rallied five straight days against the euro as mounting expectations for higher U.S. rates led traders to exit bets on a dollar decline. Fed Chairman Ben S. Bernanke led a chorus of central bank officials this week signaling concern over inflation.

“What's given the dollar a lift this week is the Federal Reserve's hawkish campaign,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. The remarks fueled “a large-scale unwinding” of holdings in emerging-markets and a flight to the dollar, he said.

The U.S. currency has advanced 2.1 percent this week to $1.2642 per euro at 4:13 p.m. in New York, and reached $1.2598, its strongest since May 4. The U.S. currency fell to 114.01 yen, from 114.24 late yesterday, when it reached 114.72 yen, the strongest since April 27.

For the week, the dollar has gained 2.1 percent versus the yen, the most since March.

The 1.6 percent increase in U.S. import prices followed a 2.1 percent surge the month before, the Labor Department said today in Washington. The jump compared with a 0.7 percent increase that was the median forecast in a Bloomberg survey.

Fed Odds

The dollar has rebounded about 2.5 percent from a 13-month low of $1.2979 per euro, reached June 5, and 4.6 percent from an eight-month low of 109 yen, touched last month.

Traders are pricing in about an 84 percent chance the Fed will boost its key rate a quarter-point to 5.25 percent in its June 28-29 meeting, up from 48 percent at the end of last week, interest-rate futures show.

The Fed has lifted its benchmark rate from 1 percent in June 2004. The European Central Bank raised its key rate by a quarter- point yesterday to 2.75 percent, the third increase since December. The Bank of Japan has kept its benchmark rate near zero since 2001. Fed Governor Donald Kohn yesterday described recent inflation data as “troubling.”

Euro losses accelerated yesterday after ECB President Jean- Claude Trichet refrained from using the word “vigilant” in describing the bank's stance toward inflation, suggesting a slower pace of rate increases than some analysts had predicted.

Trade Gap

The U.S. currency also got support today as the U.S. trade gap, the amount by which imports exceed exports, widened to $63.4 billion in April from $61.9 billion in March, the government said. The shortfall was less than the median forecast of $65 billion in a Bloomberg survey.

The report may damp concern the dollar needs to weaken to narrow the U.S. trade shortfall. The dollar has dropped about 2 percent versus the euro and yen since the Group of Seven nations on April 21 called on China and other Asian nations to let their currencies strengthen to help shrink global trade deficits.

A narrower deficit “could add to the momentum of dollar bears having to take a back seat,” said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Mellon Financial Corp, before the report.

The dollar weakened to a record $1.3666 per euro in December 2004, partly on concern the U.S. would fail to attract enough international investment to compensate for the shortfall in the current account, the broadest measure of trade. The trade deficit reached a record $68.5 billion in January.

Investment Flow

The deficit in the current account, a measure of trade, services, tourism and investments, widened to a record $224.9 billion in the fourth quarter.

The U.S. needs to attract about $2.5 billion a day to fund the gap and keep the value of the dollar steady. Net holdings of Treasury notes, corporate bonds, stocks and other financial assets increased by $69.8 billion in March, less than February's $90.5 billion, the Treasury Department said last month.

This week's 2 percent gain in the U.S. Dollar Index is the biggest since March 2005. The index gauges the dollar's value against a basket of six currencies, including the euro and yen.

Lehman Brothers Holdings Inc. advised investors to stop betting on a drop in the U.S. dollar in the next few weeks on speculation the Fed will lift rates this month.

Now were Bernanke’s signal that he wants to fight inflation by raising interest rates and Bush’s diplomatic overtures to Iran both done precisely for this reason? To prop up the dollar and stop the rise in commodities? Most likely the two events are not related, but it is fun to speculate.

More generally, though, there is no doubt the long-term health of the imperial economy is tied to success in war and success in war has eluded the neocon leadership. I’m not counting the psyops fake killing of the already-dead-for-years fake terrorist leader al-Zarqawi as any kind of success. The playing of this card probably indicates how desperate they are. Of course we will know they are really in trouble (or the election is really near) when they announce they have killed the already-dead Bin Laden.

For a better view of the real success of the Global War on Terrorism, or whatever it is they are calling it, and some of the economic costs, here is Paul Craig Roberts:

You'd Better Shut Up
War Criminal Nation
By Paul Craig Roberts

June 9, 2006

Faced with mounting civilian carnage, both from war crimes committed by demoralized and broken US troops and from the raging civil war unleashed by Bush's ill-fated illegal invasion of Iraq, the House Defense Appropriations Subcommittee has decided to waste another $50 billion to continue the lost war for five more months. Our elected "representatives" are so in thrall to the powerful military-industrial complex that no amount of American shame, pariah status and military defeat can shut off the flow of taxpayers' funds to the merchants of death.

Bush's wars in Iraq and Afghanistan are costing hard-pressed US taxpayers $300,000,000 per day! These wars are lost. Yet, imbecilic members of Congress are in the process of funding the war for another year. Multiply $300 million by 365 days and you get $109,500,000,000. These are not the full costs. The huge figure does not include the destroyed equipment, destroyed lives, and long-term care of the maimed and disabled.

Gentle reader, are you getting enough vicarious pleasure from the slaughter of Iraqi women and children to justify this price tag? Is murdering "ragheads" that important to you? If so, you are one sick person, just like every member of the Bush administration.

US forces in Iraq and Afghanistan have killed far more civilians than they have resistance fighters. Bush administration spokespersons are crowing that they have killed Musab al-Zarqawi in an air strike. But al-Zarqawi was an al Qaeda leader, not a member of the Iraqi resistance. Al-Zarqawi's death will have no affect on the outcome in Iraq.

Far more important is the news that civil war in Baghdad alone claimed 1,400 deaths last month. Perhaps even more important is the news that the Taliban's resurgence has forced the Bush administration to launch more than 750 air strikes in Afghanistan in May. That is 25 air strikes per day! It is a foregone conclusion that most of the casualties are women and children.

America is drowning in the shame of war crimes. One monstrous slaughter of civilians after another, each denied and covered up until brought to light by photos and eye witnesses. The once proud US Marines, unable to defeat the resistance that is picking them off one by one, is now a frustrated, demoralized force that is getting even by murdering 3-month old babies and old women…

It may be that the dollar is being propped up solely by short term investments for the interest rate return. Surely knowing the facts laid out by Roberts in the above article, and those of us in the United States should make no mistake in thinking that the rest of the world, especially investors and central banks, is as fooled as we are about the reality of the situation in Iraq and Afghanistan, would make the longer term prospects for the dollar much weaker. And any backing down by Bush from confrontation with Iran is too late to stop the losses the U.S. is enduring in Iraq and Afghanistan. So why, even given the short term trends, is the dollar worth any thing at all? The Cryptogon blogger, “Kevin,” raised this question in a discussion with a reader:

Robert wrote:

Subject: Comments on Gold/Stocks?I enjoy the financial commentary on your blog, and while it may not be the central focus, I am curious to hear your thoughts on the current trends in gold and stocks. I am a novice at best when it comes to economics and market analysis, but it would stand to reason that gold would be trending upwards as stocks decline and investors look for safer investments. At the moment both gold and stocks are trending down. Perhaps there really is no logic left in economic decisions?

I wrote back:

Hi Robert,

How the system is up at all right now is a COMPLETE mystery to me. Specifically, I don't understand how the U.S. dollar is still viable, with the national debt closing in on $8.4 trillion... It's probably sheer voodoo and black ops at this point.

Don't get me wrong, I'm glad that it's up, because it would be difficult for my wife and I to establish our permaculture farm with the global economy in a state of collapse. After all, the same economic system that produces tanks, rockets and bombs also produces chicken wire.

We need chicken wire.

I think that the rest of the world will continue to prop up the U.S. for as long as possible, simply because the rest of the world has gotten used to exchanging its goods and services for funny money. How and why that state of affairs came to be is a long and complicated story that doesn't even matter anymore; not at this late stage of the game. But once it's clear that the scam is unraveling, the U.S. will just print money at will. Paying off the massive debt will then simply be a matter of zapping X trillion nearly worthless U.S. dollars into the central banks of America's creditors.

The global economic system could, should and probably would collapse at that point.

When will it happen?

Who knows? Certainly not me. Maybe it will never happen and the U.S. national debt will be allowed to go to $50 trillion or $100 trillion and it will be new Hummers and iPods for all!

Or... Maybe the collapse is happening now, in slow motion. Look at the growing list of states that are divesting away from the dollar. Russia is the latest and most influential state to do this. Why is that happening? Because the U.S. has a bright future ahead?

The U.S. dollar works because people pretend that it's real, and nuclear weapons, thirteen carrier strike groups, and millions of soldiers make it so. As more and more major actors wake up to the fact that the dollar represents a total joke, and that the joke isn't funny anymore... Watch out.

Over the last few decades, the most powerful states in the world have lashed themselves to the mast of a sinking ship. It's that simple. And I'm not being cavalier about it! I don't feel financially secure because my money is out of the U.S. I firmly believe that, when the U.S. goes down, it will take the rest of the global economy down with it…

I think Kevin may be onto something with this: “Or... Maybe the collapse is happening now, in slow motion.” Susan C. Walker, writing about the effects of a drop in housing prices, quoted a historian of the Great Depression:

The real problem is that markets can move much slower than we expect, which makes it all the more difficult to decide what to do. For reference, historian John Brooks wrote about how it felt to live during the Great Depression . In one word, it was "surreal." Keep in mind his description of the 1929-1933 experience:

[It] came with a kind of surrealistic slowness … so gradually that, on the one hand, it was possible to live through a good part of it without realizing that it was happening, and, on the other hand, it was possible to believe one had experienced and survived it when in fact it had no more than just begun.

Or, as Bob Dylan put it: “There’s a slow, slow train comin’ up around the bend.”