Signs of the Economic Apocalypse, 6-9-08

From SOTT.net:

Gold closed at 899.00 dollars an ounce Friday, up 0.8% from $891.50 for the week. The dollar closed at 0.6340 euros Friday, down 1.4% from 0.6430 at the close of the previous Friday. That put the euro at 1.5774 dollars compared to 1.5552 the week before. Gold in euros would be 569.93 euros an ounce, down 1.0% from 573.24 at the close of the previous week. Oil closed at 137.84 dollars a barrel Friday, up 8.0% from $127.59 for the week. Oil in euros would be 87.38 euros a barrel, up 6.5% from 82.04 at the close of the Friday before. The gold/oil ratio closed at 6.52 Friday, down 7.2% from 6.99 for the week. In U.S. stocks, the Dow closed at 12,209.81 Friday, down 3.5% from 12,638.32 at the close of the previous Friday. The NASDAQ closed at 2,474.56 Friday, down 1.9% from 2,522.66 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.91%, down 14 basis points from 4.05 for the week.

The ten-dollar rise in the price of oil on Friday combined with the almost 400 point drop in the Dow has everybody spooked. The U.S. jobs report for May came out showing an alarming drop in jobs. Rising energy and food prices have people frightened and the mainstream media is doing nothing to stop the panic.

Job Losses and Oil Surge Spread Economic Gloom

Peter S. Goodman

June 7, 2008

The unemployment rate surged to 5.5 percent in May from 5 percent — the sharpest monthly spike in 22 years — as the economy lost 49,000 jobs, registering a fifth consecutive month of decline, the Labor Department reported Friday.

The weak jobs report, coupled with a staggering rise in the price of oil — up a record $10.75 a barrel to more than $138 — unleashed a feverish sell-off on Wall Street, sending the Dow Jones industrial average down nearly 400 points. The dollar plunged against several major currencies.

Investors’ recent hopes that the United States might yet skirt a recession sank swiftly in the face of gloomy indications that the economy is gripped by a slowdown and pressured by record fuel prices.

For tens of millions of Americans struggling to pay bills, the jobs report added an official stamp of authority to a dispiriting reality they already know: A deteriorating labor market is eliminating paychecks just as they are needed to compensate for the soaring cost of food and fuel, and as the fall in house prices hacks away at household wealth and access to credit.

“It’s unambiguously ugly,” said Robert Barbera, chief economist at the research and trading firm ITG. “The average American already knows that gas prices are up a ton and it’s really hard to find a job. Sally and Sam on Main Street are already well aware of this, and that’s why sentiment surveys are lower than they were in each of the last two recessions.”

…The report fleshed out how economic troubles that began with falling home prices have rippled out to other areas of the economy — to shopping malls, grocery stores and home improvement outlets. As merchants cut payrolls in response to declining business, that takes purchasing power out of the economy, reinforcing a downward spiral of retrenchment.

Professional and business services — which include lawyers, accountants, architects and management consultants — led the way down in May, shedding 39,000 jobs, according to the report. Construction declined by 34,000.

Manufacturing lost 26,000 jobs. Retail payrolls shrank by 27,000 and transportation and warehousing by 10,500. Finance and insurance lost 3,700 jobs, amid continuing worries that more red ink lies in wait for banks.

Here is Newsweek which for years was telling us not to worry:

Why It’s Worse Than You Think

For months, economic Pollyannas have looked beyond the dismal headlines and promised a quick recovery in the second half. They're dead wrong.

Daniel Gross

Jun 7, 2008

The forgettable first half of 2008 is stumbling to a close. On Friday, the Labor Department reported that American employers axed 49,000 jobs in May, the fifth straight month of job losses—an event that signals a recession sure as the glittery ball dropping on Times Square augurs a New Year. The report, which inspired a 394-point decline in the Dow Jones Industrial Average Friday, was the latest in a run of bad news. Auto sales, the largest retailing sector in the U.S., were off 10.7 percent in May from the year before. And housing? Ugh. Nationwide, according to the Case-Shiller Index, home prices in the first quarter fell 14 percent.

Yet hope springs eternal that the second half will be better than the first. Economists polled by the Federal Reserve Bank of Philadelphia in May believe the economy will grow at an annual rate of 1.7 percent and 1.8 percent in the third and fourth quarters, respectively. Lawrence Yun, chief economist at the National Association of Realtors, tells NEWSWEEK that "home sales and prices in most of the country will improve during the second half of 2008." (Yun is the Little Orphan Annie of forecasters. He's always sure the sun will come out tomorrow.) Last month, Treasury Secretary Henry Paulson said, "We expect to see a faster pace of economic growth before the end of the year."

The cause for optimism: the U.S. has called in the economic cavalry, which has responded in textbook fashion. The Federal Reserve has aggressively cut interest rates, bringing the Federal Funds rate down from 5.25 percent last September to 2 percent. Earlier this spring, Congress and President Bush, in a rare moment of bipartisan accord, passed a stimulus package, which will shove nearly $100 billion into the pockets of American consumers by mid-July.

But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news—a credit crunch and the global commodity boom—are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11.

As it seeks to regain its footing in the second half, the U.S. economy faces two significant obstacles, neither of which was evident in 2001. The first is entirely homegrown: the self-inflicted wounds of the promiscuous extension and abuse of credit in the housing and financial sectors. The second is a global phenomenon that has comparatively little to do with American behavior: rampant inflation in commodities such as oil, food, and steel. These trends have conspired to inflict genuine economic pain and deflate consumer confidence. The Conference Board's Consumer Confidence Index in May slumped to a 16-year low…

Last November, retired school principal Barbara McGeary, 75, of Camp Hill, Pa., switched from a Toyota Rav 4 SUV to a Prius. But the savings she realizes are eaten by a higher food bill. "When I go to the grocery store, I see prices have doubled on some of the things I'm purchasing," she says. Last year she paid $3.99 for a container of about two dozen brownies. Now that they're retailing for $8.49, she bakes her own. McGeary and her husband are also eating at home more than ever. "Restaurants, of course, have had to increase their prices," she says.

While the housing and credit crisis is homegrown, the higher prices for high-octane gasoline and corn chips are effectively imports. Historically, or at least since the end of World War II, if the U.S. sneezed, the world caught a cold. When we used more gas, oil prices rose, and when we used less gas, oil prices fell. As GM vice chairman Bob Lutz points out, "Usually petroleum prices were the first to react to a severe U.S. slowdown." In the past it would have been unthinkable for oil to spike if Americans were cutting back.

Many factors, from a weak dollar to rising speculation, are behind the higher commodity prices. But at root, $4-per-gallon gasoline and $20-per-pound steaks are largely a function of the changing economic geography, and the diminished stature of the U.S. Last January, the talk of the World Economic Forum in Davos (aside from the locale of the Google party) was the prospect of "decoupling"—the notion that India and China could maintain their breakneck economic growth rates even if the U.S. pooped out. Five months later, the global economy seems to have decoupled faster than Jessica Simpson and John Mayer. The world is growing without us. "My impression is that China and India both have sufficient domestic demand-led growth to continue to have vibrant growth even if the U.S. has a sustained period of difficulty," former Treasury secretary Robert Rubin tells NEWSWEEK. Producers of commodities are enjoying the fruits of higher prices. Sorry, Tom Friedman, the world is no longer flat. "It is upside down," says Mohamed El-Erian, co-CEO of bond mutual-fund giant PIMCO. "The growing robustness of the emerging economies enables them to step up to the global plate at a time when the U.S. has to take a breather in order to put its financial house in order." This rampant global economic growth—more people eating better, more people driving, more people using electricity—is translating into higher prices at the Stop & Shop…

Now whenever the mainstream media moves all at once in the same direction, it’s hard not to be suspicious. It may be that they are trying to channel the anger that U.S. citizens are beginning to feel away from Anglo-American capitalism that has left most people at the mercy of the economic elements and towards rivals to the Anglo-American sphere. As the media tries to explain to U.S. citizens why prices are going up in the midst of a bad recession, they are turning to the “decoupling” thesis. That other countries are growing so fast and are so much less dependent on U.S. demand that they can drive prices up even as U.S. consumers have less to spend.

Amid economic slowdown, signs of new world order

Mark Trumbull

Jun 2, 2008

The world economy is cooling this year thanks to a slowdown in the United States, but something new is playing out: This slowdown is serving to amplify a shift in financial power toward Asia and developing nations.

Countries such as China and India are now big enough to help guide the global economy. In the past, a sharp downshift in the US and Europe would decisively slow the rate of global growth.

This time, emerging markets appear poised to grow collectively by 6.7 percent this year, according to recent forecasts by the International Monetary Fund. As a result, the IMF sees world gross domestic product (GDP) growing 3.7 percent, even though the US might experience a recession.

The US economy remains the world's mightiest. But even for Americans, this new economic order has immediate implications:

•Policymakers at the Federal Reserve must worry about upward price pressures for food and fuel – driven largely by rising demand in developing nations. That problem calls for tighter monetary policy, while the domestic consumer slump calls for the opposite policy.

•Demand for US exports from these new markets is providing a helpful cushion for growth, yet trade tensions could be an issue in the US presidential election.

•Money from emerging markets is playing an increasingly important role in the US financial system.

"We have a new pecking order in the world economy in terms of influence on global growth and economic power," says Michael Cosgrove, an economist in Dallas. "[Historically] we would see oil prices fall with a slowdown in the US and Europe…. That no longer holds."

The dynamism of the "BRIC" bloc – Brazil, Russia, India, and China – is not new, but their stunningly rapid rise in this past decade is now being tested in the laboratory of tough times.

For consumers and workers worldwide, what's playing out is a tug of war between two opposing problems.

First is the weakness in the US and some other advanced nations as a housing slump and related credit squeeze hits households. That's dragging GDP growth down on all continents.

Second is inflation, a symptom of the strength of emerging nations. Their demand for commodities explains much of the surge in fuel and food prices worldwide. It's this problem that is, at present, taking center stage as a global worry.

"The good news here is that the standard of living for a lot of people is improving," says Mr. Cosgrove, publisher of the EconoClast newsletter. But for now, "the bad news is that it pushes up prices."

What's changed in the world economy is not just the rate of growth of countries labeled developing or emerging. It's also the size of their economic output.

"What's different this time is that the emerging market economies have been growing so rapidly that they've emerged," says Ed Yardeni, an economic forecaster at Yardeni Research in Great Neck, N.Y. "They've become very large."

Now, these nations are accounting for more than half the world's economic growth in a given year. And, when measured in terms of the domestic purchasing power of their incomes, these countries are also approaching half of global economic output, according to IMF figures.

This makes it a different world from just seven years ago, the last time the US was in a recession. Then, America's nosedive brought global GDP growth down to 2.2 percent in 2001. Considering the expectation that GDP should keep pace with population growth, that was in effect a worldwide recession.

Oil prices were not a concern then. But growth in developing nations fell sharply to 3.8 percent from 5.9 percent in 2000.

This year, by contrast, the IMF forecasts a recession in the US but growth well above 6 percent in developing countries – down just a percentage point from last year.

Recession or not, how the American economy fares depends partly on trends in emerging markets.

One issue is cash supply. Historically, emerging economies are importers of capital. Now, "sovereign wealth funds," investment funds controlled by developing nation governments are helping US banks survive mortgage-related losses. More broadly, nearly half of US capital inflows over the past year and a quarter came from China, Brazil, Mexico, and Russia, according to Bank of America.

Emerging economies are also influencing monetary policy. The Federal Reserve has been lowering interest rates to stave off a banking crisis. But rising commodity prices mean the Fed has to be ready to fight inflation with higher interest rates.

Economists at Merrill Lynch predict that the current global economic cycle hinges on when monetary authorities in creditor nations – many in the developing world – clamp down on inflation.

Other economists caution against viewing emerging economies as being in the driver's seat. "The US is still the biggest by far," says Jay Bryson of Wachovia Corp in Charlotte, N.C.

He predicts that inflation pressures will abate as the world feels the cooling effect of the slowdown in US and Europe.

Developing nations are also trading more than ever, offsetting the US slowdown. But these trade ties are also controversial, especially with China.

A backlash against trade with developing nations is possible in the aftermath of the US election this fall.

It's a thorny political question – how to deal with policies that may not help every worker or that help some nations more than others. "Before, say, 1985, the United States got the majority of the gains from trade" with other nations, says Cosgrove. Since then, he reckons, "the US has a smaller share of the gains from trade."

Trade remains helpful for America and the world, but the danger is that voter psychology is shifting, he says.

In that regard it is interesting that there was coverage of a speech by the president of Russia blaming the U.S. for the economic problems of the world. Are people in the U.S. being prepared for expanded war? Will economic issues replace the worn-out “war on terrorism” as an excuse?

Medvedev puts blame on US for financial crisis

Neil Buckley and Catherine Belton in St Petersburg

Jun 7 2008

Russian president Dmitry Medvedev on Saturday blamed the US and its banks in large part for provoking today's financial crisis - and pushed for a role for Russia in finding a way out of the turmoil.

Mr Medvedev warned that growing "economic egoism" had contributed to global problems including rising food prices, but singled out the US for particular criticism for its role in triggering a global economic slowdown.

"Failure to take proper account of the risks by the biggest financial companies in combination with an aggressive financial policy by the world's biggest economy led not only to corporate losses," Mr Medvedev told the St Petersburg Economic Forum, a showcase for Russia's growing economic clout.

"The majority of people on the planet, unfortunately, have become poorer. And that is noticeable not only in the economies of poorly-developed countries but in the economies of the most advanced states."

The new Russian president's comments echoed in milder form and in the economic sphere the criticisms by his predecessor, Vladimir Putin, of US attempts to dominate world affairs. They were made to thousands of delegates at an event Russia has aggressively promoted in recent years to the point where it rivals the World Economic Forum in Davos in size and its pulling power for senior global executives.

Mr Medvedev said the turmoil provoked by the subprime crisis had exposed the inadequacy of US-dominated international financial institutions to regulate properly today's complex financial markets.

"The inconsistency of the USA's formal role in the world economic system with its real capabilities was one of the central reasons for the current crisis," he said. "However large the American market is and however reliable the American financial system, it is not capable of substituting for global commodity and financial markets."

Mr Medvedev added that it was an "illusion that one country, even the most powerful, can act as a global government".

Carlos Gutierrez, the US commerce secretary who spoke at the forum, said the US had not engaged in "economic egoism" and was a strong believer in free trade.
"Globalisation is in the national interest," he added.

Mr Medvedev repeated calls made by Mr Putin at the same event last year for a reform of financial institutions so they properly reflected the weight of powerful emerging markets. And he said Russia could help resolve today's crisis, noting its recent economic history of decline in the 1990s followed by nine years of recovery meant it had largely avoided the problems of more developed economies.

He called for promotion of Moscow as a financial centre, development of the rouble as a reserve currency, and for acceptance of investment overseas by Russia's emerging corporate heavyweights. He said such investment was "neither speculative nor aggressive".

He proposed Russia should host an international conference of heads of financial companies and leading financial analysts to tackle problems in global markets, which he suggested might become an annual event.

"Russia today is a global player," Mr Medvedev said. "And understanding our responsibility for the fate of the world, we want to take part in the formation of new rules of the game, though not because of often-cited 'imperial ambitions' but because we have the appropriate capabilities and resources".

Some executives said the forum showed Russia was once again becoming a leading economic power.

"Every time you interact with President Medvedev, you can't help coming away with the feeling that Russia's going to play an increasingly important role as an economic and political force and as a leading nation of the world," said Muhtar Kent, president and chief operating officer of the Coca-Cola Company. Mr Kent was among about 90 chief executives who held an hour-long meeting with the Russian president on Saturday evening…

As this plays out it is important to remember that the rise in energy prices may be an artificially induced bubble. As Stef Zucconi puts it:

Peak Oil…

Hmmm

One of those subjects which has the potential to divide Conspiraloons straight down the middle.

There are many loons out there who believe that much of the apparently fascistic, aggressive behaviour of Western governments, especially the US and the UK, is driven by the impending shortfall in global energy supply and the need to find excuses to occupy other countries and to make preparation to clamp down on dissent at home when the lights start going out.

I’m not one of them.

I’m one of those loons who believes that, yes, finite energy resources are an issue but, no, that's not the reason why the price of oil, and food, have been going through the roof recently.

I once worked for a company which traded, amongst other things, cocoa. The firm was a real cocoa trader; buying cocoa from real suppliers, transporting it in real ships and selling it on to real customers. And every now and again, I and half a dozen other people who made a living counting stuff would fly around to take stock of our company’s prodigious physical holdings of the yummy brown stuff. Our firm held onto a ridiculous amount of cocoa – much more than it needed to meet its immediate or even medium term requirements. Some of the stocks were literally years old.

The reason why the firm held onto so much was because, thanks to the involvement of hedge funds and other speculators, the cocoa futures market had become an absolute f*****g joke. It was simply cheaper and less risky to sit on tens of thousands of tons of physical stock rather than expose the company to a market being mugged by characters who were using the futures exchanges as a (rigged) casino.

The futures pricing of cocoa had become, just like the price of oil or wheat today, no more a product of genuine supply/ demand issues than the price of Dutch tulips 400 years ago or Florida real estate every thirty years or so.

And it comes as no surprise that very few people given a mainstream voice are connecting the very close timing of the collapse in property speculation, central banks printing shed loads of lovely inflationary money and the sharp rise in commodities prices.

It shouldn’t be rocket science but the obvious conclusions seem to be beyond the grasp of people who make a living pretending to tell the rest of us what’s going on.

Honourable exceptions include…

· Some bloke writing in The Herald (as one commentator puts it ‘This is dangerously close to real journalism’)...

"What is particularly worrying about this speculative boom is that a number of the big Wall Street banks are up to their oxters in it. Goldman Sachs, for example, which recently forecast that oil would reach $200 a barrel, is heavily involved in the oil futures market. It stands to make a lot of money if its forecast comes true. So do other investment banks. These institutions control billions of dollars of oil contracts, and it takes only a few of the big banks to move in a given direction for the entire market to shift. The extraordinary financial power of the banks is one disturbing aspect of globalisation"

And whilst I do understand why some fellow loons are concerned about future shortages of oil and food I do suggest that they keep their minds open to the possibility that real structural issues are being manipulated and used as Trojan horses to facilitate some serious financial rape and pillage.

Or to quote the big boogeyman being used to scare Americans,

Ahmadinejad says market full of oil, prices artificial

Tue Jun 3, 2008

ROME (Reuters) - The global market is "full of oil" and rising crude prices are being artificially driven by forces trying to further their geopolitical aims, Iranian President Mahmoud Ahmadinejad said on Tuesday.

"While the growth of consumption is lower than that of production and the market is full of oil, prices continue to rise and this situation is completely manipulated," Ahmadinejad said in his address to a U.N. food summit in Rome.

Without naming countries, the Iranian leader said "hidden and unhidden hands are at work to control the prices mendaciously to pursue their political and economic aims."

He said the goal of "powerful and international capitalists" was to keep the price of oil and energy "artificially high" in part to justify new explorations in the North Pole and the deep seas.

In an apparent reference to the United States, he said the international community should have a mechanism to force "the bullying powers to resort to peace and amity instead of occupation and warmongering...."