7/4/7 - Does the USA Have a Reason To Celebrate?

Wednesday, July 04, 2007

Taking a gauge from Wall Street Americans have every reason to celebrate Independence Day. The Dow Jones is only a few points from its all-time record.
Recent headlines are no reason to celebrate, though.
America's popularity abroad has plummeted to new lows. Mind you! This is the opinion on the USA. Its inhabitants are still well-liked in most places.
The highest ranking administration official ever caught red-handed, Scooter Libby, will know less about jail than Paris Hilton (cheap trick on my side to boost pagehits) does now. 30 months for endangering an agents life. A mother in Virginia was handed a 27-month sentence for serving beer at their sons 16th birthday. Seems justice is a bit out of step with reality.
Both the president and his vice briefly tried to argue that they were not part of the executive branch. Excuse me!?
The USA, led by a self-declared "compassionate Christian," is home to the largest and fastest growing prison population in the world. According to the DoJ the number of inmates rose from 411 to 497 per 100,000 people which comes to a total figure of 2.245 million at mid-year's count. What a waste of money by an overly harsh justice system.
At the same time civil liberties and constitutional rights have been attacked by the current administration as never before. With a salami-slicing tactic privacy is eroded and I am startled by the immense force of judicial powers shown on US TV stations 24/7. Has anybod ever run the numbers on the extra costs for business coming from excessive security demands for all and everything?
Thanks to YouTube one can see a very different picture than the official version of propagandagress about the situation in Iraq. One thing can certainly be ruled out: This ongoing war did not stabilize energy markets. Oil closed above $71 before the holiday.
It may be a non-representative sample, but on my travels in the last 11 months I have encountered only very few Bush fans. As India is nowadays full with Israelis who chill out after their time in the army I did not meet anyone who did not see Bush rather as a threat than a benefit to Israel. Indians also mostly raised concerns but point out that their economic boom roots to a good deal in the outsourcing of US jobs in the service and software sector.
Sentiment has changed in Italy, France or Spain. It used to be laissez-faire around the Mediterranean. Now the talk is first about inflation, second about real estate prices and third about how the White House has managed to destroy the good image of the USA within the last 6 years.
Bush may still have some friends in Africa, but I would say the impoverished and disaster-ravaged continent welcomes everybody with money in his pockets. As Bush has not much more than a lukewarm handshake to offer China will be up for the grabs to be made in commodity-rich Africa. In 2006 the USA spent a mere $1.4 billion on development aid for sub-Saharan Africa. Almost half of that was debt-relief for Nigeria, the continent's biggest oil producer. Worldwide funding for this region declined in 2006 by $3 billion to $104 billion.
China will be the benefitting party. Reading regional West African newspapers I found business pages pickled with stories on bilateral joint ventures with China. As China cares little about human rights or industrial safety standards they will have favourable terms of trade, giving them an edge in the commodity sector before India could take the same route to East Africa which is predominantly English speaking - in contrast to the French speaking upper west coast. Both China and India need raw materials to satisfy the domestic needs of an emerging consumer society.
Domestically the USA is threatened by an oncoming financial crisis - suddenly hedge funds have become more closely associated with gigantic losses than with high alpha returns.
The number of worrisome reports on the housing sector is growing with every day - and it may destruct the base of the US economy, consumers already overstretched before the next re-adjustment of their first and second mortgages. The Mortgage Lender Implode-O-Meter provides a much more dramatic picture than what the Federal Reserve sees in its "anecdotal evidence." I would rather call it the beginning of a stampede out of collateralized and securitized subprime loans that will lead to a credit crunch despite historically still low interest rate levels.
All goes down - except the Dow Jones, which seems to prove the rule that markets can stay much longer irrational than expected. The ability to hold on to its lofty levels may be based on the oldest trick in the world of fiat currencies. According to Shadowstats.com, which calculates money supply M3 growth since the Fed suspended it, M3 currently grows at a rate of more than 13%, leaving gamblers with more than enough cheap liquidity. With bond markets already fearing a credit crunch at this stage it can be safely guessed that the worst is yet to come and we are not ver yfar on this road yet.
Other than greenbacks the USA does not have any real export hits and the current account deficit of $759 billion in 2006 will most certainly be surpassed this year, thanks to a weaker dollar. The USD index is not far from its historical lows and a break would very probably incur further sales of the dollar.
With no visible actions that would point towards an end of the most lavish spending of all presidents one wonders if there is another exit strategy than a collapse of the dollar. Now American individuals are taken to account for their overspending. this point will come for the nation too.
I would not become over-bearish, though. The US still offer the biggest and most liquid of all capital markets. Those trillions that look for another safe haven will not succeed in finding such with today's market structures around the world that are all based on permanently low rates and a misaligned risk-reward perception of professional investors. Or simply said, there are no cheap assets worth their name around before we will have seen a rather implosive action in securities prices in the near future when investors reallocate funds according to their new sensitivity for risk.


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