It's only hypothetical - I truly hope so

Friday, April 29, 2005

After tuning into CNBC (Europe) in the morning I always need a good dose of reality. The best way to do this is to jump to Financialsense.com for commentaries and Stormwatch for the underlying fundamentals. I especially value Richard Daughty aka Mogambo Guru for his contributions that manage to combine knowledge, wits and irony in a style that has yet to be contested.
Seeing from my webstatistics that my steadily growing readership is more or less equally split into market pro's and non-economists who try to make common sense from the information overload we all suffer from, I want to point out the most worthwhile piece of writing for the latter group that will probably give you a very good understanding why interest rates are the most important driving force in today's global economy.
Jump to The Day After Tomorrow Part 1 and Part 2, written by Jim Puplava and Frank Barbera for some fantastic weekend reading. And don't forget to settle at least some of your debts on Monday!

A quick glance shows most data to be disappointing

A glance on today's economic indicators shows no relief for the bulls:
Employment Cost Index: Actual 0.7%, Consensus 1.0%, prior 0.8%
Personal Income: Actual 0.5%, Consensus 0.4%, prior 0.4% (revised from 0.3%)

Personal Spending: Actual 0.6%, Consensus 0.4%, prior 0.7% (revised from 0.5%)

Consumer Sentiment: Actual 87.7, Consensus 88.9, prior 92.6

Chicago PMI: Actual 65.6, Consensus 62.5, prior 69.2

Deducting food and energy prices, the core PCE index, Alan Greenspan's favored inflation measure, rose 0.3 percent, topping its 0.2 percent February gain. Year over year, the price index for personal consumption was up 2.4 percent, versus an increase of 2.2 percent in February, Reuters reported.
Consolidating these figures with the previous shocking indicators of the last days there is only one conclusion permitted: The economy in general is on a downward path.
Never mind the positive earnings surprises of the mega corporations we have seen recently, the mom-and-pop stores on Main Street USA will be feeling the pinch once interest rates rise more. And that will be as soon as next week.
The consumers' willingness to permanently spend more than they earn - as the figures above show - will come to a screeching halt once the coming interest rate hikes of the Federal Reserve begin to bleed through to their ARM's (Adjustable Mortgage Rates) and the effective interest they pay on their credit card balances.
They will have no other choice than to reduce their spending. The U.S. personal saving rate declined to 0.4 percent in March from February's 0.5 percent, hitting its lowest level since October 2001. At the same time, first-quarter worker compensation posted the smallest increase in six years, just 0.7 percent, as hefty bonuses paid on Wall Street at the turn of the year evidently were not matched on Main Street, the Reuters report said. In this context I want to point readers to this marketwatch story on consumer's attitude to car buying.
Stocks and bonds have continued their seesaw trend in view of the mass of data, though one could not say that they were not clear enough. At the end of the day the market will have proven again that it is always right. The Dow is set for the biggest monthly decline in three years. The US dollar took some strength from the weak economic indicators. How long will the argument hold that a fundamentally weak currency will become more "attractive" by higher interest rates when inflation will bring the result that the greenback buys less of the same than a year ago. Sorry, common sense should make everybody shiver in view of this theory. Hypothetical question: Would you change your relatively hard currency against a bundle of Ghanaian Cedis just because they carry higher interest?
Market experts are now leaning a 100 percent on the side of another 25 basis points Fed funds rate hike on March 3. With inflationary pressures mounting the FOMC will have no other choice if they want to maintain their credibility in terms of keeping prices stable. But thinking about it all again right this moment, I think a 50 basis points hike could be a better answer. Sure, it would first turn out to be a shock, sending bonds and shares into a freefall for a day or so. On the other hand this would reinforce the belief that the Fed is serious about keeping the economy in positive territory as it would send a clear signal to the White House that the huge deficits will come at a cost in the end. The Fed has to move fast to get interest rates back into the neutral zone if they want to have some dry powder left, should the economy nosedive. And this cannot be ruled out anymore when one looks at the vanishing production capacities in the US. Looking at Japan one sees what happens to a country where all the interest-ammunition was used up prematurely. Japan sees no way out of stagflation for the next two years.
Great economies, like Germany before it began outsourcing its jobs in order to keep pension fund managers and their religious belief in shareholder value theories, have always had a base in the production sector. Now Germany groans under an unemployment rate of 12 percent. I cannot remember whose quote it is, but is still valid, "we cannot live from serving hamburgers to each other."
Looking into European store shelves, there are not many American products on sale. US cars are considered gas-inefficient monsters with terrible roadhandling. Whirlpool appliances are considered a luxury when Italian Zanussi dishwashers break down far less often. And the Apple Powerbook I am writing my posts on states on the backside "designed in California, produced in Taiwan".

The mystery of European Dow futures trading

Before I will sum up today's economic releases - which continued to show more bumps on the dire economic straits lying ahead of us as I had predicted correctly in this post - in a second post, I want to throw in this short piece about "The mystery of European Dow futures trading".
As my daily observations start at least six hours earlier than those of investors living in the new world, I am baffled almost every morning by the behaviour of the Dow future in early European trading.
It has become a regularity for the Dow future to trade anywhere between 30 to 60 points higher than its closing level of the preceding day, no matter what the expectations are. And in early European morning trading there are no other guidelines for the markets of the old world than the closing levels of the world's biggest capital markets on the other side of the Atlantic ocean.
Today's action was a particular good example as the Dow closed at its daily low on Thursday. From a chartists perspective this should warrant not more than a steady, if not lower, level of trading. (I am limiting my observations here to the Dow future, but the other index futures follow suit most times.) Despite the unsure expectations for today's developments on Wall Street in light of the massive amount of important economic data, CNBC's squawkers were visibly delighted to be able to point to the positive course the index futures were taking in Europe. If I only would be able to be soooo optimistic about the longterm outlook for shares, I'd be busy buying equities all day long. Question remaining here: For how many days?
But let me turn back to the original issue. Instead of coming up with a lot of suspicions that would all end with the thought of market manipulation, I hope to get lots of comments for these pricing patterns I am observing.
Is there anybody out there in the blogosphere who can soothe my fears that there might be some market manipulation which I conclude from the fact that volumes in European trading are only a fraction of those mountains of money being bet everyday in the states? Or are my anecdotal observations really are only the result of my proneness to see bad forces at work whereever the words profit and loss are involved. Either way: May I repeat my invitation for comments on this issue!

Oil - all the facts you need to know

Thursday, April 28, 2005

Exactly two weeks ago I had promised to come up with an extensive piece on oil and its implications for business, people and the markets. Well, honours and a wreath for being faster go to Barry Ritholtz who has compiled a fantastic series on numerous facts about oil. Visit his blog bigpicture or go directly to his series about oil here. I hope to be able to come up in the near future - I know I promised that before;-) - with an article focusing on the global political implications the fight for the most sought-after commodity has.

Slower growth today - worse indicators on Friday

The GDP growth rate of 3.1 (previous 3.8) percent and a jump in jobless claims from 299,000 to 320,000 has lessened fears that the Federal Reserve will come up with more than a 25 basis points tightening at the May 3 FOMC meeting. Looking at Friday's economic indicators, the FOMC will probably have no long discussion before voting for the next measured step unanimously. That is, if they prioritize economic growth above everything else and have no intention to slow the accelerating pace of inflation and consumer expenditures which is still expected to top the growth in personal incomes, according to a Bloomberg survey. The slower GDP growth reported today cannot be attributed to Americans getting more tightfisted as the Employment Cost Index is seen rising to one percent in the first quarter of 2005, thereby topping the last rise of 0.7 percent in the previous quarter. Malicious note here: State and government employees enjoyed a total income rise of 18.5 percent since Bush came into office while private sector workers got 15 percent more in the same period. In March 2005 personal incomes are seen to have risen 0.4 percent in March, while consumption with a forecasted plus of 0.5 percent contradicts recent reports that Americans are cutting back on their credit card or other debts. I wonder if anybody will contradict my forecast that consumer sentiment, which already fell in March to 92.9 (February 94.1) will come in a tad lower than the consensus forecast of 88.5.
The problems therefore do not seem to have changed in the recent past: America imports too much while producing and exporting too little. This results in something called the trade deficit and lucky us, we are still 24 days away from that figure which plausibly will not show an improvement, given the high oil prices, which only retreated in the current week.
The huge reversal in the trend for durable goods orders this week, still ringing in my ears, does also appear to be a negative leading indicator for the napalm-index, excuse me, the Chicago NAPM-Index (National Purchasing Managers Index), which is seen at a consensus level of 63 after 69.2 percent last month.
The stock market has absorbed today's negatives surprisingly well with a decline of 65 points in the Dow so far, thanks to a string of good quarterly earnings. No big surprise that Exxon-Mobil made a decent bundle at these oil prices. And the bond market obviously takes relief from the growth slowth that warrants a continuation of the FOMC's "measured" pace that could even come to a halt later this year if wages and production continue their lame performance.

GDP figure's impact will be limited

Less than two hours ahead of the release of the mother of all lagging economic indicators, the US GDP figures for the first quarter of 2005, has already left its mark on the markets. With the Dow Future falling 25 points in European trading and similar retreats of the S&P 500 and the Nasdaq futures it seems as if market participants have already focused on the the expected weakening economic trend in the current second quarter. Any positive impact from the figure will be limited therefore.
With first quarter GDP expected to have slowed to nominally 3.5 (previous quarter 3.8) percent, any higher figure could send both stock and bond markets tumbling as this would imply that the FOMC will have good reason to hike the Fed Funds rate on May 3 because of still solid growth on the one hand and the need to keep oil-induced inflation in check. A lower figure though could heal the wounds on the bond market and result in a further flattening of the yield curve. The administration and the Fed cannot afford to further suffocate an ailing economy by burdening it with higher interest rates.
By the way, and don't forget the deflator (i.e. inflation): While a Bloomberg survey results in a consensus number of 2.2 (2.3) percent, I doubt it will be that low, given the huge rise of crude oil and gasoline prices in March.
Beware of a number below expectations though. As consumers have to set aside an ever bigger portion of their wallets contents for 2.20 dollar gasoline (per gallon) as commuting will not stop just becauser of higher pump prices, personal spending may have come down recently. This will pull share markets lower, consumers being the mainstay of the US economy - the other part the defense sector. Capital investments will not have helped to shore up the economy either as yesterdays shocking reversal in durable goods orders has shown.
Never get fooled by core figures (ex energy) in price indices. Oil is not only the stuff you fill into your tank. Oil is plastic, oil is pharmaceuticals, oil is the bitumen road you are travelling on. Oil is a good part of your car parts. Discarding energy from prices is a trick coming out of the magic hats of statisticians who like to please inflation-weary politicians. Or do you still drive a car with a metal dashboard? The well-televised shoulder-rubbing between George W. Bush and Saudi Arabia's Crown Prince Abdullah may have calmed markets on Tuesday, but promises to ratch up Saudi oil production capacity to 12.5 million barrels per day by 2009 from a current upstream rate of 9.5 million rate leaves the Prudent Investor wondering why they do not use their capacities at a higher rate rate already.
In order to underpin the growth rate, jobless claims would have to continue last weeks downward trend. But all surveys see the number growing by around 30,000. The problems are here to stay.

Growth retreating to the bear's cave

Wednesday, April 27, 2005

Durable goods orders came in far below expectations. With a minus of 2.8 percent, the biggest since November 2002, it undershot the analysts consensus of plus 0.3 percent to such an extent I am still grasping for words.
As these were March figures, they are most likely to destroy hopes that GDP growth, to be published on Thursday, really declined to only 3.6 (3.9) percent on a year-to-year basis.
With the strongest declines seen in the transportation and computer sector, the hopes of the Federal Reserve for an uppick in technology related capital investments, stated in the FOMC minutes from March 22, vanish like the whiff of Chanel No.5 in a commuter train. Also note that the February figure, then supporting the stock market for a couple of points upwards, was revised to minus 0.2 percent after a provisional figure that had showed 0.5 percent growth initially. Growth finally retreats to the bear's cave, as the majority of the most recent figures has shown - consumer confidence, housing starts and the Philly Fed Index - to name only the three most recent shockers that put a lid on Wall Street's half hearted recovery from the year's lows.
The spate of bad numbers is to continue this week. Besides a now probably already much more cautious expectation for Thursday's GDP figures, consumer sentiment and the NAPM index on Friday are likely to be more nails in the bull's coffin.
From the view of the technician the charts don't offer any reason for optimism either. The S&P 500 has distanced itself far from the key resistance at 1163 that used to be a formidable support since the beginning of 2005 after the triple top above 1200. Next support zone to be found around 1100, then 1000 and then? Dow watchers see the next support at the psychological level at 10,000, followed by a support zone between 9800 and 9750. But with more fundamentally negative surprises in the bushes, see todays previous post, I think we are headed for a down year in stocks.
Bonds will not be able to escape the bear's claws either. Inflation figures have no other way than up once business has no other way than to pass on its higher oil and material bills to consumers.
The backed-by-nothing dollar took a little dive after the durable goods orders shock. I want remind my readers that it is the strength of an economy that gets reflected in a currency. Higher interest rates have nothing to do with the attractiveness of a currency. In doubt about this correlation? Take a look at the development of the Zimbabwe dollar. That currency startetd out a rate of 55:1 to the dollar after independence. Conclusion: It's never the economy but always politics that destroy a currency.

Counting the bubbles

Tuesday, April 26, 2005

Despite the majority of the latest corporate earnings results coming in above expectations, a slipback of crude oil prices, the stability of the greenback and surprisingly good numbers in the housing sector, capital markets seem not to be able to take advantage of these factors.
Quite the opposite. Since Fed Chairman's Alan Greenspan introduction of the "conundrum" into common man's vocabulary, the world seems to be poised to discard all good news with the excuse that all positive macro and micro economic figures that hit the newswires are just a snapshot of the recent past that might worsen any moment. The Fed itself has begun to worry about the sustainability of the expansive path. Governor Donald Kohn's speech from last Friday, "Imbalances in the US economy", certainly does not sparkle with optimism.
The reason for caution is not unfounded as a quick count of the bubbles circling around the economy indicates.
The conundrums dominating capital markets appear to be manifold.
* Growth bubble
Forecasts for US economic growth in the first quarter - to be published on April 28 - center around a rate of 3.6 procent after 3.8 percent in the last quarter of 2004. This would also slow the annual rate from a brisk 3.9 to 3.6 percent, enabling the Fed to maintain their pace of "measured" rate hikes, weren't it for the fears that inflation will nevertheless accelerate because of steady high oil prices. The Fed's rate decision on May 3 will also be made a lot easier by the stability of the dollar which benefits from the homemade factors that keep the Euro and the Yen in check, namely the sluggish growth outlook in the corresponding economies. European economic research bodies today halved their growth outlook on the basis of high oil prices that are here to stay. And Germany, the biggest economy in the Euro zone suffers from the still firm Euro that hampers exports of the world champion in exports. That title will soon be awarded to China. Japan suffers from deflation, aggravated by the fact that its economy is much more dependend on oil exports than any other industrialized country in the world and around 90 percent of these imports come from the Middle East region. So any disruption of this oil flow could reduce the latest annual economic growth forecast of 1.6 percent to shambles.
* Liquidity bubble
With interest rates globally still far below their longterm averages - as the assumed 6 percent rate for the German 10-year bund futures at their introduction 10 years ago shows - the investment community has been forced into a hunt for high yields. The billions flowing into Argentinan debt papers that went into default are only the most recent example that the treasure hunt invariably induces the risk of Murphy's law: What can go wrong, will go wrong. Fixed income investors all over the world struggle with the fact that short term interest rates lag inflation rates. With this I do not mean official inflation rates which are kept at artificially low levels that misrepresent the actual pinch on consumer's wallets.
* Bond bubble
With central banks having cemented key rates below inflation the ever growing amount of surplus capital that does not get put into economically stimulating "real" investments are forced into debt paper that yields them effectively negative interest on the short end of the yield curve and ridiculously low real positive rates on the long end. The flattening of the yield curve, last seen in the early 1980's does not stem from the fact that investors expectations for future inflation are so low. In my opinion it is rather an expression of the liquidity bubble described before. Fixed income managers are simply drowning in money entering the market they have to invest at these levels. So far they had the luck that the tide of new money has only been growing higher. As long as the world is willing to adhere to the directives of the Fed this situation is here to stay. But what if bond buyers decide to take the direction of longterm rates into their own hands and force the biggest issuer of government paper to come up with better terms at one of the next auctions? Don't get caught in that stampede!
* Deficit bubble
While the US government has been spending a billion dollars every 8 hours and 12 minutes, a speed never seen before in history, all pleas by financial policymakers to return to a more responsible handling of taxpayer's money seem to fall on deaf ears only. The US is still in the pleasant position to attract 80 percent of the world's surplus savings, thereby it can ignore these calls for a stricter spending policy. A good part of these inflows comes from the recycling of the glut of petrodollars caused by uptrending oil prices the OPEC countries enjoy and for which they basically have no other outlet so far. The same applies to the trade-generated inflows inundating China which has to put these growing mountains of money to some interest bearing use. It took the once wealthiest nation on the globe only 23 years to become the biggest debtor ever in history. And there are NO signs that the administration wants to reverse course, given the budget plans described in the previous post.
* Housing bubble
Record numbers for new and existing house sales are only on the forefront to be taken as sign that the real estate market in the US - and to a high extent in Europe too - is still healthy. This could change soon. According to the Mortgage Bankers Association's latest survey, applications for U.S. home mortgages decreased last week. Its seasonally adjusted index of mortgage application activity fell 1.6 percent to 672.6 in the week ended April 15. The reason for this can most likely be explained by the slow but steady rise of home mortgage rates that will squeeze out speculative buyers first. A mortgage rate survey by home finance firm Freddie Mac found the average 30-year at 5.93 percent in March, up from 5.63 percent in February; the rate was 5.45 percent in March 2004. Most at risk are those home "owners" with variable rate mortgages. Any hike in the Fed's key rates will immediately translate into higher monthly installments for them. In combination with an expected overall slowing of the economy - wages are already stalling - in the second half of the current year this could lead to another rally - a rally in foreclosures.
* Consumer Credit bubble
While central bankers have been demanding that Americans start to save more, the opposite has been happening. The savings rate hovers still below 1 percent of disposable incomes. Total oustanding consumer credit came in at 2.122 trillion dollars, according to the latest Fed release. Although the growth rate of indebtness hass slowed to an annual rate of 3.1 percent, in 2000 it was a staggering 10.7 percent, Americans have taken on 417 billion dollars more in debt since 2000. This rise comes on the wings of the housing bull market which allowed Americans to leverage their homes more and more, with banks more than willing to fill their wallets with these monies created out of the belief that house prices will go only one way - up. Sure, this time it's different. Like in Japan in the mid 1980's, when the aggregate value of Japan's real estate, a size that equals California, surpassed that of the whole US...
* China bubble
I love to hear managers saying it is cheaper to enter the Chinese market at a high cost than not to be part of the action at all. It didn't bode well for all of them. Like GM, who recently announced a first quarter loss of 1.1 billion dollars. Or take Volkswagen: In the first half of 2003, 80 percent of its profits came from its Chinese operation. Goldman Sachs forecasted last week that the German car maker, who has not seen a profit in three years, will lose 1.4 billion Euros in China in 2005.
While the country surprised with economic growth of 9.5 percent in the first quarter of 2005, one wonders about the sustainability of this growth rate that is way above the 25-year average of 8 percent. Reminds me of the Asian tigers with their runaway growth in the 1990's. Their steadily appreciating currencies brought this to a crashing halt in 1997, resulting in both a recession and a devaluation of their currencies.
* Euro bubble
European investors have been overwhelmed by the inversion of the $-€ exchange rate since the introduction of the common currency. But the praise of the common currency has recently worn off. The mood-shift can be mostly attributed to the fact that economy in the Euro zone has not lived up to its expectations. The softening of the stability pact, once seen as a guarantor for the stability of the currency, because of the hard times the Euro economy faces with the onslaught of China, has cast a shadow on the Euro. The continent does not have a recipe to come to terms with its record unemployment. The European Central Bank has recently warned it might raise interest rates to slow asset inflation. But in the light of growth rates beginning with a zero in most countries of the Euro zone this will be wishful thinking at best. The ECB will be forced to interest rates at some not too distant point in the future as inflation creeps ever deeper into consumer's wallets and interest rates are effectively negative in real terms. But higher interest rates are not a forerunner to a harder currency. Economic theory still telle the opposite. But who knows, maybe this time it's different. The US were also able to stabilize the dollar's fall by tightening interest rates. As long as the markets buy the argument...

US(SR) 6-year budget plan not very convincing - disturbing fine print

Friday, April 22, 2005

Before the downfall of the communist USSR economists regularly exchanged jokes about the gap between the Soviet regime's ambitious 5-year economic plans and the sad reality. A closer look at the 6-year budget plan of the White House could have the same effect, weren't it for the worrisome implications for the rest of the globe that does not exactly energize the houmorous part of the brain.
The longer term outlook, compiled by the Office of Management and Budget (OMB) in the White House, leaves the impression that the promise to halve the deficit by 2008 is nowhere taken seriously, except for the president's spokesmen who preach this mantra, ignoring the data given in the White House 6-year forecast. Please pay attention to the last footnote of this summary and its possible implications described at the end of this post.
This year's nominal GDP growth is estimated at 5.8 percent. Growth expectations for 2006 are anticipated marginally lower at 5.6 percent. For the following years up to 2010 growth estimates decrease one tenth of a percentage point every year whereas the deflator is forecasted on average with 2.4 percent. Oil prices have definitely spoiled this Soviet-style statistical optimism, proven by the fact that inflation averaged 3 percent in 2004 already and the latest numbers have been pointing to an acceleration of this trend. The Congressional Budget Office (CBO) estimates inflation still lower with an average of only 2.2 percent from 2005 to 2010, overshooting even the president's official optimism.
Attack on citizens wallets
Nevertheless the Bush administration sees high government revenue growth. Receipts in 2005 are expected to come in at 2.053 trillion $. That is 9.2 percent more than in 2004. Outlays for this period are seen increasing at an annual rate of 8.2 percent to 2.479 trillion, leaving the nation with a deficit of 427 billion.
In the following years the slogan seems to be "never mind the warnings of the Federal Reserve," which does not get tired to lament that the skyrocketing debt puts the US at considerable risk by getting ever more dependent on foreign savings. With a reduction of the budget deficit from last year's 412 to 251 billion dollars in 2008 this government already admits it won't meet its targets, which were anyway set at a quite feeble level. Aren't Republicans supposed to be more tightfistedt when handling taxpayers monies?
The Bush-approved figures forecast a steady revenue growth of around 7 percent for the years he will be in charge. National outlays are dressed down to annual growth rates of slightly less than 4 percent, mostly by maintaining the political bias against the economically weak.
Fiscal policy puts the burden mainly on American citizens while business is favoured at all costs, the figures indicate. In 2007 the acting president and his advisers will for the first time ever pull more than a trillion dollars out of peoples wallets. The growth expectations for income derived from taxing individuals hovers between 8.2 and 10.8 percent per annum for the remainder of Bush's term. In absolute terms that is roughly a 100 billion more every year.
Tax success for business lobbyists
Corporations will be relieved to see the forecasted decreasing intake in the form of company taxes. After a projected spike of 19.6 percent in the current fiscal year to 226.5 billion they can look forward to see a reduction of 2.7 percent in 2006. A couple of million for the lobbyists in Washington can result in billions of savings for companies, it appears.
Worth pointing out is also the fact that the proportion of corporate tax revenues compared to individuals taxes is decreasing at a fast pace. While corporation's contributions amount to 25.3 percent of individuals tax payments this year, their share will have fallen to 20.8 percent when this president goes out of office in 2008.
Bush's tax cuts will leave a nasty legacy for his successor in the White House. According to the OMB figures the tax cuts on dividends and capital gains from 2001 and 2003 will save this affluent clientele and small business owners 53.4 billion during his current term. But his successor will miss a staggering 1.036 trillion dollars from 2009 to 2015. Half of these tax cuts will benefit wealthy coupon clippers and inheritors and burden future budgets to a yet unknown extent.
Rising interest rates can turn into a disaster
In the last 23 years the US was seen as a reliable debtor, backed by the world's biggest and most innovative economy. Based on the unilateral aggression on the side of the US in Afghanistan and Iraq and the saber-rattling towards Iran and North Korea this could change. Looking at the 390 billion - and still expanding - budget of the Pentagon, one begins to wonder whether all foreigners are going to continue to support the US war machine at the same pace as in the past. It once could be turned against them. There are American military installations in more than 130 countries around the world. To quote Winston Churchill, "A nation's friends may change, but never its interests."
Suppose the Arab allies would stop to change their petrodollars into US Treasuries, big uncle Sam might be forced to change his mind rather quickly. US military bases in Saudi Arabia, now seen as a factor of stability, could be used to violently secure the flow of the black gold if relations worsen. Looking at the growing hostility against the US in many parts of the world, such events cannot be excluded anymore. I am not talking about tomorrow, but seeing tensions erupt all over the world these days (EU constitution, anti-Japanese protests in the Far East, Ecuador) on national and international levels that looked almost unimaginable a short time ago, we certainly are in for more negative surprises at the political front. Saudi Arabia has a bigger problem with terror than any other place. In the end every political struggle is about redistribution of wealth.
But it does not have to come to such a disastrous development to generate problems yet unknown for the US. Rising interest rates might be enough to push the US deficits and the economy over the cliff. Again the assumptions of the presidency are very tame. Ten year treasury paper, yielding 4,24 percent on Friday, is seen at a yield of 4.6 percent by year-end. The longer term forecast of a slow rise to 5.5 percent in 2008 may be very convenient for the purpose of drafting a deficit reduction, but might be far off from harsh economic realities the nation faces because of the twin deficits. The forecasts for 3-month T-bills are out of date as well with a rate of 2.7 percent for 2005, that rises to only 4 percent at the end of Bush's term. Given the latest speeches of Fed members there are higher rates on the way, although it is to be questioned how much room there really is, as can be observed on the softening stance about the solidness of growth. Higher inflation is inevitable as higher oil prices have already creeped through to producer prices, as the latest data shows.
A footnote could translate into hyper-inflation
Despite the lip-service towards attaining more budget discipline, gross federal debt will mushroom 24 percent to 9.9 trillion dollars until 2008 from a current level of 8 trillion and surpass the 10-trillion mark in 2009. Only 23 years ago the US was a net lender. History will credit president Bush with the fact that debts will have risen 74 percent during his two terms, if he performs to his own 6-year plan. No president before him ran up such a massive debt. Now the USA are the most indebted country in the world; but they are in the lucky position to pay the debts with their own money.
In this context the last footnote on the last table is highly disturbing. According to it the Federal Reserve banks held 700 billion dollars of federal securities at the end of 2004 and the public held 3.595 trillion in such papers. "Debt held by Federal Reserve Banks is not estimated for future years," it states dryly in small print. Since the Federal Reserve Banks print the money in circulation and sell it to the Treasury Department in exchange for government debt paper this could imply that the money-printing press will rotate faster and faster in the near future as this enables the government to turn to Fed banks as a lender of last resort with unlimited amounts of money - as long as they do not run out of ink and paper. Please read this and this and this post to get a better understanding of this matter that could result in a massive confidence crisis in the dollar and result in hyper-inflation.
For future reference - and to hold the administration accountable - here is a PDF-version of the longterm budget proposals. If somebody can point me to or send me such a 7-year plan beginning in the years 1999, 2000, 2001 and 2002, I would be very grateful to be able to compare the former forecasts with the actual outcome.

Bull trap

What a coincidence. The day after the Dow touched the incredibly important psychological 10,000 points level for a second or so, almighty Fed chairman Alan Greenspan had some reassuring words for a weary investor crowd. The economy still "appears to be expanding at a reasonably good pace", he said, was all it needed to send the Dow 206 points skyward. Sure, a continuation of the string of good earnings reports we have seen this week, the better than expected Philadelphia Fed survey and lower than expected jobless claims delivered some fundamental support in an increasingly volatile market.
The crowd on Wall Street's share market was cheering so loud that they therefore seem to have overheard his more cautious remarks that "the federal budget is on an unsustainable path," in which ongoing large deficits will inevitably lead to higher interest rates in order to keep foreigners supporting Bush's spending spree. Bond traders though picked up this far more important quote and sent bond prices tumbling downwards. The yield on the benchmark 10-year soared 9 basis points to 4.30 percent.
While the share market based its upturn on facts from the very recent past and neglected the fact that wages and salaries stayed flat in the first quarter, deducting 3 percent inflation from a 3 percent nominal gain, bond market participants looked forward and took notice of the 0.4 percent decline of the index leading indicators. 8 of its 10 components came in lower than a month ago.
With crude oil returning to price levels above 54 $ and therewith closing in on the average price in March of 54.63 dollars there are simply too many downward pointing factors as to assume that today's share rally could be sustainable.
Add Greenspan's worries about the aging baby-boomers and the resulting rise in retirement benefits which are more than likely to slow economic growth in the years to come, and we have all prerequisites in place to call todays stock surge in hindsight a daytripper on Wall Street. But a lot of shorts will have been squeezed out anyway by the 2 percent advance. The proverb that a bear market loves to feed itself on both bulls and bears gains credibility by such a strong move. It resembles last weeks relief rally after the publication of the latest FOMC minutes that didn't last longer than 17 hours.
Lawmakers will most likely again ignore Greenspans repeated pleas to finally get serious about trimming the budget deficit. Well, septuagenarians don't really have to worry about future budgets that will have to set aside an ever growing part of tax incomes for interest payments on debts generated now. But the rest of the country?
Paul Volckers concerns are still ringing in my ear. The longer the party keeps going, the worse the hangover will be.
Hanging on to the belief that the market is always right, whatever market participants wishes are, take note of the S&P 500 chart. Even after today's rally it is still below the former key support at 1163 points which has now turned into a resistance level. An absence of economic data will leave the market on Friday to itself. Its behaviour before the weekend will show how much confidence is really out there. I would not bet on the long side.

Current account balances show dramatic shifts

Thursday, April 21, 2005

A comparison of current account balances over the last eight years shows dramatic changes. In shorthand - as I am a little short of time today - the rich nations with their growing service sector industries lost out against the newly industrializing countries that have become the new centers of industrial action. Whereas the US current account deficit (CAD) grew from 120 billion dollars in 1996 to 666 billion in 2004, Asias CAD of 41 billion dollars in 1996 turned into a current account surplus (CAS) of 180 billion dollars in 2004.
Chinas CAS grew from 7 to 55 billion dollars in the reporting period which makes it all the more understandable that they resist any revaluation of their currency.
Even Latin America managed to turn its CAD of 39 billion dollars to a small CAS of 8 billion dollars. Argentina, which recently defaulted on its sovereign debt, saw a shift from a minus 7 billion to a surplus of 3 billion. This of course pales in comparison to the Middle East and Africa, whose CAS skyrocketed from one billion to 116 billion dollars in the said eight years. Don't get fooled though, the lion's share of this surplus went into the vaults of the OPEC countries. Africa remains the poor house of the world although this will change as the continent has most of its commodities wealth still below its soil, waiting to be explored for the benefit of the new industrializing countries.
Overall the so-called industrialized part of the world moved from a CAS of 41 billion to a CAD of 400 billion dollars. The so-called developing nations meanwhile turned their CAD of 90 billion into a healthy surplus of 326 billion.
The statistical discrepancy of 74 billion can be attributed to a lot of unproductive money sloshing around on the wave of capital market moves, seeking ever better rates of return, most of it parked in offshore banking centers. The Caribbean is not exactly known as a conglomeration of industrial powerhouses.
I am calling for a renaming of the world regions. Actually the industrialized nations should be called undeveloping countries as they produce less and less. The nations formerly called "developing" should from now on be called industrializing countries more accurately.
The western world will have to give up its arrogant stance in view of these numbers, having turned into net capital importers. Soon it will be Europe and North America knocking on the doors of governments in the more exotic places, begging for loans, as we spent ours already.

Inflation up - wages down - markets rollercoasting - problems mounting

Wednesday, April 20, 2005

Despite some positive surprises in corporate profits in the first quarter the problems for the American economy are mounting. Two weeks before the next FOMC meeting of the Federal Reserve US consumers got shot twice in their check-writing hand. Not only did prices rise 0. 6 percent in March vs. February which is the strongest advance since April 1999. Their pain gets aggravated by a real decrease of average wages at a monthly rate of minus 0.3 percent, leaving them with 0.9 percent less money in their pockets to spend.
Stock and bond markets went on a rollercoaster, pushed up and down between joy about solid corporate profit growth and fear about the acceleration of the inflation rate. US consumers account for 75 percent of economic activity.
Combine this with a new upturn of oil prices, the dramatic decline of housing starts reported the day before and no signs that the government is slowing its spending and not only the Prudent Investor comes the conclusion that the surfacing iceberg of problems could easily become too massive to be kept under control by the rate setting hand of the Federal Reserve.
Previous leaders have already voiced their concerns about the now rapidly unfolding events. Former "King of Wall Street" John Gutfreund said last Friday that "the US has been printing a lot of dollars recently" and criticized the Fed for raising rates "belatedly" in a Bloomberg TV-interview.
Greenspan's predecessor as head of the Fed, Paul Volcker, voiced his concerns in a contribution to the Washington Post. To quote Volcker, "I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars. I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change".
Volcker steered the American economy through its highest postwar inflation period in 1980 by raising interest rates aggressively, withstanding criticism that he would suffocate the economy. Listening, but not adhering to the wishes of politicians and business captains who will always vote for low interest rates, he managed to overcome the confidence crisis in the US and its currency within a difficult four year period. Volcker raised the Fed fund rate from 10.1 percent in Jan 1979 to a record high of 19.1 percent within 24 months, seeing the economy contracting every third quarter. His firm stance helped. Once Fed funds went back into the single digit range in October 1982, the economy went on a path of steady expansion again.
In hindsight Volcker was very successful by laying the base for the longest upturn of the stockmarket that began in 1982 and lasted until 2001. He hammered down annual inflation from a record high at 16.8 percent in January 1980 to a mere 2.4 percent in December 1986.
Today the Fed funds rate stands at a mere 2.75 percent while the annual inflation rate for March came in higher again at 2.6 percent. Producer prices accelerated ever faster since January too.
Lots of worrying data on Greenspan's desk
Alan Greenspan, giving testimony to the US senate on Thursday 16:00 CET about "budget process reforms", has indeed a lot of worrying data on his table to scratch his head about the short term course of interest rate policy.
If the FOMC rises interest rates too fast to avert a decline of the dollar, it will hurt the fragile economic expansion which is largely based on the growing use of home equity as consumers mortgage their property to ever higher levels. See the Prudent Bear chart library for evidence. If they continue the "measured" 25 basis point hikes the Fed might see its key interest rate lag behind the accelerating trend in inflation that could lead to the feared stampede out of the dollar.
Markets meanwhile see a flight to quality - real quality. Gold and silver have been inching up more than 3 percent over the last four trading days, easily outpacing any other paper asset class. So far there has not been a single period of rising interest rates that did not send stocks lower overall.

Real money: US will mint 24-karat coin

The United States Mint announced on Tuesday that it will develop a program to manufacture 24-karat (99.99 percent fineness) uncirculated gold bullion investment coins in early 2006. This will mark the first time that the United States Mint will produce 24-karat gold coins. Upon completion of a successful test strike, the designs, specifications, quantities and denominations will be considered. Possible themes for the images on the 24-karat gold bullion coins will be presented on April 28, 2005. The potential global market for 24-karat gold bullion coins is estimated at $2.4 billion.
"The United States Mint intends to match and exceed world class business practices with this new 24-karat gold bullion coin," said Director Henrietta Holsman Fore. "There is a demand, both here and abroad, for 24-karat gold coins. We want to meet this demand by providing the highest quality and most beautiful coins in the world, the standard that investors and collectors have come to expect from the United States Mint."
It is expected that the program will have two phases, starting with an investor-grade uncirculated 24-karat gold bullion coin, followed by a 24-karat numismatic collector proof coin. The Treasury Secretary would approve the designs, denominations and quantities of the coins.
The United States Mint is currently the world's largest manufacturer of 22-karat (91.67 percent fineness) gold bullion investment coins, as well as silver and platinum bullion coins. The United States Mint's 22-karat American Eagle gold bullion program will continue. The 22-karat American Eagle is the world's top gold bullion coin with 95 percent of sales occurring in North America. However, there is an international market for a 24-karat coin, which is becoming the industry standard.
Purchases of foreign-minted 24-karat gold coins represent almost a third of all gold bullion coins purchased annually in the United States market. Currently, 60 percent of all global bullion sales are of 24-karat gold products.

China would be stupid to revalue its currency

According to the rules of the IMF (International Monetary Fund) a developing country will only prosper by privatizing its national infrastructure, by making its currency freely convertible and by reducing the influence of the government on its markets which shall be opened up to foreigners.
China has been very wise not to adhere to this "advice". Remember how the Asian "tigers" were crushed into a recession because they did away with currency regulations in 1997? Thailand lost all its forex reserves in a matter of weeks after foreigners were allowed to participate in the currency, bond and equity markets by first driving up the Thai Baht and the Bangkok exchange and then selling it all short on a massive scale. Or have a look at Bolivia where the IMF demanded the permission for international participation in the Andean country's state owned companies as a precursor for strongly needed development aid. The result were soaring prices for water, gas and electricity to the point where the locals could not afford their daily need of drinking water anymore. After the privatization of the water companies the foreign investors did not even refrain from installing coin operated water taps: If you had money, you had water. If not, well look for drinking water elsewhere.
China has been smarter. Instead of returning international loans to the creditor countries by awarding the contracts to the said western multinationals, it only accepted limited joint ventures where full ownership will fall back to a Chinese entity after some time. Germany's BMW for example boasted recently about having built a car plant in China that emulates Bavarian quality standards.
This actually benefits the developing giant who will have the cake and can eat it too. Give it 20 years and the Chinese will have a huge pool of initially German-trained engineers and workers that will continue to manufacture wholly domestic cars. Thinking about China's laissez faire attitude to copyrighting it will be well within our lifetime that we will see "BMW" (BongMingWan) cars being rolled out on western markets that will sell for half of what a "Beamer" from Munich will cost then. The Far Eastern giant will not let its car market - already the biggest in the world - be dominated by foreigners.
The IMF's approach to developing the developing countries mostly benefitted only those multinationals getting the contracts, forced relocations were as well ignored as the environmental damage that came with the mega projects. China does it his way.
The loud demands of the G7 and especially the US for a deregulation of the Yuan fare the same fate. China's finance minister has already warned speculators not to bet on a revaluation of its currency. Basically he just parrots former US president Richard Nixon who used to say "the dollar is our currency but your problem". In the past the USA has successfully used exchange rates to shield its economy against foreign competitors. Right now the US exporters are profiting again from the weak dollar that gives them a solid competitive advantage. Being the only country in the world that repays all its debts with its own currency they cannot be interested too much in a stronger dollar as that would inflate their debt payments. Inflation is certainly the cheapest way out of its 8.8 trillion dollar debt that currently grows at a rate of more than 2 billion a day.
China learned one lesson from the currency markets wild gyrations in 1997: Don't lose your head in the markets, even if every market player is losing his. With billions of hot money waiting to enter the Chinese currency market on the wings of a revaluation this would only escalate China's difficulties in managing its stable growth on the current high level of 9 percent.
The formerly poor members of the world family meanwhile begin to question the influence of the US in international finance.
Recently the G24, an association of smaller developing countries, has requested more adequate representation in the IMF and the World Bank in the light of the fact that not the developing countries but the USA are the biggest international debtor nowadays.
Let two numbers speak for themselves: The political representatives of 250 million Americans are demanding that almost all global savings of more than 5 billion people end up in their hands to be spent mainly on a military apparatus that is considered oppressive in most corners of the globe - this will soon lead to a massive outcry towards a rethinking how the world's savings shall be distributed.

Those who enjoyed annual income growth of 5 percent, please raise your hands

Tuesday, April 19, 2005

The Prudent Investor begins to wonder whether the Federal Reserve enjoys itself too much with the punch bowl which it normally is expected to take away when the party gets going. A series of declining consumer confidence, now in it's fourth month, is according to Governor Susan Schmidt Bies' latest speech "favorable". Consumer spending, gauged by retail sales figures, which came in at a paltry .3 percent vs. expectations of .8 percent for March, is also on the expansive side, she said. But the best part is about personal debts and incomes. "It is true that households have taken on quite a bit of debt over the past several years. According to the latest available data, total household debt grew at an annual rate of about 10 percent between 1999 and 2004; in comparison, after-tax household income increased at a rate of about 5 percent over this period. This rapid growth in household debt largely reflects a surge in mortgage borrowing, which has been fueled by historically low mortgage interest rates, strong growth in house prices, and an increasing share of households owning their home rather than renting."
Citing from her speech, will please all those who now have roughly 30 percent higher incomes than in 1999, please raise your hands! Raise your hands please! RAISE YOUR HANDS, PLEASE! Didn't you hear me!? Why is nobody raising their hands except for that real estate agent and her banker in the far corner?
Let's try her other statement. Those who have 60 percent more debt than 1999, please raise their hands! Hey, what a happy crowd this must be, suddenly all arms are up in the air!
The growing number of American homeowners who are buying their houses with loans where they have to pay the interest only, hoping that a future sale of the house will bring a price that will cover the principal will at least be happy to hear that the Fed plans to stay on its measured pace of quarter point rate hikes, as the Fed sees the economic expansion on a solid pace.
Question here: Is an economy expanding when it borrows more than 2 billion dollars a day?
Higher interest rates can bring it all to an end rather quickly. As the Fed concedes, savings rates remain low at a level of around 1 percent of disposable incomes. Disposable income, that is after consumers paid their mortgage or rent, their health insurance and all other regular bills like electricity and so on.
Add in the higher gas and petrol prices and the outlook for the US economy, still the biggest in the world, is overshadowed by ever more problems. I liked a story in one of my favourite reads, the Wash. Post, NY and LA Times, that said that people were not able to move up into bigger homes because there were no takers for their by now grossly overinflated "starter" homes which are selling north of 250,000 dollars. If that effect ripples through to wooden houses selling now for a million on the east coast and the infamous NY apartments who have been selling at 1.2 million apiece, shareholders beware.
Consumer spending being the single most important pillar of the US economy with a share of 75 percent of all outlays will come to a grinding halt once interest rates move into the "neutral" zone that is described by economists at somewhere between 4 and 5 percent. Talk is about the Fed funds rate, not the consumer mortgage loan rates and credit card rates, which are way higher. Is this the reason Congress went for the new bankruptcy law because it is foreseeable that higher interest rates will suffocate millions of homeowners in the near future?
As long as the bank gets its money there should not be a problem. But credit card juggling has become a national necessity. The Survey of Consumer Finances (SCF) data shows that 18-to-24 year olds experienced on average about a 100 percent increase in credit card debt between 1992 and 2001.
Moreover, there are indications that some of these younger households are having difficulty managing their debt successfully. The 2001 SCF indicates that delinquency rates (one debt payment more than 60 days past due) were twice as high among households headed by someone less than 35 years old than for households in the 35-to-44-year age group. Finally, surveys continue to indicate that many workers are not currently saving for retirement, and many that are saving, by their own calculations, are not saving enough. The data from the SCF indicates also that among workers with a retirement savings plan, nearly 60 percent of workers aged 25 to 34 were covered by a defined-benefit plan in 1989; by 2001, this share had declined to 31 percent.
Not exactly what one can call the basis for an economic upturn.
But inflation does not stop just because consumers are not in the position to pay more for the same goods and services. As stated in an earlier post here, higher oil prices will inflate all other prices because all economic action is based on the consumption and resale of energy. And as you should know by now, four billion people in the developing countries with their desire for at least a small bike or car will likely more than offset any production increase the OPEC countries can manage in the next years.
Addendum: To get a graphic picture of the growing US household debts, go to Prudent Bear's chart library.

And these are only the economic indicators - beware of the earnings

Monday, April 18, 2005

After Wall Street fell out of the bed last week (as foretold), first an easy forecast: Asian and European stock markets have no reason not to follow the decline of the sickly mother of all bourses, given the weak economies in the Euro area. Germany and France are most likely to be the leaders on the downside since their unemployment figures of 12 and 10 percent respectively don't bode well for an upturn in consumer spending anywhere soon.
A look at the economic calendar for the coming week and the associated expectations that all indicators will point to a worsening of the economic picture do not raise much hopes for a significant slowdown of the demise of Wall Street.
Alas, since forecasts on the general economic indicators all point to a negative trend, they might not wreak as much havoc as last Fridays NY Empire State index did, when it came in way below estimates. Economists now should have shifted to much more cautious forecasts, thereby even undershooting the actual outcome, except for producer and consumer prices, due on Tuesday and Wednesday.
I am not swaying away from my opinion that official consumer prices still understate real inflation significantly because of factors explained in this post. The same applies to producer prices, as oil is more than just the energy needed to produce things and to transport them, but it actually is the product itself in most cases. Just look at the mouse under your palm and the veneer of the desk your arm is resting on and you will understand what I mean. And don't let yourself fool from CPI "ex food & energy", when exactly these two "ex"-items are the ones on which we spend a considerable part of our income and which are the most inelastic items in our spending patterns. The US is most likely to become a net importer of food this year so there are further increases to be expected in the future.
So far, so bad about the general economy. Now lets turn to the earnings numbers to be released this week. Sticking to the Dow components only, EPS estimates for 3M are seen up to 1,01 $ from 90 cents on Monday. On Tuesday, Coke (the beverage company) should report EPS of 43 cents, GM is seen at minus 1.49 (plus 2.25) $ a share - when will it file for chapter 11 ? -, Intel at 31 (26) cents, Johnson & Johnson should have made 92 (83) cents and Pfizer is seen at 53 (52) cents, all according to data from marketwatch.com. Pfizer could be the bad surprise, given the problems the company is looking at a wide range of problems (Bextra, lots of marketing, declining research spending). After Citigroup's good numbers, Merrill Lynch could come in higher than the estimate of 1.22 $ too. But that's no reason for a rally altogether.
On Wednesday nicotine provider Altria's EPS are seen in a range from 1.19 to 1.26 $. Caterpillar is seen stronger with 1.34 (1.16) $ EPS for the last quarter. That's not in line with recent soft durable goods orders. Honeywell, estimated at 40 (34) cents could fare the same fate as IBM last week. JP Morgan Chase's estimates of 69 cents lie well below the comparison period, when it managed to make 92 cents a share. SBC Comunications is associated with a drop to 33 (37 ) cents and estimates of 1.25 (1.14) $ a share for United Technologies seem to be out of touch with the dire realities in the technology sector.
50 year old McDonalds might meet the estimate target of 43 (40) cents on Thursday, assuming that the need to save by eating cheaper worldwide because of stagnant wages drives people from healthy food back to "supersize me's". The estimates for Merck, at 58 (73) cents seem to have discounted already some of the problems of the drugmaker, who had to pull its painkiller Vioxx off the shelf.
My bets lie with a further decline of the Dow, given the cloudy outlook. While there are few possibilities for a surprise to the upside, don't forget that oil prices could reverse their recent fall as they depend not only on US consumption of the black gold. The far east might take advantage of the current 50 $ range and fill up its stock, thereby driving prices up again. OPEC has not taken back its forecast of 60 to 80 $ dollar oil in the next 20 months.

ECB's concern about asset price inflation might hit the US dollar

Sunday, April 17, 2005

The ECB cannot be counted on to hold its key interest rate stable for much longer. In its latest monthly bulletin the watchdog for the the stability of the Euro said that rising asset prices could lead it to raise interest rates even if growth in the 12-nation euro zone remained sluggish this year and inflation stayed under control.
"The central bank would adopt a somewhat tighter policy stance in the face of an inflating asset market than it would otherwise allow if confronted with a similar macroeconomic outlook under more normal market conditions," it said in regard to rapidly rising real estate prices in the Euro region which are attributed to the low interest rate climate the Euro area enjoys.
In its editorial it also pointed out that inflation is to remain above 2 percent for the remainder of 2005, "although the exact figure will depend largely on how oil prices develop."
These statements have not yet sent shivers across the Atlantic where a rate rise in Europe is broadly seen as another strong argument for a weakening dollar. Higher interest rates would inevitably lead to a reversal of the huge currency inflows the US fixed income market has enjoyed because of the interest rate differential the dollar curently enjoys to its main rivals, the Euro and the Yen.
Central banks worldwide are looking for ways to get out of the dilemma the weak dollar and the so far inflation-immune gold assets represent. In a survey 65 central banks worldwide had opted for the possibility to shift a greater part of their foreign exchange reserves away from the dollar into the Euro, the Financial Times had reported on January 24.
The decision of the German Bundesbank to abstain from more gold sales - the same policy is also observed in France - is officially founded on the fact that a sale of the country's savings to mend holes in Germanys budget deficit would not be favored by the German public. But it also seems to come from the expectation that the gold price will rather rise than decline although Bundesbank officials go out of the way to avoid any commentary on the likely future of gold prices, except for saying that gold is a stabilizing factor.
Germany hoards 3,433 tonnes of gold, more than the IMF (3,217 tonnes). France states its gold reserves at 2,978 tonnes. In comparison, US gold reserves are believed to be 8,136 tonnes. The biggest private gold hoarders are to be found in India: gold imports rose threefold to 600 tonnes annually in the last four years.
The yellow metal has retreated to 422 $ an ounce, after a 16-year-high of 455 $ last year and its price moves are almost perfectly negatively correlated to the dollar exchange rate. Gold analysts see it trading in a range between 400 and 500 $ this year. Purchases by Asian central banks outstrip the sales of European central banks recently, market observers say.

Antal Fekete on the lack of scientific research on fiat money and gold

Ever wondered why there is so little scientific research done on the virtues of a gold standard and the dangers of a backed-by-nothing currency? Antal E Fekete, Professor Emeritus at the Memorial University of Newfoundland, and an economist in a class of its own, gives some insight how researchers are kept away from this topic since the US dropped the gold standard in this contribution to the Asia Times Online.

You wont't hear this in Sunday school

Naomi Klein about "disaster capitalism" in the Tsunami areas.
For a single page version, click here.

If you believe in war - buy GE

Friday, April 15, 2005

A quick glance at the newswires gives the impression that Wall Streets hopes of the day are pinned to General Electrics. With earnings estimates centering around 37 cents a share in the first quarter there could be a positive surprise to the upside. While the once biggest company in terms of market capitalization, now overtaken by Exxon/Mobil, likes to portray itself as as a developer and marketer of a wide variety of products for the generation, transmission, distribution, control and utilization of electricity, they also have a strong focus on control systems which is a nice euphemism for military gear.

Friday will be THE key day for the markets

Thursday, April 14, 2005

After feeling a little proud to have correctly forecasted that the FOMC relief rally of Tuesday would only be a flash in the pan - the Dow having fallen almost 250 points since, please be prepared for an ever bolder forecast for the last trading day of this week.

Has Saudi oil output peaked?

Please click the headline for a very interesting article about the world's biggest oil producer, Saudi Arabia. It overtakes my intention to write a longer piece about the concept of peak-oil-production. Just to tell you so much now: Oil production has peaked or is about to peak in 38 of the 42 major oil producing countries. Read also this scientific paper from 1998 by Richard Duncan and Walter Youngquist.
Oil prices are to stay above 50 $, no matter what efforts will be undertaken to use it more efficiently.

Markets dominated by changing correlations

The risk in equity markets shifts to the downside. Stocks took a beating on Wednesday after abysmal retail sales figures detached Wall Street from its inverse correlation with oil prices. Well, even at 50 $ per barrel the black gold is still some 20 percent higher than only a month ago. The very fast slide from 58 to 50 $ with a growing number of speculative short positions in the oil markets makes one think that this more than welcome move on the downside is rather to be seen as a swift technical correction in an otherwise demand driven oil market. The lowering of consumption estimates by the IEA (International Energy Agency) smells too much of politics by the western oil junkies.

Who cares about indicators and debts anyway?

Wednesday, April 13, 2005

If I only had a currency trader's mind! Both the higher trade deficit of yesterday and today's shocking retail sales figures being far off the positive expectations gave the dollar an upward push that defies any logic. Numbers that prove the concept that the US economy is running, or rather stumbling, on borrowed money nevertheless led to an uptick in the backed-by-nothing $ (see former posts).

FOMC relief rally a flash in the pan

Thanks to macroblog I was finally able to locate the latest FOMC minutes after not being able to access them on the Fed's page until 10 AM CET. Believe me, when I woke up during the night, my wife was not happy to see me googling for FOMC minutes and calling up the Fed website over and over.
Now, after having read them, I pity myself for my impatience that got aroused by the "relief rally" on Wall Street but didn't make it any further than Hongkong, a market I consider equal to the casinos in Macau, where card counters could make money too. European markets didn't follow up on the euphoria Wall Street encountered. That's maybe because the old continent had a little more time to dive into the if-and-when-but-let's-not forget... Fed talk and also remembered that all the economic indicators of the recent past didn't really point to an ongoing expansion.

For a stable currency turn (not too far) east

Tuesday, April 12, 2005

Almost all currency talk these days revolves around the three ugly ducklings, the US$ (deficits), the Euro (stagflation) and the Yen (worsening economic outlook). Of course, with 75 percent of all savings in the world denominated in US$, the greenback deserves all the media coverage it gets. A lot of ink gets also dry on the issue of the revaluation of the Chinese Yuan.
Bud did you ever read about the currency of a major nation that excels in high GDP growth while managing to lower inflation at the same time? A country that is building up its foreign exchange reserves relatively faster than China and improving its trade account, all built on private enterprise with only 12 percent of GDP coming from government spending.
"Bharat", as it is called locally, won't mean much to the most of us, but India does. The biggest democracy in the world has - almost unnoticed by the rest of the world - undergone the most dramatic change of all developing nations.

Minutes that will shape a day - but not more

Monday, April 11, 2005

With the markets focusing on Tuesday's publication of the "minutes" of the latest meeting of the Federal Open Market Committee (FOMC), trading activity remained very subdued today. Investors are hoping for an indication for the results of the next FOMC meeting, scheduled for May 3.
Given the inexhaustible cryptic vocabulary the Fed has been mastering to cloud economic realities like the sluggishness in the labour market and accelerating producer prices (as well as creating jobs for thousands of Fed watchers in the financial industry), there is

The US debt balloon - a simple explanation for non-economists

Sunday, April 10, 2005

I apologize for scaring away readers with headlines like the last one. To make up for it, an easy-to-comprehend explanation of the effects of the ballooning US federal debt follows here.
I have published this explanation before as it has proven very effective in educating non-economists about the geopolitical dangers of ever expanding debts. I am especially proud that this taught even my 12 year old daughter that the US is running a dangerous pyramid scheme that will come to a terrible end once creditors want their money back.
The story goes like that:

Inflation in hedonic conundrum

Saturday, April 09, 2005

Apart from "no sports", Winston Churchill is famous for his quote that he only believed in statistics he had falsified himself. Doubt has to be put into the official US inflations figures too when one applies anecdotal evidence.
Just take two everyday items like gasoline and mail.

Where the jobs will go

Friday, April 08, 2005

The next wave of off-shoring (From the Far Eastern Economic Review)

Where Did All the TRILLIONS Go

Thursday, April 07, 2005

According to the US Treasury's data, the total external debt of the world's biggest economy has grown from 6,570,168 (six million fivehundred seventy thousand one hundred and sixty eight) million to 8,360,166 (eight million three hundred sixty thousand one hundred sixty six) million dollars in the eighteen months leading to Dec 31, 2004. This amounts to almost 100 billion dollars per month. The US has been sinking deeper and faster into debt than ever before. All the presidents before George W. Bush did not burden the country with so much debt in so little time, not even Ronald ("deficits don't matter") Reagan managed to run up such a tab for his wars on the poor central American nations.
Every rational mind will have a problem calling this consumption on the back of creditors economic growth. It also contradicts the widely published belief that the US gets indebted at a rate of "only" 1.7 billion dollars per day, as this would be only roughly half of the effective rate of debt growth.
The big question is where do these enormous mountains of money go? Not even the Pentagon spends that much according to official budget figures. The indebted American consumer does not feel it in his pockets either although this effectively means a per capita borrowing of 400 dollars per month, every month.

Media star Alan Greenspan

Wednesday, April 06, 2005

There was once a time when the chairman of the Federal Reserve kept himself to commenting monetary policy - and monetary policy only.
This has changed dramatically. In the first quarter of the running year he has almost become an anchorman of the American economy. From social security to fiscal discipline, from medicaid to medicare, from the price appreciation in real estate to demographics, from Fannie Mae to Freddie Mac, there seem to be few areas of interest left that do not need the reassuring words of Mr. Greenspan in order to keep the party going.
Greenspan now has also become an expert in oil, telling the oil industry where they are heading to.
In my opinion that's far too much of a reassurance that everything is OK with the US economy. It is a little bit suspicious that the only person with almost unlimited global credibility nowadays has to calm the markets so frequently. OK, not many people outside the US would believe president Bush, who talked the world into a war with a more than uncertain outcome (except for the staggering costs incurred) and keeps talking about freedom and democracy while acting the opposite way. But this is a different issue I will elaborate on in another posting.
The markets seemingly love Alan's guidance. His short speech on energy issues yesterday led oil prices lower, although for a day only. It is most ominous that he talked a lot about the future expectations for the use of liquefied natural gas (LNG) and the market forces that would help lower oil demand, i.e. higher prices. But while he pointed out that LNG accounts for only 3 percent of energy use in the US, he omitted any hints that the dramatically higher oil prices will dent growth expectations, let alone the price pressure they already create not only at the gas pump.
Reminding readers of my favourite comment by Greenspan, posted here on April 4, which clearly shows there are reasons for concern about monetary and market stability, I would not take all his words as an unbiased comment from a very wise man.
There is too much at stake and he knows it. While Greenspan managed to delay a severe economic downturn by lowering interest rates to their lowest levels in the last 100 years, he is now out of ammunition to save the consumers worldwide. Being a data-driven economist he surely must see the worrisome data as there are: low national savings, record budget and trade deficits, an accelerating inflation rate, a stagnant labour market (at best) and the falling value of the dollar. One can add the uptick in producer prices, equity markets in a sideways band, falling profit growth rates and the decay of the American infrastructure to the negative outlook that grows more negative with almost every economic statistic released these days.
The Fed's most powerful weapon - determining the interest rate level - has turned into a double-edged sword that is more than likely to rip open the chest of mankind either way.
In the now widely believed scenario A that sees the Fed rising rates further lies the problem that it will choke economic growth which is already burdened by rising energy and commodity prices. Scenario B is right now unthinkable at the best: Would the Fed keep interest rates stable or even lower them this would accelerate the fall of the greenback to levels that would hurt the whole world too as roughly 75 percent of the worlds savings are denominated in dollars.
In historical context the outcome of the looming crisis is clear. Whenever a government debased its money from the gold standard it invited its own decline from power. Being an agnostic I still value the bible where it says money shall be made from silver and gold only. Being a believer in democratic political systems that serve the population I also value the US constitution which says the same and even explicitly restrains the state from issuing fiat currency (= paper money).
It took 400 years for the Roman empire until its currency was not accepted anymore. It took Austria and Germany only 5 years in the 1920's until it was cheaper to burn the notes than to buy firewood with them.
If one believes the concept of gold equals money, it took the US 35 years to devalue its currency by 95 percent. In 1971 one still got an ounce of gold in exchange for 35 dollars. Today one needs 426 dollars to get an ounce of gold.
So far there has not been a single paper currency without gold-backing that survived for more than a few decades. Remember the times when a one pound note could be returned to the Bank of England in exchange for one pound of sterling (pure) silver. The ruling banking system has done everything possible to push gold as an enduring value out of people's minds. The best invention in this game was the phrase, "gold does not yield any interest". If one held gold since 1971, he now looks at a total return of more than 1200 percent!!! Show me a comparable IOU (I owe you) paper that did not get eaten up by inflation in the same period!!!
With the central banks having sold off a good portion of their gold reserves the return to a gold standard will be all the more painful. But it will happen within the next two decades, maybe already within the next five years. Gold has been the universe currency in the 6000 year old history of the monetarized world. To think this will not be the case again only because it has been abandoned for the last 35 years seems a bit unrealistic when one looks at the looming problems the coming acceleration of inflation will bring upon the world.
The smart money is already moving into gold: China and India are building up gold reserves and the European countries seem to be more and more unwilling to continue their drafted gold sale programs which helped drive the gold price down to 250 dollars only 5 years ago. Malaysia proposes a common muslim currency - backed by gold of course.
Not being able to imagine a painless way out of the dilemma of paper currencies without a backing with some real values like gold and silver I fear the day when the whole world will rush to the exit. All those dollars nobody will want any more will create the yet unknown scenario C which will make the 1930's depression look like like a bee-sting compared to the pain in our ripped open chests we will experience.

Oil bulls are on the loose - or on the losing side?

Monday, April 04, 2005

All economic worries about rising deficits, slowing profit growth and fears of inflation have suddenly been washed away by a single concern: the price of oil which rose to a record high of more than 58 $ today.
The reason for fear is clear. Economic theory says that all the productivity of human mankind is based on its exploration of the earth's energy resources. Whatever we do commercially is based on this free lunch from our globe (OK, the utility companies stand in between people and their free lunch). But one still has to consider that whether one travels for business or personal reasons, cooks a meal, works on a computer or enhances one's knowledge by reading a book after sunset, it all involves using some form of energy. Even your doctor does basically the same thing. He charges you for the mental energy that gets invested into your well being (OK, he's got to pay his utility bills and the gas for his home visits and his assistant too). In short, without energy there would be no economy (and no warm meals).
But now the greed that led to record sales of gas guzzlers in any shape makes a sharp u-turn into panic. The disgusting four letter word of the times comes ahead of oil production: peak.

We Can Guarantee Cash...

If you ever wondered what the future will bring for the US dollar, stop wondering. One just has to listen to the Federal Reserve (that's the agency printing them). "We can guarantee cash, but we cannot guarantee its purchsing power", said Fed chairman Alan Greenspan in his latest testimony to congress. Very reassuring!

US AAA rating - how much longer???

Sunday, April 03, 2005

Being contempt to see there are at least more than just a handful of analytical humans that do not get blinded by the nervous - and by now contradicting - Fed comments/speeches/minutes, I am just missing one important issue here: How long can the USA sustain it's AAA rating?
Everybody knows, S&P and Moody's didn't foresee the problems at Enron and Worldcom up to the moment of collapse. OK, the cos. dodged the books, and a credit analyst HAS to rely on the data provided to him.
But when will these so called independent credit analysts wake up to the horrendous worsening of most US economic indicators?
Assuming there are no ready to shoot tanks in front of the ofices of Moody's and S&P,

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