Least You Can't Say You Didn't Know

Sunday, January 08, 2006

What a wonderful time! Two blog-free weeks gave me the time to find out again there is more to life than doubtful data and volatile investment prices. (And please excuse that my writing may sound a bit rusty right now after this wonderful break. But I have so many macroeconomic worries in my head that make it difficult to follow the rule "first things first" as all problems rank equally on my worry scale.)
Returning to my compassionate routine of trying to make sense from all the economic and political white noise that fills airwaves and bandwidths and a few books wiser I come to the conclusion that a shortlist of the most pressing problems for the US (and therefore the global) economy listed in June has basically not changed.
Quite the opposite. Galloping monetary expansion - US M3 has expanded 8.3% in the last 12 months and it has been running at an annualized rate of more than 10% in the last 3 months - and the exploding gold price sum up all the inflationary fears we rightfully project into the future. While the dollar reversed its downward trend against the other majors a year ago I get the feeling that the change from 2005 to 2006 will mark the end of the year-long bear market rally we have seen in the greenbacks of which ever more get printed. And while the official world tries to discard M3 growth as an outdated indicator I point you to this story of CNN online where former Deutsche Bundesbank president Hans Tietmeyer - 10 years ago the second most powerful central banker in the world - is described as a central banker who was "trained in the monetarist school that teaches rapid money supply growth is a sure predictor of inflation and requires a firm policy response."
Remembering the Fed's policy of baby-steps that have done nothing to rein the expanding liquidity bubble we have not seen such a response to the rapid price rises that affect daily lives everywhere except for the official inflation numbers. And reading the latest FOMC minutes released last week it does not sound really hawkish when the FOMC states dryly it will act on the upcoming economic indicators.
In order to prevent the dollar from crashing, which will bring a triple dilemma I save for my next post the Fed will also have to watch geopolitical events that can bring the exogenous shock that has so often been the kick-starter for dramatic historic changes.
In order not to give the excuse that things were not foreseeable I am listing the - in my view - most important events that will shape the year to come.
Foreseeable Pivot Points For 2006
January 31 - Greenspan Hands Over To Bernanke
The first test for the dollar will come around the end of the month, or a little earlier as markets are very diligent at discounting future events. Greenspan will leave at a point of time when US debt will have grown close to $8.2 trillion, an ever bigger part of it monetized by the Fed itself which buys public US debt at a rapidly growing speed.
All These Open Positions At The Top Of The Fed
It cannot be overlooked that the top jobs at the Federal Reserve are seemingly hard to fill. The Bush administration has so far been unlucky to find top people for the two governor posts at the Fed itself. Ed Gramlich left last summer and Bernanke's chair is vacant even longer.
Suspicions rise further when thinking about Fed Philadelphia president Anthony Santomero surprisingly announced that he will leave his prestigious post in March to start another career.
At 59??
What are all the top economists and businesspeople thinking when they turn turn down the invitations the Fed and the adminstration are sending out to them? Is it maybe the thought that you don't join the crew of a sinking ship?
Lots Of Newbies Will Decide Fed Policy This Year
As if the handover from Greenspan to the Bush crony Bernanke were not worrisome enough, the rotation on the FOMC board means that the new voting members - Sandra Pianalto from Cleveland and San Francisco's Janet Yellen - will have to try their hand at a crucial point in financial history. Excuse me for not naming the other rotations; there has not been an annnouncement by the Fed (or in the commercial media) so far. But let me give them some pre-approval. Women are more rational in business decisions then we males ever want to admit.
This is also the reason why I always plead for a female defense secretary with a kid in the active forces. Wouldn't that be a way to a world with less violent conflicts?
The Iranian Oil Bourse - Or One More War Soon?
Another most worrisome event is the coming de-dollarization in commodities markets through the planned inception of the Iranian Oil Bourse in early April. Is it more than a coincidence that the Fed will stop publishing M3 figures a week before that memorable event?
To make a complicated story short: The USA will get a lot of problems if commodities - especially the most sought-after black gold which keeps the military apparatus on its killing path - cannot be paid anymore in a currency that can be created by a few mouse clicks or some paper and ink. And the rest of the world has a lot to gain from it.
For exactly this reason I would not wonder if there would be a massive strike against Iran - probably executed by Israel as the USA has already overstretched its military capacity with the disastrous Iraq "liberation" that I view rather as the colonization of the region with the world's largest oil reserves only second to Saudi Arabia. Extra note: Who really knows how much oil is left in Saudi Arabia?
I want to proudly add that my post "Iranian Oil Bourse Could Kill The US Dollar" has been read well over 15,000 times at this blog only and got republished at at least another 120 online media. Ithaca Times called it one of the 10 most important stories of 2005 not covered by the commercial MSM (main stream media), next to my story that the Fed will cease to publish M3 figures, a story I broke first globally.
So check back to this blog regularly if you don't want to miss out on the next 20% of the most important news of 2006!
Corporate Profits - Not If You Exclude Oil
Another tidbit of information that haunts me in my economic nightmares is the news that corporate profit growth of 15% in 2005 for the S&P 500's comes in a third lower when you exclude oil companies. Oh, and don't forget that dozens of companies are in the process of "restating" their balance sheets for the last years. I wonder how much their auditors will reimburse when it turns out that they have "overlooked" the one or other billion of liabilities or mistook inventory for revenues.
Let us see what happens to GM and Ford once the money in their pension funds cannot be called assets but will be categorized as liabilities in the coming update of US bookkeeping rules...
GDP And Employment Growth - Done By The Government
While the markets cheer goodlooking GDP growth numbers and even took last Friday's shocking employment report as a reason to tread higher I foremostly take note that these numbers all look much worse when subtracting the government's share in this so called growth progress. From 108,000 new jobs - consensus expectations were around 200,000 - 14,000 were created within the government. This leads us to
The End Of The Housing (And Credit) Bubble
While the administration is busy taking on ever more people for doubtful purposes (where were these public employees after hurricanes Rita and Katrina) which I associate mainly with more persons spying on the people and the rest of the world, the reduction in construction jobs is a(nother) good leading indicator that the housing bubble will come to an abrupt end this year.
The deflating housing bubble - connected with a rise in Fed Funds to 5% this year IMHO - will in turn lead to terrible problems on consumers finances who have over-confidently relied on cheap and more than abundant credit. Just remember how many headlines these days are concerned with this upcoming problem. And take note how few stories deal with a possible default of the GSE's (Fannie Mae, Freddie Mac.) As they are government sponsored they technically cannot default this leaves only one method of rescue: Print a few trillion more dollars! Do I sound cynical? Yes!
Some commentators see only one way out: We need another bubble!
The Coming Gold Bubble
The next bubble is already on its way. As the world will begin to flee the dollar - and that is not only my opinion - mankind will again remember what has been the only universally accepted currency of the last 6000 years: GOLD.
As there is less than an ounce of gold for every living person on this globe and more and more talk about a diversification out of the dollar - which currently represents 75% of the world's savings - the stage for an unprecedented expansion of the still very young gold bull market is set. I am not giving any price targets here as a dollar price target will not make sense in a few years from now. Looking at the coming superpowers China and India we will all watch the Yuan or Rupee price for gold. Sorry guys; the dollar is toast and I will post a lot more about the reasons for this provocative statement in the running year.
But for the time being I say only so much: Expect gold to rise way above $1,000 an ounce within this decade. If the world were to return to a gold standard - and there are strong forces in the eastern hemisphere voting for it - the current outstanding amount of fiat money would justify a gold price of more than $8,000/ounce. And also tell me if there is one fiat currency around that has not returned to its intrinsic value within a human's lifespan (the $ is now 93 years old and has lost 95.5% of its purchasing power since then.)
China, China, China
The last bit of interesting news I picked up last week is probably the one that has brought along the reversal in the dollar's upward trend of last year and could break the back of the backed-by-nothing greenback. China officially announced that it wants to diversify its forex holdings, meaning a reduction of the share of the dollar in their forex reserves. While it is already known that China wants to use its dollar holdings to build up a Strategic Petroleum Reserve in the last two weeks Chinese economists also recommended that China grows its gold holdings. Given the past and present impressive economic performance of China its economists certainly should not be disregarded as second-tiers only.
The same goes for Russia. The country awash in oil and natural gas revenues has decided to double its gold reserves. Anybody show me another product/commodity with such a good growth outlook while production remains limited and cannot be boosted like the output of BigMacs at McDonalds?
To complete the picture I have to include Japan. The biggest holder of dollar denominated debt has kept mum about its strategy for its dollar "reserves." No wonder. One word that they also want to "diversify", meaning getting rid of the mountains of $-IOU's can lead to a stampede out of the dollar for which the word "unprecedented" is a gross negative exaggeration.
My worries and thoughts about geopolitical events to come do not end end here. Check back to this blog for my regular updates! There is so much more to come and I have the strongest of all possible gut feelings that 2006 will see even more radical changes on the globe than even I anticipate. Your additions to this list are most welcome in comments.

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