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syracus

26.02.2003, 22:46

Re-thinking Alan Greenspan

By Michael Preiss 25 February 2003, FinanceAsia

Alan Greenspan, like the US dollar, was for a long time believed to be almighty. But CFC’s chief strategist argues his actions and inactions have had huge implications for the global financial system, some very negative.

The Fed Chairman has made several critical miscalculations and missteps since 1999 that have exacerbated, if not actually triggered, many of the woes the United States and global economy are currently experiencing.

Not that fiscal policy has helped, but the Fed's lack of coordination and inappropriate actions have buffeted the US economy to the precipice of depression. One could argue that many of the mistakes attributed to Chairman Greenspan are not within the purview of the Federal Reserve or the banking industry. However, unlike his unceremonious predecessors, Chairman Greenspan by the virtue of a nearly deified public persona - he has shaped public opinion and affected public policy on a myriad economic issues.

If he is going to keep interest rates artificially low for an extended time, Greenspan needs to tighten bank lending standards for consumer loans, especially home loans, where he has now created a second bubble.

It's time to replace the irrational reverence granted to Chairman Greenspan with sober objectivity and examine the fragility of the world economy and vulnerability of the US dollar. History teaches us that the Federal Reserve and monetary policy can either be the market's very best friend or its most perverse enemy.

Indeed, since the 1970s, the Fed has intentionally caused at least one major bear recession and bear market, and inadvertently helped trigger several others - including the present one.

On the other hand, the Fed has miraculously ridden to the market's rescue in numerous other crisis, most notably the 1987 "Black Monday" stock market crash, the 1997-1998 Asian Crisis and most recently (but less successfully) the terrorist attacks of September 11, 2001.

For these and any other reason, virtually every trader pro follows the adage; "Don't fight the Fed." Analyzing monetary policy and the Fed's recent actions provide clues about how the market will trade in the months to come.

Despite its good intentions, the Fed doesn't always get the "soft landing" it seeks. Indeed, over the last four decades, the Fed's polices have been just as likely to plunge the economy into a deep recession, or bring about high inflation and a horrific bear market as to "fine tune" us out of a precarious economic situation.

One major concern for the markets in the wake of a the terrorist attacks and the possible war with Iraq, coupled with President Bush's highly expansionary fiscal policy may be perceived by the Fed as highly inflationary. As a result, the Fed may delay much needed polices that might lift us out of the recession and buoy the markets.

However, if the Fed doesn't exercise restraint on President Bush, there is the risk that a massive double dose of expansionary fiscal and monetary policy will indeed lead to a horrific bout of inflation - and an ongoing bear market.

Alan Greenspan has learned to how to pump enormous amounts of liquidity into the markets on very short notice. Greenspan did this in the aftermath of the 1987 October "Black Monday" stock market crash, and this action is generally regarded as the single greatest factor in preventing a total market collapse at that time. In similar fashion, Greenspan stepped in with a huge injection of liquidity during the 1997-98 Asian financial crisis, an action that stimulated a quicker market recovery.

Most recently in the aftermath of the terrorist attacks of September 11, Greenspan flooded the US banking system with more than $80 billion of liquidity. At the same time, Greenspan engineered a $50 billion currency swap with the European Central Bank to provide dollars for European commercial banks that ran low on dollars in the wake of the attacks. While these actions did not stop the downward slide of global markets, they did perhaps stave off a much less orderly wave of panic selling and market collapse.

Despite these achievements at the helm of the Fed, Alan Greenspan's reign should be reconsidered.

Granted, Greenspan did warn US equity prices were overvalued with his now famous "irrational exuberance" comment in 1996. However, this single cautionary comment was a raindrop in a sea of testimony regarding the productivity-increasing technology revolution. Furthermore, he repeatedly claimed that the "business cycle" is dead and that productivity increase translated into higher corporate profits and in turn, justified higher stock prices.

However, Bureau of Economic Analysis reports reveal that US corporate profits peaked in 1997 and fell steadily into 2002, even as productivity continued to increase. By comparison, through out the 1960s gains in productivity outpaced those of the 1990s without comment from the central banker at the time. Nor did such gains eliminate the economic cycle or increase the equilibrium prices for equities. Eventually, recognizing the largest stock bubble in history, Greenspan raised interest rates to the highest real rate (the difference between Federal Funds rate and the rate of inflation) in 50 years, effectively killing an entire economy instead of just the stock market.

As if to prove the US did not learn much from the Japanese economic bubble and banking crisis of the 1980s, in the midst of the 1990s US stock market bubble Chairman Greenspan advocated the repeal of Glass Steagall, the law that erected a wall between investment banking and commercial banking. In effect, the law kept commercial banks from doing business in the stock market. The repeal of Glass-Steagall further exacerbated the stock bubble, caused a misallocation of capital resources and helped erode the objectivity of stock analysts.

It is axiomatic that large institutional banks are the cornerstone of a healthy economy; they act as gatekeepers for the efficient allocation of capital. Commercial banking (which is based primarily on profiting from the differential between the interest paid for capital and the interest received on loans) is a long-term, low-margin business, whereas investment banking is a high margin, quick profit venture.

Consequently, commercial banking requires much more rigorous financial scrutiny than investment banking. However, during the Greenspan years, conflicts abounded. Commercial banks that held large corporate debt could coerce investment banking revenue. Paradoxically, institutions would undermine their own long-term credit worthiness because of their desire for investment banking revenue, a condition that was aggravated by an environment in which they were judged by the stock market on short-term (quarterly) profits.

Despite his recent apology during Congressional testimony for his past opposition to the reform and regulation of accounting practices, Chairman Greenspan called for "unfettered" use of over the counter derivatives and reliance on "counter party surveillance", even at the cost of transparency.

As he said: "Regulation is not only unnecessary in these markets, it is potentially damaging, because regulation presupposes disclosure, and forced disclosure of proprietary information can undercut innovations in financial markets."

The same argument led Greenspan to call for the repeal of the Security Acts of 1933 and 1934 and a return to the financial gunslinger days of the 1920s. This is exactly what occurred in the 1990s when firms like Enron, WorldCom, to mention but a few, circumvented lumbering accounting and banking regulations through the use of increasingly sophisticated financial derivatives.

Currently, this laissez-faire approach jeopardizes the banking system. According to the US Office of the Comptroller of the Currency, major US investment banks are said to have more than $20 trillion (greater than the combined GDP of the US and European Union) of customized and other derivatives on its books. Every major derivatives exchange has position limits to avoid market manipulation and liquidity meltdowns. By dismissing the need for regulation in the over-the-counter derivatives market, Chairman Greenspan abdicates one of the primary responsibilities of the central banker: the oversight of the risk undertaken by the financial community.

Additional accounting woes stemmed from the confluence of burgeoning consulting practices among accounting firms and their metamorphosis from partnerships to LLCs (Limited Liability Corporations). As partnerships, senior accountants were faced with the prospect of forfeiting their personal assets if their corporate scrutiny was substandard. As LLCs, however, virtually no penalty exists if an accounting firm or its partners perform shoddy or unethical work. (A less draconian solution would be something similar to the loan-loss reserve system of a bank.) Additionally, profits from consulting outgrew those of auditing, which skewed the priorities of accounting firms like Arthur Andersen and undermined their integrity.

As the incentive for accounting integrity was eliminated, firms exploited the inadequacy of accounting rules. Without accurate accounting, transparency - a key investment tenet - became a meaningless buzzword. Through the use of derivatives, modern finance and accounting can convert liabilities into assets on a balance sheet and create fictitious income, as the Enron debacle and similar frauds have made clear.

The basis spread between corporate bonds and US Treasuries are now wider than at any time since the Great Depression.

Now to fix the problem he caused - the death of capital expenditures - Alan Greenspan is creating a credit bubble that will end badly for banks and consumers.

Because of the Fed's previous miscalculations, a 1.25% Fed Funds rate can be justified. However, Greenspan is once again using a blunt object to make a fine point. Every medicine has its side effects and contradictions. If he is going to keep interest rates artificially low for an extended period of time he needs to tighten bank lending standards for consumer loans, especially home loans where he has now created a second bubble. In the second half of 2002, the average American homebuyer has made a 7% down payment and is putting 40% of household income toward mortgage payments. This is unsustainable and will end just as badly or even worse than the tech bubble did.

Instead of starting several of his recent speeches asserting that there is no US housing bubble (to avoid rattling American consumers), Greenspan should have addressed bank lending standards to home buyers. "While the stock market turnover is more than 100% annually, the turnover of home ownership is less than 10% annually - scarcely tinder for speculative conflagration," Chairman Greenspan has said.

The housing bubble is not merely a consequence of transference of home ownership, but a consequence of refinancing. Refinancing is essentially trading one's home with oneself, whereby the homeowner leverages up his or her asset and creates a higher cost basis.

Equally important, Alan Greenspan should discuss the flood of money into CMOs) Collateralized Mortgage Obligations, as investors seek higher returns because of low Treasury yields. As a result, the American consumer has become doubly exposed to the symbiotic spiral of a housing bubble. The ratio of housing prices to average earnings is the highest in recorded US history, and the average amount of home equity is at an all-time low. The percentage of household income necessary to service debt is near all-time highs - and held down, ironically, only by the low interest rates themselves.

A small increase in interest rates or depreciation of the US dollar could cause catastrophic consequences.

Granted, one of the intended consequences of lower rates is to spur demand, since lower interest rates reduce the burden of existing debt through lower payments. However, a concerted effort should have been made to prudently ration the issuance of debt.

Nevertheless, burdening the consumer with a mountain of debt to temporarily boost demand is not a long-term solution to a business sector problem. Instead Chairman Greenspan should testify on Capital Hill to promote the only viable solution to the prevailing economic problem: tax incentives and credits for capital expenditures.

Admittedly, this is a fiscal policy, where leadership is equally adrift. Alan Greenspan has served the as Federal Reserve Chairman for approximately 15 years. Following a single perspective for too long magnifies its flaws. Given the position of Federal Reserve Chairman is arguably one of the most powerful positions in the world of finance, it seems prudent to limit the term of the Fed Chairman to eight years, or two terms.

Quelle (http://www.financeasia.com/Accessories/faPrintStory.cfm?objectID=A69335E5-3A08-11D7-81F40090277E174B)

syr :sss

syracus

27.02.2003, 09:12

Mal etwas aus US-Sicht zu USA/Frankreich in der Zukunft, nach einem Irakentscheid....

International Perspective, by Marshall Auerback

France’s “Non” On Iraq Is The First Of Many In The Future

February 25, 2003

As obnoxious as many Americans find the current behaviour of French President Jacques Chirac, there is clear method behind his apparent madness. It is true that during past crises, France has usually ended up alongside its American and British counterparts - as during the Cuban missile crisis or the first Gulf war. Many have assumed that for all of its Gaullist posturing, France would eventually fall in line on Gulf War II as well.

This may not come to pass, despite Monday’s announcement that the government would seek tight deadlines to force Iraqi disarmament (thereby potentially paving the way for a shift in policy). France is playing a longer game here, largely based on a two-fold calculation in relation to its external relations with the US on the one hand, and its concomitant desire to organise the European Union in a manner that best maximises French influence and ensures the long term viability of the euro on the other. The country’s policy making elite increasingly sees America as a decaying, overstretched empire; it may therefore no longer wish to throw all of its eggs into the American basket. Related to this perception of inexorable American economic decline is the recently manifested tendency to resist further eastward expansion of the European Union, given the latter bloc’s pro-American proclivities in foreign policy, which France views as inimical to the cohesion and effectiveness of the European Union and therefore fundamentally contrary to the long term success of the euro as a viable reserve currency alternative.

In regard to France’s “declinist” view of the US, this may not be a totally unrealistic proposition. Martin Wolf of the Financial Times, for example, has noted the paradoxical position of the US today: it is both the world's greatest power and its biggest debtor. This has allowed it to deploy guns and consume butter. The costs of this policy are coming home to roost: The US current account deficit today is nearly 50 per cent bigger than its defence spending. The trade deficit hit a record $435.2 billion last year. The recently announced 2003 budget forecasts a $304 billion deficit, but this figure excludes the deficits of agencies that are guaranteed, backed or sponsored by the U.S. government, a bailout of which could render the final number substantially higher, even before adding the cost of the Iraq war and any other new outlays.

That this combination should worry US strategic planners is obvious. That it may also deeply concern its allies has been given less consideration by commentators unremittingly hostile to France’s current position. But it is undoubtedly legitimate for a country like France to question the US ability to perpetuate its huge deficits in the absence of sustained multilateral co-operation and further economic discipline. Indeed, one of the original rationales for the establishment of a currency union was a desire to develop a legitimate alternative to the crumbling dollar reserve system.

But what kind of monetary union has always been a subject of active debate. For a long interval between the signing of the Maastricht Treaty in 1991 and the critical year for economic assessment, 1997, it was commonly assumed that EMU would initially take the form of a limited number of countries, all of whom were well within the so-called convergence criteria (e.g. exchange rate stabilisation, the convergence of consumer price inflation and government bond yields, some upper limits for government borrowing and public sector debt in relation to GDP, etc.). However, so great was the prize of sharing a common currency and enjoying broadly similar borrowing costs to those of France and Germany that very strenuous efforts were made by all 11 original participants to comply with the convergence criteria. By the spring of 1998, when the official reports on Maastricht convergence were prepared by the European Monetary Institute and the European Commission, the only obstacle to Italy’s participation was its high government debt ratio. But since Italy’s ratio was scarcely worse than Belgium (and there was never any question of excluding any of the Benelux countries), Italy could not be excluded. Italy’s inclusion made the acceptance of “wide and weak” version of EMU inevitable, and this came into being at the start of 1999. In spite of their ultimate acceptance, this broader version of EMU was received with misgivings on the part of France and Germany, and has been cited as a persistent structural weakness of the monetary union itself.

The rationale for a smaller euro bloc was predicated on sound economic principles: it was felt that the long-term success of the currency project was more likely to be secured in a zone which consisted of a smaller group of nations with a more cohesive set of economic and political philosophies. As we have noted previously, pooled national sovereignty, greater monetary and fiscal co-ordination, are surely more feasible where the countries involved have comparable political and economic structures and similar social outlooks. Such a policy might lead to a convergence in the direction of American neo-liberalism or continental European social democracy. But whichever direction, the end product takes it is far more likely to succeed than a half-baked compromise amongst a larger group of nations that embrace fundamentally different systems, ideologies, etc.

It is in this context that one should read President Chirac's comments at a press conference last week that, “it takes just one country not to ratify [EU enlargement] by referendum for the thing not to work.” In addition to the threat posed to French dominance of the EU, the French President was also implicitly reflecting longstanding misgivings about the EU’s push eastward in light of the resultant additional difficulties that this would throw up for the union.

A long-standing structural weakness of the EMU is the absence of a true federal authority to coordinate fiscal policy across the continent. Foreign policy disagreements, coupled with an even greater lack of economic convergence implied by the entry of the less developed economies of Eastern Europe, makes the pooling of political sovereignty implied by such fiscal coordination more problematic. France is not unique in expressing concerns about this eastward expansion. In fact, the only country to hold a referendum on the Treaty of Nice (which is supposed to confirm the entry of a number of Eastern European EU hopefuls, such as Poland and the Czech Republic), Ireland, initially rejected the proposal (although under considerable pressure, the country has since held a second referendum which has reversed the position).

Thus far, none of the other current EU members have announced plans to hold a referendum. Until Chirac’s outburst it was assumed that they would endorse enlargement in less risky parliamentary votes. One of Chirac's aides told Le Figaro, however, “There were no threats in the president's remarks … but if applicant countries think they can join Europe and benefit from its financial advantages without complying with its rules and political ways, they are very much mistaken. It was better to tell them this before they joined.”

In fact, the French President has probably let the cat out of the bag. In the interests of “true democracy”, Chirac is now likely to call a referendum to endorse the decision to allow Eastern European hopefuls to join the EU. Fearing a huge dilution of its traditional influence and prerogatives, the French electorate is almost certain to vote no in this plebiscite, thereby halting the eastward expansion of the European Union once and for all. However unpalatable to Eastern Europe (and Turkey), the result of a smaller EU will also be a correspondingly more cohesive Federalist structure. This is more likely to ensure the long run success of the currency union. France’s “non” on Iraq, therefore, might be the first of many such refusals in the future.

In regard to the external aspects of France’s Iraq policy, President Chirac senses a world deeply uneasy about the American policy on Iraq. His government has therefore seized the opportunity to change the dynamics of the post-Cold War world. In the words of Washington Post columnist Charles Krauthammer:

“During the Cold War, Charles de Gaulle and his successors had tried breaking free of the United States by ‘triangulating’ with the Soviets. De Gaulle withdrew France from NATO's military structure. France kept offering itself as a ‘third force.’ That posturing went nowhere because France, like everyone else, depended ultimately on American power for defense against the Soviet threat. With the end of the Soviet threat, everything changed. A unipolar system emerged with the United States dominant and unchallenged. The Iraq crisis has provided France an opportunity to create the first coherent challenge to that dominance--and to give France a unique position as leader of that challenge. Last Friday at the Security Council was the high water mark. France stood at the head of an impressive opposition bloc--Germany, Russia, China, perhaps seven other members of the Council and dozens of other smaller countries--challenging American policy, and, implicitly, American hegemony. The world has not become bipolar. But we have just witnessed the first serious breach of the post-Cold War unipolarity--engineered not, as many expected, by Russia or China, but by France.”

Krauthammer is clearly no fan of the French President, but he is undoubtedly correct to note that the country’s actions vis a vis Iraq and the Eastern European countries which support the Anglo-American position do have more than mere emotional pique or political pandering behind them. Among the benefits of being part of what Secretary Rumsfeld derisively terms “Old Europe” is an overriding sense of history, a quality for which America and her policy makers are not generally known. In 1965, President Charles de Gaulle loyally warned his American friends that their B-52's would not be able to do anything against Vietnamese nationalism – de Gaulle’s own country had learned that from its devastating defeat at Dienbienphu in 1953. Iraq has many historical parallels, which a “new world” country in love with modernity and somewhat contemptuous of the past might be inclined to ignore.

In the words of Regis DeBray, a former adviser to French President Francois Mitterrand, “The United States compensates for its shortsightedness, its tendency to improvise, with an altogether biblical self-assurance in its transcendent destiny.” Although DeBray was making reference to American diplomacy, one could easily make the case that economic policy making in the past several years has been characterised by the same shortsighted, haphazard quality.

Anyone looking beyond the might of America’s military machine and at the economy itself might draw similar conclusions to the French. Ever increasing quantities of debt are like termites chewing away at America’s hitherto strong national foundations; it is increasingly a nation suffering from the classic early symptoms of what Paul Kennedy, the Yale historian, describes as "imperial overstretch".

We have discussed Kennedy’s book, "The Rise and Fall of the Great Powers" before; but it is worth repeating its central thesis. According to Kennedy, there exists a dynamic for change, driven chiefly by economic structures, political systems, military power, and the position of individual states and empires throughout history. In regard to the US, Kennedy’s main point was that “although the United States is at present still in a class of its own economically and perhaps even militarily, it cannot avoid confronting the two great tests which challenge the longevity of every major power that occupies the ‘number one’ position in world affairs…This test of American abilities will be the greater because it, like Imperial Spain around 1600 or the British Empire around 1900, is the inheritor of a vast array of strategical commitments which had been made decades earlier, when the nation’s political, economic, and military capacity to influence world affairs seemed so much more assured. In consequence, the United States now runs the risk, so familiar to historians of the rise and fall of previous Great Powers, of what might roughly be called ‘imperial overstretch’: that is to say, decision-makers in Washington must face the awkward and enduring fact that the sum total of the United States’ global interests and obligations is nowadays far larger than the country’s power to defend them all simultaneously.”

Kennedy prophetically wrote these words in 1988. They seem to express America's current economic and political predicament perfectly today.

There is much discussion about the enormous deficits implied by the Bush economic proposals. Even on short-term Keynesian grounds, it is difficult to make the case for any kind of stimulus that might be derived from the budget’s proposed tax cuts, many of which the President himself acknowledges are long term and structural in nature. Now place this budget within the context of the recent record trade deficit reported last week, and add to that the enormous estimated costs of a long term military occupation of Iraq now being mooted publicly in the US press. Taken in aggregate, one can begin to envisage why a country like France might find this time appropriate to loosen the historically close transatlantic ties that have generally characterized Franco-American relations for over two centuries. America's economic position has seldom appeared more vulnerable, even discounting the heightened risks that emanate from its ongoing war against terrorism.

Seeing this, France may now believe there is relatively little to lose by confirming its anti-war stance. Clearly, much damage has already been done and France will likely derive few benefits from switching sides at this late stage, so why bother given that this would simply reinforce an impression of President Chirac as a cynical political opportunist?

For all of the historical spats between the two great republics, France’s current relations with the US are the worst they have been in years and its position in the EU is being challenged by the countries of “new Europe”. While exclusion from a post-Saddam Iraq may cost it dear, France might be calculating that it can absorb these short term costs. In the case of Eastern Europe, it can single-handedly arrest the eastward expansion of the Union and thereby perpetuate its dominance in a smaller and more political and socially cohesive monetary union. The greater the success of this union, the more likely the euro can match or supplant the US as a legitimate reserve currency alternative, a clear long term French objective since the days that de Gaulle railed against the “unlimited overdraft facility” available to the Americans under the dollar reserve currency system. Rightly or wrongly, therefore, President Chirac might be calculating that staying out of a war could open other doors in the Middle East. The country may well conclude that its interests are best served by continuing to say, "Non", not just to the United States, but increasingly, to its Eastern European allies and, the United Kingdom, all of whom the French public increasingly sees much as de Gaulle used to view “Perfidious Albion” when he rejected the UK’s entry into the EEC in the early 1960s: namely, as American Trojan Horses designed to perpetuate a split in the EU and thereby weaken France’s traditional dominance of this organisation. This is something Tony Blair might also wish to consider should he continue to make the case for Britain’s own embrace of the euro post the invasion of Iraq, assuming, of course, that he is still Prime Minister in a few months’ time.

Quelle (http://www.prudentbear.com/archive_comm_article.asp?category=International+Perspective&content_idx=20787)

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syracus

27.02.2003, 22:27

Thursday, February 27, 2003

Deficits Do Matter

by Hans Sennholz

http://mises.org/images2/fed.gif

In their election oratory politicians usually stress their love of fiscal discipline and balanced budgets. But as soon as they are elected they tend to discover a great number of exceptions that require more funding. President Bush clearly made the election pledge to avoid budget deficits, but, ever since September 11, 2001, his budget proposals built on exceptions project a deficit of more than $300 billion for each of the next few years. Yet, he also argues for prompt tax reduction, which signals a brand-new course of action in the annals of fiscal policy.

The prospect of soaring deficits and simultaneous tax reductions alarms a few economists. On this new fiscal road they foresee deficits of $500 billion or even $600 billion annually, which in time may cast doubt on the credibility of the federal government as debtor. Every few months the Congressional debt ceiling needs to be lifted by a few hundred billion dollars. Congress last raised it by $450 billion to $6.4 trillion on June 30, 2002; it needs to be lifted right now as the official Treasury debt again has reached the ceiling. At the present rate of spending it will need to be lifted in June or July of this year and, in case of war with Iraq, even earlier.

The federal deficits are compounded by the budget shortfalls of most state governments, estimated at some $105 billion in 1992–1993. State governments are required legally to balance their budgets, which forces them either to raise taxes or cut expenditures. Undoubtedly, most prefer to boost their fees and exactions; the proposed federal tax reduction, if and when it finally passes the U.S. Congress, may even compound their problems as many state systems are based on the federal tax structure.

Both deficits, the federal and the state, constitute a heavy burden on the capital market which keeps no idle savings amounting to hundreds of billions of dollars. They force the Federal Reserve System to come to the rescue; it can print any amount of money and create any volume of credit. The Fed is the financier of last resort, the ultimate source of funds that enables the federal government to finance any conceivable expenditure and cover any possible deficit. Without the Fed, fiscal deficits of such magnitude would soon depress the American economy and cause serious political repercussions. Its ability to create dollars that enjoy world-wide acceptability enables it to distribute the burden of U.S. Government deficits to countless millions of dollar holders all over the globe. They pay for the deficits through depreciation of the dollars in their pockets. Japanese and Chinese, Arabs and Hindus, French and Germans, and all others with dollar savings join Americans in bearing the burden of federal deficits.

This ability to place the economic cost of government spending on millions of trusting victims rests on the extraordinary position of the U.S. dollar as the world's primary reserve currency. The dollar acquired this distinction by international agreement reached at Bretton Woods in New Hampshire in 1944 which committed the United States to provide an anchor for world prices by pegging the dollar at $35 per ounce of gold and envisioned a world economy linked by fixed dollar exchange rates. When the United States suffered chronic gold losses and finally faced inability to make payments in gold, President Nixon severed the dollar's gold link in August 1971, devalued the dollar against major foreign currencies in December 1971, and finally floated it in March 1973. The world has been on a floating dollar standard ever since. It is a fiat standard, unbacked and irredeemable, which can be inflated and depreciated at will. Managed by the Federal Reserve System, it is a useful standard in the financial service of the U.S. Government.

Other countries are narrowly limited in their ability to inflate and create credit; if they indulge in expansion rates greater than those of their neighbors and trade partners, they soon face payment difficulties as imports increase and exports decline. They then have to reduce the expansion rates and fall in line with their neighbors and partners. The Federal Reserve System as the manager of the world dollar standard has no such narrow limits. It can inflate and create credit as long as its expansion does not exceed the world-wide demand for its currency. It may generate trade deficits year after year and aggravate its maladjustments as long as foreign banks and investors hoard the dollars or invest them in American obligations. It is bound to cause world-wide financial upheavals, however, when it depreciates the dollar at excessive rates and thereby inflicts painful losses on those foreign investors.

The floating system based on the U.S. dollar has been a precarious structure ever since its inception. During the 1970s the country suffered the worst inflation in decades. By the end of the decade the inflation rate stood at 13 percent, the Federal Reserve discount rate at 12 percent, and the prime lending rate at 15.75 percent, the highest of the century. The dollar had fallen notably in relation to the currencies of other trading countries and especially to gold.

The 1980s saw some economic recovery but also brought new difficulties and more maladjustments. They led to an explosion of personal, business, and government debt which cast a shadow on the future of the financial structure. Federal government debt soared from approximately $950 billion to nearly $3 trillion. A growing share of this debt was acquired by foreign banks and investors who used the widening imbalance of American imports over exports to invest their earnings in the United States.

The 1990s, finally, seemed to defy all rules of economic behavior. Easy money and credit spurred the most explosive stock market boom in U.S. history, creating enormous speculative wealth and spawning new companies. With financial markets booming, the federal government even reported a budget surplus, borrowing from Social Security trust accounts. The balance-of-payment deficit became a major concern as imports soared and exports stagnated, which further raised the mountain of debt.

Toward the end of the decade, in 1998, the floating dollar standard suffered a number of financial shocks that began in Asia and eventually struck fragile economies around the world. American equity markets continued to surge until 2000 when an economic slowdown became evident also in the United States. In 2001, finally, the American economy slipped into recession for the first time in ten years. The Federal Reserve immediately cut interest rates, a record eleven times in one year; the U.S. Congress passed a large multi-year tax cut, and the U.S. Treasury even sent out tax rebates to boost consumer spending. Yet, the markets continued to plunge following the terrorist attacks on September 11, 2001.

According to various market analyses, foreign investors now own some $7 trillion of U.S. assets, 13 percent of American corporate stock, 35 percent of U.S. Treasury obligations, 23 percent of corporate bonds, and 14 percent of ownership in American companies. They obviously do not take kindly to Federal Reserve policies that depreciate the dollar and depress its exchange rate. Last year alone, European investors in the S&P 500 lost 38 percent on their property compared to just 24 percent suffered by U.S. investors because of the fall of the dollar versus the euro. Suffering such losses, their interest in American investments is bound to decline. They may even liquidate and withdraw their holdings, which could lead to a crushing stampede to the exits.

We now face a situation that resembles the late 1970s when the world began to abandon the dollar and liquidate American investments. It took two years of Federal Reserve inactivity and 20 percent interest rates to restore foreign confidence and lure foreigner investors and creditors back. Today, the Fed is doing the opposite; it is making every effort to stimulate the economy by flooding the money market while the U.S. Treasury is accelerating its deficit spending. Both point towards monetary upheavals and deep global recession straight ahead, and both cast a shadow on the future of the floating dollar standard.

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Hans F. Sennholz, emeritus professor of economics at Grove City College, is an adjunct scholar of the Mises Institute.

Quelle (http://mises.org/fullstory.asp?control=1171)

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syracus

01.03.2003, 08:26

Charley Reese, For Wednesday, February 26, 2003

The Facts About Rebellion

Which political leader made war on his own people, killing 262,000 of them, burning their cities, destroying their food supply and placing the survivors under military occupation?

If your answer is Saddam Hussein, you're wrong. The answer is Abraham Lincoln.

Accepting the Northern but incorrect view of the War Between the States, Lincoln did exactly the same thing Saddam Hussein did. When "his own people" rose up in armed rebellion, he crushed the rebellion, brutally and decisively.

I'm making this point not to disillusion you about Lincoln but to point out how propaganda works. One effective way to propagandize people is to take a fact out of context. Much has been made of the fact that Saddam Hussein crushed the Kurdish rebellion. Any leader of Iraq would have crushed the Kurdish rebellion. If the Scots rose up in armed rebellion today, British Prime Minister Tony Blair would crush, or try to crush, the rebellion. What do you think the British have been doing in Ireland lo these many years?

Any government will assert the right to self-defense. When our forefathers chose to secede from the British Empire, the British tried to crush what they considered a rebellion. And before you give up the delicious and high-quality products of France, you should remember that without French troops and the French fleet, the British would likely have succeeded.

I know it's idealistic foolishness to expect the government to tell the truth rather than to resort to propaganda. For that reason, we, as citizens, have to learn to recognize propaganda. To sell the war, the Bush administration has demonized Saddam Hussein. The fact is, Saddam is a run-of-the-mill dictator, worse than some, better than some. In the war against Iran, a nation with three times the population of Iraq, the Iraqis used chemical weapons. So did the Iranians. In World War I, the United States, the British, the French and the Germans used chemical weapons. In World War II, we used nuclear weapons. In Waco, Texas, in 1993, the Federal Bureau of Investigation used chemical weapons against American civilians.

It's quite true that, like any other dictator, Saddam treats his political opponents harshly, but it's also true that if you stay out of politics, you could live as freely in Baghdad as you can in New York City. Unlike a communist-style dictator, Saddam doesn't give a damn what Iraqis think or do unless it involves a threat to his hold on power. There are two categories of dictators: totalitarians who want to control every aspect of a person's life, and gangsters who just want to stay in power. Saddam is in the gangster category. Iraqi women, for example, are entitled to free education, just the same as men, and are free to choose any vocation they wish. Prior to the Gulf War, Iraq had one of the largest middle classes in the Middle East, one of the best education systems and one of the best health care systems. We, not Saddam, have destroyed all three with the war and economic sanctions.

Another propaganda technique is to focus on Saddam. To hear the Bush administration and to watch American television, you'd think Iraq was occupied by one individual, Saddam. He's only one of 25 million people, and the overwhelming majority of Iraqis are just like us, with the same dreams and hopes we have.

I don't give a damn about Saddam Hussein. He's a tough guy and a killer. He's lived 66 years in a tough and dangerous world. I'm sure he's ready to die if it comes to that. But why should Iraqi children have to die or be maimed or orphaned just because our political leader doesn't like their political leader? It's too bad we can't give Bush and Saddam each a knife, put them both in a dark room and let them settle the matter between themselves.

Quelle (http://reese.king-online.com/Reese_20030226/index.php)

Damit das "andere" Amerika auch eine Stimme hat :).

syr:sss

syracus

01.03.2003, 12:30

Noch eine interessante Meinung zu Frankreich / USA / UN ;):

Weekly Column - Tuesday, Feb. 25, 2003

"Friendly Fire"

After writing last week about the anti-American agenda of the organizers of the anti-war movement I received a letter from an intelligent Frenchman who says that he loves America. To his way of thinking George W. Bush is the problem. I also received an email from the chief pro-American voice in the Brazilian media, Olavo de Carvalho. He is exasperated with American conservatives for failing to see that Latin America is being taken over by communists who dream of destroying the United States. The two missives are interrelated and deserve to be considered together.

My French correspondent took me to task for lumping all anti-war protestors together, as if they were uniformly opposed to the United States. According to him, “Last week’s protests in Europe gathered a wide variety of viewpoints spanning from crypto-communists bent on weakening America to concerned citizens who rightfully or not consider that war is the last of solutions.”

The readers of this column probably do not realize that I was initially (though privately) opposed to attacking Iraq. But the rhetoric and the affiliations of those opposed to the war changed my thinking. If an American is to take sides in a debate, he cannot in conscience side with those who talk hatefully and maliciously of American power. He cannot, in conscience, argue on the side of communists and anti-Semites against America’s commander-in-chief. As soon as the old Nazi and communist slanders began to appear, as soon as the vicious personal attacks on President Bush were pronounced, the anti-war argument began to stink. And this was no ordinary stench. To adopt the rhetoric of America’s enemies, or to stand alongside those who hate the United States, is inexcusable.

But my French correspondent protests. He is the friend of America and does not prefer evil. He cares what happens to us. “The problem that the world perceives,” he wrote, “is not the fact that America is the only military economic superpower, but what George W. Bush is and what he wants to do with that power.”

The argument against the war is simple. Attacking a country armed with mass destruction weapons is a reckless adventure. “George W. Bush is by all accounts armed with a very mediocre knowledge of the world beyond America’s borders,” explained the Frenchman. “George Bush and his administration appear as a team of ignorant and arrogant people who have no intention of embarrassing themselves with details. Yes, Bin laden is a criminal for what he did, but also [he is responsible] for unleashing this mediocre administration’s contempt for the outside world. It’s the story of how Bin Laden opened George’s Pandora’s box if you will.”

How disappointing it is to find a statement against the war that begins so well yet ends in a vicious attack on the character of President Bush, on the competency of the U.S. military, and on the judgment of the American people. Now maybe the American people are wrong and the French are right. But it cannot be right to publicly show such naked contempt for America. Contempt so expressed is a two way street. If you want others to feel contempt for you, express contempt for them. If the French want to know why Americans are angry with them at this point, it is the exasperation we feel at being insulted after all that we have done to keep the world – to keep France – free from totalitarianism. The thanks we get, the thanks we have too often received, is to be derided for stupidity and arrogance.

My French correspondent, not remembering his history, asks the following rhetorical question: “Do Bush, Rice and Rumsfeld think that the Iraqi population will become pro-American once the dust has blown over and … they can … eat at McDonalds?”

Turkish truckers making trips into Iraq recently reported that Saddam’s soldiers are desperately hoping for an American victory. In public Iraqi soldiers talk as if they are loyal to Saddam Hussein’s regime. But to the Turkish drivers they show their true feelings. They want to know if the American forces are already staged on the Turkish side of the border. “What is taking so long? Saddam is starving us. Tell the Americans to hurry.” Even the Iraqi army wants the Americans to come. It only makes sense. In public all Iraqis must denounce the United States while pledging loyalty to Saddam on pain of death. Everyone in Iraq knows this is the case. Are we to think that people so terrorized are happy with their government and resentful – as they are in France – against the golden arches of a fast-food empire?

My French correspondent is deeply worried about the future. “What about the consequences of the new regional power structure that will appear? What would the Iranians think, for example?”

In 1944 the French were not anxious about the consequences of “the new regional power structure” that would be established in central Europe after Hitler’s fall. They simply wanted to be free from Nazi oppression. Did the United States make a mess of Europe after our victory in World War II? Not at all! American policy enabled German, Japanese and Italian democracy to flourish. So why would the establishment of an Iraqi democracy be any different? As for the Iranians, they also want freedom. They are tired of religious tyranny. Yet my French correspondent doesn’t seem to know these most basic facts. Instead, he berates the American president for having a mediocre knowledge of the world.

According to my French correspondent, “Bush wants to ‘protect America’ but he will end up fueling further anti-American sentiments throughout the world.” Yes, indeed, that is how it works. If we defend ourselves then we are evil and deserve the world’s ill opinion. It should surprise no one that communists and the enemies of America invented this argument and others like it. They are fueling and financing today’s anti-American propaganda on a huge scale. It is a replay of the Vietnam War protests. And as Col. Stanislav Lunev once explained to me, the Soviet Union fed more cash to the anti-war movement in America during the 1960s than they fed to the communist war machine in Southeast Asia. So why does a French friend of America take up an argument meant to paralyze America’s will to resist?

According to my French correspondent, “Nobody except America and Britain wants to see Washington dominate the Persian Gulf. In these matters we all know where things begin but no one knows where and how they will end. As for the ending Bush inspires absolutely no trust in the rest of the world. Would you entrust a china shop to an elephant and then let him play poker with your money and your home mortgage?”

But my dear friend, your insults are off the mark. An overwhelming majority of Americans trust in the leadership of George W. Bush. In the crisis and aftermath of Sept. 11 we saw his tears and his determination to wage war on the perpetrators and their overseas supporters. Despite the slanders of the left, despite the president’s human frailties, he is very unlike his predecessor in office. George W. Bush is a sincere man and sincerity is the coin of trust. Furthermore, President Bush did not take counsel of his fears. Against the advice of his bodyguards he insisted on returning to Washington on Sept. 11. Against the protests of his vice president, he insisted on governing from the White House and not from a bunker. President Bush follows the way of that great America general, Thomas “Stonewall” Jackson, who said, “Never take counsel of your fears.” The French would do well to study Jackson’s example. Instead, it seems, they have attended too long the George B. McClellan School of Politics and War.

My French correspondent is also worried about the U.S. economy. “That is our main interest isn’t it, after all?” he noted. “It is quite clear that America’s economic situation is precarious. How is Washington going to foot the bill if it goes at it alone?”

This may sound like blasphemy to some, but economic interests – important as they are – should not be placed above security interests. Unless we are secure from attack any prosperity we might enjoy would be precarious and false. Furthermore, if anyone thinks that Bush’s actions tend to hasten an economic crisis they should think again. We have just experienced an unprecedented inflation of credit. This is what triggers economic crises. If you recklessly inflate credit you will eventually produce a crash. It is as simple as that. The outcome will be the same whether we invade Iraq or not.

My French correspondent, however, is already prepared to blame a global economic crisis on President Bush. He has already embraced the argument prepared by the communists. And this Frenchman should know better. “I was brought up in New York,” he explained, “and I lived there 15 years so I can understand, better than those who have never been to America, that the assassination of more than 3,000 people is in the hearts and minds of practically all Americans an act of war. But it isn’t a visa for reckless endangerment on a worldwide scale. Don’t fuel further anti-Americanisms. Stifle Iraq if you will, but don’t stain your hands in the name of ‘freedom and democracy.’”

My French correspondent disdains “a naïve vision of things.” A disagreement between friends need not make them enemies. “If certain Americans think that way then it just reveals the contempt they have for what they call ‘friends.’”

In America we do not like war. So we can readily understand those who are against an attack that may be reckless. What we object to is not the anti-war stance itself, but the disrespect shown to the person of our president, to our flag and to our culture. It is not friendly to insult people or burn their flag – or march with those who do. And how friendly is this “advice” offered by the French, salted as it is with so many insults?

The Frenchman wrote: “I, like many in Europe, refuse to let some mediocre politician at the helm tarnish my hopes for America’s role in the future and my belief in the values that it should truly stand for. God bless America and may it come out of this folly unscathed.”

I would say “amen” except for the insults that came before. Accusing the American leadership of a contemptuous and arrogant attitude, my French friend revealed his own contempt and arrogance. Here we find a classic projection of the Jungian shadow – a textbook case of the pot calling the kettle black!

Americans need to know about the kind of propaganda, the kind of thinking, that has been spread across the Latin world. One might say that France is the cultural center of this world. Americans are often impressed by these French arguments. We therefore talk among ourselves. “We must be sensitive to the Latin countries. Perhaps we have run roughshod over them. Perhaps we have hurt their dignity. Let us be careful. Let us be courteous and humble.” This is the logic that has often made America into a timid, paper tiger. It is the logic of our current policy in Latin America. And this brings me to the statement of the Brazilian philosopher, Olavo de Carvalho.

In a missive with the title “Brazilian anti-Americanism is dangerous,” Olavo writes: “Brazilian anti-Americanism is turning into a furious rage, and nobody in Washington seems to be conscious of it. I am tired of being the ONLY pro-American columnist in the main Brazilian media and suffering attacks and death threats for it, while Americans themselves don’t care in the least what is happening here.”

I should like to explain to our Brazilian friend that we have been likened to an elephant in the world’s china shop. While studying politics at the university of California I was taught, as all educated Americans are taught, that past American interference in Latin America was a grave sin. Yankee imperialism must come to an end. That is the lesson we were forced to memorize. Olavo needs to understand the extent to which we have been intimidated by words similar to those of my French correspondent. While America is willing to act around the world, it is afraid to act in the Western Hemisphere, in Latin America. The United States is afraid to take notice of Brazil’s anti-American hysteria. We were taught to feel guilty before those in South America who hate us. Just as Brazil is the victim of anti-American propaganda, Americans have themselves absorbed the poison.

According to Olavo, “Every big Brazilian newspaper says Americans are only fighting for oil, and nobody contradicts them. Pictures showing George W. Bush with a Hitler-style mustache reach every Brazilian mailbox, but no message against Saddam Hussein is seen anywhere except in my own electronic newspaper www.midiasemmascara.org and a few other sites owned by my friends. Any anti-American lie, even an absurd one, is immediately taken for granted as pure truth. Any pro-American word I write is at once explained as the work of a professional liar ‘sponsored by Wall Street.’ My personal situation is the best symbol of the Brazilian state of affairs. Hundreds of powerful NGOs have millions of dollars (even from the Ford Foundation) to spend on anti-American propaganda, but the only Brazilian journalist that fights against them, with his own personal resources, with no American or local support, is accused of being “sponsored” by Wall Street, the CIA or the Pentagon. My life is turning into a Franz Kafka novel. If I believed in reincarnation I would choose to be born again as a communist or radical anti-Zionist. That is the best of lives for a Brazilian.”

Here is a true friend of America, and he suffers for his friendship. He also knows the enemy we are facing. It is the enemy of all mankind and of civilization. He knows what is happening. He knows that civilization is losing. He cannot understand why America remains paralyzed in the face of this mounting danger. It is the simple fact that anti-American propaganda, reaching a crescendo, can work wonders. It can stop the superpower from attacking its enemy. It can purchase precious time for the terrorists to plot their next strike. It can also prevent America from assisting the people of Venezuela against the emerging tyranny of Hugo Chavez.

“Is it really IMPOSSIBLE for American conservatives to take into account what is happening here?” Olavo de Carvalho asks. “Is the Latin American ‘Little Axis of Evil’ so unimportant for you?”

I know for a fact that American conservatives, in general, do not understand that the communist threat is a continuing one. They have given way to victory sickness, imagining that communism is dead. There is no threat, you see. The KGB colonel in the Kremlin is George W. Bush’s friend. Sadly, America has been seduced. Europe has been seduced. Brazil has been seduced. We are living in a Kafka novel. Olavo, you are NOT ALONE. Destruction is written across the heavens. But despair is a sin. We must not despair. Whatever the insults offered us we must have faith. We must do our duty. And that duty is to see things clearly, without hate or rancor. We must follow the words of Gen. Jackson. “Never take counsel of your fears.” While others flee we must remain and take the brunt. We must even take the “friendly” fire of deluded friends.

It is not easy.

Jeffrey R. Nyquist
February 25, 2003

qUELLE (http://www.financialsense.com/stormwatch/geo/analysis.htm)

syr :sss

syracus

01.03.2003, 12:43

A Bear Case Overview

by Bill Fox
Investment Strategist, American First Trust Financial Services

February 28,2003

There is strong evidence that America's economic trends and outlook may be far more serious than has been generally reported in the national media. Prudent investors need to be aware of the full spectrum of bear case arguments, even if it is hard to prove the validity of certain trends or understand when or where they might reach a "tipping point" where they could fully impact the economy and market. All of that having been said, this report explains why I think it is likely the market will continue to significantly decline over the next couple of years or longer.

Numerous key macroeconomic indicators look bad
with no near term recovery in sight.

Debt is at historic highs and keeps growing while credit quality is deteriorating.

According to Doug Noland, author of "Credit Bubble Bulletin," Total indebtedness (corporate, personal, and government) is currently about three times GDP compared to 2.6 times during the Great Depression. Corporate and individual bankruptcies are at record highs. Consumer spending, which comprises about 75% of GDP, now appears to be slowing down as a result of higher debt levels eating into discretionary funds, while credit creation by Government Supported Enterprises such as Fannie Mae, GNMA, and Freddie Mac outside the banking system continues to grow by as much as 20% a year. The national strategy of outsourcing manufacturing and emphasizing services through a very liberal approach to "free trade" has distorted our economy in both directions. The mortgage refinance boom has been an important element to provide consumers with liquidity and keep the economy going, but this can not last forever.

The economic activity pulse is weak.

Consumer sentiment is low, production is in a slump, and hiring is at its worst point in twenty five years. The U.S. personal savings rate has dropped to nearly zero. cf. Jim Puplava "What Ails Our Economy."

The balance of trade deficit is over the 5% of GDP "danger zone" and keeps growing.

The U.S. has gone from being the net creditor of the world to the world's greatest debtor nation. In the recent past, foreigners have used their excess dollars generated by the balance of trade deficits to buy around 15% of America's stocks and about 40% of its Treasuries. America consumes 6% of the world's savings to finance its deficit.

Dollar slide trend shows no sign of reversing.

The dollar has lost about 20% of its value against the Euro in the last year, and looks likely to continue sliding much further. Normally a dollar slide could be simply a cyclic corrective process that will make exports cheaper and imports more expensive, decreasing imports and increasing exports to bring things back in balance. Bears fear that something more ominous has taken place; that is, America has exported so many jobs and facilities overseas that it has seriously hollowed out its manufacturing base and does not offer enough quality products to eliminate its trade deficit problem even at lower prices. In classical economics, over the long run, a strengthening currency is a good sign that a country is increasing its manufacturing base, productivity, innovativeness, standard of living, and quality of its products (from this viewpoint, a unit of currency is roughly like holding a share of stock in an entire country). Countries such as Argentina that went from being a first world country at the beginning of the 20th century to a third world country by its end suffer from continuing currency slide problems.

A sliding dollar tends to scare foreign investors, encouraging sell-offs of their shares in the U.S. equity markets and their holdings of U.S. bonds. If the dollar continues to slide, the Fed may need to raise interest rates to attract foreign investors to help finance America's burgeoning deficits. Rising interest rates can crimp business recovery and reduce stock values further.

Earnings growth for American companies is still lackluster.

Analysts continue (as they have since 2000) to revise earnings growth estimates downward from initial rosy projections such as a 20% growth rate looking forward a year to well below 8% as the projected time periods arrive. High tech companies complain again that inventory channels are backing up.

The global economy is still stalled out with no near term turn around in sight.

There is no major advanced industrial nation around to act as an "global economic engine." Japan and Europe are both in recession. If the Japanese economy becomes more distressed and Japanese start pulling investment funds out of the U.S, that could hurt the dollar and U.S. markets further. China has the world's fastest growing major economy with a large balance of trade and currency surplus, and the national media usually portrays this as wonderful news. But there is an important dark side to the "free trade" miracle of China that American business magazines and business school professors rarely mention in their discussions about free trade. (On the benefits side, the basic idea is that if all nations focus on their comparative advantage through free trade, a global version of the division of labor concept will supposedly make nations wealthier, and wealthier peoples tend to be happier and friendlier to each other). The Chinese work force is effectively engaged in a labor price war with American, Japanese, and European workers, working long hours for almost nothing to gain global manufacturing market share. India is trying to play the same game as China, but is not nearly as significant.

In one sense, this really is a "war," that is, rather than operate in muddy trenches while sacrificing lives, the contestants work grueling hours under substandard conditions with low paychecks to achieve the same ultimate goal as in most shooting wars, that is, gain market share or command of natural resources that translate into enhanced national economic, military, and political power. Please remember that a manufacturing base is part of the total power equation, which is why Sherman's troops in the Civil War and Allied bombers in World War II leveled every manufacturing facility they could strike at. If being an American citizen is comparable to belonging to an American "union;" Chinese workers are analogous to "strikebreakers" in the global economy. As a point of fact, the Chinese "miracle" has had a militaristic/nationalistic struggle tinge to it, to the extent that the Chinese government has made it a practice to place active duty Red Chinese Army officers in charge of newly privatized industries. A Chinese firm controls both ends of the Panama canal, and American "free trade" goods have gone into Chinese ICBMs that can now incinerate our major cities. (c.f. the video interview of global investment gurus Jim Rogers, Marc Faber, and Daniel Yergin which validates many of the key points in this Bear Case Overview, and includes an extensive, albeit "gushing" discussion of China. Marc Faber claims the U.S. dollar has to drop 80% before the U.S. will become competitive with the Chinese RMB currency. Click to the "Riverside Conversations" interview. Although this has a Dutch language introduction, the interviewees speak in English.)

The overall U.S. stock market valuation remains high.

Despite the S&P's decline by nearly half since March 2000, according to State Street Global Advisor strategist Diane Garnick, the S&P 500 still trades at 30.4 times trailing GAAP earnings, well above its 53-year average of 16.2. Most prolonged bull markets have been followed by bear markets that are proportional to them. From 1982 to 2000 the U.S. had the longest secular bull market in history, capped by the greatest mania in history from 1995 to 2000. We are only two and a half years on the backside of all this. Please note the PowerPoint presentations "Buy & Hold?" and "Why the Bear Market Is Not Over". Also, Bill Gross, head strategist of PIMCO Funds, thinks the Dow must drop below 5000 before it is positioned to offer reasonable risk-adjusted returns.

The stock market decline has hurt business and government.

A further downward market spiral could threaten to increase the "negative wealth effect" in which eroding portfolio values reduce consumer confidence and consumer spending. The "negative wealth effect" is already impacting corporations, for example IBM now has to devote 20% of its cash flow for the last year to bringing its pension plan back up (cf. Paul Kasriel) Lack of capital gains tax revenue and recession is now causing about half the states in America to talk about raising taxes: http://www.nytimes.com/2003/02/14/national/14TAX.html. This could threaten to choke off business profits and capital investment required to create jobs and sustain economic recovery.

Interest rates are at historic lows and seem to have no way to go but back up.

So far dramatic drops in interest rates by the Fed have been "pushing on a string" to revive the economy. The problem is that if interest rates start moving back up, rising debt service could help push America into a liquidity trap. (Fed Chairman Alan Greenspan voiced concerns about reaching a "point of no return" in his recent Congressional testimony, discussed at CBSMarketWatch.

America's money supply is growing at torrid pace threatening to ignite serious inflation.

According to Jim Puplava , the money supply grew at 16% in the 4th quarter of 2002. Its growth has averaged at least two to three times the officially reported inflation rate of 2-3% over the last five years. Historically, inflation runs parallel to money supply growth. From 1995 to 2000 the U.S. was able to ramp up the money supply and run balance of trade deficits and get away with it, largely because foreigners were willing to sop up excess dollars as a global reserve currency or invest their dollars in America's roaring stock market. Now the global demand for dollars is holding constant or even reversing, and meanwhile the money pump keeps going. Russians have started dumping dollars for Euros, and many Islamic countries plan to dump dollars for a revival of the ancient Arab gold coin the Dinar as a reserve currency. Dollars washing back at the U.S. would encourage inflation. Critics voice concern that by ramping up the money supply to stave off the impact of the Asian crisis beginning in late 1997, followed by similar actions regarding the Russian default and LTCM crisis in 1998, followed by the Y2K concerns of 1999, followed by efforts to stave off a U.S. market and economic collapse since 2000, the Fed has created additional bubbles in the economy besides the stock market bubble, such as bubbles in consumer finance, the bond market, and the mortgage finance/real estate market.

Risks of "shocks" is high, particularly related to oil, terrorism, and financial system meltdown.

Oil shocks helped to induce the stagflation of the 1970's. Marshall Auerbach explains how we might see higher overall oil prices even if the U.S. quickly occupies Iraqi and its oil fields. Oil prices are sensitive to relatively small supply disruptions, and last year the Alaska pipeline was shut down for two days to fix damage from a hunter's rounds. Al Qaeda has targeted the global oil industry for sabotage, as reflected by a recent attempt to attack the world's largest refinery in Saudi Arabia. Another point on oil: global demand is escalating, particularly from China, while North America and other areas outside of the Middle East face a production decline curve. "War for oil" will probably become an increasingly familiar theme in the 21st century. Check out Jim Puplava's "PowerShift" series on oil, politics, and war.

As for a possible financial system meltdown, many bears believe that there are still a lot of other "Enrons" and "LTCM's" out there waiting to happen (Long Term Capital Management is the hedge fund that blew up in 1998). A prime suspect is Dow Company JP Morgan Chase, implicated along with Citigroup in suspect dealings with Enron, and which has over 20 trillion (twice America's GDP) in derivatives exposure, whose counterparty risk and deal structure quality is open to question. The LTCM blow up required a coordinated Fed/bank bailout to avoid a financial meltdown. The problem is that JP Morgan Chase is on an order of magnitude 100 to 1000 times larger and may not be "containable" if it blows up. (J.P. Morgan is being sued along with Citigroup for allegedly helping Enron set up bogus offshore entities, also, as mentioned elsewhere, it is being sued by Blanchard &. Co. for alleged gold market manipulation. The company has been experiencing profitability problems in its retail banking operations, and many critics claim that they can only guess what is going on in the derivatives area).

...This does not include American bank exposure to third world countries such as Brazil and Argentina that are unlikely to ever repay their debts. Pat Buchanan wrote about the most recent crisis in "Bailing Out Brazil or Robert Rubin?" (Aug 14, 2002) in which the Bush Administration stepped in on behalf of the big banks to stave off the day of reckoning one more time. As Buchanan points out, although the third world debt problems started with prior administrations, no one wants to be in the wheelhouse when the ship hits the reef. This is actually ominous information, because it implies that we have top policy makers who are in fact desperately trying to "keep up appearances" at all costs while sweeping major problems under the rug that only get larger and messier over time and morph and reemerge in other places. Pat Buchanan wrote on January 27th that he thinks the global economy could be on track to crash.

Financial risk to American corporations has increased because the high amount of debt they have absorbed in their capital structure. As an example, according to Adam Barth in "The Collapse of the Inverse Pyramids," in regard to the thirty "blue chip" companies that make up the Dow Jones industrial average, "The Dow’s net tangible assets are presently leveraged at a 6/1 ratio- a capital structure bearing far greater resemblance to a hedge fund than a prudently financed corporation."

Policies on a government, corporate, Wall Street, and national media levelmay still be adding fuel to the fire, driving us deeper into crisis.

Symptom suppression and feedback distortion.

Critics charge that in the late 1990s the Fed and U.S. Treasury intervened to artificially build a strong dollar and suppress the price of gold and silver to mask underlying economic problems and disguise inflation, and now we are beginning to experience pent up whip-lash as the smoke-and-mirrors act begins to unwind. Among other things, an artificially strong dollar increased demand for the exports of third world countries struggling to pay their debts to major U.S. banks. As part of this pattern, the U.S. bailed out Mexico in the mid-1990's following the Peso crisis. An artificially strong dollar and artificially low inflation rates also helped fuel the greatest speculative stock market in history and make money for major Wall Street firms.

Misleading inflation reports.

The topic of inflation can be complicated by the process of netting out pockets of deflation resulting from cheap imports from China and lower cost chips from the microcomputer chip revolution with pockets of inflation elsewhere, such as in basic commodities, consumer durables, and asset prices (stocks and real estate). But step back and look at the big picture, and Jim Rogers sees plenty of snake oil in the way "inflation" is being presented overall to Americans. Go to his archives at www.jimrogers.com, click on "articles," scroll down to "22 March 2002 They Are Lying To Us Again." (This was published in a summer 2002 issue of Worth Magazine).

How policymakers may have put the gold and silver barometer of inflation to sleep for a while.

John Embry, chairman of investment committee for the Royal Bank of Canada, has accused the Fed and U.S. Treasury of artificially suppressing the price of gold through coordinated central bank sales. You can find his internal report that got leaked to the public by clicking on 'The Embry Report" archived at Chris Temple's National Investor "Other Experts" web site at: http://www.nationalinvestor.com/experts.htm

In Dec 2002, Blanchard & Co., the largest retailer of physical gold in America, filed a $2 billion anti-trust law suit against Barrick Gold Corp and J.P. Morgan Chase for "unlawfully combining to actively manipulate the price of gold" and making $2 billion in short-selling profits by suppressing the price of gold at the expense of individual investors.

James Sinclair, lauded by Forbes magazine as a successful CEO of a precious metals trading company and gold mining firm, accuses the Fed and Treasury of using an Exchange Stabilization Fund and other tools to manipulate gold as well as currencies. He provides a brief history of the ESF, created by Congress in 1934, and some insight into how it manipulates markets in his Dec 5, 2002 guest editorial "What is the Difference between Stabilization and Manipulation?" Go to www.jsmineset.com and type the title of the article in the search box.

Manipulation of commodities markets and general stock market.

Jim Puplava describes how "gearing" may be behind "flag pole" rallies that have periodically bolstered the markets: http://www.financialsense.com/Market/archive/shortsilver_1.htm According to Puplava, the gold and silver markets are among the most heavily "geared" markets of all. He claims there are about three times as many short positions in derivative contracts on gold and silver as there is physical gold and silver to cover. Most long contracts get rolled over rather than delivered on the commodity exchanges. If the longs all demanded delivery, some financial observers think that this could possibly cause panic and possibly bring down some exchanges...and maybe even J.P. Morgan Chase, which some sources believe is heavily exposed in this area. Bill Murphy, head of the Gold Anti Trust Action Committee, provides important insights in his interview with Jim Puplava at: http://www.financialsense.com/transcriptions/Murphy.htm.

...a quick editorial remark...
when the price of gold steadily declined under the pressure of central bank sales and other influences from 1996 to 1999, it threatened to put half of the world's gold mining companies out of business. Back in 1996, many investors responded to Alan Greenspan's comment about "irrational exuberance" regarding overall stock market valuation (the Dow then was at 6500) by seeking to diversify into gold as a safe haven, only to see it collapse underneath them as internet stocks without earnings kept moving up. "Prudence" was punished and recklessness was rewarded. This is a theme I will return to later in my comments in the "grid-lock" section about social values getting turned on their head. Ironically, back in 1966, during his more Bohemian days as a member of Ayn Rand's inner circle, Dr. Alan Greenspan wrote a paper titled "Gold and Economic Freedom" in which he stated towards the last two paragraphs: "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value...The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

So in other words, if John Embry is correct, Alan Greenspan's Federal Reserve policy has been a major adversary of gold, yet in his younger years Dr. Greenspan was an ardent supporter of gold. Ayn Rand's laissez faire, libertarian capitalist philosophy is generally against big government and Fed intervention, yet Dr. Greenspan's Fed has presided over one of the most proactive Feds in history in terms of money expansion and support for deficit Federal spending. This dovetails with a theme I reinforce at the end of this report about the need for the American people and their policymakers to resolve inconsistencies, establish credibility, and sort things out. (Jim Rogers thinks Greenspan's policies as Fed Chairman have been a disaster, as pointed out in his excellent 22 Oct 2002 article "For Whom the Closing Bell Tolls" archived at www.jimrogers.com).

Could a headstrong guns and butter policy drive us to double digit inflation?

According to my introductory economics textbook by MIT professor Paul Samuelson, societies can afford either guns or butter but not both. Go for both, and financially beleaguered governments eventually end up running the printing presses to make ends meet --and one gets serious inflation. (For example, in the 1970's Vietnam-related spending plus the Great Society Programs plus oil shocks helped to give us stagnation and double digit inflation that killed the stock market).

The Bush Administration has proposed a $500 billion deficit, or some huge number like that (it keeps changing, and the real number, that probably includes government "slush" accounts, is probably much larger). Our national debt is officially around $6.5 trillion (again, who knows what it really is, unless one can somehow uncover and figure out all of the "off balance sheet" and social security-related obligations) and is now perhaps somewhere around 65% of America's $10 trillion GDP. As a general rule of thumb, when a nation's debt gets over 100% of GDP, it runs into a serious danger of falling into a liquidity trap. In fear of this, in the late 1990's, Sweden and Canada slammed on the austerity brakes to bring down their national debt levels just in the nick of time. There is currently no sign this is happening in America, in fact, quite to the contrary. Fed Governor Ben S. Bernanke and Chairman Alan Greenspan have stated publicly that they are willing to err on the side of trying to inflate our way out of tight spots. As mentioned elsewhere in this report, Alan Greenspan recently expressed concern about a liquidity trap in his recent Congressional testimony. In the aforementioned video interview with Marc Faber and Jim Rogers, the two individuals claim that the Fed is clearly signaling that inflation is ahead.

Corporations need to rebuild credibility.

The article "Illusory Profits Cloud USA Inc" claims that profit growth may have been overstated by American S & P 500 companies by about 150% from 1995 to 2000. http://news.bbc.co.uk/1/hi/business/2075864.stm Warren Buffet stated in a November 1999 Fortune article that on average companies in the 1990's actually had below average profits and earnings growth, particularly compared to the 1950's. In other words, deceit was practiced far more widely than by just Arthur Anderson.

Major Wall Street firms still need to show they know what they are doing.

Back in late November 2002, Wall Street firms faced over $1.0 billion in fines over charges that they misled investors during the boom years. Post bubble performance has been problematic as well; according to David Futrelle, in "Rebuilding Credibility on Wall Street" (Business2.com, Feb 8, 2002): "Consider the results of a recent survey by Zack's Investment Research: For the second year in a row, researchers discovered that the stocks that were least popular with analysts ultimately performed the best. Stocks with the highest percentage of "sell" ratings moved up nearly 60 percent in 2001, while the stocks with the highest percentage of "buy" ratings (you guessed it) plunged more than 70 percent." Part of this could be due to herd instinct that exists in all industries, for example Forbes columnist Ken Fisher points out how the consensus year ahead forecasts of Wall Street strategists has tended to be consistently wrong in his studies that have gone back a decade.

The national media has been a big part of the problem. :hihi

Please note the Washington Post expose: "The Media Fueled New Economy and Vice Versa", read about Maria "Money Honey" Bartiromo and other cheerleaders in "On CNBC, Boosters for the Boom", and lastly, this article explains why the media tends to deny the reality of a bearish economy: "Why James Grant Will Never Be Louis Rukeyser" at Bloomberg.

Certain overall patterns may suggest something more serious than a relatively short, self-correcting recession

A movie running backwards?

Morgan Stanley economist Steve Roach has commented that all of the "virtuous circles" that led to economic and market expansion in the 1990's seem to have now reversed into vicious circles, and it feels like the 1990's "movie" is now running backwards.

Worse than Japan?

Contrary to the current Wall Street consensus that America is different, Doug Noland in "Pondering Post Bubble America" argues that the U.S. is actually worse off than Japan and may emulate the tragedy of Argentina. Japan entered its decade of economic malaise as a net surplus, net creditor country, which has given it a cushion that the U.S. now lacks as a net debtor country with record trade deficits.

Are we overly "grid-locked" when it comes to handling the REAL problems?
(Are policymakers so encumbered with "hidden agendas", conflicts of interests, "super ordinate goals," and misperceptions that they are unlikely to adequately address and help "fix" our economic problems any time soon?)

Lew Rockwell argues that America's policy makers are too steeped in inappropriate Keynesian economic ideology to adequately diagnose and cure our economic ills (c.f. "George W. Keynes" and "Keynes Rules From the Grave" in his archives) Rockwell's "Austrian" school of economics (www.mises.org), whose proponent Friedrich von Hayek has been idolized by Forbes magazine, emphasizes saving, prudent investment, cost control, and free markets as the true path for viable economic growth. Keynesian economics emphasizes utilizing credit expansion and deficit government spending to stimulate overall demand. This can be great for pork barrel politicians and big money center bankers looking to boost loan volume, but tough on Joe Average American when he finds out that he is tapped out on unsecured debt while overextended business owners have to cut back on jobs. Lets rewind the tape here for a moment and recollect that "Deficit spending is simply a scheme for the confiscation of wealth" according to Dr. Alan Greenspan (as mentioned elsewhere in this report) performed by people who might hold the "shabby secret of the welfare statist's tirade against gold."

Forbes business writer and CBS Market Watch commentator Peter Brimelow argue that most Americans are ideologically blind to trends that are permanently altering the country's social fabric, undermining core values, increasing welfare and other "drag" costs to the economy while decreasing its overall level of social and economic efficiency (cf. reviews of his book "Alien Nation" at his site www.vdare.com)

From the left, Gore Vidal claims that policy makers are showing some serious inconsistencies in terms of their obligation to support and defend the U.S. Constitution: "The Enemy Within" and "The Last Defender of the American Republic?". (Somewhat paradoxically, there are commentators on the right such as Pat Buchanan and Ron Paul who have been making similar observations as Gore Vidal).

Since 1998, the U.S. has lost 13% of its manufacturing jobs, and NAFTA has exacerbated our trade deficits. Go to www.AFL-CIO.org, click on "manufacturing," scroll down and click on "IUC Report: The Crisis in Manufacturing." Complete with narrative, charts, and graphs, this paper talks about the results of policymakers who may be so steeped in internationalist, free trade ideology (or just plain short-sighted greed) that they have forgotten that charity begins at home while they proceed to export manufacturing infrastructure, trade secrets, and skilled, tax-paying jobs overseas to countries that engage in dumping, gross worker exploitation, vicious human rights violations, and use of our technology for hostile purposes. Some "free trade" partners even threaten to become our military enemies, such as China, which makes angry noises at the U.S. over Taiwan and influences North Korea behind the scenes. Much of Saddam Hussein's chemical warfare arsenal (which he freely used in the Iran-Iraq War and is probably hiding right now), was supplied to him by American companies. As another paradox, it was a Democratic President and supposedly ardent friend of organized labor in America, Bill Clinton, who helped push through the North American Free Trade Agreement that organized labor decries as a major policy blunder.

Let me summarize here...

There are dozens of sources I could point to in this area, but what they all have in common is the following theme: sure, there have been manias and market booms and busts before; there were stock market booms surrounding canals, telegraphs, railroads, and electrification in the 1800s and the automobile and radio and aviation in the early twentieth century. In their day, these innovations seemed every bit as exciting and revolutionary to prior generations as the microchip and internet revolutions have been to our generation. However, the mania from 1995-2000 has dwarfed all prior manias hands down. The accounting scandals have dwarfed all previous periods of mass dishonesty. Because of the sheer scale and magnitude, a lot of social critics are wondering if there is something much deeper going on, that is, a society that has become too cacophonous in terms of its core values, and where it does show commonality in values, it appears to be deeply infected with immediate gratification and a socially irresponsible "devil take the hind most" and a "wise guy" approach to life. (Even among some of the sources I like, such as Jim Rogers and Peter Brimelow, they are at loggerheads on whether an open borders policy is an economic and social blessing or an economic and social disaster). Many bears believe America is: a) economically, ideologically, and ethically too deeply distorted to get back on the road to true prosperity any time soon and b) there is probably a lot more negative news and "settling of accounts" left ahead before things get sorted out and get put back on track.

No evidence yet that we AREN'T headed towards costly boondoggles and "imperial overstretch."

For thousands of years Central Asia has been a graveyard for overconfident empires much like Russia was for Hitler and Napoleon. Empires that wage costly, prolonged military ventures without keeping their manufacturing and general economic base healthy have eventually imploded, such as the Spanish and British Empires. Larry Lindsay, President Bush's former economic advisor, lowballed an estimate of $200 billion to go to war with Iraq. The longer term tab for "nation rebuilding" and prolonged occupation for more than five years could exceed a trillion dollars. And of course we still have troops in Germany and the Balkans and South Korea other exotic places around the globe.

Just as in the case of buying a risky stock or mutual fund, when it comes to foreign policy, it can be a good idea to mentally model in advance the possible outcomes and envision double up, stop loss, or exit strategy points. As the Bush administration and media talk about going into Iraq and taking a hard line towards other countries such as Iran and North Korea, the report cards coming out of Afghanistan are hardly "straight A". (For example, numerous accidental bombings of civilians --to include a wedding, U.S. troops abandoning posts along the Pakistani border, increasing tempo of insurgent operations; (c.f. See SFGate.com also "Details of U.S. Victory are a Little Premature")

Are we up against a hydra?

Let me share a joke that circulated in Germany in the early 1980's when Israel invaded southern Lebanon with massive tank and aerial support. The attack was commanded by Ariel Sharon, Israel's current Prime Minister, nicknamed "the Bulldozer." The joke was that Adolf Hitler came back to earth from Hell to look around a bit. When he saw that is now the Germans who are making money and the Jews who were waging Blitzkrieg warfare, he couldn't deal with it and decided to go back down to Hell.

As you may recall, the Israeli blitzkrieg failed miserably in its principal objective to root out the PLO; ironically, the PLO is politically stronger and its headquarters is now physically located closer to Jerusalem. Hezbollah, which is funded by Iran and is considered by some to be as dangerous as Al Qaeda, developed the insurgent infrastructure to help eject the Israelis out of Lebanon, and Ariel Sharon has been tainted in the international community by associations with the Shatilla massacre. To make a reference from Greek mythology, the Israelis tried to slice off one hydra head and got three coming back at them.

America's quick victory against Iraqi troops in the Kuwaiti desert in the Persian Gulf War was a poster boy of blitzkrieg warfare, complete with massive air support and a huge left hook envelopment of Iraqi forces by massed tank formations. But will the same cookie cutter approach work in other situations? Will "blitzkrieging" and "bulldozing" our way through the urban areas of Islamic countries solve our problems, or will we end up creating more hydra heads like the Israelis did in southern Lebanon?

Imagine hearing this from a Texas Republican.

Congressman Ron Paul, thinks the Bush Administration has become an overly adventuristic bull in an international diplomatic china shop and its policy is creating more problems than it is solving; c.f. "The Heroic Ron Paul".

Before we try complex "nation-building" in Iraq, could our military first try to get it right in preparing for chemical warfare?
One of America's most heavily decorated veterans and well-regarded military authors, Col David Hackworth, U.S. Army (Ret) thinks the U.S. military has not adequately thought through likely chemical warfare scenarios in preparation for invading Iraq: c.f. http://www.sftt.org/dwa/2003/2/12/da.html. For starters, up until an outsider recently sent in an e-mail, the Pentagon was apparently unaware that the water inside its mobile water tanks ("water buffalos") used by troops to refill their canteens could be easily contaminated by chemical agents. Everything might have been fine until our troops had to start refilling their canteens in the desert. Hackworth claims that the military has failed to conduct prolonged large unit training exercises in a nonlethal chemical environment to adequately test its gear and chemical battlefield doctrine. He also claims that nearly 200,000 Gulf War veterans continue to complain of ailments that may be linked to indirect chemical contamination during the Persian Gulf War. (Please remember elsewhere in this report I mentioned that American companies once "free-traded" chemical agents to the Iraqis).

My own opinion.

Jim Puplava (www.financialsense.com) points out how "things" (commodities and precious metals) rather than paper claims (stocks in general) have been in a "stealth" bull market for the last two years, signaling current rising prices and inflation concerns. If we head towards a stagflatonary scenario similar to the late 1970's, these areas should continue to do well while the overall market may experience a steady slide until it ultimately reaches a historically low P/E and high dividend yield. In 1982 the average P/E was around 7 and the dividend yield on may "blue chip" stocks was around 6%.

The Wall Street consensus for the year ahead has been mildly bullish, and I think the odds are that it will be wrong again. The bear arguments I have outlined have not yet been openly absorbed by Wall Street strategists or the general public. My guess is that that full absorption will not be achieved until about two to three years from now. In the 1970's about 25% of American households were into stocks, at the bull market peak by 2000 it got up to 75%. Mutual fund withdrawals have remained relatively subdued despite the market drop. One hellish scenario I haven't even addressed yet is if the public starts to panic and pull their money out of mutual funds all at once. In the aforementioned video interview with Jim Rogers and Marc Faber, Faber claims that Japan's malaise for over a decade has cost Japanese mutual fund companies over 90% of their assets.

A couple of years from now, if the public mood starts to really get ugly, paradoxically the market may form its first major bottom and then it may time to start increasing ones exposure to on the long side to general equities. Until then, I would look at sitting on the side lines or leaning towards certain foreign bond funds, short funds, precious metals, commodities or "hard assets"-related funds.

America still has ample natural resources and in terms of demographics the equivalent of Germany, Britain, France, and Scandinavia inside its borders, so I do not see us necessarily turning into Argentina or Brazil within the next five to ten years. Once the bad debts get liquidated and the middle class gets unconfused (perhaps after a period of crisis and cynicism to finally figure it out how badly they have been misled), I think we will finally have the basis for a viable rebound. I am reminded of the observation of Friedrich Nietzsche that in order for civilizations to function, they start promoting "white lies" in their public discourse to avoid social conflict. The problem is that generation after generation, the white lies get built on top of each other (and the new generations take too much at face value) to the point that the value systems (and even religious theologies) become inverted and dysfunctional and removed from basic realities of life. Anyone who has watched the movie Gangs of New York knows that American leaders have been making extra efforts to "spin" and smooth over messy problems ever since the War Between the States. But sometimes the smooth talk gets too rich, and "putting your best foot forward" for corporations becomes outright fraud. "Free trade", carried to excess (depending on what kinds of concessions are made), can bleed away a country's competitive advantages and wealth and turn into outright "treason." A lot of this still needs to be uncovered and sorted out. Among other things, we need to motivate American business leaders to get a bit more interested in generating business income to benefit American workers rather than sweat shop operations run by active duty military officers of the Red Chinese Army.

Noting the jagged saw tooth downward chart pattern of the S& P 500 index (on a five year chart), some of my more adventuresome clients have tried to play the cyclic bull rallies within the context of the longer term secular bear market. Just remember if you want to be a trader to get out a few months after the market makes its most recent deep dip to avoid getting swept along in the next possible leg down.

Bill Fox

Ich weiss, viel Lesestoff. Aber Bildung schadet nie:p.....

syr :sss

syracus

01.03.2003, 14:36

Und auch das merken die Amis so langsam, es ist nicht nur der Irak, der die "Erholung" behindert......

The Atlanta Journal-Constitution, 2/28/03

Stocks' woes seen as more than Iraq

By TOM WALKER

It will take more than a military victory over Iraq -- even a quick one -- to cure America's deep anxiety about the economy and stock market, say leading consumer and market analysts.

"We should not count on a quick, decisive victory over Iraq to turn the economy around," J. Walker Smith, president of national consumer research organization Yankelovich Inc., told clients and marketing executives on Thursday.

"Once uncertainty about a war is relieved, other issues will still be there, especially the economy," said Smith. "The point is this: The decline in public sentiment predates fear of war with Iraq."

At Morgan Stanley, meanwhile, analysts Richard Berner and David Greenlaw suggested that concern about the impact of rising oil prices may also be exaggerated, relative to other factors.

The 1990 oil shock prior to the Gulf War may have contributed to recession at that time, "but the major cause was the real estate and banking crises that came to a head in 1989-90," they said in a report.

"Similarly," they continued, "optimists who think that a resolution to the Iraq crisis will usher in a new bull market in equities will probably also be disappointed."

The analysts were reacting to a widespread notion on Wall Street and in the media that uncertainty about a prospective war with Iraq is keeping a lid on consumer and business spending -- and on stock market investing.

On Tuesday, for example, the Conference Board announced that its February index of consumer confidence recorded the biggest decline since the terrorist attacks in September 2001.

Lynn Franco, research director for the Conference Board, said, "Lackluster job and financial markets, rising fuel costs and the increasing threat of war and terrorism appear to have taken a toll."

Investor pessimism has prevented the stock market from sustaining anything longer than a four-month rally since the bear market began in March 2000. The current rally since Oct. 9, 2002, has lasted about 4 1/2 months, but many strategists fear that stock indexes are headed for new lows.

Salomon Smith Barney analyst Louise Yamada said in a report released Thursday that "there is no definitive evidence the [stock] decline has ended."

She said previously that the major stock indexes are likely to "test" the Oct. 9 lows, possibly going lower.

Stocks were up in Thursday's session, but only a massive rally will prevent the market from posting its third straight monthly decline.

According to Smith, the bigger picture includes a litany of bad news since the end of the 1990s, leaving people in a mood of "disenchantment and disappointment."

Those events included the stock market crash, a recession, the terrorist attacks in 2001, the subsequent war on terrorism, and a long string of corporate and financial scandals in 2002. All preceded the mounting anxiety over the threat of war with Iraq, said Smith.

Even so, consumers continued to spend selectively, buying houses, cars and other consumer items. But in each case it was because of good deals on prices, such as low mortgage rates and zero-rate auto financing.

"Spending is being driven by the only thing that will get them in the store in an era of anxiety -- a good deal," said Smith.

The one area where military victory might have a positive near-term impact is in business spending, said Smith. If victory restores business confidence, that could lead to renewed business spending, which in turn would create the jobs that restore consumer confidence.

Quelle (http://www.accessatlanta.com/ajc/business/0203/28dowdow.html)

syr :sss

syracus

03.03.2003, 21:47

Ein neues Wort in die Runde:

United States: Stagflation Ahead?

Richard Berner (New York), Mar 03/2003

You remember the 1970s: We survived Watergate, wore bellbottoms, and danced to disco -- or maybe you watched your parents as they did. You may also remember gasoline lines following the 1973 oil embargo and skyrocketing energy prices. In the 1970s, we suffered two massive energy shocks, and the sustained jump in energy quotes seemed to usher in an era of “stagflation” -- a period of high and rising inflation, low productivity gains, and low earnings growth. By the end of that decade, the trend in inflation rose from 3% to 8%, trend productivity tumbled from over 2% to below 1%, and trend earnings at nonfinancial corporations excluding petroleum had tumbled from high single digits to zero. Does the combination of today’s post-bubble headwinds and a severe energy shock threaten a return to anything like that sorry economic environment? I strongly doubt it, but energy prices will have to fall substantially and growth will have to improve to erase the feeling that the growth/inflation mix will be unpleasant.

Post-bubble headwinds are still at work restraining the US economy; even absent the energy shock, first-half growth likely would manage only a tepid 2% annual rate. What I call restrictive financial conditions are key retarding factors, in my view. Primarily, that means sinking stock prices, but lingering credit restraint and the lagged effects of a strong dollar are also still hampering capital spending and US exports. In addition, while I believe that some pent-up demand is building for high-tech capital goods, that’s hardly universal. Demand for transportation and industrial equipment has stagnated, hinting at the potential for pent-up demand, but struggling airlines and manufacturers with still-slow earnings growth aren’t in a hurry to step up spending again. And of course, war-related uncertainty is contributing to business and consumer hesitation. With the US economy the only engine of global growth, and the US engine sputtering, vulnerability to shocks is high.

I don’t want to minimize the potential significance of the current energy shock; on the contrary, it has already raised the odds of renewed recession to one in four (see “How Much Do Shocks Matter?” Global Economic Forum, February 28, 2003). Moreover, the jury is still out on how long today’s energy shock will last, or for that matter, how big it will be, given the uncertainties surrounding war in Iraq and its possible aftermath. But so far, it is smaller and likely will be shorter in duration than those of the 1970s. Crude quotes more than tripled in 1973-74, and overall retail energy quotes rose by 60% over three years. The 1979 shock was even bigger at the retail level, with energy quotes rising a whopping 95% over three years. That was then. Today it is difficult to imagine that prices would rise so far for so long, and if we are right that energy prices will peak for two months at a crude equivalent of $40/bbl., we estimate that today’s energy/confidence shock will trim first-half growth by three-quarters of a point at an annual rate.

A curious paradox is nonetheless unfolding. Unlike in the 1970s, deflation is a bigger risk than stagflation, or than higher inflation, at least for now. In the 1970s, the rise in energy prices hit when lax monetary policy nurtured inflationary psychology and capacity use was high. Industrial operating rates in 1978 exceeded 85% -- nearly 10 points higher than they are today. In contrast, I believe that energy shocks today tax growth more than they boost inflation. The potential for higher energy prices to filter through to costs -- and thus to “core” inflation and inflation expectations -- is one set of forces. But more powerful and working in the opposite direction, an extended period of sluggish global growth, ample capacity, and relatively restrictive policies abroad all argue for lower, not higher global inflation.

Yet at the same time, three factors are beginning to incubate a rebirth of pricing power. First, “capital exit,” or the process of cutting back on capacity growth and ultimately shrinking capacity itself is well under way. Second, the Federal Reserve’s commitment to fight deflation, evident in speeches and testimony from Chairman Greenspan, Governor Bernanke, and others sends market participants an important message: We’ll do whatever it takes. The concomitant decline in the dollar against most currencies is a manifestation of that policy stance, one that is helping to boost corporate profits. Finally, stronger growth ultimately will lift inflation expectations and firm pricing for Corporate America (see “The Rebirth of Pricing Power,” Global Economic Forum, December 22, 2002). And that last part is critical: Without stronger growth, the nascent upswing in pricing power likely will perish stillborn.

Are any stagflation fears creeping into the price of any financial assets? Fixed income markets seem to be discounting a worsening growth/inflation outlook. For example, the TIPS spread -- the spread between yields on conventional Treasury notes and those on Treasury Inflation Protected Securities, and which often proxies for inflation expectations -- has widened by 55 bp to 175 bp since crude prices began to surge. What’s unusual in this episode is the way this spread widening has occurred. In the past, these spreads have widened when the bond market has sold off and nominal yields have risen. This time, spreads have widened as TIPS yields have declined by more than those on conventional Treasuries. The sharp decline in real yields as represented by those on TIPS -- now at 1.71% for 10-year issues -- and widening spreads seem to hint at a whiff of stagflation.

My colleague Bernd Wuebben has noted that TIPS yields are highly correlated with energy price swings, which also seems to imply that price action in TIPS reflects stagflation fears (see “TIPS on Fire,” February 25, 2003). If that correlation persists, sizable declines in energy prices might trigger higher TIPS yields and TIPS underperformance (see “Could TIPS Underperform Treasuries?” February 28, 2003). Investors should interpret swings in TIPS spreads with care, however: Wider TIPS spreads could reflect stagflation fears, but Bernd cautions that there is no guarantee that this energy price-TIPS relationship will hold up. Time will tell, but my guess is that higher energy prices will widen such spreads even further, while lower energy prices would narrow them. In other words, even though stagflation is unlikely today, market participants may not want to take the chance that it won’t make a comeback.

Quelle (http://www.morganstanley.com/GEFdata/digests/20030303-mon.html#anchor1)

syr :sss

Vetinari

04.03.2003, 10:04

Perma Bear Roach ... Oil and recession :D

Global: When Shocks Matter

Stephen Roach (from Singapore)

Not all shocks are alike. Nor do they exert comparable impacts on macro economic performance. Shock analysis has two critical dimensions — the magnitude and duration of the shock itself, as well the pre-shock condition of the affected economy. On both counts, the oil shock of 2003 is extremely worrisome. That leads me to conclude that the risks of renewed recession in the US and in the US-centric global economy are high and rising.

There are times when it pays to be overly-simplistic on the global macro call. This is one of those times. Three key points are most obvious to me insofar as the cyclical prognosis for the world economy is concerned: First, in a US-centric world, the global call is basically a call on the US economy. Second, the US is in the midst of a classic oil shock. And, third, that shock has occurred at a point of maximum vulnerability — when a US-centric industrial world had slowed to a virtual standstill. The conclusion is inescapable: The recession warning model that I have long advocated is now flashing a serious alert for the US and for the US-centric global economy. A stalling economy lacks the cyclical immunities that cushion it from an unexpected blow. A stalling economy that has been hit by a shock is a recipe for recession. Unfortunately, it’s that simple.

It’s educated guesswork as to where oil prices are headed. It’s a painful reality check to see where they have come from. Crude oil (WTI spot) prices have now pierced the $37 threshold — fully 89% above the level prevailing in January 2002. Moreover, as of the close of February 27, oil prices have now equaled the highs of $37.20 hit on September 20, 2000, that played an important role in triggering the recession of 2001. With oil inventories low, disruptions in Venezuela lingering, and war looming, the risk is that oil prices will move higher before they begin their fairly typical post-shock mean reversion. But those risks lie in a murky and uncertain future. At this point in time, the facts speak for themselves — an oil shock has already occurred.

In and of themselves, shocks don’t always cause recessions. That’s where pre-shock resilience comes into play — the economy’s ability to withstand the blow of a shock. Sadly, the industrial world is far from being resilient at this point in time. The world’s three largest economies — the United States, Japan, and Germany — were all in lousy shape as 2002 came to an end. The US economy inched ahead at just a 0.7% annual rate in 4Q02, and Germany’s growth rate was estimated at “zero.” Ironically, Japan was the strongest of the lot, with a +2.0% sequential annualized growth, but most have been quick to dismiss this estimate as statistical hocus-pocus for an otherwise weak Japanese economy (see Takehiro Sato’s February 24 dispatch, “The National Accounts vs. Reality”). To me, the conclusion is inescapable: With the industrial world at its stall speed, the current oil shock — to say nothing of the related confidence shock — hurts a good deal more than would be had been the case in a more vigorous growth climate.

Critical to the prognosis are the factors that have led to the stalling — in this case, the pre-shock vulnerability of a US-centric world. America’s post-bubble shakeout is at the top of my list in setting the stage for the extraordinarily fragile cyclical outlook of the past several years. With pre-bubble excesses lingering — namely record lows of national saving, record highs of private sector indebtedness, and an unprecedented current-account deficit — the US economy faces unusually stiff headwinds. The lack of pricing leverage in an increasingly deflationary climate is the coup de grace. That keeps Corporate America fixated on cost-cutting in an effort to generate earnings, thereby inhibiting capital spending and hiring. The result is a US economy that has been lacking in its traditional cyclical sustenance — unable to respond to the massive policy stimulus that has since been unleashed. In that critical respect, America’s policymakers are going through a very Japanese-like experience of “pushing on a string” in a post-bubble era. With Washington contemplating deficit spending not seen since the early 1980s, that frustration is likely to mount.

America’s post-bubble shakeout was central to my recession call in early 2001 and has been equally crucial to the double-dip warnings that I first issued a little over a year ago. The post-bubble shakeout keeps the US economy dangerously close to its stall speed, thereby leaving it more vulnerable to shocks than might otherwise be the case in a more vigorous growth climate. The previous oil shock of 2000 needs to be interpreted in that context. The spike of crude oil to $37.20 per barrel on September 20, 2000, represented a 49% increase from levels prevailing a year earlier — only about half the current surge in oil prices. Yet that earlier shock hit a vulnerable US economy just as it was entering its post-bubble shakeout. As such, it played an important role in contributing to the ensuing recession of 2001. It may not have been the decisive blow but, in my view, it was very much a central player in that cyclical saga. And the outcome only served to underscore the key role that oil plays in shaping the ups and downs of the US business cycle: Since the early 1970s, there’s never been an oil shock that was not followed by recession.

The notorious double-dip call needs to be seen in that same vein. In my view, lingering post-bubble excesses have inhibited cyclical recovery from the recession of 2001 and have left the US economy unusually vulnerable to another shock. After contracting over the first three quarters of 2001, the US economy has grown at just a 2.7% average annual rate over the ensuing five quarters — an anemic recovery by any cyclical standards of the past. Moreover, about one-fifth of that growth was driven by a temporary inventory dynamic that reflects the termination of the massive inventory liquidation that occurred in late 2001. The resulting final demand trajectory of just 2.2% over the past five quarters spells nothing but stall speed, in my view — leaving the US highly vulnerable to a shock. The twin shocks of surging oil prices and the geopolitical battering of the American psyche need to be seen in that context. The odds of a recessionary relapse are high and rising in my view. In this critical respect, the dreaded double dip needs to be seen as nothing more than yet another symptom of America’s post-bubble malaise.

No two shocks are alike. But their macro impacts can be categorized rather neatly. If a shock hits a rapidly growing economy, it usually doesn’t inflict much pain. But if a shock hits a slowly growing economy that is hovering near its stall speed, then it can easily take on the role of the “tipping point” — the event that pushes the economy back over the cyclical edge. It is the latter set of circumstances that applies to the current economic prognosis. For the second time in three years, the recession alert needs to be taken quite seriously. In my view, renewed recession is a clear and present danger for today’s US economy. It is also the key risk for a US-centric world.

http://www.morganstanley.com/GEFdata/digests/20030228-fri.html#anchor0

:sss

syracus

04.03.2003, 11:46

The Kondratieff Winter & The Case for Gold

Anon
4 March, 2003

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." Alan Greenspan, 1966.

"There can be no question that the US economy is at its most critical juncture since the Great Depression of the 1930's. With both the cause and pattern of the present downturn diametrically different from those of prior recessions, it should be clear that past experience cannot help in accessing what is to come." The Richebacher Letter, October 2002.

"Sharp rise in US job losses adds to gloom." "Fears grow over faltering global rebound as Germany and UK also report bleak economic news." Front Page headline: The Financial Times Jan 11/12 2003 "US job losses increased sharply last month, adding to concerns about the weakening global economy recovery. The 101,000 decline in payrolls was the largest since February and surprised Wall Street... US job losses last year reached 181,000 the worst since the end of the 1991 recession. Losses in the manufacturing sector became more widespread. Makers of aircraft, cars, computers and films experienced some of the biggest percentage declinesin employment along with restaurants, bars, retailers and banks." Ibid.. The Kondratieff winter is here, and it is getting colder.

The economy has only just begun its slide into the Long Wave depression, and already excessive debt is leading to significant bankruptcies. As the recession deepens, and it will, the pace of bankruptcies will increase markedly. It is akin to a landslide that starts from a single rock dislodged from the top of a steep hill. Once the Kondratieff winter debt landslide is set in motion there is nothing that will stop it until it has run its course.

The primary purpose of a Kondratieff winter is to purge debt from the economy. That process is just beginning with collapse of companies like Worldcom, Enron, Global Crossing, K Mart, Florsheim Shoes, Formica, United Airlines, Conseca, GenTek, Mcleod USA, Williams Communications, and others, whose names escape me as I write this. By the time this Long Wave winter reaches its conclusion, considerably more sizeable US corporations, which are household names, will undoubtedly fail due to excessive debt. As long as the economy continues to prosper, large debts are manageable. When the economy slows down, corporate revenues fall, and debt becomes an onerous burden. This is compounded by the scarcity of capital and rising interest rates, as banks tighten their lending practices. For example, even though the Federal Reserve has now cut the cost of borrowing to its member banks 12 times in the past 11 months, the cost of borrowing to the telecoms has approximately doubled. Ford Motor Company paid a higher rate of interest in its latest debt offering in December 2002 than it did six months before, in spite of the 300-point basis rate cut by the Federal Reserve over the same period.

During 2002, more than 180 publicly traded companies filed for Chapter 11 bankruptcy, which led to the destruction of $368 billion in assets; a record. These failures included six of the 12 largest corporate bankruptcies in US history. And it has only just begun. Martin Weiss counts an additional 2,453 publicly traded companies, which are vulnerable to bankruptcy. These bankruptcies are closely following the haemorrhaging of US corporate earnings. AOL lost almost $100 billion last year. This colossal number is far greater than the total market capitalization of all the publicly listed gold stocks, which is about $70 billion. Several other major US companies are spilling red ink. According to Martin Weiss, technology companies listed on the Nasdaq have posted losses in excess of $190 billion over the past 12 months. This was sufficient to wipe out all of their accumulated profits of the past six years. The liquidation of excessive debt and a mounting tide of bankruptcies will continue, as the US economy falls into it's forth Kondratieff winter deflationary depression. There is perhaps as much as another $10 to $15 trillion of debt which must be erased from the economy before winter has run its course. This is a staggering amount and infers that the bleakest part of the Kondratieff winter is still far into the future.

These bankruptcies are beginning to significantly impact US banks. Following the Kmart bankruptcy, J.P. Morgan Chase suffered a $117.8 million loss and Fleet Boston Financial, a $119.9 million loss. Between May and October 2002, J.P. Morgan's share price had fallen a whopping 60.5%, which effectively sliced $46 billion from the firm's market cap. Excessive debt always has a major negative impact on banks. The Japanese experience should serve as a stark reminder of that fact. "This much is certain, whenever any society accumulates debt beyond its ability to repay, it is the creditors who are robbed." Hoppe, Donald. The Donald J. Hoppe Analysis, November 1983. P.138

Consider the following: "What would one have to think of a major US corporation whose finance arm with debts of $US 170 Billion while the company itself stands with a balance sheet net worth of $US 7.8 Billion (down from $US 19 Billion as of the end of 2000) and whose recent earnings covered less than half of its total interest burden? That US company is FORD. Some people have finally taken a look at the Ford balance sheet. Ford's commercial paper lost $US 6 Billion in four days."

"How could a company with $US 170 Billion in debt paper outstanding, with current earnings insufficient to service even half of this debt, and with a net worth of $US 7.8 Billion still have ANY commercial paper in the market place? Ford does." The privateer http://www.the-privateer.com Late October 2002 edition. (reproduced with permission).

Not only does Ford have this enormous amount of debt outstanding, but it also continues to add to this monstrous burden. The only thing that can save Ford from bankruptcy is a resonant rebound in the economy. Will that happen? Not likely, because most of the Kondratieff winter lies ahead of us. Anyway, car sales in the US are now stalling. "Shrinking car sales hint at consumer fatigue in the US Unnerved by job cuts and random violence, shoppers are not tempted by interest free loans." So the Financial Times reported on August 23, 2002. Jeff Barry, the sales manager at the Jacobs' Twin car dealership, which sells Ford, Hyundai, Mazda and Honda brands, said that in August his dealerships delivered 130 new cars to customers, but that this month its likely to be only half that number, and he said, "People are getting laid off daily. There's a vast majority of people who are worried about committing themselves to something they can't fulfill. The whole damned world is in turmoil."

The only means left to Ford, and many other companies too, is to borrow to pay the interest on its debt. Obviously, that cannot continue for very long. On October 23, 2002, Ford's debt rating was cut by S&P to two notches above junk with a negative outlook, which means that further downgrades are probable. October was the worst single month for the Three US automakers in four years. Car sales at Ford fell 36.6%. At GM, sales dropped 40.3% and even Daimler-Chrysler, which had not pushed the cut-rate financing deals was off 25.8%. According to Martin Weiss' Safe Money Report, "an auto sales bloodbath is in the making." December 2002.

Employee Pension Plans Seriously Under-Funded

Besides this colossal debt burden facing the majority of US corporations, many also face a black hole with regard to their employee pension plan funding. This is a scandal that is only now beginning to attract attention Martin Weiss in (www.safemoneyreport.com) writes that there is a $78 Billion shortfall amongst just 234 listed companies in the S&P 500. This is the shortfall between the amount these companies have set aside and what is required for these companies to pay to their employees at retirement. For example, General Motors owes its pension fund $19.3 Billion, which is almost 50% of GM's total market capitalization, and Ford owes its pension fund $14.5 Billion. According to Weiss, the total amount of aggregate pension liabilities for 354 companies surveyed was $1.06 Trillion and the total amount of liabilities (funded and unfunded) for all of the pension plans in the US is $4.3 Trillion. This is really only the beginning of the problem, which will be compounded by larger and larger investment losses. For example, Martin Weiss anticipates that if the corporate pension funds of the S&P 500 companies lose just 5% this year, the shortfall in pension funding is going to be at least $109 Billion.

These pension plan funding shortfalls are hidden in the companies' balance sheets via legal GAAP gimmicks. This allows corporations to project annual returns on their pension funds and write off losses spread over a number of years against these projected gains. For example, a company projects an annual return of 10% on its pension fund assets of $100 Million ($10 Million). But, the company's investment losses on these assets are actually 5% or $5 Million. You might suppose that the company would show a loss of $5 Million on its profit and loss statement, but that is not a requirement. It can spread that loss over a number of years, assume 10, and write one tenth of the loss or $500,000 against the projected gain of $10 Million, there by showing a net gain of $9.5 million. Through this legal maneuvering the company can buy time in maintaining its pension fund at the required amount to satisfy its pension commitments and avoid deducting the loss from the bottom line. As investment losses deepen, so too will the hidden losses in employee pension plan funding. Eventually, however, these losses will have to be revealed. The losses will have to be recouped from corporate earnings, which are likely to be meager; or, the losses will compound losses. What this ultimately means is that many employee defined pension benefit plans are in jeopardy.

For the individual, the desperate employee pension plan shortfall is compounded by the enormous losses now being experienced in individual IRAs and in Canadian RRSPs. It was not that long ago when individual Americans and Canadians in their 50's and 60's could look forward to a comfortable retirement based upon: their investment holdings outside their retirement plans, the defined pension benefit that their employers guaranteed them on their retirement, and the growth of their individual retirement plans. Unfortunately, as the Kondratieff winter has unfolded each of these individual wealth and retirement mediums have been incurring substantial losses. Several stories attest to the pervasive fear now rampant among prospective retirees. Many cannot face opening their retirement plan statements, because of the losses that they know will be shown.

In the Financial Times of 26/27 October 2002, Tony Jackson headlines his Weekender article, " Perplexed by Corporate Calamities." He should not be. The calamities are evidence of the unfolding Kondratieff winter. He writes: "There is a long list of industries seduced by their share prices into overextending themselves, from telecommunications to insurance. The bull market also led many companies to make pension promises they could not keep. Yet what interests me is the host of things going wrong that seem unrelated to the financial markets." He then cites the wretched state of electricity companies. "In the US, according to Standard and Poor's, power generators have not been in such bad shape since the 1930's depression. (We are beginning to see a lot of comparisons with the 1930's, which is something very few writers mentioned, even as little as a year ago). In the UK, several electricity companies are in effect bankrupt. In France, the state-owned Electricite de France is likely to fall into a loss situation this year, mainly because of the wretched performance of its businesses in Argentina and Brazil."

"It's the Debt, Stupid" :lach

When President Clinton was fighting his first presidential campaign against George Bush senior, he kept a piece of paper in his pocket on which he had written, "It's the economy, stupid." This was to serve as a constant reminder to him that he was fighting the election during a time of a mild recession in the US. In like manner, all my readers need to know is that, "It's the DEBT, stupid," which is the principal cause of the impending depression.

In the 1990's, total real debt increased $15.4 trillion. (= 52% of all current debt)

Last year it took $8.20 to produce $1 of income (GNP). Last year household and business debt increased 3X faster than the economy, domestic financial sector debt soared nearly 4X and what the Federal government extracted from Trust Funds now stands at $2.6 trillion.

Foreign interests own about $8 trillion of US assets, including 13% of all stocks, 24% of all corporate debt, 43% of US government debt and 14% of US Agency Debt (i.e. Fannie Mae).

It's a Depression

A depression is far more severe than a recession. A depression takes a great deal more time to shed all the imbalances in the economy. "A depression involves the capital goods sector of the world economy and the illiquidity occurs or becomes apparent in the far more critical (and enormously larger) area of long term credit. A depression is worldwide because it is also a result of the illiquidity in the international debt system. Excessive inventories of consumer goods and illiquidity in short term business and consumer credit can generally be worked off in a relatively brief time, without excessive or prolonged distress. But over-investment in capital goods, which includes large buildings, factories and specialized technologies and entire transportation and communication systems, takes decades to develop, and excessive inventories of capital goods quite obviously require a number of years to be absorbed or consolidated" The Donald J. Hoppe Analysis, October 1982. Thus, a Kondratieff winter is characterized by an overcapacity in basic industries on a worldwide basis, over-investment in the capital goods sector, severe illiquidity at every level of the financial system and a massive and intolerable debt burden. These conditions have always led to financial panic and economic depression. "Illiquidity in long term credit and international debt is the result of an entire generation's errors, excesses and follies and consequently takes a long time to correct." Hoppe, Donald, The Donald J. Hoppe Analysis, October 18, 1982.

Alan Greenspan, "The Greatest Central Banker of the Century."

What Mr. Greenspan says we are experiencing is simply a series of mild recessions. Because inventories have been declining, he thinks that is a sign that the economy is on the mend. If only it was that simple. How can it be any different this time when the imbalances are more acute than they have ever been in history?

"Greenspan declares U.S. recession over." "Economy already growing, says Fed chairman, buoyed by week's positive data," trumpeted Canada's Globe and Mail Report on Business on Friday, March 8, 2002. The Federal Reserve Chairman himself, appearing before the House Banking Committee the previous day, had said, "The recent evidence increasingly suggests that an economic expansion is underway." Really? The evidence suggests to the contrary. Very little of the excesses built into the economy throughout the Long Wave autumn have been exorcised, and the debt, far from being reduced, has continued to expand. "This recession has corrected nothing, because the Fed fought the powers of correction tooth and nail. Thus, the real corrections in the economy lie ahead." Richard Russell, www.dowtheoryletters.com

It is amazing to me that so many people who should know better continue to heap accolades upon Alan Greenspan. Senator Phil Gramm (R-Texas) recently called the Federal Reserve Chairman, "the greatest Central Banker of the Century." If this kind of adulation were not so stupid it would be comical. It must create in the mindset of the Chairman that he is omnipotent when it comes to the economy. It is something akin to the English Stuart Kings, who were adamant about their belief in the ëdivine right of kings'. Charles 1 was executed by Parliament after he had been defeated in the English Civil War and James II was ostracized from England, after the 'Bloodless Revolution'. If Alan Greenspan suffers the same fate of James II, perhaps Queen Elizabeth will welcome him to England, where she has conveyed on him an honourary knighthood in consideration of his outstanding efforts as the world's most important central banker. When this Kondratieff winter has reached its coldest and bleakest moment, Sir Alan Greenspan will be vilified by those who have borne the brunt of his grandiose fiat experiment. It has been an abysmal failure and one that will bring severe financial distress to many Americans and to millions of others around the world.

Upbeat Official Pronouncements :hihi

Now the President believes too, or at least he purports to believe, that everything is on the mend. "I am optimistic about our economy, and I should be. The fundamentals are strong. Interest rates are low. Monetary policy is sound," he declared to worried Americans on August 5, 2002. And in a moment of New Year's Eve cheer, the President said "our economy is strong, it's resilient; we've got to continue to make it strong and resilient." I guess that is why he had to unveil his latest stimulus package on January 7, 2003. Sounds like Herbert Hoover who, immediately following the stock market crash in October 1929, said, "the fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis."

Several other official pronouncements have downplayed the seriousness of the situation, whether by design or ignorance is unclear. What is clear however is that the Federal Reserve Board is hugely concerned. The rapid reduction in interest rates, 12 in total so far, and the gigantic increase in the money supply is evidence of panic in that quarter. Maybe, just maybe, Alan Greenspan truly believes that these monetary and fiscal efforts have saved the day, but the latest events such as the recent stock market woes, rising bankruptcies and declining consumer confidence must be sufficient to reestablish his concern that the economy is once again in a downtrend.

Federal Reserve Actions to Offset Deflation

The Federal Reserve has only two means at its disposal to re-ignite the economy. These are a reduction in interest rates and an increase the money supply. These methods have always worked in the past, that is, at least as far back as the last depression. But of course that's precisely where the economy is once again and that is why it is not working and why it will not work. The Federal Reserve, through these actions, creates the conditions whereby there is plenty of money available to borrow and the borrowing costs are cheap. But it is the banks that must consent to lend the money and it is consumers and corporations that must express a desire to borrow. Neither of these conditions prevails now. Banks are already substantially increasing their loan loss provisions as countries, corporations and consumers renege on their respective debt obligations and prospective borrowers have limited borrowing room remaining. "Considering, however, what has actually happened during the recovery to resource allocation, jobs, profits and general indebtedness, it is a compelling conclusion that the U.S. economy is in even worse shape today than a year ago when the recovery began." The Richebacher Letter, January 2003.

Contrary to popular belief, the Federal Reserve acted with similar vigour to that currently demonstrated by Alan Greenspan, to arrest the decline in the economy in the early 1930s, but to no avail. "If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash-the final week of October-and in that brief period added almost $300 million to the reserves of the nations' banks." Rothbard, Murray, America's Great Depression, P.191.

Not only did the Central Bank inject massive amounts of dollars in the banking system, but it also dramatically lowered interest rates in an effort to re-start the economy. The rediscount rate was lowered from 6% to 4.5% in the space of three weeks into the bottom of the stock market crash, which ended in mid-November 1929. By the end of 1930, the rate was lowered to just 2%. By mid-1931 the rate was down to only 1.5%. At the same time, as the depression deepened the Federal Reserve frantically tried to inject money into the ailing banking system, but to no avail as desperate savers rushed to convert their deposits into cash and gold to be held outside the bank. During 1931, "The Federal Reserve tried its best to continue its favorite nostrum of inflation-pumping $268 million of new controlled reserves into the banking system." Ibid, P.231. As we well know these aggressive fiscal and monetary actions on the part of the Federal Reserve at that time failed to arrest the Great Depression. Given the magnitude of the debt problem at the onset of this Kondratieff winter, it is unlikely that similar actions that have already been instigated by Alan Greenspan will prove successful in thwarting the deepening Kondratieff winter.

"Alas, regardless of their doom, the little victims play"

What is so surprising to me is how sanguine people appear to be about the financial events that are now unfolding. Their memories of the good times have not been dulled by a growing financial catastrophe. They view every bankruptcy as a one of a kind and are incapable of linking one to another. They see three down years in the stock market as an almost sure thing that the year 2003 will be an up year. "American investors still have faith. Not even the dismal economy or last year's 24% plunge in the S&P 500 has shaken their staunch confidence in the US stock marketÖMore than 60% believe the S&P will be higher at the end of 2003 than at the end of 2002, while 10% expect it to be around the same level." The F.T. Thursday January 9, 2003. After all, the last time that there were four down years in succession was so long ago. Let me see when was that? Of course that was in 1929,1930, 1931 and 1932, which of course just happened to forecast the greatest depression in US history, but they just cannot see the parallel. The latest Intelligence Investors poll (Late December 2002) shows bullish stock market advisors at 49.9% versus only 26.5% in the bearish camp. Think on this for a moment: the Japanese stock market recently touched lows not seen since 1983 and at that time the Dow Jones Industrial Averages were trading somewhere between 1100 and 1200 points.

It's the impending war with Iraq, of course, that is keeping the stock market from rising. "Our view is that stocks are being affected by war talk. If it weren't for all the hand-wringing, stocks would be off to the races." Tim Hayes, Global Strategist for Ned Davis Research as reported by Richard Russell www.dowtheoryletters.com December 27, 2002. (I emphatically endorse Mr. Russell's work to all my readers). Anyway, the war will be over almost as soon as it has started, or so they think, and then investors can turn their attention back to the business of making money in the stock market. But the bear market has nothing to do with the war, it has everything to do with the astounding excesses that were built into the economy throughout the Kondratieff autumn and particularly at its cusp. This includes absurd valuations in stocks which were explained as they always have been by the mantra, ëthis time it is different;' a huge mal-investment in all industries and in particular telecoms and the internet; an oversupply of all goods and services; unconscionable greed; a spate of ridiculous mergers and acquisitions that did nothing to enhance business but simply overburdened corporations with debt; stock buy backs which added more debt, but enhanced the value of executive options; and debt burdened consumers, beguiled by huge profits in the stock market and easy lending practices at the banks.

It is not that difficult to understand why most people have no inkling of what lies ahead. Times have been so good for so long. America has been on a tear since the end of the Second World War. She has been the most prosperous and the strongest military power in the world. Sure there have been recessions, but the last one of any consequence was between 1981 and 1982. Not many of us even remember that. Nor do many of us remember that the US military might was beaten in Viet Nam. But, all in all, things have been very good in America for more than 50 years, or at the dawn of the present Kondratieff cycle in 1949. Why would not the average American believe that nothing has changed and that the good times are still here, just interrupted by a temporary blip? Unfortunately, those good times were created through excessive debt. But the good times are over and America now faces a devastating deflationary depression, which is likely to create violent social unrest. The American people have been imbued with a feeling that they have a perpetual right to wealth and good times. Unfortunately, many will become destitute, leveled by an overwhelming debt burden.

Current sentiment is reminiscent of that which prevailed in 1930. "Down to the last weeks of 1930, Americans could still plausibly assume that they were caught up in yet another of the routine business-cycle downswings that periodically afflicted their traditionally boom-and-bust economy." Kennedy, David. Freedom from Fear, the American People in the Depression and War, 1929-1945. Oxford University Press. P.65. Most Americans are still spending as if what has just been experienced is a mild hiccup in an otherwise booming economy and they are adding to their debt as a means to support their excessive spending habits. US corporations having reduced their inventories are starting to rebuild them in anticipation of renewed consumer purchases. The stock market is reflecting this hope of an economic recovery and is performing much as it did following the first bottom in November 1929.

From the price lows, which were reached on November 13, 1929, stocks advanced into the spring of 1930. By April 1930 Steel was once again nudging $200 and American Telephone and General Electric had almost reached their pre-panic highs, "Stock-market-minded businessmen hoped and half believed that this was but a temporary trouble: did not the graphs of security prices on the financial pages show an encouraging uptrend?

Many corporations increased their dividend rates; the total amount of money paid out in dividends was only three percent less in 1930 than in 1929. New investment trusts were coming to birth, and the pattern which prevailed among them hardly suggested any widespread doubt in the resumption of old-style prosperity; for most of them were "fixed trusts."Tom, Dick and Harry were cheerfully buying participations in these curiously rigid trusts. Why shouldn't they? They knew enough economics to know that business ebbed and flowed in cycles; if you knew economics, you knew that the time to buy was after a panic, and that it was the leading corporations of the country that were likely to prosper most in the bull market of the 1930s." Allen, Frederick Lewis. The Lords of Creation. Harper Brothers, New York, 1935. P.400. But things were not back to normal and the economy was not about to improve. It was barely holding its own and was well below the levels of 1929.

In the Globe and Mail, Report on Business section, dated December 28, 2002, a front page headline reads "Dundee Wealth to buy IPC for $120 million." It transpires that the new company will manage about $23 billion in assets and have more than 1,300 financial advisors across Canada managing this money. Obviously, Dundee Management is bullish and is gearing up for the onset of a new bull market. However, the Kondratieff winter is a time of massive financial adjustment and the problems are far too immense to be solved in the normal course of events or corrected by the usual central bank strategies.

"Farewell house, and farewell home" Richard Crashaw

Unfortunately, Sir Alan has simply created another bubble. The stock market bubble has burst, but he has induced the real estate bubble through his ability to print money. Because the real estate bubble has been pumped up by debt, it too must burst into the Kondratieff winter. Investors caught up in this latest bubble are completely oblivious to it, just as those that were duped by their apparent investment prowess at the peak of the stock market were oblivious to its ridiculous over-inflated characteristics. It is likely that many investors now buying into the real estate bubble, through new purchases, upgrading to more expensive homes or refinancing existing homes are the same as those that were caught in the loss of $8 trillion since the stock market peak. It is unfortunate that they fail to understand that real estate is now in a similar position to stocks at their peak. From this lofty level, home prices can only go down. Real estate cannot be immune to the overall health of the economy and the Kondratieff winter anticipates a deflationary depression at least on the scale of that experienced in the previous Kondratieff winter.

Not long ago the newspapers were full of stories about the booming Toronto real estate market. One such story was about a couple that had accumulated some savings and did not want to miss out on the market. They purchased a home after a cursory visit and the following day could not remember any details of the house that they had bought. Another story discussed a dozen real estate agents in their BMWs lined up outside a home anxious to make a commission by making the sale. And yet another story told of a real estate agent who put in an offer to purchase a home well above the asking price. The bank rejected the mortgage application on the grounds that the house could not be appraised at such a lofty value, but lent the agent the difference through a demand loan.

I recently returned from a short golfing holiday in Phoenix. My host has a property within a gated community just north of Scottsdale. There are 5 different spectacular golf courses situated in this large community. He told me that several investors had purchased large lots here for as much as $3 million at the stock market peak. Now, many of these lots have been put on the market for $2 million, but are not selling. He also told me that there were more than 400 expensive houses on the market in the community, but they were just not selling. I was also told that houses in Phoenix and Scottsdale priced above $300,000 were also not selling, whereas below that price there was still a brisk market.

In 1951, approximately 13.9% of household expenditures were allocated to housing costs. By 1995, that number had almost doubled to 26.8%. Today, according to Martin Weiss, "many homeowners spend more than 50% or even more of their take home pay on their mortgages" and mortgage delinquency rates are hitting record highs.

Meanwhile, homeowners have been taking the equity value out of their homes, beguiled by low mortgage rates. In 1940, average home equity was at 85%. By 2001, average equity had plunged to only 55%. Of course this is only an average. There are many US homeowners with little or no equity in their homes. When prices begin to fall, and they will, this paltry ownership will soon turn to a negative equity, which is going to create all kinds of problems if the owners cannot meet their mortgage payments. These payments will become crippling as unemployment grows. Or, when the housing market starts to incur losses similar to the stock market, limited home equity will become an excessive and frightening burden to the owners. It is somewhat like being margined to the hilt in the stock market at the peak in prices.

The bursting of the real estate bubble has begun.

Implications of the Coming Depression

What is the likely outcome of this coming depression? Using the last Kondratieff winter as a guide, here are some of the possibilities. Remember that the excesses at the peak of this Kondratieff autumn were far greater than they were at the peak of the last Kondratieff autumn. That includes debt, the stock market, the real estate market, greed and dishonesty. The payback is likely to be horrendous.
· The worst bear market in stocks since the 1929-1932 bear market (the previous Kondratieff winter bear market) and possibly worse even than that one. "We've entered a bear market that's so big, we haven't had anything like it since the 1700s, and that was a 64-year corrective process. " Robert Prechter and Adam Levy in Bloomberg News, 24th Dec. 2002. Repeating the 1929-1932 winter bear market experience could take the DJIA to 500.

Huge losses in real estate. Heavily mortgaged homes and apartments, industrial complexes, shopping centers and office towers are likely to experience significant losses in value as they did in the last depression. "By the time this whole thing is over, you'll be able to buy your favorite neighborhood mansion from the bank at 10 cents on the dollar." Ibid. Many buildings will be left only partially built and boarded up. Donald Hoppe says that in Chicago, following the 1929 crash, not one new office tower was started until 1955.

Massive unemployment. At the peak of the last depression more than 25% o the American workforce was unemployed. This will mean a significant increase in the number of homeless people and street beggars.

Serious banking problems, including banking runs and failures. The huge debt problem is a banking problem. The Japanese experience is a good indication.

Decimation of professional sports. The huge player and management salaries of the past few years cannot hold in a Kondratieff winter. Many professional sports teams will be bankrupted (The Ottawa Senators and Buffalo Sabres are just the beginning), and professional leagues will be considerably downsized. Tiger Woods will not be able to command $2 million appearance fees, purses for golf tournaments will be considerably smaller, and sponsors will not renew their agreements, resulting in fewer golf tournaments per year.

Government Debt: In 1929, the US was the largest creditor nation and the federal debt was a paltry $16 billion. Now however the official debt is almost $6.4 trillion, which added to all to off-budget debt, which includes social security, probably transcends a Federal Government liability in excess of $10 trillion. State Governments are also starting to feel the pinch. The lead headline in The Arizona Star on January 2, 2003 was "States Destitute." The article went on to describe the desperate plight faced by many of the US states as revenues fall and expenses rise. This must ultimately mean higher taxes.

Major civil unrest. People will not countenance poverty after the extreme feelings of wealth experienced at the end of the Kondratieff autumn. During the 1930's there was some civil unrest, especially on the part of some war veterans who built a shantytown in Washington, until they were routed by General McArthur. At that time, far fewer Americans were invested in the stock market than in 2000, personal debt was considerably less than it is now, and most Americans did not have official retirement plans. All this sets the stage for a much more angry citizen after the losses take their toll.

Infringement on individual liberty. It is very likely that governments will escalate this process in an effort to curtail anti-government protests.

Curtailment of municipal services, due to the cost. This includes public transportation, garbage collection, police and fire services, and maintenance of parks, streets and other public works.

Secessionist movements on the part of some States and some Canadian Provinces, particularly in the West, as Federal dictates become too overbearing.

Trade Wars. The desire to protect inefficient industries in the face of a deepening depression becomes of paramount political importance, just as it was in 1931 when President Hoover signed into law the Smoot-Hawley Act, which imposed a host of ruinous duties on imported foreign goods. President Bush has already started down the road with agricultural subsidies to US farmers, steel tariffs on foreign imported steel products, duties on Canadian softwood lumber and, currently under review by the United States, the actions of the Canadian Wheat Board in support of Canadian grain prices. Free Trade agreements notwithstanding, the US has a record of simply making up the rules to suit itself.

I have listed these possibilities to convey to you that something very different and far more drastic is likely to occur in our immediate future; something of which we have no experience, but something for which we must be prepared.

The Depression Presidents - Bush & Hoover

Calvin Coolidge, President Hoover's predecessor, decided that one term in office was enough, even though he had presided over the most prosperous period in American history.

Coolidge's presidency was witness to, at least up to that point in time, the greatest bull market in stocks in American history. That record was to be shattered in the subsequent Kondratieff autumn during the two-term presidency of Bill Clinton.

In his last State of the Union address to Congress on December 4th, 1929, the outgoing President reflected that, "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment and the highest record years of prosperity. In the foreign field there is peace, the goodwill that comes from mutual understanding. Regard the present with satisfaction and anticipate the future with optimism."

On that record, why would the President not seek another term? Probably because his private thoughts differed from his public pronouncements. When his wife Grace was asked why her husband wanted to leave the White House amidst this period of great prosperity she replied, "Poppa says there's a depression coming." Sobel, Robert. The Great Bull Market, Wall Street in the 1920s. P.118.

In his acceptance speech as nominee for the Republican Party, Herbert Hoover said, "We in America today are nearer to the final triumph over poverty than ever before in the history of any land." He was shortly to be disabused of his lofty prediction. Following his inauguration, it took only six months for the stock market to peak and the Great Depression to start. This threw millions of Americans into the very poverty that Hoover had anticipated would be eradicated. Unlike his predecessor, Calvin Coolidge, Hoover's one term in office was not a matter of choice.

Like Herbert Hoover, George W. Bush assumed the presidency at the end of the Kondratieff autumn. At the time of President Bush's inauguration, the great bull market was almost at its peak. Affluence in America was pervasive. Money flowed, just as it had done in 1929, from every corner of the earth to participate in the great American miracle. Unfortunately, the Kondratieff winter has now overtaken President Bush. The affluence, built on a mirage of debt, and the flows of money from foreign sources are evaporating, just as they did after the stock market crash in 1929. President Bush is faced with a depression that will be at least as severe as that which faced Herbert Hoover--a depression that robbed the competent Hoover of a second presidential term. George W. Bush is likely to suffer the same fate. No mercy is shown for those in power at the onset of a Kondratieff winter.

The Case For Gold

I want to leave my readers in no doubt that gold is the absolute investment of choice during the Kondratieff winter. At this time, there appears to be considerable doubt that this is so. This disbelief in gold is primarily due to the fact that throughout the Kondratieff autumn gold has been in a bear market. This bear market lasted from 1980 when gold reached a record high price of $850 per ounce (the end of the Kondratieff inflationary summer) to 2000, when gold dropped to $252 per ounce (the beginning of the Kondratieff winter). Every gold price rally during those 20 years was a bear market rally, and every gold stock rally was a short-lived phenomenon. Thus, for 20 years investors have been conditioned into believing that gold is a very poor investment medium and that they should put their money into stocks. That belief continues to this day even though stocks have been in a vicious bear market and gold has been in a blossoming bull market.

When stocks are very high priced compared to gold, it's time to sell stocks and buy gold. This always occurs at the end of autumn.

During the Kondratieff autumn, paper investments, like stocks, bonds and real estate, are always the investments of choice. Indeed, during this season these particular investment mediums reach outrageous prices by autumn's end. In such an investment environment there is absolutely no reason to own gold. But when the Kondratieff winter begins with the peak in stock prices (2000 and 1929), gold becomes the investment of choice, because the outlandish excesses in autumn lead to severe financial distress and monetary chaos. Allow me to show you.

Distress in the banking system

As the depression got underway following the crash in stock prices in 1929, the US banking system all but collapsed. Bank failures spiraled into 1933. Shortly after he had assumed the presidency in March 1933, Roosevelt ordered the closing of all banks so that federal inspectors could determine which banks were solvent and which were not. Those that were deemed insolvent were forced to close and the depositors' money was lost. There was no deposit insurance at that time. The banking failures caused a run on even solvent banks, as depositors were fearful that their savings would be lost. Much of the money taken out of the banks was converted to gold.

The current crisis in the Japanese banking system is an example of how the excesses of the Kondratieff autumn play havoc on a country's banks. When the Japanese autumn turned to winter in early 2000, 8 of the 10 largest banks in the world were Japanese. Now only one Japanese bank carries that distinction. What are the Japanese people doing to protect themselves from their enormous banking problems? They are buying gold..

So size by itself is not a protection against bad loans. Large banks have large loans on the books. Many of these loans will turn bad as the Kondratieff winter gets underway. Do not think that American banks are in some way immune to the ravages of winter. The enormous debt amassed during the US autumn is frightening and its effect on US Banks is likely to be just as devastating as has been the Japanese experience. For many US banks the debt mountain is not the only issue that must be addressed in winter; huge derivative positions are also likely to add to banking woes. Americans, mindful of the ravages of winter, are increasingly turning to the security of gold.

Failure of Paper Money

History is replete with stories of government induced paper money systems, all of which have failed. The dollar system, which was imposed on the world at Bretton Woods in 1944 and which became a pure fiat system in August 1970, when President Nixon closed the ëgold window' is now in the process of failing.

In my essay entitled "The War on Gold' published in September 1999, I introduced my readers to three more recent paper money experiments, all of them failures. These failures all resulted in a return to the stability of gold as a backing for money. These three paper money experiments were the 1787-1796 French Assignat, the 1775-1792 Continental Dollar and the 1796-1810 fiat Pound Sterling. In 1810, the British Parliament appointed the Bullion Committee to ascertain why the price of gold had risen during the fourteen years when the pound had been de-coupled from gold. The Committee reported; "Inflation is an increase in the money supply. To restrict inflation you look to the note-issuing authority, whether it is a central bank or a government mint, and restrict note issue. The only effective restriction of note issue, in light of experience, is convertibility into specie such as gold and silver." Following its experiment with paper money, Great Britain returned to a gold backed-pound. Its leadership in that regard provided for world monetary and financial stability which endured for more than one hundred years; that is, to the outbreak of World War I in 1914.

Since the introduction of the fiat-based dollar system, there has never been a time when the world has experienced a stable currency environment. The dollar system has allowed the United States to take unfair advantage of other countries by constantly being indebted to them. This level of indebtedness is no longer sustainable. Foreigners must send back $2 billion per day to the United States just to sustain its unquenchable thirst for money. Last year the US, with 5% of the world's population, accounted for 70% of the world's debt. Every year the US consumes more than 75% of the capital that is available to the entire world. This voracious appetite for money is starving the rest of the world, which is unconsciously financing America's huge military requirements, which at $350 billion per annum is larger than the military budgets of the next twelve countries military expenditures combined. Clearly this cannot go on. As the US debt bubble continues to unwind during this Kondratieff winter, foreigners will no longer want to hold dollars and the US fiat currency regime will be over. What will replace the fiat dollar? It can only be gold, because all other currencies are only paper, too. "These paper-versus-gold battles have been fought before. The stark fact is that paper currency and debt money have never emerged triumphant in a straight, head-on battle with gold. Why not? Because gold has tangible worth and is limited in supply. Paper has negligible tangible worth and is unlimited in supply." Sutton, Anthony, The War on Gold, page 157-158.

Collapse of the Monetary System

In conjunction with the failure of the fiat dollar system, the world monetary system based on the dollar will collapse. The US is facing financial catastrophe brought about by excessive use of the printing press to manufacture a mountain of debt. The debt bubble is now in the initial stages of collapse. When the world understands the magnitude of the impending disaster, the abandonment of the US dollar will reach panic proportions. This will drive up US interest rates, which will add to the financial maelstrom. The worldwide abandonment of the dollar will in turn lead to panic buying in gold, which will, fulfill its traditional function as money of last resort.

In the previous Kondratieff winter, which started with the collapse of US stock prices in 1929, the world monetary system, based on gold, collapsed, following Great Britain's abandonment of gold in September 1931. The simple reason for the failure of the monetary system at that time was because it was too restrictive. At that time governments were unable to print excessive amounts of money to fight the growing economic calamity. It is for exactly the opposite reason that this Kondratieff winter will see the collapse of the international monetary system. A paper money system imposes no restrictions on the amount of money that can be produced. Unfortunately, the US has taken maximum advantage of that prerogative, and as a result has created an enormous debt bubble, which will now collapse into the Kondratieff winter. This collapse will lead to the disintegration of the world monetary system, based on the dollar.

Gold in Deflation

It is not my intention here to get into the interminable argument as to whether the US faces a period of inflation or deflation. I have made my point in most of my past issues that the Kondratieff winter is always the season of deflation because debt is deflationary. And there is far too much debt in the US. "I'm very much afraid that the US is going into a state of deflation. The bonds are telling me that. The economic statistics are telling me that. My insides are telling me that. The US has accumulated too much debt. The US has accumulated more debt than it can handle. The situation looks increasingly as though the debt mountain is about to fall over. If it does, we will have deflation" Richard's Remarks, January 8th 2003 @www.dowtheoryletters.com.

The Federal Reserve is gearing up to fight deflation and has put the dollar printing presses on maximum output in an effort to overcome it. Alan Greenspan admitted as much when he addressed the Economic Club of New York on December 19, 2002, "Moreover, a major objective of the recent heightened level of scrutiny is to ensure that any latent deflationary pressures are appropriately addressed well before they become a problem." The entire financial system is jeopardized by an overwhelming debt burden which collapses into deflation. This collapse causes a panic to own gold.

Scarcity of Gold

In the paragraphs above I have cited many reasons as to why gold becomes the money of choice during a Kondratieff winter. I have shown that the winter is a time of acute financial distress. I have suggested that in if the dollar system collapses, and there are compelling reasons to believe that it will, there will be a worldwide panic to buy gold. But gold and gold equities are very scarce and massive buying of the monetary metal will have a huge positive impact on price and will dramatically drive up the price of the few companies that mine gold and the few companies that explore for it.

The following chart shows the relative values of different asset classes at the peak of the world's stock markets at the end of 1999. The value of gold and gold equities were miniscule as compared to stocks. They still are.

Even now, there are more than a dozen US companies that have market capitalizations larger than the combined value of all the gold companies.

Climbing a Wall of Worry

According to Financial Research Corp, a Boston Based Research firm, US investors added $612 million to gold funds in 2002 after withdrawing $9 million in 2001. Gold funds had net assets of $3.2 billion at the end of November 2002, or 1% of the $2.8 trillion in stock funds. Even though gold funds have been the top fund performers in the US the past two years, the skepticism still remains. Vanguard Group has barred new investment in its gold fund, the second largest, since June 2002. Rebecca Cohen, a Vanguard spokesperson, said, "we were very afraid that investors were chasing performance." She alluded to the returns of gold funds during the mid 1990's as justification for Vanguard's policy, citing the fact that the average gold fund rose 9.5% in 1995 and 1996, only to drop 48% (post-Bre-X) in the next two years. Ms. Cohen said that Vanguard has no plans to re-open the fund. First Eagle SoGen Gold fund surged 105% in 2002, and the average gold fund appreciation was 64% in that year, but investors still maintain their fascination for investment in all other equities. "Since 1926, the S & P has returned 10.6% annually, 4.8% better than corporate bonds and double the return of government bonds. I see no reason to believe that that's going to be any different in the future. Equities look extraordinarily attractive right now compared with bonds." Straszheim, Donald. President Staszheim Global Advisors, Los Angeles, July 22, 2002.

In spite of the major increases in price in gold and gold equities in 2001 and 2002 and the corresponding bear market in all other stocks, very few investors are convinced on either score. This is a contrarian's dream. As most of you will know, every bull market climbs a wall of worry, at least in the initial stages, and so it is with gold. In the Globe and Mail, Global Investor section, written by Rob Carrick dated Saturday, January 11, 2003, the main article headline reads "In Search Of This Year's Midas Touch." "Precious metals funds were golden in 2002, producing big returns in an otherwise lackluster year for mutual funds. The category might not shine so brightly in '03, but there could be treasures in other sectors." This is the same Rob Carrick, who in the same paper wrote on January 2, 2002, "What's the best financial move you can make for 2002? Get into stocks now. That's now, as in immediately. If you don't, you could miss out on as near to a surefire win as there is in the ever unpredictable world of investing."

The current article interviews several mutual fund analysts, none of whom pick a gold fund as an investment of choice in 2003. "Still game to try precious metals funds? Then limit your exposure to 5% of your portfolio and get ready for an exceptionally volatile ride." Ibid

It is time to remind readers that it took 25 years (1954) for stocks to regain the price level that they had reached at the peak of the autumn bull market in September 1929. Investing for the long term at the beginning of a Kondratieff winter is financial suicide. But, the so-called experts still do not get it. No wonder the average investor is so confused. Gold stocks have outperformed all other equities the past two years but few advisors recognize that fact. Even if they do, they somehow expect that this out-performance will be reversed during 2003. It is a pity that they fail to understand that the seasons have changed. The Kondratieff winter is a time to seek the safety of gold, and not a time to be invested in paper assets, all of which are based on a mountain of debt.

Robert Prechter's Gold Price Target - $200 :hihi

Some gold investors are concerned because Robert Prechter of Elliott Wave fame is calling for gold to fall to $200 per ounce. Normally, I would pay attention to anything that Mr. Prechter has to say, but his stance on gold is clearly incorrect. He argues that if the gold price had not been fixed during the last depression it would have fallen like the price of all commodities, including silver, on account of a reduced demand. This was of course true for all other commodities, but gold in the Depression took on its historical role as money of last resort. In the early 1930's, the demand for gold was enormous, based on distrust for paper money and a rising tide of bank failures. So large was the demand that Secretary Treasurer Lamont informed President Hoover, towards the end of his tenure, that the US would soon run out of all its gold. Roosevelt assumed the presidency in March 1933, and immediately ordered the confiscation of all gold that US citizens had amassed, so as to replenish the US Treasury.

Indeed, one might argue that had the price of gold not been fixed, its price, based on this huge demand, would have risen considerably. In his book Conquer the Crash, which I encourage you to read, Prechter writes, "I suspect that the reason that people bought gold then (early 1930's) is that the US government had fixed the price, at $20.67 per ounce. While everything else collapsed, gold was soaring in relative value, and its value gains were guaranteed. Who wouldn't buy it? If the government had fixed the price of any other substance, people would have invested in that instead. Today, gold, like silver in the 1930's is free to trade at market price, which means that it can go down during a dollar deflation." But what we are now witnessing is a dollar deflation, and the gold price far from falling is rising.

It is true that gold was soaring in relative value to all other commodities. If the government had fixed the price of, say, steel, would everyone have rushed to buy steel ingots? The gold price was fixed because it was money and convertible into paper dollars at the fixed price of $20.67. People and countries exchanged their paper dollars for gold coins, simply because gold was money. By the way, it still is money.

Though it is very early into this winter cycle, gold is already being accumulated by knowledgeable and concerned investors. Just as people like Bernard Baruch, began to purchase gold and gold mining shares following the 1929 stock market crash. The gold price is rising because demand is increasing all over the world. On January 9, 2003, Ron Insana reported on CNBC, "a gold dealer that he has known personally for a long, long time recently told him that throughout his entire career (the dealer's) he has never seen so many high net worth people buying so much gold." Reported in Richard Russell's Remarks on January 9, 2003.

As the international financial crisis unfolded following the Wall Street crash in October 1929, investors moved through a five-stage investment strategy in search of safety. Allow me to review these stages for you, courtesy of Donald Hoppe.

1 . A flight from questionable securities into strong securities
The flight from the Nasdaq stocks to the comparative safety of the Dow stocks has already taken place. Eventually, of course, all US stocks will fall to price levels that most investors cannot fathom. Similar flights have taken place out of most foreign stock markets, the German Dax being a good example.

For a time, the beneficiary of this foreign decline in stocks, particularly in Europe and Japan, was US stocks, but that all came to an end in 2000. Investment money is now being attracted to some relatively obscure foreign stock markets and US Treasury bonds, which are perceived by many as the ultimate in quality.

2. Intense liquidation of inventories and commodities
The process of inventory liquidation has been vicious and has resulted in price deflation for many products. While some commodity prices have increased, others have declined. The prices for grains have increased, because of extreme shortages caused by drought conditions in the principal grain-growing regions of North America. Oil prices are high, because of the threat of war in Iraq and political uncertainty in Venezuela. Some metal prices remain relatively high, copper for example, because of demand in China. On the other hand lumber prices have collapsed in anticipation of major slowdown in homebuilding in the US.

Once the worldwide depression gets underway, the price of all commodities are likely to collapse, as they did during the Asian crisis in 1997. At that time oil prices dropped to $10 a barrel.

3. Liquidation of commercial real estate, houses and farms, both through foreclosures and sacrifice sales at a fraction of former values
This is well underway in Japan and other Asian countries, including Hong Kong, where home prices have dropped by more than 70% since their peak in 1997. It is in the early stages in North America. Farm and commercial real estate prices are already in decline. Rental rates are falling too, as vacancy rates increase throughout all the major US cities. For example, vacancy rates in Denver have increased from 14% to 22.3% in the year ending the 3rd quarter 2002. Meanwhile, home prices have peaked and prices for top-end homes are beginning to fall. Generally, real estate prices continue to appreciate, following a major stock market peak. In Japan prices continued higher two years after the peak in the Nikkei at the end of 1989. Thereafter, prices fell dramatically. The real estate market in the US cannot continue to defy the reality of the economy.

4. Flight from banks into cash and gold
In 1929, 659 US banks failed. In 1930, at least through October, approximately the same number shut their doors. Then in the final 60 days of the year, with a sickening suddenness, another 600 banks were suspended, bringing the annual total to 1352. As the failures intensified, "mobs of shouting depositors shouldered up to tellers' windows to withdraw their savings." Freedom From Fear, p.66. In 1931, another 2294 US banks failed. When these depositors withdrew their savings, not only did they take cash (paper money), but they also took out gold, which at that time be converted from paper money at a fixed price of $20.67 per ounce. Of course gold can be purchased today, but the price is not fixed and it is rising in the face of increasing demand.

5. A flight from cash into gold
As the banking failures intensified and the gold standard monetary system began to crumble, initiated by Great Britain's repudiation of gold in September 1931, the move from cash to gold became a stampede; so much so, that the US was on the verge of running out of its official gold holdings. As a result, in 1933, the US was forced off the gold Exchange standard system, and confiscated private gold holdings, to replenish depleted reserves.

The Inverted Financial Pyramid
John Exter, a past member of the Federal Reserve Bank, has been a gold advocate for most of his business life. I have kept some of his writings and treasure them. It was John Exter who called the fiat dollar 'an iou nothing.' A long time ago, I saw a copy of his inverted pyramid chart, which he had constructed to indicate the relative degrees of liquidity in financial assets during a deflationary collapse, which he believed inevitable in a fiat money system. I wished I still had that chart; lo and behold, in his January 2003 issue of Gold and Technology Stocks, my good friend, Jay Taylor, used John Exter's chart, which I have reproduced here. "As you work your way down the pyramid from top to bottom, you encounter increasingly liquid assets. The only asset on the pyramid that retains intrinsic value and liquidity, no matter what happens through any and all circumstances is gold." Ibid

Small Business
Real Estate
Diamonds/Gemstones
OTC Stocks
Muni Bonds
Corporate Bonds
Listed Stocks
Government Bonds
Treasury Bills
Cash
Gold

Gold Bull Market in Progress

Gresham's Law states 'bad money drives out good money', which means if paper money and gold exist side by side, people will use paper money and hoard gold. We are in the initial stages of repeating Gresham's Law once again. Trust in paper money is eroding fast and the 5000-year history of gold as the ultimate money of choice is once again giving competition to paper money, which is simply backed by a mountain of debt.

The gold bull market is already in progress, but it has gone unrecognized, except by the few astute investors, who know that the seasons have changed.

Winter is the season when all the excesses that have been built into the economy during the entire Kondratieff cycle, particularly autumn, are cleansed. This cleansing is always extremely unpleasant and involves severe financial and monetary distress. It is this acute distress that drives investors to the ultimate money GOLD.

4 March, 2003

Quelle (http://www.321gold.com/editorials/anon/anon030403.html)

syr:sss

syracus

04.03.2003, 21:03

Nette Wortschöpfung.....

Iraqnophobia

David Chapman
posted March 4, 2003

A new word has appeared in our vocabulary. Iraqnophobia - fear of Iraq or fear of terrorism. Let's be clear. By definition, phobias are IRRATIONAL, meaning they interfere with one's everyday life or daily routine. But what appears as IRRATIONAL to most people is very real to those suffering from the phobia. In this case it is a mass phobia, the fear of a terrorist attack involving chemicals or biological weapons. Recently the United States was placed on code 'Orange' or a state of high alert that an attack was imminent.

Of course as has happened with consistency thus far in the past, nothing happened. However, we were treated to the specter of numerous people heeding the code 'Orange' and following instructions to go out and purchase duct tape and plastic sheeting to seal their homes. The fact that it would do little to help them in the event of a real attack appears to have been lost on most people. Homeland Security issued the instructions to seal homes with duct tape and plastic sealing only later to recant the orders. Given the confusion surrounding the instructions to seal homes we are sure it only added to the anxiety (phobia?) that was felt. We are also sure that 3M (MMM-NYSE), Home Depot (HD-NYSE) and numerous others were pleased with the rush of sales.

But Iraqnophobia is biting. Consumer confidence in the US fell a shocking 15 points in February to 64 from a revised 78.8 in January. Analysts could only scramble to explain this sharp drop due to a falling stock market, blizzards, colder than expected weather resulting in sharply rising fuel prices and of course Iraqnophobia. Consumer confidence had not seen such a sharp drop since Iraq invaded Kuwait in 1991 and the Iranian hostage crisis of April 1980.

And it seems that no matter where you turn today it is Iraq 24/7. The UN Security Council is badly split threatening its long-term existence. Both Russia and France have indicated that may exercise their veto on the new US/British resolution. The US is trying to gather support from other Security Council members and has been accused of bribery and bullying in order to obtain that support. Iraq may or may not be co-operating according to whom you listen to at any given point in time. War is being threatened over missiles that exceed limits by 33 kilometers.

Turkey wants troops in Northern Iraq in order to ensure that the Iraqi Kurds do not cause problems for them and the Turkish Kurds who have rebelled in the past. Turkey first appeared to succumbed to US bribes and were going to allow troops in Turkey then their Parliament followed the 90%+ of Turks who oppose any war with Iraq and voted against it. The Iraqi opposition is upset that the US may impose military rule for up to 5 years after a successful invasion. The Kurds, who were most willing to assist the US in ousting Saddam are now upset because once again the US appears to be throwing them aside in order to curry favour with Turkey who want to put troops in Northern to prevent the Kurds And on it goes.

What all this does is it continues to cast a pall over the market that some pundits say is holding the market back. But as we have pointed out in the past that with everything possibly coming apart in global geopolitics (UN, Iraq) and the economy on shaky ground (rising price inflation, slow down in spending, falling consumer confidence, continued pressure on employment, rising budget and trade deficits, high debt levels and a slowing economy) the risk is higher for an accident that triggers an even broader stock market sell off. We have also pointed out that Iraq is merely a cover for an economy that is on shaky ground anyway irrespective of an invasion or no invasion. But the Iraq situation is certainly not helping and adds to the anxiety and therefore Iraqnophobia.

Energy and gold stocks are also feeling the uncertainty. While gold ran to $380 it has since corrected down into the $340 area. Oil prices shot to almost $40 before settling back. Natural Gas prices have been in a strong uptrend mainly because of the weather and shortages. Gold and oil stocks have not followed the upward movement in the commodity confusing many. Some believe that gold and oil stocks will fall sharply once an Iraqi invasion begins as they did in 1991 when the Gulf War started and that may be a part of the reason for the uncertainty. Call it another case of Iraqnophobia but in a different way.

But both sectors are in strong uptrends backed by strong fundamentals. With the US Dollar in full retreat both these commodities priced in US$ are major beneficiaries as are all commodities priced in US$. Rising commodity prices are a major reason we are now seeing inflationary pressures. And rising commodity prices have a negative impact on the consumer particularly the sharply rising oil and gas prices. The falling US$ is putting pressure on the already huge trade deficit. Some see the trade deficit soon hitting $600 billion per year. Couple this with the possibility of $400 billion budget deficits and the US could soon have trillion dollar deficits or 10% of the entire economy. These numbers are too huge to dismiss easily.

And gold (and other precious metals such as silver) along with oil and gas are commodities with supply problems as well. War or threat of war in the middle east coupled with no major new discoveries in over 30 years keep the pressure on oil prices irrespective of cold weather. New demands including the probable introduction of the Islamic Gold Dinar in 2004 will keep the demand pressure on gold prices. Silver has been drawing from current supplies for years and unless there is a significant increase in the price of silver coupled with no new production supply shortages for ongoing commercial use will soon be upon us.

Our charts of the TSX Gold Index and the TSX Energy Index are presented below. The energy complex is the only TSX index up on the year to any degree (healthcare is up marginally) gaining 3.6%. But the energy index has been in a strong uptrend since lows in October 2000. The gold index, while down on the year, remains in a strong uptrend also from its October 2000 lows. The irregular rise in a series of higher highs and higher lows is indicative of strength in a bull market (or climbing the wall of worry as some would term it). The energy index has also broken out of a symmetrical triangle formation over the past several months. The gold index may also be doing the same thing but a confirmed breakout will not occur until we get over 200. Meanwhile we are still susceptible to a drop to the 160 area to complete the correction and remain within the bull channel.

http://www.321gold.com/editorials/chapman_d/030403tsxgld.jpg

Canada has in no small measure been a beneficiary of the problems of Iraqnophobia. While Canada has similar problems as the US with high debt levels Canada does have both a budget and a trade surplus. Recent economic numbers, however, have indicated that we are not immune to a slowing economy south of the border as our recent GDP numbers came in at 1.6% versus an expected 2.3%. But generally our unemployment is growing more slowly and the economy has been one of the best performing of the G7.

These improvements coupled with strength in the commodity sector have been positive for the Canadian Dollar. Indeed the Canadian dollar has broken out of long term down trend line from the 1991 highs. In 2003 the Canadian dollar is already up 6%. This is a very positive development and certainly favours the Canadian stock markets versus the US markets. And the place to be is the energy and gold sectors plus as well the metals and mining sector, which while down so far this year, is also in a bull market. Overall the TSX Composite (down 42% from its highs) looks similar to the US stock markets. The TSX may also have formed a huge head and shoulders topping pattern as our chart notes. While it looks interesting the target of roughly 600 looks too improbable by even our bearish standards. Nonetheless the composite is currently meeting stiff resistance at its 40-week and 13-week moving average. Look for a move back down even if the gold and energy indices continue to do well.

http://www.321gold.com/editorials/chapman_d/030403cdntsx.jpg

Iraqnophobia may be gripping the populace. And it is not likely to end any time soon. No matter what, war appears to be imminent possibly as early as mid March but certainly no later than early April. And the commencement of war will not be the solution to Iraqnophobia that many would like it to be as it is most likely to occur following a failed UN resolution. This could be worst nightmare of Iraqnophobia and result in a sharp decline in the markets with the exception of gold and energy. As noted Canadian comedian Red Green would say "well Harold, get out the duct tape."

email david@davidchapman.com

Quelle (http://www.321gold.com/editorials/chapman_d/chapman_d_030403.html)

syr:sss

syracus

05.03.2003, 11:56

Wieder einmal, das "andere" Amerika meldet sich :):

U.S. Diplomat John Brady Kiesling
Letter of Resignation, to:
Secretary of State Colin L. Powell

ATHENS | Thursday 27 February 2003

Dear Mr. Secretary:

I am writing you to submit my resignation from the Foreign Service of the United States and from my position as Political Counselor in U.S. Embassy Athens, effective March 7. I do so with a heavy heart. The baggage of my upbringing included a felt obligation to give something back to my country. Service as a U.S. diplomat was a dream job. I was paid to understand foreign languages and cultures, to seek out diplomats, politicians, scholars and journalists, and to persuade them that U.S. interests and theirs fundamentally coincided. My faith in my country and its values was the most powerful weapon in my diplomatic arsenal.

It is inevitable that during twenty years with the State Department I would become more sophisticated and cynical about the narrow and selfish bureaucratic motives that sometimes shaped our policies. Human nature is what it is, and I was rewarded and promoted for understanding human nature. But until this Administration it had been possible to believe that by upholding the policies of my president I was also upholding the interests of the American people and the world. I believe it no longer.

The policies we are now asked to advance are incompatible not only with American values but also with American interests. Our fervent pursuit of war with Iraq is driving us to squander the international legitimacy that has been America’s most potent weapon of both offense and defense since the days of Woodrow Wilson. We have begun to dismantle the largest and most effective web of international relationships the world has ever known. Our current course will bring instability and danger, not security.

The sacrifice of global interests to domestic politics and to bureaucratic self-interest is nothing new, and it is certainly not a uniquely American problem. Still, we have not seen such systematic distortion of intelligence, such systematic manipulation of American opinion, since the war in Vietnam. The September 11 tragedy left us stronger than before, rallying around us a vast international coalition to cooperate for the first time in a systematic way against the threat of terrorism. But rather than take credit for those successes and build on them, this Administration has chosen to make terrorism a domestic political tool, enlisting a scattered and largely defeated Al Qaeda as its bureaucratic ally. We spread disproportionate terror and confusion in the public mind, arbitrarily linking the unrelated problems of terrorism and Iraq. The result, and perhaps the motive, is to justify a vast misallocation of shrinking public wealth to the military and to weaken the safeguards that protect American citizens from the heavy hand of government. September 11 did not do as much damage to the fabric of American society as we seem determined to so to ourselves. Is the Russia of the late Romanovs really our model, a selfish, superstitious empire thrashing toward self-destruction in the name of a doomed status quo?

We should ask ourselves why we have failed to persuade more of the world that a war with Iraq is necessary. We have over the past two years done too much to assert to our world partners that narrow and mercenary U.S. interests override the cherished values of our partners. Even where our aims were not in question, our consistency is at issue. The model of Afghanistan is little comfort to allies wondering on what basis we plan to rebuild the Middle East, and in whose image and interests. Have we indeed become blind, as Russia is blind in Chechnya, as Israel is blind in the Occupied Territories, to our own advice, that overwhelming military power is not the answer to terrorism? After the shambles of post-war Iraq joins the shambles in Grozny and Ramallah, it will be a brave foreigner who forms ranks with Micronesia to follow where we lead.

We have a coalition still, a good one. The loyalty of many of our friends is impressive, a tribute to American moral capital built up over a century. But our closest allies are persuaded less that war is justified than that it would be perilous to allow the U.S. to drift into complete solipsism. Loyalty should be reciprocal. Why does our President condone the swaggering and contemptuous approach to our friends and allies this Administration is fostering, including among its most senior officials. Has “oderint dum metuant” really become our motto?

I urge you to listen to America’s friends around the world. Even here in Greece, purported hotbed of European anti-Americanism, we have more and closer friends than the American newspaper reader can possibly imagine. Even when they complain about American arrogance, Greeks know that the world is a difficult and dangerous place, and they want a strong international system, with the U.S. and EU in close partnership. When our friends are afraid of us rather than for us, it is time to worry. And now they are afraid. Who will tell them convincingly that the United States is as it was, a beacon of liberty, security, and justice for the planet?

Mr. Secretary, I have enormous respect for your character and ability. You have preserved more international credibility for us than our policy deserves, and salvaged something positive from the excesses of an ideological and self-serving Administration. But your loyalty to the President goes too far . We are straining beyond its limits an international system we built with such toil and treasure, a web of laws, treaties, organizations, and shared values that sets limits on our foes far more effectively than it ever constrained America’s ability to defend its interests.

I am resigning because I have tried and failed to reconcile my conscience with my ability to represent the current U.S. Administration. I have confidence that our democratic process is ultimately self-correcting, and hope that in a small way I can contribute from outside to shaping policies that better serve the security and prosperity of the American people and the world we share.

John Brady Kiesling

Quelle (http://www.gooff.com/NM/templates/Breaking_News.asp?articleid=150&zoneid=2)

:eek: .......... Recht hat er.

syr

syracus

06.03.2003, 19:43

Weiter in der Reihe, ganz einfach weil es knapp wird mit der Zeit...

Investment Outlook
Bill Gross | March 2003

http://www.pimco.com/ca/images/billgross.jpg

The Hours

What happens when we die?
We go back to where we came from.

And where is that?
I can't remember.

- Dialogue from The Hours

One of the benefits of writing a book is that it serves as a snapshot of time. Thoughts, feelings, philosophies of living change as we funnel down through the hourglass and the printed word is near immutable proof of such transformations. One thing that strikes me about "me" as I infrequently pick up Everything You've Heard About Investing Is Wrong is how absorbed I was in my late forties and early fifties with religion and the meaning of life. My stories describing St. Catherine's Church and the fictional Father Guido Sarducci were numerous, and filled with frequent references to religion and the search for a higher authority. Nearly a decade later in 2003, I must confide that I am no nearer to resolving the conundrum. Like Virginia Woolf in The Hours, I cannot remember where I came from, and I lack certainty in where I am going. We have company - Virginia and I. Still there are those who have found answers to their individual quests and I accept their certitude if not their conclusions. In the absence of personal resolution, I fall back on the thinking of Tennyson: "There lives more faith in honest doubt," he wrote, "than in half the creeds." Perhaps. My life seems sprinkled with such self-consolations as the conclusion to my multi-act play comes rushing towards me faster than I care to acknowledge. And my current faith, if it could be described as such, would be a near resignation, suggesting that in the absence of certainty, the best we can do is to encircle our loved ones, display empathy and compassion to the billions that share a world with us, and hold on tight as we descend into the maelstrom. Answers, if any, await in the density of that great black hole beyond.

While I'm in the emoting mood let me tread into even more dangerous waters and speak to the impending conflict with Iraq. For those of you who have already had enough, please skip this paragraph and proceed to the actual investment outlook. I am not a geopolitical expert, but I have an opinion founded on what hopefully is a healthy dose of common sense and historical perspective. I speak now, and risk client, public, and press censure because I was silent 35 years ago. I sailed off to Vietnam, came back and collected my Veteran's benefits and was none the worse for the experience. But hundreds of thousands, including some friends - were - and that is the point I suppose, in speaking out now. The crux of the current argument involving Iraq is this: All would agree, especially since 9/11 that America has a right to defend herself. The question is how far we can go in that defense and in the process what cost to the American spirit and the American soul. President Bush and others say that we must take almost every step to insure our internal safety. He argues that, in addition, those steps will bring positive changes in regimes dominated by oppression; Afghanistan, Iraq, North Korea and Iran are but steppingstones towards a new democratic world order with America at the center. I know the arguments - I'm even temporarily persuaded by them during emotional speeches such as Bush's State of the Union. I suspect, however, that by invading "evil doer" nations, we may lessen our vulnerability but lose a piece of our soul in the process. Yes, I'm aware that Iraq is in noncompliance with UN resolutions and that its leader is a near madman. I'm also aware, however, of how absolute power corrupts and how we may be crossing a thin line. Preemptive attacks? Kill them before they kill us? No one has experienced such Hours in the United States before. I am heartbroken that it has come to this and I fear for my country's proud heritage and even more for its future.

http://www.pimco.com/IO/Mar03/chart1.gif :rolleyes:

And now finally, it is time for the investment Hour. Readers may remember my Investment Outlook remarks of recent months suggesting that the U.S. Treasury market's "salad days" are over. If short rates can't go down from here, then further price increases for intermediate and long-term Treasuries are unlikely, especially under the threat of accelerating fiscal deficits and Fed Governor Bernanke's vow to use any and all means to defeat deflation. "I believe him," I suggested, and I still do. 2-4% inflation beginning in 2004 and continuing for at least several years beyond is the most likely outcome, which would seem to lead to an "overvalued" Treasury market. After all, if inflation a few years hence almost matches existing yields, then real interest rates, at least for nominal as opposed to TIPS related Treasuries, are close to 0%. Overvalued indeed.

I have also cautioned, however, that just because a 20-year bull market in bonds is likely now complete, it is not necessarily the case that a new bear market has begun. 10-year Treasury yields at 4% do not exactly resemble "NASDAQ 5000." I cite two primary reasons for this bear market "hibernation" of uncertain duration. First of all, it is important to remember that during our last secular transition from inflation to disinflation it took several years for intermediate and long-term yields to adjust. Return with me to the Volcker years of 1979-81 during which he vowed to raise short rates as high as necessary to reverse America's inflationary spiral. He did - raise rates - eventually producing a prime of 20%+. He did - initiate a 20-year trend of disinflation - starting at a CPI peak of 14.8% in March of 1980 and culminating at an ebb of 1.2% in June of 2002. But it was not until mid-1984 that long-term bond investors began to catch on. 30-year Treasuries were still at 14% in June of that year. There is no reason to suspect anything different this time around in terms of the pace of secular transformation from "dis" to "re" inflation. It may take many more quarters of abysmally low short rates to begin to throw cold water in the face of bond investors used to a Caesar Salad and near double-digit annual total returns. In the meantime, Treasury yields could stay at overvalued levels, reflecting not only disbelief in the ability of the Fed and the Congress to reflate, but the remarkably attractive "carry" during this sleepy time period of hibernation. With money market funds yielding less than 1%, a 4% Treasury undoubtedly has considerable appeal to some investors despite its downside price risk.

There is a second reason to suspect continued overvaluation in U.S. Treasuries. If current reflationary tactics do not gain traction, if 1% Fed funds and $300+ billion deficits do not sustain a satisfactory growth rate in nominal GDP, then Fed Governor Bernanke has hinted at using additional weapons in the Fed's arsenal. While those extraordinary measures are numerous, the bulk of Bernanke's "promises" center on the purchase of 1-year to perhaps 3-year Treasuries in order to "guarantee" a minimum return for holders over a future period of time. In the process, the Fed would presumably inject liquidity sufficient to reflate the economy. These tactics, which involve capping yields, at first blush appear to offer investors few favors, but the implicit promise of price stability allows for an extension of risk further out on the yield curve which would serve to limit the downside price risk of 10 to 30-year Treasuries as well. In addition, the mortgage market would continue to thrive, refis and equity takeouts would stimulate consumer spending, and the housing bubble, if real, would be granted a stay of execution. And if for some reason, 30-year fixed rate mortgage yields did not decline, Bernanke has hinted at the possibility of outright purchases of GNMAs, which would accomplish the same thing. Like the movement of U.S. troops to the borders of Iraq in anticipation of an early March invasion, the Fed and the Treasury may have begun preparation to do just that in the GNMA market. The messiness of purchasing thousands upon thousands of small GNMA pools has been reduced by GNMA's recent lowering of the cost of what are known as "platinum" or mega-sized mortgage pools. The Fed, with just slight exaggeration, could now buy one trillion dollars of GNMAs and have but one accounting entry per month. Bernanke's war may not be imminent but the logistics are falling into place.

Typically, inflation is the primary driver of bond yields, and when the word "reflation" begins to characterize the outlooks of bond managers such as PIMCO, investors tend to fear the worst. I suspect however, a delay of bond market Armageddon until the U.S. and perhaps even the global economy regains sufficient traction to grow on its own - without the benefit of extraordinarily low interest rates or Bernanke's troops in reserve. A run on the dollar is perhaps the only substantial fly in this scenario's ointment. While total returns should approximate only a bond's coupon in 2003 (4-5%), the imminent demise of bonds just as investors are beginning to love them, has been exaggerated. I still prefer an overvalued Treasury to an overvalued stock.

And so the Hours go ticking by: Hours to our individual deaths - Hours to the demise of a country's soul - Hours before our financial markets may be employed in a high stakes game of Bernanke poker. Like Virginia Woolf, I wish to remember where we came from. For now, I can at least remember where we have been, but a few years hence, a new world order filled with fresh, more virulent memories may mask the contentment of my first 58 years.

William H. Gross
Managing Director
PIMCO Funds

Quelle (http://www.pimco.com/ca/bonds_commentary_investmentoutlook_recent_index_bottom_archive.htm)

Das ganze als PDF (http://www.pimco.com/pdf/IO%20March_03%20Web%20FINAL.pdf)

Wobei es derzeit wohl schlecht aussieht... Und damit etwas Pause mit Themen zu Irak, Konjunktur will auch mal wieder.

syr:sss

syracus

07.03.2003, 10:46

Noch besser derzeit, eine Kombination.

What You Should Know About War and the Economy

by Llewellyn H. Rockwell, Jr.

There's something about the prospect of an interview that focuses the mind. I write as I prepare to leave for an extended interview with Bill Moyers for PBS. He wants to know how it is possible to be against this war, and the policies of the Bush administration, and also be for a free and globally engaged commercial republic. To put it more crudely, how can we make sense of the phenomenon of right-wing anti-war theory and practice?

Behind the query is the longstanding canard that war is good for the economy. If what you care about is a prosperous economy, why wouldn't it make sense to spend hundreds of billions on huge industrial products like military planes and tanks? Why not employ hundreds of thousands in a great public-works program like war? Why not destroy a country so that money can funnel to American companies in charge of rebuilding it? Doesn't all of this help us out of the recession?

All these questions somehow come back to Bastiat's "Broken Window" fallacy. In the story, a boy throws a rock through a window. Regrets for this act of destruction are all around. But then a confused intellectual pops up to explain that this is a good thing after all. The window will have to be fixed, which gives business to the glazier, who will use it to buy a suit, helping the tailor, and so on. Where's the fallacy? It comes down to focusing on the seen (the new spending) as versus the unseen (what might have been done with the resources had they not had to be diverted to window repair).

Let us never forget that the military is the largest single government bureaucracy. It produces nothing. It only consumes resources which it takes from taxpayers by force of law. Making matters worse, all these resources are directed toward the building and maintenance of weapons of mass destruction and those who will operate them. The military machine is the boy with the rock writ large. It does not create wealth. It diverts it from more productive uses.

How big is the US military? It is by far the largest and most potentially destructive in the history of the world. The US this year will spend in excess of $400 billion (not including much spy spending). The next largest spender is Russia, which spends only 14% of the US total. To equal US spending, the military budgets of the next 27 highest spenders have to be added together. If you consider this, and also consider the disparity of the US nuclear stockpile and the 120 countries in which the US keeps its troops, you begin to see why the US is so widely regarded as an imperialist power and a threat to world peace.

This is very hard for Americans to understand. We tend to think of the American nation as a mere extension of our own lives. We all work hard. We mind our own business. We tend to our families and involve ourselves in local civic activities. We love our history and are proud of our founding. We are pleased by our prosperity (even if we don't know why it exists). We think most other Americans live the way we do. We tend to think our government (if we think about it at all) is nothing but an extension of this way of life.

A deadly military empire? Don't be ridiculous. The military is just defending the country. Bush is a potential tyrant? Get real! He's a good man. Those crazy foreigners who resent the US are really no better than those people who attacked us on September 11, 2001: they envy our wealth and hate us for our goodness. We are a godly people, which makes our enemies ungodly, even demonic. This is a short summary of a widely held view, one that those who seek a government-dominated society use to build their public-sector empire.

What most Americans refuse to face is that what the government does day to day, and in particular its military arm, is not an extension of the way the rest of us live. Government knows only one mode of operation: coercion. It does not cooperate; it coerces. Because it is constantly overriding human choices, it makes unrelenting error, most often producing consequences opposite of the stated intention. This is no less true in its foreign operations than it is in its domestic ones.

Consider the most recent military action in Afghanistan. The Taliban was nothing but a reincarnation of the opposition tribes the US supported when the country was being run by the Soviets in the 1980s. Back then we called them freedom fighters. When the Taliban fled the capital city last year, the US knew where to look for them because the US assisted in building their hideouts during the last war.

What did the war do to the country? All hoopla aside, it is no freer, no more democratic, and no more prosperous. The warlords are running the country and women are still subject to fundamentalist Islamic dictate. How many civilians did the US kill? Thousands, perhaps many thousands. During the war, every day brought news of a few dozen innocent dead, all verified by humanitarian organizations monitoring the situation. We don't have a definitive final tabulation because the US bombed radio and TV stations and worked to keep news of the dead from leaking.

The New York Times reports concerning the newest proposed war: "General [Richard] Myers gave a stark warning that the American attack would result in Iraqi civilian casualties despite the military's best efforts to prevent them." Americans don't like to think about this, but it is a reality nonetheless. As for best efforts, one would have to turn a blind eye to the history of US warfare to believe it.

With regard to Iraq in particular, let us remember that the US has waged unrelenting war on that country for twelve years, with bombings and sanctions that the UN says have killed millions. The entire fiasco began with the Iraq invasion of its former province, Kuwait, which the US ambassador was warned about in advance and responded that the US took no position on the border-oil dispute then brewing.

But let's return to the economic costs associated with war. It does not stimulate productivity. It destroys capital, in the same sense that all government spending destroys capital. It removes resources from where they are productive – within the market economy – and places them in the hands of bureaucrats, who assign these resources to uses that have nothing to do with consumer or producer demand. All decisions made by government bureaucrats are economically arbitrary because the decision makers have no access to market signaling.

What's interesting this time around is how the markets seem to have caught on. The prospect of war is inhibiting recovery. The stock market is now at 1998 levels, with five years of increased valuations wiped out. The recession itself, the longest in postwar history, may have been the inevitable response to the economic bubble that preceded it, but the drive to war is prolonging it. It could get worse and likely will. Consumer confidence is falling, as is consumer spending. Unemployment is rising. The dollar is falling. Commodity prices are rising. All signs point to a man-made economic calamity.

The deficit is completely out of control. It will soar past $400 billion in short order. The idea of tax cuts is fine, but let's not pretend as if the bill for government spending doesn't need to be paid by someone at some point. It will be paid either through inflation or higher taxes later. In the meantime, deficits crowd out private production because they need to be financed through bond holdings. War will only make the problem worse. From time immemorial, war has gone along with fiscal irresponsibility.

War also goes hand in hand with government control of the economy. Bush has increased spending upwards of 30 percent since he took the oath of office. He has imposed punishing tariffs on steel and hardwood. He has created the largest new civilian bureaucracy erected since World War II. He has unleashed the federal police power against the American people in violation of the constitution. All of this amounts to a war on freedom, of which commercial freedom is an essential part. This is why no true partisan of free enterprise can support war.

But what about September 11? Doesn't that event justify just about anything? Let us not forget that this was a multiple hijacking, of which there have been hundreds over the decades since commercial flight became popular. The difference this time was that the hijackers gave up their lives rather than surrender. It was a low-budget operation, and needed no international conspiracy to bring it about. It was easily prevented by permitting pilots to protect their planes and passengers by force of arms, but federal bureaucrats had a policy against this.

In any case, there is no evidence that Iraq had anything to do with 9-11. The Iraqi regime is liberal by Muslim standards and for that reason hated by Islamic fundamentalists. Unlike Saudi Arabia, it tolerates religious diversity, permits gun ownership, and allows drinking. It has a secular culture, complete with rock stars and symphony halls, that few other Muslim states have. Yes it is a dictatorship, but there are a lot of these in the world. Many of them are US allies.

The focus of the Bush administration on Iraq has more to do with personal vendettas and Iraqi oil. In waging war, the Bush administration proposes to spend twice the annual GDP of the entire Iraqi economy! The US will spend $2 for every $1 it will destroy – the very definition of economic perversity. What's more, an attack will only further destabilize the region and recruit more terrorists intent on harming us.

Meanwhile, the prospect of war has markets completely spooked. Is this a narrow economic concern? Not in any way. Prosperity is an essential partner in civilization itself. It is the basis of leisure, charity, and a hopeful outlook on life. It is the means for conquering poverty at the lowest rung of society, the basis on which children and the elderly are cared for, the foundation for the cultivation of arts and learning. Crush an economy and you crush civilization.

It is natural that liberty and peace go together. Liberty makes it possible for people from different religious traditions and cultural backgrounds to find common ground. Commerce is the great mechanism that permits cooperation amidst radical diversity. It is also the basis for the working out of the brotherhood of man. Trade is the key to peace. It allows us to think and act both locally and globally.

What makes no sense is the belief that big government can be cultivated at home without the same government becoming belligerent abroad. What also makes no sense is the belief that big-government wars and belligerent foreign policies can be supported without creating the conditions that allow for the thriving of big government at home. The libertarian view that peace and freedom go together may be the outlier in current public opinion. But it is a consistent view, the only one compatible with a true concern for human rights, and for social and global well-being.

March 6, 2003

Llewellyn H. Rockwell, Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama, and editor of LewRockwell.com.

Quelle (http://www.lewrockwell.com/rockwell/warandeconomy.html)

read it!

syr:sss

syracus

11.03.2003, 18:16

Mal etwas für unsere Gemeinde der ultralangfrist cost leverage ähm avarage Zocker, Anleger oder gar Grossinvestoren;).

In the long run, the price you pay is what counts

By Bill Fleckenstein

Warren Buffett tells shareholders he believes stock prices are still too high. Investing legend Peter Bernstein agrees. That's why simple buy-and-hold no longer makes sense.

Some folks just don't want to be confused with the facts. Let’s take the "fact" of buy-and-hold as an example. That one wins the contest for most beloved investing strategy. Well, this post-bubble world has turned strategy to myth. Cruise control is fine for the highway, not the portfolio.

For anyone who finds it hard to say so long to what worked for so long, a couple of guys who've been around the Wall Street block, Warren Buffett and Peter Bernstein, offer facts to make the separation easier.

The point both men are making -- and the point I’ve been making for the last several years -- is that stocks are still so high that you can't assume you’ll make money in the long run. In fact, you could lose money.

Buffett on house (of cards) cleaning

By now, I'm sure many people know that last week, Fortune.com published an excerpt of Warren Buffett's annual letter to Berkshire Hathaway (BRK.B, news, msgs) shareholders, which was released in its entirety last weekend (after this column had been put to bed). But for any readers who may not have seen this preview, I would like to share some of Buffett's comments on derivatives and their associated trading activities.

"Time bombs" is how he describes them, "both for the parties that deal in them and the economic system." Then he goes on to point out counterparty risk: "Unless derivative contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties in them." Of course, that's the rub. Sometimes it is not possible to ferret out creditworthiness in advance. Anybody who had counted on Enron (ENRNQ, news, msgs) as a counterparty, for instance, has a problem on his hands.

To show the complex layers that separate investors from a company's true credit picture, Buffett points out that General Re Securities (which his General Re tried unsuccessfully to divest) still had 14,384 contracts outstanding, involving 672 counterparties, after 10 months of his attempt to wind down its operations. This was his account of how unwieldy the situation had become: "Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity." If it's mind-bogglingly complex for Warren Buffett, you can be sure that it's complicated.

So, there is what the world's greatest investor had to say about the eighth wonder of the world -- this massive derivatives mess. Thus far, it has avoided blowing up, and it’s lasted long enough to have lulled people into a false sense of security. But for Buffett to take an up-close and personal look at derivatives and conclude that this is a time bomb should serve as an alert to people when they examine their own investments. (Editor's note: For more on derivatives, see Jim Jubak’s column, “Why J.P. Morgan Chase has the market panicked.")

As for stocks in general, Buffett said, "We still find very few (stocks) that even mildly interest us." He continued: "That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge." My sentiments exactly.

Q&A the Welling way

Along the same vein of wisdom, and since we are in the quiet period and awaiting more war news, I thought I would reprise one of the single most spectacular interviews I have seen Kate Welling conduct (and believe me, she has done a few). Kate used to run the interviews at Barron's. For some time now, she has had her own publication, Welling@Weedon (see link at left under 'Related Sites'), a fee-based institutional product. In the current issue, her subject is Peter Bernstein, the New York financial expert who has forgotten more about investing than most people will ever learn.

What struck me about the interview was his view (which happens to be mine, but he is Peter Bernstein and I am not) that the post-bubble period will be entirely different from what has come before and entirely different from what people expect. A longtime hobbyhorse of mine, as longtime readers know, is that you can sort people into two camps: those who understand we had a bubble and what it means, and those who don't. Peter has given a lot of thought to his position, and I would like to share some of his comments here.

Bernstein hollows out hallowed truths

First of all, he believes, people need to say to themselves, "The basic investment structure that I have been using, which served me pretty well, is no longer appropriate." He explains: "My point is that we've reached a funny position, where the long run doesn't work, where long-run evidence doesn't fit circumstances as they are today." He ascribes that in part to the bubble: "I am suggesting we have to begin by focusing on the meaning of the long term – think about it differently in the post-bubble world."

To help people understand that "the old long run, she ain't what she used to be," Bernstein cites powerful data. (He has made this point before, and some of the data may appear dry, but people may now be in a more receptive frame of mind to accept his compelling analysis.)

First, he takes up the theory articulated by University of Pennsylvania finance professor Jeremy Siegel that you will be just fine as an investor if you just “shut your eyes and hang on.” The foundation for that idea comes from Siegel's research showing that in the long run (in 20-year periods), real annual rate of return on equities in U.S. history has been a remarkably consistent 7%. "Ever since 1880. It's a very powerful story,” Bernstein says. “There's no way you can match that anywhere."

Data points prick illusions

The folly in that thinking, however, lies in how that 7% real (or after inflation) return is built. The average dividend yield during all those 20-year periods that Siegel studied was well over 4%, Bernstein points out. “Real price appreciation contributed only 2.1% of the total return. All the rest was dividends, received and reinvested. By contrast, today's dividend yield is in the neighborhood of 2%. Thus, to achieve 7% real growth over the next 20 years, the stock market would need 5% real growth in both earnings and dividends. “That's not exactly a reasonable expectation over the long run. Impossible, in fact," he says.

Okay, you say, 5% real growth doesn't sound so hard. Wrong, Bernstein argues. The question is the difference between what investors expect and what's rational to expect. Remember, he continues, "It’s an important but little-known fact that real growth in earnings and dividends consistently lags long-run growth rates in real GDP -- and in many cases even in per capita GDP growth -- not just in the United States, but in all other developed economies. Between 1900 and 2001, U.S. GDP growth averaged 3.3% a year in real terms vs. 1.9% growth in GDP per capita, 1.5% earnings growth and just 1.1% dividend growth."

And, he added, “the U.S. economy was the most successful on the planet." So there is some of the sobering data behind the view that people's long-run expectations are not liable to be met.

Of 'long run' and long runny noses

Furthering the disappointment is another problem that I have talked about frequently: valuations. If stock prices were far cheaper, dividend yields would be higher and therefore prospective rates of return would be higher. I believe that someday we will see much lower stock prices, which will then enable people who have cash reserves to realize their long-run expectations. But in the meantime, as Peter notes: "The underlying message in all of them (recent studies about valuation levels and prospective rates of return) is that until these valuation issues adjust themselves, equities are not necessarily going to be the best place in the long run."

The bottom line, he says: Research shows that starting price matters. “The objectively feasible long-run equity return is the sum of the dividend yield and the long-run earnings growth. And when it's high, that's bullish for equities." As I have stated many times, the difference between a good company and a good investment is the price you pay for it.

Of course, all of this doesn't mean we can't have rallies from time to time, and big ones to boot, as this bear market winds its way along. We've had 10 of the biggest upside days in Nasdaq history since the bear market began. Tokyo has experienced many mini-bull markets during its 13-year bear market. So, there will be big rallies. But Peter's point, and one I heartily agree with, is that people who think they're going to make big money in the "long run" from these starting prices are more likely basing their faith on arm-waving than on facts.

William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney.

Quelle (http://moneycentral.msn.com/content/p42637.asp)

syr :sss

syracus

12.03.2003, 20:18

http://www.atimes.com/images/f_images/atime_logo1.gif

America's Eurasian reshuffle

By Francesco Sisci and Lu Xiang

BEIJING - The terror attacks of September 11, 2001, seemed close enough to Samuel P Huntington's forecasts in his famous The Clash of Civilizations and the Remaking of World Order, but the consequences for the world appear now, some 18 months after those events, completely opposite. France and Germany, the bulwark of Western civilization according to Huntington, are on a collision course against the United States; ironically, the European countries closer to the US are the ones further from Huntington's "nordic" culture: Spain, Italy and Eastern Europe.

France and Germany, partly because of their significant domestic Muslim minorities, are in fact rediscovering 13 centuries after the Arab conquest that split the Mediterranean in two, north and south, that the center of Europe is something that is only partly "European". In fact the projection of northern and continental Europe toward the southern and eastern shores of this sea is something that has been attempted routinely for centuries, from the times of the Crusades until a few decades ago, when France controlled Algeria and Tunisia. The opposite was also true, as the Arabs held Spain, in all or in part, until the 15th century, and the Turks battled Vienna in the Balkans until the 18th century.

In this case for France and Germany the opposition to the US war in Iraq could be part of a grander strategy. On the one hand Paris and Berlin, commanding the largest economies on the continent, could form the nucleus of that "Kerneuropa" (Core Europe) which could be the real pole of union for Europe. The project is even more important as the European Union is expanding in all directions, incorporating the Baltic republics and Turkey. A union, moving from 12 to 15 and then to 22 and who knows how many more members, loses focus and decisiveness. The rules in the EU are democratic and differentiate among the size of member states, in theory granting the same power for the six-month presidency to Luxembourg and to Germany encourages divisions within larger countries. Provinces, such as Bavaria in Germany or Lombardy in Italy, could feel they could get better representation in the EU if they stood as independent states rather than as part of a larger country. This is particularly true in Italy, where Lombardy is one of the richest areas in Europe but within Italy it must live with provinces that are some of the poorest areas of the whole union.

At the same time, the collapse of the Soviet Union in the east has erased the 50-year-long strategic challenge to Western and Central Europe. The defeat of the radical Muslim world in the first Gulf War has erased the other challenge from the southern and eastern Mediterranean. This second Gulf War is set to start without an open provocation from Iraq like its previous invasion of Kuwait, and likely without the much-ballyhooed smoking gun proving Saddam Hussein's evil intentions. This could antagonize the Muslims in Europe and in the Middle East, and widen the rift between the northern and southern Mediterranean.

On the contrary, a greater cooperation between France and Germany and their projection toward the Muslim world could, in time, produce the double bonus of forming a center of European decisions and extending a friendly hand to the Middle East. This friendly hand is especially important as, for the first time since the Roman Empire, there could be some degree of cultural and political agreement between the north and the south of this sea. In Europe in the same fashion France and Germany stand alone but strong within Europe, thus in effect marginalizing other countries. The position of France and Germany also offers a Western interlocutor to moderate Muslims seeking viable alternatives to radicalism. This could be especially important as Iraq, unlike Saudi Arabia, is not a radicalized country, and its defeat could open the floodgates to greater Muslim fundamentalism.

All of this is not necessarily negative for the ongoing US war in Iraq, but certainly imposes a new strategic paradigm between the two sides of the Atlantic, where France and Germany do not accept playing second fiddle to the United States. However, from the US perspective, the United States was able to fight for France, the center of the present dispute, three times in the past century - in both World Wars and in the Cold War - but France is dragging its feet on a war for the US.

But it is not a matter of exchange of favors and certainly not one of civilizations: it is geopolitics. France and Germany could move up their political integration, and project themselves to Africa and the Middle East, appease Moscow while integrating Poland, the Baltic and even Ukraine into a bipolar Europe. In one there can be Framania (France plus Germany) and the dwarves who wish to join (Belgium, Luxembourg etc) and in the other everyone else.

The appeal of this design is enormous, and whatever the results of the war it could build a sizable economic nucleus that, in time, could do without the US. The present growth of the euro is also part of this appeal, as the European economy appears slower but less volatile than the turbulent economy of the United States.

On the security issue, in theory France and Germany could do without the US, as Russia is no longer a real threat, the greatest cause of conflict in the continent for centuries, the clash between France and Germany, has been solved thanks to US intervention. Furthermore Framania feels it could handle the Middle East better without the United States, or at least with less US intervention.

Go east, young man
The picture of this geopolitical reshuffle is not complete without looking at the other side of the Eurasian continent. Here China, Japan, but also Taiwan, South Korea and Thailand have a greater financial integration with the US than Europe has. They have built a virtuous circle in which the US buys their products, and in turn these countries buy US debt in the form of US Treasury bonds. In this way the US keeps its inflation down and the Asian countries are able to produce more efficiently. The Asian countries boost and upgrade their production, as the US supports the continuous improvement of Asian production lines. This contract has built a mutual bond from which it is practically impossible for either side to withdraw.

The bond has grown stronger after the defeat of Japan in its challenge to the US in the late 1980s and the weakening of the yen vis-a-vis the dollar. Furthermore, the region has weathered the 1997 financial crisis in which Chinese Premier Zhu Rongji refused to devalue Asia's second-strongest currency, the yuan, and break the peg between it and the dollar. In 1998, Washington and Beijing intervened together to stem the continuous devaluation of the yen, which was making life difficult for the yuan and its peg to the dollar. Now in times of a weak dollar, it can be argued that the peg of the yuan, sustained by the buoyant Chinese economy, helps support the greenback against the euro. And even while thinking of a greater integration in Asia with the Asian Cooperation Dialogue, promoted by Thailand, the ACD has launched an Asian bond, which is denominated in US dollars.

On a strategic level, while the US is not necessary in continental Europe, as internal conflicts have subsided and clashes with the Muslim world could be solved possibly, thinks Framania, with less US intervention, the United States is more necessary than ever in East Asia.

The North Korean crisis shows the reality of threats from the peninsula to the islands of Japan. Before these threats, China was not able to control them, and the mutual suspicion between Beijing and Tokyo is light-years away from the entente cordiale between Berlin and Paris. Therefore either the US intervenes and spearheads a solution, or Japan could very well rearm, something that would prickle many sensitivities in China and the rest of Asia. Similarly, if not worse, problems exist between China and India, where there is an unsolved and difficult border issue, and the open wound of Kashmir and low-intensity war with Pakistan, a traditional Chinese ally. Whereas both in Beijing and Tokyo in the past decades there have been many movements, largely aborted, to improve the political climate, such gestures have not even started to be exchanged between Beijing and New Delhi, where the list of problems is dauntingly long. In Southeast Asia the situation is better, but only in appearance, because these nations are torn between contradictory loyalties, to Beijing, Tokyo or New Delhi, with each country harboring its own agenda, priorities and suspicions. For example, Vietnam is more wary of China than Thailand is.

Even China, considered by the US to be the biggest threat to the region, would have a very difficult time doing without a US presence in East Asia, as it would be left without a net to deal with Japan and India. Tensions could quite easily arise, which could potentially derail Beijing's ultimate concern of economic growth.

East Asia is far from the lack of strategic flashpoints of Western Europe, which managed to stand up, with the US, to the communist threat for 50 years and the war in Yugoslavia for 10 years without breaking up. In Asia for instance, the simple withdrawal of the US from its protection of Taiwan could ignite several conflicts. Without US protection, would Taiwan resist the temptation to declare independence and thus provoke Beijing into a war? Would China resist the temptation to pressure Taiwan more? In both cases, whatever the outcome, Japan would feel threatened, and Japan is the single largest economy of Asia, making up alone most of the dollar value of the regional production and trade. Japan therefore is not like Britain, which is a large economy but does not make up the largest part of the welfare of Europe. Differences of political regimes in different countries hamper further trust and political integration. The resolution of political systems and the soothing of wariness could take at least 20 years. In the meantime the US is the only huge buffer among the many potential conflicts of the continent.

In other words, differently from Europe, there is an economic and strategic integration across the Pacific far larger than across the Atlantic. Moreover, whereas in Europe there are objective interests to decrease the US presence, none of these interests are present in Asia, nor will be for the next two decades.

The war in Iraq could well be a catalyst of both trends. It could deepen the Atlantic divide, and strengthen the Asian reliance on the United States. Framania might be tempted to show greater difference with the United States whereas Asia would fear a US pullout from the continent, which would do away with the huge buffer provided by the US. However, especially in the case of US failure in Iraq, Asia might look with greater interest at Framania, as a counterbalance to the buffer role of the United States in the region.

It all depends on the results of US actions in Iraq. Iraq is no Afghanistan. In Afghanistan it is just important to take Kabul and make sure the many tribes won't host foreign fundamentalists, something that most would gladly do, as they saw Osama bin Laden and his cohorts as some kind of foreign interference or invasion. In Iraq, one must rebuild a state, and in recent times there have not been many successful examples of state rebuilding. But the very idea of rebuilding a state comes from the US, which after World War II successfully rebuilt Japan and Germany. In theory, Washington could do it, provided it does so in earnest and considers the concerns of other countries in the region and throughout the world.

The success of peace in Iraq could as well set a new tone in relations across the Atlantic, but could it really unwind the new notion of Framania? The concept of European union pales in comparison of the new Framania. And Italy, naturally straddled halfway between the Middle East and Europe, can hardly resist the sirens of Framania singing the tune of bridging the gap with the other shore of the Mediterranean. With Italy, France-Germany would stop being simply "Framania" and would become something very much like a new version of the Roman Empire.

Then, what would be the relations across the Atlantic? There are many "ifs" in this story, but one certainty: after a short period of glory, is definitely time to say adieu to Mr Huntington.

2003 Asia Times Online Co

Asia Times (http://www.atimes.com/atimes/Front_Page/EC12Aa01.html)

syr :rolleyes:

syracus

14.03.2003, 21:48

George Soros....

The Miami Herald, Mar. 13, 2003

Burst the bubble of U.S. supremacy

By GEORGE SOROS

As U.S. and British troops prepare to invade Iraq, public opinion in these countries does not support war without U.N. authorization. The rest of the world overwhelmingly opposes war. Yet Saddam Hussein is regarded as a tyrant who must be disarmed, and the U.N. Security Council unanimously passed Resolution 1441, demanding that Saddam destroy his weapons of mass-destruction.

What caused this disconnect?

Iraq is the first instance when the Bush doctrine is being applied, and it is provoking an allergic reaction. The Bush doctrine is built on two pillars:

• The United States will do everything in its power to maintain its unquestioned military supremacy.

• The United States arrogates the right to preemptive action.

These pillars support two classes of sovereignty: American sovereignty, which takes precedence over international treaties and obligations; and the sovereignty of all other states. This is reminiscent of George Orwell's Animal Farm: All animals are equal, but some animals are more equal than others. To be sure, the Bush doctrine is not stated starkly; it is buried in Orwellian doublespeak, which is needed because the doctrine contradicts American values.

The Bush administration believes that international relations are relations of power; legality and legitimacy are mere decorations. This belief is not false, but it exaggerates one aspect of reality to the exclusion of others. The aspect it stresses is military power. But no empire could ever be held together by military power alone.

Yet that belief guides the Bush administration. Israeli Prime Minister Ariel Sharon believes the same, and look where that has led. The idea that might is right cannot be reconciled with the idea of an open society. Hence the need for Orwellian doublespeak.

But nobody is in possession of the ultimate truth. Those who make such claims are bound to be wrong at times, and so can enforce their claims only by coercion and repression. Bush makes no allowance for the possibility that he may be wrong, and he tolerates no dissent. If you are not with us, you are with the terrorists, he proclaims.

Of course, the presence of extremist views in the executive branch does not make America a totalitarian state. The principles of open society are enshrined in the Declaration of Independence, and the institutions of American democracy are protected by the Constitution. There are checks and balances, and the president must obtain the support of the people. Nevertheless, the Bush doctrine could do untold harm before it is abandoned -- as eventually it will be.

I see parallels between the Bush administration's pursuit of American supremacy and a boom-bust process or bubble in the stock market. Bubbles do not arise out of thin air; they have a basis in reality, but misconception distorts reality. Here, the dominant position of the United States is the reality; the pursuit of American supremacy is the misconception.

For a while, reality reinforces the misconception, but eventually the gap between reality and its false interpretation becomes unsustainable. During the self-reinforcing phase, the misconception may be tested; when a test is successful, the misconception is reinforced. This widens the gap, leading to an eventual reversal. The later it comes, the more devastating the consequences.

There seems to be an inexorable quality about this, but a boom-bust process can be aborted at any stage. Most stock-market booms are aborted long before the extremes reached by the recent bull market. The sooner this happens, the better. That is how I view the Bush administration's pursuit of American supremacy.

The Bush administration came into office with an ideology based on market fundamentalism and military supremacy. Prior to Sept. 11, it could not make much headway in implementing its ideology because it lacked a clear mandate and defined enemy. Terrorism provided the ideal enemy because it is invisible and never disappears.

Beyond Iraq, an even more dangerous threat looms in North Korea, a crisis that Bush precipitated in his eagerness to break with what he deemed to be President Clinton's appeasement. Bush repudiated South Korean President Kim Dae Jung's sunshine policy and included North Korea in the ``axis of evil.''

Rapid victory in Iraq could bring about a dramatic change in the overall situation. Oil prices could fall, stock markets could celebrate, consumers could resume spending, and business could step up capital expenditures. America could end its dependency on Saudi oil, the Israeli-Palestinian conflict could become more tractable, and negotiations could start with North Korea without loss of face. That is what Bush counts on.

But military victory in Iraq is the easy part. It is what comes after it that gives pause. In a boom-bust process, passing an early test tends to reinforce the misconception that gave rise to it. That is to be feared here.

It is not too late to prevent the boom-bust process from getting out of hand. The United Nations could accede to Chief Inspector Hans Blix's request for several months to complete his inspections. America's military presence in the region could be reduced, but it could be beefed up again if Iraq balks. Invasion could take place at summer's end. This would be a victory for the United Nations and for the United States, whose prodding made the U.N. Security Council act resolutely. That is what the French propose, but that is not what is going to happen. Bush has practically declared war.

I hope that Iraq's conquest will be swift and relatively painless. Removing Saddam is a good thing; yet the way Bush is going about it must be opposed. In the long run, open society cannot survive unless the people who live in it believe in it.

George Soros is chairman of Soros Fund Management and of the Open Society Institute.

Quelle (http://www.miami.com/mld/miamiherald/news/opinion/5378192.htm?template=contentModules/printstory.jsp)

syr

syracus

15.03.2003, 14:19

Hamilton on air.......

S&P 500 Waterfall Imminent

Adam Hamilton
March 14, 2003

An epic battle was waged in the flagship S&P 500 this week between the bulls and the bears. What do the charts suggest its next destination will be?

The massive 4” thick Webster’s dictionary holding down my desk defines the word waterfall as, “a steep fall or flow of water in a watercourse from a height, as over a precipice”.

Waterfalls in nature are certainly an awesome sight to behold. I am sure virtually everyone reading this has shared my awe in visiting a waterfall and drinking in the intense sensory stimulation. From the immense thundering sound that resonates deep within your very chest, to the cool foggy mists, to the wondrous spectacle of countless tons of water freefalling and then furiously smashing into a pool below, waterfalls truly stir our souls.

In the financial markets, the word waterfall plays on the visceral experience of observing the real thing in nature in order to explain a distinct bear-market phenomenon.

A financial waterfall is a relentless decline in a market for weeks in a row, almost always carving out new interim lows when it finally ends. In a financial waterfall selling pressure builds and builds, powerfully driving an index lower and lower. Eventually the selling pressure reaches a temporary climax in a short-term capitulation panic and then a textbook V-bounce is born from the ashes.

The term waterfall is so useful not only because of its raw descriptive power, but because it ensures that the crucial distinction between an all-out crash and a much slower decline is emphasized. While classical crashes are catastrophic 10%+ daily losses for a day or two, waterfalls are relentless declines that run their full courses over a month or two, about 20x slower than a true crash.

In market history the only times true crashes erupt is shortly after major long-term bubble tops are reached. Waterfalls, on the other hand, happen most often deep within the bowels of major secular bear markets. Waterfalls are the final stage in major downlegs before a temporary fear-laden V-bounce is carved.

As the title of this essay suggests, I do believe that the S&P 500 is in for another waterfall decline, for many technical and fundamental reasons outlined below. Waterfalls are emotional times for the financial markets so it is far better and vastly more profitable to know about a potential waterfall ahead of time rather than failing to recognize it until too late, after it’s over.

Another potential S&P 500 waterfall means this flagship American index could relentlessly fall for a month or more. This would carry it well below its recent October 9th closing low of 777 and ultimately carve out a totally new interim bottom. This next waterfall will form the left leg of the long-awaited V-bounce in the index.

The incredibly dangerous emotions of greed and fear are the arch-nemeses of all speculation, and a coming S&P 500 waterfall will be hazardous for both the longs and shorts. Hence it warrants some discussion and psychological planning in order to successfully weather it intact.

For the longs, an S&P 500 waterfall is a nightmare scenario. It is like a month of trading days in a row of financial torture exquisitely crafted by the Great Bear to sow uncontrolled terror deep in their hearts. If they succumb to fear they will panic and sell near the V-bounce, at the worst possible moment, and hemorrhage a lot of valuable capital in the melee.

For the shorts, an S&P 500 waterfall seems like a dream come true at first. Unfortunately the waterfall deftly lays devious emotional traps that can slaughter the shorts too. Towards the end of the waterfall as the V-bounce nears and a major new bear rally prepares to spring forth out of the short-term fear ashes, greed utterly consumes many shorts. They fall into the foolish trap of believing that the first late-bust crash in history is near so their greed seduces them into not selling near the interim bottom. They too lose a lot of money by succumbing to greed at the V-bounce.

For speculators on all sides of the game, the imminent S&P 500 waterfall and its implications bear careful consideration and psychological preparation. Speculators must strive to be emotionally neutral through this awesome event, neither growing too scared nor lusting too greedily after profits.

Our first chart this week, and indeed this whole essay, was inspired by a fantastic graph a speculator friend of mine, Robert Fisher, graciously shared with me a few days ago. Mr. Fisher is an active private speculator who has lately been focusing his attention on researching moving averages as tools to execute superior trades.

Mr. Fisher noted that in the last few bust years the 50-day moving average (50dma) of the S&P 500 has consistently flashed an outstanding warning signal for impending waterfall declines. This incredibly bearish development just reared up again and speculators should carefully heed its ominous tidings.

http://www.zealllc.com/graphs2003/Zeal031403A.gif

In this graph the S&P 500 index itself is rendered in blue and its 50dma in white. As the secular S&P 500 bear market has unfolded in recent years, each time its 50dma nosed over and headed south, a vicious waterfall-type event followed in the near-term future, within a couple months. The most recent three of these very bearish short signals are flagged with solid-white arrows.

Mr. Fisher’s excellent observations went much deeper however. He showed me that there is a subtle secondary signal that the 50dma flashes slightly after the very beginning of each waterfall. It is not as easy to see but after you examine the graph a bit it will really stick out at you, kind of like those computer-generated 3D illusion books that look like visual noise at first but if you stare hard enough eventually a picture materializes.

Mr. Fisher noted that each time the S&P 500’s 50dma makes a new all-bust low following a major bear rally, it is all over. Within days or weeks after such a new all-bust 50dma low, an ugly new S&P waterfall continues accelerating down a steep slope carving the left-hand leg of the famous V-bounces. The dotted-white arrows above mark these new all-bust lows in the 50dma.

This fascinating phenomenon happened in every waterfall above, which are labeled in blue. The 50dma tops and then turns south shortly after a major bear-market rally fails. Then, a month or two later, the 50dma stealthily makes a new all-bust low and the waterfall accelerates.

A new 50dma all-bust low after a major bear-market rally begins failing is a rock-solid short signal, an unambiguous warning to get out of Dodge in terms of long positions or face horrific losses.

Following the latest October 9th V-bounce labeled as “Rally 3” above, the S&P 500’s 50dma achieved an all-bust low of 867 in mid-November. Then the 50dma dutifully turned higher on the spectacular bear rally and peaked at 908 by mid-January. Then, as is evident in the graph, the S&P 500 index itself began to fall rather rapidly in recent weeks, unceremoniously dragging its 50dma lower.

As anticipated, this latest major bear-market rally is rapidly imploding before our very eyes. And yes, all the graphs in this essay and this whole analysis fully considers Thursday’s impressive short-covering rally in the indices on the good tidings of a potential war delay by Washington.

Last Friday, March 7th, Mr. Fisher’s imminent waterfall signal was triggered, and bullish and bearish speculators ought to take careful note of this provocative development. On March 7th the S&P 500’s 50dma closed at a new all-bust low of 866. By Thursday March 13th of this week, after the sharp one-day anti-war stock-market relief rally, the S&P 500’s 50dma closed under 860, another fresh new all-bust low. And so it begins!

Each time this signal has been flashed in the bust to date, it has warned of an imminent waterfall decline approaching. I suspect the signal will prove valid yet again today. You fellow shorts, rejoice but don’t get greedy and be ready to cover near the V-bounce. You remaining longs, get ready for some excruciating pain if you insist on staying long through this waterfall.

This coming S&P 500 waterfall will blast through the old October 9th low of 777 as if it didn’t exist. The next potential V-bounce will probably materialize somewhere around 667, a potential short-term target for which we discussed the logic and rationale behind recently in our popular Zeal Intelligence newsletter for our subscribers.

Interestingly, an S&P 500 level of 667ish sometime in the next 6-8 weeks would bounce right off the heavy lower support line drawn above just like the past V-bounces have. It is always encouraging to see short-term targets computed by totally different methodologies line up nicely!

Now that you have had the opportunity to observe Mr. Fisher’s powerful waterfall-imminent warning signal, like me you probably know a huge number of folks who are still ragingly bullish this very day. The awesome mini-bear rally on Thursday the 13th certainly stoked these fires! The bulls are out in force and they seem to think that the destruction and waste of war will somehow magically unleash a fantastic new bull market in US equities.

Personally my tolerance for this perma-bullish drivel is wearing rather thin. Monday March 10th was the three-year anniversary since the NASDAQ bubble topped, and if investors and speculators can’t take the time to learn how post-bubble bear markets work in three long, hard years, then they probably fully deserve to be gutted by the Great Bear.

While the perma-bulls have already chosen to lobotomize themselves by ignoring the facts as their fortunes are flushed away by this ravenous Great Bear, it is important that speculators understand the inherent goofiness in the perma-bulls’ perpetually hyper-optimistic market predictions. The endless Wall Street hype has already cost so many so much, yet like undiscerning sheep people are sadly still swayed by it.

The perma-bulls are now claiming that the S&P 500 is carving out a super-bullish triple bottom around 800, and you can see what they are talking about in the graph above. Yet, upon careful examination this theory doesn’t seem to hold much water. In the rest of this essay I will discuss the strong technical and fundamental case against this wishful thinking.

As all speculators are forced to learn sooner or later, major interim bottoms only occur on great fear, a short-term capitulation panic marking the low point of V-bounces. If you look at the red VIX line in the graph above, you will note that a huge VIX spike above surrounding technical terrain was conspicuously Missing In Action this week.

The VIX, a great gauge of general fear, is recording no extreme fear at all today! This week’s S&P 500 slump showed no fear, meaning that odds are vastly in favor of the hypothesis that it is not a valid interim bottom.

A real, solid interim bottom will occur on a monstrous VIX 50ish or even 50+ spike that will leave no ambiguity whatsoever. The perma-bulls’ arguments for a triple S&P 500 bottom near 800 launching a fabulous new bull market are specious and easy to dismiss at this point in the game. Technically there has been no solid “third bottom” yet!

The bulls also amazingly claim that recent short-term technical action is bullish, something that utterly blows my mind. As this next graph shows, recent S&P 500 behavior is anything but bullish. This is an indexed graph, indexing the three latest major bear-market rallies circled in yellow on the graph above. It converts each rally into common terms so they are perfectly comparable.

While this unique methodology is thoroughly explained in “Bear-Market Rally Autopsy 2”, it is easy to quickly grasp. Each major S&P 500 bear rally is converted into a common scale from 0 to 100, with 0 marking the preceding V-bounce and 100 marking each bear rally’s ultimate top. The X-axis shows the number of trading days before and after each bear-rally top, which is classified as day 0.

http://www.zealllc.com/graphs2003/Zeal031403B.gif

In perfectly comparable indexed terms, the dismal failure of the latest bear-market rally in the S&P 500, the blue one above, is phenomenally bearish. Not only is the recent post-rally downtrend in the S&P 500 sloped steeply downward in a laser-sharp line, but the index has already witnessed two bearish technical failures below this important support.

85% of the ground gained from the latest V-bounce low of 777 has already been lost. The S&P 500 is once again trading within spitting distance of these important levels and it won’t take much fear to push it through.

Once the S&P 500 closes below 777 for a few days, a blizzard of sell orders will hit as confidence crumbles. In addition, many speculators set stop-losses right under recent lows in order to protect themselves. As these stops are triggered the waterfall will accelerate dramatically, feeding on itself and breeding even more frantic selling. 777 truly is the Moment of Truth when popular bullish fairy tales boldly heralding the end of the Great Bear will face their ultimate acid test.

If I was long this market today like the bulls, the chart above would deeply disturb me. If everything is so wonderful in the US equity markets as the perma-bulls claim, why does the current decay curve in the flagship US equity index line up exactly with past S&P 500 behavior right before previous waterfall declines to new lows? Why is the trend down, with lower lows and lower highs, rather than the other way around? If the markets really believed that war was somehow positive wouldn’t they anticipate this and rally ahead of the fighting?

This week, three long and painful years after the NASDAQ bubble topped, it defies belief that so many investors and speculators still don’t understand the central issue behind bubbles and busts. Things like the coming Iraq war, economic releases, news, and single-day movements are totally irrelevant. They are merely useless distracting noise.

The immensely powerful driving force behind bubbles and busts is valuation. If stocks get way overvalued in a spectacular bubble then they are going to inevitably be ground down to way undervalued levels in the bust that follows. This is the way markets have always worked in history and the way they will probably always work in the future.

Until the US equity markets are officially undervalued relative to multi-century-old historical average valuations in terms of price-to-earnings ratios and dividend yields, the remaining perma-bulls’ unbridled optimism will be proven premature. Our final graph builds on this crucial central market truth which was discussed in great detail in “Long Valuation Waves”, “Valuation Wave Reversion”, and “Dividend Valuation Waves”.

http://www.zealllc.com/graphs2003/Zeal031403C.gif

History plainly teaches that until the US equity markets are undervalued, any chance of a long-term secular bull once again emerging is purely wishful thinking. As the P/Es and dividend yields at various stages in the S&P 500’s bust-to-date clearly show, the Great Bear is simply working to eliminate the gross speculative excesses of the bubble.

The S&P 500, the biggest and most important stock index on Earth, was trading at a breathtaking 55x earnings and only yielding 1% near its bubble top! Several years later, after immense losses of capital and incredible financial pain, the index is still trading at 21x earnings and only yielding 2%. To the best of my knowledge a major secular bull market has never launched from general valuations anywhere near this high in all of financial-market history!

All of the major long-term bottoms in US equities in the last 70 years or so have occurred at an average P/E ratio under 8x earnings and an average dividend yield over 8%. 8x and 8%! To get to such historically low and immensely bullish valuations today, the S&P 500 will have to plunge far, far lower than anything we have witnessed to date.

If the combined earnings power of all 500 elite S&P 500 companies today is used as a baseline, the flagship index would have to grind down to 325 before it would be trading at 8x earnings, the historical super-bullish long-term bottoming level! 325!?!

If the combined dividend payments of all 500 elite S&P 500 companies today are used as a baseline, the flagship index would have to grind down to 210 before it would be yielding 8%, the historical super-bullish long-term bottoming level! 210!?! Yikes.

Now I do doubt the S&P 500 will plunge quite this low in the coming years because earnings and dividends generally rise slightly over time slowly addressing the rampant overvaluation problem, but I have no doubts based on my many thousands of hours of financial-market research that the ultimate S&P 500 bear-market bottom is far lower than the October 9th 777 levels! There is simply no way the index bottomed above 25x earnings while yielding under 2%! Preposterous.

Based on history, anyone who thinks a long-term bottom has been reached before the S&P 500 trades under about 10x earnings and before it yields around 6%+ is ignoring the core valuation problem. To borrow a famous 1990s Democratic campaign slogan, the ultimate issue driving the financial markets today is not the war, not economic reports, not the news, but “It’s the valuations stupid!”

Whenever you hear the perma-bulls, who have been catastrophically wrong for three years in a row now, brazenly proclaim that another “ultimate bottom” has been reached, you ought to check on valuations to see if they even have a realistic hope of being right. If you want to stay on top of current valuation levels as all investors and speculators should, we painstakingly calculate and track these valuation numbers every month in our acclaimed Zeal Intelligence newsletter for our subscribers.

The S&P 500 won’t carve out a long-term bottom, and a new secular bull market won’t begin galloping, until the flagship index once again trades well under fair value (14x earnings and a 4.6% dividend yield). This unpleasant aftermath is the price we all have to pay for the euphoria and absurdly high valuations reached in the bubble. Sadly it is like winter after summer, inevitable.

With valuations still far too high, the probability that the October 9th 777 low will hold in this downleg is pretty darned close to zero. As Robert Fisher’s excellent 50dma signal showed, an S&P 500 waterfall decline is almost certainly imminent.

For one final perspective shooting the perma-bulls’ pet idea of a triple S&P 500 bottom near 800 out of the water, please note the white volume data in the graph above. Any major interim bottom is marked by a large volume spike above surrounding levels, a temporary short-term capitulation panic on high volume. The S&P 500 lows of this week did not correspond with a high-volume spike, betraying that they are almost certainly not real interim lows and merely daily market noise.

All signs today point to an imminent S&P 500 waterfall decline. Get out if you remain long and get ready for some serious action if you are already playing the short side!

Adam Hamilton, CPA
March 14, 2003

Quelle (http://www.zealllc.com/2003/waterfall.htm?321gold)

syr:sss

syracus

15.03.2003, 14:56

Eine Institution meldet sich :).....

The world economy

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Horror stories

Mar 13th 2003

Even without the uncertainty about Iraq, the global economy would be fragile

BEARS are supposed to hibernate all winter. This year they have had little rest. Investors marked this week's third anniversary of the Nasdaq stockmarket's peak by pushing most markets to fresh lows—some 50% or more below their levels in early 2000 (see chart 1). Some economists reckon that the outlook for the big rich economies is similarly grizzly.

The reason why markets are nervous is not just the imminence of war with Iraq, but the evidence that, even without a war, the world economy is in worse shape than many had thought. America's total payroll employment fell by a huge 308,000 in February. Some of this was due to bad weather and the call-up of military reservists, but other surveys confirm that companies have been cutting labour in response to falling profits and rising energy costs.

A weak jobs market, along with war fears, explains why in February the Conference Board's index of consumer confidence fell to its lowest in nine years. Consumer spending, the main pillar of the American economy over the past two years, seems to be stalling. Some economists are starting to fret about the risk of another recession—the second in three years. Every big oil-price increase over the past three decades has been followed by an American recession. That does not prove that oil shocks always cause recession. But with the economy already vulnerable, a sustained rise in oil prices above $40 a barrel could nudge it over the edge.

Many forecasters now expect GDP growth in America of only 1-1.5% at an annual rate in the first half of this year. Futures markets are pricing in a more than 50% chance that America's Federal Reserve will cut interest rates at its open-market committee meeting next week.

http://www.economist.com/images/20030315/CSF600.gifhttp://www.economist.com/images/20030315/CSF594.gif

It is not only America where growth forecasts are being shaved. A year ago, GDP growth in the euro area was tipped to be a respectable 2.8% in 2003 by The Economist's poll of forecasters; now it is expected to be only 1.1% (see chart 2). This represents an even more dramatic pruning than the cut in America's expected growth rate from 3.6% to 2.5%. Germany's GDP shrank slightly in the fourth quarter, and may well have contracted again in the present quarter, meeting the popular definition of a recession. German industrial production jumped by 1.6% in January, but this followed a 3.5% fall in December, so output remains weak.

Jobs are also disappearing in the euro area. German unemployment jumped by 135,000 in January and February, close to its fastest rate of increase since the depths of the early 1990s recession. Germany's jobless rate stands at 10.5% of its labour force. In France, too, surveys show that households are more worried about jobs than at any time since the early 1990s. French consumer confidence has fallen to its lowest for six years.

Japan, for years the economic laggard, was in the unusual position of having the fastest GDP growth rate in the fourth quarter of last year (2.2% at an annual rate) of any of the 15 rich countries that are monitored each week on our Economic indicators pages. This was largely due to a jump in net exports, helped by strong demand in China. But Japan's brief spurt looks unsustainable: most forecasters expect its growth to average only about 0.5% both this year and next.

The recent rise in the yen against the dollar will hurt exports and reinforce deflationary pressures. Japan's trade surplus narrowed sharply in January. Toshihiko Fukui, who takes over as the new governor of the Bank of Japan next week, is not expected to embrace a radical easing of monetary policy to rid the country of deflation. The Japanese stockmarket fell this week to its lowest in 20 years, prompting fears of a new financial crisis, because lower share prices will erode the capital of banks and insurers when they close their books at the end of the financial year on March 31st.

Still bubbling over

To a large extent the fate of the rich economies rests on America. Stephen Roach, chief economist at Morgan Stanley, reckons that America accounted for two-thirds of total global growth since 1995. If the American economy now stumbles again, neither Europe nor Japan look ready to take over as an engine of growth.

Yet despite worries about the immediate impact of a war and higher oil prices, most economists still expect America's economy, along with its stockmarkets, to rebound once the war is out of the way and the associated uncertainty lifts. For example, J.P. Morgan Chase is predicting annual growth of almost 4% in the second half of this year. This seems to assume that the recent slump in consumer and corporate confidence is mostly related to war fears. Iraq has clearly taken its toll on the economy, but there are also deeper problems that would continue to cramp growth even without a war.

The biggest is that the economic excesses created by the greatest financial bubble in history have still not been fully purged. Ed McKelvey, an economist at Goldman Sachs, argues that the main reason why private-sector spending is weak is that households and companies are still trying to correct the huge deficits that they ran up during the stockmarket bubble.

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Chart 3 illustrates the problem. America's private sector was a net saver for 40 years until 1997: the total income of households and firms always exceeded their spending, with average net saving of 2.6% of GDP. But the irrational exuberance of the late 1990s encouraged a massive boom in spending and borrowing, pushing the private sector into a deficit of 5.2% of GDP by 2000. In the year to the third quarter (the latest period for which data are available), the private sector was still in deficit, to the tune of 1.4% of GDP. In other words, says Mr McKelvey, the private sector is only halfway back to its long-term average rate of net saving of 2.6% of GDP.

Firms have done much to cut costs and restore the health of their balance sheets, but they have further to go. In the early stages of a recovery, the corporate sector usually runs a small financial surplus, investing less than cashflow. But America's companies continue to run a deficit. Worse still, profits have remained feeble. Ian Harwood, chief economist of Dresdner Kleinwort Wasserstein, estimates that profits across the whole economy, as measured in the national accounts, fell again in the fourth quarter of last year—the third quarter in a row of decline after a brief recovery. This may explain why firms are still cutting jobs.

American households have done even less to repair their balance sheets. Personal savings rose from 2% of disposable income in 2000 to 4% in the fourth quarter of 2002. But Mr McKelvey reckons that the appropriate saving rate, given the decline in households' total net worth as share prices have fallen, is somewhere in the 6-10% range.

The main reason why households have been able to postpone their adjustment is their ability to borrow—and so spend—against the rising value of their homes. But that extra cash could soon run out: even if property prices stay high and mortgage rates stay low, the scope for home-equity withdrawal will decline. Households will then have to tighten their belts. This, in turn, implies that America's growth rate could remain below potential for some time, regardless of what happens in Iraq.

The required adjustment in household saving back to normal levels can be cushioned (if not prevented) by monetary or fiscal easing. In 2002 America's economy had a fiscal stimulus worth over 2% of GDP. Without it the economy might barely have grown. This year's boost is likely to be more modest. Defence spending will increase, but President Bush's proposed tax cuts are likely to be watered down by Congress. On top of this, cuts by state governments, which are constitutionally bound to balance their budgets, are likely to offset as much as half of any easing by the federal government this year.

This increases the pressure on the Federal Reserve to cut interest rates soon. In testimony to Congress in early February, Alan Greenspan, the Fed's chairman, hinted that he would wait for a resolution on Iraq, to see if the economy then rebounds, and then cut rates if necessary. But the recent weakening of the economy argues for a rate cut now.

Another prop to America's economy is the cheaper dollar, which will boost net exports. The snag is that a weaker dollar will hurt the rest of the world. The dollar hit a four-year low against the euro of almost $1.11 this week after John Snow, America's treasury secretary, said that he was “not particularly concerned” about the dollar's decline. Europe and Japan, however, are much more concerned.

The correct response by central banks in Europe and Japan to an appreciation of their currencies is to ease monetary policy. The Bank of Japan cannot cut interest rates, which are already at zero, but it has been intervening to push down the yen. The European Central Bank, on the other hand, has more room for manoeuvre. It duly trimmed rates on March 6th, by a quarter-point, to 2.5%. But this was not enough.

Since the ECB cut interest rates in December, the euro's trade-weighted value has risen by 6%, equivalent in terms of its impact on inflation to a rise in interest rates of more than half a point. Policy has, in effect, tightened this year, even though the economic outlook has deteriorated; and the euro area's core inflation rate (excluding food, energy and tobacco) has dropped below 2%. Fiscal policy has also tightened slightly because of the straitjacket imposed by the stability pact, which is forcing Germany to increase taxes in the midst of recession. Tighter fiscal policy increases the case for monetary easing.

If the world economy does stumble, policymakers will have to act quickly. Starting from a position of ample global excess capacity, further sluggish growth, let alone a recession, could raise the risk of deflation in some countries. There is clearly a big chance of further falls in share prices: in its latest quarterly review, the Bank for International Settlements argued that, despite the war premium, America's stockmarket still looks overvalued relative to historical norms. After previous bubbles share prices have always become significantly undervalued before recovering. The economic and financial headlines could get worse before they get better.

Quelle (http://www.economist.com/business/PrinterFriendly.cfm?Story_ID=1632261)

Wie immer, die Masse wird nicht Recht bekommen. Und die denkt derzeit "Irak vorbei und blühende Landschaften kommen". No way :p....

syr:sss

syracus

16.03.2003, 21:43

Achtung, Fake ;)... Aber einmal Spass muss sein. Aus dem Archiv:

The Onion October 2, 2002

http://globalsecurity.com/onion/The%20Onion%20%20Bush%20Seeks%20U_N_%20Support%20For%20'U_S_%20Does%20Whatever%20It%20Wants'%20Plan_files/head_bush_seeks_un_support.gif

UNITED NATIONS—In an address before the U.N. General Assembly Monday, President Bush called upon the international community to support his "U.S. Does Whatever It Wants" plan, which would permit the U.S. to take any action it wishes anywhere in the world at any time.

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"As a shining beacon of freedom and democracy, America has inspired the world," said Bush in his 25-minute address. "With its military might, it has kept the peace and bravely defended the unalienable [sic] rights of millions around the globe. In this spirit, I call upon the world's nations to support my proposal to give America unrestricted carte blanche to remove whatever leaders, plunder whatever resources, and impose whatever policies it deems necessary or expedient."

According to top Bush Administration officials, if the measure is passed by the U.N.—and possibly if it is not—the U.S. would immediately launch invasions of Iraq, North Korea, and Cuba; establish oil-drilling operations in Siberia; install nuclear-missile silos in Mongolia along the Chinese border; make English the official language of the planet; detain thousands of Middle Eastern nationals currently in the U.S. on temporary visas; begin each day with a moment of worldwide prayer; and prohibit Japan and Germany from manufacturing automobiles.

In addition, no demonstration against U.S. actions by any foreign nation or individual would be permitted. Any such protestation would be deemed a high crime subject to a U.N. tribunal, with those found guilty flown to Texas for execution by lethal injection.

"After the unspeakable events of last Sept. 11, the U.S. was deeply touched by the outpouring of support and condolences from our neighbors and allies the world over," Bush said. "This kindness played a vital role in our national healing process, but, more importantly, it cemented our long-standing self-image as the country, with all other nations lumped together into a vague, foreign Other Place. I call upon you now to join us in our vision of America as the only country whose wishes matter."

Bush then turned to the pressing issue of Iraq.

"Despite repeated American efforts to change the situation, Saddam Hussein defiantly continues his longtime policy of being the president of Iraq," Bush said. "The time has come for this man to step down, because we want him to."

http://globalsecurity.com/onion/The%20Onion%20%20Bush%20Seeks%20U_N_%20Support%20For%20'U_S_%20Does%20Whatever%20It%20Wants'%20Plan_files/bush_seeks_un_support_jump.jpg
Above: A sampling of the details of the Bush plan.

In addition to enabling the U.S. to address foreign crises, Bush said his plan will help solve many of the nation's domestic problems.

"While there exist many grave threats to America abroad, we suffer still more problems—from unemployment to a lack of quality, affordable housing—right here at home," Bush said. "After this resolution is passed, we will begin a 10-year project to clean out our nation's landfills and toxic-waste sites, transport the materials to Central American jungles, and build low-cost housing on the newly cleared land. This would solve the housing shortage, create thousands of construction jobs, and improve our nation's environment, all in one fell swoop."

As much of a boon as it would be to America, Bush stressed that his plan will also benefit the rest of the world, giving foreigners greater access than ever to American goods and entertainment.

"From the Beijing businessman who treats his family to dinner at KFC to the New Delhi textile worker who unwinds after a hard day's work by watching Friends, the world community has embraced our many wonderful cultural and commercial exports," Bush said. "As part of my plan, the U.S. will be allowed to export its products tariff-free, while other countries' goods will be subject to heavy taxes. This will help ensure that people the world over will continue to enjoy our computers, DVDs, and soft drinks, free of the clutter of competing non-American goods on their store shelves."

Bush concluded his speech by calling upon the U.N. to fly an extra-large U.S. flag outside its headquarters, high above the other member nations' flags.

"From the Monroe Doctrine to our ignoring of the Kyoto Treaty, America has always boldly defied the powers that be. Ever since its founding, this great nation has courageously asserted its will, bravely tuning out the objections of the other nations of the world," Bush said at the speech's conclusion. "I urge you today, do not let that legacy die. Allow us to continue our long-standing tradition of getting our way."

Global reaction to Bush's plan has been mixed, with 56 percent of Americans in support and 100 percent of non-Americans strongly opposed.

Quelle (http://www.theonion.com/onion3902/index.html)

syr

syracus

17.03.2003, 21:07

Ganz einfach "gut" :)....

The Present Age

by Llewellyn H. Rockwell, Jr.

To hear official voices talk, we have not been going through the longest recession in the postwar period. Instead, we have been through a 24-month "slow recovery." It is also called a "sagging economy with sound fundamentals." Greenspan has made references to a "soft patch" in a foundation otherwise as hard as stone.

Indeed, in the effort to avoid using the term recession, the Federal Reserve has become a business-cycle phrase mill. Thus, according to the Fed, this is a "soft economy," a "subpar" economy," a "skittish" economy, an economy "weighed down by weak expenditures," an economy of "persistent weakness," or, my favorite, an economy facing "formidable barriers to vigorous expansion." Call it what you want, but don't call it a recession. As for the D-word, depression, don't even think it!

With the latest data on the Producer Price Index and the increase in oil prices, we are starting to see other tortuous linguistic devices at work. It is not inflation; it is "sector-specific price pressure." In the old days, rising unemployment, sinking production, and price inflation combined to create what was called "stagflation." What will it be called this time? Something rather ingenious, no doubt.

The National Bureau of Economic Research officially dates this recession from March 2001, fully six months before 9/11. Not a day has gone by in the last two years when some commentator hasn’t either denied we are in recession, claimed we are already out of recession, or cited evidence that the recovery is underway and demanded that everyone admit it already.

Now, until recently, it was possible that the NBER might have backdated the beginning of recovery to have shortened the total duration of the recession. Recent unemployment numbers, and worsening contractions in New York and California, make that increasingly unlikely.

Also, if you look carefully, you find that the fourth quarter 2002 GDP data paint a grim picture of slow growth, declining household net worth, and continued deterioration of the non-farm business sector. In the first estimate, official GDP grew at an annual rate of 0.7 percent, but when you exclude the government component of GDP, the economy actually shrank in the fourth quarter.

The revised numbers put growth at an annualized 1.7 percent, but the two factors driving the GDP remain government spending and credit-fueled personal consumption. You can try this trick in your own neighborhood. Steal your neighbor's furniture and replace it with stacks of counterfeit money. Encourage everyone to spend the money, and then announce that this amounts to higher economic growth.

General Economic Meltdown

Our time will be recorded as a period of general economic meltdown. Next month, we will have lived through the second longest period of continuous economic contraction since 1882. How much worse will it get and how much longer will it last? We cannot know for sure, but we do know that right now, the government is doing everything in its power to make it worse.

Those of us who warned in the 1990s that the stock-price mania could not last were accused of spreading "gloom and doom." Our warnings were considered self-evidently ridiculous, because, of course, it was said that we were in a New Economy and such things as profitability and earnings and savings were old hat and had no bearing on the cyber-world being created before our eyes. Only the Austrian School economists seemed to wonder who or what was behind the frenzy.

In contrast to the 1980s, when everyone was watching the money supply, the markets were suspiciously uninterested in what the Fed was up to in the 1990s. It funded a bailout of Mexico, then a bailout of East Asia, and then a bailout of a crazy Connecticut hedge fund that believed it could predict the future by paying Nobel laureates vast sums to concoct a mathematical model that perfectly predicted the past.

But, still, hardly anyone cared. The phrase "money supply" elicited yawns. The Wall Street Journal, meanwhile, ran a few articles explaining why there is no longer any such thing as risk.

It was only the Austrians who seemed to take notice when money creation rates began to take off in 1995 and climb to 15 percent in late 1998 and 1999, taking the bull market on its wildest-ever ride. Monetary expansion rates settled down a bit in 2000, a trend which at first seemed merely inauspicious – like a tiny tap on a domino lined up against a thousand others.

Once the bear market began, there was no turning back, no matter how much the Fed inflated. Instead of stabilizing downward as they had in Clinton's first term, money-creation rates shot up again, reaching an astounding 22 percent in December 2001 from a year earlier and then fell back down again, creating a double dip bear market in the course of a mere 24 months.

In these numbers we find the secret history of the great boom and bust of our time. Let me give a brief outline of why, and try to explain why it is that so few seemed to pick up on it.

Mises and Cycles

At the dawn of the age of central banking, an economist named Ludwig von Mises set out to rewrite the theory of what money is and how government can seriously distort its workings. Among the puzzles he sought to solve was one that most economists, including Karl Marx, had noticed: swings in business activity from boom to bust.

Marx said that cycles are endemic to capitalism, and a sign of the final crisis that will sweep in the age of socialism. In contrast, Mises found that the business cycle is a symptom not of the free market but of attempts to manipulate the market through unsound monetary practices. Moreover, he found that these cycles are self-correcting provided that the government doesn't attempt to forestall the necessary correction that follows an artificial boom.

Mises concluded by looking carefully at the relationships among the financial sector, money and banking, and the structure of production itself. On the free market, he said, the interest rate reflects the extent to which people are willing to forego current consumption for later investment. The more business and holders of money are willing to put off consumption, the lower the rate will be. A low borrowing rate for business, which spurs investment, reflects a high rate of consumer savings, which reflects a willingness of consumers to purchase the products made in lengthy production processes.

In testimony the other day, Greenspan claimed the following: "Economists understand very little about how technological progress occurs." Perhaps he should have said that he, Greenspan, knows little about how technological progress occurs. As least as regards the Austrian economists, his statement is false. Within the framework of the freedom of exchange, entrepreneurs make judgments about what consumers might want in the future, including new technologies.

Capitalists and investors assume the risk, employing private property, that this judgment is correct. Investments that are profitable attract more resources and those that yield losses are shelved.

This is the free-market capital structure at work in a complex economy. It is truly a miracle of coordination – extending through all sectors and across a huge range of time horizons – with no central management, and needing none. It balances human needs with the availability of all the world's resources, unleashes the amazing power of human creativity, and works to meet the material needs of every member of society at the least possible cost.

It does this through exchange, cooperation, competition, entrepreneurship, and all the institutions that make possible capitalism – the most productive economic system this side of heaven. This system of capital coordination not only works without central management; the attempt to manage it creates dislocations across sectors and across time.

What We Owe the Free Market

Let us never underestimate the social benefits that flow from this seemingly technical mechanism. The market economy has created unfathomable prosperity and, decade by decade, century by century, miraculous feats of innovation, production, distribution, and social coordination.

To the free market, we owe all material prosperity, all leisure time, our health and longevity, our huge and growing population, nearly everything we call life itself. Capitalism and capitalism alone has rescued the human race from degrading poverty, rampant sickness, and early death.

In the absence of the capitalist economy and all its underlying institutions, the world's population would, over time, shrink to a small fraction of its current size, with whatever was left of the human race systematically reduced to subsistence, eating only what can be hunted or gathered. The institution that is the source of the word civilization – the city – depends on trade and commerce, and cannot exist without them.

And this is only to mention the economic benefits of capitalism. It is also an expression of freedom. It is not so much a social system but the natural result of a society wherein individual freedom is respected, and where businesses, families, and every form of association are permitted to flourish in the absence of coercion, looting, and war.

Capitalism protects the weak from the strong, granting choice and opportunity to the masses, who once had no choice but to live in a state of dependency on the politically connected and their enforcers.

But capitalism has many enemies, among them those who would attempt to gin up economic production through loose credit. What Mises focused on in his book on money was the effects of this particular attack on the free market: expansion of money and credit by the central bank, and, in particular, the attempt to drive down the price of credit to spur business investment.

Doing this through the interest rate injects new money into the economy. One effect of this has been known for centuries: it causes prices to rise. But the other effect Mises discovered: it subsidizes long-term capital investment in a manner than cannot be supported by the patterns of consumption and saving. As one Austrian economist puts it, when the central bank drives down interest rates, it causes the economy to bite off more than it can chew.

The effects of artificially inflating the economy can be to cause prices to increase. But as we saw in the late 1920s and other times since, that is not always the case. It often causes a kind of investment euphoria that leads people to believe that nothing can go wrong.

The monetarists, for example, believe that so long as prices remain in check, there is no problem associated with money expansion. The supply-siders, though sound on many issues, have an unfortunate faith in the power of loose credit to make bread from stones.

Mises developed his theory throughout the 1920s and warned of the coming of the 1929 stock market crash. His work was carried forward by F.A. Hayek throughout the 1930s. Hayek later received the Nobel Prize for this. Indeed, the theory was widely embraced until Keynes dreamed up an alternative view that resurrected all the old fallacies about the miracles of money creation and centralized economic management.

Then the Misesian theory languished for decades until the current downturn. Today it is getting new attention as the leading explanation of the insanity of the late 1990s and the current bust. Only the Austrians knew all along that reality would strike back.

The Fed and the administration have worked ever since, using the only tools they have of regulation, spending, and credit expansion, to reverse the course of the recession.

When I think of the Fed's spreading money far and wide, I think of the government in Huxley's Brave New World handing out soma pills or spreading soma vapors to distract people from reality, drugging them so they will be content despite the surrounding disaster. If they start to resist, out comes the soma until the crowds collapse in kisses and hugs.

The Money Illusion

It is always an illusion to believe that more money is the answer. The federal funds rate is at a 40-year low, and that hasn't done the trick. During the 1990s, the Bank of Japan tried again and again to manufacture a recovery through absurdly low rates, but that didn't work either. There is no evidence from either theory or history that pounding interest rates into the ground can create anything resembling a sustainable prosperity. And yet, people believe it, or want to believe it, because it seems better than the alternative.

This entire affair illustrates the underlying reality of American political and economic life: the state's ability to create money and credit. All other powers of government – regulatory, fiscal, even military – pale in comparison to this.

Despite that, the Fed is the least controversial institution in American political life. Apart from Ron Paul of Texas, no sitting politician understands how it works. When Greenspan comes before Congress, he is treated like a minor god.

If his worship is ever tempered with skepticism, it is on grounds that he is not inflating enough, that he is somehow being stingy and not spreading the wealth. Tragically, there is no organized constituency in American politics for tighter money, less credit, sounder finance.

Mises distinguishes three varieties of inflationism, that is, the demand that the state work with the banking industry to flood the economy with credit. The first is naïve inflationism that sees no real downside to monetary expansion, the second is inflationism intended to reward debtors at the expense of creditors, and the third sees disadvantages to an expansionary policy, but believes that the advantages outweigh them.

The US is right now in the grip of the worst form: naive inflationism, which, as Mises says "demands an increase in the quantity of money without suspecting that this will diminish the purchasing power of the money. It wants more money because in its eyes the mere abundance of money is wealth. Fiat money! Let the state 'create' money, and make the poor rich, and free them from the bonds of the capitalists!"

And here we are today enduring the longest recession in postwar history, a Nasdaq off 75 percent from its highs and a Dow off 40 percent, and the government is still issuing buy signals.

Imagine if you had used George W. as your portfolio manager. You would have bought stocks when he became president, held onto them through 9-11 and then bought more and more afterwards.

Incidentally, you'll notice that the official rationale for buying stocks has changed. Whereas once it was said that you should buy because the economy is on a permanent growth path, after September 11, it was said that you should buy to display your patriotism.

If that isn't a sell signal, I don't know what is.

Of course no one in his right mind would let the president of the United States manage his stock portfolio. Why, then, do we trust his government to spend wisely the $2.5 trillion it will extract from the private economy this year? Of course, we don't really trust the government to do that, but we do not have much choice in the matter. This money is taken from us through force and is thereby, by definition, directed toward uses that are not those owners would choose. This is power, not market, at work.

Enron, WorldCom, and the Market Economy

What is striking to note, however, is all the ways in which power is not only destructive but also ineffective against the market economy. The government did not know that firms such as Enron and WorldCom were unviable. All the regulators put together could not anticipate the consequences of what private traders alone were to discover: that these businesses had wildly overextended themselves.

Leaving aside questions of ethical lapses at these companies, the most significant lesson we should learn from their collapse is that the market economy has built within it a fabulous internal check against illusion. Companies that could not sustain themselves on their own merits were simply abandoned by investors. It counts toward the enduring shame of the Bush administration that it attempted to blame the market for the bust of so many companies, rather than having given credit to the market for having discovered the problem in the first place and having done something about it.

But as FDR demonstrated after the depression, there are political points to be made by skewering the private sector to distract from the failures of the public sector. The alleged crime the Bush administration seized on was "accounting fraud" – even though it is not at all clear that what WorldCom, Enron, Computer Associates, Global Crossing, or Qwest did, often with the blessing of respected auditors, amounts to that at all.

In each case, the accusation was similar: their books counted spending as profitable investment before the revenue was in the bag, and when the economic tables turned, their optimistic projections proved unsound and even, in retrospect, absurd.

WorldCom was the worst case of the batch, which is why the government has made such a big deal out of the arrest of two former executives. Their spectacular shifting of a total of $3.8 billion from expenses to capital began small, in mid 2000 as the bust was hitting and their accounts were starting to appear unimpressive.

No one disputes the facts. WorldCom's expenses for last-mile leases on other companies' communications networks were rising very quickly. Managers wanted to move these expenses out of their operating account (filed quarterly and watched carefully) into the capital account – which is something akin to treating the electric bill like the mortgage.

Now, understand that there was no lying going on, and no graft or theft or anything else of that nature. What we have here is an imprudent reclassification designed to impress investors who, at the height of the bubble, demanded nothing less. Unless you are an accounting whiz, there is no way to say that this is a priori evil. In any case, it didn't fool everyone. Many skeptics drew attention to the crazy finance of WorldCom's books. But in the boom times made possible by the Fed, most people didn’t care.

Most of the other cases of corporate fraud that came under the microscope were far less serious than WorldCom, and none are obvious cases of theft or fraud. Mostly it was just bad forecasting reflected in optimistic accounting methods. The supposed damage caused by their behavior was that their pretty books kept their stock price rising even as the financial condition of the company deteriorated. That's probably true, but it is also a short description of what it means to be in a bubble economy. If this be fraud, the entire economic boom is fraud.

Hitting closer to the truth, the New York Times called DC’s anti-business frenzy "the vital center of the administration's strategy for reducing the political vulnerability for the White House." In other words, the Republicans were up to their old trick of behaving even worse than the Democrats in order to keep the Democrats from coming to power. If you disagree with this approach, you must be some sort of libertarian utopian who doesn't understand the need for compromise.

The underlying assumption was the view that it is always a terrible thing for a business to go under, which in fact it is not. It is merely a reflection of human preference as expressed in buying and selling decisions. The only option to going under, in some cases, is to operate uneconomically. But that is precisely what the government had in mind for the steel sector last year.

Soviet-Like Tariffs

As a way of dealing with domestic inefficiencies and growing imports, the US imposed a 30-percent tariff on steel. The idea was to help one inefficient, bloated, and pampered industry at the expense of all US consumers of steel, including US businesses, and all producers in Europe, Asia, Brazil, and Australia. This is brazen protectionism, deeply harmful all around, not to mention morally repugnant.

Did it help the steel industry? In the short run, yes. But we have to ask ourselves whether this kind of help is a good thing in the long run. The tariffs permit an inefficient industry to continue to produce inefficiently, and forestall improvements in technology and cutbacks in wages that are necessary if the industry is to adjust to twenty-first–century realities. There is no virtue to keeping dying technology humming along so that workers and managers who might be better employed elsewhere can continue to enjoy fat checks doing outmoded work.

How long must such tariffs remain in place? The steel industry says they are only necessary in order to get the industry back on its feet. But that belies the question of what, precisely, is going to inspire this sector to clean up its act? Protecting an industry from competition is a method that permits everything wrong with the industry to persist.

If you think about it, Soviet socialism survived for seventy-two years on precisely such policies. The Soviet state protected all its industries from market competition under the alleged need to build socialism. Factories were never closed, and workers were never let go except for political reasons, when their services were employed in the Gulag. The system worked only if your standard is not efficiency but merely the guarding of the status quo. Eventually this system collapsed, as it must, and the Russians woke up to a world that was horrifically backward and decayed.

The steel tariff imposed by the Bush administration was different from Soviet socialism only in degree. It was an attempt to circumvent the market process through a centrally administered system of rewards and subsidies, to ensure that an industry abides by political priorities rather than market dictates. In the meantime, every purchaser of steel, whether a consumer or a business, has been harmed by being forced to pay a higher price for an inferior product.

The same pattern repeated itself with the punitive duties on softwood imported from Canada. Canada refused to obey a US demand that it place a new tax on its softwood, and so the US struck back. The new duties raised the price of softwood, used for building nearly every home in America, by 27 percent.

In economic terms, tariffs are indistinguishable from taxes. They take people's property by force, requiring businesses and consumers to pay higher prices for goods than they would otherwise pay in a free market. To that extent, they harm the prospects for economic growth. If anyone says otherwise, he is ignoring hundreds of years of scholarship, and the entire sorry history of government interference with international trade.

Here again, this can create the illusion of prosperity, but we must also remember that first lesson of economic science: the world is a finite place where the use of any and all resources is constrained by scarcity. This is just another way of saying that you can't always get what you want, and when you do, it must come from somewhere. When the government spends resources, it must drain them from the private economy through taxation and borrowing, or by inflating the money supply.

Economics doesn't deny that redirecting resources from one sector where they are valued by consumers, to another sector where they are valued by government, can create pockets of expansion. What economics suggests is that this is not an efficient or sustainable use of such resources. Only the unhampered competitive market economy, with its system of market prices, profits, and losses, can reveal to us with any certainty the most desirable destination of economic goods.

If credit expansion, protectionism, and government spending were a path to prosperity, mankind would have long ago created heaven on earth. However, the politicians engaged in these activities have to contend with reality, and the reality is that economic forces in society must be mutually sustaining. To have production and borrowing, there must be savings, which only occurs when people forestall consumption today to prepare for tomorrow, and investment that pans out in the form of consumption. Absent such conditions, economic growth lacks a foundation in reality and turns to dust when conditions change.

Terrorism, War, and Recession

Recession, inefficiency, and bankruptcy are not the only man-made disasters with which government threatens us. Hardly a day goes by when the government doesn't issue some maniacal warning about an impending terror attack. And the sense of uncertainty and confusion that follows can only forestall recovery.

How much is real and how much is propaganda or merely bureaucratic risk aversion? We cannot know. They recently urged us to buy duct tape to seal the windows in a suitable spot in our house in order to hide from chemical warfare. They told us that they may use nuclear bombs against enemies real and imagined.

When the warning was given in February, gullible Americans cleaned out the stores of duct tape. Buried in the news a week later was the fact that the person who gave the tip that led to the orange alert was lying.

Of course, the revelation didn't do the government much harm, and the crisis environment that the tip engendered did much good for our masters, who want to keep us in a relentless state of insecurity and therefore dependent on them.

That helps them keep doing what they want to do anyway: for example, spend money and inflate away the debt thereby incurred. Politicians say they must run deficits of hundreds of billions of dollars to avert an impending calamity that will make 9-11 look like a warmup. They say this, but have yet to issue a sell signal.

The government continues to downplay the economic calamity before our eyes while talking up the prospects for a calamity that can only be solved, they say, by use of the biggest big-government program of them all: war.

At the end of the Cold War, many of us hoped that normalcy would return, that the US would become again a peaceful commercial republic. But Bush the elder had a different idea. He decided to bomb Iraq and to impose sanctions that would last 12 years, kill untold hundreds of thousands, inspire terror plots all over the Muslim world, and provide a new rationale for why the US must continue to squander hundreds of billions a year on military public-works programs.

We are often told we must go to war because some swarthy foreign head of state is not a big fan of the US president. This year, the person fitting that description is Saddam Hussein. Before that it was the Mullah Omar. A few years earlier, it was Milosevic. Before that, it was some ward-heeler in Somalia. Moving backwards in time, we had to take out the strongmen in Panama and Haiti. The story goes on and on. It seems that the US government is addicted to conflict. It just can't seem to give it up.

Now, I know there will be plenty of disagreement with me when I say we ought to be trading with Iraq, not bombing it. But let's at least be clear on what we are talking about when we refer to the US military machine. The US will spend $400 billion on its military this year – and that doesn’t include VA hospitals, most spying, the atom-bomb building at the Energy Department, the military part of Nasa, or the Pentagon’s huge "black" or secret budget. The second highest military budget in the world is Russia. Going down the list, next comes China, then Japan, then the UK. You have to tick through 27 countries and add their total spending together to equal what the US spends per year. Not since the Roman Empire has a single country been so militarily dominant.

Let's look at the relative strength of the US versus Iraq in particular. Quantitatively, Iraq spends one quarter of one percent of what the US government spends on its military. Qualitatively, the Iraqi military machine is crippled, with no spare parts for its ancient equipment. The soldiers are teenage conscripts in rags with old rifles. The idea that this is going to be a fair fight is a joke. Those who worry about Iraq over-arming ought to look a bit closer to home. As for the shooting war, some military commentators have compared its ease to drowning puppies. Thanks to a combination of misrule and punishing sanctions, this once prosperous country has been reduced to rubble. The US proposes to reduce it further.

The longtime emphasis of the old liberal tradition with regard to war is this: even the victor loses. We lose resources. We lose tax dollars. We lose trading relationships and good will around the world. Most of all, we lose freedom. And herein lies the biggest cost of war to us, for there is no way that the US can maintain a free market that is the foundation of prosperity while at the same time it attempts to create a global military central plan.

Big government abroad is incompatible with small government at home. To the extent we cheer war, we are cheering domestic socialism and our own eventual destruction as a civilization.

But perhaps you do not need persuading on any of these matters. I know many people who look at the economy and the military belligerence of the US government and they react with despair. I reject this posture. For one thing, I am firmly convinced that the government has reached too far. When you consider the full range of social, economic, and international planning on which it has embarked, you can know in advance that this cannot work. Government is not God, nor are the men who run it impeccable or infallible, nor do they have a direct pipeline to the Almighty. The method they have chosen to bring about security and order is destined toward failure.

The Impossibility of the War on Terrorism

The war against terrorism is a good example. Everyone in Washington is terrified of the next attack. To shore up the war, there has been no shortage of rhetoric. No expense is spared on arms escalation. There is no lack of will. The effort has the aid of plenty of smart people. It is backed by threats of massive bloodshed.

What is missing is the essential means to cause the war to yield beneficial results. Of all the millions of potential terrorists out there, and the infinite possibilities of how, when, and where they will strike, there is no way the state can possibly stop them.

Behind terrorism is political grievance, mostly having to do with frustration at the activities and arrogance of the state and its violations of rights. This is not speculation. This is the word of the terrorists themselves, from Timothy McVeigh to Osama Bin Laden to the suicide bombers.

The pool of actual terrorists (like the pool of the poor in the war on poverty) is limited and can be known, and they are the ones the state focuses on. But the pool of potential terrorists (and potential poor people) is unlimited, and unleashed by the very means the state employs.

Hence, not only does the state not accomplish its stated goals, it recruits more people into the armies of the enemy, and ends up completely swamped by a problem that grows ever worse, as the target population is able to make a mockery of the state through sheer defiance.

In the war on poverty, as more and more were added to the ranks of the poor and the intended beneficiaries of the programs themselves began to mock the state's benevolence, people began to speak of the failure and collapse of the Great Society. Of course the welfare state still exists, but the moral passion and ideological fervor are gone. In the same way, we will soon begin speaking of the collapse of the War on Terror.

Bin Laden is still on the loose, and everyone knows that there are hundreds or thousands of additional Bin Ladens out there. Terrorism has increased since the war began. Israel suffers daily, and in constantly changing ways, ways in which even the most famous and empowered intelligence and military units cannot anticipate or prevent.

But can't the state just kill more, employ ever more violence, perhaps even terrify the enemy into passivity? It cannot work. Even prisons experience rioting. A bracing comment from Israeli military historian Martin van Creveld: "The Americans in Vietnam tried it. They killed between two-and-a-half and three million Vietnamese. I don’t see that it helped them much." Without admitting defeat, the Americans finally pulled out of Vietnam, which today has a thriving stock market.

Can the US just back out of its war on terror? Wouldn't that mean surrender? It would mean that the state surrenders its role, but not that everyone else does. Had the airlines been in charge of their own security, 9-11 would not have happened. In the same way that the free market provides for all our material needs, it can provide our security needs as well.

In all the talk of war on Iraq, I've yet to hear anyone claim that taking out Saddam or bringing about a regime change will make the world a more peaceful, happy place. No one believes that. The last war on Iraq gave rise to al-Qaeda, due to sanctions and Christian troops in Saudi Arabia, led to the bombing of the Oklahoma City federal building, and emboldened an entire generation of Muslims to devote their lives to fighting America. What will the next one bring?

The War on Terror is impossible, not in the sense that it cannot cause immense amounts of bloodshed and destruction and loss of liberty, but in the sense that it cannot finally achieve what it is supposed to achieve, and will only end in creating more of the same conditions that led to its declaration in the first place.

In other words, it is a typical government program, costly and unworkable, like socialism, like the war on poverty, like the war on drugs, like every other attempt by the government to shape reality according to its own designs.

The next time Bush gets up to make his promises of the amazing things he will achieve through force of arms, how the world will be bent and shaped by his administration, think of Stalin speaking at the 15th Party Congress, promising "further to promote the development of our country's national economy in all branches of production." Everyone applauded, and waded in blood, pursuant to that goal, but in the end, even if he did not know it, it was impossible to achieve.

Mises on Peace

Mises, who was so brilliant when it comes to issues of money and credit, also saw the need for a thriving economy to operate amidst an environment of peace. "War," he said, "is harmful, not only to the conquered but to the conqueror. Society has arisen out of the works of peace; the essence of society is peacemaking. Peace and not war is the father of all things. Only economic action has created the wealth around us; labor, not the profession of arms, brings happiness. Peace builds, war destroys."

My theme today has been the present age. Our age is dominated by the state and its errors. The state has given us recession and war, while liberty has given us prosperity and peace. Which of the two paths prevails in the end depends on the ideas we hold about freedom, capitalism, and ourselves.

May we never forget the great truth that our founding fathers worked so hard to impart: tyranny destroys, while liberty is the mother of all that is beautiful and true in our world.

I make no apologies for being a champion of prosperity and its source, the free-market economy. It is what gives birth to civilization itself.

It is fashionable to reject concerns about the economy as narrow and uninteresting, a merely bourgeois interest. If this attitude comes to prevail, we have great reason to be concerned about our present age.

If, on the other hand, we can educate ourselves about the workings of economic forces, and the way in which they are the foundation of freedom and peace, we will not only emerge from this recession prepared to enter onto a new growth path; we will have gone a long way to protecting ourselves from future assaults on our right to be free.

Llewellyn H. Rockwell, Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama, and editor of LewRockwell.com. This was the keynote address at the spring conference of Sage Capital Management in Houston, Texas, March 12, 2003.

Quelle (http://www.lewrockwell.com/rockwell/present-age.html)

syr :rolleyes:

syracus

23.03.2003, 17:01

financial engineering ;).

http://www.bloomberg.com/gifs/logonew.gif

03/21 00:04

Pension Accounting Turns $31 Billion of Losses Into Earnings

By David Evans

New York, March 21 (Bloomberg) -- Nine of the largest U.S. companies obscured $30.61 billion in pension-fund losses in 2002 because of an accounting rule, boosting corporate earnings and prompting calls for a change in regulations .

Verizon Communications Inc., Lockheed Martin Corp., International Business Machine Corp. and six other companies each lost more than $1 billion in pension-fund investments last year, according to footnotes in their annual reports.

Verizon, which lost $4.68 billion, reported a $2.5 billion pension gain. That accounted for 40 percent of its 2002 pretax earnings. U.S. accounting rules call for companies to include estimated pension gains, rather than actual returns, in their income statements. As a result of the rule called FAS 87, the nine companies legally transformed $30.61 billion of pension losses into pretax earnings of $7.9 billion, annual reports show.

``I don't like the FAS 87 model,'' said Robert Herz, chairman of the Financial Accounting Standards Board, which wrote FAS 87 in 1985. ``I believe you're better off showing what actually happened.''

As a first step pension disclosure to investors should be improved, he said. FASB decided last week to develop a new pension- accounting proposal, with a draft expected by year-end.

None of the nine companies with billion-dollar pension losses disclosed the amount of losses in the management discussion and analysis section of their annual reports to the Securities and Exchange Commission, most of which were filed in the last three weeks. The losses were included in footnotes to financial statements in those reports.

More Disclosure

Last month, SEC officials said companies aren't providing investors with clear disclosure about pension accounting. Carol Stacey, chief accountant of the SEC's division of corporation finance, said in an interview that there was a ``general lack of informative transparent disclosure'' in more than 500 annual reports for 2001 reviewed with her staff.

Alan Beller, director of the SEC's division of corporation finance, said in an interview last month that actual pension returns should be included when companies discuss pension accounting and pension fund performance.

``The actual rate of return is something that should be an element of that disclosure,'' Beller said.

The FAS 87 rule requires companies to use estimated pension investment gains, rather than actual gains or losses, to ``smooth'' away stock-market volatility, according to its primary author, Tim Lucas.

FASB Chairman Herz said in an interview he discussed the need to improve pension-accounting disclosures last Friday in a meeting with the SEC's Stacey.

Estimating Returns

The FAS 87 rule requires companies to estimate long-term stock-market performance. The nine companies computed their 2002 pension earnings based on average expected rates of return of 9.2 percent.

Their pension funds actually suffered losses averaging 9.3 percent in 2002 and 7.97 percent in 2001, and have reduced their 2003 expected returns to an average of 8.58 percent.

``I certainly don't have those kind of expectations for my portfolio,'' said Herz, an accountant who became FASB chairman last summer after retiring as a partner at PricewaterhouseCoopers LLP.

Also skeptical is Ethan Kra, chief actuary of the U.S. retirement practice at Marsh & McLennan Cos.' Mercer Human Resources Consulting, the world's largest actuarial firm.

``Some companies think their money managers will outperform the market,'' Kra said. ``I believe the most likely result is generally between 6.5 and 7.5 percent for the next ten or twenty years.''

Bull-Market Distortions

Lucas, project manager of the FASB team that wrote FAS 87 18 years ago, says the board reasoned that since studies show that stocks appreciate over the long term, and can be volatile in the short term, it made sense to use a smoothing technique.

The FAS 87 rule distorts earnings during bull markets, too, company filings show. In 1999, pension earnings for the nine companies exceeded expected rates of return. Their pension funds actually gained $55.19 billion, while pretax earnings were only boosted by $5.34 billion.

Lucas said that's how the companies managed to report pension earnings in 2002 as their pension funds actually lost money. ``Gains that happened during prior years were saved up by the smoothing device of FAS 87,'' he said.

Verizon, the largest U.S. local telephone company, got the biggest boost of the nine companies identified by Bloomberg News. The company relied on its pension fund for 40 percent of its 2002 pretax earnings of $6.2 billion.

Loss in Footnote ;)

The company reported $2.5 billion gain from the pension fund, under FAS 87, as the fund actually lost $4.68 billion on its investments. The expected rate of return was positive 9.25 percent, while the actual return was a negative 9.63 percent.

The management discussion and analysis section of Verizon's annual report filed on March 14 didn't mention the pension plan's actual loss, which was found in a footnote.

``Investors aren't investing in Verizon's pension plan, they're investing in Verizon,'' said company spokesman Robert Varettoni. ``We follow all SEC rules. We think we're providing all the necessary disclosure.''

Lockheed Martin, the largest U.S. defense contractor, added $160 million to 2002 earnings with estimated pension earnings, as its pension fund actually lost $1.4 billion :hihi . The company used an expected rate of return for the fund of 9.5 percent; the fund actually lost 6.9 percent. Lockheed Martin didn't mention the pension loss in its discussion section of its annual report.

``The $160 million that is listed as income, according to FASB, is just that, a list of numbers on paper and not cash income, and no indication of the fund's performance on the market,'' said Lockheed spokeswoman Meghan Mariman.

SBC Communications

SBC Communications, the second-largest U.S. local telephone company, boosted pretax earnings in 2002 with $1.14 billion of estimated pension earnings, based on an expected rate of return of 9.5 percent. The pension fund actually lost $3.4 billion, or 10.5 percent. The loss wasn't mentioned in the annual report's management discussion and analysis.

``We feel like it's good disclosure,'' said SBC spokesman Russell Johnson. He said the management discussion is 12 pages more than in the 2001 annual report. ``It's a lot more than it was last year.''

IBM, the world's largest provider of computer services, boosted pretax earnings by $520 million from estimated returns, as its pension fund actually lost $6.94 billion. Its expected rate of return was 9.5 percent, and its actual return was a loss of 11.35 percent. The loss wasn't specified in the annual report's management discussion and analysis, which directs readers to footnote W for more information about retirement plans.

``We point people to the footnote section where they can get detailed information,'' said IBM spokesman Joe Stunkard.

Here is a chart of the nine companies, their actual pension fund losses for 2002, as described in the pension footnotes of their annual reports, and the pretax gains reported from pension- fund investments, as filed with the SEC:

2002 Pension Earnings:
Actual, ,Earnings Boost

IBM, -$6.94 bln , +$520 mln
General Electric Co., -$5.25 bln , +$1.56 bln
Verizon Communications Inc. , -$4.68 bln , +$2.50 bln
SBC Communications Inc. , -$3.40 bln , +$1.14 bln
Boeing Co. , -$3.27 bln, +$400 mln
Lucent Technologies Inc., -$2.47 bln , +$580 mln
Lockheed Martin Corp. , -$1.40 bln , +$160 mln
BellSouth Corp. , -$1.28 bln , +$830 mln
DuPont Co. , -$1.92 bln , +$220 mln

TOTAL , -$30.61 bln , +$7.9 bln

If actual pension returns had been counted in financial statements, aggregate earnings for the S&P 500 would have been 69 percent lower than the companies reported for 2001, or $68.7 billion rather than $219 billion, Credit Suisse First Boston Corp. found in a research study on pension accounting published in September. http://www.stock-channel.net/stock-board/images/icons/icon30.gif

Stock-market declines in the past two years have led to more than $200 billion in pension-fund losses for S&P 500 companies, according to the CSFB study.

bloomberg (http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&T=markets_box.ht&s2=ad_right1_topfin&bt=ad_position1_topfin&box=ad_box_all&tag=financial&middle=ad_frame2_topfin&s=APnqdQRVzUGVuc2lv)

syr

syracus

25.03.2003, 18:53

no further comment;).....

16:43 2003-03-25

Old Asia Says NO

Andrey Krushinsky
PRAVDA.Ru

It is rumored that the USA has prepared over 300 new super-effective instruments of killing for today’s war in the Gulf. Within the 12 years since the First Gulf War America has been strengthening its power and Iraq, on the contrary, was losing its might under the pressure of total embargo. When the USA pretended it was thrilled with horror because of Iraq’s chemical and bacteriological weapons, it was deceiving the whole of the world in the network of a campaign it designed to persuade everyone that Iraq had weapons of mass destruction. Within the first two days of the war it became clear that the Iraqi leader had no weapons of mass destruction. Is there any reason then to disarm Iraq at all? There are only outdated tanks and missiles that cannot hit targets even in Kuwait. Americans knew perfectly well that there was nothing to be afraid in Iraq, otherwise they wouldn’t rally about the deserts so madly. Resistance of the Iraqi troops was the only thing that really surprised Americans.

The idea to send inspectors to Iraq and then to recall them was a fraudulent trick. This was done with a view to embed CIA agents into the mission headed by Hans Blix so that they could upgrade maps of Iraqi military objects on the eve of intrusion in Iraq. The people were also to recruit more agents. This was planned to be done with money of the UN! With the help of their Apache helicopters and Tomahawk missiles it is much easier for the USA to destroy the Iraqis than it was to do away with Indians a couple of centuries ago. Main difference between the Gulf wars waged by the father of the incumbent American president and by George W. Bush is that the first one was organized as a universal campaign against Baghdad, and the present war turned out to be a universal campaign against Washington. Asia is a remarkable participant of the campaign.

The Commission for international affairs in the Chinese People’s Congress issued a statement saying: “ China strongly calls for immediate stop of military actions against Iraq, return to track of political solution to Iraq issue.” A similar statement was also made by the Chinese Foreign Ministry.

It won’t be a surprise at all if someone in Washington calls China “old Asia”, the same manner that the label “old Europe” was invented for France and Germany. By analogy with leaders from the “old Europe” (Bulgarian and others who would like to rush to Baghdad), there are Asiatic politicians who also want to do George W. Bush favor. Bangkok, Kabul, Manila, Seoul, Taipei and Tokyo expressed their solidarity with the US aggression on the very first day of the war. But these six YES in support of the aggression are all together much less than one NO said by China, and also by India.

India’s NO was the most disagreeable truth George W. Bush has learnt recently. It is not so harsh as China’s, but it was voiced on a higher level. Indian Prime Minister Atal Bihari Vajpayee said: “The use of force by a superpower to change a regime is wrong and cannot be supported”.

“The US has certainly made progress in the war against international jihadi terrorism. India, the most suffering victim of pan-Islamic jihadi terrorism in the world today, has reasons to be gratified over the US success in its operations,” B.Raman says. B.Raman is Additional Secretary (ret), Cabinet Secretariat, Government of India, and presently director, Institute For Topical Studies, Chennai; former member of the National Security Advisory Board of the Government of India. He was also head of the counter-terrorism division of the Research & Analysis Wing, India's external intelligence agency, from 1988 to 1994. But Mr. Raman himself isn’t so much enthusiastic what can be seen by the headline of his publication “The USA Will Achieve Pyrrhic Victory” posted on Asia Times website in Hong Kong on March 21. He wrote: “What the US advocated and continues to advocate for Iraq is not democracy as perceived by the majority of Iraqi people, but democracy as designed in the Central Intelligence Agency that would serve US national interests. The question is not whether the US will win, but how soon. But it will be a Pyrrhic victory, which will not contribute to enhanced peace and security for the US, Israel or the rest of the international community. The world has nearly a billion Muslims”.

India’s Moslem population is 130 million people; the Moslem states of Pakistan and Afghanistan are its neighbors. Moslem community is the biggest in Malaysia, that is also very close to India. Indonesia with its 220 million population is considered to be the most densely populated Moslem country of the world, and it is also very close to India. The Indian expert on anti-terrorist struggle cannot but denounce US’s operations in Iraq that aggravate the terrorism problem even more. However, it seems that he himself hasn’t yet realized the depth of the forecast concerning the “Pyrrhic victory”.

The cannonades of the US/UK war in Iraq are not heard neither in South nor in East Asia. In these regions analysts are more focused on economy: they are trying to forecast how the aggression in Iraq will influence oil prices, exchange indices, dollar rate, business activity and economic growth. All Asiatic countries are in the same boat: if it leaks somewhere, all of the Asiatic countries will suffer, no matter if they said yes or no to the aggression. Majority of forecasts say that Asia is in for hard times. And this is one of considerable factors of the “Pyrrhic victory”, unfortunately not the only one.

When I looked over economic analysis on the website of People’s Daily, I came across a publication on its English-language version saying what financial problems the USA may face as a result of the aggression in the Middle East. There was some curious response from an American reader of the website who called himself as “Borg” published on March 20: “The funny thing is that once we stop trading with China, your economy will take a nose dive into the dirt and your citizens will cause unrest and the government of China will begin to lose power. It is well known that China lies about its actual GDP figures and that its economy is not growing as fast as it would have the rest of the world believe.
The American people have already begun boycotting Chinese products and we will continue to do so until you feel the pressure and until we see you crumble into dust. Eat **** bastards! You are next!”

Next for what? For another Desert Storm operation?

The anger of a billion of Moslems about which B.Raman warns is certainly a serious problem. But madness of a superpower that lost an adequate counterbalance after the breakup of the USSR is even more dangerous.

Pravda (http://english.pravda.ru/war/2003/03/25/44999.html)

syr :rolleyes:

syracus

26.03.2003, 13:16

Zu einer der grössten Fehldeutungen der neueren Wirtschaftsgeschichte :hihi.......

http://www.mises.org/images/2002/top_logo.gif

New Economy Not Resting in Peace

By Christopher Mayer
March 21, 2003

http://www.mises.org/images2/rip.gif

It may still be too early to pen the postmortem on the New Economy. The final chapters on that episode are still being written. Nonetheless, Leon Levy's discursive memoir, The Mind of Wall Street, is a first cut, perhaps inadvertently so, at disentangling some of the threads that helped create the great bull market of recent vintage.

Levy is a very wealthy man, ranked among the Forbes 400, with a net worth of over $750 million. He is the co-founder of mutual fund giant Oppenheimer and also founded the celebrated hedge fund Odyssey Partners, which returned 28 percent annually during its fourteen-year life. Because of his success, his views on markets, while certainly not in the laissez-faire tradition, deserve some attention. A few of his observations are explored below.

Levy's view of history is rooted in Mark Twain's maxim that "history may not repeat, but it often rhymes." In Levy's mind he has seen all of this before. With the bubble finally deflating, as inevitably all bubbles do, investors, Levy writes, "snap out of their trance and ruefully look back on the myths, delusions, and outright lies they had cherished as truths when they were blinded by a rising market."

The New Economy mythology was just such a collection of cherished falsehoods. The long boom was more an illusion than a time of real growth and expansion. By August 2001, losses by Nasdaq companies wiped out all of the profits from the prior five years.

The New Economy was a prolific producer of supposed world-changing wonders, and one by-product was the claim of increased productivity. Ironically, even the author of the famed phrase "irrational exuberance" was snookered into believing that the old laws of economics had somehow been repealed. Greenspan never hesitated to use this prop (increasing productivity) to justify ever-dizzying stock market prices. In retrospect, as Levy points out, the productivity gains were a myth.

Levy points to the work of James Grant, among others, that show the only productivity growth in 1990s came from the computer industry and that most of the economy's productivity gains lagged the gains registered in 1980s. Moreover, as Levy cites, McKinley and Company has also done work in this area that demonstrates that much of the productivity gains came from a surge in consumer spending.

The current economic malaise has not shaken Greenspan's faith in the potency of productivity. In his remarks to Congress on February 11th he still cited "favorable underlying trends in productivity" as a positive force in the economy. Robert Samuelson addressed this issue in a Washington Post editorial titled "Economic Darwinism". He noted that labor productivity in 2002 was 4.8%, the best showing since the 1950. However, that productivity surge was not due to the sorts of things that normally drive productivity in a growing economy. Instead, as Samuelson notes, much of the increase was due to layoffs, bankruptcies and cutbacks.

The problem with the 1990s boom and one that Levy glosses over (his focus is on the investor psychology) was its fuel: rampant credit and monetary expansion, which led to massive malinvestment. The Internet and the computer revolution were supposed to break the old laws of economics. Instead, the landscape is dotted with lifeless dot-coms and the still smoldering wreckage of telecom bankruptcies, among other limping and wounded industries. As Samuelson notes, "The efficient production of what's unneeded…is still wasteful. Productivity statistics, temporarily puffed up, were somewhat misleading."

Then, there are all those phony accounting reports. Levy writes, "companies artificially pumped up earnings by treating ordinary expenses as extraordinary events (Enron, Cisco), by booking earnings and revenues long before they were realized (Computer Associates, Calpine), by including capital gains from investments in earnings (Microsoft, General Electric)…" and on and on it goes.

The time of reckoning was inevitable. "Companies can maintain the illusion of operating earnings for only so long, " Levy writes. "In a corporate replay of The Picture of Dorian Gray, earnings …remained eternally ebullient while hidden from public view was the true portrait that had become disfigured by warts, goiter and pox." A prime example would be Computer Associates, which, in October 2001, reported record second quarter earnings of $359 million in its press release, while at the same time it reported a $291 million loss in its filings to the SEC using generally accepted accounting principles.

Another example: Enron, whose very name has come to symbolize corporate deceit and sleaze, was still on target to meet its pro forma earnings predictions as late as November 2001, even as a firestorm of controversy raged around it. As Floyd Norris of The New York Times commented, Enron "managed to go broke without ever reporting a bad quarter."

Such examples underscore the absurdity of the accounting abuses of the late 1990s. They also show how economic reality was blurred by massive credit expansion, and how naïve investors (perhaps operating under the poor assumption that Greenspan and the Fed could sustain the bubble) so willingly suspended their belief in the older ideas of economic progress through hard work and real savings. The loose monetary order of the time provided a rich soil for wide-scale malinvestments that would not have been possible in a hard money regime.

It would all have been much more amusing if it didn't ache so much. After all, trillions have been lost ($4 trillion in the Nasdaq alone). As Levy writes, the bubble's "legacy is like a wretched hangover. Long after the valuations of new-economy stocks collapsed, major companies continued to take significant writedowns of their assets...without the prop of an irrational stock market, investors finally tuned in to the fantasy accounting that had become pervasive in American business, and they slaughtered stocks whose earnings came under suspicion."

It is still quite stunning to go over some of the anecdotal happenings of that frenzied time. Priceline.com, a company that sold airline tickets at discount prices, had a market capitalization greater than the entire airline industry. By 2001, it had a value of 1/100th its old valuation. Theglobe.com was another Internet darling, whose IPO went from $9 to $97 in one day. In little less than one year later, its stock would go for pennies.

The collapse inevitably draws comparisons with the '29 Crash and the ensuing Great Depression. A septuagenarian and child of the Depression, Levy began his Wall Street career when the wounds of that calamity were still raw and viscerally felt. It was a vastly different world in many respects. Perceptions of risk, for one thing, were very different from what they are today.

At the tail-end of 20th century America, a pension fund manager was fired for investing in Treasury funds rather than stocks (it was the manager of the California State pension fund), apparently he was being too conservative. In mid-century America, it was against the law for a pension fund to invest all but a small part of its portfolio in stocks.

As Levy writes, "to a fund manager from the 1950s catapulted into the late 1990s, the notion that someone could be fired for investing in bonds would make no sense, somewhat akin to hearing that ice cream was good for you. Back then, with the memories of the Great Depression still fresh, those entrusted with other people's money eschewed stocks as too risky." While a seemingly small thing, Levy writes that the episode served as a "tap on the shoulder," a telling reminder about the extraordinary state of affairs of the late 1990s boom.

These events support the idea that another contributing problem of the 1990s boom was ideological, and it is one that still persists in the aftermath. It was a cultural error that made a hero out of a Fed Chairman and that put so much faith in the Fed to begin with, at the expense of sound economics. For this reason, the best way to avoid a like situation in the future and to reform the financial structure of the country is to destroy the ideas that continue to support such institutions and that also continue to support government intervention in markets. In this way, the head of the axe is really brought to the root of the tree.

So what is Levy's view of the future? For those interested in prognostications, Levy offers the view that we are in "but the third act of a five-act Shakespearean drama that portends a bad ending." Admitting he has no crystal ball, Levy sees a protracted recession and lists many reasons why. Debt burdens, low savings rates and government deficits do not form a sound foundation for new growth (government debt appears to be the new growth industry of post-bubble America).

In a recent interview, Levy disclosed that he has 50% of assets in treasuries and advises investors to use stock market rallies to sell equities—a contrarian view to say the least.

However, Levy has built his fortune by going against the crowd, by buying assets out of favor and then selling in them when the tide turned. It takes an incredible amount of discipline and intellectual independence to consistently make such commitments. That is why there is a built-in lid on the number of people that can invest like Leon Levy. Contrarianism is a self-limiting proposition. As investment writer Steven Mintz once observed, it is akin to the old riddle that asks how far a dog can run into the woods. The answer is halfway. After that, he's running out.

Christopher Mayer is a commercial lender for Provident Bank in the suburbs of Washington, D.C.

Quelle (http://www.mises.org/fullstory.asp?control=1187)

syr :rolleyes:

schloss

28.03.2003, 11:32

Die amerikanischen Verluste sind wohl wesentlich höher, als in den westlichen Medien zugegeben werden... friendly fire ist auch dabei (aber nicht nur)

Täglicher Bericht aus russischen Fernaufklärungsquellen (im Spiegel gefunden, scheint seriös zu sein)

http://www.aeronautics.ru/news/news002/news080.htm
War in Iraq - requirement for more troops

March 27, 2003
www.iraqwar.ru

The IRAQWAR.RU analytical center was created recently by a group of journalists and military experts from Russia to provide accurate and up-to-date news and analysis of the war against Iraq. The following is the English translation of the IRAQWAR.RU report based on the Russian military intelligence reports.

March 27, 2003, 1425hrs MSK (GMT +3), Moscow - There has been a sharp increase in activity on the southern front. As of 0700hrs the coalition forces are subjected to nearly constant attacks along the entire length of the front. The Iraqi command took the advantage of the raging sand storm to regroup its troops and to reinforce the defenses along the approaches to Karabela and An-Najaf with two large armored units (up to two armored brigades totaling up to 200 tanks). The Iraqi attack units were covertly moved near the positions of the US 3rd Infantry Division (Motorized) and the 101st Airborne Division. With sunrise and a marginal visibility improvement the Iraqis attacked these US forces in the flank to the west of Karabela.

Simultaneously, massive artillery barrages and counterattacks were launched against units of the US 3rd Infantry Division and the 101st Airborne Division conducting combat operations near An-Najaf. The situation [for the US troops] was complicated by the fact that the continuing sand storm forced them to group their units into battalion convoys in order to avoid losing troops and equipment in near zero-visibility conditions. These battalion convoys were concentrated along the roads leading to Karabela and An-Najaf and had only limited defenses. There was no single line of the front; aerial reconnaissance in these conditions was not possible and until the very last moment the coalition command was unaware of the Iraqi preparations.

During one of such attacks [the Iraqi forces] caught off-guard a unit of the US 3rd Infantry Division that was doing vehicle maintenance and repairs. In a short battle the US unit was destroyed and dispersed, leaving behind one armored personnel carrier, a repair vehicle and two Abrams tanks, one of which was fully operational.

At the present time visibility in the combat zone does not exceed 300 meters, which limits the effectiveness of the 101st Airborne Division and that of its 70 attack helicopters representing the main aerial reconnaissance and ground support force of the coalition. One of the coalition transport helicopters crashed yesterday during take-off. The reason for the crash was sand in the engine compressors.

The Iraqis were able to get in range for close combat without losses and now fierce battles are continuing in the areas of Karabela and An-Najaf. The main burden of supporting the coalition ground troops has been placed with the artillery and ground attack aircraft. Effectiveness of the latter is minimal due to the weather conditions. Strikes can be delivered only against old Iraqi targets with known coordinates, while actually supporting the ground troops engaged in combat is virtually impossible and attempts to do so lead to the most unfortunate consequences.

Intercepted radio communications show that at around 0615hrs this morning the lead of a flight of two A-10 ground attack planes detected a convoy of armored vehicles. Unable to see any markings identifying these vehicles as friendly and not being able to contact the convoy by radio the pilot directed artillery fire to the coordinates of the convoy.

Later it was discovered that this was a coalition convoy. Thick layers of dust covered up the identification markings - colored strips of cloth in the rear of the vehicles. Electronic jamming made radio contact impossible. First reports indicated that the US unit lost 50 troops killed and wounded. At least five armored vehicles have been destroyed, one of which was an Abrams tank.

During the past day the coalition losses in this area [ Karabela and An-Najaf ] were 18-22 killed and up to 40 wounded. Most of the fatalities were sustained due to unexpected attacks by the Iraqi Special Forces against the coalition rears and against communication sites. This is a sign of the increasing diversionary and partisan actions by the Iraqis.

During the same period of time the Iraqi forces sustained up to 100 killed, about the same number of wounded and up to 50 captured.

Since the beginning of the operation no more than 2000 Iraqi troops were captured by the coalition. The majority of the captured troops were members of regional defense [militia] units.

The Iraqis were able to move significant reinforcements to the area of An-Nasiriya making it now extremely difficult for the Americans to widen their staging areas on the left bank of the Euphrates. Moreover, the Americans [on the left bank of the Euphrates] may end up in a very difficult situation if the Iraqis manage to destroy the bridges and to separate [these US units] from the main coalition force. The US forces in this area consist of up to 4,000 Marines from the 1st Marine Division and supporting units of the 82nd Airborne Division. Currently, fighting has resumed in the An-Nasiriya suburbs.

During one of the Iraqi attacks yesterday against the US positions the Iraqis for the first time employed the "Grad" mobile multiple rocket launch systems [MLRS]. As the result an entire US unit was taken out of combat after sustaining up to 40 killed and wounded as well as losing up to 7 armored vehicles.

There are no other reports of any losses in this area [ An-Nasiriya] except for one US Marine drowning in one of the city's water canals and another Marine being killed by a sniper.

During the sand storm the coalition command lost contact with up to 4 coalition reconnaissance groups. Their whereabouts are being determined. It is still unknown what happened to more than 600 other coalition troops mainly from resupply, communications and reconnaissance units communication with which was lost during the past 24 hours.

The situation around Basra remains unclear. The Iraqis control the city and its suburbs, as well as the area south of Basra and the part of the adjacent Fao peninsula, which the British have so far failed to take. The British forces are blockading Basra from the west and northwest. However, due to difficult marshy terrain crossed by numerous waterways the British have been unable to create a single line of front and to establish a complete blockade of the city. Currently main combat operations are being launched for control of a small village near Basra where the local airport is located. The British field commanders report that there has been no drop in the combat activity of the Iraqis. On the contrary, under the cover of the sand storm up to two battalions of the "surrendered" Iraqi 51st Infantry Division were moved to the Fao peninsula to support the local defending forces.

Rumors about an uprising by the Basra Shiite population turned out to be false. Moreover, the Shiite community leaders called on the local residents to fight the "children of the Satan" - the Americans and the British.

During the past 24 hours the British sustained no less than 3 killed and up to 10 wounded due to mortar and sniper fire.

It is difficult to estimate the Iraqi losses [in Basra] due to limited available information. However, some reports suggest that up to 30 Iraqi troops were killed during the past day by artillery and aircraft fire.

During an attack against a coalition checkpoint in Umm Qasr last night one British marine infantry soldier was heavily wounded. This once again points to the tentative nature of the British claims of control over the town.

Information coming from northern regions of Iraq indicates that most of the Kurdish leaders chose not to participate in the US war against Iraq. The primary reason for that is the mistrust of the Kurds toward the US. Yesterday one of the Russian intelligence sources obtained information about a secret agreement reached between the US and the Turkish government. In the agreement the US, behind the backs of the Kurds, promised Turkey not to support in any way a formation of a Kurdish state in this region. The US has also promised not to prevent Turkey from sending its troops [ to Northern Kurdistan] immediately following [the coalition] capture of northern Iraq.

In essence, this gives Turkey a card-blanche to use force for a "cleanup" in Kurdistan. At the same time the Kurdish troops will be moved to fight the Iraqis outside of Kurdistan, thus rendering them unable to support their own people.

Along the border with Kurdistan Turkey has already massed a 40,000-strong army expeditionary corps that is specializing in combat operations against the Kurds. This force remains at a 4-hour readiness to begin combat operations.

All of this indicates that the coalition command will be unable to create a strong "Northern Front" during the next 3-4 days and that the US Marines and paratroopers in this area will have to limit their operations to distracting the Iraqis and to launching reconnaissance missions.

During a meeting with the Germany's chancellor [ Gerhard ] Schroeder the heads of the German military and political intelligence reported that the US is doing everything possible to conceal information on the situation in the combat zone and that the US shows an extremely "unfriendly" attitude. Germany's own intelligence-gathering capabilities in this region are very limited. This is the result of Germany, being true to its obligations as an ally, not attempting to bolster its national intelligence operations in the region and not trying to separate its intelligence agencies from the intelligence structures of NATO and the US.

There has been a confirmation of yesterday's reports about the plans of the coalition command to increase its forces fighting in Iraq. The troops of the 4th Infantry Division (Mechanized) are currently being airlifted to the region, while its equipment is traveling by sea around the Arabian Peninsula and the unloading is expected to begin as early as by the end of tomorrow. The Division numbers 30,000 soldiers and officers. By the end of April up to 120,000 more US troops, up to 500 tanks and up to 300 more helicopters will be moved to the region.

In addition to that, today the US President [George W] Bush asked the British Prime-Minister [Tony] Blair to increase the British military presence in Iraq by a minimum of 15,000-20,000 troops.

At the current level of combat operations and at the current level of Iraqi resistance the coalition may face a sharp shortage of troops and weapons within the next 5-7 days, which will allow the Iraqis to take the initiative. The White House took this conclusion of the US Joint Chiefs of Staff with great concern.

During the past seven days of the war the US Navy detained all ships in the Persian Gulf going to Iraq under the US "Oil for Food" program. Since yesterday all these ships are being unloaded in Kuwait. Unloaded food is being delivered by the US military to Iraq and is being distributed as "American humanitarian aid" and as a part of the "rebuilding Iraq" program. These US actions have already cause a serious scandal in the UN. The US explained its actions by its unilateral decision to freeze all Iraqi financial assets, including the Iraqi financial assets with the UN. These assets the US now considers its property and will exercise full control over them. Captains of the detained ships have already called these actions by the US a "piracy."

(source: www1.iraqwar.ru , 03-27-03, translated by Venik)

schloss

28.03.2003, 11:54

War in Iraq - preparing for battle UPDATE

March 27, 2003
www.iraqwar.ru

The IRAQWAR.RU analytical center was created recently by a group of journalists and military experts from Russia to provide accurate and up-to-date news and analysis of the war against Iraq. The following is the English translation of the IRAQWAR.RU report based on the Russian military intelligence reports.

March 27, 2003, 2321hrs MSK (GMT +3), Moscow (UPDATE) - Intercepted radio communications indicate that tomorrow we should expect a powerful attack by the coalition. During all day today the coalition troops were being reinforced and fully resupplied with fuel and ammunition. Additional units reserved for maintaining security along the Kuwaiti border were moved today to the front lines. The total number of additional [coalition] forces to enter Iraq numbers up to five battalions and around 800 combat vehicles.

By 1600hrs today the sand storm in Iraq has subsided allowing coalition to resume helicopter support of ground troops. At the same time the Iraqi positions were attacked by bombers and ground attack aircraft, which forced the Iraqis to cease their attacks and to resume defensive operations.

Available information suggests that the coalition command, despite of the extreme exhaustion of its troops, will attempt to use elements of the 3rd Mechanized Infantry Division to actively contain the Iraqi forces around Karabela and to reach the strategic Al-Falludja highway by moving from the west around the Razzaza lake, thus cutting off the way to Jordan. It is expected that by noon of March 29 the main coalition forces will reach this area.

During the night from March 29 to March 30 elements of the US 82nd Airborne Division aided by the Army Special Operations units may attempt to capture the Saddam Hussein Airport. Immediately following the capture of the airport the coalition plans to use it for the deployment of a brigade from the 101st Airborne Division, which will be responsible for holding the airport until the arrival of the main forces.

Commanders of the reinforced Marine brigade trying to take An-Nasiriya for the fourth day have received strict orders to suppress the Iraqi defenses and to take the town during the next day, after which to continue their advance toward Al-Kut and Al-Ammara. Similarly strict orders were received by the command of the brigade attacking An-Najaf. They will have to take this town, widen the staging area on the left bank of the Euphrates and push the Iraqis away from the town. By the morning of March 29 both these brigades are supposed join up southwest of Al-Kut, where they will be reinforced by the elements of the 101st Airborne Division and, after forming a southern attack line, they would blockade Baghdad from the south.

The British command has been ordered to completely take over the Fao peninsula, complete the blockade of Basra from the south and to completely take over the [Basra] airport area. After that the British are to advance toward Basra from the south along the Al-Arab river.

Based on this information to say that tomorrow we should expect heated combat would be an understatement.

(source: iraqwar.ru, 03-27-03, translated by Venik

syracus

29.03.2003, 07:23

Housing-Bubble :p......

Thursday, March 27, 2003

The housing economy

Home equity debt nearly doubles, prompting fear that borrowers could end up losing homes.

By RIVA D. ATLAS
The New York Times

Americans are borrowing against their homes at unprecedented levels, leading some bankruptcy lawyers and consumer advocates to warn that many people could wind up losing their homes.

Homeowners raised $130 billion last year through home equity loans and lines of credit, nearly double the total a year earlier, according to the Federal Reserve.

This boom in borrowing comes at a time when housing prices nationwide are still strong, as they are in Southern California.

As long as their home values rise, borrowers who are having trouble making their payments can take out more loans or can sell their homes for more than they owe. Indeed, people have not fallen behind on their home equity loans nationwide in troubling numbers.

But in parts of the Midwest and the Southeast where home prices have softened, delinquencies on home equity debt have started to rise, and bankruptcy lawyers are reporting that a growing number of their clients are losing their homes to the banks.

"I'm representing a large number of newly homeless people," said Barbara May, a bankruptcy lawyer in St. Paul, Minn. Many of these people have taken on home equity loans in addition to their existing mortgages.

"We are just buried in foreclosures," she said.

Bankruptcy lawyers warn that the problem could spread to other parts of the country if home prices soften or if the economy does not improve.

Homeowners eager to lower their monthly payments have refinanced their mortgages in great numbers over the last year, often taking cash out to maintain or increase their spending.

Banks have been particularly active in extending this debt over the last three years. Total outstanding bank credit lines more than doubled, to $216.9 billion, as of January, according to Economy.com. By contrast, credit card and other revolving credit rose 19 percent over the same period.

Despite a surge in home equity loans, bankers say that consumers seem far from the end of their run. Richard M. Kovacevich, chief executive of Wells Fargo, one of the nation's biggest home equity lenders, estimated at an investor conference in January that Americans could still borrow against $6.6 trillion in "untapped equity" in their homes.

And Doreen Woo Ho, president of the consumer credit group at the bank, said, "We feel that the home is an asset that consumers can use."

Banks have made it so easy for people to borrow against their homes that some people may be borrowing more than they need. Some consumer-credit specialists now worry that many people are taking on more debt than they can handle. Even after using the money raised from their home's equity to pay down debt, some people then go out and again run up balances on their credit cards.

Lawyers say they are coming across people who have lost their jobs and are using both credit-card and home equity debt in an attempt to stay out of bankruptcy.

"They are still winding up in bankruptcy, but a year or two later," said Norma Hammes, a bankruptcy attorney in San Jose. "They are just delaying the inevitable."

Those people who fail to make payments on the home loans or credit lines could wind up in more serious trouble in a bankruptcy than if they just had credit-card debt. In a bankruptcy, individuals can often write off their unpaid credit card balances. Home equity loans and other mortgage debt must be repaid, or the bank can seize the property.

While credit card lenders can sue a borrower and get a lien on the person's home, those judgments are generally not enforceable after a person files for bankruptcy, Hammes said. So far, the number of consumers nationwide who have fallen behind on home equity payments is relatively small. For every $1,000 in such credit lines, $7.30 in loans was past due by at least 30 days as of last September, compared with $14.40 a decade ago.

Given the sharp rise in this debt recently, it may take a couple of years for trouble on many of these loans to surface, bankruptcy lawyers said. That is because it usually takes some time for the borrower to use up the cash he raised by taking on the home equity debt.

Quelle (http://www2.ocregister.com/ocrweb/ocr/article.do?id=31935&section=BUSINESS&subsection=MONEY_SMARTS&year=2003&month=3&day=27)

syr :rolleyes:

syracus

29.03.2003, 07:51

Hamilton on air :sss....

War Rally Euphoria

Adam Hamilton

My trusty Webster's dictionary tome defines the word "euphoria" as "a feeling of happiness, confidence, or well-being sometimes exaggerated in pathological states as mania."

In light of the absolutely awesome action in the US equity markets in the past couple weeks, euphoria is an appropriate description of the amazing spectacle that we have just witnessed.

In its first run of 8 consecutive winning days since December 1998, the flagship S&P 500 soared an incredible 12%! Last week the US equity markets witnessed their biggest weekly gain in two decades, since October 1982! With exciting records like these being achieved, it is no wonder that our recent monster rally captured the attention of investors and speculators worldwide.

While it is only natural for us mere mortals to want to feel happy and confident, we certainly don't want to go overboard and stray into the second part of Webster's definition of euphoria, grossly exaggerating these positive feelings in a pathological state like a mania.

In these emotional times at the advent of a dangerous foreign war, investors and speculators need to carefully consider the fine line between healthy confidence and pathological mania states reminiscent of the NASDAQ bubble in early 2000. Is the war rally euphoria that we have all marveled at in recent days healthy, or has it approached the pathological mania stage?

As an outspoken bearish speculator who is heavily short, the awesome war rally certainly moved against all of my own personal positions. After the second day of the war rally, which was then technically still a pre-war rally at the time, I wrote and published an essay called "S&P 500 Waterfall Imminent". In this essay of two weeks ago I expressed my belief that the S&P 500 was soon heading for an ugly waterfall decline culminating in a new interim low and V-bounce.

It was really interesting as within one or two days after this essay was published I was deluged with an immense number of questions and flames. Some folks wondered if I had changed my mind after a few days of rallying and others were chortling with glee over "the end of the bear market" spawned by Washington's attempted annexation of a far-off third-world foreign nation.

The euphoria waxed so intense that by last Friday the talking heads on CNBC were virtually unanimous in forecasting the end of the war in a couple days and were talking about how folks were actually scared to be short. After 8 consecutive winning days and an awesome rally I was starting to think that actual stock-market bears were even harder to find than the Bush Clan's perpetual nemesis Saddam Hussein!

Dan Basch, a speculator friend of mine who has graciously shared some of his outstanding research work with me that was featured in some past Zeal essays, coined a wonderful new word to describe the apparent extinction of the bearish operators late last week. He spoke to me of the glorious rise of a brave new species of speculator he calls the InstaBulls!

Isn't this a fantastic word? In addition to the perpetually bullish perma-bulls, the war rally euphoria caused a sea-change of sentiment among many marginally bearish players. They were almost miraculously transformed from concerned skeptics before the war rally launched to fanatically zealous bullish cheerleaders only one week later. Behold the rise of the insta-bulls!

The popular rage of insta-bulldom swept through the bearish community like the Black Death last week. Before the dust settled, the tsunami of optimism and greed over the war had crushed or drowned the vast majority of bearishly oriented speculators who existed before. While the perma-bulls brazenly proclaimed that the Great Bear was dead, killed by Washington's phalanx of cruise missiles, the few remaining bears and shorts huddled in their foxholes in fear.

Now that the war rally euphoria is finally dissipating like a chemical-weapon fog in the wind, rationality is slowly catching up with the perma-bulls and the newly minted insta-bulls. The temporarily sidelined debate over the near-term future direction of the US equity markets is beginning again. At stake are literally hundreds of billions of dollars worth of investors' and speculators' scarce capital.

Is the Great Bear dead as the perma-bulls claim and the insta-bulls wish? Did the war rally euphoria slay the fearsome beast that has viciously terrorized us for so long now? Or is the Great Bear ready to roar out of its cave with a vengeance again in the coming weeks and months?

There is almost certainly no more important question facing the financial markets today!

While it is no fun and certainly unpopular to be bearish, unfortunately I still strongly believe that the latter scenario is most probable by far. Amazingly enough, fear of Saddam Hussein wasn't the cause of the Great Bear market which began in 2000 and Washington's assassination of the Iraqi clown won't end the Great Bear market.

The overwhelming weight of fundamental and technical history powerfully suggests that the bulls are about to get slaughtered and the bears are about to feast on bull flesh in another massive barbecue.

I believe that a waterfall decline in the US equity indices is still imminent for three primary reasons. Conspiring to make this case are the current extreme equity overvaluations, the glaring lack of a technical sentiment bottoming signature before the war rally launched, and the powerful technical sentiment topping signature just witnessed this week. Considered together, this triad of evidence in favor of the bearish case is amazingly compelling.

We'll begin with valuations, the number one reason why the war rally euphoria was nothing more than that.

While the perpetually dueling emotions of greed and fear drive financial markets over the short-term, valuations are truly the ultimate driver of financial markets over the long-term. In history Great Bear markets following extreme bubbles never reach their ultimate long-term bottoms until these markets are fundamentally undervalued in price-to-earnings ratio and dividend yield terms. Period.

The last graph and final quarter of my "S&P 500 Waterfall Imminent" essay published two weeks ago explain the current equity overvaluation and resulting problems in some detail if you are interested in learning more. Since US equities haven't even been ground down to fair value yet, let alone undervalued levels, since the bubble burst in the States, the probability approaches certainty that we haven't witnessed our ultimate bottom yet.

To make matters even worse, the war rally euphoria ran valuations back up into even higher levels of overvalued extremes than I mentioned a couple weeks ago. Expecting a final long-term bottom in US equities when the markets are still extremely overvalued is like hoping for a 100-degree day in Alaska in December. Sure, maybe it could somehow happen, but the odds are overwhelmingly against it!

While the number one reason why we haven't yet seen a long-term bottom in the US equity markets is purely fundamental based on valuations, the other two reasons are technical and are based on emotional sentiment, popular fear and greed.

Interestingly, since short-term market movements within the primary trend are utterly dominated by fear and greed, distinctly recognizable sentiment signatures of both meaningful interim bottoms and meaningful interim tops emerge. By closely examining the war rally in light of these telltale signatures, we can gain a good idea of whether the war rally still has legs or if it is likely already exhausted.

First we will consider meaningful interim bottoming signatures marked by extreme fear and then we will take a look at meaningful interim topping signatures marked by extreme greed. After you carefully consider the heavy implications of these charts I think you will understand if not fully agree with my belief that a vicious waterfall decline remains imminent.

Since the S&P 500 index is the best major proxy for the US equity markets as a whole, we are using it in our graphs this week. Please bear in mind though that the exact same conclusions would be reached as well if we looked at any other major index relative to fear and greed extremes.

http://www.321gold.com/editorials/hamilton/Zeal032803A.gif

All meaningful interim market bottoms are carved during episodes of great fear. If you want to know if a particular market bottom is likely to hold for at least a few months, all you have to do is find out whether or not it emerged out of the depths of widespread fear and despair. If the markets appear to bounce in the absence of exceptional fear, then the bottom is false. No fear? No bottom!

Did the recent war rally erupt out of great fear?

My favorite proxy for general fear in the US equity markets today is the venerable VIX S&P 100 Implied Volatility Index. If you are unfamiliar with this powerful indicator or would like to review, I have discussed it in great depth in many past essays including "The Bust and the VIX". The VIX measures implied volatility, and extreme market volatility is most often witnessed when the majority of players are scared, near major interim bottoms.

The graph above shows the VIX relative to every major interim low in the S&P 500 in its Great Bear market to date. You will note that the VIX spikes dramatically when any major V-bounce low is achieved. Three numbered VIX spikes marking interim lows are highlighted in yellow above and they all share similar characteristics, a kind of tradable bottoming signature or fingerprint.

First, before the waterfall declines leading into the left legs of the V-bounces begin, the VIX generally trades sideways within a lower range. These zones of complacency are highlighted with the yellow ovals above. As the waterfall declines accelerate, the fear in speculators explodes and their frantic trading vaults up general volatility and the VIX with it. The VIX soars far above the immediately preceding terrain and reaches very high levels often approaching or exceeding 50. These mega-VIX spikes betray the great fear marking true interim bottoms.

If the lows before the euphoric war rally of last week were meaningful, they should have a similar bottoming signature. The VIX should have exploded above surrounding terrain to new heights as fear grew too extreme in the days immediately before the war rally launched. Remember, no meaningful bottoms are ever achieved without widespread fear!

Provocatively, the graph above reveals absolutely no bottoming signature before the war rally! The VIX had spiked from the mid-20s to 40ish at point A, but that was definitely not a major interim bottom because the US markets continued to relentlessly fall until the lower point B about a month later. Between points A and B the VIX traded sideways establishing a relatively high zone of complacency, but when the euphoric war rally suddenly erupted at point B there was no extreme VIX spike and hence no widespread fear.

If the war rally didn't launch out of extreme fear, then our most recent bottom at point B is false. That's right, no fear means no bottom!

Since the war rally didn't launch out of a fear-filled environment, the probabilities are vastly in favor of the hypothesis that the war rally will soon fail if it hasn't already and that a brand new bust-to-date interim low is approaching in the next couple months or so. If you carefully examine the entire chart above you will note that the only meaningful interim lows are carved during great fear characterized by massive VIX spikes.

In the absence of a major VIX spike, speculators have to assume that the war rally is purely emotional based on irrational euphoria and that it is probably already dead!

Besides, war is the greatest waste of scarce resources that we humans can undertake, taking valuable capital away from entrepreneurs and free enterprise in order to first build bombs to destroy expensive infrastructure and then stealing even more capital from innocent American taxpayers to rebuild from the rubble. War is a total economic loss for all sides, a catastrophic misallocation of scarce capital with fearsome inflationary consequences.

As usual, I also have a couple side notes on the graph above.

First, note the heavy resistance that the S&P 500 has faced at its 200-day moving average, especially in early 2002. Provocatively the flagship US equity index has not been able to break decisively above its 200dma in this whole bust to date! It is ominous that the war rally, exciting though it was, totally failed at the S&P 500's 200dma. This is another immensely bearish piece to place in the near-term market puzzle.

Second, serious mini-bear rallies after a bear downleg begins are not uncommon. The 12% war rally looks an awful lot like the early 2002 mini-bear rally shown on the graph above that ran up 8%. It is interesting to contrast these mini-bear rallies with the truly massive bear rallies that erupt from fear-filled interim bottoms. These authentic bear-market rallies in the S&P 500 typically run up 21% or so. The war rally, though no doubt blisteringly fast, pales in comparison to the real thing.

From a technical sentiment perspective, the awesome war rally looks to be fake, a purely emotional buying panic and short-covering bonanza spawned by a distant foreign war not even remotely related to the US stock markets.

While the distinctive bottoming signature necessary for a meaningful fear-based major bear-market rally to spawn is conspicuously absent before the war rally began, it is ominous to note that the war rally has also signaled a major interim market top!

Just as meaningful interim market bottoms are signaled by widespread popular fear among market players, meaningful interim market tops are betrayed by widespread popular greed. An outstanding technical sentiment indicator useful for quantifying greed is the 21-day moving average of the CBOE's famous Put/Call Ratio.

http://www.321gold.com/editorials/hamilton/Zeal032803B.gif

Options traders willingly and enthusiastically undertake one of the most risky and highly leveraged forms of speculation. When they think the markets are heading higher they buy call options, and when they see lower prices ahead they buy puts. Contrarian speculation theory states that most traders are wrong at the crucial turning points (both long-term and short-term), so prudent speculators will carefully watch the PCR and its smoothed 21dma for signs of unsustainable greed or fear on which to capitalize.

When the Put/Call Ratio is low, it signals that traders are loaded up to the gills with calls, bets for higher prices. It is provocative and sobering to note that at these very times are the optimal moments to throw short, betting against the chronically wrong majority. The PCR 21dma shorting zone in the graph above is shaded yellow and it marks the times when the PCR was too low because traders were too bullish and greedy.

Every major interim top in the whole S&P 500 bust to date coincides with a low point within the PCR 21dma's gradually rising uptrend channel! These interim S&P 500 tops are all marked above with yellow lines intersecting the PCR 21dma levels witnessed at each stock-index topping point. When the PCR falls low enough to scrape the bottom of this channel, it clearly signals that popular greed and complacency are far too great hence falling stock-index prices lie dead ahead.

It is unbelievably ominous to note that the most recent PCR 21dma shorting signal has been officially triggered at the very top of the euphoric war rally! Since the Great Bear bust began this powerful topping signature has perfectly marked 8 outstanding shorting opportunities in a row. What do you think the odds are that it will be proven right again this time?

As the PCR 21dma illustrates, the time to recognize meaningful interim tops and be short is when many more calls are being purchased than puts, signaling extreme greed and complacency. After witnessing the market action of last week, I have a hard time remembering a similar week that even rivals it in terms of raw greed. I don't know if I have ever seen more hubris than the talking heads on TV assuming that Bush's Iraq invasion would be over within 3 days after it started. Unreal!

While the greed-driven euphoric war rally was certainly exciting, three hard facts conspire against its very survival. First, the US equity markets were far too overvalued to reach a serious long-term bottom before the war rally began and they are even more overvalued today. Second, the war rally didn't emerge out of fear as no distinct interim-bottoming signature heralded its birth. Finally, when the war rally failed at the S&P 500's 200dma, a powerful topping signature was witnessed, suggesting that the markets are destined to plunge soon.

Any single component of this triad of bearish evidence alone would cause serious concern about the staying power of the euphoric war rally, but all three taken together are catastrophic for the bulls. When both long-term valuation and short-term sentiment conspire to bludgeon a market lower, no force on Earth can stand in their way.

So, to the legions of insta-bulls out there who asked me if I retracted my "S&P 500 Waterfall Imminent" prognostication after a few days of war rally euphoria, the answer is heck no! I still believe that probabilities are vastly in favor of the US equity waterfall commencing in April, soon after the standard end-of-quarter window-dressing season is over.

Although the markets may yet crush this waterfall call, I will even go so far as to say that I believe the euphoric war rally is already dead. If not dead, it is certainly dying, as the extraordinary firestorm of raw greed unleashed last week seems to have pretty much already burned itself out.

If you are interested in discussions on the crucial psychology of speculating successfully and how to avoid being fooled in the future by inconsequential fleeting events like this euphoric war rally, I am going to attack this very topic in the new April issue of Zeal Intelligence which I expect will be published on April 1st for our dear subscribers.

In addition, the new ZI will also discuss all of our outstanding options trades based on the US equity indices in light of the war rally, not to mention the current exciting gold-stock scene. Thankfully there are lots of fantastic opportunities coming up to directly profit on the silly war rally euphoria that we witnessed last week!

The bottom line is that the recent euphoric war rally in US equities was not the good kind of happiness and confidence that Webster mentioned, but the second maniacal pathological kind.

Pathological greed is an immensely dangerous emotion that always ends in catastrophic capital losses for those foolishly swept away by it. Never forget the horrific price that the NASDAQ investors have already paid for their own pathological greed that manifested itself in a bubble!

Today's insta-bulls are on the verge of learning another brutal lesson about the grave dangers of pathological euphoria.

Adam Hamilton, CPA
March 28, 2003

Quelle (http://www.321gold.com/editorials/hamilton/hamilton032803.html)

syr:xyz

syracus

29.03.2003, 08:24

Fleckstein zur FED :hihi ......

The Fed Revisits Its Experimentation Lab

By Bill Fleckenstein
03/27/2003 07:13 AM EST

I'm sorry but I must again comment on the Fed. I realize that I have talked about this a lot, but our monetary statesmen, especially Alan Greenspan, have caused so much damage to so many people both in the stock market bubble and, potentially, in the housing bubble that the fact they are threatening to do it again simply must be discussed. First, though, I'd like to preface this latest development with some general comments.

The problems sown by the Fed sometimes have long gestation periods. It often turns out to be the case that one can talk about these problems seemingly ad nauseam without them mattering until they matter, and then they are the only things that matter. I can remember being laughed at for screaming about Greenspan and the Fed during the bubble. Of course now, the damage is pretty apparent for all to see.

In my opinion, the unwinding of the stock market bubble -- and the economic damage created in that process -- has not yet run its course. Meanwhile, I think we're in for some problems in the housing market. Let's also not forget Ben Bernanke's remark about how the Fed could crank up the printing press, a frightening prospect for those of us who own dollars, which is almost everyone.

Acing a Fiddle Audition: However, what most concerns me, and what should concern everybody, are comments that passed on Bloomberg Wednesday by Vince Reinhart, who is secretary to the Federal Open Market Committee and director of the Federal Reserve Board's Division of Monetary Affairs. (So, obviously, this is someone who has clout inside that institution.) In remarks that ran along the same lines as Bernanke's, and just as disturbing, he said, "If asset prices don't adjust sufficiently to stimulate spending, then open-market purchases of long-term Treasurys in sizable quantities can move premiums lower." (The emphasis is mine.)

There are several points to be made about this quote. First of all, it's clear that the Fed is targeting the stock market to try to stimulate spending. In saner times, the stock market was always a reflection of what happened in the real economy. Now, it's apparent that the Fed is trying to use the stock market to stimulate demand.

This, of course, happened in the bubble. That the stock market became the economy was an unhealthy consequence of the bubble. Now the Fed is intent on re-creating that unhealthy environment, though I don't think it will be successful.

Indefatigable Incompetence: In any case, Reinhart's comments also raise the question of who decides the meaning of "sufficiently." Regrettably, the answer is: the same people who didn't know anything about the bubble and who have made all these other errors. Then, there is the question of why the Fed thinks this little maneuver will be any more successful than any of its other unsuccessful maneuvers, like the 0-for-12 run it's had with rate cuts.

The Fed might recall Operation Twist, a 1961 variation on this theme, in which the central bank simultaneously lifted short-term money rates and suppressed bond yields in a bid to induce foreigners to hold more dollars. It was one palliative among many intended to defeat the inflation that presently engulfed the world. That fiasco wound up requiring the draconian measures instituted by former Fed chair Paul Volcker to break the back of runaway inflation.

Also, I'd like to know, who told the Fed that this was its job? Who told the Fed that deflation was unacceptable and that the stock market should be used to try to force demand to a place it deemed to be correct? Basically, the Fed is standing up and saying, we don't like what's going on, and we're going to change it, and the consequences be damned -- even as we see all the problems related to their prior experiments.

Arm's Length on Elucidation: Then, showing how disingenuous the Fed can be with its comments, Reinhart went on to say, "No doubt, there are ongoing impediments to satisfactory growth in the United States, but policymakers have reason to believe that the current stretch of subpar growth will be modest in both magnitude and duration." Notice he didn't discuss what the ongoing impediments were, which are, of course, the bubble that came before. I would just like to know what supports his belief that this current stretch will be modest. Certainly, it can't be the Fed's success with the rate cuts thus far.

Moving from the misguided to the nonsensical, Reinhart went on to make this statement: "Of course, such promises to put a ceiling on parts of the yield curve would be reinforced with a credible promise to keep the short rate along a path consistent with long rates." I guess he means to keep the yield curve positively sloped. But once you start talking about longer-term rates, it's impossible to say that you're going to keep them anywhere.

Markets rule the long rates, even if the Fed can control the short rates. And, the mere attempt by the Fed to try to put rates where they don't belong will ultimately backfire on them, in the form of a weaker dollar, higher inflation, and eventually, higher rates, even if asset prices are collapsing.

Behind the Mantle of Mantra: Lastly, this knucklehead hides behind the same lame excuses that the Fed trotted out in the past, namely, productivity growth arguments, "which support consumption and ultimately induce firms to hire and spend." I recommend that people reread that last sentence and see if it describes what's been occurring in the past several years since the bubble burst. Again, I'm sorry to start harping on the Fed, but through its latest efforts at experimentation, it is set to exacerbate earlier problems of its own making. There will be long-lived consequences to these experiments, even if they take time to emerge.

William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle.

Quelle (http://www.thestreet.com/_tsclsii/markets/billfleckenstein/10076745.html)

syr:sss

RIVA

29.03.2003, 18:50

CORNERED RATS AND THE PPT

Nelson Hultberg

There is a new wrinkle to consider regarding the government's Plunge Protection Team (PPT), which the investing public needs to be made aware of. First, however, some groundwork on the PPT, its origins, and its assumed purposes. Then I will present a theory about the PPT that should further validate its existence and clue us in to what it has planned for the future.

Conventional Wall Street media and Washington establishment types are quick to denigrate those of us who theorize about the establishment of a secretive PPT organization to manipulate the markets. But it is a matter of public record that the Working Group on Financial Markets (WGFM), which we allege to be the parent to the PPT, was formed under the Reagan administration. It was done by Executive Order on March 18, 1988.

This order states that the major appointees of this group are to be the Secretary of the Treasury, the Federal Reserve Chairman, the SEC Chairman, and the CFTC Chairman and those they designate to fulfill their purposes. The purposes, as defined in the Executive Order, are to "[enhance] the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and [maintain] investor confidence." The order goes on to say, "To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions." (Executive Order 12631 of March 18, 1988, 53 FR, 3 CFR, 1988 Comp., p. 559)

The WGFM was formed in the aftermath of the crash of 1987 as a natural effort by government bureaucracy to do for the economy what it thinks it is supposed to do -- intervene and manipulate the workings of the marketplace so as to create an ordered economy, an economy that is to the greatest possible extent devoid of volatility, disruption, severity, loss, etc. So it is in this context that we need to consider the origins of the PPT. At the time, there was great fear that something very big had to now be done to regulate the stock market and smooth out its potential volatility. The WGFM (in conjunction with mega-bankers they chose) was to make sure there was always sufficient "liquidity" to prevent any serious plummeting of the market again. And whatever additional interventions were deemed to be necessary would have to be tolerated.

The fact that severe market volatility was largely a result of government manipulation of the money supply and interest rates was merely blanked out on by the WGFM and its creators. A study of our nation's economic history will show to any objective observer that there are natural fluctuations inherent in the free-market that humans must always put up with, but which are always self-corrected if the forces of the market are simply LEFT ALONE. This is basic Adam Smith economics; the smoothest economy is a laissez-faire economy. But these fluctuations become extremely exacerbated with the intervention of government into the mix to try and "manage the economy" so as to eliminate these fluctuations. The fact that the Federal Government had become in the 20th century a massive interventionist-manager of the economy, and thus a massive exacerbator of these natural fluctuations, was something that just could not be grasped by the bureaucratic mentality. The modern day statist has been taught via Marxist-Keynesian indoctrination in college to believe that a "free" market is dangerous, chaotic, and unworkable. He is not capable (or not willing) to dispute this view. Thus, he naturally moves toward more and more MANIPULATION of market forces as his duty. And the very volatility he seeks to diminish, he intensifies.

So the climate of government opinion in the aftermath of the 1987 crash was moving toward even more "interventionist-manipulative" tactics than it had felt necessary during previous decades of the 20th century. In this climate, it is quite natural that the WGFM authorities decided that something unprecedented had to now be done to guarantee a safe, smooth, crash-free, perma-bull stock market. Thus was born the idea of the PPT.

How the Plunge Protection Team Came About
Bill King of the highly regarded King Report in New York tells us that the PPT sprang from an analysis written and presented by former Fed Governor Robert Heller in 1989. After his paper was published is when the PPT agenda was formalized.

King refers to his associate John Crudele's writing on the subject of how the stock market was to be rigged. "Heller had just left the Fed when he gave a speech suggesting that the central bank should step in and take direct action to keep the stock market from collapsing. The Fed had taken action before. It made sure there was enough liquidity during the crash of '87 to keep the system going. It may have even strong-armed a few banks into propping up the market. And it has often lowered interest rates at opportune times.

"But Heller's idea was different. He wanted a more direct approach, especially when the bond and currency markets were becoming uncontrollable [like they are these days]. Heller believed that in an emergency, the Fed should start buying stock index futures contracts until it managed to pull stocks out of their nosedive. Essentially, whenever there is heavy buying of these futures contracts it causes the underlying stock market to rise. The futures contracts can be bought cheaply; they are highly leveraged so you can get more bang for your buck, and they eliminate the need for a rigger to purchase, say, all 30 stocks that make up the Dow. Heller explained that the process was simple. And it is. The trouble is, the government never has had authority to rig the stock market." kingreport@ramkingsec.com]

King, who at the time was running several equity trading desks in New York, goes on to say that it was during Q1 of 1990, as the Japan bubble was bursting, that massive S&P futures buying began to be used extensively by the trusted agents of the PPT, big 'name' brokers in New York. During the crises of the late 90's, this massive buying increased even more. By this time, many skeptics of such manipulation in the investment advisory business began to realize it was definitely taking place.

If you still doubt, here is a BBC release from the latest King Report on the issue: "A deal was struck last week in the United States between a former Japanese finance minister and the head of the U.S. central bank, the Federal Reserve's Alan Greenspan. There was an agreement between Japan and the United States to take action cooperatively in foreign exchange, STOCKS and OTHER MARKETS (bonds? GOLD?) if the markets face a crisis," Chief Cabinet Secretary Yasuo Fukuda said....

We know never to believe anything until it's been officially denied, so we were pleased to note that U.S. Treasury Dept spokesman Tony Fratto did just that, stating: "The administration's views on markets on interventions are well-known and there has been no change in our view." [King Report, March 24, 2003]

What needs to be grasped by all Americans who invest their money in the equity, currency, and commodity markets today is that the PPT is not a fantasy conjured up in the minds of conspiracy wackos who see aliens from outer space climbing over their backyard fence every other month. It is a verifiable reality. It exists. It is bigger than any of us imagine. It is the result of the hideous statist mindset that is taking over our country -- which believes that all aspects of economic life must be regulated and MANIPULATED by central planners from Washington. Yet such omnipresent manipulation and regulation goes contrary to the logic, the freedom, the entire meaning of America. When manifested in specific areas like the stock market, it becomes especially unsavory. If such an organization to rig the stock market was ever to become widely known throughout the country, then confidence in the integrity of the markets would be greatly diminished and probably destroyed. So the PPT and all federal bureaucrats who know of it must continually deny its existence. They must travel by night and operate through surrogates.

A New and Sinister Use of the PPT
For the past 12-14 years then, the PPT has been used by Washington to control the price movements of the NYSE through the buying of S&P futures as former Fed governor Heller advocated. Whenever a crisis appears especially threatening, the PPT swings into action to shore up equity prices on the exchange. The media sycophants of the establishment turn a deaf ear to such a claim, but it is accepted by most astute followers of the market today. The sheep who idolize CNBC choose to ignore such revelations when divulged to them because it is in their interests to have such a shoring-up agency putting a floor under them. They are happy with such an arrangement, and being unable to grasp the long range ramifications of such market rigging, they just dutifully go along to get along. That their profits are protected is all they care about. The fact that eventually such rigging will destroy the integrity of the markets as free institutions of trading is for someone in the future to worry about.

Well that future is rapidly approaching us. And it concerns the new theoretical wrinkle I alluded to above. This is purely hypothetical on my part. I have no verification to prove the claim that follows. But if the reader will keep an open mind and think logically, he should come to the same conclusion that I have.

What, in the minds of Federal Reserve and Treasury bureaucrats, is the most important economic need facing our economy today? And as a result of this need, what is it that they desire to do the most? I would say their greatest desire is to counter the potential forces of deflation that have devastated Japan for over 10 years, and now threaten to afflict us also. If this is so, then the most crucial problem the Fed and the Treasury has is to get liquidity into the system so as to hopefully maintain consumer spending and stimulate new capital expansion, but to do so without spooking the foreign holders of American equities and bonds into repatriating their funds, which would bring about a crash of the dollar and the Dow. If the Fed starts printing up dollars wholesale as Bernanke postulated, then alarm bells begin sounding throughout the Forex markets and the dollar starts falling like an elevator with a severed cable. This Washington cannot tolerate. But since it is becoming more and more evident that mere Fed manipulation of interest rates is not going to be enough to counter the forces of deflation, the printing presses have to be brought out. How to start printing money, though, without setting off the alarm bells?

Here is where the Clinton-Rubin "strong dollar" policy and its gold leasing scheme becomes instructive. Rubin understood that to confront the Republican revolution of '94 and insure Clinton's re-election he needed to inflate the money supply; but to do so, he needed to suppress the price of gold so as to not alarm the Forex markets. However, he could not suppress the price of gold by just selling Fed owned gold. That was public; it would set off the Forex alarm bells and negate his desire to keep the dollar "strong" while still inflating it. He therefore hatched the scheme to lease gold to the bullion banks who would then sell it into the market. Leased gold could still be carried on the Fed's books as an asset; the movement of the gold would not be acknowledged to the world. The bond vigilantes and Forex markets would not get alarmed. The dollar could be inflated, yet made to appear to be strong. Capital would continue to flow into America. Clinton could be re-elected.

The lesson here is that any substantial printing to inflate the money supply must be done SECRETLY. If it is done in large amounts by conventional monetization of bonds and deficits, then it will set off those nasty alarm bells in the Forex markets. The dollar will plummet, capital will flow out of America, and the Dow will crash.

So the Fed has to print up billions of dollars and inject them into the economy without public acknowledgement. Enter the PPT! The Treasury Department has by now found that it is a natural vehicle to use to funnel "new money" into the market secretly. Since the PPT's operations and existence must always be kept secret, then its funding (at least its major funding) must also be orchestrated in clandestine manner. It must be done offshore. And this is where the funding for the PPT undoubtedly comes from. Rubin probably initiated this procedure. The Fed prints up billions of dollars and slips them into an offshore bank account for say XYZ Investment Corp (which is established as a front for the PPT). JP Morgan and Goldman Sachs are then designated as the brokers for XYZ Corp to act as the funnels to bring the "new money" into the economy via the PPT's "market stabilization activities." Thus, there are unlimited funds for use to short gold, buy dollars, and buy S&P futures whenever the markets look to be in jeopardy. Whenever the offshore account runs low, the Fed merely prints up more money for a PPT operative to deposit into the account.

Thus, the Fed and the Treasury accomplish two things that help them to keep their sinking ship afloat: 1) They shore up both the equity and dollar markets and put a cap on the gold market, and 2) they also inject billions of "newly printed" dollars into the economy, which helps them to counter deflation. The important point, however, is that the new dollars are injected into the economy SECRETLY! There is no public record of their entry like there would be if the Fed monetized the purchase of bonds through its open market operations. So the Big Government-Big Banking cartel gets to control the equity, currency and commodity markets, and it also gets to funnel billions of newly printed dollars into the economy without sending out an alarm to the world. In this way, the Federal Reserve can print money big time without causing a big sell-off of the dollar in the Forex markets and an exodus of foreign capital out of America.

The Federal Government will do anything to avert deflation, keep the Dow and the dollar from crashing, and keep gold and silver from skyrocketing. USING THE PPT ALLOWS IT TO DO ALL THREE IN A SIMPLE, SECRETIVE WAY. It's a perfect tool for the disingenuous Machiavellians who run Washington today. As stated, I have no proof of any offshore funding, and no Deep Throat contact has informed me that the Treasury has bumped the PPT's role into a vehicle to inject substantial amounts of "printed" dollars into the economy. But such a role is as natural as members of a Mafia family operating neighborhood protection rackets. It fits the personas of the participants, and it fulfills their needs.

Will Such Manipulation Work?
There is an adage that no man and no group is bigger than the market -- even government men and groups. This can be borne out by any perusal of history. All savvy theoreticians accept this truth. And it is especially true if the market trend that the government is attempting to manipulate is a Kondratieff winter. The only thing that will cure this kind of bear market is the PURGING OF DEBT, which is precisely the opposite of what the Fed and Treasury machinations are geared to do. They are hell bent upon creating more debt and more fiat money to chase more goods and services higher in price. This is what they conceive to be "stability" and "prosperity."

So in the long run, the PPT's manipulatory tactics will not be able to stop the gold and silver bull market, nor will they be able to stop the continued bear market in equities. No government has ever been able to reverse or stop a "primary bull or bear trend" once it is launched. All government manipulators can do is delay the ultimate destination of the market and make for wild swings of high volatility. All they can do is buy some time, which is what desperate men always try to do when their backs are against the wall.

What these manipulators don't realize is that a secular bear market is like a great northern blizzard. All we can do is try to calculate its duration. All we can do is hunker down and ride it out, while loading up on various storm shields that might gain value in freezing weather. The manipulators' efforts to stop the development of the blizzard will fail, but this doesn't keep them from trying to stop it, and in the process creating havoc and volatility along the way.

Therefore, what we can expect from the Fed on an ever increasing scale in the upcoming years is an effort to "manage" the dollar down slowly so as to alleviate America's trade and current account deficits, while trying to keep the Dow from crashing, and also at the same time helping JP Morgan and its cohorts in New York to ease out of their short derivatives. Thus, the Fed needs to push gold down to a low enough price where JP Morgan, et al can buy their shorts back without too much of a loss. This buying back then causes the gold market to shoot up, which then necessitates that the PPT come in and push it back down to where JP Morgan, et al can then dump some more of their short contracts. Jim Sinclair thinks the recent rocket up to $390 in gold was the first big attempt by JP Morgan to close out some of their short positions. It put tremendous buying pressure on the price, and it had to be contained. So the PPT was brought in to push the price down again. (I am not saying that gold didn't get overbought; it did. But you can bet that the PPT was right there helping to push the price down once the market turned. And it will be ever with us into the foreseeable future trying its damndest to convince the world that gold as an investment vehicle is a fool's choice.)

So the Fed's strategy is to try and keep the Dow above 7000 and gold below $400 until all the dangers are purged, i.e., until the New York banking cartel has eased out of its short positions and U.S. corporations are beginning to make profits again. That's why the Fed will be making liberal use of the PPT along with lots of rumors and smear campaigns over the next decade. This is a very dangerous game that these participants are playing, and we need to be aware of it.

As stated above, the only thing such PPT rigging can accomplish in the long run is more WORTHLESS DOLLARS being funneled into the economy, which is just more of the paper money poison that is killing us. But such rigging will be able to buy the Fed and the New York cartel some time. If Greenspan can pull this off until June of 2004, he then retires, and can drop the whole mess in the lap of his successor. He can then escape to his knighthood and become an elder statesman. The crash will come on someone else's watch. So it's a good bet that such motives and manipulations are a prominent part of his present rationale.

This, in my opinion, is the vision of our Federal Reserve and Treasury bureaucrats who are in bed with the mega-bankers of New York City. These are desperate men, and desperate men blind themselves to long term reality. They shrink their focus down to the short run, so as to buy time. This is why the PPT is going to become a much bigger and more dangerous element in the investment markets as this decade unfolds. We must always keep in mind that desperate men are like cornered rats. They will use any means at their disposal to avoid loss and humiliation. These are the people who are governing us today -- cornered rats.

Nelson Hultberg
March 26, 2003
Nelshultberg@aol.com

____________________________________________________________________________

Das ist mit das Beste, was ich bislang über dieses Thema gelesen habe. MHO on that. ;)

syracus

09.04.2003, 22:41

Hultbert ist gut, 321 :). Dann komm ich einmal mit dem "Klassiker", zum Hauptproblem.....

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Global Economy

Perils of the debt-propelled economy

By Henry C K Liu
Sep 14, 2002

Economics is a complex subject. Any subject, however complex, if looked at in the right way, will become even more complex. This fact baffles many experts who tend to avoid small errors meticulously while sweeping on to grand fallacy.

One of the shortcomings of economics is the inadequate attention paid to it as a behavioral science. The problem can be traced to the neoclassical concept of the economic man who is supposed to act rationally in his own interest which in a money economy is generally defined rather simplistically as financial gain. Economics is obviously more than finance, and economic well-being is not synonymous with financial gain. Modern economics of course deals with the problem of human behavior with some sophistication, albeit always through the back door, and always equating self-interest with rational individual response to pricing. A market economy is coordinated through the price system operating on the principle of marginal utility.

Economists construct indifference curves to show consumer preferences. In economics, the effect on consumption of a pure change in price is shown in an income-compensated demand curve (also known as a Hicksian demand curve after economist John Hicks - 1904-89). A Marshallian demand curve (after economist Alfred Marshall - 1842-1924) is based on the concept of marginal utility. Marginal utility is observed only through choices. Marginal utility in consumption is simply a problem of choosing the bundle of goods that maximizes a buyer's utility, subject to the income constraint - the requirement that the bundle the consumer chooses costs no more than the buyer's disposable income.

Yet the demand for goods is affected by human behavior. A good whose consumption increases when its price goes up is called a Giffen good, after Robert Giffen, a 19th-century English statistician, who noted that Irish peasants bought more potatoes when the price of potatoes rose. This contradicted the law of demand, one of the basic laws of economics. For the poor Irish peasants, potatoes, as the main staple, took up a huge share of their income. If the price of potatoes went up, the share of their income available to purchase other foods would shrink markedly, forcing them to consume more potatoes to make up the difference.

Giffen goods are also necessary for conspicuous consumption. When high-price items go up further in price regularly, such as art objects, more buyers will enter the market, bidding up prices even more. Tulip bulbs during the speculative bubble in Holland in the 17th century were overpriced Giffen goods. The stock market is full of Giffen goods. When a share price goes up, it attracts more buyers. Real estate is often a Giffen good, particularly in places like Hong Kong where the real-estate market is fundamentally controlled by the government through control of the supply of land.

When housing prices rise over long periods, more buyers enter the housing market. The increased demand created by anticipated price appreciation more than offsets the fall in demand caused by price increases. And price deflation in housing creates a downward spiral of shrinking demand, a phenomenon easily observed in recent years all over Asia, from Tokyo to Hong Kong to Singapore. Public health and commercial medicine have characteristics of Giffen goods. When the price of medicine rises, more people tend to get ill due to less preventive use of medicine, causing aggregate demand for medicine to rise.

An inferior good is a good that one buys less of when one's income rises, because one can afford a superior good by comparison, even if the inferior good may also rise in price. During periods of prosperity, when income rises generally faster than prices, inferior goods are separated from Giffen goods. During periods of recession, when income falls generally while prices remain the same or continue to rise, inferior goods and Giffen goods tend to merge. A Giffen good must be an inferior good, but most inferior goods are not Giffen goods.

Credit drives the economy, not debt. Debt is the mirror reflection of credit. Even the most accurate mirror does violence to the symmetry of its reflection. Why does a mirror turn an image right to left and not upside down as the lens of a camera does? The scientific answer is that a mirror image transforms front to back rather than left to right as commonly assumed. Yet we often accept this aberrant mirror distortion as uncolored truth and we unthinkingly consider the flawed reflection in the mirror as a perfect representation.

Similarly, we reflexively accept as exact fidelity the encrypted labels assigned to our thoughts by the distorting mirror of language. Such habitual faulty acceptance is consequential because it is through language that ideas are transmitted and around language that culture develops.

In the language of economics, credit and debt are related but not the same. In fact, credit and debt operate in reverse relations. Credit requires a positive net worth and debt does not. One can have good credit and no debt. Too much debt lowers credit rating. When one understands credit, one understands the main force behind the modern economy, which is driven by credit and stalled by debt. Behaviorally, debt distorts marginal utility calculations and rearranges disposable income. Thus debt turns more commodities into Giffen goods and creates what US Federal Reserve Board chairman Alan Greenspan calls "irrational exuberance", the economic man gone mad.

Human behavior is complex beyond the measurement of price. Price alone is not sufficient to influence market behavior. Karl Marx dealt with the concept of fetish as a factor in demand as expressed in price.

Education is a classic dilemma. Economics literature has never dealt satisfactorily with education, being unable to decide whether it is consumption or investment or both. It has done similarly with health care and environmental preservation. If these endeavors are consumption, the law of scarcity dictates that society cannot afford too much of them. If they are investment, then supply-side theory would conclude the more the better. If they are both consumption and investment, there should be a limitless upward spiraling supply/demand symbiosis. One could not possibly have an over-educated society or over-healthy population or an over-clean environment, if being more educated, more healthy and more clean is deemed economically productive and thus financially profitable.

It is obvious that debt changes human behavior. A little debt reinforces responsibility. The US social system of private property is built on the notion that homeowners with a life-long mortgage are better citizens than renters. People tend to take better care of their homes and plant roots in their communities if they "own" their homes, even though 90 percent of the purchase value is in debt that is not expected to be paid off until three decades later.

On the other hand, it is clear that excessive debt encourages irresponsibility. The borrower may develop an irresistible incentive to walk away from his debt if he perceives the debt to be beyond his ability to repay, or the cost of the debt to exceed its benefits. Even a central bank, which is the domestic lender of last resort, is wary of the problem of moral hazard, that commercial banks within its system would lend irresponsibly if they knew that their lending errors would be bailed out by the central bank.

The US bankruptcy regime is designed to give trapped debtors a fresh start from distressed debt to reestablish credit. Unlike European precedents, one cannot be jailed in the United States for failing to pay one's debt, unless criminal fraud is involved. In fact, there is a legal concept of lender liability, based on which a distressed debtor can sue the lender for damages for lending money irresponsibly that led the debtor into financial trouble.

Lender liability is embodied in common and statutory law covering a broad spectrum of claims surrounding predatory lending. It is a key concept in environmental-cleanup litigation. If a lender knowingly lends to a borrower who is obviously unable to make reasonable beneficial gain from the use of the funds, or causes the borrower to assume responsibilities that are obviously beyond the borrower's capacity, the lender not only risks losing the loan without recourse but is also liable for the financial damage to the borrower caused by such loans. For example, if a bank lends to a trust client who is a minor, or someone who had no business experience, to start a risky business that resulted in the loss not only of the loan but of the client trust account, the bank may well be required by the court to make whole the client.

In the United States, although predatory lending is not defined by federal law, and various states define abusive lending differently, it usually involves practices that strip equity away from a homeowner, or equity from a company, or condemn the debtor into perpetual indenture. Predatory or abusive lending practices can include making a loan to a borrower without regard to the borrower's ability to repay, repeatedly refinancing a loan within a short period of time and charging high points and fees with each refinance, charging excessive rates and fees to a borrower who qualifies for lower rates and/or fees offered by the lender, or imposing new unjustifiably harsh terms for rolling over existing debt. Predation breaks the links between an economy's aggregate resource endowment and aggregate consumption and between the interpersonal distribution of endowments and the interpersonal distribution of consumption.

The choice by some to be predators decreases aggregate consumption, both because the predators' resources are wasted and because producers sacrifice production by allocating resources to guarding against predators. Much of welfare economics is based on the concept of Pareto Optimum, which asserts that resources are optimally distributed when an individual cannot move into a better position without putting someone else into a worse position. In an unjust global society, the Pareto Optimum will perpetuate injustice.

Now, there is a close parallel in most Third World debts and International Monetary Fund (IMF) rescue packages to the above predation examples where sophisticated international bankers knowingly lend to dubious schemes in developing economies merely to get their fees and high interest, knowing that "countries don't go bankrupt", as Walter Wriston of Citibank famously proclaimed. The argument for Third World debt forgiveness contains large measures of lender liability and predatory lending. Debt securitization allows these bankers to pass the risk to the credit markets, socializing the potential damage after skimming off the privatized profits.

Credit is reserved financial resources ready for deployment. Debt basically is unearned money secured with a promise to repay the principal sum plus interest with optimistically anticipated earned money in the future, assuming, for example, that the borrower will not become unemployed through no fault of his own or a business will not be adversely affect by unanticipated shifts in business paradigm, or an economy will not be destroyed by global financial contagion.

Paying down debt with new debt is a Ponzi scheme - the likelihood of its exposure is inversely proportional to its scale of operation. More and more critics are calling the Enron debacle a Ponzi scheme, in that the company filed for bankruptcy even though, for almost a decade up to a few weeks before its bankruptcy filing, many in high places were hailing Enron as the new innovative business model.

Neoliberal economist Paul Krugman publicly hailed Enron as a shining example of free-market entrepreneurship in what he called "a love letter to free markets". He served on its prestigious advisory board for a annual fee of US$50,000. Neoconservative Weekly Standard editor Bill Kristol received $100,000 from the same Enron advisory board, while contributing editor Irwin Stelzer praised Enron for "leading the fight for competition".

On November 13, 2001, two weeks before Enron filed bankruptcy on December 2, the Baker Institute honored Greenspan with its Enron Prize, which the official press release said "gives recognition to outstanding individuals for their contributions to public service. The prize is made possible by a generous gift from the Enron Corp ... one of the world's leading electricity, natural-gas and communications companies. Among the previous recipients of the Enron Prize are Colin Powell, current US secretary of state; Mikhail Gorbachev, former president of the Soviet Union; Nelson Mandela, the first black president of South Africa; and Georgian President Eduard Shevardnadze."

Enron officials have since acknowledged that the company has purposely overstated its profits by billions of dollars since 1997 and has disguised billions in debt as revenue through structured finance via offshore special-purpose vehicles. Top Enron executives cashed out more than $1 billion in company stocks when they were near their peak price of more than $80. In addition, nearly 600 employees deemed critical to Enron's operations received more than $100 million in bonuses in November 2001 while the company was on the brink of bankruptcy. Some commitment to public service.

On the corporate level, debt inevitably alters management behavior. Leverage increases profit margin on successful business plans. As Henry Kravis, king of the leveraged buyout, famously said: "Debt can be an asset. Debt tightens a company." To less creative minds, debt is still a liability, not an asset. But debt also exaggerates losses when business plans fail. In the US financial system, bankruptcy is a legal if not painless way to refute debt. The comfort to lenders is that equity investors are wiped out first before the lenders' various collateralized positions are endangered.

Banks used to be the sole intermediaries of debt. For this reason, a central bank was formed to supervise and provide liquidity to the banking system. Thus a central bank came into existence in the United States in 1913 on the assumption that the existence of a healthy banking system is in the national interest. And to protect the national interest, the central bank, which in the US version is a government institution privately owned by the banks in the Federal Reserve system, is allowed to act as lender of last resort to the nation's commercial banks with public money, or more accurately, through government authority to create fiat money.

Thus regulation on banks is a fair quid pro quo, a social contract. Bank deregulation without corresponding raising of the threshold for central-bank bailout is a direct breach of this social contract. If for the good of the nation banks cannot be allowed to fail, they should also not be allowed to deregulate.

More ominous, the US credit system has broken through the banking system - the bulk of debt now is intermediated through the unregulated credit markets by debt securitization. Securitization acts as more than just providing a vehicle for investment in debt instruments. It restructures simple debt into complex, hybrid instruments sliced infinite ways until the original debt is beyond recognition.

Debt securitization is guerrilla warfare against a sound credit system. Debt proceeds can be disguised as current income, distorting the financial performance of the debtor. In these brave new credit markets, the government is generally only an interested bystander, so far quite unwilling to regulate even over-the-counter (OTC) derivative trading by banks, which are suppose to be regulated, with an "if I don't smoke, someone else will" mentality.

OTC derivatives are traded off exchanges, directly between counterparties, and as such are not subject to disclosure rules. Adding estimated data from the Bank for International Settlements for OTC derivatives to published figures for exchange-traded derivatives, the total notional principal balance of the reported derivatives market in June 2001 was $119 trillion, about four times the gross domestic product (GDP) of the Organization of Economic Cooperation and Development (OECD) countries and twice the value of global trade. The amount unreported remains unknown.

This shows that derivatives performed more than a hedge function, as apologists claim. Derivative trading has become a profit center for banks and non-bank financial institutions. True, the notional principal amount is never at risk, because no principal payments are exchanged. The interest payments that are linked to that notional principal amount are at risk. A loss on a derivative contract becomes possible when (a) interest rates or commodity prices move in a direction that makes the contract more or less valuable, and (b) the counterparty on the other side of the contract defaults. Derivatives credit exposure is the present value of the cost of restoring the economic value of a contract should a counterparty default.

All kinds of street rumors are flying at this very moment that one of the world's biggest banks is exposed to derivative trades that would cause serious counterparty credit problems if the market capitalization of this bank should fall below a triggering level, or the price of commodities or interest rates should move against its derivative positions. Because there is no way to dispel or confirm such rumors, and the bank involved remains tight-lipped about its true financial conditions, the uncertainties weigh down on the economy.

There is ample evidence that the level of interest rates does not always control the aggregate level of debt in an economy, popular expectations notwithstanding. When interest rates are high, they often merely reflect the systemic credit-unworthiness of borrowers as a group or the high risk assumed by lenders collectively. High interest rates in fact create more incentive for both lenders and borrowers to take higher risk to shoot for the higher returns needed to meet higher interest cost. High interest rates also direct money to more desperate borrowers. As William Zeckendorf, the bankrupt real-estate tycoon, once said: "I'd rather be alive at 30 percent interest than be dead at 3 percent."

However, interest rates do affect the distribution of credit in the economy. When rationed by interest rates, debt actually puts money to work for those who need it most desperately, and not necessarily the highest and best use in the economy, or where it is socially needed most. Debts at high interest rates can only be justified by high risk, which tends to destabilize the economy. Debt securitization actually lowers systemic credit quality by socializing risk across the whole system rather than concentrating it on singular, isolatable defaults.

The US Federal Reserve's fixation on interest-rate policy as the sole tool of regulating monetary policy is increasingly taking on the look of shadow boxing, with declining effect on the economy. As chairman Greenspan is fond of saying: "Bad loans are made in good times." As interest rates are artificially raised by Fed action to tighten money supply, distressed borrowers with bad loans made in good times will need to borrow more, thus enlarging the credit pool, defeating the Fed's purpose of a tight monetary policy. As interest rates are artificially lowered by Fed action to stimulate a slowing economy, banks raise their credit threshold to compensate for the narrowing of rate spread, thus reducing the number of qualified borrowers and shrinking aggregate loan volume. This is known as the Fed pushing on a credit string.

Credit rationed by interest rates also discourages economic democracy, since the poor generally find it much harder to obtain or afford credit. The poor also do not have the sophistication to participate in structured finance. There is much truth is the saying that it is not how much you own, it is how much you owe that measures how rich or financially powerful you are.

Debt also encourages carelessness with money, since lending implies faith in the borrower's ability to repay in the future. People tend to be more careful with money they earned in the past in the form of savings because they remember how hard they had to work for it. In contrast, debt is based on future earnings, which is deemed easier money by the existence of debt itself. High interest rates also encourage high risks to justify the high cost of money.

The problem with debt is that it needs to be serviced regularly (except zero coupons, which are discounted from the principal sum at the outset and cost more and are monitored with bond covenants and triggers to activate automatic foreclosure). Unlike a credit-driven economy, a debt-propelled economy will inevitably reach a point where its ability to service the growing debt is exceeded, unless inflation stays ahead of interest charges, in which case the banking system will fail. Thus runaway systemic debt frequently leads to hyperinflation.

Bankruptcy only relieves the debtor, not the economy. If, as economist Hyman Minsky claimed, money is created whenever credit is extended, then the erasure of debt destroys money and shrinks the economy.

There is a circular link among deregulation, debt, overcapacity and bankruptcy. Deregulation has created a havoc of bankruptcy in the airline, health-care, communication, energy and finance sectors. Deregulation permits predatory pricing in the name of competition, which often leads to monopolistic consolidation within industries. The surviving giants then take on massive debt to acquire vanquished competitors and to expand capacity in anticipation of increased demand and soon reach a point where increased sales do not increase net revenue to offset low margin. Once a company is trapped in the whirlpool of debt, a downward spiral of low prices and shrinking revenue will push the cost of debt beyond sustainability, leading to bankruptcy. This is known as the bursting of the debt bubble.

In March 1980, the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was enacted in the United States. It was a deregulation initiative by the administration of president Jimmy Carter aimed at eliminating many of the distinctions among different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts. Authority for federal savings and loan associations to make risky ADC (acquisition, development, construction) loans was expanded, which ended up with the savings and loan (S&L) crisis five years later. Deregulation of airlines also began under Carter, leading to recurring waves of bankruptcy.

Conventional wisdom suggests that a good credit rating is necessary to borrow. But the financial world works differently in reality. A good credit rating is first necessary to issue credit. Without the ability of some entity to issue credit, no one can borrow. And since no modern financial institution lends its own money, lenders must first secure funds wholesale to lend to retail borrowers. For that, a lender must maintain a good credit rating.

Banks are protected from this requirement by their discount window at the central bank, which is backed by the full faith and credit of the nation, and by Federal Deposit Insurance Corp (FDIC) insurance. Still, central banks and the Bank of International Settlement (BIS) set capital and reserve requirements for commercial banks to assure risk prudence.

GE, the world's largest non-bank financial conglomerate that incidentally also manufactures, issues credit at the retail level through vendor financing, to capture sales for GE products. It gets its funds wholesale from the commercial paper market, which GE dominates because it has a good credit rating. When GE credit rating was downgraded recently, it faced being frozen out of the commercial paper market, and had to revert back to costly bank credit lines that adversely affected its interest rate spread and profitability.

When a government issues currency and circulates money through the banking system, it is in essence issuing credit to the economy that it is entitled to receive back in taxes. Government then spends the tax money on goods and services that the public provides. The surplus money that is not returned by taxes is government credit floating around the economy to keep it operating financially.

It is important to understand that money issued by the government, unlike private money, is not IOUs from the issuer. Money, when issued by government as a legal tender, is a credit from the government good for the payment of taxes, and for settling "all debts, public and private", as printed plainly on all Federal Reserve notes. A US dollar is a Federal Reserve note that entitles its holder to exchange it at any of the six Federal Reserve Banks for another Federal Reserve note of the same face value, no more and no less, at least since 1971 when the late president Richard Nixon took the dollar off the gold standard.

Even before 1971, while an ounce of gold was officially pegged at $35 by president Franklin Roosevelt on January 31, 1931, a domestic holder of a dollar note could only exchange it at a Federal Reserve Bank for another dollar note, since US citizens were forbidden by law to own gold. Only foreigners could demand gold for dollar up to 1971.

A government bond, which on the surface looks like a government debt, is merely a call on government credit previously issued, withdrawing dollars from the money supply by providing a government bond. Government bonds are the living proof that money is not an IOU from the government, otherwise when government sells or redeems bonds, it is perpetrating a Ponzi scheme of paying off old debt with new debt, rather than exchanging debt instruments (bonds) with credit instruments (dollars).

Sovereign debt is fundamentally different from corporate debt. A corporate bond entitles its holder to claim its face value in dollar notes that the bond-issuing corporation cannot create by itself. It must earn dollars with the bond proceeds to pay interest on the bonds. At the time of redemption, if the corporation already spent the bond proceeds, it must then earn back or sell assets or borrow the dollars from somewhere to redeem the bond.

In contrast, a government bond entitles its holder to claim from a Federal Reserve Bank its face value in dollars that the government can print at will, even if it already spent the bond proceeds. The interest on the bond is also paid with dollars of which the government has an unlimited supply. Part of the dollars that the government spends will come back from the public in the form of taxes. The rest will stay in the economy to finance its operations.

So if the government runs a surplus, meaning it takes in more tax money than it spends, it drains money from the economy, forcing the economy to contract. A budget deficit is in essence an injection of more government credit into the economy.

Private citizens can own assets, but whenever such assets are monetized with dollars, one trades those assets for credit from the US government that other market participants in the economy will accept because, aside from its status of legal tender as defined by law, it is good for negotiating tax liabilities.

Technically, a government never borrows. It issues tax credit in the form of money. So when former president Ronald Reagan said the government does not make any money, only the private sector does, he was merely mouthing conventional wisdom, with no clear understanding of the true nature of money and credit. In fact, money is all that government makes. Thus any government that takes on foreign-currency debt or allows its economy to do so is taking unnecessary risk.

The main function of sovereign debt is not to make up for any shortfalls in government funds. Such shortfalls cannot exist by definition. Rather, sovereign debt instruments act as fundamental collateral for the nation's credit market. The Fed Open Market Desk buys and sells government securities to maintain the Fed funds target rate set by the Federal Reserve Board. The repo (repurchase agreement) market, which provides overnight and short-term funds for banks, operates with government securities as collateral.

Thus IMF conditionalities of reducing sovereign debt by imposing budget surpluses and price deflation as a cure for a distressed credit market of excessive foreign debt is merely adding gasoline to fire.

As a sovereign bond is redeemed with cash, it is in essence replacing a call instrument on government credit with government credit. When government securities are withdrawn and cash floods the economy, the debt market shrinks because the amount of collateral shrinks and the amount of cash increases, reducing the need for credit, and the economy contracts with cash inflation, unless the cash is immediately recirculated as private debt or investment.

The reason that the market monitors the Fed funds rate as an indication of Fed policy is that the Fed funds rate closely tracks another rate, the repo rate, that the Fed Open Market Desk actively influences during most market days. Every business-day morning at 11:45 Eastern Standard Time, the Fed announces what it intends to do (buying or selling government securities with an agreement to reverse the transaction later) in the repo market to keep the repo rate close to the Fed funds target rate set by the Fed. Changes in the repo rate are normally quickly followed by changes in the Fed funds rate. Thus, indirectly, the Fed appears to influence the federal funds rate through its impact upon the repo rate.

Non-monetarists subscribe to the view that Fed easing means the Fed lowers interest rates. But they are not specific about how these rates are lowered are how the Fed should go about doing this. There are often periods (such as 1990-91) when interest rates dropped but money growth also fell. Non-monetarists (and market participants) view periods like this as Fed easing episodes, while monetarists argue that these are (implicitly) periods of Fed tightening. Thus it is clear that interest rates by themselves do not always determine the money supply.

Since all private debts in a money economy are anchored by government credit, through what economists called high-power money (money created by the Fed through the increase of the total reserves in the banking system, so called because it would be multiplied manifold through the money-creation power of commercial bank loans), credit in an economic democracy should not be rationed by interest rates to the highest bidder, but by national purposes or social needs.

Credit in fact is a financial public utility, much like air and water, and it should be equally accessible to all, not just the rich. Government loan guarantees for students and house mortgages for low- and moderate-income groups and loans to small business are based on this principle.

For example, the US National Housing Act was enacted on June 27, 1934, as one of several economic-recovery measures of the New Deal. It provided for the establishment of a Federal Housing Administration (FHA). Title II of the Act provided for the insurance of home mortgage loans made by private lenders, taking the risk in lending to low income borrowers off the private lenders. Title III of the Act provided for the chartering of national mortgage associations by the administrator. These associations were to be independent corporations regulated by the administrator, and their chief purpose was to buy and sell the mortgages to be insured by the FHA under Title II.

Only one association was ever formed under this authority on February 10, 1938, as a subsidiary of the Reconstruction Finance Corp, a government corporation. Its name was National Mortgage Association of Washington, and this was changed that same year to Federal National Mortgage Association (Fannie Mae). By amendments made in 1948, Title III became a statutory charter for Fannie Mae.

Before the Great Depression, affording a home was difficult for most people in the United States. At that time, a prospective homeowner had to make a down payment of 40 percent and pay the mortgage off in three to five years. Until the last payment, borrowers paid only interest on the loan. The entire principal was paid in one lump sum as the final "balloon" payment.

During the 1920s boom time in real estate, a rudimentary secondary mortgage market was established. The stock-market crash of 1929 ended the real-estate boom and forced many private guarantee companies into insolvency as home prices collapsed. As economic conditions worsened, more and more people defaulted on mortgages because they couldn't come up with the money for the final balloon payment or to roll over their mortgage because of low market value of their homes.

To help lift the country out of the Depression, Congress created the FHA through the National Housing Act of 1934. The FHA's insurance program protected mortgage lenders from the risk of default on long-term, fixed-rate mortgages. Because this type of mortgage was unpopular with private lenders and investors, Congress in 1938 created Fannie Mae to refinance FHA-insured mortgages.

As soldiers came home from World War II, Congress passed the Serviceman's Readjustment Act of 1944, which gave the Department of Veterans Affairs (VA) authority to guarantee veterans' loans with no down payment or insurance premium requirements. Many financial institutions considered this arrangement a more attractive investment than war bonds.

By revision of Title III in 1954, Fannie Mae was converted into a mixed-ownership corporation, its preferred stock to be held by the government and its common stock to be privately held. It was at this time that Section 312 was first enacted, giving Title III the short title of Federal National Mortgage Association Charter Act.

By amendments made in 1968, the Federal National Mortgage Association was partitioned into two separate entities, one to be known as the Government National Mortgage Association (Ginnie Mae), the other to retain the name Federal National Mortgage Association (Fannie Mae). Ginnie Mae remained in the government, and Fannie Mae became privately owned by retiring the government-held stock. Ginnie Mae has operated as a wholly owned government association since the 1968 amendments. Fannie Mae, as a private company operating with private capital on a self-sustaining basis, expanded to buy mortgages beyond traditional government loan limits, reaching out to a broader income cross-section.

By the early '70s, inflation and interest rates rose drastically. Many investors drifted away from mortgages. Ginnie Mae eased economic tension by issuing its first mortgage-backed security (MBS) guarantee in 1970. Investors found these guaranteed MBSs highly attractive. Also in 1970, under the Emergency Home Finance Act, Congress chartered the Federal Home Loan Mortgage Corp (Freddie Mac) to buy conventional mortgages from federally insured financial institutions. The legislation also authorized Fannie Mae to purchase conventional mortgages. Freddie Mac introduced its own MBS program in 1971.

In the early 1980s, the US economy spiraled into deep recession. Interest rates and housing prices were high, while income growth was stagnant. The US economy faced a dual problem of income deficiency and money devaluation. In this poor housing environment, Ginnie Mae, Fannie Mae and Freddie Mac all created programs to handle adjustable-rate mortgages. The Ginnie Mae guaranty is backed by the full faith and credit of the United States. Today, Ginnie Mae guaranteed securities are one of the most widely held and traded MBSs in the world. Ginnie Mae has guaranteed more than $1.7 trillion in MBSs. Historically, 95 percent of all FHA and VA mortgages have been securitized through Ginnie Mae. Ginnie Mae is a guarantor, a surety. Ginnie Mae does not issue, sell, or buy MBSs, or purchase mortgage loans.

Fannie Mae operates under a congressional charter that directs it to channel its efforts into increasing the availability and affordability of home ownership for low-, moderate- and middle-income Americans. Yet Fannie Mae receives no government funding or backing, and it is one of the nation's largest taxpayers as well as one of the most consistently profitable corporations in America. The company has evolved to become a shareholder-owned, privately managed corporation supporting the secondary market for conventional loans. It continues to operate under a congressional charter with oversight from the US Department of Housing and Urban Development and the US Treasury.

Fannie Mae has two primary lines of business: Portfolio Investment, in which the company buys mortgages and MBSs as investments, and funds those purchases with debt, and Credit Guaranty, which involves guaranteeing the credit performance of single-family and multi-family loans for a fee.

Its Portfolio Investment business includes mortgage loans purchased throughout the US from approved mortgage lending institutions. It also purchases MBSs, structured mortgage products and other assets in the open market. The corporation derives income from the difference between the yield on these investments and the costs to fund these investments, usually from issuing debt in the domestic and international markets. Fannie Mae has $3.46 trillion in MBSs outstanding today.

The corporation accomplishes its mission to provide products and services that increase the availability and the affordability of housing for low-, moderate- and middle-income Americans by operating in the secondary rather than the primary mortgage market. Fannie Mae purchases mortgage loans from mortgage lenders such as mortgage companies, savings institutions, credit unions and commercial banks, thereby replenishing those institutions' supply of mortgage funds. Fannie Mae either packages these loans into MBSs, which it guarantees for full and timely payment of principal and interest, or purchases these loans for cash and retains the mortgages in its portfolio.

Fannie Mae is one of the world's largest issuers of debt securities, the leader in the $5 trillion US home-mortgage market. Fannie Mae's debt obligations are treated as US agency securities in the marketplace, which is just below US Treasuries and above AAA corporate debt. This agency status is due in part to the creation and existence of the corporation pursuant to a federal law, the public mission that it serves, and the corporation's continuing ties to the US government. It benefits from the appearance, though not the essence, of being backed by government credit.

Fannie Mae debt obligations receive favorable treatment from a regulatory perspective. Fannie Mae securities are "exempted securities" under the laws administered by the US Securities and Exchange Commission to the same extent as US government obligations. Also, Fannie Mae debt qualifies for more liberal treatment than corporate debt under US federal statutes and regulations and, to a limited extent, foreign overseas statutes and regulations.

Some of these statutes and regulations make it possible for deposit-taking institutions to invest in Fannie Mae debt more liberally than in corporate debt and mortgage-backed and asset-backed securities. Others enable certain institutions to invest in Fannie Mae debt on par with obligations of the United States and in unlimited amounts. Fannie Mae uses a variety of funding vehicles to provide investors with debt securities that meet their investment, trading, hedging, and financing needs. Fannie Mae is able to issue different debt structures at various points on the yield curve because of its large and consistent funding needs. As the Treasury retires 30-year bonds, agencies have stepped in to fill the void.

The privatization of Fannie Mae and Freddie Mac was an ideological move. It was financially unnecessary and government credit could have funded the entire low-, moderate- and middle-income housing-mortgage needs with no profit siphoned off to private investors. These agency debt instruments played a crucial role in developing and sustaining the credit markets in the US.

In fact, the funding risk of both agencies was questioned by the Wall Street Journal last February 20 in an editorial about Fannie Mae's and Freddie Mac's safety, soundness and financial management, characterizing both agencies as risky, fast-growing companies that "look like poorly run hedge funds", "unduly exposed to credit risk with large derivative positions", and that they "use all manner of derivatives" and "are exposed to unquantified counterparty risk on these positions". Such concerns would have been avoided if both agencies had been funded with government credit, and the cost of housing to low-, moderate- and middle-income Americans would have been lower.

A government credit economy is different from a private debt economy in its sustainability. The Japanese economy stagnated for more than a decade primarily because it shifted from a government credit economy to a private debt economy in the name of financial liberalization and market fundamentalism. The Japanese version of London's Big Bang started the Japanese private debt bubble that subsequently infected all Asian economies.

The Big Bang in London refers to deregulation on October 27, 1986, of London-based securities markets, an event comparable to May Day in the US, marking a major step toward a single global financial market. May Day refers to May 1, 1975, when fixed minimum brokerage commissions ended in the US, ushering in the era of discount brokerage firms and the beginning of diversification by the brokerage industry into a wide range of financial services using computerization and advanced communication systems. This started the offering of new genres of financial products and the emergence of structured finance that made possible a new private-debt economy that turned quickly into a global debt bubble. As the US reaped the fleeting benefits of dollar hegemony, a budget surplus accompanied with sovereign debt reduction merely pushed more debt on to the private sector to feed the debt bubble.

The most fundamental aspect of a private-debt economy is that it cannot sustain a slowdown, even a soft landing. If Greenspan had been better versed in debt economics, he would have understood that a debt bubble, unlike the conventional business cycle, cannot survive the slightest deflation. Inflation is the oxygen for a debt bubble.

Greenspan's attempt to engineer a soft landing by raising interest rates to fight pending inflation pre-emptively only accelerated the debt bubble's burst. His only option was to prevent the debt bubble from forming by tightening credit quality years ago, but he chose to rely on the market to exercise its discipline. He rejected the suggestion of such Wall Street gurus as Henry Kaufman to raise margin requirements. Instead of discipline, the market gave him an insatiable appetite for addictive debt, which he had previously called "irrational exuberance".

Once the bubble was on its way, Greenspan was on top of a debt tiger that he could not get off without being devoured by the beast. It was not the New Economy, it was not the unprecedented productivity that gave the US its decade-long boom. It was debt. Without debt, there would have been no New Economy, no dotcom industry, no telecom explosion, no structured finance, no budget surplus and no current account deficit or its flip side, capital account surplus.

The 1990s was the debt decade. Much of the technology was invented prior to the beginning of the decade of finance capitalism and became widely applied through debt in the form of vendor finance. The communication revolution was built on debt that had been accumulated in the last decade. The greatest invention of the 1990s was more and more sophisticated debt instruments.

Greenspan warned in December 1996 about "irrational exuberance" when the Dow Jones Industrial Average (DJIA) was at 7,000, that inflation down the road was inevitable unless the Fed started to raise Fed funds rate pre-emptively. Yet as rates rose, the DJIA rose to 12,000 by 2000, because inflation as measured by the government failed take into account the wealth effect.

The reason for this was twofold. Inflation was kept low by imports and inflation was measured mostly by rising wages but not by rising asset value. Stock prices doubled and real-estate prices tripled, but the economy officially did not register inflation because of low wages and cheap imports. As stock prices rose, the price to earnings ratio skyrocketed. As the economy inched toward technical full employment with 4 percent unemployed, Greenspan reflexively raised the interest rate to cut off anticipated wage-pushed inflation. The high interest rate adversely affected the earnings of debt-ridden companies. To boost earnings, companies cut employees, which started the downward spiral.

Since July 1997, the risks of protracted global asset deflation caused by the aftermath of excessive private debt have become reality, first in the emerging markets and now in the United States. Neither the IMF nor the Group of Seven (G-7) have been able to deal effectively with the twin problems of the artificially strong but debt-driven dollar and the spreading manipulated devaluation of other national currencies around the globe.

For the affected nations, the combination of mountains of foreign-currency debt and massive short-term capital flight through stock-market collapses, exacerbated by IMF conditionalities of high interest rates, austerity measures that insisted on reduced government deficits and sharp currency devaluations coupled with asset deflation, have led to tragic destruction of hard-earned wealth and a severe drop of living standards.

Certainly market forces in a runaway-debt economy have not created Adam Smith's "universal opulence which extends itself to the lowest ranks of the people". The only trickling down has been poverty and misery. In a world of 6 billion people, only about 1,000 currency traders and a small circle of rich investors in their hedge funds seem to enrich themselves further through the unbridled manipulation of the free financial market. Even in advanced economies, workers are misled to accept low wages as a trade-off for stock options that become worthless when the debt bubble bursts.

Corporations seduce share owners with fantasy capital gains based on debt to replace regular dividend payouts. When market capitalization of major corporations inflated by debt can fall by 90 percent within a matter of months while top executives can cash out at peak prices and resign with severance packages worth tens of millions of dollars, there is no other way to describe the situation than reversed Robin Hood: robbing the poor to help the dishonest rich.

This view is now shared by increasing numbers across ideological spectrums. Economist John Kenneth Galbraith's famous description of trickling down prosperity was if you feed the horse enough oats, the sparrows will some day benefit from its droppings. In finance capitalism, the poor sparrows are crushed by the wheels of the carriage of debt that the horse pulls.

If debt is dilapidating, foreign-currency debt, mostly dollar debt, is deadly. Thus those governments that had been misled by neoliberals to borrow massive amounts of foreign currency unnecessarily and subsequently dutifully implemented IMF prescriptions, such as Brazil, Argentina, Turkey, South Korea and Indonesia, saw their economies destroyed to the point where recovery may now take decades, if ever, and only if the poisonous IMF medicine is quickly rejected.

The IMF has now admitted that it made a "slight mistake" in dealing with the Asian financial crisis of 1997. It might have been slight for the IMF, but the cost to the economies of Asia was horrendous. Trillions of dollars of hard-earned assets and economic capacities have been destroyed, lost forever. In fact, lives have been lost, children malnourished, families ruined, governments fallen and ethnic animosities intensified. The cooperative partnership among neighboring countries has been undermined and regions destabilized. This is the direct result of predatory lending followed by predatory IMF rescues. The operations were technically successful but the patients died.

Since World War II, the term "capitalism" has been gradually displaced by the more benign label of the free market. Capitalism ceased to be mentioned in most economic literature. In the process, economists also squeezed out of official dialogues the word "capitalism", the once-traditional name for the market system, with its subjective connotation of class struggle between owners, through their professional managers, and workers, through their trade and industrial unions, and with its legitimization of the privileges that go with various levels of wealth.

The word "capitalism" no longer appears in textbooks for Economics 101. A Harvard economist, N Gregory Mankiw, author of a popular new textbook, Principles of Economics, told the New York Times: "We make a distinction now between positive or descriptive statements that are scientifically verifiable and normative statements that reflect values and judgments." A whole new generation of economists have grown up thinking of "capitalism" only as a historical term like "slavery", unreal in the modern world of market fundamentalism.

Capital, when monetized in dollars, is in essence credit from government. Capitalism in a money economy is a system of government credits. Thus a case can be made that in a capitalistic democracy, access to capital and credit should be available equally to all in accordance with national purpose and social needs. The anti-statist posture of neoliberalism is not only logically flawed, but its glorification of a private-debt economy will inevitably lead to self-destruction.

Henry C K Liu is chairman of the New York-based Liu Investment Group

http://www.atimes.com/atimes/Global_Economy/DI14Dj01.html

Meinungen aus Asien sind für den $ wesentlich wichtiger als aus Euroland. :rolleyes:

syr :sss

syracus

10.04.2003, 11:08

Inflation :ek? Yes..........

Time to Start Thinking About Inflation

By Howard Simons
04/08/2003 02:15 PM EDT

This might seem like an odd time to think about inflation. Gold prices have retreated from their prewar highs, with the cash bullion price threatening a breach of support at $319 per ounce. Crude oil prices have pulled back from their flirtation with $40 a barrel, the dollar has stabilized near 1.07 per euro, and bond yields are still scraping 40-year lows.

The economy is -- charitably -- sputtering, almost no industry is encountering production bottlenecks, and the growth of the monetary base is well within historical norms. Why worry?

As a wise man once said, "When there is not a cloud in the sky, be careful where you step."

On a more practical level, the 21-year bull market in bonds, which supported an 18-year bull market in stocks, will come to an end someday. When it does, look out.

The last bear market in bonds lasted for three decades. It didn't break until inflation was broken by the Reagan/Volcker combination of fiscal stimulus and monetary contraction, a policy mix advocated by Nobel laureate Robert Mundell.

They Shoot Bulls, Don't They?

http://images.thestreet.com/options/futuresshocktsc/11751.gif
Source: Bloomberg

Measuring Stick

A long-ago chemistry professor of mine posed a question: What is temperature? After about 20 minutes, he established to everyone's satisfaction that this common metric (cool word; we should use it to value industries we don't understand someday) that everyone understood intuitively was nearly impossible to define.

Inflation is similar.

The common indices, such as the PPI or the consumer price index, are bandied about by the eternally sophomoric, and their monthly announcement usually prompts an interesting parody of some Three Stooges slapstick in the bond futures pit, but they're poor measures of the underlying process. Neither recognizes the effects of technological improvement, price elasticity of demand, the dynamics of substitution or the impact of nonprice discounting. Technically, they're Laspeyres indices that measure the change in price of a fixed basket of goods and services.

The quarterly GDP deflator, which is announced too late and infrequently for Wall Street's if-I-don't-trade-something-soon-I'm-going-to-bust crowd, is a Paasche index, which measures the change in price, not of the original basket of goods and services, but of the final basket of goods and services. (As an aside, the Laspeyres index was developed way back in 1864, while the Paasche index is from 1874.)

Looking Ahead

But markets are supposed to look ahead at what is going to be, not behind at what was. The Economic Cycle Research Institute (ECRI) has developed a forward inflation gauge (FIG) that uses the Journal of Commerce materials price index; growth in real estate loans; the insured unemployment rate, treated on an inverse basis; the yield spread between the 10-year note and the six-month bill, also treated on an inverse basis; the growth rate in civilian employment; the growth rate in federal and nonfederal debt; the growth rate in nonfuel import prices; and the percentage of purchasing managers reporting slower deliveries.

If we're to believe that inflation is always and everywhere a monetary phenomenon (hint: it is), then the Federal Reserve's aggressive rate cutting of the past two years should give us pause. The steepness of the yield curve, here measured by the ratio of the forward rate between one and 10 years, the rate at which you can borrow for nine years starting one year from now, to the 10-year rate itself, has led the rise in the FIG by about two years.

Yield Curve & Future Inflation Gauge

http://images.thestreet.com/options/futuresshocktsc/11750.gif
Source: Bloomberg

The FIG itself is higher than levels reached during the Fed's 1994-1995 rate increase campaign and is almost as high as it was after the Fed's 1999-2000 series of rate increases.

That we haven't yet seen an increase in inflation can be ascribed to a slowdown in commercial credit extensions.

While bank loans aren't as important as they once were to corporations -- many prime borrowers go directly to the commercial paper market -- they still reflect trends in the overall credit picture.

If we take commercial and industrial loans as a percentage of GDP, we find that this number is the lowest since the Eisenhower administration. Bank loans are a lagging indicator. They rise only after the economy recovers and slack capacity disappears, and they remain high once a recession starts to finance inventories.

Whatever Happened to Lending?

http://images.thestreet.com/options/futuresshocktsc/11752.gif
Source: Bloomberg

Once the economy turns higher (and it will someday), bank lending will recover and with it the rate of money supply growth. If the money supply grows faster than GDP, we have inflation.

Lack of Speed Kills

We know that inflation raises interest rates and kills bonds. Is there any sort of benefit to stocks? Only if an upturn in inflation is accompanied by an upturn in velocity, a process that requires continued strong growth in productivity. Monetary velocity, the ratio of GDP to M2, is a barometer for the overall level of risk acceptance in the economy. Lately it has been falling off a cliff as investors have been fleeing risk and moving toward the perceived safety of cash and bonds.

Unsafe at Lower Speed

http://images.thestreet.com/options/futuresshocktsc/11749.gif
Source: Bloomberg

Velocity has tended to lead equity prices by just 11 quarters. As risk acceptance increases, new ventures are formed, profits are generated and investors react. This process takes time. The continued plunge in velocity suggests we are a long way away from the beginning of this virtuous cycle

Howard L. Simons is a special academic adviser at Nasdaq Liffe Markets, a professor of finance at the Illinois Institute of Technology, a trading consultant and the author of The Dynamic Option Selection System.

Quelle (http://www.thestreet.com/_tsclsii/options/futuresshocktsc/10079006.html)

syr:rolleyes:

syracus

17.04.2003, 10:20

Zum Strohhalm der Neurotiker :hihi....

"Productivity: The Illusion of Prosperity"

Richard Benson

The Chairman of the Federal Reserve has used the mantra of "Increasing Productivity" to both justify the creation of the Credit and Stock Market Bubbles, and to make us "feel good" about the state of the economy as the bubbles blow out. There is no question that over the long course, economic development and prosperity are tied to increases in productivity. However, in the "Post Bubble" phase of the US economic cycle, the measured increase in productivity is purposely mismeasured and used as old-fashioned propaganda, or "Psychological Warfare," to help stabilize the markets.

The government has manipulated the inflation index to create knowing bias for price increases to be greatly under-reported. The number of dollars spent on computers and IT has been basically flat for the last four years, yet the government's economic statistics reflect that "real spending" increased 40% because the equipment has "improved". Simply because a computer chip is faster, or a hard drive can store more data, doesn't necessarily mean that a user will really be any better off. Example: If you buy a Porsche that can go 180MPH, instead of a Ford that can go 120MPH, it doesn't help you get home any faster if the speed limit is 35MPH or you are stuck in traffic. Sure, more for the money helps, but not 40%! This simple mismeasurement is very likely cutting inflation by about 1% a year, and boosting reported GDP and productivity by about 1%. Without this false measure there would have been no economic growth in 2002.

Another major cause of increased productivity is the sad by-product of a negative return on capital. Even the return on cash is negative. The CPI was up 3% for February 2002 - February 2003, while the return on cash in a money market fund, before tax, is 0.75%. Capacity utilization is 75%, and the only way to get a positive return on capital in the US is to take capacity off-line permanently. Hundreds of dot.coms have closed never to return. The telecom, cable, and wireless industries have had massive bankruptcies and are still in need of additional consolidation. Hundreds of airplanes sit idle in the desert, and many more are expected. Pilots fortunate enough to keep their jobs will have their wages cut 30%, and their pensions cut in half, as their firms file Chapter 11. Cutting wages and pensions make productivity soar! Productivity goes up every time a company moves from a defined benefit plan to a defined contribution plan, or makes workers pay for a larger share of their health benefits. A major contributing factor to rising productivity is the result of 2,000,000 US workers losing their jobs.

We can expect these types of increases in productivity to continue this year. American Airlines is restructuring without formal bankruptcy. Except for Southwest and JetBlue, the entire airline industry has to restructure, lay off thousands of workers, and park hundreds of more airplanes in the desert. In the auto industry, production for the second quarter has been cut back over 12%. More cut-backs are necessary. There are 17 domestic auto plants slated for permanent closure, probably in the fourth quarter. The auto manufactures entered into insane labor contracts during the Bubble Prosperity that stipulated they would pay workers 90% of their salaries whether they worked or not. The Zero, Zero, Zero percent financing only made sense because both capital and labor became fixed costs. When auto labor again becomes a variable cost, productivity can go up as these workers are let go. One look at used car prices, which have collapsed, tells the whole story on how many new cars Americans really need.

There are many more productivity increases to follow. US pension funds still have an under-funded liability of $300 billion dollars. Just think of the tremendous productivity increases that are still available as more industries restructure, and default, on these promises of a full pension. Typically, the US Pension Guarantee Corp. picks up about half of what the old promised pensions were, and ultimately the liability is shifted to the US taxpayer! Think of all the tremendous increases in productivity that can be had by moving more corporate obligations back to the American taxpayer.

Finally, the biggest and most worrisome source of American Productivity is our trade deficit. As we "gut our factory base" and import more components from China, our productivity soars! A worker in China will work for 10% of what it costs to use an American. If China makes the parts, and we use just a few workers to do a tiny amount of final assembly here in the US, we get to count all that cheap Chinese labor as Real US Productivity, because the final good was "Made in the USA". The cost of Chinese labor is so low that the factories just south of the Mexican Border are closing and production has moved to Asia. Now that is real productivity!

Productivity is a simple measure based on total output, divided by the number of workers. Since we have a negative return on capital, the more factories we close to raise capacity utilization, and the more factories we move to China, the fewer workers we will need. Therefore, by definition, productivity goes up. So when our Fed Chairman says "everything is all right because productivity is rising and this is good for the economy and good for the "market", you should stop and think about who Chairman Greenspan is really talking about. As in every downturn in the past 25 years, when manufacturing jobs go, they don't come back. We are continuing to move to a modern service economy that is "post industrial".

The real bubble that remains is the Debt Bubble. What ails corporate America is the need to pay down debt. Moreover, there is no need to invest in new equipment until such time as there has been enough corporate restructuring to get capacity utilization back up to 85%. If new investment is going to be undertaken it is then likely to be undertaken where the labor is hard working and cheap, like China. Even service industries are letting workers go. Productivity is rising, but lay-offs are at recession levels. There are no new jobs. Wages in some industries are dropping, benefits are being slashed, and pensions are not going to be there. We have rising productivity, falling incomes, a negative return on cash, and the destruction of financial capital that will continue until enough factories are taken off line and permanently closed. Both physical and financial capital are in surplus and need to be "destroyed" to bring back a positive return to new investment.

The Credit Bubble created by an over-accommodating Fed, leaves a horrible hangover and massive imbalances yet to work their way out of the system. Citing productivity gains is nothing but propaganda to divert the public from the policy blunders of the past, and present, economic winter. The productivity mantra is being used to give the illusion of prosperity to an investing public that needs hope to soldier on. Only time, bankruptcy, merger, corporate restructuring, and industry consolidation will cure the disease of "bubble induced over-investment". Only then will we see real productivity from the next round of needed investment, and the re-employment of labor to meet society's endless needs.

Hopefully, the next generation Fed Chairman will learn that bubbles are only fun on the way up, and the downside destroys more than the upside created. Bubbles always end badly.

Richard Benson
April 15, 2003
President
Specialty Finance Group, LLC
Member NASD/SIPC
800-860-2907

Quelle (http://www.321gold.com/editorials/benson/benson041503.html)

syr:sss

syracus

22.04.2003, 19:50

Fleck zur Superduper-Kriegshype-Rally :hihi.....

Hype, hope, wishful thinking -- and more hype

By Bill Fleckenstein

The rally unfolding since March is fantasy built on corporate spin and half-truths, foisted on an investing public that's ready to believe. Keep your guard up.

Along the path to successful investing, folks find lots of stumbling blocks. In the self-imposed category, there's hope and denial, which keep investors from understanding financial truths, however unpleasant they may be. Lying in wait to play into that are the big players on Wall Street and corporate America. Their lure is the manipulation of fact, which has been perfected through years of practice.

But with a bit of practice, investors can begin to recognize the manipulation for what it is.

Big Blue's elevator shoes

Last Monday night's earnings announcement from IBM (IBM, news, msgs) was very interesting, as was the market's response the next day, when IBM closed up 3.5%. Early in the conference call, the company indicated its comfort with estimates for the year. But, as became evident further into the call, it couldn't muster much confidence in the second quarter. In fact, CFO John Joyce basically dodged the issue three times, with one instance that went like this: See the numbers that lenders see.

Question: "You just indicated, John, that you are comfortable with consensus. I'm assuming you mean the full-year consensus. The clarification is, are you also comfortable with the second-quarter consensus?"

Answer: "OK. First on the full year: Yes, we are comfortable with the full year in that we are on track for the full year. On the second quarter, I just stated that we have a good pipeline of activity. And we are going to be working with our customers to close that business, or as much of that business as we can in the second quarter."

If you're left scratching your head, so were many folks. Actually, when the numbers were torn apart, the "growth" was all from the recent PricewaterhouseCoopers and Rational Software acquisitions, some benefit from currency translation, and other items as well, such as the sale of a facility to Sanmina-SCI (SANM, news, msgs) and a further $90 million reversal of something else. So, all in all, while the headline says that IBM more or less made the number and is comfortable with its guidance, there was a whole lot of smoke and mirrors. I don't think for a second that IBM can make the second-quarter number or the full-year number. Nevertheless, since I felt that its news wouldn't be bad enough to knock down the stock, I covered my short in it last Monday night. I am now once again without any shorts.

In any case, all I ask out of management is to be honest, and I don't think what IBM did was honest at all. It would be one thing if the company said, "Look, we really don't have a clue, so you guys decide what you think; or, we're just not going to give guidance anymore." But to try to pretend that you're giving some guidance when you're not seems to me to be rather duplicitous.

Face-masking reality

It's sort of like what Novellus Systems (NVLS, news, msgs) said last Monday night on its conference call. The company blamed the fact that people weren't buying semiconductor-capital equipment on SARS (severe acute respiratory syndrome). I mean, give me a break. Hotels might be empty in Asia, and air travel might be curtailed, but nobody cancels orders for semiconductor-capital equipment because of the outbreak of SARS. The company's order guidance saw a huge miss, coming in at about $180 million, vs. expectations of around $240 million. The stock was lower the following Tuesday, but not nearly as weak as one might have expected.

This continued indifference to bad news gives rise to my fear of being short. For the most part, people have been in denial about why we’re having a bear market for about three years now. I have felt that if we got through this earnings season without significant damage done to the tape, the fantasy phase would begin -- sort of the second part of the war rally, following on part one, the relief phase.

Will Tinker Bell ring the opening bell?

While anything is possible. I think we will get a fantasy phase. Folks will say the bad news is behind us and it was all related to the war and SARS and now things will get better. They'll say that Bush has a mandate and that geopolitical concerns are not getting worse, they're getting better. (In my opinion, that happens to be true, by the way.) We will see all kinds of arm-waving about the second half, about how we're not going to be down for four years in a row, after all, and that never fear, the tooth fairy is here and Tinker Bell will ring the NYSE open. If that fantasy phase develops, I think it will provide us with one of the great opportunities of the last few years to take the other side, and that's what I plan to do.

I have thought and been saying since February that we would have a rally around the war, and that it stood a good chance of taking on a life of its own, fueled by all sorts of rationalizations and proclamations. (See my Feb. 24 column, "3 Reasons to Expect a War Rally" and my March 24 column, "Don't Confuse This Rally with a New Bull Market.") I specifically noted before the rally began that, once it got under way, folks would read too much into it. That way, readers could be prepared and not get sucked in by all the hype and hoopla that would likely develop. At this juncture, I don't know how long the rally will continue; it could easily run well into the second quarter. Meanwhile, we must bear in mind that this is a bear-market rally, and things can change rather quickly.

Do not blame the short sellers for this market

You would think that three years after the market peaked, and all the scandals and nonsense that's been uncovered, folks would be interested in placing blame where it's due, rather than trying to find a scapegoat. But the need for a scapegoat remains strong, given the failure of many people to connect the pain of the stock market to the unwinding of the mania. So, some folks seem to think that short sellers, all by themselves, have made certain stocks go lower, which is ridiculous.

Along that line, Jesse Eisinger, who writes the always-worthwhile "Ahead of the Tape" column for The Wall Street Journal, penned a piece last Monday about William Donaldson, our new SEC chairman, and potential changes concerning the regulation of hedge funds. I have looked at some of the proposals, most of which don't seem too onerous. But as Eisinger noted, there appears to be some chatter that this "regulation" is a euphemism for targeting short sellers, the logic of which is naturally absurd. I have written on this topic at length many times, but Eisinger's three-paragraph synopsis was absolutely on point:

"Unfortunately, this seems like a pretext for regulators to target short sellers amid allegations they manipulate markets. On the contrary, short-selling hedge funds -- the majority mostly have their money invested long -- are one of the most effective free-market tools to catch frauds. You could argue that encouraging short selling is an efficient and cost-effective private-sector adjunct to public regulation.

"Surely, some short sellers have done questionable things. But the percentage of short sales compared with the overall volume of trading is minuscule. It is impossible not to notice that the hedge-fund controversies have coincided with our lasting bear market and whining by companies targeted by shorts. These companies bring suspicion only on themselves. Eventually, fundamentals win out; good companies have nothing to fear.

(Let me cut in here: It's been my experience that the greatest whining comes from companies that have something to hide. Back to Eisinger: )

"The odds are so stacked against short selling, it's a wonder anyone does it. The technique exposes you to theoretically unlimited risk. Stocks tend to go up over time. The tax structure disadvantages short-selling capital gains, and it isn't an unregulated practice, either. The 'uptick' rule, whereby you can't short a falling stock, hinders shorting."

Why are these guys AWOL from perp walks?

From that succinct analysis, Eisinger then segued to the mutual-fund industry to make what I would call the most important point: "But it is the mutual-fund managers who were the bubble blowers. They wiped out normal people's riches and have yet to come under serious scrutiny. Despite widespread money-management incompetence, mutual-fund companies haven't changed their practices in the least. Shouldn't the crackdown be focused elsewhere?" I have long asked myself this very question. It's not to say that all mutual funds were guilty of shoddy investment practices, but some certainly were.

Another troubling area for the mutual-fund industry is illiquid positions, which is candidly described by Scott Schoelzel in a recent Wall Street Journal interview ("Janus Twenty's Manager Reflects on His Choices"). Among his problems was the fund’s enormous size; it was as large as $25 billion. "We were … treading in some uncharted water,” Schoelzel said. Plus, he added, “we had these enormous positions that weren't liquid. (The emphasis is mine.) It was difficult to say, 'Go in and sell 80 million shares of AOL Time Warner.' … Now they are much smaller positions and are at valuations that reflect their current economic outlook."

Pull over on the amass pike?

The point I'd like to emphasize is that mutual funds have been allowed to accumulate these gigantic positions (some of which may comprise 7% to 15% of a company) in the first place, and can make adjustments in them with almost no disclosure requirements -- unlike an individual or an entity, which must "file" with every adjustment in position once any holding reaches 5% of a company.

The sheer size of these positions can tempt the mutual funds to tape-paint -- to force prices absurdly higher in a short space of time. (I'm not saying Janus was guilty in that regard, because I have no idea who actually did it, and without a subpoena, no one will ever know.)

During the mania, I used to complain ad nauseam about all the tape-painting that went on at month's end and quarter's end. The practice remains so blatant, and tolerated, that the talking heads on TV sanitize it with the nice words "window dressing." I am not for creating paperwork, but, given how the large funds are able to amass these positions, perhaps new regulations are in order. For example, the funds could be restricted in their trading activity of stocks where they own over, say, 5%, for the last few days of an accounting period, be it month-end or quarter-end. In any case, tape-painting is the biggest open secret on Wall Street. Certainly, it’s something that the SEC ought to be looking into, if its examination into the investment community is to be comprehensive, rather than just targeted at the hedge fund industry, as Jesse Eisinger pointed out.

By the way, I don't ever recall seeing any ads that say, "You know, we run a giant fund and our liquidity may be hampered because we have these enormously concentrated positions, and hey, if we make a mistake, we may not be able to get out. (And oh, if we keep getting more new money and keep plowing it into the same names, we're potentially marking up positions we already own.)" On the face of it, that should seem obvious to someone who is experienced, but it might not be for someone who is inexperienced. Perhaps the novice investor has the right to be warned of this in advance.

The vermin filter malfunctions

Now on to a recent, related story in the Journal (another about blaming short-sellers) titled "Hedge Fund Finds Dark Side to Message Board," which described the investing branch of the Internet's underbelly. The article recounted a battle between Rocker Partners' Marc Cohodes, a brilliant analyst and short seller, and some anonymous folks on message boards who personally attacked and threatened him. The firm has now sued as many as 17 such investors in the dispute, accusing them of libel and restraint of trade. In the mania, when my column ran on Silicon Investor, I would occasionally visit their message boards related to stocks I’d panned, most notably Gateway (GTW, news, msgs). During one visit in the fall of 2000, I laid out the case for what I believed to be unsavory accounting practices. One lunatic accused me of trying to manipulate the stock and said he wanted to report me to the SEC.

I obviously was doing nothing wrong; in fact, it was the company that was doing things wrong. As someone who has been out there frequently criticizing the status quo and things that I thought were incorrect, I myself have gotten a variety of hate mail over the years and had the same experiences that Marc had, although perhaps not to this degree.

In any case, John W. Bartlett, Rocker Partners’ lawyer, made a key point: "We're not saying you can't criticize Rocker Partners, we're saying you can't hide behind anonymity and libel people." Folks who want to use the Internet for investing would be far better off if they just analyzed the negative viewpoints they read, rather than attacking the sources. A lot of people are mighty brave when nobody knows who they are. But I doubt they would behave quite so boorishly if they had to use their real names.

Bill Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney.

Quelle (http://moneycentral.msn.com/content/P45828.asp)

syr:sss

syracus

25.04.2003, 09:41

Stephen Roach zu den Traumtänzern und ihren Erwartungen:p....

Dreamcatchers

Stephen Roach (New York)
Apr 21, 2003

The dream merchants are hard at work peddling the tale of another economic revival. The magic of postwar relief is widely billed as the catalyst. A veil of uncertainty will be lifted — so goes the argument — prompting businesses and consumers, alike, to unleash the animal spirits of pent-up demand. Just as America led the charge to Baghdad, the US economy is now presumed to lead the way to global recovery. Prewar malaise will give way to postwar healing, and presto — world financial markets will unwind many of the trades that have been in place for the past six months. Just like that.

To me, this is a leap of faith of Herculean proportions. While I certainly concede it is possible to get from Point A to Point B, I am hard-pressed to believe that the path will be seamless or expeditious. As I see it, there are five myths to the recovery call of 2003, each of which draws the postwar healing scenario into serious question:

First and foremost, is the myth of another US-led recovery in a lopsided global economy. I fully realize that’s precisely the way it’s been for so long, that most now take this American-centric growth dynamic for granted. Yet global imbalances have now reached the point where another burst of US-led growth would be inherently destabilizing. Reflecting a US economy that accounted for fully 64% of the cumulative increase in world GDP over the 1995 to 2001 interval, the US current-account deficit hit a record $548 billion in the final period of 2002, or 5.2% of GDP. If the world stays the path of its US-centric growth dynamic and if America’s federal budget goes deeper into deficit, as certainly seems likely, the US current-account deficit could easily surge toward 7% of GDP. These are external imbalances that the global economy has never before had to face, let alone finance. Yet the postwar healing scenario presumes that massive and ever-widening external imbalances don’t matter at all — and that they can be easily financed at current exchange rates and other relative asset prices. I don’t buy that. The only way out of this trap, in my view, is for a long overdue global rebalancing — less growth in the United States and more growth elsewhere around the world. Unfortunately, there are no signs that such a rebalancing is in the cards.

The notion of a capex-led recovery in the United States is a second myth of the global healing scenario. I don’t doubt for a moment that balance sheet repair is well advanced for Corporate America. What I have a problem with is the belief that such progress will spark an imminent revival in business capital spending (see my 5 March dispatch, “Capital Spending Myths”). There are three serious flaws to this argument, in my view: First, most US businesses are still lacking in pricing leverage. That means, reflective of a world awash in excess capacity, the risks are still biased more toward deflation than inflation. In keeping with this depiction, the capacity utilization rate for US manufacturers fell to 72.9% in March 2003 — more than seven percentage points below the 30-year average of 80.2% recorded over the 1972 to 2002 interval. A capex-led revival would only exacerbate this overhang of excess supply — the last thing a deflation-prone world needs. Second, history tells us that capital spending never leads a US cyclical recovery — it responds to perceived improvements in end-market demands, mainly for consumers. Such demand visibility is not exactly evident these days. Third, since information technology now accounts for fully 55% of total real spending on US capital equipment, many hold the view that long-deferred IT upgrades will spark a capex-led recovery. This overlooks the enormous consolidation occurring in the IT user community, suggesting that there will be fewer buyers if and when the IT replacement cycle turns. The notion of an IT-led upsurge also sweeps away one of the most painful remnants of the bubble-induced excesses of the late 1990s. All in all, I suspect that Corporate America will remain quite cautious in committing to a new wave of IT projects.

A third myth of recovery is that America has fixed its saving problem, thereby removing one of the key impediments to sustained economic revival. Nothing could be further from the truth. Sure, the US personal saving rate has now moved up to 4.0% — well off the rock-bottom level of 0.3% hit in October 2001 but still only about half the 9.0 % pre-bubble average that prevailed over the 1970–94 interval. But that’s beside the basic point. The modest rebound in personal saving has been funded by a massive reversal in the government’s saving position, as the federal government’s budget has swung from a surplus of 2.3% of GDP in early 2000 to a deficit of 2.3% in late 2002. As seen though the lens of the national saving rate — the combined saving of households, businesses, and the government sector — the United States is in terrible shape. America’s net national saving rate — which also subtracts the depreciation charges associated with the replacement of worn-out capital — fell to an all-time low of 1.3% in the second half of 2002; by way of comparison, this same metric averaged about 5% in the 1990s and considerably higher in recent years. This is a proxy for the domestically-generated saving left over to fund investment, the sustenance of any economy’s longer-term economic growth potential. Lacking in such domestically-generated saving, America has no choice other than to import surplus saving from abroad and run a massive current account deficit in order to attract such capital. But that’s not all. As the US federal budget now plunges far deeper into deficit — reflecting the combined impacts of a weak economy, war and postwar spending commitments, and ill-timed multi-year tax cuts — America’s net national saving can fall only further. Another myth of the global healing scenario is to presume that this just doesn’t matter.

A fourth myth of recovery is to pretend that the deflationary scare is over. After all, this was a low-probability scenario from the start, goes the argument. And as global healing presumably sparks a turn in the business cycle, it seems appropriate to revert to the time-honored fixation on inflation. A bit of a reality check is in order here. In case you haven’t noticed, America is still sliding down the slippery slope toward deflation. Sure, a war-related surge in energy prices is boosting headline inflation. But the core rate of inflation is receding sharply. Excluding food and energy, the US Consumer Price Index was unchanged in March 2003 and was up at only a 0.8% annual rate in 1Q03; that’s well below its cycle peak of 2.8% in late 2001 and sufficient to bring the year-over-year comparison in March down to 1.7% — nearly a 40-year low. There are three ingredients to the case for deflation — a weak cyclical climate that continues to restrain aggregate demand, a post-bubble legacy of excess supply, and the unrelenting pressures of globalization which are leading to intensified competition in both tradable goods and services. The perils of global deflation, which first reared their ugly head in Asia, still pose considerable risks to America and Europe, in my view. This is not the time to sweep those risks under the rug.

A fifth myth of recovery is the notion that postwar healing in the US is about to spark an economic revival elsewhere in the world. Unfortunately, the world is still headed the other way. Our European and Japanese teams still see little, if any, positive growth in 2Q03. The recent data flow on the Euro-zone production front wasn’t quite as bad as we had thought, but the trend remains consistent with only fractional GDP growth, at best. Moreover, while the just-released annual revisions to the Japanese industrial production data were on the upside, as expected, the underlying trend still looks quite stagnant. Meanwhile, SARS-related downside risks seem to be cropping up everywhere in Asia ex Japan. Hong Kong’s economy has come to a virtual standstill. Singapore’s government recently noted that tourist arrivals are down some 61% (YoY) in the first 13 days of April. And Taiwan, Korea, and Malaysia are all bracing for SARS-related impacts. China remains the outlier in the region, especially on the heels of its stunning 9.9% increase in 1Q03 real GDP growth. However, in a weakening regional and global climate, even the sustainability of China’s growth dynamic can now be drawn into question. Total trade — exports and imports, combined — hit a record 61% of GDP in the first period of this year; that’s up from 50% in 2002 and essentially double the 32% reading of a decade ago. Moreover, the growth in exports, alone, accounted for 71% of overall GDP growth in the four quarters ending in 1Q03; this not only underscores China’s extraordinary dependence on the combination of external demand and surging outsourcing activity but it also reveals a notable lack of autonomous support from domestic demand. In short, there’s little reason to believe in the myth that the non-US world is about to provide its own spark to the global growth outlook.

The basic problem with the postwar healing scenario is that the world was facing many of these problems long before the war in Iraq. War, and the stunning victory that has since ensued, changes none of that. After all these years, a US-centric world now makes for an increasingly dysfunctional global economy. Moreover, courtesy of SARS, runaway US budget deficits, and lingering structural problems in Japan and Europe, the major risk is that the imbalances are about to get worse — possibly a lot worse.

There’s nothing like the romance of postwar recoveries and cyclical revivals. For those of us who choose instead to remain cold, calculating, and unemotional, the world still looks like a very treacherous place. Call me a dreamcatcher.

Quelle (http://www.morganstanley.com/GEFdata/digests/20030421-mon.html)

syr:sss

syracus

02.05.2003, 14:57

Hultberg zum "berühmten" PPT :sss....

Cornered Rats and the PPT

by Nelson Hultberg
April 30, 2003

http://www.financialsense.com/editorials/hultberg/images/cornered.gif

There is a new wrinkle to consider regarding the government's Plunge Protection Team (PPT), which the investing public needs to be made aware of. First, however, some groundwork on the PPT, its origins, and its assumed purposes. Then I will present a theory about the PPT that should further validate its existence and clue us in to what it has planned for the future.

Conventional Wall Street media and Washington establishment types are quick to denigrate those of us who theorize about the establishment of a secretive PPT organization to manipulate the markets. But it is a matter of public record that the Working Group on Financial Markets (WGFM), which we allege to be the parent to the PPT, was formed under the Reagan administration. It was done by Executive Order on March 18, 1988.

This order states that the major appointees of this group are to be the Secretary of the Treasury, the Federal Reserve Chairman, the SEC Chairman, and the CFTC Chairman and those they designate to fulfill their purposes. The purposes, as defined in the Executive Order, are to "[enhance] the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and [maintain] investor confidence." The order goes on to say, "To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions." (Executive Order 12631 of March 18, 1988, 53 FR, 3 CFR, 1988 Comp., p. 559)

The WGFM was formed in the aftermath of the crash of 1987 as a natural effort by government bureaucracy to do for the economy what it thinks it is supposed to do -- intervene and manipulate the workings of the marketplace so as to create an ordered economy, an economy that is to the greatest possible extent devoid of volatility, disruption, severity, loss, etc. So it is in this context that we need to consider the origins of the PPT. At the time, there was great fear that something very big had to now be done to regulate the stock market and smooth out its potential volatility. The WGFM (in conjunction with mega-bankers they chose) was to make sure there was always sufficient "liquidity" to prevent any serious plummet of the market again. And whatever additional interventions were deemed to be necessary would have to be tolerated.

The fact that severe market volatility was largely a result of government manipulation of the money supply and interest rates was merely blanked out on by the WGFM and its creators. A study of our nation's economic history will show to any objective observer that there are natural fluctuations inherent in the free-market that humans must always put up with, but which are always self-corrected if the forces of the market are simply LEFT ALONE. This is basic Adam Smith economics; the smoothest economy is a laissez-faire economy. But these fluctuations become extremely exacerbated with the intervention of government into the mix to try and "manage the economy" so as to eliminate these fluctuations. The fact that the Federal Government had become in the 20th century a massive interventionist-manager of the economy, and thus a massive exacerbator of these natural fluctuations, was something that just could not be grasped by the bureaucratic mentality. The modern day statist has been taught via Marxist-Keynesian indoctrination in college to believe that a "free" market is dangerous, chaotic, and unworkable. He is not capable (or not willing) to dispute this view. Thus, he naturally moves toward more and more MANIPULATION of market forces as his duty. And the very volatility he seeks to diminish, he intensifies.

So the climate of government opinion in the aftermath of the 1987 crash was moving toward even more "interventionist-manipulative" tactics than it had felt necessary during previous decades of the 20th century. In this climate, it is quite natural that the WGFM authorities decided that something unprecedented had to now be done to guarantee a safe, smooth, crash-free, perma-bull stock market. Thus was born the idea of the PPT.

How the Plunge Protection Team Came About

Bill King of the highly regarded King Report in New York tells us that the PPT sprang from an analysis written and presented by former Fed Governor Robert Heller in 1989. After his paper was published is when the PPT agenda was formalized.

King refers to his associate John Crudele's writing on the subject of how the stock market was to be rigged. "Heller had just left the Fed when he gave a speech suggesting that the central bank should step in and take direct action to keep the stock market from collapsing. The Fed had taken action before. It made sure there was enough liquidity during the crash of '87 to keep the system going. It may have even strong-armed a few banks into propping up the market. And it has often lowered interest rates at opportune times.

"But Heller's idea was different. He wanted a more direct approach, especially when the bond and currency markets were becoming uncontrollable [like they are these days]. Heller believed that in an emergency, the Fed should start buying stock index futures contracts until it managed to pull stocks out of their nosedive. Essentially, whenever there is heavy buying of these futures contracts it causes the underlying stock market to rise. The futures contracts can be bought cheaply; they are highly leveraged so you can get more bang for your buck, and they eliminate the need for a rigger to purchase, say, all 30 stocks that make up the Dow. Heller explained that the process was simple. And it is. The trouble is, the government never has had authority to rig the stock market." [email from Bill King, March 11, 2003]

King, who at the time was running several equity trading desks in New York, goes on to say that it was during Q1 of 1990, as the Japan bubble was bursting, that massive S&P futures buying began to be used extensively by the trusted agents of the PPT, big 'name' brokers in New York. During the crises of the late 90's, this massive buying increased even more. By this time, many skeptics of such manipulation in the investment advisory business began to realize it was definitely taking place.

If you still doubt, here is a BBC release from the latest King Report on the issue:

"A deal was struck last week in the United States between a former Japanese finance minister and the head of the U.S. central bank, the Federal Reserve's Alan Greenspan. There was an agreement between Japan and the United States to take action cooperatively in foreign exchange, STOCKS and OTHER MARKETS (bonds? GOLD?) if the markets face a crisis," Chief Cabinet Secretary Yasuo Fukuda said....

We know never to believe anything until it's been officially denied, so we were pleased to note that U.S. Treasury Dept spokesman Tony Fratto did just that, stating: "The administration's views on markets on interventions are well-known and there has been no change in our view." [King Report, March 24, 2003]

What needs to be grasped by all Americans who invest their money in the equity, currency, and commodity markets today is that the PPT is not a fantasy conjured up in the minds of conspiracy wackos who see aliens from outer space climbing over their backyard fence every other month. It is a verifiable reality. It exists. It is bigger than any of us imagine. It is the result of the hideous statist mindset that is taking over our country -- which believes that all aspects of economic life must be regulated and MANIPULATED by central planners from Washington. Yet such omnipresent manipulation and regulation goes contrary to the logic, the freedom, the entire meaning of America. When manifested in specific areas like the stock market, it becomes especially unsavory. If such an organization to rig the stock market was ever to become widely known throughout the country, then confidence in the integrity of the markets would be greatly diminished and probably destroyed. So the PPT and all federal bureaucrats who know of it must continually deny its existence. They must travel by night and operate through surrogates.

A New and Sinister Use of the PPT

For the past 12 years then, the PPT has been used by Washington to control the price movements of the NYSE through the buying of S&P futures as former Fed governor Heller advocated. Whenever a crisis appears especially threatening, the PPT swings into action to shore up equity prices on the exchange. The media sycophants of the establishment turn a deaf ear to such a claim, but it is accepted by most astute followers of the market today. The sheep who idolize CNBC choose to ignore such revelations when divulged to them because it is in their interests to have such a shoring-up agency putting a floor under them. They are happy with such an arrangement, and being unable to grasp the long-range ramifications of such market rigging, they just dutifully go along to get along. That their profits are protected is all they care about. The fact that eventually such rigging will destroy the integrity of the markets as free institutions of trading is for someone in the future to worry about.

Well that future is rapidly approaching us. And it concerns the new theoretical wrinkle I alluded to above. This is purely hypothetical on my part. I have no verification to prove the claim that follows. But if the reader will keep an open mind and think logically, he should come to the same conclusion that I have.

What, in the minds of Federal Reserve and Treasury bureaucrats, is the most important economic need facing our economy today? And as a result of this need, what is it that they desire to do the most? I would say their greatest desire is to counter the potential forces of deflation that have devastated Japan for over 10 years, and now threaten to afflict us also. If this is so, then the most crucial problem the Fed and the Treasury has is to get liquidity into the system so as to hopefully maintain consumer spending and stimulate new capital expansion, but to do so without spooking the foreign holders of American equities and bonds into repatriating their funds, which would bring about a crash of the dollar and the Dow. If the Fed starts printing up dollars wholesale as Bernanke postulated, then alarm bells begin sounding throughout the Forex markets and the dollar starts falling like an elevator with a severed cable. This Washington cannot tolerate. But since it is becoming more and more evident that mere Fed manipulation of interest rates is not going to be enough to counter the forces of deflation, the printing presses have to be brought out. How to start creating new money, though, without drastically setting off the alarm bells?

Here is where the Clinton-Rubin "strong dollar" policy and its gold leasing scheme becomes instructive. Rubin understood that to confront the Republican revolution of '94 and insure Clinton's re-election he needed to inflate the money supply; but to do so, he needed to suppress the price of gold so as to not alarm the Forex markets. However, he could not suppress the price of gold by just selling Fed owned gold. That was public; it would set off the Forex alarm bells and negate his desire to keep the dollar "strong" while still inflating it. He therefore hatched the scheme to lease gold to the bullion banks who would then sell it into the market. Leased gold could still be carried on the Fed's books as an asset; the movement of the gold would not be acknowledged to the world. The bond vigilantes and Forex markets would not get alarmed. The dollar could be inflated, yet made to appear to be strong. Capital would continue to flow into America. Clinton could be re-elected.

The lesson here is that any substantial creation of new money to pump up the economy must be done SECRETLY if at all possible. If it is done in large amounts by conventional monetization of bonds and deficits, then it will set off those nasty alarm bells in the Forex markets. The dollar will plummet, capital will flow out of America, and the Dow will crash.

So the Fed has to create billions of dollars and inject them into the economy without public acknowledgement. Enter the PPT! Could not the Treasury Department use the PPT to funnel "new money" into the market secretly? Since the PPT's operations and existence must always be kept secret, then its funding must also be orchestrated in clandestine manner. It must be done offshore. And this is where the funding for the PPT undoubtedly comes from. Rubin probably initiated this procedure. The Fed launders billions of dollars into an offshore bank account for say XYZ Investment Corp (which is established as a front for the PPT). JP Morgan and Goldman Sachs are then designated as the brokers for XYZ Corp to act as the funnels to bring the "new money" into the economy via the PPT's "market stabilization activities." Thus, there are unlimited funds for use to buy S&P futures whenever the markets look to be in jeopardy. Whenever the PPT's offshore account runs low, the Fed merely launders more money into it.

The question that now occurs, however, is this: Doesn't the PPT just operate in S&P futures, skipping in and skipping out, rather than going "net long" stocks? Consequently, wouldn't that negate any funneling of new money into the economy?

Yes it would if we assume that the PPT only operates in S&P futures. But why should we assume that the PPT only operates in futures and only skips in and out? If the Fed is empowered to purchase Treasuries as an asset publicly, why could not its PPT arm purchase corporate equities as an asset secretly from an offshore account?

The accepted assumption is that the PPT has been operating only as a "match to kindling" in the market (to use the wonderful analogy of Will Reishman at Euro Pacific Capital). That is to say the PPT merely lights the fire by intervening into a dangerous market sell-off with massive purchases of S&P longs to check the fall. This ignites short covering, which then brings in the hedge funds and other institutional money to try and catch the train before it leaves the station. A large rally ensues, and the PPT then sells its long positions into the hedge fund and institutional buying. In this way, they never go "net long" stocks. They do not accumulate inventory. Thus, they do not actually add their Fed created "new money" to the system. So their actions are not inflationary.

This undoubtedly is the way that the PPT has been operating for the past decade; and it is probably the way they are operating today. But will it be the way they continue to operate as the economy gets weaker and weaker? Because they always sell their positions back to the hedge funds who follow them, no sustained rally can ever be created. Their selling back of their positions will always snuff out the intensity of the rally before it can begin -- at least it will in a bear market. By the looks of the Dow over the past three years, this seems to be the case. All its rallies fizzle out, so if the PPT has lit the match, it then douses the fire a week to a month later by closing out its positions. In the nineties, such match lighting strategy would result in a sustained rally because overall sentiment was still ragingly bullish. But for the past three years, such match lighting has been operating in a decidedly bearish sentiment, and thus it results only in rallies with no legs.

This creates a sideways, range-bound movement for equity prices. It still accomplishes good results as far as the PPT is concerned because it creates a floor under which prices will not be able to drop. It also makes some nice profits for the PPT, as the "black box boys" get left holding the bag at the rally top and have no one to follow them to buy their positions at the elevated prices.

This, we can be pretty certain, is the methodology of the PPT. But what if the day comes when a floor can no longer be maintained by just "lighting the match" and then selling into the hedge funds later? What if the day comes when they need something stronger, such as actually going "net long" and accumulating inventory? It should be obvious that they would not hesitate to do such a thing. These are desperate men, and since they have a printing press, why not put themselves in a position where they can buy stocks secretly via an offshore corporate front, instead of buying bonds openly through conventional market operations?

These are men who will not hesitate to recall all greenbacks and replace them with a new colored money. These are men who will not hesitate to devalue the dollar just as Argentina did if things get bad. So why not establish an offshore corporation to go net long billions in stocks BEFORE things get to the dangerous "depression stage?" Why not try and check ahead of time any danger whatsoever of deflation? Heavy deflation would require drastic hyper-inflationary measures and bring on heavy devaluation. Hello Argentina! Do not want to go there for sure. Would not accumulating inventory in an offshore account then be the lesser of the two evils? I have to believe that since they have a printing press, an offshore account, and an S&P futures buying program already in place, the idea of going net long and accumulating an inventory of Dow 30 stocks is certainly a contingency plan.

If the Fed is faced with a steadily weakening dollar and a stagnant economy come Spring of 2004, and it has a choice between buying bonds in the open market and setting off alarm bells, or buying stocks from an offshore account and setting off no alarm bells, which would they prefer to do? Not a very difficult question. The PPT's front corporations will start accumulating large holdings of Dow 30 stocks. An ounce of prevention is worth a pound of cure.

The Federal Government will do anything to avert deflation, keep the Dow and the dollar from crashing, and keep gold and silver from skyrocketing. Using the PPT allows it to do all three in a simple, secretive way. It's a perfect tool for the disingenuous Machiavellians who run Washington today. As stated, I have no proof of any offshore funding, and no Deep Throat contact has informed me that the Treasury has bumped the PPT's role into a vehicle to inject substantial amounts of "new" dollars into the economy. But such a role is as natural as members of a Mafia family operating neighborhood protection rackets. It fits the personas of the participants, and it fulfills their needs.

Will Such Manipulation Work?

There is an adage that no man and no group is bigger than the market -- even government men and groups. This can be borne out by any perusal of history. All savvy theoreticians accept this truth. And it is especially true if the market trend that the government is attempting to manipulate is a Kondratieff winter. The only thing that will cure this kind of bear market is the PURGING OF DEBT, which is precisely the opposite of what the Fed and Treasury machinations are geared to do. They are hell bent upon creating more debt and more fiat money to chase more goods and services higher in price. This is what they conceive to be "stability" and "prosperity."

So in the long run, the PPT's manipulatory tactics will not be able to stop the gold and silver bull market, nor will they be able to stop the continued bear market in equities. No government has ever been able to reverse or stop a "primary bull or bear trend" once it is launched. All government manipulators can do is delay the ultimate destination of the market and make for wild swings of high volatility. All they can do is buy some time, which is what desperate men always try to do when their backs are against the wall.

What these manipulators don't realize is that a secular bear market is like a great northern blizzard. All we can do is try to calculate its duration. All we can do is hunker down and ride it out, while loading up on various storm shields that might gain value in freezing weather. The manipulators' efforts to stop the development of the blizzard will fail, but this doesn't keep them from trying to stop it, and in the process creating havoc and volatility along the way.

Therefore, what we can expect from the Fed on an ever increasing scale in the upcoming years is an effort to "manage" the dollar down slowly so as to alleviate America's trade and current account deficits, while trying to keep the Dow from crashing, and also at the same time helping JP Morgan and its cohorts in New York to ease out of their short derivatives. Thus, the Fed needs to push gold down to a low enough price where JP Morgan, et al can buy their shorts back without too much of a loss. This buying back then causes the gold market to shoot up, which then necessitates that the PPT come in and push it back down to where JP Morgan, et al can then dump some more of their short contracts. Jim Sinclair thinks the recent rocket up to $390 in gold was the first big attempt by JP Morgan to close out some of their short positions. It put tremendous buying pressure on the price, and it had to be contained. So the PPT was brought in to push the price down again. (I am not saying that gold didn't get overbought; it did. But you can bet that the PPT was right there helping to push the price down once the market turned. And it will be ever with us into the foreseeable future trying its damndest to convince the world that gold as an investment vehicle is a fool's choice.)

So the Fed's strategy is to try and keep the Dow above 7000 and gold below $400 until all the dangers are purged, i.e., until the New York banking cartel has eased out of its short positions and U.S. corporations are beginning to make profits again. That's why the Fed will be making liberal use of the PPT along with lots of rumors and smear campaigns over the next decade. This is a very dangerous game these participants are playing, and we need to be aware of it.

As stated above, the only thing such PPT rigging can accomplish in the long run is more WORTHLESS DOLLARS being funneled into the economy, which is just more of the paper money poison that is killing us. But such rigging will be able to buy the Fed and the New York cartel some time. If Greenspan can pull this off until June of 2004, he then retires, and can drop the whole mess in the lap of his successor. He can then escape to his knighthood and become an elder statesman. The crash will come on someone else's watch. So it's a good bet that such motives and manipulations are a prominent part of his present rationale.

This, in my opinion, is the vision of our Federal Reserve and Treasury bureaucrats who are in bed with the mega-bankers of New York City. These are desperate men, and desperate men blind themselves to long term reality. They shrink their focus down to the short run, so as to buy time. This is why the PPT is going to become a much bigger and more dangerous element in the investment markets as this decade unfolds. We must always keep in mind that desperate men are like cornered rats. They will use any means at their disposal to avoid loss and humiliation. These are the people who are governing us today -- cornered rats.

Nelson Hultberg

Quelle (http://www.financialsense.com/editorials/hultberg/2003/0430.htm)

syr:rolleyes:

syracus

05.05.2003, 08:57

Zu den "Insidern" und ihrem derzeitigen Verhalten bez. buy/sell ;).....

Company Executives May See `Fluff Rally': U.S. Stocks Outlook

By Justin Baer

New York, May 4 (Bloomberg) -- U.S. executives and directors purchased less company stock in April than in any other month during the past eight years. Their reluctance to buy shows that many of corporate America's leaders aren't convinced the market's rally will last, some investors said.

Corporate insiders spent $90.8 million on their companies' shares last month, the lowest since April 1995, according to the Washington Service. The Standard & Poor's 500 Index rose 8.1 percent in April amid an allied victory in Iraq and better-than- expected profits from companies such as Citigroup Inc., Microsoft Corp. and Intel Corp.

Executives ``saw the prices of the stocks rise, and they're not seeing any improvement in their businesses,'' said Allan Meyers, a money manager at Fifth Third Asset Management, which oversees $35 billion. ``They're saying, `Maybe this was just a fluff rally.'''

Twenty-eight S&P 500 members will post quarterly results this week, including Cisco Systems Inc., the biggest maker of computer- networking equipment, and Gillette Co., the world's largest razor maker. For the 416 companies that have reported, first-quarter earnings climbed 13.8 percent, according to Thomson Financial.

Insiders' Views

Investors often mine the stock purchases of officers and directors for clues that companies may perform better than Wall Street predicts. The thinking is that corporate insiders know more about a company's orders, sales and expenses than any money manager or analyst. Insiders must alert the U.S. Securities and Exchange Commission within two days of buying or selling their companies' shares.

Last month's figures provided evidence that ``stocks are expensive and business isn't getting better,'' said W. Shannon Reid, who manages the $1 billion Evergreen Strategic Growth Fund. Even after the 39 percent slide in the S&P 500 since the market peaked in March 2000, the companies in the index sell 30 times earnings for the past 12 months, not far from the price-earnings multiple of 32 for the past five years.

Some investors cautioned not to read too much into one month of data. ``If we see the market level off here, or even pull back, and we still don't see any insider buying, then I may give it a little more credence,'' said Meyers of Fifth Third.

Whether the market holds steady, retreats or moves higher this week may depend not only on the earnings report, but also on events that may provide clues about the economic outlook.

Possible Reluctance

Federal Reserve officials meet Tuesday to decide whether to change the benchmark interest rate. Last week, Fed Chairman Alan Greenspan told Congress he's confident the pace U.S. economic growth will quicken, so long as businesses become less cautious about spending. Economists surveyed by Bloomberg News expect the Federal Open Market Committee to leave rates unchanged.

The Institute for Supply Management on Monday publishes its monthly index on service industry expansion. The survey is likely to show a contracting market for non-manufacturers.

Some of the corporate executives may have been reluctant to buy shares in the same month they report quarterly results, said Peter Conrad, an analyst at Kopp Investment Advisors. Most first- quarter earnings are released in April, and Conrad said executives may have feared that any transactions would violate the spirit of recent reforms to corporate accounting and disclosure.

Still, he said, the dearth of buying doesn't bode well for predictions that corporate spending and profits will rise as the year progresses. Based on average analyst forecasts, Wall Street expects earnings for S&P 500 companies to climb 21.1 percent in the fourth quarter, according to Thomson Financial.

Personal Finance

Concerns that bedevil chief executives' personal finances also creep into decisions on whether to boost or slow capital spending, hire or fire workers, and expand or idle factories, investors said.

``Whether they'll admit it or not, personal spending patterns carry into corporate spending patterns,'' said Conrad, whose firm oversees $1.5 billion in Edina, Minnesota. ``If the CEO is not feeling good about the economy and not spending money himself, he's going to be more apt to put the brakes on corporate spending as well.''

It has worked the other way, too, said Jonathan Moreland, who runs the Web site Insiderinsights.com and advises investors on how to interpret insider-trading data.

Moreland, who said he has followed insiders' moves for more than a decade, said companies that had buyers outpaced those with sellers in August. The S&P 500 fell 11 percent in September and ended the month at 815.28 before beginning to climb. On Friday, the benchmark closed at 930.08.

Investors ought to use insider-trading data as a screen to help them pick stocks, he said, and not as a sole indicator of a company's financial health and prospects.

``Insiders have been wrong, and they will be wrong, but they tend to be good indicators of what really moves stocks: when there could be an earnings surprise or a good, new product coming out,'' Moreland said.

If April's insider purchases are any guide, there may be few of those kinds of announcements soon. Corporate America certainly doesn't expect them.

Quelle (http://quote.bloomberg.com/apps/news?pid=10000006&sid=aRRS3OZ1Kjrs&refer=home)

syr:rolleyes:

syracus

05.05.2003, 10:46

Politiker lügen, nichts neues.....

All the President's Lies
Bush's rhetoric bears no resemblence to his policies. How does he get away with it?

By Drake Bennett and Heidi Pauken
Issue Date: 5.1.03

Other presidents have had problems with truth-telling. Lyndon Johnson was said, politely, to have suffered a "credibility gap" when it came to Vietnam. Richard Nixon, during Watergate, was reduced to protesting, "I am not a crook." Bill Clinton was relentlessly accused by both adversaries and allies of reversing solemn commitments, not to mention his sexual dissembling. But George W. Bush is in a class by himself when it comes to prevarication. It is no exaggeration to say that lying has become Bush's signature as president.
The pattern is now well established. Soothing rhetoric -- about compassionate conservatism, about how much money the "average" American worker will get through the White House tax program, about prescription-drug benefits -- is simply at odds with what Bush's policies actually do. Last month Bush promised to enhance Medicaid; his actual policy would effectively end it as a federal entitlement program.

More distressing even than the president's lies, though, is the public's apparent passivity. Bush just seems to get away with it. The post-September 11 effect and the Iraq war distract attention, but there's more to it. Are we finally paying the price for three decades of steadily eroding democracy? Is Bush benefiting from the echo chamber of a right-wing press that repeats the White House line until it starts sounding like the truth? Or does the complicity of the press help to lull the public and reinforce the president's lies?

One thing is clear: If a Democrat, say, Bill Clinton, engaged in Bush-scale dishonesty, the press would be all over him. In the spirit of rekindling public outrage, here are just some of the president's lies.

The Education President

"Every single child in America must be educated, I mean every child. ... There's nothing more prejudiced than not educating a child." -- George W. Bush, presidential debate versus Vice President Al Gore, Oct. 11, 2000

Along with tax cuts, education was Bush's top priority when he entered the White House. He charmed lawmakers on both sides of the aisle in an effort to get his bill passed, a bill that combined greater accountability and testing with increased funding. Then, in what has become a trademark, he pulled the plug on the funding.
Members of Congress had good reason to believe Bush was being sincere. As governor of Texas, he had raised state education spending by 55 percent, tightened curriculum requirements and pushed for more accountability from the schools themselves. Even state test scores shot up -- although that was likely the result of the tendency to "teach to the test" rather than an actual increase in learning or knowledge. (The increase wasn't reflected in national standardized test scores.) Still, Bush was able to persuade the top two education Democrats in Congress, Sen. Edward Kennedy (D-Mass.) and Rep. George Miller (D-Calif.), to work with him on the No Child Left Behind Act. And when the lawmakers objected to voucher provisions, Bush dropped the vouchers -- and toned down the testing measures to win Congress' approval.

But in his 2003 budget, Bush proposed funding levels far below what the legislation called for, requesting only $22.1 billion of the $29.2 billion that Congress authorized. For the largest program, Title I of the Elementary and Secondary Education Act, which provides support to students in impoverished school districts, Bush asked for $11.35 billion out of the $18.5 billion authorized. His 2004 budget was more than $6 billion short of what Congress authorized. Furious, Kennedy called Bush's proposal a "tin cup budget" that "may provide the resources to test our children, but not enough to teach them."

The result: States already strapped by record deficits are being held responsible for the extra testing and administration mandated by law -- but aren't getting nearly enough money to pay for it. So the number of public schools likely to be labeled "failing" by the law is estimated to be as high as 85 percent. Failing triggers sanctions, from technical assistance to requiring public-school choice to "reconstitution" -- that is, firing the entire school's staff and hiring a new one. And Bush isn't doing much to help. The New Hampshire School Administrators Association calculated that Bush's plan imposed at least $575 per student in new obligations. His budget, however, provides just $77 per student. It's a revolution in education policy, all right, but No Child Left Behind was simply a lie.

Healthy Skepticism

"Our goal is a system in which all Americans have got a good insurance policy, in which all Americans can choose their own doctor, in which seniors and low-income citizens receive the help they need. ... Our Medicare system is a binding commitment of a caring society. We must renew that commitment by providing the seniors of today and tomorrow with preventive care and the new medicines that are transforming health care in our country." -- George W. Bush, Medicare address, March 4, 2003

The man simply has no shame. His program does none of this. What it does, simply, is to make dramatic cuts in the benefits for both the poor and the elderly.
Under the current Medicaid program, the federal government matches, on a sliding scale, the money that states put up. The state is required to cover some beneficiaries and services, although others are "optional." But "optional" services include many essential and life-saving treatments. And "optional" beneficiaries are seldom able to pay for private insurance. Bush's plan, in effect, would turn Medicaid into a block grant, capping the federal contribution. Because states are already hard-pressed to keep up with Medicaid costs, services to the poor will simply dwindle. As Leighton Ku, a health-policy analyst at the Center for Budget and Policy Priorities, notes, if under the current plan "you wanted to save that much money, you would have to specify which cuts to make, how to make the cuts. But it's much easier to cut the block grant because it's invisible; someone else has to make the decisions."

Bush claims to bring flexibility to Medicaid, and, in a sense, he's right. Under his plan states would have, as Secretary of Health and Human Services Tommy Thompson put it, "carte blanche" in dealing with optional benefits and optional recipients. In other words, a mother making more than $9,000 a year would be fair game, as would an 8-year-old child who lives in a family with an income just above the poverty line, or a senior citizen or disabled person living on $7,200 a year.

And there's a whiff of coercion to the way in which the states are offered the option of switching to the Medicaid block grant. The states, which have already started cutting Medicaid on their own, are literally begging for federal fiscal assistance, and none is forthcoming. But if they consent to Bush's Medicaid plan, they'll get not only $3 billion in new federal money next year (a loan they would have to repay) but the ability to save money by trimming their Medicaid rolls. In other words, the president is making them an offer they can't refuse.

Bush relentlessly invokes a rhetoric of choice on Medicare. But the Republican proposal pushes seniors toward heavily managed private plans that offer partial drug benefits but limit choice of treatment and doctor. If you stayed with traditional Medicare (which does offer free choice of doctor and hospital), you'd only get minimal prescription-drug benefits. The plan would spend some $400 billion over 10 years, a sum that provides coverage worth 40 percent less than that enjoyed by members of Congress under the Federal Employees Health Benefit Program, which Bush repeatedly invokes as a model.

And while the plan allows House Republicans to avoid making politically unpopular cuts to Medicare, it requires Congress to cut $169 billion over 10 years from programs they oversee. So in the end, Medicare cuts may end up paying for prescription-drug benefits.

Despite rhetoric promising to increase other health spending, a close reading of the House Republican budget proposal shows $2.4 billion in cuts for programs -- such as the National Institutes of Health, Community Health Centers and the Ryan White AIDS program -- that Bush has pledged to support. Even though Bush vowed in his State of the Union address to spend $15 billion over the next five years to provide AIDS relief to Africa, much of that money won't be available until at least 2006. [See Garance Franke-Ruta, "The Fakeout," TAP, April 2003.]

A Paler Shade of Green

"Clear Skies legislation, when passed by Congress, will significantly reduce smog and mercury emissions, as well as stop acid rain. It will put more money directly into programs to reduce pollution, so as to meet firm national air-quality goals. ..." -- George W. Bush, Earth Day speech, April 22, 2002

Actually, the Clear Skies law doesn't do any of this. The act, in fact, delays required emission cuts by as much as 10 years, usurps the states' power to address interstate pollution problems and allows outdated industrial facilities to skirt costly pollution-control upgrades. The Environmental Protection Agency ensured that few people would notice this last regulation by announcing the change on the Friday before Thanksgiving and publishing it in the Federal Register on New Year's Eve. Still, nine northeastern states immediately filed suit against the administration; their case is pending. Meanwhile, Bush's commitment to clean water is just as murky. Despite saying last October that he wanted to "renew our commitment" to building on the Clean Water Act, he's instead decided to "update" it by removing protections for "isolated" waters and weakening sewage-overflow rules, which could significantly increase the potential for waterborne illnesses.
It's hardly surprising to learn that big business is behind a lot of these changes. The Washington Post recounted a meeting between Office of Information and Regulatory Affairs (OIRA) Administrator John Graham and industry lobbyists during which the latter were encouraged to identify particularly onerous rules -- and ultimately created a regulatory "hit list." "There is a stealth campaign that's going on behind closed doors to twist the anti-regulatory process into a pretzel so that the public will be unaware that they are bottling up these protections," says Wesley Warren, the National Resources Defense Council's senior fellow for environmental economics. A good chunk of the 57-item list fell under the EPA's jurisdiction. One by one these rules have been submitted to OIRA under the Paperwork Reduction Act for cost-benefit analysis, a regulatory accounting technique that often ends up justifying watered-down rules.

Even as EPA Administrator Christine Todd Whitman announced that global warming is a "real phenomenon," Bush refused to sign the Kyoto Protocol to reduce carbon-dioxide emissions. His decision weakened the treaty's effectiveness because the United States produces 25 percent of all greenhouse-gas emissions.

The former Texas oilman, who made one environmental promise after another on the campaign trail, has slashed the EPA's budget by half a billion dollars over two years, cut 100 employees and rolled back regulations on a near-weekly basis. "There has never been anything to compare this to," says Greg Wetstone, director of advocacy at the National Resources Defense Council. "Even in the days of Reagan, there was never an administration so willfully and almost obsessively concerned with finding ways to really undermine the environmental infrastructure."

Whitman, the administration's supposed environmental champion, is also contributing to the weakening of protections. Although she said the administration was working to put in place a standard to "dramatically reduce" levels of arsenic in drinking water, she later tried to lower the existing regulation, saying that even the 10-part-per-billion federal benchmark was too tough. The EPA rolled back the standard until a report warning of health risks (and public outcry) forced the agency to reinstate the old limit.

Here's another classic Bush whopper. In his State of the Union address, the president proposed $1.2 billion in research funding to develop hydrogen-powered cars, in part to make the United States less reliant on foreign oil. What he didn't say is that the technology and infrastructure needed to mass produce such cars won't be available until at least 2020. If Bush truly cared about immediate relief, he might start by acknowledging existing hybrid vehicles or supporting more stringent Corporate Average Fuel Economy Standards for light trucks and SUVs. Neither is likely to be part of a Republican energy package this year.

Democrats in the Senate dealt Bush a rare blow when they voted down his proposal to drill for oil in the Arctic National Wildlife Refuge in March, although House Majority Leader Tom DeLay (R-Texas) plans to bring the issue back. Still, many lawmakers, especially in the House, feel they can do little except try to fend off the administration's attacks on the environment. "There is an absolute hostility toward any positive strengthening of environmental law," says Rep. Sherrod Brown (D-Ohio), a member of the Committee on Energy and Commerce. "It is a wholesale turning over to corporate America the governing of this country."

Hypocrisy has been defined as the tribute that vice pays to virtue. George W. Bush lied about all these policies because the programs he pretends to favor are far more popular than the ones he puts into effect. But unless the voters and the press start paying attention, all the president's lies will have little political consequence -- except to certify that we have become something less than a democracy.

Drake Bennett and Heidi Pauken

The American Prospect (http://www.prospect.org/print/V14/5/bennett-d.html)

syr:sss

syracus

07.05.2003, 21:53

Monstrously More Monetary Creation

"...Money inflation leads to price inflation. Price inflation is historically bad news for anybody experiencing it. And... and this is the part that makes me scream in my sleep and awake in a sweat-soaked panic to empty whole banana-clip magazines of expensive high-powered ammo at anything that moves in the shadows... not only have we HAD monetary inflation for at least six years, not only are we HAVING monetary inflation right freaking now, but we have Alan Greenspan and Ben Bernanke explicitly promising to do even MORE monetary creation! And everybody else is, too! And we are monstrously deficit-spending at the end of a long, long boom where there is zero pent-up demand! Gaaaaaaahhhhhh!..."

Richard Daughty

- The jackasses at the Federal Reserve pumped up raw credit in the system by another $6.5 billion dollars last week, continuing that particular filthy fraud. Actually, $6.5 billion is not that bad by recent Fed standards, but still, it is a new record.

I hope you'll pardon me if the typing gets weird right here, as my eyes seem to be glazed over, and several circuits in my tiny little brain have seemingly popped their fuses. Apparently they were wired to the circuits that control bladder and bowel functions, because when I read that the banks soaked up an incredible $56 billion in government debt last week, I might have had a little accident. My hygiene problems aside, this is, as far as I can tell, a new record for a one-week feeding frenzy. Perfect. Just freaking perfect. But, you may be relieved to know, I also plan to lay in a supply of Depends adult diapers for the NEXT time I go snooping around in the banking system.

I mean, bond prices are at record highs, with the result that yields are at record lows, and yet here are these banking losers sniffing around and soaking up scads of debt at these record-low yields and record-high prices, at the exact same time that inflation is heading up and the dollar is heading down! This is beyond absurd! AIU assume that they are merely participating in the on-going Fed program to actively destroy the dollar and the US economy. How special.

Now the only thing left to wonder about is when the foreign holders of US debt start flexing their muscles and say, "No more with that buying-debt thing or we're selling," and then the Fed will cool its extravagance, and will try and stick the banks with a load of debt, which will be falling in price because interest rates are no longer being held forcibly down, and then the banks will start whining about how everybody needs to please please please bail them out, again, of the mess that their own incompetence caused, again. One merely has to merely glance at the history of banking crises to realize that this exact same damn thing, over and over and over, is what caused banking crises in the first place. Some things DO never change, apparently.

- The decline in the Monetary Base statistics that I was lamenting last week has, incredibly, reversed and literally exploded to the upside. I seem to have powers that I did not even know I had! I flex my mighty Mogambo muscles! Now, if I could only get this X-ray vision thing working as well...

- At least the morons who run the banks will have a lot of company at the annual Imbeciles' Picnic, as the chumps bid up the stocks of the SP500 to a P/E of almost 34. Thirty-four!

Perhaps the idea, as stupid as it sounds, is that all this monetary and fiscal stimulating will restore a profitable and wonderful future, because laws of economics somehow do not apply to the United States, and all this money will soon be fixing everything that is broken, and that the earnings of the companies will soon rise to such heights that everyone will be employed and rich. Throwing a little cold water on this idea, anecdotal conversations with friends and acquaintances who run retail businesses reveal that they are almost uniformly reporting that sales are down between ten and fifty percent. Yow! And they are quite, quite glum.

Or, maybe, all this bullishness is because it is commonly accepted that Bush will do anything and everything to make sure that the economy is perking along in time for the elections in 2004 so that he can win re-election, and that somehow means that shares will be worth more. We already know that the damnable Fed will do anything and everything stupid as far as it can, and the Congress is deficit-spending like there is no tomorrow, too. So all we needed, according to the bulls, was Bush pushing for what he terms a "bold plan." I have no idea how in the hell the Bush people can come up with something that is bolder, if bold means "committing almost-certain suicide in pursuit of a transitory goal," than what the Fed and the Congress are already doing. I didn't even know that there WAS anything beyond monetary and fiscal insanity! But, perhaps these three things WILL produce a revived economy. Unfortunately, all of these have been tried many times before in history, and they have failed every time in history, with the latest experiment being Japan, where it has failed for fourteen years in a row, so I am not holding my breath.

- The latest read on business costs is that the total cost to employ somebody went up 1.3% in the fourth quarter, and a whopping 3.9% y/y. Turning our attention to the cost of mere benefits, they were up 2.2% in the first quarter and a staggering 6.1% from a year earlier.

An interesting quirk, maybe of the statistical kind, was that total wages were up a healthy 2.9% in the last twelve months, but most of the gains were apparently concentrated in the mortgage industry, where wages and salaries surged 5.2%. So, stripping out the higher incomes of those who are participating in the Great Mortgage and Housing Bubble, the wages and salaries of everybody else must have gone, umm, someplace else. Bummer.

And, truth be told, the y/y 2.9% increase in total wages was not enough to offset the y/y increases in consumer prices, which were up 3%. And those wage increases first have to be reduced by about a third by taxes. So, prices increased faster than wages and salaries, even BEFORE taxes. Wonderful. Just freaking wonderful.

To show that we and the Japanese are not the only moronic jackasses in town, there was recently an article in the Financial Times that said that the ECB was considering changing its policy toward inflation, and that, and I quote, "excessively low inflation was bad." The ECB is actually considering, and I know you are going to find this hard to believe because my eyes are spinning in the sockets and making me quite dizzy as a result, adjusting their polices to maintain a MINIMUM of 1% price inflation! Apparently, that is the minimum of "good" inflation. I know what you are thinking; "Who are these idiots? And where in the hell did they get the stupid idea that inflation is good?" I don't know.

- Bill Bonner at the Daily Reckoning website writes disparagingly about what he call the "lumpeninvestoriat," which sounds rather Russian, which makes a sort of sense, since the story goes that the first thing that the Communists did when they seized power was to execute all the intellectuals and anybody with an education, so that all that was left was the stupid and the un-educated, and we know how well that turned out for the USSR. But anyway, he writes, "But the lumpeninvestoriat have neither a clue nor a prayer. The happy schmucks don't read the Daily Reckoning and don't seem to be aware of the vulnerability of the dollar, the national savings rate...debt....bankruptcies...jobs disappearing to China...falling profit margins...or any of the other end-of-the-world-type problems we worry about."

Well, this is true, and anecdotal evidence that I have gathered says that the lumpeninvestoriat Mr. Bonner refers to is worried about many, many things, and is happy to leave weighty matters to those who have the smug audacity to claim that they can deal with them. These hapless people are worried about dealing with their pressing personal problems CAUSED by that short list.

And, of course, let's not forget to include foreign investors on our short list of lumpeninvestoriat doofuses. Those people, who almost uniformly speak English with funny accents if they can speak English at all, are loaning and investing gigantic sums of money, at least $503 billion a year if we use the current-account deficit as the benchmark, to a country of us fat, lazy, whining, something-for-nothing, neo-communist weenies, and getting negative returns for their trouble. Maybe they are all Russians, which would certainly explain why they would do such a stupid thing.

Fortunately, the evidence indicates that all foreigners are stupid and all Americans are smart. I mean, this $503 billion per year current account deficit didn't appear overnight, you know. Didn't they notice? At least us domestic lumps, to use a nickname, are taking their losses on a dollar-for-dollar basis. These foreign poop-heads are taking a double-whammy to the noggin when they convert the same losses back into their own currencies for yet another loss, because the dollar is going down. And yet, here they are, day after day, putting more and more money into the dysfunctional mess that the Fed and Congress has made of this country. Morons.

Bill also dryly notes that the Japanese stock market has lost 80% from its high in 1989 to last week's low, with lots and lots of monumental gains and losses along the way. Unfortunately, the losses have outweighed the gains. Perhaps that is why the average Japanese citizen has a much smaller portfolio of stocks now than he, or she, used to have.

Let's not lose sight of the fact that every failed attempt at getting things fixed that the Japanese government has done for the last fourteen freaking years in a row is exactly what our own Federal Reserve bozos have advised them to do, and is exactly what the bozos at the Fed are doing to us right this very minute. It failed for the Japanese and it will fail for us, too, only with a hell of a lot more pain and gnashing of teeth.

And I am not alone in that sorry assessment. Mr. Bonner sees the same thing happening to us over the next decade. Recognizing that always losing money is not the sort of thing that remains popular for long, at the end of the decade he figures that, "By then, people will have stopped paying attention to the Dow. Instead, they will probably keep an eye on the Chinese stock market or the price of gold, for they will have concluded years ago that U.S. stocks are not a suitable place to put money."

Even that aside, the statistical comparison between the USA and Japan is flawed because "There is one major difference between the U.S. and Japan. The Japanese never saved less than 10% of their incomes (in the U.S., savings rates fell near zero) and never had to rely on foreigners to finance their economy."

- John Myers, a noted big-shot expert on commodities in general and metals in particular, writes, "Net-net, something is stirring in the base metals markets, and that 'something' looks an awful lot like a major rally."

What could possibly cause such a major rally? He explains, "We note that the latest PBOC money supply data revealed a 19.2% year-over-year pace of M2 expansion in China, its sharpest expansion since the 1998 Asian-Russian-Brazilian debt crisis. Adding even more fuel to the fire is the fact that the money supply expansion is being led by an explosion in the supply of currency in circulation (up an exuberant 29%, year-over-year, in January) and is fully supported by concurrently high growth in bank deposits."

In short, China's government is going down the monetary expansion road. The Chinese have the pedal to the metal on rapid industrialization to satisfy a growing domestic demand. Mr. Myers characterizes the explosion as a juggernaut, and notes that it "... is having a discernible impact on the pricing structure for London Metal Exchange (LME) base metals, which reflects a tightening supply-demand dynamic."

I like that phrase; "tightening supply-demand dynamic." It smells of, sniff sniff, money. And here I am going to re-use a sentence I recently penned, both because I am too damn lazy to construct anything new to say and because it was mildly clever, and believe me when I say that there is nobody more surprised than me when I realized that I had finally written something that was not laughably moronic. To A. DeLuca, a delightful and thoughtful reader who was kind enough to send me an e-mail that was not a death threat, a final demand for immediate payment, and did not actually contain the words "restraining order" or "lawsuit," which is a real nice change of pace, I wrote "And if there are two damn things in the whole freaking universe that I am one-hundred percent sure of, one is that money goes where money is being made, and the other is that a lot of money will be made helping money get to where money is being made."

- Greenspan, testifying before the alarmingly-clueless dimwits in Congress, said that this country needs inflation so that profit margins can improve. This ridiculous statement demonstrates proof-positive that Alan Greenspan has lost all his marbles. And putting this, umm, person in charge of the Federal Reserve will actually prevent America from ever emerging from the abyss into which the unbelievable stupidities of the Fed have thrown us.

Let me be completely frank; there is never been any economic theory that I have ever heard of that propounds the idea that price inflation is anything other than baaaad news, except for that theory I developed that postulated that gravity waves from the planet Venus impacts currency exchange rates and inflation, but teams of psychiatrists working around the clock were finally able to disabuse me of that stupid idea. On the other hand, the entire history of economic crises is one of government and central-banks causing inflation, and thus destroying one country after another with waves of misery. So the entire corpus of economics literature has been completely free of the preposterous idea that inflation is somehow something one would EVER want to engender. Until now, that is. Now we have Alan Greenspan, America's premier pompous jackass, uttering such a preposterous statement.

To the uninformed nitwit it seems correct that when companies charge more money that they will make more money. Duh. To the informed nitwit, like me, it is axiomatic that paying higher prices for the inputs of materials, capital and labor means you will NOT make more money. What it means is that everything will merely cost more.

And what THAT means is that when it takes your entire paycheck to buy a loaf of bread, then there is not much left to buy anything else. And if you are in the business of manufacturing that anything else, then nobody is going to be buying your output, because customers are using all their money to buy bread, and you will fire the workers, and then those poor bastards will not even be buying bread.

The people who are the final consumers will find that their paychecks always lag the rise in prices, so they must necessarily buy less and less stuff every week. And it is a law of economics that people buying less and less stuff is NOT the road to economic Nirvana.

At this point, the only way that we can possibly be saved is if some miracle happens, with the salubrious result that the final consumers end up with more spending money at the end of the week, and then this now-moneyed collection of consumers goes out and spends the money. And this is, unfortunately, the same "looking for a miracle" that every economy that pursued an inflationary policy has ended up looking for. And not one has ever found it, because there are no miracles.

- Marshall Auerback, perusing the ramblings of various Fed people, writes, "In the lexicon of economics, Mr Reinhart is telling us that the Federal Reserve has no idea what happens to the money demand curve when they start promoting an explicit inflationary policy."

He notes that "At the micro level, consumers have not been exhibiting any greater fear of inflation, and very few of them have ever heard of Bernanke or his printing press threat." Well, why should they? Didn't they all graduate from a government school? And isn't one of the Big Messages of government schools the idea that the government knows best, and that the government will take care of you, and that everything will be wonderful once we all vote the straight Democrat-ticket and have our level of esteem raised by that singular act?

- The Bloomberg news organization writes that "Federal Reserve Chairman Alan Greenspan said he remains confident that the U.S. economy will expand at a faster pace, provided that corporate executives shed their pessimism and begin to spend more." Well, duh. So, taking my cue from Sir Alan, I exhort American corporations to forget that the consumers have no money to spend! Forget that inflation is already reducing their incomes even more! Forget the crushing burden of under-funded retirement plans that will need to suck up every dime the corporation makes for the next few decades! Forget the vast unused capacity that exists in every business in America! Forget everything you ever learned in getting that stupid MBA and everything you learned in the real world, too, and just go out and spend, spend, spend!

- The dollar hit a four-year low. Next year the news will be that the dollar has hit a five-year low. Or more.

- Dean Baker, co-director of the Center for Economics and Policy, writes in an article entitled "Greenspan's Unfortunate Return," casts a disapproving eye at how we need to borrow more than $1.5 billion every day from foreigners. "This process cannot continue for long. At some point the country literally will run out of things to sell - in about 20 years at the current rate, if foreigners don't lose interest in the United States long before that. Whenever it happens, the dollar will drop, sending import prices and inflation soaring, and U.S. living standards will plummet."

Please note that Mr. Baker's estimate of how we will literally have mortgaged everything in the country in twenty years is predicated on the idea that the current rate of borrowing does not increase. Hahahaha! Mr. Baker is truly an optimist!

And what do you think is going to happen to bond prices? Well, let me put it this way; people are now locking up their money for up to thirty years or more at rates that are historically at the extremes of the low end. In most cases, almost all government debt is issued at rates that are, after taxes, less than the rate of inflation.

And it is being issued in huge, huge amounts. Amounts so large that experienced bond traders stand in awe, like I stand in awe. Well, actually, I am not standing at all. If you look closely at the photograph identified as Exhibit D, you will no doubt notice that I am the one waaayyy over there in the far, back corner, cowering and whimpering in some bizarre, fetal-like crouch. Although I am obviously convulsed with fear, according to both the court indictment and vilification by the popular press, everyone else is stalwart and brave, heroically girding themselves for the orgy of buying and selling this tsunami of new debt.

But Mr. Baker believes that, in the meantime, things will improve. "Again," he writes, "Greenspan seems happy to let this debt continue to grow, happy to pass this problem on to future generations." I have less optimism, in case you ain't noticed. I figure that future generations will rise up and murder us all in our sleep for what we have done to them.

- I interrupt today's important and highly entertaining broadcast to announce that I received a catalog of books, and one of the tomes offered is "Fiat Money Inflation in France," and the little blurb supplied by the publisher says, "Classic account of how deficit spending led to ruinous runaway inflation and tyranny during the French Revolution."

Well, you can imagine how intrigued I was. We, right here in America, have deficit-spending in the neighborhood of "insane." Okay, I will admit that I am not the guy they call on the game show "Who Wants to be a Millionaire?" especially when it comes to questions about the French Revolution. All I remember is guillotines and toothless old women cackling and knitting at the beheadings. In fact, the only things that I ever learned about the French Revolution were from the movies, and that is why I am able to flawlessly imitate Charles Lawton's classic character, Quasimodo. "Esmerelda! Sanctuary! Esmerelda! Sanctuary!"

But getting back to the point for a change, I call your attention to the publisher's remarks about this being "classic," which I interpret as meaning "textbook example, and what will happen to you if you dare get into the habit of deficit-spending."

Another point is the publisher's use of the alliteration of "ruinous runaway" inflation. That is, if I get this patent-thing going according to plan, I will hold the everlasting copyright on alliteration, and everybody who uses such a literary device will owe me, oh, let's say two cents. No, make that a nickel.

Anyway, the point is that there was not just inflation, make that "ruinous runaway inflation," but that there was a lot of tyranny involved, too. Now, I don't know why, but when I read the word "tyranny" I immediately thought of Janet Reno and John Ashcroft, although, to be fair, Mr. Ashcroft is not shooting twelve-year old boys in the back, burning groups of religious fanatics to death, or sending armed and armored government agents to kidnap children at gunpoint in the middle of the night like the blood-thirsty Ms. Reno.

And, and here is where the spooky thing happens, as I was writing the above, Philip Spicer came by, a real nice fella and a big muckety-muck at the Gold Trust of Canada, fortunately at one of those rare moments when my Anti-Trespass and Intruder Intercept System was down for maintenance and reloading, and in the course of a very pleasant conversation spontaneously mentioned that this very book is a good one. Spooky, huh?

Not only that, but he loaned me the most remarkable book. Every page a gem! It is called "A Man of Principle. Essays in honor of Hans F. Sennholz." And if you want a book that brightly illuminates the Austrian School of economics and the incandescent brilliance of Hans Sennholz, then get this book.

Philip, who says that I can call him Philip when there is nobody else around, is the guy who actually suggested the title. As much as I like the guy, he obviously suggested the title before he read it, because if he had read it then he would have known that it was vitally important to get this book into as many hands as possible, and a dull title like that ain't a-gonna do it. The Mogambo Way is to re-title the book, "Austrian Economics and Beautiful Naked Ladies." And of course the publisher would have to stoop to include actual pictures of naked chicks, and as an aside, in case anybody from Grove City College Press knows somebody who knows somebody who knows somebody who knows somebody who read down this far in this run-on sentence and they hear about my terrific idea and are willing to take a gamble on the re-printing with the new title and inserts, I would be happy to volunteer my time to help pick the good photos to include, and am willing to put in many, many hours culling the stacks and, hopefully, more stacks of them.

But getting back to the point, which was something about the French Revolution, the point is that money inflation leads to price inflation. Another salient fact is that price inflation is historically bad news for anybody experiencing it. The third fact, and this is the part that makes me scream in my sleep and awake in a sweat-soaked panic to empty whole banana-clip magazines of expensive high-powered ammo at anything that moves in the shadows, is that not only have we HAD monetary inflation for at least six years, not only are we HAVING monetary inflation right freaking now, but we have Alan Greenspan and Ben Bernanke explicitly promising to do even MORE monetary creation! And everybody else is, too! And we are monstrously deficit-spending at the end of a long, long boom where there is zero pent-up demand! Gaaaaaaahhhhhh!

And this is at the exact same time that consumer price inflation is at 3% and rising! Raw materials are rising at double-digit rates! Employment costs are rising at 6%! Housing prices at double-digit rates! Debt loads rising! And here is the Federal Reserve committing an act that would cause price inflation when there was none! And who the hell knows what will happen by committing monetary creation when inflation is already high and rising? Who knows? Who the hell could possibly know?

Well, just relax, my little darling. I am happy to report that I, personally, know. And when I explain to you my new theory of economics, in yet another pathetic and ultimately-abortive attempt to get a little respect from the Nobel Prize people, you will know too.

First, to understand this fabulous new theory, you have to imagine this large toilet, see. There is a limited supply of water available per day. The government, in the guise of an agent assigned to provide round-the-clock protection by living in your house, can either drink the water, which will cause it to need to use the toilet, or use it to fill the tank of the toilet, with which to flush said toilet. Then each day, the amount of government, ummm, using the facilities goes up because it is always drinking more and more of the available-in-limited-quantities water. The tank thus cannot fill to capacity because the government guzzled the water supply, and thus cannot completely flush the bowl. And the government starts drinking more and more of the available water, using the facilities more and more, and leaving less and less water with which to flush the toilet.

For this next section of the explanation of this exciting theoretical breakthrough, I refer you to a graph showing the rise in the level of, umm, toilet bowl contents, as compared to the dashed line, up here at the top, that indicates maximum capacity of the bowl. Note the narrowing of that gap.

Then, just as the gap disappears, the scene fades to black, and all you hear is the sound of somebody drinking glug glug glug, tinkling streams of water, toilets weakly flushing, and the new, ever-louder sound of water sloshing onto the tile floor, over and over. As the light comes up, the camera comes into focus on your beautiful photogenic face as you walk down the hall, dressed in your snazzy chenille robe and fuzzy slippers, to the bathroom. You turn the doorknob. You go in.

- I am happy to announce that I may be on my way to my fifteen minutes of fame, in that the Mogambo Guru, the most worthless and ridiculously-inept economics commentary in publication in the USA and the world, and probably the whole solar system as far as I can tell, is reportedly, but erroneously, being mentioned as appearing in a lawsuit by the SEC against some other guys, who are being looked at for offering investment ideas that hold the promise of outsized returns. Imagine my delight and excitement as I was provided with a link showing the purported indictment, and then imagine my profound disappointment when I discovered that I am not mentioned even once. Not once! Damn. I wanted to be in there so bad! Because then, when I died, my obituary will read with a little more spice and sparkle, as in, "Village idiot dies. Nobody knew him or liked him. Was mentioned in an indictment once." But now, alas, another dream gone.

It's not that I don't have some fabulous ideas to produce spectacular speculating results, because I do. It's just that whenever I pitch them to any investors they are always put off by the Hannibal Lector-esque wire mask I am required to wear, so I have now resorted living in gloom, withdrawing into my shell and hating the world.

And it certainly isn't because I am not a bad apple with an attitude, a tragic-yet-endearing-and-handsome Rebel Without A Cause. I am the Original Bad Dude! For example, when I am driving down the Interstate highway and the speed limit is 70, sometimes I go 75 or even 76 miles an hour! And sometimes I ease through stop signs without coming to a complete stop! Speed limits? Laws? I laugh in scornful disrespect - ha! - at your puny laws! I am above your stinking laws!

I am also hoping that somebody from "60 Minutes" will come by and stick a camera in my face, because I have PLENTY to say about a lot of things, especially about rap music, most of which is tuneless and boringly repetitive as far as I am concerned, and I would love to have the opportunity to run my big, fat mouth about whole constellations of things I know absolutely nothing about, as there is nothing that I love better than the sound of my own voice. In anticipation of their visit, I even cleaned the place up a little by kicking all the old fried-chicken bones and empty pizza boxes under the couch and everything. But so far, again, nothing. Rats.

Ditto the SEC. Not only am I not mentioned in the whole thing, but I was never even called on the damn phone! This is the first I have heard of the whole thing! I'm insulted! They don't call, they don't write, they don't serve me any papers, or at least send over an agent to document my theory about how mysterious aliens from outer space are involved in a government conspiracy somehow. But, so far, another big fat zero.

I was purposely kept in the dark, until I got an e-mail this morning, wherein this whole thing was revealed to me.

"And exactly when," and here he paused, "was that, Mr. Daughty?" asked the arrogant prosecuting attorney. The gallery was instantly hushed. I cleared my throat, pretended to think about it for a moment, savoring the anticipation, and said, "Friday, May 02, 2003 at, oh, about eight o'clock in the morning." He quickly exclaims, "I object, your Honor. I asked the witness for the date, and was NOT going to ask the time!" to which I would leap to my feet and say "Yes you were, you slimy little weasel of a lawyer!" And then he would hotly deny it, and I would press the point in a louder voice, and then back and forth, back and forth, until I would probably scream a grossly insulting remark to explicitly imply that he had some unwholesome sexual relationship with his own mother, and then the judge would jump in and caution me with that contempt thing again and I would leap to my feet to not only quote Mae West, but impersonate her to a disturbing and disquieting degree of perfection, and say, "Am I showing contempt of court, your Honor? I hope not! I'm doing my best to hide it!"

Anyway, I thought SEC lawsuits were supposed to get a lot of unwarranted attention and maybe get me booked into a guest spot on "Hollywood Squares" or something, but, so far, the whole thing is turning into a big bust as far as I am concerned.

In case, and I realize I am really losing touch here, one of my multiple personalities had taken over my body and actually did something, umm, untoward, I spent part of the morning practicing my "perp walk," parading back and forth in front of the mirror pretending that my hands are handcuffed behind me, trying to find a way to imprint the whole process with my own, you know, unique mark. "Making it mine," as it were. And I soon found that I can grab my own butt with my hands handcuffed behind me as I am being escorted to the waiting squad cars! In my hypothesized vision of the near future, we, using the editorial "we" which means, paradoxically, "you," turn to Channel Nine, and the TV screen is filled with the scene of what appears to be every policeman, federal agent, newscaster, and unmarked black helicopter in town, with throngs of miscellaneous angry citizens bearing flaming torches being held back by straining cordons of uniformed police officers in human barricades. The newscaster is saying in voice-over, with breathless excitement, "Richard Daughty, local hothead and paranoid recluse, who is the tragically inept writer of an idiotic newsletter that is mildly popular among the incarcerated mentally ill, is seen here being led away in handcuffs by handsome and brave law-enforcement personnel. The assembled crowd is now shocked to silence, in sharp contrast to their behavior this morning, when they were angrily chanting some catchy rhymes that apparently called for bringing back "drawing and quartering" as the only form of punishment that would fit the crime, or crimes, of which Mr. Daughty is, or is not, perhaps charged, or maybe just mentioned, by mistake, by some guy, on some website, according to some anecdotal reports. But now the assembled crowd of on-lookers and armed representatives of the system of law and order stand open-mouthed and speechless, as he appears to be - oh, the humanity! - apparently fondling his own buttocks in some bizarre and revolting editorial comment! Cut to a commercial!"

I prefer to think of it as, "Not all poems are written with a pen!"

Now, anybody who knows me is amazed that I can even tie my own shoes without constant supervision, but they are, thankfully too polite to acknowledge their astonishment at the feat. To them, I say "thank you." But continuing on, a quick read of any Mogambo Guru, or anything that I ever wrote for publication, in any place in the universe, either forward or backwards in time and space, including, for the umpteenth time, that ugly and false rumor about that incident with that belly-dancer on that little hell-hole planet in the Rigel star system, which I will again note for the record that I really DID have a Federation of Planets license to carry a concealed neutron-ray blaster, but my dog ate it, so it's not my fault, will quickly convince you that I have never recommended or offered for sale any investment idea or research, any company, or anything of any kind, except for that time I offered to sell myself to Ann-Margret as a love-slave, but I was never really serious. And anyway, her check bounced.

But although I have a great many talents to offer for sale, they only really appeal to people who have court-appointed guardians and those people never seem to have any money, so you can see why I am starving to death here, but I reserve the right to screech hysterically and with seemingly unending pointlessness, and with more than the usual amount of incoherent bombast, that the Federal Reserve is not only a gigantic, colossal fraud and failure, but also directly responsible for the complete economic ruination of the United States and the dollar, and that now your only hope for survival is to buy gold, buy silver, buy commodities, invest in China and Russia, and arm yourself to the teeth, preferably with a tank, that has extra ammo-storage space, great miles-per-gallon fuel efficiency, and responsive handling-ability for those quick runs to the grocery store. Maybe a sound system, too. And a snazzy paint job.

- Gary North, another one of those guys who seem to have more than their share of brain-horsepower and can effortlessly illuminate economics, "Fractional reserve banking invariably increases the rate of money creation and therefore the rate of price increases. It always leads to an economic boom, followed by contraction, a run on the banks, and bankruptcy."

So, following this script, let's recap, shall we? First we got fractional banking. Check. Then they increased the rate of money creation. Check. We have had almost continual price increases for, let me check my watch here, eighty years in a row. Check. Then we got a whole series of economic booms and contractions. Check. Now, we are at the end of an unbelievably huge, misshapen boom. Check. Now we are going through the contraction. Check. Now, we are getting to the exciting climax with Steve McQueen in a high-speed car chase through the streets of San Francisco. No, wait. That's the movie "Bullitt." Sorry. I thought Gary said we were getting to the exciting climax where we run BY the bank.

Anyway, in the modern, real world, I am not sure that we will have runs on banks anymore. Those were the good old days, when people ran to get their real money out before the bank collapsed. Nowadays, nobody has real money anymore, as we use fake money. And, being fake money, the Fed can just print up enough fresh, fake money to pay off all depositors in the case of a bank failure, so what would be the point of a bank run? I know you are disappointed, after having seen a bank run in the movie "It's a Wonderful Life," and it looks so exciting, what with all your friends and neighbors crowding into the bank lobby, waving their savings account passbooks in the air and all.

But we still have real bankruptcies, if that is any consolation.

- The National Conference of State Legislatures came out with their estimate that the states collectively face deficits in the $80 billion range for fiscal year 2004, which is about double the deficits they face THIS year.

And, almost without a shadow of a doubt, I say that next year the National Conference of State Legislatures will come out with another estimate and say that the states face deficits for 2005 that are higher than that.

Speaking of budget troubles in the states, a guy named Philip Gailey is the Editor of Editorials for the St. Petersburg Times, the far-Leftist, laughable neo-communist rag that ostensibly functions as the newspaper for my home town.

In an editorial in the May 4 issue, he takes the boringly predictable and sophomoric swipes at Republicans as he pontificates about the budget crisis that we, and almost every other state in the nation, are in. He states that we Floridians are somehow unique, because we, well, let me provide the actual quote, "But Florida has one problem most states don't - the political character of its antitax Republican leadership." I know you are waiting breathlessly for him to reveal the depths of depravity of this "Republican leadership." Like you, I was hoping for something spicy, maybe full of sex-scandals and wild orgies involving buxom college cheerleaders, but, alas, no. He sums up "Republican mentality" by saying, "For them, government is the problem, not the solution. That is the organizing principle of their politics" Well, I can't speak for anybody else, but that is exactly the organizing principle of MY politics!

The difference between these Republicans and the smug righteousness of Mr. Gailey and his far-Leftist buddies is that Republicans have, according to the execrable Mr. Gailey, a "political mentality that jeopardizes the quality of life in Florida's future." We must extrapolate this to reveal that Mr. Gailey and all his fellow-traveler neo-communist/fascist buddies think just the opposite; they think that government is always the solution, that more government means more solutions, and that enhancing quality of life revolves around the government providing more solutions, which boils down to providing more free things to more people. Hahahaha! And if you think I am exaggerating, get a load of the title of Mr. Gailey's ridiculous essay; "Antitax ideology in Tallahassee hobbles Florida's future." This is own chosen title, and he is the Editor of Editorials, for crying out loud, so he can pick any title he wants and send anybody who dares to disagree with him to write endless stories about life as a sewer inspector, and this can only mean that he actually believes, and remember that this is a grown man who is supposedly so erudite and literate that he has a big-shot job at a newspaper, that a pro-tax ideology will prevent hobbling Florida's future! Hahahaha! I'm cracking up here! Economic vitality through constantly-increasing taxation? Man, this is too, too rich! So now we know conclusively that you do NOT have to be erudite or even literate to be a big-shot at a newspaper, because Mr. Gailey obviously did NOT get his job from either of those credentials, or he would have had read at least SOMETHING to give him an inkling of how ridiculous and preposterously stupid he sounds.

He avoided actually getting down to dollars and cents, because it is ugly. The fact is that the Florida government already spends over four thousand bucks per resident, or about $22,000 for a family of four, which is, looking adoringly at the picture of your family there on your desk, namely you, your spouse, and those two darling children of yours. But for Mr. Gailey, it is not enough! It is never enough!

And that twenty-two grand is, if we reduce gross income by the standard third that is taxed away, roughly the ENTIRE after-tax annual income of the average family in Florida! This is preposterous! This is beyond ludicrous! The freaking state spends as much per year per family as the average family MAKES in a whole year! And yet, again, it is not enough! It is never freaking enough!

In short, it is the Republicans who want the citizens to pay less tax and lower prices, and it is Philip Gailey and his low-IQ Leftist ilk that want citizens to pay higher taxes and higher prices. It find it remarkable, using that word instead of the more descriptive "un-freaking-believeable," that only in the bizarro-world of Mr. Gailey and his intellectually-defective friends toeing some preposterous Democrat party-line is it possible to characterize impoverishing the citizens via constantly-increasing taxation and forcing them to pay constantly-higher prices for everything as something government should aspire to.

So to the Republican leadership in Tallahassee, whose shining leader is Johnnie Byrd, I stand and salute, and say you are truly heroes! And if the other states who are also grappling with budgetary woes, also brought on by a decade of outrageous and idiotically-profligate spending and mindless over-expansion of government, would merely emulate them and their fine philosophy, then they, too, will be heroes, and one day soon the sun of bounty and prosperity will shine again on their constituents.

But if Florida and the other states hew to the foul philosophy of Mr Gailey and the other preposterously-silly Leftist losers, then the future will be like today, only worse. Much worse. Much, MUCH worse. And for a long, long time, too. Ugh.

--- Mogambo Sez: I am struck my how Bush's plan for being "bold" differs by only one letter from "gold." One measly letter is the difference between something that will ruin you and one will save you. How poetic.

Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning, and other fine publications.

The Daily Reckoning (http://www.dailyreckoning.com/body_headline.cfm?id=3149)

syr:sss

syracus

08.05.2003, 11:45

United States Daily Economic Commentary

Are Collapsing Credit Spreads Portending Second-Half Economic Rebound? (No :p)

May 07, 2003

Recently there has been a lot of ink dedicated to the notion that improving "financial conditions" are giving an all-clear signal that the worst is over for the U.S. economy. One element of improving financial conditions is the stock market. The S&P 500 is, indeed, a leading indicator of economic activity, as shown in Chart 1. And, the S&P 500 is up an impressive 16.7% as of Tuesday from March 11. Now, whether two months of a rally marks a major trend change will only be known after the fact. I might add that if the S&P 500 is an infallible leading indicator of economic activity, there would be no need for us to toil over economic forecasts. After all, don't we care about the future path of the economy as it relates to the future path of the stock market?

http://www.northerntrust.com/library/econ_research/daily/us/images/030507_01.gif

By the way, there is another leading indicator of economic growth that is flashing a warning signal, the M2 money supply. Chart 2 shows that real M2 growth has an even higher correlation with future real GDP growth than does the S&P 500 (0.61 vs. 0.50). Chart 3 shows that the 13-week annualized growth in nominal M2 has been slipping of late - not a good sign for a second-half recovery.

http://www.northerntrust.com/library/econ_research/daily/us/images/030507_02.gif

http://www.northerntrust.com/library/econ_research/daily/us/images/030507_03.gif

But I digress. The improving financial condition that has caught the eye of many analysts is the narrowing spread between corporate and Treasury bond yields. This narrowing in credit spreads is alleged to be sending the signal that good economic times are just a quarter away. Let's examine the relationship between credit spreads and economic growth. Chart 4 shows the contemporaneous relationship between the Moody's corporate Baa - Treasury 10-year yield spread. As expected, the correlation between the two series is negative. An absolute value correlation coefficient of 0.35 is hardly in the league of real M2 or the S&P 500, but I've seen worse.

http://www.northerntrust.com/library/econ_research/daily/us/images/030507_04.gif

Of course, though, this is a correlation coefficient between contemporaneous observations of the two variables. What we want to know is what leading indicator properties does the credit spread have? This is shown in Chart 5. Unfortunately for those banking on narrower credit spreads as sign of better economic conditions ahead, the historical record is not encouraging. When the 4-quarter moving average of the credit spread is advanced by two quarters (signified by the -2 in parentheses in graph title), the absolute value of the correlation coefficient falls and falls to a very low level, 0.06. This indicates that there is scarcely any correlation between today's credit spread and tomorrow's real GDP growth.

http://www.northerntrust.com/library/econ_research/daily/us/images/030507_05.gif

If narrowing credit spreads were portending stronger economic activity ahead and if the U.S. Treasury were embarking on a program of massive debt issuance, which it is, would you not think that this combination would result in a spike in Treasury bond yields? Well, as you can see in Chart 6, this has not happened.

So, the behavior of Treasury bond yields is inconsistent with the notion that narrowing credit spreads are signaling a pick up in real GDP growth.

http://www.northerntrust.com/library/econ_research/daily/us/images/030507_06.gif

What then, might the narrowing in credit spreads be telling us? Perhaps it is reflecting weak credit demand on the part of corporations. Chart 7 shows that there has been a sharp slowdown in the pace of corporate borrowing in the past two years. Perhaps corporations continue to clean up their balance sheets, caring more about preserving or improving their credit ratings than expanding their operations. Perhaps the low level of interest rates in general is a reflection of a perceived low return on capital. If this is the case, neither the low interest rate structure nor the narrowing credit spread is heralding the re-acceleration of economic growth.

http://www.northerntrust.com/library/econ_research/daily/us/images/030507_07.gif

Paul Kasriel
Director of Economic Research
Northern Trust Inc.

Quelle (http://www.northerntrust.com/library/econ_research/daily/us/030507.html)

syr:sss

syracus

09.05.2003, 14:48

Mises on Iraq....

http://mises.org/images/2002/top_logo.gif

Friday, May 09, 2003

A Plan for Iraq: Leave

by Llewellyn H. Rockwell, Jr.

When Bush announced the end of fighting in Iraq, he also threw the first pitch in the great American sport of telling a foreign country, about which we know nothing, how to restructure itself to our liking. The preferred model, of course, is the United States, or, rather, the part of the United States that particularly appeals to the would-be central planner who happens to be writing about Iraq. Thus are the web and print publications overflowing with articles on what kind of country Iraq ought to be and what the U.S. should do to bring it about.

Inevitably, the plans for Iraq also mirror the special interest of the institution or commentator in question. The social democrats recommend social democracy. Moderate free marketeers recommend a moderate free market. The militarists counsel more military control. The American mercantilists say that job one is getting contracts for American firms. Education reformers demand education reform.

And so on it goes in this great punditry free-for-all in which people are designing the new Iraq the way they might play a computer game like SimCity. (For a critique of the computer-game approach to economic planning, see Timothy Terrell's "Simulating Statism".) Consulting firms are being paid millions in tax dollars to crank out these plans for running an entire country. And of course every federal agency in Washington has put together a postwar plan for Iraq that mirrors its own highly detailed organization chart.

There are three major problems with all these plans that seem to have escaped everyone's notice. First, none of these plan writers will have their way. U.S. bureaucrats (civilian and/or military) are ultimately in charge here and the plan that is put into effect will be the usual internally contradictory and unworkable mishmash of competing views and interests that bureaucracies always produce. Those who believe they can tell bureaucracies what to do ought first to compel the U.S. post office to be efficient, and only then get the bureaucrats to run Iraq in the right way.

Second, none of these central plans can ultimately work because all of them partake of a problem that afflicts all central planning, namely that society and economic life are too complex to be run from the top down. A management blueprint for a whole country consisting of actual people is a ridiculous notion. The notion of planning a market economy is particularly egregious in this respect. Again, these federal bureaucrats ought to first try their hand at shaping up Washington, D.C., with all its poverty, crime, and nonworking public services, before tinkering with Iraq.

Third, and most important, none of these plans address the overwhelming reality that the U.S. government has no legitimate role to play in Iraq, now or ever. If anyone should be in charge in Iraq it is Iraqis. It is simply a law of civilized nations. As Richard Cobden, the great English liberal, said: "If you want to give a guarantee for peace, and, as I believe, the surest guarantee for progress and freedom, lay down this principle, and act on it, that no foreign State has a right by force to interfere with the domestic concerns of another State, even to confer a benefit on it, with its own consent." In short, no progress can take place until the military occupier, which only recently created unprecedented havoc, leaves the country.

Let's plunge straight into the specifics. The U.S. has no greater economic priority here than to get the oil wells working and refineries operating to create energy to run the country and to export. But the attempt has created nothing short of a comedy of errors—or at least it would be comedy if it were not tragic for the Iraqi people. Gas lines in northern Iraq are three-days long. Cooking fuel is in such shortage that the U.S. taxpayers are footing the bill to import a 30-day supply.

And why is there such a shortage of petroleum products in a country with the second largest oil reserves in the world? Quite simply, it is not being refined. The U.S. bombed the power grid, so power plants are running at a fraction of capacity. This means that refineries can't process the crude oil that is piling up. That also means that other byproducts of refining, like gasoline, are not available. In order to meet demand, the power grid has to be fixed and the Iraqi export market will need to be kick started. Absent this, what we get is chaos.

Without gasoline to fuel cars, the entire economy comes to a standstill. The U.S. military realizes this and so it has variously taken charge of service stations and tried to get people whatever gasoline that is available. In one instance in Baghdad this week, the lines grew so long than the U.S. general in charge decided he would speed things up by not charging for the gas. Soldiers under his command pumped and pumped at his orders. Well, they must not teach economics at Officer Training School, because he didn't anticipate the result of zero price: vastly longer lines!

"Under socialism, who will take out the garbage?" went a snappy question that free marketeers once asked of their leftist colleagues. It is an important question that underscores the reality that no society is run by vast plans but by the doers of millions and millions of tiny tasks, most of them menial, that have to be coordinated one with another and be consistent with the availability of labor and natural resources. The reason this should be left to property holders is so that people can work out mutually beneficial trades with each other in a peaceful and orderly way consistent with human liberty.

Similarly, we might ask of all those people who demand a top-down plan for Iraq: "Who will pump the gas?" The U.S. has already given us the answer: panicked U.S. troops doing their best to forestall a civilian uprising brought on by anger at the unrelenting chaos in Iraq. War planners had a great time picking buildings to bomb and watching explosions from the air. But when it comes to actually running a country, death machines don't do much good, at least if your goal is to make life livable.

Neither, for that matter, does this game of administrative musical chairs, in which one blowhard bureaucrat is replaced by another in a tug-of-war between the State Department and the Pentagon. Average Iraqis are trying to get food, water, and transportation, but the State Department and the Pentagon are fixated on the issue of who will pretend to be in charge and otherwise staff the bureaucracies they are setting up!

Matters will not improve soon. Central planning of this sort can eventually settle down into a calm state of affairs of unrelenting, all-round poverty. But one thing it cannot do is create a viable working economy. If the problem of oil is ever solved, there will be a million other problems that will crop up unexpectedly and for which the U.S. will be (rightly) blamed. In the medical sector, for example, Iraqi doctors have taken to the streets to protest not the U.S. presence as such but the ties that a U.S.-appointed head of the Health Ministry has to the old regime!

For a look into the future of Iraq, turn your eyes toward Afghanistan. Everyone calls the U.S. military campaign against Afghanistan a success, but it has been less successful than the Soviet attempt at the same. The puppet government—whose writ doesn't run outside a small corridor in Kabul—can't pay its workers, and hasn't for three months. Afghans who go to work for the regime are commonly decried as "cat washers" because so many lived in America doing odd jobs and returned only on the promise of a government job.

The economy is in shambles. Signs declaring "Death to America" are now seen on the streets. The Taliban is reforming, in both senses, and may enjoy more support now than when it ran the country. Public protests are becoming more and more common. The U.S. can do nothing to stop this. It is the hated foreign enemy, no matter how much Americans like to flatter themselves with the title "liberator."

One Afghani quoted by the Washington Post summed up the issue succinctly: "If the foreigners stop interfering with the country, we can rebuild our country ourselves." How many millions and millions of people throughout history have pleaded the same!

Can Iraqis really rebuild? Maybe or maybe not. But the U.S. has no business planning its future. I have my own thoughts on what kind of government and economy Iraq ought to have. I would be pleased for Iraqis to click on a whole range of links on www.Mises.org and www.LewRockwell.com that address a huge range of monetary, fiscal, industrial, and political issues.

But let us not forget that self-government is a first principle of freedom. That cannot be achieved so long as the U.S. military is there. The U.S. has done enough damage to this poor country. The proper U.S. plan for Iraq consists of one priority: get out!

---------

Llewellyn H. Rockwell, Jr. (Rockwell@mises.org) is president of the Ludwig von Mises Institute in Auburn, Alabama, and editor of LewRockwell.com.

syr:sss

Vetinari

10.05.2003, 13:36

Perma Baer Stephen Roach basht Europa ...

Global: Europe's Wake-Up Call

Stephen Roach (from Venice)

The European economy is an accident waiting to happen. Lacking in domestic demand, a sharply rising euro is crimping the continent’s main source of growth -- external demand. In my view, the combination of misguided policies, lagging structural reforms, and acute pressure on Germany leaves Europe both exposed and unprepared to cope with most shocks -- let alone the currency shock that is now unfolding. Europe needs to get its act together sooner rather than later. Steeped in denial, the risk is it won’t.

Euro-sclerosis has now become a reality. The region has not carried its weight in the global economy for a long time. Over the eight-year period, 1995 to 2002, Euroland real GDP growth has averaged just 2.2%. Such anemic growth accounted for only 9.6% of the average growth in world GDP over that interval, far short of the region’s 15.7% share of world output (as measured on a purchasing-power parity basis). Moreover, Europe’s now chronically weak contribution to world economic growth has gotten even worse in recent years. Over the 2001-02 period, Euroland GDP growth averaged a mere 1.1% -- accounting for only 6% of global GDP growth, or just 40% of the region’s share in the world economy. Our 2003 estimates point to more of the same -- a 0.8% increase in the Euroland economy that accounts for only about 4% of the growth we are estimating for the world at large.

Moreover, there has been an ominous tilt in the mix of European growth in recent years, shifting away from domestic demand and increasingly toward external demand. In six of the past eight years, swings in the foreign balance made disproportionately large contributions to overall Euroland GDP growth. The only exceptions were in 1998 and 1999, when European export performance lagged and domestic demand growth picked up the slack. Recent trends are even more disconcerting. The bulk of the Euroland growth slowdown reflects a sharp deceleration in domestic demand growth; over the 2001-03 period, our estimates suggest that Euroland domestic demand growth has been essentially on an anemic 1% trajectory, well less than half the 2.8% average pace recorded over the prior six years, 1995 to 2000. By default, an improved external balance -- adding an average of about 0.3 percentage point to Euroland GDP growth over the 2000-02 period -- has emerged as an important cushion in an otherwise weakening economy.

Therein lies the potential for a serious growth shock to Europe. Lacking in support from domestic demand, a sharply appreciating currency will likely deflate Euroland’s external growth cushion, unmasking the full extent of the weakness that has emerged on the domestic demand front. In that context, and with layoffs and unemployment back on the rise, it is all the more critical for policy makers to apply counter-cyclical stimulus in order to jump-start anemic growth in domestic demand. Unfortunately, those options have all but been closed off by the institutional constraints of the European Monetary Union -- the Growth and Stability Pact, which effectively rules out fiscal expansion, and the backward-looking inflation-targeting mandate of the ECB, which inhibits aggressive monetary ease. To borrow and slightly modify a line from Robert Kagan’s indictment of Europe (see his provocative book, Of Paradise and Power: America and Europe in the New World Order, Alfred A. Knopf, 2003), the region is so steeped in its rules-based approach to policy setting that it may simply be unable to adapt to rapidly changing conditions.

And dramatic change is exactly what’s now in the air. The Federal Reserve said it all with its extraordinary policy statement of May 6: After nearly 18 months of steadfast denial, America’s central bank has finally conceded that the risks are now skewed toward deflation. With most of Asia in deflation and US monetary authorities now sounding the alert, it’s hard to fathom the possibility that a structurally impaired Europe might be spared from this increasingly global phenomenon. If anything, the sharp appreciation of the euro makes the case for Euroland deflation all the more compelling. Yet the ECB’s stunning intransigence at its May 8 policy meeting takes the concept of denial to an entirely different level. I believe European policy makers are taking unnecessary risk when they can least afford to do so -- precisely the opposite of what is required to fight deflation. The strictures of EMU are being placed ahead of increasingly worrisome economic perils. Something has to give -- either the economy or an increasingly antiquated policy framework. I vote for the latter. Rules-based policy constraints don’t fly in an increasingly deflationary world -- especially if those rules are set with an eye toward fighting the old battle of inflation.

There’s an added twist to this unfortunate state of affairs -- the special problems of Germany. For years, the Europhiles have been telling us to ignore country-specific issues in the new “United States of Europe.” Just as Americans don’t worry about California, went the logic, Europeans shouldn’t worry about Germany. Never mind that Germany accounted for one-third of Euroland activity -- three times California’s share in the US economy. The model of EMU was built on the pan-regional policy design of “one size fits all.” The German experience draws that theoretical presumption into serious question. With Germany’s core inflation rate down to 0.8% in March 2003 -- essentially half the Euroland average -- deflationary perils in Europe’s largest economy are considerably greater than is the case elsewhere in the region.

Obviously, it wouldn’t take much to push Germany through the deflationary threshold. That push may now be at hand. With the German economy probably contracting in the current quarter and the unemployment rate extraordinarily high (10.7%) and rising, there is every reason to expect further disinflation in this extremely low-inflation economy in the months ahead. A whiff of German deflation could be complicated all the more by the nation’s increasingly fragile financial system -- banks and insurance companies, alike. The Japan comparison is no longer a stretch for Germany. And if that’s the case, you have to wonder if the rest of Euroland has the capacity to avoid a similar outcome. As I see it, the German experience has revealed a critical and potentially fatal flaw of EMU: Without true economic convergence, it may well be that the big economies in this heterogeneous union have to be treated as special risks. If and when they are judged to be in a state of acute distress, pan-regional policies may need to be tailor-made for the weak link in the chain. The mounting perils of Germany are now screaming out for just such a remedy. Euroland’s once proud growth engine has been transformed into the deadweight of an anchor.

A post-bubble world has come a long way since the Roaring Nineties. Japan was the first to go and now Washington recognizes the risks of a similar fate. Europe remains frozen at the switch -- unable or unwilling to stimulate its stagnant domestic economy and about to lose any support from external demand. And the special risks of Germany only compound the problem. Europe is in increasingly desperate need of bold policy actions. It is getting precisely the opposite.

http://www.morganstanley.com/GEFdata/digests/20030509-fri.html#anchor0

:gusa

syracus

19.05.2003, 11:04

Ein anderer hat es ganz passend genannt: "Chaos ersetzt Teror", Irak....

A battle in Washington breaks the peace in Iraq

By Philip Stephens
Published: May 16 2003 5:00 | Last Updated: May 16 2003 5:00

You can touch the smugness in Europe. Opponents of the war against Iraq got the fighting wrong. They badly underestimated America's military might. But now Washington is making a mess of the peace. Chaos reigns in place of tyranny. Iraq's weapons of mass destruction seem something of a mirage. The world's sole superpower bears a passing resemblance to a bull in a Baghdad bazaar.

Let's own up. It is great fun to see Donald Rumsfeld discomfited. The US defence secretary is not exactly a modest man. And everyone knows what he thinks about Europe. Mr Rumsfeld, we can now recall, insisted he would have sole control over postwar Iraq. The United Nations would be left out in the cold. The same applied to Colin Powell's state department. This was Mr Rumsfeld's war and so it would be his peace. Even the ever-so-loyal Brits now lay the dismal record of the past month at the Pentagon's door. The soon-to-depart Jay Garner was Mr Rumsfeld's man.

Intelligent Europeans, though, will worry rather than gloat. Washington, one European (no, he wasn't French) diplomat told me recently with more than a trace of glee, must face up to the consequences of its military "adventurism". Well, the choice of noun apart, that is patently true. But so also must Europe. What happens in Baghdad and Basra touches the national interests of Germany and France, Britain and Spain just as closely, perhaps more so, as it does those of the US.

Inexplicable though they seem, the immediate incompetences of Mr Rumsfeld's Office for Reconstruction and Humanitarian Assistance can be fixed. Presumably the new team under Paul Bremer will be given access to a working telephone system and permission to hire a few interpreters. Mr Bremer will probably also realise that it is a good idea to talk to local Iraqis rather than peer out from behind the barbed wire around one of Saddam Hussein's old palaces. It is pretty obvious really: the US civilian authority has not a hope in hell of getting the politics right unless and until it fixes the plumbing. And, for that, it needs Mr Rumsfeld's military to provide some basic security.

As for those elusive chemical and biological weapons, well, the coalition forces are still looking. One of those who warned about the regime's weapons of mass destruction stocks now has a nice quip in response to the growing scepticism that there never were any such weapons. The fact that the US has not found Mr Hussein, he says, does not prove the Iraqi leader never existed. Not bad. And he is probably right. Some or other toxin will turn up, even if Mr Hussein never does. In any event, most people probably no longer care. The war has been won and there is ample evidence that Mr Hussein was indeed the heinous tyrant of reputation.

No, the bigger concern is the absence of anything resembling a strategy in Washington to steer Iraq toward a better long-term future. If the US is serious about building a new Iraq it needs some sense of the architecture. But, as far as I can tell, there is not a design drawing in sight.

In part that reflects the uncomfortable fact that the US administration never quite worked out why it was going to war. For some, particularly among the assertive nationalists who follow Mr Rumsfeld, it was mostly a question of defeating an enemy. Mr Hussein had defied the hyperpower for more than a decade. That could not be allowed to happen in the world after September 11 2001. Some thought an example needed to be set to the other rogue states developing weapons of mass destruction. A third group, the so-called neo-conservatives, had altogether grander, even nobler, ambitions. The defeat of Mr Hussein would open the door to democracy in the Middle East and to a transformation in the region that would make it better for its people as well as safe for America.

We never quite knew where George W. Bush stood on this spectrum. He certainly wanted to lift the shadow of Vietnam and show that the US was ready again to fight preventative wars. And, with Afghanistan pacified, he wanted to prove he was still beating up America's enemies. But there were also occasional glimpses of the Wilsonian mission to export America's democratic values to the region.

And there lies the ambiguity that now hobbles the US in Iraq. Ask the administration how long it will be there and it still offers the glib response: for as long as is necessary and not a day longer. But necessary for what? Press them on the purpose, and it is to return Iraq to Iraqis. But to which Iraqis and under what form of government?

This week I listened to one senior administration official spell out the nationalist case. The US, this official gladly acknowledged, was no good at nation-building. Its task was to set up an interim Iraqi authority as soon as possible. Washington should then help steer that authority towards the creation of a permanent Iraqi administration. Then it should get out. If the Iraqis made a mess of it, that was their problem. America had to give them a fair shot. That was it. What happened next was for Iraq. America had work to do in countering the threats from Iran and North Korea. As for neo-conservative dreams of Jeffersonian democracy, of an Iraq that recognises Israel and pumps as much oil as America can take, well, that is what they were: dreams.

In other words, the battle between nationalists and neo-conservatives is still being fought. Mr Bush stands somewhere in the middle. So, for all its unparalleled primacy, America lacks anything like a coherent strategic ambition for Iraq or the Middle East. The president says he will add drive to the road map for peace between Israelis and Palestinians. But no one is quite sure whether the intent is rhetorical or real. Even before this week's suicide bomb attacks, the US was preparing to withdraw militarily from Saudi Arabia. But is the desert kingdom now an enemy or is it still a friend?

There are no neat answers to any of the above questions. But what we see now is American power without obvious purpose, an empire without a role. Mr Bush has choices to make. Fast. As things stand, chaos in Baghdad holds up a mirror to division and indecision in Washington.

philip.stephens@ft.com

Financial Times (http://www.majority.com/news/ft3.html)

syr :sss

syracus

20.05.2003, 22:25

Droke zu den Bonds, K-Waves und Gold. Ps: Auch wenn der "Chart" schon etwas älter ist, mit einem Blick auf die gegenwärtige Situation ist das "Minimum" mehr als ausreichen;)....

Bonds vs. gold

May 20, 2002

The big news this week is that the yield on the 30-year bond slid to a new record low while yields on a benchmark 10-year note probed fresh 45-year lows. The dollar also continued its bear market decline. And while interest rates and the dollar continued to slide, gold prices kept rising, leading many observers to ask, "What has become of the relationship between gold and interest rates (also, bond values)." In years past, a rise in bond prices (and thus a decline in interest rates) typically meant a decline in gold prices, yet we have seen in the past year that this relationship is no longer true. Why the disconnect? Is this a case of an unprecedented decoupling in the bonds/gold relationship or nothing more than a normal cyclical occurrence?

So why the continued decline in interest rates after a multitude of financial forecasters (including some very respectable ones) confidently affirm that the "bottom is in." Every time we hear this pronouncement rates proceed to make new lows. Shouldn't we have learned our lesson by now? What does this suggest? Plain and simple, it shows that the K-wave is still declining and has not bottomed yet contrary to what many analysts are saying. Technically, the K-wave isn't due to bottom until sometime between 2004-2005, yet it can be manipulated by central bank/federal government economic policies to last much longer. But assuming a textbook bottom, we can expect at least one and maybe two more solid years of the "hard down" phase of the economic long wave, which means continued low or falling interest rates and overall deflation in the financial sector of the economy.

"But interest rates peaked in 1980-81 and have been in overall decline since then," someone protests. "After 23 years of decline we should be seeing the bottom by now, shouldn't we?" Based on historical precedent, no. Realizing, of course, that no two K-waves are exactly alike, yet understanding that there will always be many similarities and parallels, we can observe that in the prior K-wave which bottomed sometime in the early-to-mid-1950s, there was a nearly 30-year declining trend in interest rates. At that time, the interest rates (as measured by the quarterly average of Moody's AAA bond yields) peaked in 1920 and went into an overall decline until around 1945, then spent an additional five or so years bottoming along the lows. And it wasn't until about 1955 that rates took off again and began a new uptrend. So we're talking a 35-year period between the previous peak in rates until the next big upswing began. Yet despite this clear historical evidence there are a number of vocal prognosticators who insist that interest rates will "skyrocket" sometime in the near future. Sorry guys, but it doesn't work this way. Interest rates are basically the cost of borrowing money and banks cannot let out huge loans at high rates of interest until the left-over debt from the previous K-wave binge period are serviced. And the record-level debt on the books today is no way near being amortized.

We all know that a picture is worth a thousand words, so let's examine in picture form the long-term trend in interest rates from the previous two K-waves. P.Q. Wall of the P.Q. Wall Forecast, Inc. (from whom I borrowed this graph) calls this "the single greatest all time chart," and I can't help but agree. Take a look and see for yourself.

http://www.321gold.com/editorials/droke/droke052003_bonds.jpg

So what exactly is the significance of a rise in bond values (which is another way of saying a decline in interest rates)? A rise in bond value sends the message that rates are falling usually due to decreased inflation risk. When interest rates decline in a pronounced downtrend it goes a step beyond mere "disinflation" and enters the realm of outright deflation. But this begs the question, "deflation of what?" Forgetting for one moment the interminable debate between the deflationist and inflationist camps, a pronounced and sustained decline in interest rates reflects deflation in the overall financial sector, but not necessarily in other areas of the economy. That's really the crux of the deflation argument right now - the deflation the U.S. now faces is mainly focused in stocks, interest rates, and the dollar. As I argued in my Gold-Eagle article from a couple of years ago, "The New Economy of Retroflation," it is possible for the conditions of inflation and deflation to exist simultaneously in an economy, particularly when the inflation is found mostly in consumer goods and certain commodities (i.e., tangible assets) while the deflation is found mainly in financial (i.e., intangible) assets. This especially holds true during a war-time economy (most frequently seen in times of economic depression) when the supplies of certain commodities can be artificially restricted and their retail prices inflated well beyond their actual value.

Now let's bring gold into the picture. Historically a store of value, it becomes widely held and highly valued in times of high inflation as a financial hedge. But in "normal" times when interest rates are declining, and thus bond prices are rising, the demand for holding gold declines as investors prefer bonds and other stores of value. Yet this does not always hold true. As we are now seeing, at the far end of the K-wave (runaway deflation) gold once again becomes a prominent and highly desirable store of value in the eyes of many investors. The relationship between bonds and gold over the past 4-5 years provides justification for the theory I espoused in several Gold-Eagle articles over the past three years, namely, that gold is just as valuable in late runaway K-wave deflation (1998-present) as it is in late runaway K-wave inflation (1975-1980).

Ever since at least 1998 when the entire so-called "global economy" nearly fell apart at the seams, the de-coupling process in the relationship between gold and bond prices has picked up steam. Since then we have seen numerous occasions when the value of the 10-year T-note, for example, rose even as gold prices rose and vice-versa. Again, this strongly suggests that we are in the runaway deflation portion of the K-wave where you can have falling interest rates AND rising gold prices at the same time. The falling interest rates (and thus rising bond prices) point to deflationary concerns while the rising gold price reflects - not concern for inflation - but rather a flight to safety as the financial system, overall, becomes unglued and investors are desperately seeking a monetary safe-haven. Thus we see that the argument of those gold enthusiasts who insist that interest rates MUST rise in order for gold to rise is false. In the next couple of years we will likely see continued low interest rates and rising gold prices at the same time.

--Clif Droke
May 20, 2003
mail: clif@clifdroke.com

Quelle (http://www.321gold.com/editorials/droke/droke052003_bonds.html)

syr:sss

syracus

27.05.2003, 19:10

Welch ein Beitrag :ek:kiss:.......

The Matrix: Reloaded
--------------------------------------------------------------------------------
DATED MAY 22, 2003
A SPECIAL REPORT BY ALAN M. NEWMAN, EDITOR
LONGBOAT GLOBAL ADVISORS CROSSCURRENTS

The May 7th issue of Longboat Global Advisors Crosscurrents was entitled "The Matrix: Reloaded." The title said it all. We have every reason to use the title again for this report. The residents of the matrix continue to be bathed in their nutrient soup and still believe they reside in a world that does not exist; a bull market. From every angle we examine, it seems as if the reality of the secular bear market is disrespected to the fullest extent. Participants of every stripe are so tired of the downside and are so eager to believe in the bull case that any excuse is conjured up for the return of the bull. And the basic tenet utilized for the return of the bull is that bull cycles occur in the midst of secular bear markets. We agree but would caution that this is no ordinary bear market. This bear follows the greatest stock market mania of all time, greater than the South Sea Bubble, greater than the Roaring Twenties, greater even than Tulipmania. The move up from the October & March lows has already satisified all the parameters for a bear market bounce. A new bull? Given the huge recent expansion in bullish sentiment, a new bull market would appear to be a remote possibility....but that is the preferred mode in the Matrix.

--------------------------------------------------------------------------------

We were hoping to present a fully updated and totally accurate picture of Dollar Trading Volume in this report, but Nasdaq's budget problems are still an obstacle. As a result, their statistics department continues to work at a snail's pace and has only compiled data through October 2002. In lieu of their offer to assist us for the princely sum of $100 per hour, we decided once again to go with our own estimates, as we have done several times in the past. Typically, when we have been forced to do the estimates ourselves, we turned out to be within 2% of the actual totals, so we are fairly confident that our methodology works. But we are offering no guarantees on accuracy. As of last week and extrapolated through the end of the year, DTV comes in at 170.7% of GDP, down nominally from last year's 177.2%. Thus, for every dollar Americans spend on goods and services, $1.70 in stock is traded on our stock exchanges. It is no wonder that economic numbers are still punk. For the seventh year running, the stock market is more important than the economy. The mania continues to rage on. Excluding the prior mania years of 1928-1929 and 1996 to date, the average for DTV is a mere 19.5% of GDP. This means that trading activity is still almost nine times "normal." Let's repeat that....

Trading activity is still almost nine times "normal."

Even though present activity is down from the peak 328% registered in the year 2000, the current read is still higher than every other year except 1999-2002. Despite the horrific bear market that at its very worst tore 78% from Nasdaq and cut the S&P 500 in half, investors are not yet giving up and continue to trade as if the bull had never gone away. Meanwhile, stock market wealth losses remain in territory resembling only one other period, 1931-1932. Although the Dow more than doubled from the 1932 low to the 1933 high, we must remind the 1932 low was 89% down from the 1929 highs, far greater than the loss of the S&P in the present mania. And although the Dow rallied an amazing 353% from its 1932 low of 42.44 to a high of 192.40 in March 1937, it was still 49% below the 1929 high and remained below that high until late in 1954! Bulls are now counting on the market to respond as it did from the 1932 lows into the 1933 high. But in this bear market, prices never fell anywhere near as much as they did in 1929-1932. Inferring huge gains today simply because prices have gone down "far enough" and for "long enough" just doesn't constitute a logical analysis. Although the losses in wealth in the present period are not quite as fearsome as they were after the Roaring Twenties imploded, they are nevertheless substantial enough to infer that "bull market" gains must still leave the major averages well below their prior peaks. As of today, the Dow stands 27% below the peak. As of today, the S&P 500 is 41% below the peak. As of today, Nasdaq stands 70% below the peak. Logically, we can't imagine why we should look for greater gains than those already in hand.

Bulls are now counting on the market to respond as it did from the 1932 lows.

History may rhyme, but it does not necessarily repeat exactly.

Prices are much closer to their peak now than they were at the 1933 highs!

http://www.cross-currents.net/may03_01.gifhttp://www.cross-currents.net/may03_02.gif

Most of the following portion of our report first appeared in the April 28th issue of Longboat Global Advisors Crosscurrents:

It's 'that' time of year again. We call it the Dead Zone, which seems an apt appellation for the half of the year in which stocks have not only not made money for investors over the last 50-odd years, but have actually lost money. It's one of Wall Street's dirty little secrets that no one in the industry wants to admit since admission of the circumstances would be simply horrible for business. Nevertheless, the facts are routinely ignored by the residents of the Matrix. It is a fact that $10,000 invested in the Dow since 1950 during the months May through October is now worth only $9056, an annualized loss of 0.4%. Of course, the reason why folks in the Matrix can be so eas_ily persuaded year after year to go for the gusto and keep their money in for all 12 months is that the same $10,000 in_vested during November to April has grown to $459,917, an annual_ized clip of 15.2%.

We have postulated several times before why this phenomenon exists and have cited a number of factors, including year end bonuses and IRAs. In the case of the former, they can be anticipated and acted upon before the end of the year although one would expect the major portion of bonus money to be invested in January, immediately after receipt. In the case of the latter and an April 15th deadline for investment, there is no question that IRAs have impacted mutual fund inflows. And guess what? The months of January and April represent the months in which mutual funds inflows have been the greatest dating back to October 1984. No one has ever shown the chart of net inflows broken down by month before. Since 1984, 62% of all mutual fund inflows have occurred in the period of November to April, incontrovertible proof that leaving money in stocks throughout the Dead Zone of May to October leaves an investor without an important impetus for continued price gains, namely demand. January and April to_gether are responsible for an astounding 26.8% of all mutual fund in_flows. Both months gar_ner roughly 83% higher inflows than all other months.

Worse yet, as we noted last year, "there is a clear distinction be_tween secular phases for the Dead Zone. If the current bear market plays out anywhere near like it did from 1966-1982, the Dead Zone will provide a very costly experience for in_vestors. And in reality, the results are far worse than they appear. Monies invested solely during the Dead Zone from 1966-1982 fell by a resounding 54.2% but that was before the effects of inflation.

With inflation factored in, the constant dollar loss was a whopping 84.6%!

Consider that when the folks on Wall Street tell you to be invested all year round.

To equal the total loss of the prior secular bear market, the Dead Zone will have to provide an additional 33.7% decline in price, not including the effects of inflation. Also consider how many times you have been told that market timing does not work. What a crock! All one needed to do over the course of the last 50-odd years was to make two investment decisions each year in order to outperform every mutual fund ever created. Market timing is not a panacea and not a guarantee but it works as well as any method we have ever encountered. Meanwhile, every mutual fund in existence has never acknowledged that approach - quite the opposite. Imagine the irony of quoting returns for 1, 3, 5 and 10 year periods without ever acknowledging that half of the specified time, their own investments did nothing. Given that the average mutual fund has lost 38% over the last three years, it would appear that just throwing money into equity mutuals has very limited value as a viable investment strategy.

We'll stick with market timing and the potential to profit at all times, not just when prices go up.

http://www.cross-currents.net/may03_03.gifhttp://www.cross-currents.net/may03_04.gif

The residents of the Matrix believe stocks are undervalued. How else can you account for so many proclaiming a new bull market? So, are stock prices undervalued? According to Tobin's Q Ratio, the answer is a resounding "NO!" The ratio is simply a perspective of how expensive or cheap the entire stock market is by dividing the total market value of publicly traded corporations by the total replacement cost of their assets (Source: Smithers & Co. - UK). In theory, if the ratio is above 1 it would be more profitable to sell shares to the public. If the ratio is under 1, it would be more profitable to buy corporate shares. In the long run, stocks must eventually trade at fair value so Tobin's Q is a good measure of over, fair and under valuation. Undervaluations must eventually attract buyers. Overvaluations must eventually catalyze sellers into action. For a period of 95 years up to and including 1994, Tobin's Q Ratio was dead on at an average reading of 1. To be sure, there were swings to levels way out of whack in both directions but over time, Q always reverted to the average. The stock market mania changed the equation as the residents of the Matrix were prepared to believe that almost no price was too high to pay for stocks. During the mania, "Q" soared to over 2.6! One had to be literally crazy to pay for stock assets which could far more easily be replaced by creating the same company from scratch. And of course, that is why so many companies were created and then sold to the unsuspecting public as "hot" initial public offerings that could double or triple in only one day.

At the current level of 1.63, "Q" is still quite excessive.

At some point, "Q" can be expected to revert to the long term average.

Stocks are still way too expensive.

Can dividends drive stock prices higher? Despite the plans of the Federal government to pare taxes on dividends, the limitations under consideration would ensure a minimal impact on prices. However, if dividends were to grow rapidly to levels seen in the past, perhaps stocks would be viewed far more attractively. But stocks in the S&P 500 already pay out 60% of their earnings as dividends, far more than the historical average and it is far more reasonable to expect that dividend yields can only rise if stock prices fall. Given six months of the year are a virtual Dead Zone for investors, only hefty yields can coerce investors their best policy is to sit still and not stampede out of stocks. A paradox. Only higher yields will keep investors in but higher yields will most likely occur only when investors get out. Best bet? Perhaps we should consider a mix and postulate dividend increases of 10% per year for the next five years. At that rate, a move back to traditionally overvalued (not undervalued) levels will still result in the SPX at 926, basically a sideways drift from today. Considering that the definition of overvalued comprises 87% of all premania years, we're not asking for much, are we? A move to halfway between over and under valuations would result in a decline to 662. A move to traditionally undervalued levels? Don't ask! Meanwhile, what are the odds of dividends rising at the rate of 10% a year for the next five years? Perhaps slimmer than the residents of the Matrix realize. Remember, dividends are now equal to 60% of S&P earnings. If dividends rise, earnings must rise as well. If dividends are to rise by 10% per year and the payout ratio is to fall to a more normal 50% of earnings, earnings will have to surge by a pretty steep 13.9% per year. That could be a real stretch in an economy where GDP has grown by an average of only 5.3% annually over the last 20 years.

In our view, the more likely prospect is that despite any tax break, stock prices must fall to where yields are once again robust enough to attract investors.

http://www.cross-currents.net/may03_05.gifhttp://www.cross-currents.net/may03_06.gif

Program traders; more residents of the matrix. Program Trading has apparently given us the most volatile market in 67 years. Despite lower short term volatility numbers in recent weeks, as programs take a larger share of trading on the New York Stock Exchange, longer term volatility has increased sharply over the last few years. It is very troubling that the VIX and programs continue to climb together! The stock market has truly morphed into something grotesque and no longer resembles the capital formation system of yesterday in any way, shape or form. We commented on this subject extensively after the Crash of '87 and program trading has been a subject of continued interest since. Program trading was at much lower levels a decade ago, about 15% of total New York Stock Exchange volume. But over the last few years, programs have expanded significantly and are now averaging 38.5% of daily volume, affecting better than three of every eight shares traded. Although programs do not represent index arbitrage to any significant degree, they are nevertheless, of sufficient size to move the markets rapidly. Why so many programs? It is not difficult to see how or why funds like the $59 billion Fidelity Magellan prefer programs. Magellan's cash position is probably somewhere around $1.8 billion as of this moment. If fund manager Robert Stansky deems it time to invest a bit more, rather than go into the market and buy one favored issue and then another, perhaps it might make more sense to buy a "basket" of securities that closely replicate the market? The money gets invested sooner and perhaps more cheaply than otherwise. If only 5% of Magellan's cash is expanded in this manner, a $90 million program hits the floor of the NYSE and is executed in short order. A basket is defined as a minimum of 15 stocks. Let's assume a particular "basket" comprises all of the Dow 30. To spend $90 million, one would have to buy 72,629 shares of each Dow issue. Thus, $90 million can move prices quite rapidly! Programs proliferated in 1987 and coincidence or not, volatility soon expanded to the worst of all time. Is it happening again? The stock market is no longer a proper place for small investors. Why is this procedure so anathema for investors? One simple reason is that since programs can move prices so rapidly, the effect makes the concept of "current price" undependable. We are astonished that the New York Stock Exchange has allowed programs to proliferate to this extent.

Where does it end? 50% of total trading volume? 70%?! 90%?!!!

In every update, we attempt to afford our readers a reasonable view of where long term prices are headed. Of course, there can be no guarantees that our methodology works and we could conceivably be way off the mark. However, we are using history as our guideline and if history is meaningful (as it should be), then at least we are presenting a logical perspective. As it now stands, 10 year returns for the Dow ex-dividends are down sharply from their all time record high of 16.6% in May 1998. Are they down sufficiently? Given that 10-year returns have averaged 5.14% back to 1907, it would appear a return to "normal" would require a lot more bear market. In fact, remove the influence of the mania from 1995 to date and the average return drops to only 4.37%! A return to "normal" can be accommodated in either of two ways, price or time. Rather than impute further losses for this bear market, we choose to examine "normal" as defined by time. Assuming the Dow trades sideways from the May 16th close of 8678, the 10-year return will finally revert to "normal" towards the end of January 2006 and will fall to zero percent close to five years from today, more than nine years after prices peaked.

Since 10-year returns are under 5% more often than not,
it would appear the bear has more in store for residents of the Matrix.

http://www.cross-currents.net/may03_07.gifhttp://www.cross-currents.net/may03_08.gif

As New York's Attorney General Elliot Spitzer has recently shown, there are many Agent Smiths on Wall Street, intent upon keeping investors in the dark. Merrill Lynch Chairman Stanley O'Neal says, ".... our industry did not create the bubble..." The blame is laid squarely at the public's feet for being so naïve and trusting. And in commenting on the $1.4 billion fraud settlement, Morgan Stanley Chairman Phillip J. Purcell glosses over ethical realities of capitalism as if they are a nuisance. Have financial firms constructed a dream world Matrix for investors? If not, why can't Wall Street's top managers admit to the role they played in sacking investor's trust? If not, why have strategists not admitted their error in continuing to forecast much higher prices all throughout the bear market? If not, why cannot professionals admit that for more than 50 years, virtually half of the time, investors were better off out of the market? If not, why do financial firms still maintain their bull stance when so many stocks are so clearly overvalued? If not, why has Wall Street allowed the proliferation of Program Trading, which places the small investor at a tremendous disadvantage?

Why cannot Wall Street admit to the truths of the long term,
patently shown by our final chart?

Sentiment in recent weeks has been jostled, swayed and pushed by participants, eager to believe in the easiest and most comfortable scenario, rather than the tough and more likely scenario.

Even newsletter writers are the least bearish they have been since January 1992.

The Matrix has been reloaded.

The mania continues....

Alan M. Newman, May 22, 2003

cross-currants (http://www.cross-currents.net/charts.htm)

syr :rolleyes:

syracus

28.05.2003, 10:14

Noch einer von Droke :sss......

The K-wave and the coming credit collapse

By Clif Droke

May 28, 2002

I wrote in an earlier article entitled "Bonds and Gold" of the relationship between interest rates and the K-wave, pointing out that persistently low or declining rates are an earmark of the final portion of the K-wave (known as "runaway deflation" or hyper-deflation). I'd like to follow up on that article with some more salient observations about the current K-wave and its potential impacts on the U.S. economy and financial structure.

The interest rate situation is really the pivot of the deflation argument. In fact, of all the various financial indicators, interest rates show the most historical consistency for reflecting the true rate of inflation and deflation. Despite the currently-prevailing myth that gold is strictly an "inflation hedge," gold and certain other commodities can actually rally in a climate of runaway deflation as they did through the better part of the 1930s.

In the 1930s, unilateral default was the rule rather than the exception, despite the fact that commodity prices rallied quite vigorously from about 1932 to 1937. The general economy remained persistently weak through that doleful decade known as the Great Depression. Yet there are distinct differences between the times then and the financial situation today. What are those differences? Consider the following:

1. In 1929 when the stock market peaked before the Great Crash of '29, the K-wave itself was still peaking while the 120-year Master Cycle (which had previously bottomed around the year 1894) was still rising. It was the 40-year cycle (a component of the 120-year cycle) which, more than anything, was a major catalyst to the crash.

2. Even in the Depression Era of the 1930s the U.S. economy had certain things in its favor, namely, the still-rising 120-year cycle and a K-wave bottom that was still some 15-20 years away.

3. For the first time in many generations, the U.S. economy has absolutely nothing (in cyclical terms) in its favor. All of the major long-term cycles in the 120-year cycle series have peaked: the 120-year cycle peaked in 1954, the latest 60-year cycle peaked in 1984, the 30-year cycle peaked in 1999. On top of that, the following cycles are still declining: the 10-year cycle, the 8-year cycle, and the K-wave itself (typically 50-60 years in duration). With all these long-term cycles leaning, as it were, against the financial/economic structure we can expect an extremely bumpy ride in the years immediately ahead.

Now let's turn our attention to what has become a critical component of the U.S. economy and growing debt situation -- the real estate bubble. Back in March in my forecast for the second quarter I wrote concerning the leading indicator for real estate, the U.S., the Morgan Stanley REIT index (RMS):

"Here's a fact worth pointing out about RMS: for the 8 or so years this index has been in existence the 100-day/200-day moving averages have been in a bullish configuration (i.e., 100-day MA above 200-day MA, both averages rising) for close to 5 of those 8 years. The averages got out of their bullish alignment in mid-2002 and have been unaligned ever since, but as you can see from the chart the 100-day MA is threatening to penetrate back above the 200-day MA, which would send a bullish signal. This would put RMS in line to challenge its previous peak of approximately 470 (RMS currently near 450). And what would such a bullish signal spell out for the broad U.S. real estate market? Obviously that the bull market in housing isn't over just yet.

This alone could keep the economy propped up for a while longer."

http://www.321gold.com/editorials/droke/droke052803_rms.gif

This bullish moving average crossover signal was accomplished last month and RMS has been rocketing higher ever since. Looking at the history of this index it is clear that the final "blow-off" phase of the bull market in real estate equities (and by extension, real estate) is now underway and I note that the RMS chart has traced out a clear-cut five-wave Elliott Wave pattern with wave 5 currently underway. I predict that real estate prices will reach their peak by the first quarter of 2004 and that the real estate crash will get underway next year. And since the U.S. consumer has most of his or her eggs in the real estate basket, this will be the real catalyst for deflation. I've stated for the past couple of years that real estate is the proverbial "last Indian standing" and the only thing keeping consumer confidence up and preventing the average American from completely losing faith in the financial system.

Speaking of real estate bubble, I personally experienced something the other day that really brought home to me the enormous proportions this bubble is taking. Stepping into the local bank to make a deposit, I was accosted by a bank official who was taking a "customer survey." I politely consented to fill out the questionnaire (even though I despise such polls as an invasion of privacy) and was surprised to discover that the "survey" was nothing more than a cleverly-disguised promotional for the bank's mortgage and home-lending services. Basically, the bank (a well-known U.S. lending institution) has taken to practically handing out home loans to prospective home buyer (including first-timers) and is literally "taking to the streets" to get people to take on a 30-year mortgage.

I interpret this as a move of desperation on the part of the major lenders who are doing everything in their power to not only keep the real estate bubble pumped, but more importantly, to keep the overall economy afloat via credit inflation. But as Ludwig von Mises teaches us so eloquently, this game of continuously expanding credit and adding debt onto debt can only go on for so long before it collapses of its own weight, bringing hyper-deflation. Speaking of deflation, newsletter veteran Richard Russell had this to say in a recent edition of his venerable Dow Theory Letters:

"I believe we're on the edge of a very dangerous deflation. I have listed the reasons why I think deflation is in our future... China and Asia with their low wage scales and exporting deflation. Discount chains like Wal-Mart and Target are retail forces for deflation. The Internet is a mighty force for deflation, in that it allows consumers to check the price of anything anywhere at any time of the day or night and find the best price. Over-production in almost every area from cars to computers. Over-loads in debt in the cities, counties, states, corporations and among consumers. Rising unemployment and concession in wages (as per the airline personnel). Rising trend of bankruptcies, both corporate and individual. Huge levels of unfunded debts on the part of corporations."

Concludes Russell, "I take these deflationary trends very seriously. A trend in deflation will [hurt] the debt-laden U.S. economy, in that deflation renders debt much more difficult to service."

Back to the K-wave. I asked friend and fellow market analyst Samuel "Bud" Kress recently his take on the K-wave and how we'll know when the current economic K-wave has finally bottomed. Since we obviously can't predict in advance exactly when the K-wave will bottom (the bottom is only konwn in retrospect), I wondered what his criteria was for discerning the bottom. You will remember that the K-wave (named after Nikolai Kondratief, who first posited the idea of a 50-60 year economic long wave). The K-wave also closely corresponds to the biblical "Jubilee Cycle" of 50 years, although technically the K-wave isn't really a cycle -- as its name suggests, it's a "wave." An economic long wave is distinguished from a cycle in that its duration from trough to trough is not precise and can be extended or contracted via manipulative efforts on the part of governments or central banks.

Bud and I discussed the possibility that the U.S. government will attempt to extend the K-wave as long as possible to keep it from collapsing the economic system. K-wave expert Ian Gordon also subscribes to this theory and points out that K-waves can sometimes last as long as 70 years when serious government/banking efforts are made at manipulating it. According to Bud's understanding of the K-wave, the previous one bottomed in 1949-1950 and the current one should theoretically bottom in 2004-2005. So here's what Bud had to say: "Keeping in mind that we don't actually know in advance when the K-wave will bottom, we'll know the bottom has come when we see an increase in month-over-month monetary growth as measured by M-3, and an increase in inflation as well as an increase in corporate earnings for at least two back-to-back quarters."

--Clif Droke
Email: clif@clifdroke.com

zur Quelle (http://www.321gold.com/editorials/droke/droke052803_k.html)

syr :rolleyes:

syracus

03.06.2003, 11:20

Amis und Statistiken, am Beispiel der "Produktivität" :rofl...

The new economy may already be history

By Dean Baker
Published: June 1 2003 19:04 | Last Updated: June 1 2003 19:04

The core of the "new economy" has always been the sharp increase in productivity growth that began in the second half of 1995. Proponents of the new economy, led by Alan Greenspan, chairman of the Federal Reserve, have focused on this upturn in productivity growth as its defining feature. The US had a boom of investment, concentrated in information technology, which unleashed a surge in productivity growth unmatched since the 1960s.

It is therefore striking that new data, suggesting that productivity is no longer growing rapidly, have received little attention. The most recent data from the US Department of Commerce indicate that over the past year, productivity growth has fallen back to the rate of the productivity slowdown of 1973-95. If productivity continues to grow at this pace, the new economy will prove to be just a blip in a longer period of slow growth.

Mr Greenspan and other proponents of the new economy are justified in focusing on productivity growth because it is the most important factor determining living standards over the long run. If the economy could sustain a rate of productivity growth of 2.5 per cent annually - the general consensus for the new economy - living standards can double in little more than a quarter of a century. If productivity grows at the 1.5 per cent rate of the slowdown era, living standards would improve by less than 50 per cent.

While part of the explanation for the neglect of the productivity data may stem from a desire to ignore bad news, a bigger factor is that the main issue is technical in nature. In the past decade, an increasing share of the economy's output has gone to depreciation - the replacement of worn-out or obsolete equipment - as short-lived equipment (for example, computers and software) has accounted for a growing share of investment. In the past year, the share of output going for depreciation has increased by 0.8 percentage points of gross domestic product. While necessary to sustain the economy, the resources that are used to replace depreciated plant and equipment do not directly improve living standards.

If we use a net measure of output - which excludes depreciation - the increase in productivity over the past year would be approximately 1.5 per cent, just 0.2 to 0.3 percentage points above the rate of net productivity growth in the years before the arrival of the new economy. By contrast, the productivity numbers, which report gross productivity growth, showed 2.3 per cent for the last year, only slightly lower than the 2.5 per cent new economy average. But the gross productivity data conceal the fact that the share of output going to depreciation was increasing at a 0.3 percentage point annual rate in 1995. It is currently increasing at almost 0.8 per cent a year.

In short, when the recent numbers on productivity growth are adjusted for depreciation, most of the new economy upturn disappears. It remains to be seen whether the share of output going to depreciation will continue to increase at the same rate but the gross measure of productivity growth may fall as well.

Even before the latest productivity numbers, the new economy had already largely gone out of fashion. The days of ever-rising stock prices seem a distant memory. Plunging retirement plans have sent millions of older workers scurrying for part-time jobs at a point in their lives where they expected to be relaxing on the beach. The stories of oversubscribed dotcom initial public offerings have been replaced by stories of accounting fraud, as tumbling stock prices put an end to the investment boom.

The loss of more than 2m jobs in the past two years has pushed the US unemployment rate up from 4 per cent in 2000 to 6 per cent today. As the labour market has weakened, workers who still have jobs have become far less secure. One result is that the healthy growth in real wages during the boom of the late 1990s has largely evaporated. Real wages are stagnating for most workers; increases are barely keeping pace with inflation and the gap in wages between high-end and low-end workers seems to be growing again.

Even so, the upturn in productivity growth had appeared to persist into the recession and the subsequent period of slow growth. The new data indicate that this last pillar of the new economy may be collapsing. Yet the latest productivity numbers were barely mentioned in most reporting on the economy.

It is important to note that productivity numbers are highly erratic and are often revised substantially. This means that years from now, when we have more complete data, the productivity picture for this past year may appear very different from what current data show.

But, in the meantime, these data are all we have to go on. They show that the slower growth in productivity has now lasted for a full year, rather than just a single quarter. With four quarters of slow productivity growth behind us, economists such as Mr Greenspan should be asking if the new economy is history. If it is, America's economic slowdown may prove to be more persistent than many had hoped.

The writer is co-director of the Center for Economic and Policy Research in Washington, DC, www.cepr.net

Financial Times (http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1054416312824&p=1012571727126#Static)

syr:sss

syracus

07.06.2003, 18:04

Zu Risiken und Nebenwirkungen ;).......

The Bankrupting of America

John Mauldin
Millennium Wave Advisors, LLC
June 7, 2003

*The Bankruptcy of America
*And the Number Is?
*Where are the Profits?
*Inflation and the Fall of the Dollar
*Meet me in New York and San Francisco

Today we have a guest writer for Thoughts From the Frontline, as I am in Puerto Vallarta sipping margaritas by the beach. I asked my friend, Porter Stansberry, to give us his take on the recent (and very important) study which shows the US government is $44 trillion dollars in debt. I think you will like his easy reading style, even if the analysis is sobering. Then, to end on an upbeat note, I asked him to give you a free link to a recent study by David Lashmet, one of his analysts from the Pirate Investor, on new cancer treatment breakthroughs just announced last week at an industry meeting. We have all lost friends to cancer. There is real hope we may lose fewer in the near future. Now let's read Porter's thoughts:

The Bankruptcy of America

By Porter Stansberry

"There's nothing unprecedented about interest rates beginning with the numbers 1, 2 or 3. They were the rule rather than the exception in the days of the gold standard. But, as far as I know, no rates such as those quoted today ever appeared in a monetary system unballasted by gold or silver."
--James Grant, Forbes 6/9/2003

America is bankrupt.

This from Jagadeesh Gokhale and Kent Smetters.

No, these men are not a Saudi terrorist or Southern right wing extremist respectively. Instead the former is the Senior Economic Advisor to the Federal Reserve Bank of Cleveland, and the latter is a full professor at the Wharton School of the University of Pennsylvania.

Credentials notwithstanding, the men's conclusion would seem preposterous. America has never seemed more prosperous. Even this recession has been minor.

On the other hand, their source seems reliable: Gokhale and Smetters got their data from the U.S. Department of Treasury. And they performed their present value calculations on the order of then Secretary of the Treasury Paul O'Neill. Smetters was, until recently, on staff there, as the Deputy Assistant Secretary for Economic Policy. The Treasury needed new numbers because the Office of Management and Budget's numbers have almost no connection to reality. (For example, OMB projects a constant 75-year average lifespan in its Social Security and Medicare cost estimates even though the average lifespan in America is already 78... and increasing at the rate of three months every year.)

When you look honestly at our government's future obligations, the numbers in the red quickly become so large they require entirely new measures to describe them. Gokhale and Smetters invent the term "financial imbalance," to measure Uncle Sam's impending bankruptcy. Financial imbalance means: "current federal debt held by the public plus the present value of all future federal non-interest spending minus the present value of all future federal receipts."

Or, in other words, Gokhale and Smetters use FI (financial imbalance) to estimate how broke Uncle Sam is when measured in constant dollars, today. FI is how much Uncle Sam owes now and will garner in the future versus how much he is on the hook for now and later.

And the number?

"Taking present values as of fiscal-year-end 2002 and interpreting the policies in the federal budget for fiscal year 2004 as current policies, the federal government's total fiscal imbalance is equal to $44.2 trillion."

Huge numbers like $44.2 trillion don't mean much to anyone without a comparison. So, consider: Uncle Sam's "financial imbalance" is 10 times the size of our current national debt.

In order to achieve current solvency, the government would have to raise payroll taxes by 68.5%, beginning today. Alternatively the government could cut Social Security and non-Medicare outlays by 54.8% immediately and forever. (How do you think either policy would go over at the polls?)

It's unlikely that either huge tax hikes or huge Social Security cuts will occur. Most likely nothing will happen. And so, the government's insolvency will grow much larger. By 2008 FI will reach $54 trillion. To reach solvency at that point, taxes would have to increase by 73.7%.

Looking at the government's finances in a serious way is like expecting a Ponzi scheme operator's numbers to add up. They don't. And they never will; that's the game. Making political promises is easier than paying for them. Theoretically these debts could be inflated away by printing more dollars. But legally this would require the repeal of the 1972 Social Security Act, which pegs benefits to inflation.

And that will not be a simple matter.

Worse, these financial imbalances stem from direct wealth redistribution, from one generation to the next. They're a disincentive for saving and investment. They hinder current growth today while bankrupting America tomorrow. But politically they're sacred cows.

Ironically, the people most threatened by this hydra-headed financial and political monster are the very same people these programs were designed to benefit: the middle class.

Your typical 50-year old, middle class American isn't prepared to retire without a lot of help. In fact, most baby boomers will never even pay off their mortgages. Lawrence Capital Management notes in the last 19 quarters total mortgage debt increased by $3 trillion (+58%). To put this in perspective, prior to 1997, it took 13 years to add $3 trillion in mortgage debt. Or, said another way, before 1997, around $50 billion a quarter was being borrowed against homes. Today the run rate is near $200 billion per quarter, or four times more. Household borrowings now total $8.2 trillion in America and they continue to grow at near double-digit rates.

And it's not just mortgage debt that's problematic...

According to the Federal Reserve Bank of St. Louis, US household consumer debt is up more than 12% from last year. Debt service, as a percentage of disposable income, is above 14%. Only twice in the last 25 years has debt service taken as large a chunk of America's income -- and that's despite the lowest interest rates in fifty years.

When you look at these numbers you quickly see the problems our favorite weekly scribe, John Mauldin, hopes we can "muddle" through: The government is making promises it can't keep without bankrupting the nation; the individual American has made promises to his bank he can't keep without bankrupting his family. And we haven't even looked at the biggest borrowers yet - corporations.

Corporate America has been on a borrowing binge for most of the last 25 years. Even the very best companies are now loaded up with debt. GE, for example, has been a net borrower since 1992.

And IBM borrowed $20 billion during the 1990s, while at the same time buying back $9 billion worth of its stock on the open market. Why would you take on expensive debt while buying back even more expensive stock? It made the income statement look good, converting debt to earnings per share. And that made Lou Gerstner's bank account look good, because he got paid in options whose value was influenced by earnings growth. Meanwhile the balance sheet was covered in the concrete of debt.

Then there's Ford - one of America's greatest companies. Debt on the balance sheet is now 24 times equity.

Lower interests rates aren't necessarily helping, either.

Yes, firms can restructure debts and improve earnings thanks to lower interest expenses. But these lower interest rates are also keeping companies that should be bankrupt, alive. Consider Juniper Networks, which shows a cumulative net loss of $37 million after ten years in business. Despite having over $1 billion in debt, Juniper was able to close a $350 million convertible bond deal that pays no interest coupon two weeks ago. The company is borrowing $350 million dollars until 2008 for free. Bankers say similar deals are closing at the rate of two a day.

Why? Because investors once burned by stocks are now plowing into bonds. Through April of this year, investors sank $53.7 billion into bond funds, compared to only $4.5 billion into stock funds.

The money isn't going into new capital investment. Instead, this "free" money is paying off more expensive, older loans. Corporate America is repairing its balance sheet. The ratio of long-term debt to total liabilities now stands at 68.2%, the highest level since 1959, according to economist Richard Berner of Morgan Stanley. And cash is staying put: corporate liquidity (current assets minus current liabilities) is at its highest level since the mid-1960s. The combination of cash and extended debts is easing the credit crunch. Bond yield spreads have narrowed between investment grade bonds and government treasuries, from 260 basis points in October 2002 to only 108 basis points currently.

You can also see this new debt isn't creating new demand by looking at capacity utilization. If businesses were spending again, capacity utilization would be up. It's not. Across the board in our economy, capacity utilization has fallen from around 85-90% in 1985 to below 75% today, according to the Board of Governors of the Federal Reserve System. The data makes sense: areas of our economy that had the biggest investment boom show the biggest decline in capacity utilization today. Capacity utilization in electronics, for example, has declined from 90% in 1999 to under 65% today.

In the long term, debt restructuring does absolutely nothing to improve America's economic fundamentals. Lower interest rates aren't spurring new investment or new demand. More debt only postpones the day of reckoning. Thus, the current bond market mania is just the corporate version of the consumer's home equity loans: We're buying today what we couldn't afford yesterday...

Where are the Profits?

What we need are genuine profits. But there aren't many real profits in the leading companies of the baby boom generation, the generation that's approaching retirement with a bankrupt social net and no net savings.

Consider Adobe Systems, a leading software firm, headed by a baby boomer (Bruce Chizen, CEO, was born in 1956). Sales are rebounding. Earnings are up. But profits genuinely available to shareholders have all but disappeared.

In the last five years, Adobe's net income has grown from $105.1 million to over $191 million. But stock based compensation in the same period grew from $50 million a year to over $184 million a year. Taking into account options expenses, net income shrunk from $54 million to only $6 million. Adobe, a firm valued by Wall Street for $7 billion can only produce $6 million in genuine net income.

Without profits, an entire generation of Americans will see their retirement savings wiped out. Moving into bonds instead of stocks will not save anyone - interest payments must come from corporate profits. Even with zero coupon loans, principle must be repaid.

And there are still bigger threats to corporate profitability.

As was reported this week in the Wall Street Journal, New Jersey State Senator Shirley Turner, upset that a firm hired by New Jersey would use cheap Indian call-center workers, introduced a bill requiring state contractors to use U.S.-based employees. As a result, New Jersey wound up paying 22% more for the $4.1 million contract -- $100,000 per job it saved. Politicians in five states - New Jersey, Connecticut, Maryland, Missouri and Washington - are now partnering with the AFL-CIO to craft new laws against using cheaper offshore workers for service sector jobs like accounting, programming and customer service.

The goal, of course, is to prevent service sector jobs from leaving the country, like we lost manufacturing jobs. And as with Social Security financing, the politicians believe they can simply legislate economic reality. They won't save jobs, but they will force more investment capital away from America and make American professional service firms less competitive.

Meanwhile, new FASB guidelines regarding stock options -- rules meant to encourage genuine profitability -- are in danger of being stymied by Congress. Congressman David Dreier (R, California) and Congresswoman Anna Eshoo (D, California) have written new legislation that would impose a three-year ban on the new rules. The FASB wants to force companies to count options grants against earnings, where excessive executive compensation would impact the bottomline (as it should). Unfortunately, super-rich technology executives, who have fed at the stock option trough for ten years are the main factor in California political fund raising.

Legislation like these two recent items and the never-ending stream of consumer protection laws, environmental laws, SEC regulations etc., will all combine to dampen any lasting economic growth and to discourage entrepreneurial risk taking.

It's more to muddle through. All of which is reason to doubt corporate profitability will rebound substantially before corporate debts, home loans and America's retirement crunch begins in 2010.

And I haven't even mentioned the problems lower interest rates are causing for insurance companies (annuities) and life insurance companies...

So... what will happen? What's the financial endgame? What are the consequences of America's bankruptcy... ?

Inflation and the Fall of the Dollar

Like John, I'm sure we'll find a way to muddle through. In the end - even if there's more deflation in the short term - our government will end up monetizing its debts. Greenspan and others at the Fed have already mentioned they're prepared to buy large amounts of long-dated Treasury bonds. Retiring Treasury obligations with dollars the Fed prints will cause a weaker dollar. That means, sooner or later, inflation will be back -- and in a big way.

This is the real endgame, as I see it. Let me explain.

One of the smartest and best investors I've ever met, Chris Weber, says we're entering the third dollar bear market. And if there's anyone worth listening to when it comes to the currency, it's Chris Weber. Starting with the money he made on a Phoenix, Arizona paper route in the early 1970s, Chris built a $10 million fortune, primarily through currency investing. He has never had any other job. When I met him seven years ago he was living on Palm Beach. Now he resides in Monaco. I saw him two weeks ago in Amelia Island, Florida.

According to Chris, the first dollar bear market began in 1971. It ended when gold peaked out at $850 an ounce in 1980. This inflation helped ease the debts the U.S. incurred fighting the Vietnam War while wasting billions on the "war on poverty."

The second dollar bear market began after the Plaza Accord in 1985. This inflation helped pay for Reagan's tax cuts and the final build-up of the Cold War. (You should remember the impact the falling dollar had on stocks. They collapsed in 1987 on a Monday following comments over the weekend by Treasury Secretary Baker who said the dollar could continue to weaken.)

And Chris thinks this - the third dollar bear market - will be much worse than the last two. This time the falling dollar might lead to the end of the dollar as the world's only reserve currency. He's not the only one who thinks so. Doug Casey sees this happening too. And I believe it's not an unlikely outcome.

Why? Because the imbalances inside the U.S. economy have never been this large, nor has our current account deficit ever been this big and never before has the United States been more dependent on foreigners for oil.

This possible move away from the dollar as the primary reserve currency for the world is high-lighted by a recent comment from Dennis Gartman (The Gartman Letter):

"At what has been promoted as "The Executives' Meeting of East Asia-Pacific Central Banks" (The EMEAP), those attending took the preliminary steps toward creating an Asian bond market fund to be managed by the central bank's central banker, the Bank for International Settlements (The BIS). According to the Nihon Keizai and The Japan Daily Digest, the EMEAP is a co-operative of eleven regional central banks and it intends to create a fund with contributions from its member banks and to use the money to invest in dollar denominated government debt... initially. Then from our perspective, the fun begins. Given that the idea works in practice, the fund will proceed to increase its size and to start buying debt denominated in local currencies, moving away from the US dollar. The idea according to the Nikkei is to give the Asian central banks a place to invest the dollars their economies generate in something other than U.S. Treasuries. The intention is ultimately to keep the foreign currencies that these economies generate available in the region for investment. They are apparently weary of washing these earnings back into the US dollar, and that weariness has become all the more emphatic in light of Mr. Snow's ill-advised comments over several weeks ago. President Bush's comments over the weekend might have assuaged those concerns somewhat, but they are still looking above for other avenues of investment. Were we in their shoes, certainly we'd be doing the same. The EMEAP's member central banks include Australia, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand. Other's may join, making the effect even more material. Snow's comments created a veritable blizzard effect."

If this happen, it will accelerate the drop of the dollar predicted by both John and myself for some time.

For investors, while we muddle through this mess, it will pay to remember: America is bankrupt. Another big inflation is coming. And that's bad for equity investors. From 1968 through 1981 the Dow lost 75% of its value, in real terms.

What should you do? Imagine the 1970s, but on an even bigger scale. Doug Casey says fair value for gold right now is $700 an ounce. And he expects it to go to $3,000. It's hard for me to imagine that he's right. But then I look at my fellow American's finances, at Uncle Sam's balance sheet and the mockery corporate America has made of accounting standards... and suddenly gold looks pretty good.

Dr. Sjuggerud compiled this list of the annual returns of various asset classes from 1968 to 1981, during the last major collapse in the dollar:

19.4% Gold
18.9% Stamps
15.7% Rare books
13.7% Silver
12.7% Coins (U.S. non-gold)
12.5% Old masters' paintings
11.8% Diamonds
11.3% Farmland
9.6% Single-family homes
6.5% Inflation (CPI)
6.4% Foreign currencies
5.8% High-grade corporate bonds
3.1% Stocks

Chances are pretty good that you don't have a big position in these assets (with the exception of housing). It might be time to consider moving some of your savings out of stocks and bonds and into things more attuned to the declining value of the dollar.

We'll muddle through... the way we always do.

Your filling-in-for-my-friend analyst,

-Porter Stansberry

****************************

Editor's note: Porter Stansberry is the founder of Pirate Investor (www.pirateinvestor.com), a publisher of independent financial newsletters. Pirate Investor titles include: Porter Stansberry's Investment Advisory, Steve Sjuggerud's True Wealth, Extreme Value and Diligence, a small cap research service for high net worth investors.

Your can't wait to get on the plane analyst,

John Mauldin

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor

Quelle (http://www.321gold.com/editorials/mauldin/mauldin060703.html)

syr :rolleyes:

syracus

09.06.2003, 22:45

Nix "Kriegsendrally*, die "Greenspan-Rally" passt wohl eher :sss.....

Mon, Jun. 09, 2003

Stock buyers, proceed carefully

RALLY GREETED WITH SKEPTICISM

By David A. Sylvester
Mercury News

Call it the Alan Greenspan rally.

One brief speech by the Federal Reserve Board chairman warning of the dangers of deflation, and both the stock and bond markets capped a three-month rally with a sharp burst last week.

Since March 11, the Standard & Poor's 500 index has risen 23 percent, and the Nasdaq composite index is up 28 percent. Last week, they both rose by more than 2 percent.

Is this a new bull market?

Be careful.

A growing number of professional investors and traders are warning that this current rally may have risen too far, too fast. Not only are too many investors suddenly bullish, but a spate of insiders sold large amounts of stock in May. Stock prices remain expensive compared with current earnings, one of the lingering legacies of the bubble three years ago.

``I'd say it's a bubble within a bear market,'' says Joe Corona, executive vice president of the Dynamic Hedge fund who is watching for signs of a decline. ``It's a bear with indigestion.''

Some attribute the rally since March to the new tax cut on dividends and capital gains, the hopes for an economic rebound soon and on the expectation that the Fed could lower interest rates again when it meets June 24 and 25.

In his speech last week, Greenspan pointed out the national economy weakened in March and April but believes it showed signs of a ``fairly marked turnaround'' since then. The danger is that a weak economy might add pressure on prices leading to deflation, a widespread decline in price levels.

The process of deflation can sap an economy because it feeds on itself. Weak economic demand can lead to declining prices that translates into declining profits, more layoffs and plant closings. And as employees are laid off, that hurts wages and further undercuts demand.

To avoid such a spiral, Greenspan told international central bankers last week that the Fed would take out some unspecified ``insurance.'' Most analysts thought he was considering further interest-rate cuts, which immediately drove bond prices up and bond yields down in anticipation.

`Greenspan put'

In trading parlance, this has been called the ``Greenspan put.''

During the 1990s, Greenspan took action to protect the market from some of its worst excesses, such as orchestrating the bailout of failed hedge fund Long Term Capital Management. By protecting the market against its worst declines, he was giving investors the same kind of protection against sudden losses that put options can serve.

An investor buys puts to protect a stock portfolio from losses during a temporary market decline. The option costs a fraction of the price of the stock but can make sizable gains if the price of the stock drops, offsetting some of the loss.

Now, as the danger of deflation rises, Greenspan is concerned a weak economy and stock market could drag each other down.

``The Greenspan put has been issued,'' Corona says. ``Greenspan and the Fed have made it clear that they are going to protect investors.''

With this assurance, investors and speculators have begun to bid up prices. However, some warn that there's too much optimism. One widely watched indicator from the American Association of Investors Intelligence shows 57 percent of the investors are bullish and only 21 percent bears. In March, before the rally began, the sentiment was much different: 39 percent were bullish and 38 percent were bearish.

Another widely watched indicator is the so-called ``fear indicator'' of the Volatility Index of the S&P options, which is now at very low levels of 23, a sign of too much complacency. During a sharp market decline, this figure can shoot up to anywhere from 30 to 50.

But stock prices can keep climbing in spite of such warnings. As economist John Maynard Keynes once warned, the stock market can remain irrational longer than an investor can remain solvent.

``You're setting up the conditions for a decline,'' says David Rahn, president of Avalon Capital in Port of Redwood City. ``It doesn't mean it's going to happen.''

During the bubble in 2000, investors kept pouring money into the stock market even though it showed signs of becoming overvalued. Today, the Standard & Poor's 500 index is selling for 31 times the earnings per share over the last four quarters of its companies -- exactly the same as the peak of the bubble in March 2000, according to Bloomberg News. This measure's historical average is about 17 and can drop below 10 during major bear markets.

`Money on the sidelines'

Joe Sunderman, director of trading at Schaeffer's Investment Research, believes enough investors still have cash in money-market funds to keep buying stock. ``As long as people are talking about the bear market, there's money on the sidelines that can move back into the market and move it higher,'' he says.

At some point, this will change. Signs of a coming decline would include seeing some leading stocks begin to weaken, and some leading industries, such as semiconductors and brokerage firms, beginning to show slumping prices.

George Muzea, president of his consulting firm specializing in insider transactions, says rising insider selling indicates trouble for the coming weeks. He is issuing an advisory to his 60 institutional clients to prepare for a market decline.

Among the insider transactions he follows, there were 205 insider sales of stock for every 100 purchases in May. In March, when the current rally began, there were only 77 insider sales per 100 purchases, he says.

``There's no question in my mind that we're at a top,'' says Muzea, author of a book on insider selling, ``The Vital Few vs. the Trivial Many.''

--------------------------------------------------------------------------------
Contact David A. Sylvester at dsylvester@mercurynews.com or (408) 920-5019.

Quelle (http://www.bayarea.com/mld/mercurynews/business/6047010.htm)

"Greenspan put'" :rofl :cool:

syr :rolleyes:

syracus

17.06.2003, 23:12

Wieder die FED;).....

BusinessWeek Online, JUNE 23, 2003

NEWS: ANALYSIS & COMMENTARY

The Scary Side of Low Rates

Will they spur growth before they inflict serious damage?

To Federal Reserve Chairman Alan Greenspan's way of thinking, the natural tendency of the economy is to grow. Consumers want to buy new things and companies want to build up businesses. That's why the lingering gloom among corporate honchos has come as a surprise. Some 18 months after the recession's end -- and nearly two months after Iraq jitters were laid to rest -- corporate CEOs are still reluctant to shell out money for new investment or take on more workers. If the gloom goes on too much longer, it could snuff out the sputtering recovery.

With the corporate set so cautious, the Fed's only hope is to use cheap credit to juice up other parts of the economy, including housing and the financial sector, so much that industrialists will take heart and start investing again. The key is using rock-bottom rates to help shift executives' expectations in a more positive direction and revive animal spirits.

But with interest rates at levels not seen in more than four decades, there are risks to the strategy. Indeed, there are already signs that ultralow interest rates are spawning bubble-like behavior in the financial markets. Another danger: increased financial disruptions as everyone from money-market to pension-fund managers struggle to cope with the brand-new world of ultralow rates.

Big rate drops have put particular pressures on mortgage financiers like Fannie Mae and Freddie Mac (FRE ), as property owners have rushed to prepay their home loans. While the two government-sponsored agencies have long maintained they can handle the risks, Freddie Mac's abrupt dismissal of its president on June 9 following an accounting inquiry that will lead to an earnings restatement raised questions about whether it has adequate financial controls in place. The big, so far unfounded, worry: that future financial troubles at Fannie and Freddie could hurt the housing market, one of the few bright spots of the recovery.

Indeed, in a world of cheap credit, further rate cuts could, in some cases, hurt rather than help the economy. A further fall in interest rates could decimate the money-market fund industry, which provides hundreds of billions of dollars to Corporate America via purchases of commercial paper. "You're operating in an environment that you don't know very much about," says Goldman, Sachs & Co. economist Jan Hatzius.

But that's a risk Greenspan & Co. think they have to take. Fed officials are betting that the financial system is big and flexible enough to stand the stresses and strains of the brand-new world of ultralow interest rates. And they're also willing to accept any financial bubbles those low rates may spawn, if that's what it takes to get the economy going again. In comments to international bankers on June 2, Greenspan signaled that he thought investors might be getting a bit ahead of themselves in their enthusiasm about the economy. Yet he evinced little concern about the consequences. Indeed, Greenspan seems likely to push rates even lower when the Fed meets to map monetary strategy on June 24-25. In his June 2 comments, Greenspan hinted that a further cut in the 1 1/4% interbank interest rate was in the offing as insurance against the real, though remote, risk that the economy could tip into a debilitating, deflationary downturn.

The trouble for the Fed, though, is that when it cuts rates, the money doesn't necessarily flow to the parts of the economy where it can do the most good. Despite all the money that the central bank has pumped out, industrial companies remain gun-shy about taking on new debt to finance investment. Commercial and industrial loans at banks have actually shrunk over the past year, by $75 billion according to the Fed.

Even though lending rates are extraordinarily low, chief executives in the goods-producing sector are reluctant to borrow for fear that, with prices falling and demand lackluster, they will have a hard time repaying loans. In essence, manufacturers are mired in a localized deflation and low interest rates make very little difference to them. Adjusted for expected deflation in the price of goods they sell, real interest rates for those firms "have been going up," says Wachovia Corp. economist Mark Vitner.

Fed officials say that Corporate America is also holding back on borrowing and investment because company execs are still skittish in the wake of recent accounting scandals. Rather than focusing on ways to expand their businesses, corporate execs are focused on minimizing risk and keeping their jobs.

Ultralow rates, however, are clearly fueling a surge in the stock market. One example: The state of Illinois has taken some proceeds from a $10 billion bond issue to invest in stocks. That, state officials hope, will help close a huge $35 billion pension funding gap. To some, there is a smell of irrational exuberance in the air. "It's reminiscent of the [1990s] bubble," says Henry T.C. Hu, a corporate and securities law professor at the University of Texas.

Some stock strategists also worry that cheap money is propping up companies that ought to shrink or liquidate -- and so is delaying the consolidation needed for a vigorous recovery. Kari Bayer Pinkernell, senior U.S. strategist at Merrill Lynch & Co., frets that investors' renewed infatuation with tech companies is delaying much-needed restructuring.

There's another worry, too: the creation of a bubble in the bond market. Egged on by deflation talk from the Fed, yields on Treasury securities are at 45-year lows. "There is a great deal of risk and no return in the market," says James Grant, editor of Grant's Interest Rate Observer. The big risk for bonds is that the Fed's efforts to reflate the economy will prove all too successful, leading to an eventual surge in inflation. Inflation phobes argue that given the unprecedented amount of stimulus being pumped into the economy, it's only a matter of time before price pressures build. "Greenspan has made very clear that he's going to monetize the deficit," says Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business. "That means you're going to have inflation down the road."

For now, though, the focus is on whether the Fed will succeed in goosing growth. And in the looking-glass world of cheap credit, that's by no means clear. Money-market funds are most at risk from rock-bottom rates. Falling rates have lowered yields on money-market mutual funds so much that their 0.6% annual fees eat up close to half of their 1.3% annual return, leaving investors just 0.7%. A further sharp rate drop could put many of the funds, which are big buyers of commercial paper, out of business. If that happened, it would force issuers of commercial paper like Ford Motor Credit (F ) to find other, presumably more expensive, ways to raise money.

But turning to banks for funding may not be so easy, either. In ordinary times, banks usually benefit strongly from interbank rate cuts by the Fed because they lower their cost of funds. But with bank borrowing costs already close to zero, another Fed rate won't make much difference. But it would pressure the banks to lower their lending rates, squeezing their profit margins and discouraging them from granting credit.

Pension funds are also feeling the pinch from bargain interest rates. They're required by regulation to have enough money so they can meet future obligations even if all their assets were invested at today's ultralow rates. By that standard, "pension plans are getting weaker," despite the stock market's surge, David Zion of Credit Suisse First Boston Zion states.

Greenspan & Co. are well aware of the distortions and disruptions that cheap credit could spawn. But with the economy sputtering, they have little choice but to accept the consequences of their ultralow interest-rate regime -- and hope for the best.

By Rich Miller in Washington and Peter Coy in New York, with Michael Arndt in Chicago

BusinessWeek (http://www.businessweek.com/magazine/content/03_25/b3838030.htm)

syr :rolleyes:

RIVA

21.06.2003, 11:31

Das hier ist ein "Muss", wenn man's noch nicht kennt:

Click (http://www.contraryinvestor.com/moprinter.htm)

RIVA

21.06.2003, 16:01

http://www.financialsense.com/Market/graphs/june/0620debt.jpg

America is Bankrupt

It’s a sobering thought. Are we really broke? The answer is clearly, YES, but living on borrowed time and money. A recent study was done by Jagadeesh Gokhale and Kent Smetters which measures our government’s current debts and projected debts based on the proposed federal budget and revenues for 2004. By extending the numbers in constant 2003 dollars, they have come to the conclusion that the Federal government is officially insolvent to the tune of $44 trillion. You might ask, “Who are these guys?” Mr. Gokhale is the former Senior Economic Advisor to the Federal Reserve Bank of Cleveland and Mr. Smetters was recently on staff as the Deputy Assistant Secretary for Economic Policy. These fellas know what they are talking about! Additionally, the numbers they used are from the U.S. Department of Treasury.

I’m out of the office early today with Jim Puplava to go wait in line for the new Harry Potter book. Jim and I will take advantage of the time “queuing” to discuss investment strategy as we move into earnings season. I’m taking liberty on this short office day, to provide you with two links that describe the details of the federal debt study along with analysis and commentary. The articles are somewhat redundant, but I believe it’s good to read varying analysis in order to formulate our own opinions. I highly recommend that you print out the essays and use a highlighter pen to mark the portions that could potentially have the greatest impact on your investment positions. At minimum, this information should lead you to the conclusion that the dollar will have to fall further in value to reach a point of equilibrium relative to our financial condition.

I particularly enjoyed reading the piece written by Porter Stansberry, since he did a nice job in bringing the study into terms we can understand and apply to our own investment situation. Here’s the link: frontlinethoughts. The second analysis and commentary is from the Wharton School of Business.

Two News Items
One little tid-bit of news that Scott brought to my attention this morning came from a Reuters article which reads, “Foreclosures Hit Record High in First Quarter.” WOW! We are at fifty-year low mortgage rates and foreclosures are already at record levels. What happens if rates actually go up? My new beach house should be pennies on the dollar in a few years.

Another news item that caught my attention this morning was that General Motors just raised $13 billion by going deeper into debt. Three billion will be used for operations, while $10 billion will be used to reduce the pension plan deficits. They will need to borrow an additional $15.4 billion to make the pension plan whole again.

I mention the two news releases relating to debt so you can get a better picture of what is happening right now. The two links point to unbridled Federal debts, while the news releases are indicative of excessive household debt and corporate debt. When will people get it through their heads that we can’t borrow our way to prosperity and unlimited wealth? It comes from hard work, discipline and savings – the old fashion way.

See ya’ Next Week…

I hope you enjoy the linked articles as much as I did. They do a great job to paint the picture of where we are as a nation and where we could possibly be headed. It’s not the warm-fuzzy reading that will put you to sleep. Each time I caught myself saying WOW, I highlighted the sentence for future reference to keep a handle on the big picture.

For now we wait and watch to see if the Fed cuts a quarter-point next week or a half-point. Back to the regular weekly recap next Friday; in the meantime, I wish you all the best of luck in all your investment decisions.

Copyright © 2003 Mike Hartman
June 20, 2003

syracus

22.06.2003, 10:43

#54 kann ich auch nur als "must-read" bezeichnen, Kosto's Vision kommt :cool:.... Verblüffend ähnliche Verläufe. Passt auch zu dem Beitrag:

Has the bear market started?

Steve Saville
21 June, 2003

The current debate between stock-market bulls, bears, and innocent bystanders, revolves around the following question: Is this a rally in an on-going bear market or a new bull market? Or, amongst those in the bullish camp the question would be: Is this a cyclical bull market within an on-going secular bear market or the early part of a new secular bull market? There is, however, one question we think is valid but which is never asked, at least in the presence of polite company. That question is; has a bear market started?

At first glance the above question seems absurd given the massive declines in many stocks over the past 3 years, particularly the stocks of any company involved in the tech industry. After all, an 80% decline in the NASDAQ100 Index from peak to trough could hardly be described as anything other than a severe bear market. However, while it is crystal clear that certain sectors have experienced bear markets of historic proportion, it is not so clear that the overall market has been immersed in a major bear trend.

Support for the above statement is provided by the following chart of the NYSE advance-decline line (a cumulative daily total of the number of advancing stocks minus the number of declining stocks). The chart shows that the A-D Line has been trending higher over the past 3 years, has just moved to a 5-year high, and is not far from the major peak reached during the first half of 1998. The popular explanation for the extraordinary performance of the A-D Line over the past few years is that this measure of market breadth has been distorted by the fact that there are so many interest-rate-sensitive stocks (stocks that benefit from lower interest rates) now trading on the NYSE. The popular thinking is that the relentless downward trend in interest rates has created an artificial rally in the A-D Line. This may be a valid explanation, but the point is that there has never been a major bear market in the past that was accompanied by a rising A-D Line.

http://www.321gold.com/editorials/saville/saville062103/1.gif

Further support is provided by the below 9-year chart of the Bank Stock Index (BKX). The BKX has traded sideways for 6 years and is now near the top of its range and only marginally below its all-time high. The lengthy consolidation in the bank stocks might eventually lead to a downside break, but it is not fair to say that this important sector has experienced a bear market over the past few years. Once again the chart can probably be explained by the relentless downward trend in interest rates, but during major bear markets bank stocks typically fall sharply regardless of falling interest rates

http://www.321gold.com/editorials/saville/saville062103/2.jpg

So, what has actually happened over the past 3 years if a secular bear market hasn't yet begun? The below charts provide a clue.

The first chart shows the ratio of the NASDAQ100 Index (NDX) and the Dow Industrials Index over the past 9 years. Notice that at last year's bottom the NDX/Dow ratio was back to near its 1996 low. In other words, the market action between March of 2000 and October of 2002 wiped away the excess in the NDX relative to the Dow that had developed over the preceding 4 years. The second chart shows the ratio of the S&P500 Index and the XAU over the past 20 years. During the final quarter of 2000, when the S&P/XAU ratio was 27, we forecast that it would reach 10 within 2 years. This was the minimum decline needed to bring the ratio back into line with its long-term trend. Thanks to the poor performances of ABX and PDG the ratio didn't quite make it all the way back to 10, but it got close.

http://www.321gold.com/editorials/saville/saville062103/3.jpg

http://www.321gold.com/editorials/saville/saville062103/4.gif

The above charts suggest that the market action of 2000-2002 was more a correction of the excesses in certain sectors relative to other sectors than it was an all-encompassing bear market. In other words, the market has gone a long way towards removing relative excesses, but valuations are still very high because the overall market excess resulting from the great US credit expansion has not yet been addressed.

At this stage we are willing to seriously consider the possibility that a secular bear market has not yet begun. That doesn't mean that we think the Dow or the S&P500 have a fighting chance of reaching new all-time highs over the next 1-2 years (for the record, we don't think that is a realistic possibility). However, rather than wondering about whether the latest rally represents a new bull market or a rebound within an on-going bear market, it might be more appropriate to consider everything that has happened over the past 5 years or so to be a giant topping process and that the bear market actually lies in the future.

Steve Saville
email: sas888@netvigator.com
Hong Kong
21 June, 2003

saville (http://www.321gold.com/editorials/saville/saville062103.html)

syr:sss

syracus

23.06.2003, 21:56

Zu den Zinsen, eine kleine Lehrstunde oder so. Mit ein paar ganz guten Erklärungen und Beispielen ;)...

What is behind the sharp fall in long term rates?

Monday 23 June 2003

The yield on the 10-year T-Bond fell to 3.10% on June 13 — the lowest level since June 1958. Also, the yield on Moody's AAA-rated corporate long-term bonds fell to 4.85% — the lowest level since February 1966.

Most experts are of the view that this sharp fall in long term rates is positive for economic activity since a fall in interest rates is a key driving force behind the formation of real fixed investment, which in turn sets in motion economic growth, so it is held. It seems therefore that the level of interest rates is the key determinant of real economic growth and hence the build-up of real wealth. But does this way of thinking make any sense?

The choices that any individual makes regarding the allocation of his real wealth towards consumption and towards savings is determined by his desire to maintain his life and well being. The improvement of life and well being requires various tools and machinery that must be funded through savings.

Hence the more an individual saves the more funding is made available to build tools and machinery, which in turn gives rise to a greater variety and quantity of goods i.e. an increase in living standards ensues. The consequent expansion in real wealth permits in turn more consumption and more savings and thus a further improvement in living standards.

To make a long story short, the reason why an individual allocates his real savings towards the buildup of tools and machinery is his expectation that better tools will improve his standard of living. It is the desire to improve living standards that serves as a driving force behind individuals' decisions to allocate a portion of real wealth towards savings.

Thus out of his production of 110 loaves of bread a baker consumes 10 loaves of bread and saves 100 loaves. He then exchanges these saved loaves for the services of an oven maker to improve his oven. With the enhanced oven the output of the baker rises to 150 loaves of bread. In short, his stock of real wealth is now 150 loaves of bread. The invested savings of the 100 loaves of bread gave rise to 150 loaves of bread i.e. a real return of 50%. With more real wealth at his disposal the baker can lift his consumption and savings. He can now directly consume 15 loaves of bread and exchange other 15 loaves of bread for various other consumer goods and save 120 loaves.

Now, the importance of projects that individuals aim at is dictated by the ultimate goal, which is to maintain life and well being. Thus with a limited stock of real wealth at his disposal an individuals' top priority would be just to sustain life. This means that his entire stock of real wealth will be consumed daily without anything being allocated towards savings. With an increase in real wealth however, the individual can now consider less important goals as far as life and well being is concerned. Thus with very limited real wealth an individual can only just stay alive.

With a larger stock of real wealth he can have various other things that make his life more enjoyable. Consequently, his required return on investment will be now lower (since these things are of lesser importance as far as life sustenance is concerned). In other words, as individual's real wealth expands less important goals can be accommodated (with life and well-being serving as the standard of evaluation) which in turn implies that lower returns on investments will be accepted.

Things are not much different when a baker, Tom, lends his bread to a baker Sam. Tom is ready to lend Sam the 100 loaves of bread for 150 loaves in a one-year time. Sam agrees on this deal because he believes that an oven he can secure for the 100 loaves of bread will generate 160 loaves. Observe that it is the lender that sets the interest rate. However, it is up to a borrower to decide whether the asked interest rate is a good deal for him.

In order to secure the fundamental return, which is associated with the improvement in life and well being, a lender must consider also the risk involved in lending his real savings. Hence the higher the risk the higher the overall return on the invested real savings that the lender will demand, all other things being equal.

Also, note that the supplier of a given stock of real savings may discover that the interest he set doesn't generate enough borrowers, as a consequence he will be forced to lower his interest rate if he wants to dispose of his supply of real savings. Furthermore, below a certain level of interest rate the lender will not agree to exchange his real savings in order to prevent an undermining of his life and well being. Likewise the borrower will not agree to borrow above a certain level of interest rates that will lead to a deterioration of his living standard.

The introduction of money does not alter the essence of what we have said so far. Instead of lending bread Tom the baker will lend Sam $100, which Sam will use to acquire an oven. On the maturity date Sam will exchange his 160 loaves of bread for $160 and repay Tom $150. Also, in the world of money with the expansion of real wealth there will be a fall in interest rates.

Trouble emerges, however, when money is generated out of "thin air". This type of money undermines the pool of real savings and hence reduces the range of goals that can be achieved. This in turn implies higher real interest rates. Moreover, the dilution of the pool of real savings also raises the risk factor. Consequently, all this leads lenders to ask for a higher return on their loaned money. It follows then that an injection of money out of "thin air" leads to a higher real interest rate, all other things being equal. Furthermore, as monetary pumping increases this raises prices of goods and services. In order then to protect his real interest rate the lender will now demand compensation for a fall in the purchasing power of money.

We can then conclude that the fundamental driving force of interest rate determination is the desire to maintain life and well being. It is this ultimate goal that provides the standard of evaluation regarding the allocation of real wealth towards various subsidiary goals. The higher on the evaluation scale a particular goal is the higher the required return on investment will be. The importance of other factors, like risk, and inflationary expectations are always assessed with regard to the fundamental real interest rate.

Now, the effect from monetary injections on real wealth is not instantaneous — it operates with a time lag. In contrast the effect of monetary pumping on credit markets is immediate. Hence once new money is injected as a rule it first goes to credit markets. This in turn bids up the prices of bonds thereby lowering nominal interest rates. It is only after a time lag that the new money starts to undermine the stock of real wealth and hence the pool of real savings, which in turn starts to exert upward pressure on real and nominal interest rates.

The central bank, however, doesn't stop there, it continues with its monetary pumping thereby suppressing any upward tendencies in interest rates. It follows then that the central bank can be always ahead in the race with the pool of real savings. As long as the stock of real wealth is expanding and price inflation appears to be tame monetary policy seems to be successful in maintaining interest rate at low levels. Once, however, the central bank tightens its stance as a result of emerging price inflation the support behind the artificial lowering of interest rates falls apart and the state of real wealth asserts itself.

If the stock of real wealth starts to shrink on the account of the aggressive artificial lowering of interest rates by the central bank this will harm the pool of real savings and in turn real economic activity. In response to this banks’ lending out of "thin air" is likely to be curtailed and the rate of growth in the money stock follows suit. In short, the support behind the artificial lowering of interest rates disappears and the state of real savings starts to assert itself as far as interest rates are concerned.

Contrary to popular thinking it is not the rise in interest rates that weakens economic growth but the availability of real savings. Interest rates as such are an indicator as it were. Consequently, an artificial lowering of interest rates cannot grow the economy if real savings are not there to fund real economic expansion.

In terms of present underlying real fundamentals there is very little support for low real interest rates. Thus the consumer liabilities-to-assets ratio climbed to a new record high of 0.185 in Q1 from 0.182 in Q4 2002 . Year-on-year consumers' real net worth fell by 7.5% in Q1 after a fall of 5.9% in the previous quarter. This was the 4th consecutive quarterly decline.

Also, the fact that the personal income to consumption ratio remains in free fall is another indication that the pool of real savings is in trouble. In addition to this, ever growing government outlays continue to undermine the formation of real wealth. For 2004 the President's budget outlays stand at $2.229 trillion. This is an increase of 19.8% on outlays in 2001 budget, which President Bush inherited from President Clinton.

A further loosening in the monetary stance is likely to undermine the pool of real savings further and thereby put more pressure on real interest rates. As long as the bubble still holds and price inflation remains subdued market interest rates will continue to fall. In this regard, the yearly rate of increase in adjusted money AMS jumped from 0.9% in January to 6% in early June. This sharp increase in the growth momentum of monetary liquidity continues to provide support for the price of T-Bonds (see chart). After falling by 4.9% in March 2002 year-on-year the price of the 10-year T-Bond increased by 14.5% in May.

To pre-empt the possibility of price deflation the Fed is likely to boost monetary pumping by aggressive buying Treasury Bonds, thereby depressing long-term yields further. Another positive for T-Bonds is strong buying by commercial banks. In the week ending June 4 commercial ban holdings of T-Bonds increased by $7.3 billion from the previous week. The yearly rate of increase of these holdings stood at 25.1% against 25.7% in April.

All this monetary pumping however will weaken the pool of real savings further and consequently will push real interest rates higher. Additionally the likely deterioration in real fundamentals runs the risk that the bust of the present stock market bubble will undermine the attractiveness of corporate bonds and thereby push their yields higher.

The currently perceived risk on corporate bonds, as depicted by the spread between the Moody's BAA-rated long-term corporate bond and the yield on the 10 year T-Bond, while displaying softening at the margin remains at historically lofty levels. Also, should the stock market plunge a liquidity crunch may develop. To prevent insolvency investors are likely to attempt to mobilise cash by selling their most marketable assets like T-Bonds. However, this will depress their prices and boost their yields. A similar situation was observed during 1930s when the yield on the 10 year T-Bond after falling to 3.13% by June 1930 climbed to 4.26% by January 1932.

Also in Japan, after falling to 3.14% in December 93 the yield on the 10 year Government Bond jumped to 4.78% by August 94. Furthermore, after falling to 0.785% by September 98 the yield on the 10 year Government Bond skyrocketed to 2.46% by December of that year.

To conclude then, while the present loose monetary policy is likely to provide further support to the T-Bond market, at the same time it continues to undermine the pool of real savings. Consequently, this will continue to exert upward pressures on real interest rates and at some time in the future will push nominal yields on long-term T-Bonds higher.

Dr Frank Shostak

Quelle (http://www.brookesnews.com/032306frank.html)

syr:sss

Holodeck

04.07.2003, 04:15

Noch einer, der absolut lesenswert ist. The Daily Reckoning (http://www.dailyreckoning.com/home.cfm?loc=/body_headline.cfm&qs=id=3293) - FASCIST DOOM AWAITS US ... aber zuerst gehen die Börsen rauf :sss

And why is America doomed to bankruptcy and ruination? Because we so desperately deserve it, as we are obviously a nation of imbeciles and morons who elect imbeciles and morons to spend us into hell.

(...)

Mr. Dodd recounts how the derivatives market has "No reporting requirements, no collateral requirements, no licensing of traders. There's no supervision of this activity. Even if you're a regulator and you want to see what's happening, you can't."

Germa, Du kannst gar nicht wissen, wieviele Derivate herumgeistern :p

(...)

The Mortgage Bankers Association released their data last week showing that nearly all the profits being banked through mortgages are now coming from cash-out refinancings (the practice of refinancing your home for more than it's worth, so you can afford to make payments on your SUV and meet the minimum monthly requirement on your 8 credit cards!). The Federal Reserve's own numbers reveal that cash from refinancing accounted for nearly $700 billion of consumer spending last year."

(...)

In a similar vein, Marc Faber, in an essay on the Daily Reckoning site, wrote, "Fannie Mae is the perfect example of today's reckless excess of credit. The GSE mortgage lender just raised its projection of mortgage originations for 2003 to a record $3.7 trillion - this in a $10 trillion U.S. economy and compared to an increase of total mortgage borrowing of just $1 trillion between 1990 and 1996!" :eek:

Perfect. Just freaking perfect. The jackasses known as the American electorate have, in one damn year, saddled themselves with more huge mortgages, to the tune of 40% of everything that this country produces in a whole year. In one year! :eek

(...)

Robert G. Anderson, a big shot economist of the Austrian persuasion, in an old article entitled, "The Disintegration of Economic Ownership," has distilled the new America. "While the ordering of economic resources under a socialist structure is failing thought the world today, a more insidious successor to state socialism has developed. A form of statism has evolved whose adherents are less concerned with outcome and more concerned with controlling the processes of society. These new statists are interested in a social order which can be manipulated politically to interfere with private property ownership without completely repudiating the market order framework. While state socialism seized all claim of private ownership to property, the new form of statism captures only the economic ownership to private property, achieving its political objectives by imposing mandates and injunctions upon the legal owners of property. It has become a system of social organization which can best be described as a pragmatic, neo-fascist state."

Übersetzung:

Getting out our Universal Translators, decipher this into Mogambo-ese, and we read the same thing in Mogambo-speak, "The malodorous manifestations of this stinking neo-fascist nastiness are everywhere, thanks to the dim-witted neo-fascist Congress. That enclave of preening, populist morons has decided that the vital interest of the state in the workings of the economy are of such importance, and the workings of a free marketplace and the freedom of the people themselves are of such little importance, that they think nothing of pursuing blatantly fallacious and idiotic policies to the complete ruination of the currency, the country and everybody in it, I suppose because their hearts are so pure and their motives so worthy."

Not content to let it go at that, Mr. Anderson also has a few choice words about GSE's like Fannie Mae and Freddy Mac, to name but two. "Between the government and the private corporation lies a third form of economic ownership, a statist creation which epitomizes both the disintegration of private economic control of resources and a fundamental anti-market mentality. The creation of quasi-public entities, brought into existence by enabling statutory laws to pursue some partisan political agenda, has been an integral characteristic of pragmatic neo-fascism."

(...)

John Crudele, a writer for the NY Post, says of the latest interest rate cut by the Fed, "There is probably only one cut left before the government has to start doing strange things." Well, given that he lives in the NYC area, perhaps living every moment of your life in that kind of strange environment, and amid strange people, he is unaware that the rest of the regular world recognizes that the government is already doing strange things, and has been doing strange things for, let me consult my calendar here, for well over sixty years in a row. And there were plenty of examples before that, but only not to the extent that we have today.

(...)

For example, alert reader Fred Fuller sent a transcript of a Ron Insana quote about the Federal Reserve, which said, among other things, "It also can tax deposits, or break its charter at some point and buy goods and services outright. These are the things being discussed by Dallas Fed researchers." This is the American equivalent of the Japanese government buying stocks, but only more so. And when the government owns the businesses of the country, literally owning the means of production, isn't that the whole socialist dream? And how did all the other socialist experiments work out? They did? You're kidding! Then why in the hell would anybody want to go that route?

(...)

But, speaking of that, even I am starting to mellow on the guy (Clinton). Particularly when compared to George W. Bush, who is selecting the feel-good option and cranking the dial all the way up to "orgasmic," and acts more fiscally irresponsible than I thought even possible under Clinton. And who thought Alan Greenspan would play along with such an alarming thing?

(...)

And the reason that we stress gold, even though when I say "we" I mean "me especially," is that it, alone, is usually the centerpiece of the economic action, because it has always been the centerpiece of economic action, because it is the only thing that can function as a form of money that is immune from government printing press money-duplication, which causes the utter devastation that will soon befall us. And gold is the one thing that all desperate people have turned to at the end, and it always saved them.

And make no mistake; we will be devastated, as there has never been a way to prevent it, and there is no way now. The expedient of printing money is what all governments turned to, every time, by which I mean every freaking time, and then found, to their horror, that it was not a solution, and is instead the very poison that is killing everybody to start with, and so everybody ended up doubly dead, as if being merely dead is not a sufficient penalty and payback.

(...)

syracus

04.07.2003, 18:21

:rolleyes: :lach

Aber zu was anderem, "Back to the future" :Prost: ......

Flashback To The Late 1970s

A Historical Road Map For the Mid-2000s

“Because of structural and attitudinal changes that have taken place in recent years, or are presently occurring, the world economy is being [affected] by powerful deflationary forces.

These forces can only be obviated by a major restructuring of the international payment and credit mechanisms. However, because of political and technical obstacles, such a restructuring may be delayed until an international crisis threatens to erupt, thus forcing governments into immediate action.

Meanwhile, efforts to prevent the world economy from succumbing to these deflationary forces are building up an inflationary time bomb, through a massive increase in total world liquidity. The restructuring of the international credit markets, when it comes, will release this inflationary time bomb. But, because a large slack will have developed in the world economy by then, there could be an interim period of apparent non-inflationary prosperity.”

I wrote these words in… October 1977, in a prologue to a paper entitled “Between Inflation and Deflation: The Dislocating World Economy”.

Why did I recently feel the need to dig up that old report? Because I have felt for some time that we may have entered a period that will, in many ways, feel like the second half of the 1970s.

Periods of transition between more easily characterized and delineated phases of expansion/recession, prosperity/poverty, optimism/anxiety, war/peace, have been the object of relatively little inquiry. The second half of the 1970s was such a period of transition and, I believe, so will be the next several years.

Back then, we had had the great speculation of the late 1960s and early 1970s, accompanied by all kinds of new financial instruments and techniques -- futures, options, hedge funds, money market funds. These had changed the way financial markets worked and, at times, how the economy responded to traditional policy measures. The outcome of the bubble was the devastating 1973-74 bear market, after which the number of hedge fund managers shrank drastically, while the number of market-savvy cab drivers increased proportionally.

From the bottom of that bear market, in December 1974, there was a sharp, eighteen-month rally, which almost brought the Dow Jones Industrial average to its previous highs. Thereafter, the market fluctuated aimlessly (though sometimes widely) until the early 1980s.

http://www.tocqueville.com/images/upload/DJ72-82.gif

During 1973-74 bear market the S&P 500’s price/earnings ratio (P/E) dropped from over 20 to less than 8. The drop in valuation was even more dramatic for many of the “nifty-fifty” pet shares of institutional investors, whose P/E ratios had routinely hovered between 30 and 50 times earnings in 1972.

http://www.tocqueville.com/images/upload/SP73-83.gif

After rebounding nearly 80 percent (to about 13) in the first leg of recovery, in 1975 and early 1976, P/E ratios resumed a long slide, to reach below 7 in 1980-1982. Not surprisingly, the earlier increase in stock valuations was triggered by an aggressive easing of monetary policy, and it promptly ended when inflationary pressures caused the Federal Reserve to tighten again.

http://www.tocqueville.com/images/upload/Fed72-82.gif

Note that underlying inflation was extremely high in the 1970s, contrary to the present environment where fears of actual price deflation still dominate. Prices had begun to creep up very early in the decade, as a result of the “guns and butter” policies of the Johnson administration and the abandonment of the dollar convertibility into gold by the Nixon administration. In fact, it can be argued that the first oil shock, in 1973, was merely one of the consequences of these policies.

Nevertheless, by 1977, price inflation was decelerating in earnest, and many forecasters were predicting further declines. This was not to be the case, as the money easing of the early decade was about to boost prices again.

http://www.tocqueville.com/images/upload/CPI72-82.gif

Another parallel is that the 1970s disintegration of the Bretton Woods monetary system of fixed exchange rates had ushered a long period of dollar weakness, which was accompanied by major shifts in international trade and capital flows – as well as inflationary trends.

http://www.tocqueville.com/images/upload/GM71-82.gif

Throughout the 1970s, the behavior of U.S. corporate profits was generally satisfactory, despite the unsettled economic environment. After a fairly good recovery from the deep 1975 recession, growth rates in Gross Domestic Product started to weaken as early as 1978 – even before the second oil shock triggered by the fall of the Shah of Iran in 1979. But profits rose strongly, except for a sharp dip in 1980.

http://www.tocqueville.com/images/upload/GDP72-82.gif

http://www.tocqueville.com/images/upload/CP72-82.gif

Thus, throughout the second half of the 1970s, there was a tug-of-war between rising earnings and declining P/E ratios, resulting in very little net gain in stock prices.

There are many differences between then and now, in particular the level of interest rates, which was high then (hence the low P/E ratios) and is extremely low now. Thus, in an environment of steadily-rising interest rates (which we expect in coming years as a result of re-accelerating inflation), the P/E hurdle for stock prices will be even tougher to overcome and the onus on corporate profits to boost stock prices even heavier.

After the current, initial rally has run its course (which, if history is a guide, will take a few more months, though with temporary interruptions), I would expect the following several years to be characterized by fairly wide fluctuations of stock prices around a flat trend.

The good news, if my memory serves me correctly, is that such periods of transition are not inhospitable to value investors – especially contrarian ones.

François Sicart

June 30, 2003
© Tocqueville Asset Management L.P.

Tocqueville Asset Management (http://www.tocqueville.com/hlbl/hlbl.php?id=135)

syr :cool:

syracus

04.07.2003, 18:36

Und noch was zum Wochenende. Aber da nur die "Einleitung", ist sonst zuviel :sss......

http://www.financialsense.com/stormwatch/images/2003/catalyst/silver.gif

click (etwas Ladezeit....) (http://www.financialsense.com/stormwatch/oldupdates/2003/0702.htm)

syr

mfabian

06.07.2003, 18:25

Original geschrieben von Holodeck
Germa, Du kannst gar nicht wissen, wieviele Derivate herumgeistern [/b]:p

Bist Du sicher? Warum gibt's dann Zahlen und Statistiken darüber?

Guck mal Hamilton vor einem Jahr (http://www.zealllc.com/2002/jpmcrash.htm)

Tschüss
MArcus

Vetinari

08.07.2003, 00:26

Fur derivative gibts 2 quellen ... ein von der U.S. comtroller (U.S. Banken wie JPM und C ... aber nicht privat Banken wie GS oder MSDW) und die andere von der Welt Bank oder B.I.S. (fur alle Banken der Welt) ... und typische , ich habe die links nicht :rolleyes: :D

Naja , Ober Baer Roach ... Flashpoint :D

Global: Flashpoint?

Stephen Roach (from Beijing)

There’s little concern about the mounting imbalances of a saving-short US economy. Nor are there any serious worries about the perils of a US-centric world. At least that’s the verdict that I take away from my recent discussions with investors, businesspeople, and policy makers around the world. That could be a dangerous oversight. The United States is rapidly approaching an ominous threshold -- a net national saving rate that is about to go negative. Could that be the flashpoint that sends a wake-up call to world financial markets? ;)

This is a story of arithmetic. The accounting identity is often the most powerful of economic constraints. Such a framework is not subject to theoretical interpretations -- the identities simply have to add up, year in and year out. For any nation, saving must always equal investment. Unfortunately, America’s national saving rate is plunging into the danger zone. In the first quarter of 2003, gross national saving -- households, businesses, and government units, combined -- fell to 14.0% of gross national product; that’s down 1.5 percentage points from the year-earlier rate and fully 4.8 percentage points below the post-1960 norm of 18.8%. But that’s only the tip of the iceberg.

The problem is that most of America’s national saving now shows up in the form of depreciation -- funds that are earmarked for the replacement of worn-out physical assets. In the first quarter of 2003, such depreciation accounted for fully 94% of total saving. That means that the net national saving rate -- that portion of national saving that is available to fund the actual expansion of productive capacity -- fell to a record low of 0.7% of gross national product in the first period of this year. That’s off sharply from the year-earlier reading of 2.3% and is well short of the nearly 5% average of the 1990s and the 11% norm of the 1960s. There are few macro gauges that tell us more about an economy’s internally generated growth capacity. Sadly, America has all but depleted its reservoir of net saving -- the sustenance of longer-term economic growth.

This problem has profound implications for the US and the rest of the world. Lacking in domestically generated net saving, America has had to import surplus saving from abroad in order to grow its economy. In the parlance of the accounting framework noted above, the US saving-investment identity has been finessed by the willingness of the rest of the world to provide the funding. In order to attract that capital from abroad, America has had to run massive trade and current-account deficits. In the first quarter of 2003, the US current-account deficit hit a record 5.1% of GDP, or $545 billion (at an annual rate) -- an annualized shortfall that must be financed by capital inflows of slightly in excess of $2 billion per business day. Never before has the world had to finance an external imbalance of that magnitude.

So far, it’s been a “free lunch.” That is, a growth-starved world has been more than content to send its surplus saving to America without demanding compensation for investing a disproportionate share of its capital in dollar-denominated assets. But the United States is about to up the ante on this arrangement. Courtesy of deepening fiscal deficits in the government sector -- not just at the federal level but also for states and localities -- there will likely be further downward pressure on US national saving in the years immediately ahead. Morgan Stanley US economist David Greenlaw calculates that fiscal stimulus worth about 1.5 percentage points of GDP will be implemented over the next four quarters alone. That suggests that the federal budget deficit as a share of GDP will surge into at least the 4.0% to 4.5% range by mid-2004 -- a dramatic widening from the 2.7% gap as measured in the national income accounts in early 2003. Barring the unlikely event of a spontaneous resurgence of private saving, that implies America’s net national saving rate could well test the seemingly sacrosanct “zero threshold” within the year. And if that’s the case, the gaping US current-account deficit will have to widen further, probably into the 6.5% to 7.0% zone.

In my view, a net national saving rate that falls to zero could well represent a critical juncture for the US and for a US-centric global economy. It’s one thing to reduce national saving below historical norms and rely on the generosity of foreign savers to make up the difference. But it’s another thing altogether to abdicate that responsibility completely and turn over the funding of net investment to foreign savers. And of course it doesn’t stop there. The “zero line” is just a number. There is no reason why net national saving couldn’t go into negative territory, pushing the current account even deeper into deficit. Given the paucity of private sector saving and rapidly deteriorating government deficits, that’s exactly what seems likely to be in the cards within the next year.

That would be a dangerous first in the modern-day post-World War II era: The engine of the global economy has essentially run out of fuel and must now turn to the rest of the world for a supplement. In the end, that doesn’t work for America and it doesn’t work for the rest of the world. A negative net national saving rate leaves little doubt that an ever-profligate US economy is on a collision course with its own future. It unmasks the ultimate in “short-termism” -- a preference for current consumption over the longer-term imperatives of investment. It’s a macro outcome that can only be financed by ever-rising indebtedness -- both domestic and foreign. America has record levels of private sector indebtedness and is now increasing its claims on the world’s saving pool. That perpetuates an exceedingly vicious cycle -- in effect, forcing the rest of the world to keep saving in order to finance the excesses of US consumption.

To me, all this smacks of a looming flashpoint. America’s negative net national saving rate could well be the wake-up call to the rest of the world that the days of US-centric global growth are nearing an end. The denial won’t be easy to crack. In a mercantilist world, with cross-border trade the main lubricant of growth, there is a great incentive to ignore external imbalances -- in effect, to pretend they don’t matter. In such a regime, nations are more than content to forsake domestic demand and maintain undervalued currencies -- thereby exporting goods, services, and surplus saving to consumer-led economies like America. Some have argued that there is no limit to such an arrangement, especially given America’s role as the world’s reserve currency. I have my doubts. First of all, the dollar is no longer the world’s sole reserve currency -- the euro is now an emerging alternative. Moreover, reserve currencies do not deserve special dispensation from economic fundamentals -- they can also become undervalued and overvalued. That’s exactly what has occurred to the US dollar repeatedly over the past 25 years. And I suspect it’s about to happen again.

Which takes us to the endgame -- global rebalancing. I continue to believe that America’s long-overdue current-account adjustment is the only way out of this mess. It’s the only macro scenario I know of that can relieve mounting global imbalances and put the world economy back on a more sustainable track. For starters, it will take the dollar down a good deal further. At its low point earlier this year, the broad trade-weighted dollar had retreated about 10% in nominal terms from its early 2002 highs. In a full-blown current-account adjustment, the ultimate drop could be three to four times that magnitude (see Caroline L. Freund, “Current Account Adjustment in Industrialized Countries,” Board of Governors of the Federal Reserve System International Finance Discussion paper #692, December 2000).

But more to the point, a US current-account adjustment is the only way to shift the mix of global saving away from the rest of the world back toward the United States. As an economy undergoes a currency depreciation, real interest rates typically rise, inhibiting domestic consumption and boosting national saving. At the same time, as currencies strengthen elsewhere in the world, exports come under pressure -- forcing policy makers to compensate by stimulating domestic demand; this results in a reduction of surplus saving. Easier said than done, of course, especially in European and Japanese economies that are so reluctant to embrace the structural reforms needed to unlock domestic demand. But the alternatives to such a rebalancing are far worse to contemplate -- they would only lead to a far more treacherous endgame.

All this tells me that the days of a US-centric global economy could be rapidly drawing to an end. America, long the unquestioned engine of this lopsided world, is running out of time. Within the next year, the US is likely to cross the threshold of a zero net national saving rate. That unmasks the ultimate pitfall of America’s post-bubble economy -- a fixation on current consumption that can only be financed by the seemingly lethal combination of increased domestic and foreign debt. It also unmasks the flaws of the saving-led growth regimes in the rest of the world. It would be hard to conceive of a more unstable disequilibrium for the global economy and world financial markets. If that’s not a flashpoint, I don’t know what one is.

http://www.morganstanley.com/GEFdata/digests/20030707-mon.html

:ente:

Holodeck

08.07.2003, 00:34

Original geschrieben von mfabian
Bist Du sicher? Warum gibt's dann Zahlen und Statistiken darüber?

Guck mal Hamilton vor einem Jahr (http://www.zealllc.com/2002/jpmcrash.htm) Danke, Marcus! (Kenne Dich ein wenig von den "verflossenen" CH-Boards...) Merci für den Hinweis; es war etwas ironisch gemeint, weil Germa immer Behauptungen über Derivate macht -- welche ich primär auf keinen Fall in Zweifel ziehe möchte... Aber jemand muss ihn ja hochnehmen! Warum nicht der Neuling (=ich)? :hihi

Zum Artikel:
JPM’s unprecedented $23.5t inverted derivatives pyramid is hyper-leveraged and carefully built upon the irreplaceable trust of every entity that signs derivatives contracts with it. "23.5t" = "23.5 trillion" = Billionen", stimmt das? :ek :ek :ek Werde mal den Quellen für diese Zahlen nachgehen. Ich glaube, der Autor meines Beitrags spielt darauf an, dass viele Sachen gar nicht publik werden und die Öffentlichkeit gar nichts davon erfährt; umso mehr sind die geposteten Zahlen horrend!

Ein Wort zu meiner Grundeinstellung: Ich selbst bin zwar der Meinung, dass die USA gemäss den Prognosen der "Seher der niedergehenden Untergänge" :hihi komplett untergehen werden werden (also einig mit Germa), aber gleichzeitig bin ich sicher, dass es die "Alternativen" (z. B. Euroland, China, Japan etc.) recht schwer haben werden, gegen das strukturierte Vorgehen von Greeny und Co. anzukämpfen. Diese streben (aus ihrer Sicht) an, die USA gegen alle möglichen Dinge zu verteidigen, auch auf Kosten anderer, z. B. Euroland. Ich denke, dass die USA -- unverdienterweise, unrechtmässigerweise, mit illegalen Mitteln und gegen die Hoffnung der meisten hier, inkl. mich -- eventuell doch noch am besten aus dem globalen Schlamassel kommen könnten. Als Börsenmensch darf man das (=gegenwärtige und persistierende Hausse in Aktien) IMHO einfach nicht verpassen, auch wenn es "nicht sein dürfte"... Realität ist King, und die Aktien steigen, deshalb obacht, Bären, die FED ist fast "allmächtig"!!! :o

Danke nochmals, Gute Nacht und Grüessli

Holodeck

Holodeck

11.07.2003, 04:21

Original geschrieben von Vetinari
Fur derivative gibts 2 quellen ... ein von der U.S. comtroller (U.S. Banken wie JPM und C ... aber nicht privat Banken wie GS oder MSDW) und die andere von der Welt Bank oder B.I.S. (fur alle Banken der Welt) ... und typische , ich habe die links nicht :rolleyes: :D

BIZ: Derivate-Statistiken (http://www.bis.org/statistics/derstats.htm)
Den anderen habe ich auch nicht :confused:

Daniel-H

11.07.2003, 21:03

The White Metal

"...Silver is different...and it always has been different. For more than 3,000 years it was used as money. However, silver has not been used as money since the 1960s. Even so, the white metal is inherently valued higher than it would be if it were simply an industrial metal, especially during inflationary periods! I believe the federal government will be able to reflate the economy, and the result will be higher inflation. The price of silver will react the same way today as it did 30 years ago..."

--------------------------------------------------------------------------------

John Myers

Calgary, Canada --

Twelve years ago, I was at the National Committee for Monetary Reforms' annual hard-money convention, founded by the late and great precious metals forecaster Jim Blanchard. After giving my speech, I had an opportunity to listen to Dan Rosenthal lead a round-table discussion on silver.

Dan had made a fortune for his subscribers in the 1970s with his Gold & Silver newsletter and was telling this gathering that by the end of the decade, the federal government would be forced to reflate the economy. When that happened, he predicted the price of silver would skyrocket.

At the end of the round table, Dan fielded questions. I raised my hand, trying not to look like an overly eager third-grader, and said, "In the modern economy isn't silver just another industrial metal, no different from tin or zinc?"

"If that were the case," said Dan, "you wouldn't even be here."

He was right, of course. I mean, how many people follow the daily price of lead? Silver is different, though, and it always has been different. For more than 3,000 years it was used as money. However, silver has not been used as money since the 1960s. Even so, the white metal is inherently valued higher than it would be if it were simply an industrial metal, especially during inflationary periods!

Stuck in the Middle

Almost 40 years after silver was taken out of U.S. coinage, most North American investors buy gold before they buy silver when the dollar weakens and inflation is looming. This tendency partly explains why silver has not had the rally that gold has experienced in the past two years.

But there's another reason. Most institutions see the white metal as being in a no man's land, between a possible deflation and potential inflation.

Deflation would have a crushing impact on the industrial side of the silver price equation. And as we mentioned, inflation would light a fire under the price of silver on the investment side.

A Coin Toss

So, what side will win out? I think we can expect the dollar to continue to weaken. That will make imports more expensive, pushing up the Consumer Price Index (CPI), which officially increases at about 3% annually. (I say officially because it is the federal government's pronouncement of the rate of inflation.)

The CPI, calculated monthly by the Bureau of Labor Statistics, is an inflation indicator. The CPI is an estimation of the price changes for a typical basket of goods and services. In other words, the prices of everyday things such as housing, food, education, clothing, etc., are compared from one month to the next, and the difference represents the CPI.

The index is calculated in relation to a base period set from 1982 to 1984 where it was set at 100. (The original CPI base dated from 1967, but the number got so huge that the federal government started all over again.) Even at 4% CPI, the value of a dollar is halved every 19 years. At 13%, a level it reached in the 1970s, the dollar's value is cut in half every 5 1/2 years!

The graph below created by Robert Sahr, an associate professor at Oregon State University, shows that being a millionare today isn't as tough as it used to be. In the early 1960s, it took a net worth of $200,000 to equal the value that $1 million has today. The graph also shows how inflation has become a permanent economic fixture. Notice how steeply the line has been rising since the early 1970s, or since President Nixon cut the gold/dollar tether in 1971.
http://www.dailyreckoning.com/images/dr_inflation_071003.gif
If this number rises steeply, it means that the cost of living is rising, and therefore we have inflation. That is what happened in the 1970s, and the price of silver soared.

I believe the federal government will be able to reflate the economy, and the result will be higher inflation. The price of silver will react the same way today as it did 30 years ago.

White vs. Yellow

While many look at silver as a poor cousin to gold, it has at times significantly outperformed gold. It certainly did that during the 1970s. From 1971 to 1980 the price of silver skyrocketed, climbing from $1.30 per ounce to $50 per ounce. That was a gain of 3,746%! During the same period, the price of bullion rose from $35 per ounce to $800 an ounce -- a gain of 2,186%.

Since 1980, silver has been in a bear market with only the occasional spike, such as the breakout it had in early 1998, when it soared to $7.50 per ounce.

In 2001, silver established a 28-year bottom of $4.14 per ounce. In 2002, it moved its floor price to $4.50 and has moved up over the past few months, putting it in striking distance of the psychologically important $5-per-ounce benchmark. Once it clears $5, the next technical resistance is in the $5.60 to $5.90 range. If it breaches this barrier, the white metal will not face any technical resistance until $7.70.

That means that silver is very cheap at its current price. It also has very attractive fundamentals as an industrial metal.

Drawdown in Silver Supplies

The current supply and demand picture is extremely bullish. For 13 years annual demand has outpaced new supplies -- in some cases by huge margins of as much as 100 million ounces. In fact, the cumulative deficit rung up over the past 13 years totals 1.2 billion ounces, more than total annual world demand.

Any first-year economics major will tell you that supplies cannot fall behind demand indefinitely without a resulting increase in price. So why hasn't silver moved up in light of the drawdown in aboveground supplies?

"The problem," says Sue Rutsen, a commodity broker at Fox Investments, "is nobody really knows the size of aboveground supply, which includes not only silver bullion held by bullion banks but also the silverware and bagged coins stuck in display cases and sock drawers all over the world."

The void between new mine production and world demand has been made up for the past two decades by all the aboveground silver supplies. But commodity analysts believe that aboveground silver supplies are close to exhaustion.

"The highest estimate of remaining aboveground supplies I've seen is 500 million ounces," says Sue. "That means that given current rates of mine output, the world will literally run out of silver in five years."

The good news for silver investors is they do not have to worry about the U.S. government's strategic stockpile. It has been severely drained. The consensus estimate is that it holds only 200 million ounces.
http://www.dailyreckoning.com/images/dr_silver071003.gif
As aboveground supplies of silver run down, demand will have to be entirely met by new mine production. But that will be an impossible order for the mining industry to fill. You see, the rolling recession of the 1980s put most of the nation's silver mines out of business. Where once there were dozens of North American silver mining companies, there are today fewer than five. Almost 80% of newly mined silver is a byproduct of copper mining operations. Old silver mines cannot be opened quickly regardless of how high the precious metal's price climbs.

Therefore, it is safe to assume that supplies of newly mined silver will probably not increase dramatically in the near future.

Silver has come off its lows, and that tells me that the "smart money" is already buying some inflation insurance in the form of silver. Once inflation becomes more apparent, silver will probably behave as it always has -- explosively.

A breakout above $5 would attract a lot of investor interest. And like gold and platinum, silver is a thin market. It would take very little buying to drastically push up the price of silver.

Just how high could it go over the next 18 months? I don't think $12 per ounce is out of the question.

John Myers - son of the great goldbug C.V. Myers - has been helping readers earn suprisingly lucrative returns in stocks largely unknown to Wall Street's wunderkinder since his early 20s. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits - including oil, gas, energy and gold.

John has recently put together a report on terror in the Middle East and its effect on the oil price. Had you read it, the recent attacks in Riyadh would have come as no surprise... nor the oil spike that followed. For more information, you can find John's report here:

:)

Vetinari

11.07.2003, 21:13

OCC Derivatives fur US banken ...

http://www.occ.treas.gov/deriv/deriv.htm

Hier kriegen wir die JPM nummern ;)

:gusa

syracus

13.07.2003, 09:37

Einfach Zinsen im Auge behalten wegen den Derivaten, 70-80% davon sind auf Zinsen ;).......

Aber zum Thema der Zeit: Aufschwung oder Zwischenintermezzo ;).....

http://mises.org/images/2002/top_logo.gif

Sunday, July 13, 2003
by William L. Anderson

Recovery or Boomlet? http://mises.org/images3/firework.gif

In recent weeks, the stock market has staged a mild rally. Though the most recent unemployment numbers are well over six percent, Republicans, as well as a few market analysts, are claiming that the long overdue economic recovery has arrived. While I wish that were the case, the facts demonstrate otherwise; this is not a recovery, but simply an unsustainable mini-boom that makes the long-term economic picture even worse.

That is not how we hear things from the government, not surprisingly. Administration officials, hopeful that a strong economy next year will boost George W. Bush's election chances, have been trumpeting the end to the longest economic downturn in this country since the Great Depression of 70 years ago. His media supporters, such as Larry Kudlow and Neil Cavuto, also agree and have called for the Federal Reserve System literally to open the money spigots. According to Kudlow:

No matter what the investment—be it corporate profits paid out as dividends, or capital gains, or new capital-goods orders and shipments by large and small businesses, or new high-risk venture start-ups—higher after-tax investor-class returns will place new liquidity demands on the financial system. The Fed must accommodate them.

A shock-and-awe liquidity-expansion policy from the Fed will counter our underperforming economic recovery, offset the forces of worldwide deflation and recession, and stomp out deflation fears at home. An aggressive liquidity stance will also accommodate rising transaction demands following the latest Bush tax cut. And it will even counter the negative effects of any potential breakdowns in the investment portfolios of Freddie Mac and Fannie Mae, the troubled loan institutions.

Of course, "liquidity expansion" in Kudlow-speak is nothing more than a burst of inflation, and the Federal Reserve has followed suit, lowering its discount rate to something not much above zero. (Kudlow and the other inflationists wanted the Fed to cut its rates by more than what was actually done, but it would seem that the next logical step for the Fed would be simply to dump money from helicopters or hand it to passers by at the street corners.)

Kudlow is hardly the only offender here, and while his "shock and awe" analogies are over the top, the truth is that economists and pundits, both left and right, have been calling for basically the same solution: inflation, and more inflation. This not only reflects the total misunderstanding of the current economic situation by both the economic mainstream and political pundits (Well, what would we expect?), but also demonstrates ignorance both of business cycles and of money itself.

As Murray Rothbard and Ludwig von Mises tirelessly pointed out, an economic recovery occurs when consumers and investors begin to direct investment into sustainable lines of production. A recovery can only happen after the malinvestments that accumulated during the previous boom are substantially liquidated. Of course, a liquidation must be permitted to occur in the first place, something that the Bush Administration and the Fed have fought at every turn, which I note in previous articles.

Given that the government has done everything in its power to prevent the full liquidation of malinvested capital, and given that the Bush Administration and Congress have substantially increased the burden of government that must be borne by individuals, it seems clear that the U.S. economy is not poised for a recovery. Indeed, from airlines to manufacturing, the liquidation has a long way to go before the economic downturn hits bottom.

Thus, any upturn whether in economic statistics or in the stock market is almost certain to follow the patterns not of economic recovery but rather a mini-boom. I say "mini" because there is no way that this particular boom, as pathetic as it is, can be sustained for a long time, unlike the boom of the late 1990s. In fact, the Fed's recent actions can only force more malinvestments which themselves will have to be liquidated in the future.

There is historical precedence for a mini-boom. During the early days of the Franklin D. Roosevelt Administration, which were marked by the passage of legislation like the National Industrial Recovery Act and the Agricultural Adjustment Act, the economy also experienced a small boom. In fact, the rate of unemployment, which stood at about 25 percent when FDR took office in 1933, fell to about 15 percent two years later.

The Roosevelt Administration was not the only active entity in Washington. The Federal Reserve System had lowered its discount rates to near-zero and the government was trying to force up the inflation rate, using tactics like destroying the gold standard and confiscating all gold money that individuals possessed.

The strategy worked, sort of. As noted earlier, some people were put back to work (although thousands also found employment doing government-sponsored tasks), but the boom was only temporary. Government was growing quickly, along with the tax burden, the regulatory state was taking form, and FDR openly savaged businessmen and his comments, as Robert Higgs has written, had a dampening effect upon the private investment needed to bring real recovery.

Roosevelt's mini-boom came to a screeching halt by late 1937, as the economy fell into the trenches again, the unemployment rate zooming to about 20 percent. To put it another way, FDR achieved a first: he helped to create a depression within a depression.

One hopes that the Bush Administration does not seek to emulate FDR, although, like Roosevelt, this administration has forced through huge increases in government expenditures and with the recent Medicare bill, has dumped a gargantuan unfunded liability upon U.S. taxpayers. (At least FDR did not send the armed forces all over the world—at least during the 1930s. In the 1940s he helped launch the biggest and most destructive war in world history.)

As we hear the political pundits and mainstream economists debate the current economic climate, perhaps terms like "shock and awe" truly are appropriate. One is shocked at the economic ignorance that is demonstrated time and again by the "experts," who are still stuck in a Keynesian time warp that while discredited, still seems to rule the intellectual roost. And one is in awe of the truly bad policy prescriptions that emanate from the White House, Congress, and the mainstream press.

Yes, 2004 is an election year, and the Bush Administration is desperate to make voters believe that the long-awaited recovery finally is here. Furthermore, there is no shortfall of Republican pundits trying to publicly make the case that the economic policies of Bush II really are better than the policy disasters of Bush I.

However, there simply is no way that the policies of the Fed and the Bush Administration are going to give us an economic recovery. As Mises and Rothbard wrote time and again, an economic recovery within a free market economy occurs as a matter of course once the government steps out of the way. That clearly has not happened for the past three years, and now that Bush is desperate to manipulate the economy in order to pave the way for re-election, it is not politically possible for this president and his underlings to take the needed hands-off approach to the economy.

Instead, we will be given the news that the wise policies of the Fed and the meager and back loaded tax cuts that the Republicans have given us will be enough to bring recovery. However, pay no attention to the man behind the curtain (whether it be George W. Bush or Alan Greenspan), for he does not know what he is doing. We are not in recovery; it is nothing more than a little boom that ultimately will turn into a bigger bust.

William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University.

http://mises.org/fullstory.asp?control=1265

syr :rolleyes:

syracus

13.07.2003, 20:06

Das neue Teil von J. Mauldin http://www.stock-channel.net/stock-board/images/icons/icon14.gif

Poker at the Federal Reserve

*Let's Pay the Piper Tomorrow
*Poker at the Federal Reserve
*Dealing the River Card
*One or Two More Complications
*The Gun to My Head
*Paris, Geneva and Inflating My Book

Is this a critical time in the bond market or are we simply back to where we were a few months ago before the recent madness? If it was temporary insanity, what caused it? Why is the dollar rising? Why have the Japanese sold more foreign bonds in the past few weeks than in the past few years? Who is buying those bonds? If the money supply is growing at breath-taking rates, why is gold languishing? If the economic data is so dismal then why are stocks rising, setting higher highs with each run-up?

This week we will explore these and a few other paradoxes, plus a quick lesson in poker, bond market style. It's once again time to move back from looking at the financial data trees and see if we can figure out what kind of investment forest we are in.

(Yes, I can still hear you asking, "So what are interest rates going to do? Should I lock in today's mortgage rates? Will rates ever go back down?" The answer is complex. But since you are holding a gun to my head, I will give you my guess in this letter).

Let's Pay the Piper Tomorrow

Last week's letter brought more than a few readers to question my analysis of the economy. How can I suggest Muddle Through* (even with an asterisk) given the terrible imbalance in our trade deficit, an over-valued dollar, debt at record levels, a huge government deficit, rising unemployment, rising rates which will kill the mortgage and housing markets and so forth? Aren't we at least close to the End of The World As we Know It?

Of course, a few wrote to point out the rising leading indicators, improving (albeit modestly) areas of capital spending, a tax cut getting ready to kick in, record Federal Reserve stimulus, low rates which are helping consumers, and increased consumer confidence. Plus, isn't the stock market telling us that the economy is getting ready to grow at 3-4% once again, just like the Blue Chip economists predict?

Aah, the loneliness of being stuck in the Muddle Through middle with you, dear reader.

Before we get into the meat of the letter this week, let me discuss the curious notion that the market is telling us anything. Barry Ritholtz of the Maxim Group sent me a recent summary of the bear market rallies. The S&P has rallied over 21% five times since its high in March of 2000, averaging almost 25% on each of those gains. Four of those times it has fallen back. The fifth time is the current mini-bull.

The NASDAQ has had 5 rallies of over 37%, with the average being 42%. Four have failed. We are close to the top of the 5th.

Was the market telling us anything in the last four rallies? Was the market telling us the economy was getting better as it topped out in May of 2001? The economy entered a recession only a few months later (I predicted in August of 2000 that we would see a third quarter 2001 recession). I seem to remember pundits telling us (and getting a few letters from readers) that the markets were forecasting that a return to a growing economy was just around the corner. "Look at all the stimulus the Fed was applying (in the form of rate cuts)," we were told. "Don't fight the Fed." The market assured us we were going to avoid a recession.

Each of the previous bear market rallies was touted as the "return of the bull." This one will fail as did the previous rallies. No secular bull has ever started from such high valuation levels. I will write more on this topic in Part Three of our series on markets next week.

I am highly suspect of the ability of the market to predict the economy, or much else for that matter. Eventually, the market will rise from some future bottom, most likely after (or during) a recession, and a new long term bull cycle will begin. Pundits in that future world will breathlessly report to us that the market is telling us the economy is on the mend. When it happens, they will talk about the wisdom of the market.

Until that time, which I believe is not in our near future, the optimistic market moves are merely bear market rallies, to be enjoyed while they last, and are not signs of the incipient wisdom of a stock index. They are to be appreciated, as they keep the market from sinking too fast and bringing on a serious recession. It is a blessing that these cycles take so long. I, for one, am grateful to the optimists who work so hard to avoid a truly devastating bear market, sacrificing their money in the process. It is a strange paradox that we should avoid their advice during secular bear markets, but hope that not everyone else does.

Poker at the Federal Reserve

But where can we find wisdom? Let's turn to the poker game called Texas Hold'Em, which seems to me might hold some insights into the markets and the economy.

Texas Hold'Em is a popular poker game. For the uninitiated, this is a game where every player is dealt two cards, then three cards (called the flop) are played face up which every player can see. These cards are part of every player's hand. Then two more cards are dealt face up one at a time (These cards are called the turn and the river, respectively). The situation is that every player gets to use the five cards on the table and combine them into the best possible five card poker hand using the two cards in his hand. After each deal, there is a round a betting. Ultimately, the difference is of course the "hole" cards in your hand. The betting hinges on how good you think your hand is compared to the other players. When you bet you are saying either 1) "I have the best hand and I'll risk my money on that belief" or 2) "You have a poor hand, and you will fold if you are forced to put money on the table."

The current game between the Fed and the bond market is similar. This spring, as "the flop" came down, everyone in the market, including the Fed, could read all the data in the cards. The Fed told the bond market that their "hole cards" were their ability to fight deflation by physically lowering long bond rates if they needed to.

The bond market response was to believe the Fed and start the process of lowering long-term rates without the Fed actually having to do anything. The Fed bluffed the market into doing their work. Like the walls of Jericho, mortgage rates came tumbling down, mortgage re-financings went through the roof and deflation was dealt a blow, with nothing more than a little jaw-boning. (I will resist the comparison with Sampson and the jawbone of an ass. It would be much too easy.)

Then the turn card (the fourth "up" card) was dealt. That would be at the last Fed meeting. The bond market, ever an astute observer of gambler behavior, thought it read some ambivalence in the Fed posture. Was this the last rate cut? If so, that meant interest rates had no where to go but up. While the Fed still promised to hold short rates down, would they really back up their bluff and actively target long rates? If not, then why would you buy bonds at what would obviously prove to be the lowest interest rates of the last 50 years? The statement they released did nothing to make the bond vigilantes think that the Fed was ready to work the long end of the yield curve.

The response of the bond market was to "call and raise." And raise they did, by taking interest rates up on the ten year bond by more than one half percent in just a few weeks.

This rise in interest rates is more than of just academic interest. The next rise in interest rates is seen as a potential pre-cursor to market and economic turmoil.

Martin Barnes is one of my favorite analysts. He has certainly been as right as anyone for over two decades. His work at the Canadian based Bank Credit Analyst has been the soul of calm and thoughtful analysis. He sees a period of economic growth in the 3-4% range for the next 12-18 months. (He is somewhat more optimistic than my Muddle Through prognostication.) Thus it caught many of us by surprise to read the following from his June letter:

"The Federal Reserve has implicitly made an extraordinary commitment to hold short rates at current extremely low levels for an extended period, in order to hold down long-term rates. This gives a green light for hedge funds and speculators, but it will be hard to avoid major market turmoil when the Fed decides it is time to tighten. A long period of low short rates will feed mini-bubbles in a range of assets, is bearish for the dollar and bullish for gold and financial sector shares.... Policymakers will be successful in boosting the economy in the short run, but are creating even bigger problems down the road in terms of increased leverage, greater financial excesses and a larger current account deficit. Eventually, there will be enormous pressure to try and devalue accumulated debts through increased inflation.

"The U.S. policy environment has never been more stimulative. All of the policy levers are at maximum thrust and, unusually, are working in the same direction. The sheer force of this reflation should pull the U.S. economy out of its recent doldrums, rewarding those investors who have added some risk to their portfolio. However, markets could be very turbulent when the Federal Reserve is eventually forced to start raising interest rates to more normal levels. Moreover, while aggressive reflation will help the near-term economic outlook, problems are being stored up for the future via increased consumer leverage, a rapidly deteriorating fiscal outlook, and a widening trade gap.

"....The dark side of current reflationary efforts is that they are leading to increased financial imbalances that will cause problems down the road. Consumers are taking on more leverage, government finances are deteriorating dramatically and the bloated current account deficit is continuing to increase. None of these trends are sustainable over the long term." (The Bank Credit Analyst, June 2003, www.bcaresearch.com)

For our purposes today, the key sentence in those words were: "However, markets could be very turbulent when the Federal Reserve is eventually forced to start raising interest rates to more normal levels."

If long term interest rates rise beyond a certain point (more later), that will create a different set of issues, but it will be very problematic nonetheless. If capital spending has not rebounded from its current doldrums and if the economy is not producing net new jobs when the interest rate rise begins, as it inevitably will, the turbulence will be more than merely "very."

Today, the interest rate rise has merely taken us back to where we were a few months ago. I do not think this will affect the housing market all that much in the near future, as rates this low were good for the markets only a few months ago, and they did not dip into the 5% mortgage rate range for more than a few weeks.

If rates were to rise to much higher levels, this would change. The lower the mortgage rate, the higher the loan you can qualify for. Since the tendency of much of the US market is to buy as much house (in terms of dollars) as you can afford, the lowering of rates over the years has helped push the rise in home values.

When rates go back up, the pressure is in the opposite direction. Since home values are the Wealth Effect that is most closely tied with consumer confidence and spending, there is some point at which increasing mortgage rates become a serious drag on the economy if business spending and job growth are not on a roll to offset this.

Mortgage re-financing dropped 21% last week as rates rose. That sounds bad. But when you look at a long term chart of mortgage re-financings, we are still at very high levels. I know that borrowers take out a lot of money when they re-finance and that has been a big part of consumer spending, but rates are not so high today as to preclude continued borrowing. But it is not about today that we should beam concerned. It is the future about which we all obsess.

The only seeming agreement among observers is this: there is a point at which if mortgage rates were to rise in the current economic climate that the higher rates would precipitate a recession.

At what point do rates get too high and begin to pull down the economy? No one seems to know. There are just too many variables to factor in. There is a lot of disagreement or scratching of the head. Is it 6% mortgage rates? 6.5%? Can we go back to 7% in today's economy without any problems?

Bonds hate uncertainty. And right now they are not certain as to what the Fed is saying. Have rates been cut for the last time? Is deflation no longer a concern? If deflation is not a concern, then should we worry about that ancient enemy of bonds: deflation? Thus rates rise.

Dealing the River Card

And now we come to the river card - the last card to be played before the final round of betting. The river card will be dealt next week as Greenspan speaks. This may be one of his most important speeches of his career. It will certainly be one of the most watched. Every riverboat gambler that calls himself a bond trader will be watching for any signs of perspiration or nervousness as he looks at his cards.

With due regard for Greenspan, he has a tough assignment. It is a delicate game. The Fed has been telling us for some time they will work to hold long rates down to combat deflation if necessary. That "bluff" has helped bring rates down.

If he leads traders to believe that the Fed is no longer worried about deflation then rates will rise as the bond vigilantes will begin to worry about inflation. Why buy long bonds at today's low rates when the Fed is going to allow long rates to rise, thus making your bonds worth less?

If he talks about concerns of deflation, will the market believe him if he does not commit to action? Most observers I read believe the Fed will work to lower long rates if a recession or deflation appears at the front door. It is also widely believed that the Fed is loathe to do anything of that nature unless absolutely forced to. That is a very drastic action, and would be admitting that the economy is in serious shape.

If the Fed can talk rates down without actually having to do anything, it is the best of all worlds. The bond market seems to be calling the bluff. Next week we see what the last card reveals, and how the market reacts.

One or Two More Complications

Let's see if I can cloudy the picture even more. The Japanese bond market is in revolt. Greg Weldon reports that Japanese investors have sold more foreign bonds in the last four weeks than they have in total for years. It seems they are buying the Nikkei (Japanese stocks). This is a huge shift. This has put pressure on US rates. This started just a few days before the recent Fed meeting. Perhaps it precipitated the US rise in rates, but the bond market surely followed the lead.

This should also put pressure on the yen, making it rise. This is something the Japanese government does not want. They have been working to keep the yen from rising during this period, which is what the yen would normally do when investors start selling foreign bonds. (As an aside, Dennis Gartman points out the Chinese are the main buyers of these bonds. But that is for another time and another letter.)

Will the Japanese central bank help out a fellow central banker in need (Dr. Greenspan) by buying long US bonds, which will help the US (their important customer) and also lower the yen? Or will they decide that a rising Nikkei will be enough to offset the problems at home that would result from a rising yen? Will a rising stock market be enough to trigger a reflation in their economy, or will they need to use their last bullet and devalue the yen?

Greg Weldon also did an entire letter on what gold looks like to the rest of the world. (Greg's web site for his outstanding letter is www.macro-strategies.com. You can get a free 30 day subscription.) In country after country, gold is NOT in a bull market. It is signaling deflation. The worldwide wave of deflation has not subsided.

Korea is now in recession. Germany is either in recession or soon will be. German Chancellor Schroeder has called for the European Central Bank to work to bring down the value of the euro. Numerous Asian countries are working to bring their currency down against the dollar, even as we run huge trade deficits.

It is simply not possible for every country to devalue their currency simultaneously. The end result of this much government manipulation of the markets will not be good. Thus, even as gold tells us deflation is possible, gold is the one "currency" which cannot be inflated by a government. I was bearish on gold for all of the 90's and turned bullish in February of 2002. I expect I will be bullish for a long time. As Bill Bonner wrote today in today's Daily Reckoning, "Buy gold when it falls below $340. When it rises above $340, buy some more." A steady accumulation plan for gold is a wise move.

The Gun to My Head

But I can still hear you asking, "So what are interest rates going to do? Should I lock in today's mortgage rates? Will rates ever go back down?"

The answer is complex. But since you are holding a gun to my head, I will give you a simple guess.

If we have a recession within the next 18-24 months, and if inflation has not reared its ugly head, then there is the real chance we will see long bond rates drop. That will be the primary card (perhaps the only real one) the Fed has left to play to try and jump start the economy. A recession is by nature deflationary. I believe if the Fed is forced by either a shock to the market (which will cause a recession) or the rising of rates too high so as to create the probability of a recession, they will work to lower rates.

My guess (and it is only that) is that we will see lower rates one more time during the next recession which is not yet on the horizon. The Fed will work to postpone that day for as long as it can. I expect that will be the final bottom of the bond market.

What should you do today? If it makes sense to refinance your home today and lock in low rates, I would do it. If my guess is right, then you will get another chance to refinance again. If I am wrong, then you will be happy with your rate in the years to come.

Paris, Geneva and Inflating My Book

This time next week I will be with my friend Bill Bonner at his chateau (otherwise known as a money pit) in Ouzilly, France. He has promised good wine and there is always interesting conversation. His book on Japan and its implications will soon be out, and it promises to be good, from the drafts I have seen. He has also asked how I feel about a workout of moving stones, but I think my back is going to somehow not be up to such. I will report to you of our conversations. Sunday back to Paris and then Monday night on to Geneva. It will be a very full schedule, with a few media moments, I am told. I will be back in the office on the next Friday, writing to you of what I learn. With the wonder of the internet, I can stay connected, and hopefully will not find myself too far behind. We will see.

It is now very hot in Texas. In an effort to remain married, I have promised my bride to take her from the Texas heat when I get back. We will go to Halifax for the cool of the Canadian summer, where I intend to finish my book, which keeps inflating on me. It seems there is always one more important idea. It is shaping up nicely, though, and I think it is going to be a very useful tome to help you with your investment decisions.

Have a great weekend, and spend some time with a friend or two.

Your looking for his passport analyst,

John Mauldin
July 11, 2003
John@frontlinethoughts.com

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy.

Quelle (http://www.321gold.com/editorials/mauldin/mauldin071403.html)

syr:sss

syracus

10.08.2003, 18:56

August 2003

Erosion of U.S. Industrial Base Is Troubling

Growing dependence on foreign suppliers should concern policy makers

by Sheila R. Ronis

The U.S. industrial base is eroding, and this situation has enormous national security implications. It has made the United States so dependent on foreign countries for critical components and systems that it may have lost its ability to control its supply chains.

The United States is becoming dependent on countries such as China, India, Russia, France and Germany for critical weapons technology. It’s conceivable that one of these governments could tell its local suppliers not to sell critical components to the United States because they do not agree with U.S. foreign policy.

The federal government, and in particular, the Department of Defense, does not manage the country’s industrial base as a “system.”

U.S. government agencies are fiefdoms that rarely compare notes to see how their collective policies might affect a company or an industry. Interagency cooperation is an essential element of what needs to change in the future.

A Defense Department report entitled “Transforming the Defense Industrial Base: A Roadmap,” recommended the department consider “viewing the industrial base as being composed of operational effects-based sectors that support transformational war-fighting. … Organizing its decision processes to optimize operational effects—not programs, platforms or weapons systems.”

This report makes sensible arguments, but more needs to be done.

U.S. corporations increasingly act as large social systems with a global focus. But ask the CEOs of the Fortune 500 to describe the issues on their minds and, more than likely, national security or the disintegration of the U.S. industrial base would not be among them. Many global corporations do not believe they owe allegiance to any stakeholder except their stockholders, and sometimes, their customers.

This attitude has not changed since the end of the Cold War—not even since 9/11. A new vision of national security is needed that includes cooperation between government and industry.

National security requires a healthy market-based economy, with a strong industrial base of globally competitive industries continuously improving quality and pro-

ductivity.

The United States cannot sustain the kind of growth it has enjoyed for the last several decades if the industrial base steadily erodes. Increasingly, a number of U.S. companies in specific industries find it impossible to compete in world markets. This is of particular concern for the industrial base that supplies the U.S. military.

According to U.S. Census Bureau data from 1992 to 1996, the domestic market share of military and civilian aircraft combined (traditionally an American manufacturing powerhouse) dropped from 88.5 percent to 86.6 percent. Aircraft engines and engine parts suffered a steeper decline—from 70.9 percent to 63.2 percent. And domestic producers’ share of the non-engine aircraft parts market plummeted all the way from 80.5 percent to 68.5 percent, said industrial base expert Alan Tonelson of the U.S. Business and Industry Council, quoting census data.

Much of the high-value American industry experienced the same deterioration from 1992 to 1996, according to Tonelson.

Domestic market share for relays and industrial controls dropped from 81.1 percent to 75.1 percent, for computer storage devices from 39.3 percent to 31.9 percent, for analytical instruments from 78.5 percent to 75.6 percent, for metal-cutting machine tools from 55.2 percent to 47.9 percent, for specialized industrial machinery from 85.2 percent to 82.7 percent, for pharmaceuticals from 95.7 percent to 93.1 percent and for industrial inorganic chemicals from 68.2 percent to 60 percent.

Data for the 1997-2001 period shows further weakening in domestic manufacturing. But the rate of deterioration was rarely faster than from 1992 to 1996, as the weak-dollar advocates have been claiming. Precise comparisons between these periods are difficult because in 1997, the government changed a key system for classifying industries. Nonetheless, 1997-2001 data for 80 out of 90 industries show market share losses during these years, Tonelson said.

Of note to the military defense sector, from 1997-2001, civilian jetliners fell from an 84.7 percent domestic market share down to 73.9 percent; aircraft engines and engine parts, from 60 percent to 50.7 percent, and non-engine aircraft parts, from 68.9 percent to 64.6 percent.

Falling domestic market share during the late 1990s afflicted many other core industrial sectors as well.

Market share for domestic producers of relays and industrial controls dropped from 70 percent to 60.5 percent, metal-cutting machine tools from 41.5 percent to 37 percent, ball and roller bearings from 77.4 percent to 75.8 percent, mechanical power transmission equipment from 75.1 percent to 72 percent, turbines and turbine generator sets from 74.4 to 57.7 percent, pharmaceuticals from 90.5 to 85.9 percent, and plastics and resins from 88.9 percent to 85.4 percent,Tonelson said.

Globalization and the intense pressure applied by Wall Street to U.S. companies encourages indiscriminant cost cutting, a measure that frequently works in the short term, but often creates losses in the long term.

The “better, faster, cheaper” mentality sometimes sacrifices long-term gains by forcing a company to outsource work to low-wage countries in the near term. These decisions can come back to haunt a company. This is especially the case when the work acquired is of inferior quality, or the accessibility of an essential item can be put in jeopardy.

In many cases, the United States is unable to manufacture critical military equipment. This situation is not officially documented and monitored, but it needs to be.

The United States does not have control over foreign shipping. Enemies can easily disrupt the economy just by sinking ships that feed the industrial base and consumer culture. The United States is vulnerable because of its dependence on foreign parts, services and fuel to maintain economic growth, not to mention military capability.

Global purchasing organizations in industry and the military are not sufficiently looking at the risks of potential disruption of supply lines. They tend to be rewarded for getting commodities less expensively, and nothing else.

In a global economy, the rules of engagement are different. Just look at the results of the brief longshoremen’s strike last year on the West Coast and the billions of dollars it cost the nation.

The Defense Department’s Diminishing Manufacturing Sources and Material Shortages (DMSMS) program, monitors spare part shortages regardless of cause.

DMSMS is the loss or impending loss of manufacturers or suppliers of critical items and raw materials due to production discontinuance. DMSMS can be caused by rapid changes in item or material technology, uneconomical production requirements, foreign source competition, federal environ-

mental or safety requirements, and limited availability or increasing cost of items and raw materials used in the manufacturing process.

The problem is further complicated by a reduction in the industrial base dedicated to production of military equipment. In fact, the Defense Department now accounts for less than one-half of 1 percent of total microelectronic component sales. In addition, aging fleets of ships and aircraft have lost their original supplier-base of constituent mechanical, hydraulic and other components.

The DMSMS database is an example of how badly the industrial base is deteriorating.

The Industrial College of the Armed Forces at National Defense University has an industry studies program that annually examines 20 industries representing key components of national security. ICAF’s work has chronicled the deterioration in industries such as advanced manufacturing and shipping.

Manufacturing

When government R&D investment in an industry deteriorates, it is only a matter of time before an industry is in trouble. Manufacturing R&D by the federal government is declining.

According to Manufacturing News, “in the mid 1990s, the government was spending $1.5 billion on manufacturing related R&D, including such programs as Technologies Enabling Agile Manufacturing at the Energy Department and $500 million in electronics manufacturing programs at DARPA. Both of those programs have been discontinued.”

In the same article, Dick Engwall, the 2002 recipient of the multi-association “Individual Manufacturing Excellence Award,” said he is “concerned about the military’s desire to abandon programs related to materials, processes and affordability.”

Shipbuilding and Repair

In May 2001, the U.S. Department of Commerce’s Office of Strategic Industries and Economic Security, in partnership with the Carderock Division of the Naval Surface Warfare Center, completed a three-year national security assessment of the U.S. shipbuilding and repair industry. Some of the findings were disconcerting.

According to the study, employment in the industry has “dropped sharply since the early 1980s, when total private employment was close to 180,000 workers. Survey estimates indicated that employment would decline to about 83,500 in 2000.” In addition, “orders for U.S. warships have declined 60 percent during the 10 years since the end of the Cold War.”

Young people no longer view working in a shipyard as a viable way to make a living. Consequently, according to DOC, “survey responses indicate that labor shortages have reduced profits, impacted construction costs, and delayed project completion for most shipyards.”

According to the study, the basis for U.S. ship-building superiority has been the research and development expertise that currently resides in Navy’s laboratories, acquisition commands, and certain shipbuilders and universities. “Collectively, these organizations have conceived and designed most of the state-of-the-art hull, mechanical, electrical, power projection, air defense and undersea warfare capabilities that are operational today. With reduced research and development budgets, some of that capability now is becoming fragmented.”

This situation also exists in other industries, such as machine tools, the high performance explosives and explosive components industry, cartridge and propellant actuated device sector and welding. nd

Sheila Ronis, Ph.D., is president of The University Group Inc., in Birmingham, Mich.

http://www.nationaldefensemagazine.org/article.cfm?Id=1185

syr :rolleyes:

syracus

10.08.2003, 22:45

Die FED bekommt ihr Fett weg wegen der Defla-Spielerei in den Bonds. Dass muss ja "Vertrauen" schaffen ;)....

Fed Questioned After Bond Market Rout

By REUTERS

WASHINGTON (Reuters) - The blame game in the wake of the bloodiest U.S. bond market rout in nearly a decade is in full swing and many of the fingers are pointed at the Federal Reserve.

Accusations are flying that the central bank overplayed its concerns on deflation in a manipulative effort to push long-term interest rates lower to goose the economy.

Now the Fed has been ``caught out'' -- as Melvyn Krauss of the Hoover Institution put it in an opinion piece in the Wall Street Journal on Friday -- some argue its credibility has been damaged.

``The Fed whipped up a positive frenzy about deflation,'' said James Grant of Grant's Interest Rate Observer. ``To my mind not the least of the sins of the Fed in this period was its cavalier willingness to suppress, manipulate and distort what had been more-or-less free prices.'' :hihi

But other analysts say misplaced market bets in the rally that preceded the meltdown may have been more the result of an unusually open Fed debate and a complex policy message than an intention to deceive.

``The Fed didn't set out to consciously screw over markets,'' said Adam Posen, a former New York Fed researcher now with the Institute for International Economics.

``Because the Fed is moving to a more transparent regime and therefore is communicating when things are uncertain or when things are contingent, they are more open to being accused of being inconsistent,'' he said. ``People are just not ready to deal with that yet.''

DASHED HOPES

The roots of the current schism trace back to November when Fed officials first began to speak of how they could ward off a potentially crippling decline in consumer prices in the event they ran out of room to cut short-term interest rates.

The then-listless economy had the Fed preparing to cut overnight rates to a fresh four-decade low of 1.25 percent.

Officials have said their exploration of how best to fight deflation was merely prudent due diligence and their frequent public discussion over alternative policy tools, such as buying Treasury bonds to pull long-term rates down, was simply an effort to educate markets and the public.

As talk about unusual deflation-fighting steps reached a crescendo in mid-June, the yield on the benchmark 10-year Treasury note touched a 45-year low of 3.07 percent.

But when the Fed met later that month, it cut short-term rates by a modest quarter point and made no reference to the possibility of departing from traditional policy tools.

That June 25 decision disappointed investors who had bet the Fed was edging toward buying Treasury bonds -- and the selling began.

Things got uglier in mid-July when Alan Greenspan made the central bank's thinking plain: if further stimulus was needed, overnight rates would be the tool. He told Congress chances were slim the Fed would need turn to other measures.

The selloff did not cool until last week, after the yield on the 10-year Treasury note nearly reached 4.6 percent. The yield now is hovering above 4.2 percent.

``Price action in the last few weeks reveals that the bulk of the pupils flunked the mid-term exam,'' economists at Credit Suisse First Boston wrote after Greenspan's testimony. ``When the bulk of the pupils fail the test, we are inclined to assign considerable blame to the teacher.''

Former Fed governor Lyle Gramley agrees the Fed has had trouble communicating but disagrees with those who say the central bank's credibility with the markets is shot.

He said the biggest problem was that the Fed's current message has mixed implications for bonds. It plans to keep short rate low for a prolonged period -- a bond positive -- but it wants to push up a too-low inflation rate -- a negative.

``The Fed is in uncharted territory here, so is the market, and trying to communicate the message and getting it correct is inherently very difficult in these circumstances,'' he said.

http://www.nytimes.com/reuters/business/business-economy-fed-credibility.html

syr :rolleyes:

syracus

11.08.2003, 22:20

Nur schon der Titel :sss......

http://www.economist.com/images/ecdc_125x34.gif

Overproductive and underemployed

Aug 11th 2003
From The Economist Global Agenda

America's labour productivity is soaring, but its labour market is stagnant. The economy—“new” or otherwise—is working well below its full potential

WHEN American productivity accelerated in the late 1990s, many looked forward to the happy prospect of robust growth with subdued inflation. On Thursday August 7th, the Bureau of Labour Statistics offered the latest evidence of America’s productivity revival: output per worker soared by 5.7% in the second quarter, at an annualised rate. But in today's less exuberant times, the figure has raised the unhappy prospect of growth without job creation.

When productivity grows, the economy is able to produce more with the same number of workers. This raises the potential output of a fully employed economy. Unfortunately, the economy does not always live up to its potential. Surprisingly strong figures for GDP last quarter and for services last month, not to mention rising yields in the bond market, had raised hopes that the economy was returning to form and beginning to punch its weight. But the latest productivity figures show that it is still performing well within itself. There may be more slack in the economy that many commentators, and certainly many bond-market investors, had thought.

The US Department of Labour and the Department of Commerce provide up-to-date economic statistics. The White House posts information on economic and fiscal policy. The Federal Reserve gives information on monetary policy.

If that is true, it may be bad news for the labour market. Higher productivity means that firms can make more stuff without hiring more workers to do it, or the same amount of stuff with fewer workers. Back in the 1960s, Arthur Okun, an American economist, showed that employment would fall, even if the economy were growing, if an “output gap” opens up between actual output and the economy's long-term “potential” output. Okun’s razor appears to be at work in the American economy today, shaving payrolls in the non-farm sector by 44,000 in July.

http://www.economist.com/images/GA/2003w32/Product.gif

If demand continues to lag behind productivity, inflation as well as employment might fall again. In a prescient speech last month, Ben Bernanke, a governor at the Federal Reserve, warned that a growing economy might still be vulnerable to disinflation, or even deflation, if the recovery is not strong enough to take up any slack capacity. A predicament of this kind—the mirror image of stagflation—would not be unprecedented. The late 19th century saw over two decades of mild deflation, during which time many economies grew respectably. China routinely combines growth rates of 6% or 7% with near zero inflation.

All of the chatter about America's recovery or relapse should not disguise the more important long-term question: is the much-hyped “new economy” for real? Output has dipped and climbed, but has the trend rate of growth risen? Economists are still far from a consensus. Productivity, wrote Robert Solow, a nobel laureate in economics, is “a remote and slow-moving part of the macroeconomic equation”. Certainly, America’s productivity figures were slow to register any gains from the information technology revolution that so excited equity investors and technophiles in the 1990s. When the productivity figures did pick up in the second half of the 1990s, all of the assorted gurus, bulls and nerds claimed vindication. Even Mr Greenspan became a cheerleader for the new economy, albeit a rather taciturn and oblique one.

The cheers faded as the stockmarket bubble burst and the economy went into recession. But the collapse in share prices does not itself disprove the notion of a new economy. The bears can be right without the nerds being wrong, because technological revolutions do not always pay off for the people who bought stocks in them. The railroad investors of the late 19th century, for example, made no money from their stakes in America’s rail companies, but most agree that the economy as a whole benefited. Productivity gains can be real, without showing up in your dividend payments. The gains might go to workers, in the form of higher wages, or they might show up in the creation of new companies rather than new profits for old companies.

If the bear market and the recession do not refute the productivity optimists, Thursday's productivity announcement does not vindicate them either. Quarterly productivity measurements tend to jump about over the course of the cycle, because employment always lags behind output. Firms are slow to fire workers when sales fall—leading to declines in measured productivity—and they are equally hesitant to hire workers as sales start rising—leading to big gains in productivity at the start of a recovery. As Robert Gordon, a professor at Northwestern University, points out, the recoveries of early 1975, late 1982 and early 1991 were all accompanied by dramatic surges in productivity that quickly petered out over the subsequent two years.

While the academics debate the size of the output gap, both the Fed and the bond markets have to act on it. The latest productivity figures suggest the recovery has some way to go before it brings the economy back to its full potential, stirring inflationary pressures and inviting higher interest rates from the Fed.

http://www.economist.com/agenda/displayStory.cfm?story_id=1985889

syr :rolleyes:

syracus

08.09.2003, 21:00

Roach :sss....

Global: Traction, Multipliers, and Leakages

Stephen Roach (New York)

America’s jobless recovery continues unabated. With headcounts falling another 93,000 in August, the case for sustainable recovery in a post-bubble US economy remains a real stretch, in my view. While policy stimulus seems to be working temporarily on the demand side of the equation, there’s been little follow-through on the supply side. This may well reflect profound and lasting leakages in the external environment -- driven by globalization, outsourcing and the Internet -- that have diminished the policy multipliers that normally spark full-blown cyclical recovery. The character of the modern-day US business cycle may now be changing as never before.

The jobless nature of this recovery has become its most well-known characteristic. Fully 21 months since the official trough of the last recession, private nonfarm payrolls have contracted by nearly 1.3 million workers. Normally at this stage of a business cycle expansion, the job count has risen by 2.8 million. This shortfall of more than 4 million jobs has put an extraordinary crimp in the US economy’s wage generating capacity; by our calculations, real private sector wage and salary disbursements are currently running about $240 billion short of the profile of the typical business cycle expansion (see “The Half-Empty Glass” in the August 11 issue of US Investment Perspectives).

What lies behind this extraordinary shortfall in job creation? That, of course, is the burning question of the moment. Many have been quick to conclude that ongoing headcount reductions are an unavoidable implication of a secular uptrend in US productivity growth. Courtesy of IT-led breakthroughs, goes the argument, increasingly efficient US businesses are able to make do with less -- especially workers. In my view, this explanation seriously over-simplifies the story. There are, in fact, far more important forces at work. At the top of my list is what can be called the globalization of the US business cycle. Significantly, this is the first cyclical recovery in the United States that has unfolded since the advent of the Internet in 1995; as such, it has been driven by-IT-enabled outsourcing as never before. Now, with the click of a mouse, increasingly high-value-added labor input can be extracted from low-cost production platforms in Asia, central and Eastern Europe, and Latin America. Not only is that true with respect to foreign sourcing of manufacturing input, but it’s increasingly the case in services as well. That means for a given increment of domestic demand, important new external leakages are emerging in the means by which that demand is sourced.

There’s no mistaking this phenomenon in the goods-producing segment of the US economy. Based on Federal Reserve industrial production data, the gross value of such product fell to 28.8% of real GDP in 2Q03. That represents a 1.0 percentage point decline from the 29.8% share evident at the cycle trough (4Q01). By contrast, six quarters after the three preceding recoveries -- the upturns commencing in the mid-1970s, the early 1980s, and again the early 1990s -- the domestic production content of US GDP had risen by 0.6 percentage point. Surging import penetration into US markets tells the same story. At the trough of the 2001 recession, imports stood at 15.7% of real GDP -- more than double the 7.2% average prevailing at the end of the prior three recessions. There can be no mistaking the extraordinary external leakages now evident in the US economy. Even in the face of rebounding domestic consumption, incremental product is being sourced offshore at the cost of disenfranchising domestic supply -- both labor and capital -- from the US macro equation.

The flip side of this development is the emergence of countries like China as global outsourcing platforms that serve increasingly as shock absorbers to demand fluctuations in the US and elsewhere in the industrial world. China’s all-powerful export machine is, in fact, dominated by the outsourcing of Western multinationals. Over the past decade, China’s exports have essentially tripled -- rising from US$121 billion in 1994 to $365 billion in mid-2003. Yet fully 65% of that increase can be traced to what the Chinese call “foreign-invested enterprises” -- Chinese subsidiaries of multinationals and foreign joint-venture partners. That underscores yet another critical first in this cyclical recovery -- the outsourcing option as a very realistic alternative to domestic production. Put that together with the equally recent advent of the Internet, and the emergence of a new US business cycle comes increasingly into focus.

Of course, there’s more to the technology of external leakages than a loss of domestic market share in goods producing industries. Also at work is a potentially even more powerful dynamic -- the globalization of services and concomitant pressures on job creation and income generation in America’s vast and supposedly “non-tradable” sector. Several mega-forces are at work here -- the globalization of deregulation, surging cross-border M&A activity in many service industries, and the Internet.

The role of the Internet is particularly critical in reshaping the service sector dynamic in this cycle. It gives a critical new twist to the outsourcing story. Services have long been dubbed non-tradables because of a high profusion of knowledge-based content that can only be delivered on site. Now, however, courtesy of real-time e-based connectivity, a multitude of increasingly high-value added services can be transferred anywhere around the world instantaneously. That’s increasingly true of the output of software programmers, design and engineering teams, accountants, back-office processing functions, data centers, network infrastructure and management services, and a broad array of business consulting functions. Reflecting this trend, India’s IT-enabled services sector has become one of the fastest growing major industries in the world. One study estimates this segment of the Indian economy will increase by ten-fold between now and 2007 -- rising from US$1.5 billion in 2001-02 to $17 billion by 2008 (see NASSCOM’s The IT Industry in India: Strategic Review 2002).

Manufacturing leakages are one thing, but if they also hit services, it’s a different matter altogether for the US economy. Currently, the services sector accounts for fully 80% of total private employment in the US -- about six times the 13.5% share in manufacturing. To the extent that outsourcing options are now shifting increasingly into services, the jobless bias of the US economy can only increase. Moreover, this development could well be exacerbated by businesses’ persistent lack of pricing leverage in this post-bubble era. That puts unrelenting pressure on continued cost-cutting as the principal means to boost margins and deliver earnings. And that puts a premium on the outsourcing-driven efficiency solutions that lie at the heart of America’s jobless recovery.

All this underscores one of the great ironies of the current cyclical recovery in the US economy. Notwithstanding the temporary impacts of powerful stimuli from tax cuts and home mortgage refinancing activity, America is lacking in sustenance from the job creation and income generation that typically drive the internal dynamics of its business cycle. That’s not to say the injection of tax breaks don’t have any impact on disposable personal income and spending. Our current-quarter tracking models currently put 3Q03 growth in real consumption at close to a 5% annual rate and that of real disposable personal income somewhere in the 8-9% range.

However, as long as the jobless bias persists, the macro multipliers that normally convert policy stimulus into sustainable recoveries could prove surprisingly impotent. For that reason, I continue to believe that there is good reason to question the staying power of the policy-induced cyclical resurgence currently under way.

http://www.morganstanley.com/GEFdata/digests/20030908-mon.html#anchor0

syr :rolleyes:

syracus

14.09.2003, 19:29

:sss

Ponzi Economy

Kurt Richebächer
The Daily Reckoning
September 15, 2003

The Daily Reckoning PRESENTS: Bullish sentiment is riding at 1987 levels; tech stocks are leading the way in the reflation rally. What can we say, dear reader, but "oh là là... look out below!"

Hope and hype are again triumphing over reality.

The primary preoccupation in economics worldwide is the U.S. economy's "recovery," presently hyping the markets. We note three different views. First, a cocksure bullish consensus; second, doubtful voices, among them the Federal Reserve, stressing the lack of conclusive evidence; and third, a few lonely voices, ours among them, who flatly repudiate the possibility of a full-scale, self-sustaining economic recovery in the United States.

We see years of Japanese-style sluggish growth for America, if not worse.

Yet, the latest American Association of Individual Investors poll showed 71.4% bulls and a miniscule 8.6% bears. The gap between the two is the highest since August 1987, just weeks before the crash. Merrill Lynch surveys show institutional investors more fully invested than at any time in the past two years, and heavily overweight high tech.

The case of the bullish community rests crucially on the assumption that the U.S. economy is basically in excellent shape. Fed Chairman Alan Greenspan, and with him the large bullish community, have actually never seen anything seriously wrong with it.

In their view, its failure to return to normal economic growth is mainly due to a series of exogenous shocks inflicted one after the other on the economy: the stock market crash, the September 11 terrorist attack, the corporate governance scandals and the Iraq war. Rather, they consider it a sign of health that the economy has not weakened more in the face of this unusual sequence of shocks.

Yet compared to the extraordinary exuberance prevailing in the markets, the Fed has been remarkably hesitant in declaring the economy's impending recovery. In his testimony to Congress, Greenspan acknowledged that the "economy is not yet showing convincing signs of a sustained pickup in growth." In the same vein, Richmond Fed President Alfred Broaddus said a bit later in an interview, "We still don't have a critical mass of hard evidence that the economy is accelerating," defining "hard evidence" as increases in employment, production and capital spending.

Now to our own opinion: after careful analysis both of recent economic data and also of basic micro- and macroeconomic conditions for the resumption of strong economic growth, we have come to two conclusions:

* First, the U.S. economy neither improved nor accelerated in the second quarter. The reported GDP growth of 2.4% is grossly misleading. From the perspective of quality, it has distinctly deteriorated.

* Second, as we shall explain in detail, the crucial macro- and microeconomic conditions for a self-sustaining and self-reinforcing economic recovery remain flatly missing. Necessary economic and financial adjustments of past economic and financial excesses implicitly involve pain. But pain is not accepted in the United States. In essence, policymakers are trying to cure past borrowing excesses by more of the same and new excesses.

Trying to assess the U.S. economy's prospects, the first thing to realize is that past cyclical experience offers no guidance to the present downturn because it has completely different causes and also a completely different pattern.

All past recessions had their main cause in monetary tightening. As soon as the Federal Reserve loosened its shackles, the economy promptly took off again, propelled by pent-up demand. For the first time in history, the U.S. economy went into recession against the backdrop of most rampant money and credit growth.

Manifestly, the forces depressing the economy this time are radically different from past experience. The typical, major imbalance in post-war business cycles has usually been in inventories. To correct it, retailers and manufacturers temporarily sold from stock, depressing production. Once the stocks were down to desired levels, production came into its right again. At the heart of the regular V-shaped business cycles was the inventory cycle.

In contrast, the present downturn has its brunt in the combination of a profit and capital-spending crisis. At the same time, there has accumulated an array of economic and financial dislocations that tend to depress the economy in many ways, such as extremely poor profits, badly ravaged balance sheets, a variety of asset bubbles in different stages of development, excessive leverage in the whole financial system and shrinking cash flow. There is nothing normal anymore in the U.S. economy and its financial system.

For the old economists, investment in tangible assets - factories, commercial buildings and machinery - was paramount in creating both economic growth and wealth. It creates demand, employment and income as the capital goods are produced. And with their installment, all these new buildings, plant and equipment create increased supply along with increasing employment and income with increased productivity.

The United States has always been a low-savings and low-investment economy. Putting it in reverse: a high-consumption economy. But all three went to unprecedented extremes over the past several years. Savings and investment have been run down to atrociously low levels that are typical for underdeveloped countries.

To repeat: Investment in tangible assets is paramount in creating everything that is decisive in generating our wealth and raising our living standards. Given the low levels of saving and investment in the United States, American policymakers and economists in recent years have elevated productivity growth to the single most important achievement of an economy. But just by itself, productivity growth creates only unemployment. It is the normally associated capital spending that makes for the necessary, simultaneous demand and employment growth.

This simple recognition - gross lack of saving and capital formation - is really at the root of our controversial and highly critical view of the U.S. economy's sanity and vitality. True, its growth rate has been the highest among the industrial countries for years. But it has all the time been economic growth of the most miserable quality. The striking hallmarks of this extremely poor quality were collapsing savings, low rates of business fixed investment, a profit carnage that began at the height of the boom, exploding consumer and business debts and an exploding trade deficit.

Today's economists have at their disposal information in quantity and speed as never before. But reading numerous reports, we have the impression that very few are making use of it.

Particularly shocking in this respect were the immediate euphoric reports about growth acceleration in the second quarter.

During the 1960-70s, by the way, the U.S. accumulated on average about 1.5 dollars of additional debt for each dollar of additional GDP. Just extrapolate this escalating relationship between the use of debt and economic activity. And think of it: the GDP growth of today is tomorrow a thing of the past, while the debts incurred remain.

Plainly, Greenspan's policy has collapsed into uncontrolled money and debt creation that has rapidly diminishing returns on economic activity. The late economist Hyman P. Mynsky would call this a Ponzi economy, where debt payments on outstanding and soaring indebtedness are no longer met out of current income, but through new borrowing. Soaring unpaid interests become capitalized.

Kurt Richebächer
Sep 12, 2003
for The Daily Reckoning

P.S. We keep asking the question of the American economists: Are they providing deliberate misinformation or simply performing slipshod work? In our view, as usual, the latter rings true.

The whole economic discussion today is fixated on the next economic data with one single question in mind: is it better than expected? Careful, more detailed analysis with a longer-term perspective is completely missing. Obviously, most economists and journalists read no more than the brief summaries provided by agencies, like Bloomberg and Reuters, that only rehash the summaries preceding the official releases.

Editor's note: Former Fed Chairman Paul Volcker once said: "Sometimes I think that the job of central bankers is to prove Kurt Richebächer wrong." A regular contributor to The Wall Street Journal, Strategic Investment and several other respected financial publications, Dr. Richebächer's insightful analysis stems from the Austrian School of economics. France's Le Figaro magazine has done a feature story on him as "the man who predicted the Asian crisis."

Dr. Richebächer continues to warn readers about the follies of the Fed's current easy-money policies. For more, click below:

Greenspan Is Robbing You Blind
http://www.agora-inc.com/reports/RCH/RighteousGains

http://www.321gold.com/editorials/richebacher/richebacher091503.html

syr:)

syracus

18.09.2003, 20:31

"Deflation", oder wie GDP & CPI genutzt werden :sss......

The FED's Deflation Smokescreen

Craig Harris

Harris Capital Management, Inc. CTA
September 18, 2003

In my daily communication to clients and newsletter subscribers at the beginning of the year, this is what I was saying:

"I guess what I'm saying is that I could envision a situation where prices are moving sharply higher as a result of the "print your way out of deflation" strategy while at the same time the economy continues to contract. So, the "nightmare scenario" of a deflationary collapse that the FED seems to be worried about is not my concern... my concern is an inflationary economic collapse which would give way to a global depression and then maybe a fiat currency collapse. Something that really hasn't happened exactly this way before."

I'd like to compare that statement to what I think is currently happening in the US and the world today, and where this worry about deflation is coming from.

First off, the Economist's commodity-price index, (the oldest in existence) is showing that the index as a whole has risen by 6% over the past 12 months in dollar terms, with the price of industrial commodities leading the way. the industrial component has risen by 17% over the same period, and non-food agricultural products have gone up by 21%. Platinum is up by 26%, copper 17% and nickel 40%."

Locally, the operating expenses from a homeowners association are a good proxy for the general cost of living because the expenses include things like insurance, gas, capital items, salaries, etc. Essentially everything except food is represented. In the past 4 years, for the same level of service, the actual expenses in my community have gone up over 40%. The Government says they should have gone up less than 10% if I use the CPI as a barometer.

Here is my general thesis. The government is tweaking (I'm being nice) the CPI. I'm not the only one that thinks so... back in June, the NY post published a story that quoted a BLS economist as saying "the widely reported numbers understate the rising cost of life from one year to the next. The fact is, he says, "more money is coming out of your pocket." He should know.

In case it's not obvious, there are many many motivations for the Government to understate the true rate of inflation. One important reason is how the nations GDP is calculated. When the government calculates the GDP, they take the amount by which they think the economy is expanding... then they subtract the rate of inflation. So, the key is in the rate of inflation, which is determined by the CPI. If the CPI is understated, growth is overstated. Many investors don't understand this important point.

The next motivation is that government expenditures are tightly coupled to the rate of inflation. Programs like Social Security and government wages are tied to increases in the cost of living. Some government bonds have their interest rates determined by the CPI. The bond market in general looks to the CPI as a factor in determining the "correct" interest long term rates using the equation interest rate=real return+risk premium+inflation rate. So... by understating inflation the government saves billions and billions of dollars. In this age of soaring deficits, understating inflation is an important tool for the Government to save money. Now... if it's true that the government is understating inflation, what will the result be? Well, one result is that the population will have less disposable income than they would be expected to have for those that believe the governments data. In other words, their costs of living are higher than expected and their wages are increasing at a rate below the actual cost of living increase. Another result would be long term interest rates lower than would be otherwise expected. The FED is using this and other potent tools in an attempt to hold long term interest rates low to stimulate a post bubble economy into a post bubble, new bubble economy. So why does the FED keep talking about the worry of deflation on the horizon? Well, if you were trying to restore a post bubble economy, and doing inflationary things like printing money at double digit rates, holding interest rates artificially low, suppressing the price of gold, and using every other inflationary tool you know how to use... would you talk about the danger of inflation? No, you wouldn't. You'd talk about deflation because if you talked about inflation, you'd kill the recovery you were trying to generate and put fear in the marketplace, driving up inflation in the process. Using a fiat money system, if you print enough money, you aren't going to have deflation so if they (the FED) really were worried about deflation that would actually imply that they don't understand what they are doing. I'll give them more credit than that.

In my mind, one of the most important things George Soros ever said was that "markets influence events they anticipate." That quote is worthy of a lot of thought. One reason is because Mr Greenspan has apparently adopted that as a mantra. In other words, if the market is worried about inflation, that worry will drive up prices because of the anticipation of inflation and then it will become a self fulfilling prophecy. If the market is worried about deflation, then that alone will suppress inflationary concerns and have an impact on the marketplace. As an example, for what I'll call the "run of the mill" investor, it he heard G say he was worried about inflation, then he might invest in gold, and that mentality might drive up the price of gold, which in turn would fuel inflationary expectations. So, this is all very important to understand. The people who take what the FED is telling you at face value are missing the point, and hopelessly naive regarding how the world works. I always chuckle when I see supposedly serious people taking what the FED says at face value. They tell you things designed to get you to think a certain way. Talk is one of the FED's most important tools in an age where his money has no intrinsic value and they rely solely on investor confidence to promote their warez... which in this case is fiat money coming out of a printing press for just the cost of electricity, paper and ink. They want to keep you invested in paper... because that's their realm... smoke, mirrors and money created by the stroke of a pen.

So... now you have your answer regarding why the FED is talking about deflation. It's a smokescreen to mask the truth, and the truth is that the actual cost of living is rising at a much greater rate than acknowledged, and that the "real" GDP is much lower than reported. I call that stagflation and I think that's where we are here today in September of 2003. I'm bullish on real things with intrinsic value and very bearish on the US dollar which in the interest of full disclosure I have been short for some time now. Also in the interest of full disclosure, I've been long gold from the 270 area and I'm still in the market. Gold is my insurance policy against a host of bad things that I believe are all within the realm of possibility.

Craig Harris
September 18, 2003
President
Harris Capital Management, Inc. CTA

http://www.harriscapitalmanagement.com

syr:sss

syracus

19.09.2003, 15:11

Nun aber, Asien wacht auf :ek......

http://www.atimes.com/images/f_images/atime_logo1.gif

Global Economy

The end of American economic supremacy?

By Hussain Khan, 19. Sept. 2003

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

It is beginning to appear that the events of September 11, 2001 have had such an impact that it could end American economic supremacy in the world. The peril to the US economy has been compounded by fiscal actions taken by the administration of President George W Bush.

The costs of fighting and occupation in Afghanistan and Iraq, reconstruction and relief after September 11, and homeland security combined over the next two years, are expected to explode. Bush has already requested an additional US$87 billion for war funding alone. Administration tax cuts, according to the Congressional Budget Office, will cost the economy nearly three times as much as the costs of reconstruction and defense.

Moreover, these tax cuts are expected to rise to about $2 trillion over the decade. That is assuming that the sunset provisions phasing them out are enacted. If, as seems likely, they are not, the 10-year budgetary costs of the tax cuts will rise by another $2 trillion.

Bush wanted to follow on the footsteps of Ronald Reagan by relying on the theories of the supply-side economists, who believe that tax cuts generate so much additional economic activity that they increase government revenues. In his election campaign, Bush used tax-cut philosophy to appeal for votes. But the enactment of these theories is producing unforeseen negative effects rather than the positive qualities that the original supply-siders had assumed.

They had assumed that by cutting taxes, demand would increase due to surplus money available with the consumers for purchases. But this theory had already failed in Japan. Instead of spending, the Japanese simply increased their savings. The benefits of tax cuts were not cycled into the market to boost the economy, as consumers feared unemployment or business uncertainty. The situation is similar in the US today.

In a scenario changed by September 11, and after the administration's decision to invade Afghanistan and Iraq to attempt to round up terrorists, the strain on the American economy has been so tremendous that these supply-side theories have fallen apart. Uncertainty and unemployment fear has grown due to this scenario. Psychologically, as in Japan, consumers were not encouraged to increase their spending as the supply-siders believed would happen under the tax cut measures. Their benefits were confined to the well-to-do, who simply deposited the extra money instead of spending it.

The federal government enjoyed a projected 10-year budget surplus of $5.6 trillion when Bill Clinton left the presidential office. But the Bush administration is now confronting sizable annual deficits just three years later. Private economists now forecast a 10-year deficit of around $4 trillion-$6.7 trillion, excluding the social security surplus. As a share of the economy, government debt and interest payments are expected to double over the next decade.

In a recent annual survey of the US economy, the International Monetary Fund (IMF) last month quoted a White House forecast that the federal budget deficit would explode to a record $455 billion in 2003 and then $475 billion next year. The IMF further quoted the Bush administration that the deficit - 50 percent bigger than that projected just five months ago – had been exacerbated by a weak economy, the Iraq war and a $350 billion tax cut package.

The deficit has thus increased more than 50 percent in just five months. This unforeseen increase is said to have occurred due to the Iraq war and the tax cuts. It actually shows that the tax cuts did not produce the results that the administration had expected. In fact, they were exactly the opposite.

The IMF notes two improvements in the US economy. First, its rate of economic growth was set to rise from 2.25 percent in 2003 to 3.5 percent next year. Second is the high growth in productivity, or output per hour work. As a matter of fact, the expected rise in the rate of economic growth is mainly due to the rise in productivity. If productivity growth were stifled, economic growth would also be affected negatively. And that is the factor about which the IMF has expressed concern in the following words:

"In particular, the worsening of the longer-term fiscal position, including as a result of the recent tax cuts, will make it even more difficult to cope with the aging of the baby-boom generation, and will eventually crowd out investment and erode US productivity growth."

That means that despite some possible improvements in a short-term scenario, the longer-term prospects are doomed to erode productivity growth and hence cut economic growth, leading to eventual crowding out of new investment, while the US has to face the challenge of an aging baby-boom generation. This is the IMF's final conclusion. It added two further worries concerning social security and medicare in the following words:

"The risks to the fiscal outlook appear especially worrisome given the significant actuarial deficit arising from the longer-term demographic pressures on the social security and medicare [health care] systems. As a matter of fact, this temporary increase in the economic growth rate and in the productivity is going to occur at the cost of dismissing hundreds and thousands of workers. It is the result of increasing unemployment, which was accelerated by the 9/11 events. "

The number of employed workers continued to decrease after September 11 and overstocked goods had to be cleared. This situation resulted in a temporary increase in productivity or output per hour of work and hence the increase in the rate of economic growth.

As the IMF has pointed out, this situation cannot continue for long, as interest payments to fund the budget deficits will erode savings and drive out new investment. Increasing unemployment can be expected to erode purchasing power and shrink the urge for consumption and hence decrease demand, in turn bringing about stagnation and stifling growth.

Not only the IMF but the Republican-controlled Joint Committee on Taxation as well, using a variety of dynamic scoring assumptions, was forced to acknowledge that these cuts are likely to reduce the economy's long-term growth. Explaining the reason as to why the committee has come to this conclusion, Laura d'Andrea Tyson, dean of London Business School writes:

"Any positive business-investment incentives from lower taxes will be outweighed by the curtailing of national saving and investment caused by mammoth budget deficits. To the extent that larger deficits diminish domestic saving, they eat into productive investment. To the extent that larger deficits are funded by borrowing from the rest of the world they raise the nation's foreign debt and drive future income into servicing this debt. Contrary to the claims of administration ideologues, larger deficits mean lower future living standards.

"The administration argues that its tax cuts are necessary to stimulate growth in a sluggish economy. But this argument is specious. The economy may have needed a temporary infusion of additional demand during the past three years. But temporary tax cuts or spending hikes for hard-pressed working families, unemployed workers, and state governments would have stimulated demand much more effectively than tax cuts for the rich."

The tax cuts were designed to increase demand and employment opportunities, but they have backfired. The average tax cut is said to be about $1,000 per person. But half of the taxpayers will get a nominal tax cut of $120 only and one-third receive no benefit at all. The average refund is much higher because the benefit to the few rich taxpayers is very great. When more than half and the additional one-third do not benefit significantly from the tax cuts, how are those blessings going to come about that the supply-side theorists claim in the form of increased overall demand or in the purchasing power of the majority, while the number of the unemployed has peaked to a nine-year high level?

The increase in unemployment is a scourge in itself. A lot of companies like Enron and some airlines have been bankrupted. Those that survived dismissed a lot of their workers as a result of the September 11 events. The Clinton administration had created millions of new jobs and reduced unemployment to less than 4 percent. The events of September 11 reversed this trend. Unemployment is 50 percent higher than the Clinton administration figures, rising to a nine-year high of 6.1 percent. It has remained above that level for the last few months, despite slight negligible monthly adjustments.

The US had just emerged from recession in the beginning of 2001. But September 11 drove growth down again. Growth of at least 3 percent is needed to encourage hiring, say economists, but such growth has not occurred in consecutive quarters since the final six months of 1999. The economy grew only 1.4 percent annually in the first quarter of 2003. In an attempt to boost growth, the Federal Reserve cut short-term interest rates to 1 percent, their lowest level in 45 years.

The US Federal Reserve, the nation's central bank, said at the time that the economy was still weak despite previous cuts in interest rates. But the impact of September 11 was so strong that all these efforts by the Bush administration and the Fed failed to spur growth and create new jobs.

On the contrary, under the so-called jobless recovery, more than 2 million jobs have disappeared since Bush took office in January 2001, reviving memories of 1929 depression. Bush could be the first president since Herbert Hoover, who was in the White House from 1929 to 1933, the years of the Great Depression, to oversee a decline in total US jobs during his term. By contrast, 22 million jobs were created during the Clinton years.

With presidential elections looming next year, Democrats have focused on the economy as Bush's weak spot. Nancy Pelosi of California, the House Democratic leader, has described Bush's economic record as "$3 trillion deeper in debt, three million fewer jobs".

As long as fiscal deficits continue to increase and erode savings and investment, there is no possibility of creating new jobs to significantly reduce unemployment. In addition to the increasing large fiscal deficits, unemployment, slow economic growth and falling living standards, other problems are hovering. One is in the form of the fall in federal revenues. Usually, with yearly growth, however small, revenues also continue to grow every year. But the war adventures of the Bush administration have reversed this historic trend.

In 2003, federal revenues are expected to fall to as far back as the 45-year-old level. The forecast is that the American economy will regress to the level of the 34th American president, Dwight D Eisenhower (1953-61). Federal revenues include a variety of sources of income, one of them tax revenue. If only tax revenue is compared, it is going to fall to about the 60-year-old level of 1943.

The present state of social security is such that one third of the dollars in this account have to be borrowed from outside, as internal revenues are not sufficient to cover costs. This is the largest share of deficit-financed spending in the past 50 years. This deficit spending is forecast to increase $400 billion by 2008. If no cuts are made in social security, medicare, defense and debt service, government spending on everything else - from education to homeland security - would have to be slashed by more than 80 percent to restore budgetary balance. The United States is in for a rough ride.

Hussain Khan holds a Master's degree in Economics from Tokyo University, and worked for a German bank subsidiary selling Japanese stocks to institutional buyers in Japan, the Middle East, Europe and the US. He is an analyst on current affairs and economic issues for various newspapers and magazines. Email: hk@ourquran.com

http://www.atimes.com/atimes/Global_Economy/EI19Dj01.html

syr :rolleyes:

syracus

07.10.2003, 11:05

Ganz interessantes aus der New York Times :sss

A Missing Statistic: U.S. Jobs That Went Overseas

By LOUIS UCHITELLE

Published: October 5, 2003

The job market finally showed some life in September, but not enough to sidetrack a growing debate over why employment has failed to rebound nearly two years after the last recession ended. The debate intrudes increasingly on election politics, but in all the heated back and forth, an essential statistic is missing: the number of jobs that would exist in the United States today if so many had not escaped abroad.

The Labor Department, in its numerous surveys of employers and employees, has never tried to calculate this trade-off. But the "offshoring" of work has become so noticeable lately that experts in the private sector are now trying to quantify it.

By these initial estimates, at least 15 percent of the 2.81 million jobs lost in America since the decline began have reappeared overseas. Productivity improvements at home — sustaining output with fewer workers — account for the great bulk of the job loss. But the estimates being made suggest that the work sent overseas has been enough to raise the unemployment rate by four-tenths of a percentage point or more, to the present 6.1 percent.

That leakage fuels the political debate. The Bush administration is pushing the Chinese to allow their currency to rise in value, thus increasing the dollar value of wages in that country, a deterrent to locating work abroad. The Democrats agree, but some also call for trade restrictions, and they attack Republicans for cutting from the budget funds to retrain and support laid-off workers in the United States.

While most of the lost jobs are in manufacturing or in telephone call centers, lately the work sent abroad has climbed way up the skills ladder to include workers like aeronautical engineers, software designers and stock analysts as China, Russia and India, with big stocks of educated workers, merge rapidly into the global labor market.

"All of a sudden you have a huge influx of skilled people; that is a very disruptive process," said Craig R. Barrett, chief executive of Intel, the computer chip manufacturer.

Intel itself has maintained a fairly steady 60 percent of its employees in the United States. But in the past year or so, it has added 1,000 software engineers in China and India, doing work that in the past might have been done by people hired in the United States. "To be competitive, we have to move up the skill chain overseas," Mr. Barrett said.

The trade-off in jobs is not one for one. The work done here by one person often requires two or three less-efficient workers overseas. Even so, given the very low wages, the total saving for an American company can be as much 50 percent for each job shifted, even allowing for the extra cost of transportation, communication and other expenses that would not be needed if the work was done in the United States. That is the message of the nation's management consultants, who are encouraging their corporate clients to take advantage of the multiplying opportunities overseas.

" `Encourage' is a difficult way to put it," said Harold Sirkin, a senior vice president at the Boston Consulting Group. "What we are basically saying is that if your competitors are doing this, you will be at a disadvantage if you don't do it too."

The estimates of job loss from offshoring are all over the lot. They are back-of-the-envelope calculations at best, inferred from trade data and assumptions about the number of American workers needed to produce goods and services now coming from abroad, or no longer exported to a growing consumer market in, say, China.

Among economists and researchers, the high-end estimate comes from Mark Zandi, chief economist at Economy.com, who calculates that 995,000 jobs have been lost overseas since the last recession began in March 2001. That is 35 percent of the total decline in employment since then. While most of the loss is in manufacturing, about 15 percent is among college-trained professionals.

Boeing, for example, employs engineers at a design center in Moscow, while having shrunk its engineering staff in Seattle. Morgan Stanley, the investment firm, is adding jobs in Bombay, but not in New York — employing Indian engineers as well as analysts who collect corporate data and scrutinize balance sheets for stock market specialists in New York.

Near the low end of the job-loss estimates sit John McCarthy, research analyst at Forrester Research Inc., and Nariman Behravesh, chief economist at Global Insights. For them the loss is 500,000 to 600,000 jobs over the past 30 months, again mostly in manufacturing — with Mr. McCarthy suggesting that the 600,000 might turn out to be 800,000. His research focuses more on the future: Starting in January 2000 and running through 2015, globalization of American production will have eliminated 3.3 million jobs at home, he estimates.

Some are trying niche estimates. Roshi Sood, a government analyst at the Gartner Group, for example, estimates roughly that state government cutbacks have pushed overseas the work of 3,400 people once employed in the United States, either on public payrolls or on the payrolls of companies that contract with state government.

In Indiana, for example, the Department of Workforce Development recently chose an Indian company, TCS America, to maintain and update its computer programs, using high-speed telecommunications to carry out the contract. The TCS bid was $8 million below those submitted by two American competitors, Mr. Sood said.

Now political groups are offering estimates. The Progressive Policy Institute, which is affiliated with the Democratic Party, will soon publish its calculation of manufacturing jobs shifted overseas since George W. Bush took office just before the recession began, said Rob Atkinson, a vice president. Not surprisingly, the estimate — imputed from trade data — is on the high side: 800,000 jobs lost to overseas production.

http://www.nytimes.com/2003/10/05/business/05ECON.html?ex=1065931200&en=c2c811e53eefbead&ei=5062&partner=GOOGLE

syr :rolleyes:

Holodeck

27.10.2003, 12:15

Alternative Instruments for Open Market
and Discount Window Operations -- Dezember 2002

http://www.federalreserve.gov/boarddocs/surveys/soma/alt_instrmnts.pdf

Die FED evaluiert, ob in den Open Market Operation auch anderes als Anleihen eingeschlossen werden könnten. Das Wasser steht ihnen wohl bis zum Hals ... z. B. ist ihnen der Goldmarkt zu illiquide für häufige Tranksaktionen :eek:

Viel Spass beim genauen Nachlesen :)

Auszüge:

Households directly hold about 40 percent of the outstanding U.S. equity shares in terms of value. Mutual funds hold a little less than 20 percent. Private and state and local government pension plans together hold nearly 25 percent. The only other major large
equity-holding sectors are insurance companies and foreign investors, each with about 6 to 7 percent.

(...)

Also discussed are the markets for foreign sovereign debt, foreign exchange swaps, corporate equities, mutual funds, and gold. :o

(...)

If the Federal Reserve decided to purchase bond and stock mutual funds, it might wish to restrict its purchases to index funds. Index mutual funds, by definition, seek to replicate the return on a particular market index.

(...)

The largest spot market for gold is in London. That market is relatively liquid and transparent. However, the approximately $7 billion typically traded per day suggests that the market may not be deep enough for frequent, sizable transactions by the Federal Reserve. Transactions generally settle on a t + 2 basis.[/i]

syracus

29.10.2003, 07:34

:rolleyes: :)

THE DOW REPORT

"The Majority is Usually Wrong"

At first it may be difficult to accept such a statement as fact. So let us pursue the subject a bit. Let us start by dividing the population of this planet into two groups, the minority and the majority.

It is not especially pleasant to contemplate that the majority of people on this planet are not the most intelligent group. In almost any country, you would find that a large percentage of that country’s wealth is controlled by only a small percentage of the people. A study titled “Characteristics of Stock Ownership” was recently published by the University of Pennsylvania’s Wharton School. The report said that almost 50% of all stocks held by individuals in the United States were owned by approximately 1% of the American taxpayers.

It would seem that only a minority of the people on this planet have the ability and ambition to study hard, to figure out ways to accumulate wealth, and to raise their standard of living. The majority are apparently unable or unwilling to acquire the knowledge and take the action which would enable them to do the same.

Another difficulty of the majority is the herd instinct which they follow. The desire to go along with a large group is evident among people and animals. This is caused by the idea that there is safety in numbers – to think and act like the majority of other people. Anyone who dares to be different from the crowd is not considered to be “normal.”

One of the big troubles with modern society is the conformity of ideas and action. I call it the mediocrity of conformity. Many people are actually afraid to be different – to pursue unusual ideas. But the road to success is paved with unusual ideas, and traveled by unusual people who dare to be different. In our modern society it frequently pays to be unusual and different.

Another trouble with the majority is that they have a tendency to believe what they are told, especially if something is repeated frequently. The majority find it is easier to accept the statements of others than to think for themselves.

The minority, who do not believe what they are told, must put forth intensive effort in their search for truth and knowledge. Sometimes the quest for knowledge is like sailing on an uncharted sea with nothing to guide you except the facts you learn as you go along. The success of your voyage depends on how well you can separate facts from fantasy, how well you can analyze the facts you discover, and how well you use them to reach the right conclusions.

In the stock market, the majority are inclined to believe what they are told in the form of tips, rumors and advice. The minority believe only what they know to be facts, and then reach their own conclusions by analyzing those facts.

Still another weakness of the majority is their disbelief in change. Most people do not expect or prepare for changes in the status quo. They believe that things will continue indefinitely just as they are right now. When the stock market goes up, the majority expect it to continue going up indefinitely. They do not bother to think about the time when the market will change its course and turn downward.

At the same time, the minority know that change is inevitable, and they are looking ahead, trying to figure how to tell when the market makes the change, and planning what actions they will take at that time. The minority know that every bull market has been followed by a bear market, and that every bear market had been followed by a bull market. The successful investor must possess a mind which is flexible enough to accept changing conditions.

The majority of investors are almost paralyzed by their opinions, because it is difficult to change an opinion which is well established. When a person has a definite opinion, there is the danger that he might not be able to change it until too late to take the proper action.

Almost everybody tries to form an opinion of the market. Many investors are constantly gathering information to help them form the correct opinion. As the opinion forms, the investor subconsciously becomes more receptive to the ideas, which help to substantiate his opinion.

There are always plenty of arguments for both sides of a case. Since the equal acceptance of arguments from both sides would result in frustrating confusion, a person must choose which to accept. Frequently a person accepts the arguments which support his own opinion, and he ignores the opposite side of the case. It is human nature to do so. Many people actively consider and publicize only the arguments which will support their opinions. The process is called rationalization.

The majority seem to have an uncanny ability to buy near the top of a bull market, and sell near the bottom of a bear market. Apparently that is the way things must be, otherwise who would the minority sell their stocks to near the top – and who would they buy stocks from near the bottom?

One should try to think and act like the minority, for there is little hope for the success of the majority. There is not enough room at the top for the majority.

Realizing that the majority is usually wrong in their action near the tops of bull markets and the bottoms of bear markets, I looked for ways to recognize majority action at those points I also looked for a way of timing the contrary action to be taken at those points. It would not be enough just to recognize when the majority was wrong. One must also recognize exactly when the majority was wrong enough to take the contrary action.

The words above are not mine. This was a quote from The Haller Theory of Stock Market Trends 1965, by Gilbert Haller. Recently, I have been showing you a few charts on advancing volume and advancing issues. I referred to this as market fuel. Mr. Haller’s work only recently became known to me by one of my old time technical friends. He suggested that I read Mr. Haller’s book. What I found in this book served to reinforce what I have been sharing with you over the last few weeks about the lack of confirmation from upside volume and advancing issues. As it turns out, Mr. Haller’s work was solidly based on the use of volume and advancing-declining issues. Mr. Haller used these indicators to show him when the market was under distribution as is now the case. My point here is that in spite of all the hype from mainstream and popular public opinion the underlying volume and advance-decline work is telling us something else and now does not appear to be a time to be in alignment with the majority. Given that Mr. Haller’s work was based on what I have recently been presenting to you as “Market Fuel” plus the fact that I currently have a contrary opinion on the market I felt that the above quote was appropriate. I hope that you are able to find some value in it.

Tim W. Wood, CPA
Editor, Cycles News & Views

Quelle (http://www.financialsense.com/Market/wrapup.htm)

syr:sss

syracus

01.11.2003, 12:55

Benson's Economic & Market Trends

Economic Recovery or Stimu-Less?

Richard Benson
November 3, 2003

This economic recovery is the most expensive on record and has yet to produce material results for corporate investment, or employment. So far, the recovery has cost 13 interest rate cuts, 3 tax cuts, and, a war! In addition, it has created a real estate bubble (the likes of which the world has never seen before), a reflation of the stock market bubble, and a policy designed to have average citizens support both bubbles by taking unprecedented personal risks when investing. Indeed, never before has a central bank cut rates so many times, nor has a federal government spent so much money resulting in such a small economic improvement, other than boosting consumer spending.

Third quarter economic growth of 7.2% is impressive, yet this growth is a sign of gluttony fed by money borrowed by the US Treasury and the mortgage market. The spending is yet to be backed up by any growth in consumer wages and salaries. The US is experiencing the best year-over-year increases in corporate profits that will be seen in a long time. The magnificent third quarter consumption binge is in direct proportion to the change in tax rates, one time rebate checks mailed to households with children, and the peak of mortgage funding and cash-out REFI's. July and August were stellar months for consumption and September was already lackluster. All of this "Stimu-Less" proves only that a few months of growth can be purchased if the authorities are willing to pay any price. (The fact remains that if consumers are given money or access to credit, they will spend it.) Spending on consumer durables was up at a 26% annual rate in the latest quarter! The 4th Quarter of 2003, and the first Quarter of 2004, will truly suffer from "Stimu-Less." How will the current level of spending be surpassed, yet alone sustained, with no government checks in the mail, and mortgage REFI's dropping like a stone?

The worst of economic job loss seems to be history for the US economy. However, the serious structural weaknesses in the economy that caused the recession and job loss in the first place have not only not been addressed - they have been made worse in an effort to encourage continued spending and consumption to create "prosperity."

The economic policy of the Greenspan Fed and Bush Administration has been to use low interest rates and equity extraction from housing to keep the consumer propping up the economy until such time as business investment can take over as the leader of the economy. It does look like business investment is improving and is well above its lows and there is investment to replace depreciation. However, business investment in the US will clearly not lead the economy or even be sufficient to offset any slowing of consumer demand. Domestic capacity utilization is too low, and foreign investment in new Asian factories is too high to suggest there is any legitimate economic reason for a meaningful increase in business investment. Our domestic policymakers had not counted on the "dark side" of globalization in this economic cycle to send both new investment and job growth to Asia. Indeed, much of the productivity and profit growth in US corporations is merely a reflection of cheap Chinese labor, being substituted for expensive American labor, and some currency translation gains from a falling dollar.

Moreover, the political earthquakes in California and the possible bankruptcy of the City of Pittsburgh are symptoms of the serious budget mess that remains at state and local governments. For the past couple of years, aligning revenues and expenses at the state and local level have been postponed by record borrowing. Any real reform to close budget gaps will mean more taxes, and less spending. Neither of these actions will spur the economy moving forward.

Real Estate investment remains "artificially stimulated" because US interest rates are manipulated down by Foreign Central Bank money creation and purchases of Treasury and Agency securities. It is my belief that commercial and residential real estate will be subject to a price collapse when interest rates rise in the US. (Real Estate prices are leveraged plays in the price and availability of credit and building more now is a risk worth taking only with "other people's money.")

Personal income growth is rising about 0.2% a month, and the most likely growth in employment in the months ahead will be "part time" workers. Without legislation, or a return of Patriotism and Nationalism, Globalization for Profit will keep the bulk of capital investment and job growth "off-shore." Even President Bush is against legislation requiring that more of America's defense supplies be Made in America. Isn't this an odd policy for a President who wants a strong America, and to be re-elected? Job, wage and salary growth remain the "Achilles Heal" of this recovery. While some jobs will surely be added, a great number of jobs will be leaving call centers and mortgage banking firms. Both industries have been "Pillars of Economic Strength" throughout the economic downturn, and the jobs that disappear will be sorely missed. In my view, there is nothing on the economic horizon that suggests actual increases in personal income will help spur the economy.

Consumption, which will be up about 7% for the third quarter 2003 over third quarter 2002, has been lifted by tax cuts and increases in mortgage debt, not the growth of jobs or income. Indeed, when considering this tremendous increase in consumption, what's so incredible and disturbing at the same time is the lack of investment, jobs, and income growth that were associated with this spending binge. The question for the rest of 2003 and the first half of 2004 is, "now what?" Where is the self-sustaining investment? Where is the job growth? Where is the growth in personal income?

What seems certain is there are no "checks for children" being mailed and the mortgage finance boom is winding down. For those who wish to take a look at the Flow of Funds data, the cash for the consumption spending binge was running at a rate of $800 billion a year in the second quarter. That pace of increase in mortgage debt is much bigger than the stimulus from the tax cut, and each quarter going forward will offer less and less for the economy from mortgage creation.

Clearly, in looking forward, the US will need another round of stimulus. The Fed and the Bush Administration are counting on the positive effects of a falling dollar whereby they expect imports to decrease, exports to increase, and corporate profits to rise from multi-national companies translating foreign currency earnings back into dollars. President Bush has just returned from Asia on his "begging mission" to China and Japan to "let the dollar go." The problem is the President may get more than he wishes for if China, Japan, and the rest of Asia stop holding their currencies down, and stop buying all of those US Treasury and Agency bonds. If foreigners stop buying our debt, not only would that mean rising interest rates, but it would turn our mortgage bubble from a source of cash for consumption to a housing crash.

Keeping the US economic recovery going is likely to be a far more difficult task than our policymakers, or the markets, currently realize.

Richard Benson
November 1, 2003
President
Specialty Finance Group, LLC
Member NASD/SIPC
eMail: rbenson@sfgroup.org

Quelle (http://www.321gold.com/editorials/benson/benson110303.html)

syr :rolleyes:

syracus

02.11.2003, 17:39

Gefunden von mamma mia :):

Barron's: An Interview With Jeremy Grantham

An Interview With Jeremy Grantham -- Clients of Grantham, Mayo, Van Otterloo & Co. have been gathering the past two weeks at the venerable investment firm's Boston headquarters for its annual assessment of the state of the world's markets. In other words, to hear "Jeremy's jeremiads." With 35 years experience under his belt and $48 billion under management at the firm he helped found, Grantham is well worth listening to. His foresight and fastidiousness are the stuff of legend, as is the firm's ability to deliver superior results across asset classes around the globe over the long haul. For Grantham's latest prophecies, please read on.

Barron's: New bull market? Bear market rally?

Grantham: The simple story is the market is overpriced and will go to a trendline P/E, which we now believe is 16 times based on research that shows earnings tend to be overstated over time because assets tend to be underdepreciated during times of technological progress. Currently, the market is around 24 times trailing earnings, on a fairly generous earnings estimate. This is not just a bear market rally but the greatest sucker rally in history.

Q: There's nothing comparable?
A: Nothing in American history. In bear-market rallies, in the not-too-distant future, a new low is made. But the new low is only verified in hindsight. The normal characteristics of the leadership in a bear market rally flash back to the old leadership of the prior bubble.

That's not the case in a new bull market. In the three substantial, but not huge, rallies that occurred in 2000, 2001 and 2002, technology and growth stocks led the way, particularly flaky little companies. The scope of the speculation and the leadership of tech and the surviving Internet stocks is just not typical of a serious new bull market.

New bull markets typically start when the great bubbles have broken badly and stocks become very cheap: Eight times depressed earnings and way under half replacement cost. After this bubble burst, the market hit 19 times earnings, barely below the prior peak of the two previous great bull markets. Then it staged a big rally, with all of the indicators of a bear market rally except one: Bear market rallies typically don't have legs and in the U.S. have never lasted a year.

Jeremy's jeremiad: The vast overhang of debt which, unlike in other cycles, continues to grow, means a major "housecleaning" still lies ahead for the market.

Q: But this one will?
A: It is the third year of a presidential cycle. The presidential cycle is enormously important. The presidential cycle for me starts in 1932. Before then, the whole idea of stimulus hadn't sunk in. Keynes explained the concept and in Franklin Delano Roosevelt he had a very interested listener.

From then on, administrations understood it is a good idea to stimulate the economy in year three, so that in year four unemployment -- and this is key -- is dropping. It's fine to have a strong economy, but it is unemployment that really drives the vote, our research shows. The third year in a presidential cycle is not just a bull market year, but one with a bubbly flavor to it where growth wins. It's the only year in the cycle that growth wins. The speculative stocks outperform the quality stocks and small caps do very well.

Q: How does this third year stack up against those in the past?
A: This is a classic third year. The absolute return, minus inflation, is 17% in the third year and believe it or not that is exactly where we are, up 17%. Growth outperforms its normal relationship to value by 5% and that is exactly where it is today, to the penny. Small cap does very nicely and this time has done twice as well because it has benefited from another kicker.

While there isn't a very strong connection between the economy and the stock market, there is one very useful connection: In the 12 months, sometimes 24 depending on conditions, but always 12 following a low in the economy, small caps do very well. Low quality or junk does spectacularly.

What we found, too, is that the third year is fairly indifferent to value. Years one, two and four are reasonably sensitive to value. In year three, it doesn't matter whether the market is cheap, expensive or in between, the market goes up. In 1999, the most expensive year in American history up to that point, the market went straight through the roof, like a pea bouncing off a tank.

Q: What should we expect in year four?
A: Year four is neutral. The market comes in on average, small cap is about average, junk still wins -- a little echo effect -- and surprisingly value comes back and typically has the best year on average in the cycle. Value matters.

This is, of course, a glorious heaven-sent opportunity to take advantage of the rally and reposition portfolios. This is a very important rally and it will probably last through the year and may easily carry over into one or more quarters next year.

But next year is much more up for grabs. It is a very expensive market and that will be a drag. We still have very low capacity-utilization and all the problems of excess spending that went on. We have the problem of debt.

Q: How critical is the question of debt?
A: What is unique to this cycle is debt has not declined. It has, in fact, risen dramatically at the government level, quite dramatically at the corporate level, dramatically at the foreign level and very substantially and steadily at the consumer level. This is not a good picture.

Normally, it rises in bad times and falls in recoveries. This time it has not. This is a long way from today, but 2005 and 2006 will be a much clearer call than most years.

Q: How is that?
A: They will be painful years. A black hole.

Q: Why do you say that?
A: Housecleaning needs to be done, whether a new administration or old, and we have got a really dirty house. There is debt everywhere, and there are problems that have not been addressed, only postponed, by this administration and the Federal Reserve. In addition, we have a horrifically overpriced market. It is the third most expensive year ever recorded.

Q: What should investors do?
A: There are fewer places to hide than any time in my 35-year career.

Bonds are not horrific, but they are vulnerable to someone deciding the way to get rid of all this debt is to inflate. TIPS (Treasury inflation-protected securities) are okay, but fairly priced. The returns at these levels are not terrible but neither are they satisfactory.

In stocks, value has come in and won't be too much help on the downside, nothing like 2000-2001. Same with small cap. Small cap has done brilliantly all the way down and all the way up this year. Small cap is not cheap in the U.S. Do not expect it to provide any material help on the downside; it may even underperform.

Real estate has been like a cat with nine lives. Housing prices have continued to rise to a multiple of income that is dangerously high. The next time at bat, you really have to count on the housing market coming down, not disastrously, but if the S&P comes down through 700, which is our estimate of fair value, it will very likely be accompanied by at least a modest decline in housing.

All the reasons that propped it up will have flowed through the system. It would be hard to imagine a two-year decline in the market that was coincident with a continued climb in real estate. Real estate is getting very expensive and quite unaffordable, and when rates rise that will make it much more so.

Meanwhile, REITs [real-estate investment trusts] went up in 2000-'01-'02 when the U.S. market went down. Then we have a 20% rally in the S&P this year and REITs are six or seven points ahead. Since we spoke last year, REITs are up 33.4% to the S&P's 23.9%, almost 10 points ahead.

Q: Why the outperformance? Aren't REITs out of favor now that other dividend-paying stocks receive a tax advantage?

A: Of all the questions I find hard to answer, that is No. 1. I can give you plausible B.S. but I don't know why REITs have done so well. They changed the tax on dividends, but not for REITs, and therefore other high-dividend stocks should surely handsomely outperform REITs. Yet REITs, without the tax advantage, are far ahead of other high-yield stocks. Go figure.

Everyone knows the fundamentals of office space are terrible and apartment rents have fallen and vacancy rates are up. We've had three years of brilliant outperformance in the worst bear market since 1974, and still REITs are outperforming. I don't get it, except underneath it all there is still a big gap between the expected return from REITs and the S&P. We are down to about a 4.5% estimate in REITs from 8.1% a year ago. Now 4.5% is not enough, but it is a lot better than about negative 1% a year, which we expect from the S&P.

Q: Are you still anti blue-chip?
A: I'm anti blue-chips in terms of absolute return. In terms of relative return, one of the places to hide in the U.S. market will be quality stocks. Quality stocks, whether large-cap, or small- or mid-cap, provide noncontroversial, straightforward return on equity, stability of profits and balance-sheet strength. Meat and potatoes. Those characteristics have underperformed continuously all year. This has been a junk year by every parameter.

The net effect is that quality is already pretty cheap. If this bear-market rally continues for quite a long time, then quality will become about as cheap or cheaper than it has ever been. In the event the market goes another leg down, accompanied perhaps by some measures aimed at the overleverage in the system, quality could be a terrific defense against huge declines. Quality stocks will still go down, unfortunately. But they will provide real resistance to big declines. They will be pretty heroic as will REITs on a relative basis. That's the important idea in the U.S. But the real play, of course continues to be foreign and emerging stocks and bonds.

Q: Still?
A: The dollar has probably not seen its low. Even though we don't score it as cheap on traditional purchasing-power parity, we have a strong suspicion it will continue down because of the trade gap. Now the place to hide in relative terms is in foreign stocks, emerging markets and, paradoxically, high-quality U.S. and, if you insist, REITs.

The problem is, what do you do in absolute terms? Foreign is no longer cheap. It is a little expensive. The best you can say for it is if you are going into the second leg of a major bear market, it is better to go with the sectors that are only a little expensive. They will go down in sympathy with the U.S. but I think they will go down substantially less and the currency kicker will make a big difference.

The only one that may buck the trend is emerging markets. Emerging may actually go up in a fairly serious decline. We've been saying this for a long time and last year the S&P was down 22% and emerging was minus 2%. It almost made it; it almost did the impossible. Emerging is still absolutely a bit cheap. It is the only equity category that is absolutely a little cheap. Its profit margins are improving. Its GDPs are improving. If there is no out-of-left field crisis in, say, China -- and "if" should be underlined two or three times -- they are in better shape than they have been for years in terms of financials and currencies.

Q: Are you mostly focused on emerging Asia?
A: No. We like Brazil a lot. We like Argentina. We like Eastern Europe. We don't like Korea. It is picking and choosing. But emerging is the only category that might actually go up.

I am intrigued, too, by the growing interest in emerging equity. We are seeing fairly massive increases in institutional interest in emerging markets. And that is a market where a little bit goes a long way. If this speculative phase in the U.S. market were to continue for as long as nine months from today, I wouldn't be surprised if emerging markets didn't go up another 40%. It has got everything lined up for it. If the market here fades quicker than that, then it won't happen, but it still might do pretty well.

Q: What are your views on China?
A: It is working out very well, for the time being. Their imports are growing faster than their exports. Their imports are up 40% year over year. Mind boggling. Chinese imports represent almost one-third of the increase in imports globally. A country with an official GDP that puts it No. 7 or 8 in the world is accounting for 30% or so of all the growth in global importing. Stunning beyond belief. If it keeps rolling a lot of things are going to change in the world.

One of the interesting things is commodity prices. I always make a big fuss that there are only two commodity prices that have risen in the long run: fish and forestry.

What do they have in common? They started as free goods. When you start free and move to cultivation, that is known in the trade as an infinite increasing cost. Okay, it is an exaggeration but at least it makes the point that you can have a long, steady increase in price. Fish and forestry have risen and everything else has gone down in price.

It doesn't matter whether it is oil or soybeans, they have all gone down in real terms. And they've gone down because even those that have marginal increases in costs, such as oil, have had their productivity clock in a little higher than the rising marginal costs of extraction. It doesn't have to be that way, it just happens to be that way.

If China keeps up its growth rate, productivity -- which will not change just because China is growing rapidly -- will come in below the increasing marginal costs of extraction, and those commodities will tend to have a rising real price. Even though they haven't for a hundred years, they will have real price increases. If you push resources at the rate China is doing now, we are going to live in a world where commodity prices rise.

No doubt other interesting effects will fan out from that. With China increasing its imports by 40% and its exports something like 35% this year, what effect does that have on shipping? They're growing faster than they can build ships. Shipping rates have gone through the roof. China may push the whole infrastructure of shipbuilding pretty hard. It may take a few years to gear up to build enough ships to keep up with the incremental effect. Now if the rest of the world slows down a bit, that will mitigate the pressures enormously.

Q: So, how do you feel about the loss of manufacturing jobs in the U.S. to China?
A: There are only 14 million manufacturing jobs, down from 17 million four years ago. How many of those 14 for technical reasons are always going to be in America? Say 8 million. So between now and forever you are going to lose another 6 million jobs. You just lost 3 million in the last four years. It is really seriously hard to get too excited in a population of 250 million about the eventual loss of an incremental 6 million jobs.

The huge pain of the economy going from 80% manufacturing in 1900 is behind us. That is really bullish. There are plenty of countries where this is a serious factor, but for the U.K. and the U.S., the two most advanced in this way, what used to be bad news has become the good news. The U.K. and the U.S. are service-driven economies.

Q: What about the migration of services jobs at this point?
A: Migrating service jobs is much more complicated. You certainly wouldn't want them to go too fast because that is the area where we are growing and that's where our comparative advantage always has been.

But in the end, global trade benefits everybody. It may also hurt some people, but net-net, it increases the total wealth of the majority of people and so it will go on. We should welcome it. But it is tough if you are the computer programmer who just lost his job to someone in Mumbai.

Q: And so are you investing in commodities?
A: Commodities will probably be a nice place to hide and well worth looking at. We have been considering doing a real-asset fund using stocks. We probably will not, but we are working on it just to have an extra weapon to consider according to the circumstances.

A fund we will probably do is a quality stock fund. A lot of our funds are tied to benchmarks and there is a limit to how much they can tilt to high-quality stocks or should. A quality fund will allow us to target quality stocks more emphatically.

Q: Thanks, Jeremy.

Quelle (http://www.f19.parsimony.net/forum33934/messages/53868.htm)

syr:sss

syracus

03.11.2003, 12:50

Not Like 1984
Comment From a Sophisticated Viewer

The comparison of the current growth GDP rate to 1984 is a stretch at best. According to the Dismal Scientist, in 1984 real GDP grew at 7% for an entire year prior to the 1984 presidential election. The economy added 4 million jobs and the unemployment rate fell 3.6 percentage points from November 1982 to November 1984. This followed the severe double-dip recession of the early 1980s, which cleared the way for a vigorous recovery. Furthermore, in contrast to the current situation, the trade deficit was miniscule, the consumer savings rate was double the current level, and consumer debt as a percentage of GDP was far lower than it is today. Never before has the economy actually lost jobs this far into a recovery. In our view this recovery is unsustainable, and another slowdown is likely soon.
In fact, Japan also had a spike up in its GDP in the first quarter of 1997 which was about the highest in twenty years, and right in the middle of their deflationary malaise (see chart attached). This information came from feedback from a loyal viewer from Belgium. This peak in GDP growth could be somewhat explained by a pending consumption tax the following quarter.

Another release today was the Help Wanted Index, and at 37 it is lower today than it has been for decades (see attached chart). The index was as low as 35 this year and has shown very little rebound with the so-called recovery in the economy. This index should turn before employment growth starts, and it seems to be dead in the water. Which begs the question-- how can the economy be growing so fast with a continued loss of jobs? How fast does the economy have to grow before we start to generate jobs? You have to keep in mind that employment is not a lagging indicator, as the whole financial media would have you believe, but a coincident indicator.

A regular reader of our website (and someone we have great respect for) is Albert Cox, former Chief Economist of Merrill Lynch in the seventies and eighties. He also served in both the Nixon and Reagan administrations. We just got this email from him on his latest thoughts on the economy, stock market, and housing market. With his permission we will quote him directly:

“I expect the bear market to resume for a long list of reasons: (1) Consumer spending has been force-fed for 2 years and no more bullets left (2) no decline or even slowdown in consumer spending in 13 years--never happened before in business cycle history back to 1864 (3) debt ratios thru the roof everywhere--mortgage debt, installment debt, corporate debt, new upsurge in margin debt--as employment continues to sag; and employment is a coincident NOT a lagging economic indicator as the cheerleaders keep saying (4) massive budget deficits at all levels of government (5) huge trade deficit which is sinking the dollar and will trigger foreign selling (6) another frenzy of stock market speculation and the bubble will burst again on a wildly overvalued market (7) ditto for the bubble in home prices (8) heavy deflationary pressure from China and Mexico (goods) and India(services). I continue to believe that we are rather closely tracking Japan's experience of the past 13 years (Japan had huge rallies all along the way just as we're having now) and that we're still in the early stages of what will be a long secular economic and stock market decline. CHEERS

We wholeheartedly agree with these comments!

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http://www.comstockfunds.com/index.cfm?act=Newsletter.cfm&category=Market%20Commentary&newsletterid=1042&menugroup=Home&aol=1

syr :rolleyes:

syracus

04.11.2003, 16:46

11/04/03

U.S. October layoffs surge 125%, Challenger says

Rex Nutting

WASHINGTON (CBS.MW) -- Layoff announcements from U.S. companies more than doubled in October to 171,874, the highest in a year, according to the monthly tally released Tuesday by outplacement firm Challenger Gray & Christmas. October is typically the largest month for layoff notices, as companies slash costs at the end of the fiscal year. The Challenger survey is not adjusted for seasonal factors. Layoff announcements had fallen for three months in a row before October's 125 percent increase. In October, the auto industry sacked 28,363 workers, followed by 21,169 in the retail sector. Telecommunications companies cut 21,030. So far in 2003, 1.04 million job reductions have been announced

http://cbs.marketwatch.com/news/newsfinder/pulseone.asp?dateid=37929.4167939815-809414361&siteID=mktw&scid=0&doctype=806&property=&value=&categories=&

syr:sss

syracus

08.11.2003, 12:47

Geldmenge ist alles :sss.......

M3 Growth and Stocks

In the esoteric world of money supplies, it is not very often that something truly unusual transpires. Endless fiat-currency expansion, inflation, is as predictable as the four seasons as long as mere mortal central bankers wield their unfathomable power over global economies via active paper-currency manipulation.

In recent months however, the almost unthinkable is unfolding before our very eyes. The broad US money supply, M3, has started modestly contracting over the short-term! Contracting! After slamming into an all-time-high apex of $8,925b in early August, M3 had contracted by $135b as of the latest weekly Federal Reserve reporting of late October.

During the 10 weeks since M3 peaked, it has registered weekly 10-week contractions in an amazing 6 of these recent weeks! Nothing like this has been witnessed since early 1994, almost a decade ago. In a chaotic modern financial world where central bankers swear by the motto "inflate or die", this provocative monetary development is certainly worthy of contemplation.

Is M3 really shrinking!?! Has this monetary bane of the central bankers' existences happened before? How have past slowdowns in M3 growth affected the stock markets? And what are the implications going forward this time around? This week I would like to examine the recent past in the hopes of illuminating some useful insights on these very important questions for contrarian investors.

Since weekly M3 topped out in early August, I have seen increasing coverage of this fascinating development in the contrarian investing community, and rightly so. Many of the commentaries that I have read aggressively highlight the contraction of M3 money in recent months. But is M3 really shrinking? The true answer is yes and no. How's that for a paradox?

Like so many studies of the markets, the actual answer really depends on the length of time considered. Perspective, as usual, is everything! If you use a short-term measure of monetary growth, like a few months or less, the M3 money supply truly is contracting over the short-term, amazingly enough.

And this certainly is an ominous development in today's hyper-leveraged debt-worshipping financial world! Ever-increasing debt and speculative leverage can only be maintained via ever-increasing monetary inflation. Monetary disinflation or even deflation ultimately forces incredibly painful debt liquidation, eviscerating leveraged speculators.

But, from a more strategic perspective of an entire year, the US M3 money supply is still rocketing ahead from where it was last autumn. Year-over-year monetary inflation or growth is running full steam ahead on all cylinders, as mega-inflationist Alan Greenspan continues to zealously compete with 18th Century France's John Law for the dubious crown of being remembered as the most notorious debaser of currency in all of world history.

With short-term M3 growth stalling but long-term M3 growth remaining relatively aggressive, I believe it is quite a stretch to declare that the monetary sky is falling after only a few months or so of contracting data. Yet, the recent weakness in M3 inflation still certainly could be the start of a far larger and more ominous trend so it must be carefully monitored in the months ahead.

Our trio of graphs this week offers many insights into this recent monetary anomaly and what it could portend for the US equity markets. The weekly flagship S&P 500 data, along with its primary 10-week and 40-week moving averages, is superimposed over the top of both the short-term 10-week (red) and long-term year-over-year (yellow) M3 money supply growth.

We will start with the grand strategic picture since 1990, then zoom into the euphoric bubble-top years, and finally conclude with the recent brutal Great Bear years. Using a broad initial perspective as our point of embarkation helps ensure that we resist the considerable temptation to pull the recent monetary contractions out of their proper long-term context. History, rather than emotion, needs to be our guide.

http://www.321gold.com/editorials/hamilton/hamilton110703/Zeal110703A.gif

This big picture helps illustrate the conflicting signals at play in M3 today. The lower red line, the 10-week growth of M3, is what is catching the attention of countless contrarian investors today. Over the latest 3 weeks of Fed data, this 10w growth measure has fallen by -1.31%, -1.31%, and -1.27%. To place this kind of magnitude of short-term monetary contraction into proper perspective, -1.31% is the largest 10-week absolute drop in M3 since at least 1989, which is as far back as we ran these numbers for this essay.

Way back in February 1993 this 10w growth measure of M3 sunk to -1.28% for one week, and exactly one year later in February 1994 it fell to -1.27% and -1.26% for two consecutive weeks before recovering and surging. Other than these two early 1990s episodes though, we have not witnessed anything else close to the recent -1.31% back-to-back 10w drops in M3 in modern financial history.

The current steep plunge in the red 10w M3 growth line above is definitely an anomaly and worthy of note, even when well over a decade of financial-market and monetary history is considered. It has been an entire decade since anything remotely close to this sharp drop in short-term M3 growth has been witnessed, so we will have to watch M3 closely in the months ahead to see if its short-term growth rate plunges even lower into record negative territory.

Now as an incorrigible contrarian and outspoken bear these days, I would love to draw the conclusion that this plunging short-term M3 growth heralds the long overdue next downleg of the Great Bear. Yet, when I ponder the yellow longer-term year-over-year M3 growth line above, a true strategic M3 contraction is nowhere in sight at this point. The entire US money supply is 6% larger today than it was a year ago, even after the short-term M3 contraction!

Currently M3 is running about $8,790b according to the Fed. This is 6% higher than the $8,285b M3 of late October 2002, 13% higher than M3 was in October 2001, 26% higher than M3 in October 2000, and a neck-snapping 39% higher than M3 in October 1999! 6% year-over-year broad monetary inflation is certainly not an M3 contraction by any stretch of the imagination! So while the short-term trend is very provocative, it is too young at this point to trump the long-term reality of gigantic monetary inflation.

Before we delve deeper and zoom into the bubble years and then the Great Bear years below, there are a couple interesting points to note regarding this long-term strategic chart shown above.

First, if you examine the yellow year-over-year M3 growth line, it is impossible to miss the painfully obvious fact that the Great Bull market of the past couple decades really didn't begin its ultimate terminal blowoff phase until M3 growth began skyrocketing in 1995.

In the early 1990s prior to 1995, annual M3 growth averaged a modest and remarkably constrained 1.46%. I have to chuckle at this quaint number because in our surreal post-bubble years today where the Fed frantically tries to micro-manage the entire global financial system, surely similar 1.5% annual M3 growth today would be considered The End of The World, Financial Armageddon, by Wall Street. How times change!

Yet, the major bull-trend in fair-valued US equities in the early 1990s had no problem at all marching relentlessly forward without the Fed inflating away the US dollar into nothingness like it foolishly chose to do during the late 1990s. Currency debasement is not necessary for valuation-justified bull markets!

Second, the entire massive bubble top above, encompassing the late 1990s and early 2000s, corresponded with utterly outrageous monetary growth. Annual M3 inflation today, at 6%, is right on the verge of falling to its lowest point ever in the entire bubble and bust. What would happen to the US equity markets today, not to mention residential real estate, if the Fed's liquidity deluge tapered off to sub-2% YoY growth rates as in the early 1990s? I suspect that it would not be pretty for leveraged speculators, both in stocks and real estate!

If annual M3 growth continues to fall back towards early 1990s levels, then we in the contrarian community will truly have something to get excited about. The recent plunge in 10w M3 growth could very well be heralding such a vast reduction in the strategic annual M3 growth rates, but only time will tell if this really proves to be the case or not.

If soaring money supplies fueled this bubble, as they have all the other major bubbles in history, a huge reduction in monetary growth will certainly slaughter the fading remnants of the bubble and usher in the rest of this Great Bear bust. Assets, regardless of if they are stocks, real estate, or whatever, can only be pushed above economic fair value related to the cashflows that they can actually spin off when great floods of inflationary monetary growth begin to chase them. Turn off this immense M3 firehose, and there will be no monetary pressure left to support hyper-inflated asset prices.

If the annual year-over-year M3 growth rate starts plunging as much as the short-term 10-week M3 growth rate has, watch out below in all the overpriced financial-asset markets. I really doubt that the major asset bubbles in the United States can survive if their fresh blood supply of inflationary new currency is vastly reduced. I am really interested in this annual M3 growth line myself and will be carefully observing it in the weeks ahead and writing update essays on it in the future.

Now that we are blessed with the benefit of the long-term strategic perspective, we can delve into the short-term with less of a risk of misinterpreting current monetary events. We know that 10w M3 growth is just under the lowest that we have witnessed since at least 1989, that annual M3 growth is pushing its lowest levels since the terminal blowoff stage of the bubble ignited in the mid-1990s, and that we truly could be on the very verge of extraordinary monetary events.

Zooming into just the bubble years highlighting the massive long-term US equity top offers us a higher resolution view of more recent M3 growth within the strategic frame of reference discussed above.

http://www.321gold.com/editorials/hamilton/hamilton110703/Zeal110703B.gif

Some of the strategic monetary developments that fueled the Great Bubble in US equities late last decade are far clearer at this resolution. It boggles my mind that the country managing the world's reserve currency could get away with inflating broad money at 11% in the late 1990s and over 13% in late 2001. This outrageous annual inflation is on the verge of approaching banana-republic regimes and it is amazing that so few folks apparently see it for the huge structural problem that it is.

I also find it provocative to observe how the effectiveness of monetary inflation injections so dramatically vaporized in the Great Bear years as compared to the preceding Great Bull years. Between 1996 and 1999, soaring M3 YoY growth helped fuel a breathtaking rally in the US stock markets, the terminal bubble blowoff stage of a massive Great Bull. Even when the Fed tried to rein in its monetary promiscuity in 1999, the rate of ascent of the S&P 500 slowed dramatically. In the Great Bull years the markets appeared to be quite responsive to monetary inflation.

Since early 2000 however, the enormous and unchallengeable Long Valuation Waves have shattered Fed monetary manipulation's influence on the markets like a sledgehammer to the Fed's skull. Once the Long Valuation Wave Mean Reversion and Great Bear kicked in, no amount of monetary inflation would derail this necessary post-bubble adjustment process. The Fed tried desperately, even ramping up M3 by a phenomenal 13% in late 2001, but all to no avail.

While the late 1990s acceleration of M3 growth fed the Great Bubble, the early 2000s acceleration of M3 growth didn't even have a prayer of stopping the Great Bear. The S&P 500 and US markets plunged like stones even while the Fed frantically goosed M3. Short-term bear-market rallies seemed to correspond with M3 annual growth-rate spikes rather nicely, but they never lasted long. Even the mighty Fed, which basically controls or influences all of the fiat currency in the world indirectly, is no match for a supercycle Great Bear!

Shifting to the red 10w M3 growth line again, such sub-1% contractions as we are witnessing today are totally unprecedented within the bubble-topping years. Prior to 2003 it seemed like about once a year the M3 10w growth rate would briefly fall negative, every summer, but it was quickly and aggressively ramped back up to levels greater than 3% in every case. Yet, when the Fed tried to do this again in 2003, the best it could hit was a little above 2% before 10w M3 growth plummeted down to where it is today, assaulting official contraction territory.

Since we have not yet witnessed what this extreme rate of monetary deceleration does to vastly overvalued markets in modern United States history, we need to watch these monetary developments closely in the months ahead. With the S&P 500 trading at almost 27x earnings as I discussed in the just-published November issue of our Zeal Intelligence monthly newsletter for our clients, any significant reduction in monetary inflation could be extraordinarily damaging to the equity markets.

Overvalued markets are like a ball suspended above a water fountain. The ball has no problem at all staying aloft as long as the water pressure under it from the fountain's jets remains sufficient to levitate it. But, if the fountain's flow is slowed to a relative trickle, the suspended ball will tumble out of the air as gravity overcomes the weakened jets' support. The ball can only stay floating in the air if the water pressure supporting it remains adequate.

Vastly overvalued markets, similarly, can only remain aloft when fresh money is constantly thrown at them. The ultimate fountainhead of this new currency in our modern paper world is central banks like the Fed. If the Fed cannot keep the fountain pressure high enough to support the levitating markets via enormous inflationary "liquidity injections", basically outrageous M3 growth, then the markets will ultimately come tumbling down to fundamentally fair-valued levels just like the ball suspended above the water fountain.

Perhaps 6% annual M3 growth, near the lowest levels witnessed in about 8 years, and the unprecedented in the bubble years -1.3% 10w M3 shrinkage will indeed prove to reduce liquidity pressure low enough that the US markets will be unable to levitate near their current unnaturally high levels approaching 30x earnings any longer. Once again we will have to monitor the M3 growth rates closely in the months ahead to see how this all plays out.

Our final graph zooms in one last time, to just the Great Bear years. This allows us to analyze the apparent effects of monetary growth in a secular bear market. Provocatively the very same M3 acceleration that fueled the Great Bull market of the late 1990s has been utterly impotent and powerless to stop the insatiable Great Bear of the 2000s. Manipulation is always utterly futile over the long-term!

http://www.321gold.com/editorials/hamilton/hamilton110703/Zeal110703C.gif

In annual M3 growth terms, no level of M3 inflation has been able to overcome the selling of rampantly overvalued stocks so far in our Great Bear. 9% to 11% was not sufficient in 2000 to keep the Great Bubble from imploding and entering its bust phase. Even an unthinkable 13%+ was unable to stem the bearish tide in late 2001, and shortly after this immense inflation effort failed the most brutal waterfall decline of the entire bear market to date commenced in early 2002.

If even massive broad monetary inflation running over twice as high as today's 6% was unable to inject enough fiat liquidity into the equity markets, odds are that today's relatively meager 6% annual growth rate will certainly prove ineffective as well. Central bankers have long tried to stave off Great Bear supercycle busts by printing money, but this inherently flawed strategy always fails in history and is certainly also doomed this time around.

The red 10w M3 growth line is really interesting from this zoomed-in perspective too. Many of the bear-market rallies and topping periods of this Great Bear so far have corresponded with or followed shortly after relatively high short-term M3 growth in the 2% to 4% absolute range over only 10 weeks. Yet, as soon as these short-term bursts of marginal M3 growth abate, the markets seemed to fall pretty hard as the liquidity that they desperately needed to levitate at unnaturally high valuations began to dry up. Without those fountain jets of fiat-currency inflation, fundamental gravity rapidly takes over and drags the markets lower.

The only time that this pattern didn't play out this way was during the odd war rally of 2003. In July the S&P 500 and US markets appeared to be topping, and indeed both longer-term and short-term M3 growth began to decelerate. Yet, rather than roll over right away the stock markets managed to drift higher.

I call it a drift because the move since August lacked conviction. It was a low-volume low-volatility move higher, made possible more by a lack of sellers than anything else. There were no big buyers, no high volume, no huge capital inflows, but even small buying can nudge markets higher when sellers are not willing to sell for one reason or another. As I discussed a couple weeks ago in "SPX Volatility Extinctions" even the low volatility itself is another telltale warning sign of a major interim top.

While short-term M3 growth is certainly at its lowest level in this entire Great Bear, longer-term annual M3 growth is rapidly approaching bear-to-date lows as well. While we really need to accumulate more future data to see if these decelerating monetary inflation trends continue, it cannot be good for the stock markets if they do. Overvalued markets need tremendous inflationary liquidity injections to levitate, and without fresh fiat currency fundamental gravity wins out and they ultimately plunge.

>From a contrarian-investor perspective, I believe that the current M3 growth picture suggests that extreme caution is in order. Short-term M3 shrinkage is indeed happening and certainly will not help the stock markets, but annual M3 growth still remains fairly high historically at 6%. If either of these M3 growth rates continues to fall in the months ahead however, it will probably be very bad news for the chronically overvalued US equity markets. We may indeed soon find out exactly what level of fiat inflation is necessary to levitate stocks around 30x earnings in a Great Bear!

In the meantime though, until we see these early M3 deceleration trends develop farther, it is probably best to prudently watch and wait. The Fed is not going to let the lifeblood fiat inflation of the stock markets contract without an epic fight, even if it is going up against titanic Long Valuation Wave forces that it cannot possibly overcome.

The coming M3 inflation developments in the months ahead ought to be quite interesting.

Adam Hamilton, CPA
November 7, 2003

Quelle (http://www.321gold.com/editorials/hamilton/hamilton110703.html)

syr :cool:

syracus

10.11.2003, 11:34

Weiter im Thema :).....

Miraculous Growth of Money

Fear of deflation – that feeling of concern about declining prices--is slowly giving way to the dread of inflation. It prompts some economists to focus on the danger and damage of inflation which is a more familiar evil. They view the American money system as a giant inverted pyramid with ever more Federal Reserve money at the base and large growing layers of bank deposits resting on it. Official Federal Reserve statistics presently report a base of $692 billion Federal Reserve notes and a deposit superstructure of $8.9 trillion. The base is growing at a 9.2 percent rate, the superstructure at a similar rate. (Federal Reserve Bulletin, October 2003).

The Federal Reserve Board of Governors with the assistance of five representatives of the regional Reserve banks are juggling the money pyramid. They direct the issue of money by way of purchasing Federal government securities, lending to member banks, manipulating open-market operations, fixing reserve requirements, establishing discount rates, and issuing regulations concerning these functions. But no matter how diligently they juggle, theirs is an inhuman task. To manage the monetary affairs of millions of people exceeds the ability of any committe of twelve wise men, no matter how many regulatory powers the U.S. Congress may bestow on them. Built on politics and resting on the police powers of government, the pyramid is a warped and hollow structure. It distorts economic production, victimizes millions of innocent people, and breeds domestic as well as international conflict. It is visibly unstable and often threatens to contract and crumble.

At this time, goods prices, we are told, are rising at a harmless rate of just 2.1 percent. When compared with the double-digit rates of the 1970s and 1980s the present rate indeed appears to be harmless. But things are seldom what they seem; in affairs of state they rarely are. The inflation index, which primarily calculates key consumer goods and services, that is, a relatively stable part of the economy, hardly weighs the soaring prices of real estate, raw materials and commodities which have been rising at double-digit rates. But whatever the true depreciation rate may be, it must be compared with the rates of return on U.S. Treasury obligations. At the present, Treasury bills yield 1.11 percent and two-year notes 1.77 percent. Commercial banks, the reserves of which consist primarily of these Treasury obligations, earn these returns while their reserves depreciate at much higher rates. Adding insult to injury, they are forced to pay income taxes on their returns. It cannot be surprising that they eagerly expand their credits in order to compensate for the depreciation losses on their reserves.

With the stock of money expanding by nearly one trillion dollars this year, why are goods prices not rising at double-digit rates? The answer to this economic puzzle can be found in a rare combination of economic factors. The most glaring cause is the move of some American manufacture to low-cost countries such as China, India, and Malaysia. Massive imports of consumer goods from those countries keep American goods prices lower than they otherwise would be and thereby sustain the purchasing power of the dollar. Moreover, many American dollars spent abroad tend to return to the United States to purchase Treasury obligations. They help to finance the massive Federal government deficits and thus keep interest rates lower than they otherwise would be. The importation of goods and services sustains American standards of living while the foreign purchases of Treasury obligations help to support the American capital market. Never before have so many foreigners labored so diligently to serve the economic interests of the American people.

We must not plan the future by the past. It is unlikely that foreign producers will forever deliver their goods in exchange for U.S. Treasury promissory notes and bonds. A growing debt casts a growing shadow not only on the brightest place but also on the biggest debtor. It soon may signal the Federal government and the Federal Reserve to mend their prodigal ways. If they nevertheless should press ahead, we must brace for ever rising interest rates, falling dollars, and soaring goods prices. The American economy may even experience another boom and bust.

The love of money, fiat money that is, is the root of much evil. In ages past, our forefathers used real economic goods as money, such as precious metals. They are honest money the value of which depends entirely on the people's values and choices. Unfortunately, they are moneta non grata in our world of central bankers and deficit spenders.

Hans F. Sennholz
www.sennholz.com

http://www.sennholz.com/moneygrowth.html

syr:sss

syracus

11.11.2003, 07:16

Housingbubble auf CNN :eek:.......

Your home: Worst-case scenario

Will rising interest rates unravel all of the gains of the recent housing boom?

November 10, 2003: 11:46 AM EST
By Sarah Max, CNN/Money Staff Writer

BEND, Ore. (CNN/Money) - Interest rates are beginning to creep up again, and that could be bad news for homeowners.

The rate on 30-year fixed-rate mortgage loans rose to 5.98 percent in the week ended Nov. 6, and the trend could continue as a result of the rebounding economy and the deficit, which both have the effect of lifting rates.

For now, rates are at historically low levels. But John R. Talbott, a visiting scholar at UCLA's Anderson School of Business and author of "The Coming Crash in the Housing Markets," has a thesis that will leave you quaking from behind your picket fence.

He describes a worst-case scenario in which rising interest rates drive down home prices, leaving an alarming number of homeowners -- particularly those who've cashed out or borrowed against their equity -- holding more debt than their house is worth.

If they sell, they would actually owe money.

Under this scenario, foreclosure rates jump as high as 5 percent, pushing down home prices and wreaking financial havoc all the way to the top of the housing food chain at Freddie Mac and Fannie Mae. With the collapse of these financial behemoths, investors would lose money, taxpayers would be stuck paying for a bailout, and confidence in the banking industry would be as good as gone.

And your home? A 30 percent drop in home values isn't inconceivable, said Talbott.

"It's 1929 all over again," said Talbott, a former Goldman Sachs vice president. "This is big Depression-type stuff."

How rising rates affect home prices
To some, Talbott's theory sounds a little over the top. But considering the housing market's run, it's not unreasonable to think that fortunes could be lost just as quickly as they were made.

And though there's never been a nationwide decline in real estate prices, individual markets have suffered plenty -- see "Real estate horror stories."

Still, though most economists agree that rising interest rates will hurt home prices, it's tough to find one who thinks things will get quite so bloody.

Talbott contends that the relationship between rates and home prices is almost linear. In other words, a 30 percent increase in mortgage rates (from, say, 5.5 percent on a 30-year mortgage to around 7 percent) could mean as much as a 30 percent decrease in home prices.

The reason is the effect on a home's affordability. For example, a couple that could afford a $400,000 house when rates were less than 5.5 percent might only be able to pay $300,000 if rates go to 7 percent .

Others argue that the relationship isn't quite as direct. For one, when rising rates go hand-in-hand with an economic recovery, as they often do, better job prospects partially offset the effects of higher rates.

Also, when rates go up, buyers just opt for adjustable rate mortgages (ARMs), which have lower rates than fixed loans. "When rates started picking up after the last refi boom in 1993, people didn't leave the market, they just shifted into ARMs," said Eric Belsky, executive director of Harvard's Joint Center for Housing Studies.

According to David Stiff, director of economic research for Fiserv Case Shiller Weiss, rates went up 225 basis points (2.25 percentage points) in 1994. "Price appreciation really slowed but values didn't drop off," he said.

Douglas Duncan, chief economist for the Mortgage Bankers Association of America, estimates that if 30-year fixed mortgages jump past the 7 percent mark, home prices will decline 3-to-5 percent.

"You won't see any serious slowing unless rates jumped to 8 percent, in which case I'd expect a 10 percent decline in values," said Duncan.

Even then, he argued, prices would gradually come back as home buyers get used to a new, higher level of interest rates.

Some markets, some homeowners, more vulnerable
Some markets will surely feel more pain than others. "I'd be most concerned in places where housing affordability is an issue because the effects of rising interest rates are even more pronounced," said Stiff.

According to the National Association of Realtors affordability index, San Diego was one of the least affordable cities as of the end of 2002. There median-income families had only 69 percent of the income needed to buy a median-priced home.

In Peoria, Ill., on the other hand, families in the median had nearly three times the income needed to buy a median-priced home.

"In cheaper markets interest rates probably won't matter as much as the local economy," Stiff added. "These are places where new supply matches new demand, and you just have steady appreciation."

Similarly, not all homeowners will suffer the same. If you're not planning to move for years, a decline won't have as much of an impact.

But a decline could be a real problem for Americans who have taken advantage of the runup in prices to do cash-out refinancings. They could very well owe more than their house is worth -- bad news if they are forced to sell.

"People always say they won't move," said Talbott, "but, remember, people move for three bad reasons (divorce, job loss, and medical emergency) and one good one (job opportunity). Under all of those scenarios, they have no choice."

Find this article at:
http://money.cnn.com/2003/11/07/pf/yourhome/rates_and_affordability/index.htm

syr :rolleyes:

syracus

27.11.2003, 15:50

http://www.economist.com/images/ecdc_125x34.gif

The riddle of the bonds

Nov 25th 2003
From The Economist Global Agenda

The American economy’s third-quarter growth has been revised up to a dizzying 8.2% on an annual basis. But do bond investors believe in the Bush Boom?

AS A young bond trader, Buttonwood was given two pieces of advice, trading rules of thumb, if you will: that bad economic news is good news for bond markets and that every utterance dropping from the lips of Paul Volcker, the then chairman of the Federal Reserve, and the man who restored the central bank’s credibility by stomping on runaway inflation, should be treated with more reverence than a Papal injunction. Today’s traders are, of course, a more sophisticated bunch. But the advice still seems good, apart from two slight drawbacks. The first is that parsing utterances from the present chairman of the Federal Reserve, Alan Greenspan, is of more than passing difficulty. The second is that, of late, good news for the economy has not seemed to upset bond investors all that much. For all the cheer that has crackled down the wires, the yield on ten-year bonds—which you would expect to rise on good economic news—is now, at 4.2%, only two-fifths of a percentage point higher than it was at the start of the year. Pretty much unmoved, in other words.

The Federal Reserve posts economic statistics. See also the US Department of Commerce. The US Treasury Department provides news and information on the financial markets, including securities, Treasuries yields and public debt. The US Trade Representative outlines America's trade policies. The Bond Market Association, America's regulatory body, gives news on the bond market and provides links to related sites. The Institute for International Economics publishes research on exchange rates, international trade and other economic-policy issues.

Yet the news from the economic front has been better by far than anyone could have expected. On Tuesday November 25th, revised numbers showed that America’s economy grew by an annual 8.2% in the third quarter, a full percentage point more than originally thought, driven by the ever-spendthrift American consumer and, for once, corporate investment. Just about every other piece of information coming out from the number-crunchers shows the same strength. New houses are still being built at a fair clip. Exports are rising, for all the protectionist bleating. Even employment, in what had been derided as a jobless recovery, increased by 125,000 or thereabouts in September and October. Rising corporate profits, low credit spreads and the biggest-ever rally in the junk-bond market do not, on the face of it, suggest anything other than a deep and long-lasting recovery. Yet Treasury-bond yields have fallen.

If the rosy economic backdrop makes this odd, making it doubly odd is an apparent absence of foreign demand. Foreign buyers of Treasuries, especially Asian central banks, who had been hoovering up American government debt like there was no tomorrow, seem to have had second thoughts lately. In September, according to the latest available figures, foreigners bought only $5.6 billion of Treasuries, compared with $25.1 billion the previous month and an average of $38.7 billion in the preceding four months. In an effort to keep a lid on the yen’s rise, the Japanese central bank is still busy buying dollars and parking the money in government debt. Just about everybody else seems to have been selling.

These are old figures, of course, and coincided with the peak in yields. Perhaps foreign investors thought that the recovery was for real and disliked the historically meagre yields available on government debt. But the fact that overall portfolio flows slowed in September suggests that foreigners have not been overly enthused by the American economy’s prospects, or at least the price at which they can buy into them. Or perhaps they disliked the fact that their IOUs are denominated in a currency which the issuer seems determined to devalue: the dollar has fallen by 11% in trade-weighted terms since the start of the year.

Whatever the explanation for their desertion, foreigners seem to be back buying Treasuries, even though the recovery seems still more firmly entrenched. Or perhaps domestic investors are rediscovering the joys of a fixed rate of interest: even commercial banks, which have reduced their holdings of Treasuries by $62 billion since the middle of June, have been tip-toeing back in.

The simple explanation for this renewed enthusiasm is that investors sense a chill beneath the warm glow of the numbers. One cold wind blowing across this particular recovery is that Americans are up to their necks in debt. With short-term interest rates at a 45-year low, households are spending some 13% of their disposable income on servicing their debts—a higher number even than in the sharp recession of the early 1980s, when the Federal funds rate topped 13%. How much longer can they carry on spending at this rate, let alone increase it? If they don’t, then someone else will have to spend on their behalf.

The government, perhaps? The Bush administration has turned a budget surplus of 2.4% of GDP into a deficit that official numbers say will amount to 4.3% of GDP next year. Not much room, in other words, to raise spending. Nor do American companies have oodles of money to play with. For all the talk of restructuring, they continue to increase their borrowing, though at least a slowdown in the rate at which they borrow and better profitability mean that their dreadful financial ratios are starting to look better than they were. Whether they will continue to do so is another matter.

The chillest wind of all is the rising protectionist nonsense sweeping Washington as it prepares for an election year. Undeterred by having its steel tariffs recently declared illegal by the World Trade Organisation, the administration last week slapped quotas on a range of Chinese textiles, including bras, capping (cupping?) the rise in their imports. And this week it imposed stiff tariffs on Chinese television sets.

We are meant to laugh this off as a bit of electioneering hokum: the administration’s heart, we are supposed to believe, lies with free trade. But George Bush is a man who wants to get re-elected and seems prepared to sacrifice the long-term economic good—assuming (a big assumption) he knows how it is best served—to get back into the Oval Office. Mr Greenspan, who has forged a career out of obscure, elliptical comments, had this to say, and it needed no deciphering: “It is imperative that creeping protectionism be thwarted and reversed.”

http://www.economist.com/agenda/displaystory.cfm?story_id=2244281

syr:sss

syracus

14.01.2004, 18:00

False Recovery

Stephen Roach (New York)

The Great American Job Machine has long powered the US business cycle. It drives the income growth that fuels personal consumption. That internally generated fuel is all but absent in the current upturn. The US economy is mired in a jobless recovery the likes of which it has never seen. This has profound implications for the economic outlook, the political climate, trade policies, and the global business cycle.

Contrary to popular spin, the US labor market is not on the mend. In the final five months of 2003, a total of only 278,000 new jobs were added by nonfarm businesses — a gain that is easily matched in a single month of a typical hiring-led recovery. Moreover, literally all of the job growth that has occurred over this period has been concentrated in three industry segments — temporary staffing, education, and healthcare — which collectively added 286,000 positions in the final five months of last year. The “animal spirits” of a broad-based hiring-led revival by US businesses are all but absent. Jobs may be rising in America’s low-cost contingent workforce (temps) and in high-cost-areas that are shielded from international competition (health and education), but positions continue to be eliminated in manufacturing, retail trade, and financial and information services.

The modern-day US economy has never been through anything like this. Fully 25 months into this so-called economic recovery, private-sector jobs are still about 1% below levels prevailing at the official trough of the last recession in November 2001; at this juncture in the typical recovery, jobs are normally up about 6%. Had Corporate America held to the hiring trajectory of the typical cycle, fully 7.7 million more American workers would be employed today. Moreover, the current hiring shortfall far outstrips that which was evident in America’s only other jobless recovery — the upturn following the recession of 1990–91. In that instance, it took about 12 months for the job machine to kick back into gear. By our calculations, the current job profile in the private economy is now 2.4 million workers below the trajectory of the jobless recovery a decade ago.

Forward-looking financial markets have long presumed that America’s backward-looking malaise is about to change — that hiring is just around the corner. The optimists have continually drawn encouragement from declining levels of jobless unemployment insurance claims, improved purchasing managers’ sentiment, and a pickup in employment as reflected in the so-called survey of households. It’s only a matter of time, goes the argument, before businesses resume hiring. After all, Corporate America is now making money again, and such sharply improved profitability is presumed to allow businesses to step up and deliver on job creation. Furthermore, hiring is widely thought to be on the other side of America’s latest productivity miracle; the argument in this instance is that there’s only so much that companies can get out of their workforces before they have to start adding headcount again. Yet we’re fully 25 months into recovery and it just isn’t happening. In my view, this is not a story of those ever-fickle lags. Something new and far more powerful appears to be at work.

The global labor arbitrage remains at the top of my list of possible explanations (see my October 6, 2003 essay in Investment Perspectives, “The Global Labor Arbitrage”). It depicts the interplay of two brand-new forces — offshore outsourcing in goods and services together with the advent of Internet-driven connectivity. Such IT-enabled outsourcing has taken on new urgency in today’s no-pricing-leverage climate of excess global capacity. The unrelenting push for cost control leaves return-driven US businesses with no choice other than to push the envelope on productivity solutions. The result may well be a new relationship between US aggregate demand and employment

The “imported productivity” provided by offshoring has become especially evident in IT-enabled services — where the knowledge-based output of a remote low-wage white-collar workforce now has real-time, e-based connectivity to production platforms in the developed world. One of the clearest examples of this is a significant shortfall of job creation in America’s IT and information services industry. In the upturn of the early 1990s, employment in this industry had increased nearly 4% by the 25th month of that recovery; by contrast, in the current cycle, such jobs are down over 1% — even though the US economy is far more IT-intensive today than it was back then. At the same time, knowledge professionals’ headcount in India’s IT sector has risen from 50,000 in 1990–91 to an estimated 625,000 workers in 2002–03.

I don’t think these trends are a coincidence. More likely than not, they are the flip sides of the same coin — a shift of comparable-quality labor input from the high-wage US services sector to the low-wage Indian services sector. And, of course, this trend is only the tip of a much bigger iceberg, as offshoring now spreads up the value chain to include professions such as engineering, design, and accounting, as well as lawyers, actuaries, doctors, and financial analysts. Long dubbed the “nontradables” sector, the IT-enabled globalization of services is now in the process of transforming this vast sector into yet another tradable segment of the US economy — posing a formidable challenge to the once unstoppable Great American Job Machine.

There can be no mistaking the important implications of this jobless recovery. Lacking in job creation as never before, it follows that there is equally profound shortfall of wage income generation. Normally, at this juncture in a US business cycle expansion, private wage and salary disbursements — fully 45% of total personal income and easily the largest component of household purchasing power — are up by 8% (in real terms). Yet 24 months into the current expansion, this key slice of income is actually down nearly 1% — the functional equivalent of about a $350 billion shortfall in real consumer purchasing power.

Lacking in such internally generated income, saving-short American consumers have had to draw support from secondary sources of purchasing power — namely massive tax cuts, an outsized build-up of debt, and the extraction of cash from over-valued assets such as homes. This is a tenuous foundation of support for any economy. It has led to subpar national saving, a record current-account gap, and sharply elevated household debt service burdens — a steep price to pay in order to fund the insatiable appetite of the American consumer. A persistence of this jobless recovery will only up the ante on these imbalances — raising serious questions about the ultimate sustainability of the current upturn, in my view. For a US-centric global economy, that’s an equally disconcerting risk.

Nor can the political implications of America’s jobless recovery be taken lightly. If the economy falters for any reason between now and the upcoming presidential election and the unemployment rate starts to rise, labor-related issues could figure prominently in the political debate. That raises the risk of trade frictions and heightened protectionist perils. In the event of unexpected economic distress in an election year, the Bush administration — already quick to use steel tariffs as a politically expedient policy ploy — could well embrace the cause of China bashing, which has become popular sport in Washington today.

Targeting India as a threat to once-sacrosanct service-sector jobs is also a possibility in such an environment, as would be as assault on US multinationals that are leading the charge in offshoring; there are already rumblings of just such a backlash (see Senator Charles Schumer and Paul Craig Roberts, “Second Thoughts on Free Trade,” The New York Times, January 6, 2004). As remote and patently destructive as these measures might seem, the risks of such possibilities can only increase if job-related issues rise to the fore in a politically charged climate. Negative implications for an already weakened US dollar would be especially worrisome in that context. Downside risks to global growth would undoubtedly intensify as well.

None of this was supposed to happen. Typically, the demand response to policy stimulus elicits hiring and income creation — providing incremental injections of purchasing power that then spur a sequence of self-reinforcing cycles of more spending, hiring, and income. Such “multiplier effects” are the essence of any dynamic, self-sustaining model of the business cycle. They convert the policy-induced sources of cyclical uplift into autonomous, self-sustaining growth in the private sector. This is the core of the internal dynamics of the all-powerful US business cycle.

Unfortunately, the theory behind such a cyclical dynamic just isn’t working. Starved of job creation and wage income generation, consumers need supplemental sources of growth. To date, America’s monetary and fiscal authorities have been more than happy to comply. The Fed has provided the interest-rate support to asset markets that drives the wealth effects underpinning consumer demand. Washington’s penchant for deficit spending has also provided an extraordinary boon to household purchasing power. Yet there’s little opportunity for removing these life-support measures. To the contrary, until the economy kicks in on its own, the monetary and fiscal authorities could well be called upon to keep upping the ante. Therein lies the conundrum: With the Fed’s policy rate now near zero and America’s budget deficit at a record, the authorities are all but running out of options.

In the end, America’s protracted shortfall of jobs and internally generated income has created a new and powerful leakage in the system — a leakage that ultimately renders traditional multiplier effects all but inoperative. Not only does that draw into serious question the case for a cumulative and self-sustaining recovery in the US economy, but it could well elicit dangerous policy responses from Washington. Jobless recoveries unmask the false foundations of a cyclical upturn. That’s precisely the risk financial markets are missing.

http://www.morganstanley.com/GEFdata/digests/20040112-mon.html

syr:sss

syracus

20.01.2004, 18:41

A Slow-Motion Bank Run?

"...The U.S. money supply is shrinking. This is not a minor downward blip. This is a full-scale decline. What is going on? If the monetary base is stable, but MZM and M2 are falling, what is causing the disconnect between Fed monetary policy and the market’s use of monetary reserves? While no one is using the terminology, we may be witnessing a bank run...a steady bank run that is motivated by something other than fear..."

Gary North

Something very strange is going on. It has been going on since August. The U.S. money supply is shrinking.

Consider the charts published by the Federal Reserve Bank of St. Louis. The St. Louis Fed has been diligent for decades in making available charts and tables regarding the money supply, as well as other key statistics. I trust the long-term consistency of this information.

If you will see for yourself what is going on, you will be able to understand this report with less confusion, meaning your confusion will stay even with mine. I assure you, what the graphs reveal has confused me. But I think it's better for all concerned if we see the evidence before we start speculating about causes.

First, take a look at MZM, "money of zero maturity." This indicator I regard as the most relevant monetary indicator, because it is closest to the characteristic feature of money: instant spendability. Here, the decline is most prominent.

http://www.dailyreckoning.com/images/north_1_01-19-04.gif

This is not a minor downward blip. This is a full-scale decline. It has been going on for six months. The free market, through its innumerable transactions, is shrinking the money supply.

Second, look at M-2. This is a traditional indicator. I have followed it intermittently for three decades. The monetarist school of economics, once led by Milton Friedman, used to pay more attention to M-2, which includes time deposits (savings accounts), than to M-1 (currency plus checking accounts), although I don't know if this is still true of most monetarists. This statistic tells the same story, but less radically.

http://www.dailyreckoning.com/images/north_2_01-19-04.gif

Third, look at the adjusted monetary base. This monetary component is the one that the Federal Reserve System controls. It reveals the Fed's holdings of assets, mainly U.S. government debt certificates. The monetary base is what Friedman has called high-powered money. This base supplies the reserves that the commercial banking system uses to create loans, and hence money. Here, things are less clear. Notice that the graph peaked in late October. It had gyrated after late August. As you can see, the general trend was upward until November. Then, it stabilized through December, and has now started down.

http://www.dailyreckoning.com/images/north_3_01-19-04.jpg

What is going on? If the monetary base is stable, at least peak to peak, but MZM and M2 are falling, what is causing the disconnect between Fed monetary policy and the market's use of monetary reserves?

One answer is the rise in the supply of currency, i.e., pieces of paper with dead politicians' pictures on them. There was a steady upward move until late July. Then the rate of increase itself increased.

http://www.dailyreckoning.com/images/north_4_01-19-04.gif

When currency increases, the ability of the banking system to increase the number of loans decreases. When a depositor goes to his bank and withdraws currency, the bank can no longer use his money to make loans. When he pulls out currency and refuses to deposit it in another bank, the banking system cannot make new loans. The fractional reserve money-expansion process reverses, imploding the money supply by multiples of the face value of the currency withdrawn. The banks must call in old loans. When the currency supply rises faster than the increase of the monetary base, banks cannot increase the money they lend by the same percentage increase as the monetary base.

Since August, the monetary base has stayed almost constant. The currency component of the money supply has increased. So far, this tells us that the non-currency components of the money supply must have fallen. So, I went looking for other statistics that would verify what the logic of money tells us. I did not have to go far. This chart tells us: the public is pulling currency out of the banking system by cashing in (i.e., cashing out) its small time deposits.

http://www.dailyreckoning.com/images/north_5_01-19-04.gif

While no one is using the terminology, we may be witnessing a bank run. This is not a panic-driven bank run, like something out of the Great Depression. This is a steady bank run that is motivated by something other than fear.

Thrift Doesn't Pay Much

When the Federal Reserve Board decided in 2001 to fight the recession and then fight the after-effects of 9-11, it pumped money into the economy. Its answer to recession was monetary inflation. This is the Fed's usual response.

The combination, a rising money supply and falling demand for commercial loans, produced the sharpest decline in the federal funds rate in my lifetime. The federal funds rate is the rate at which commercial banks lend money to each other overnight, in order for lending banks that have temporarily overshot their legal reserve limit to maintain legal reserves for their loans. The fed funds rate has remained in the 1% range for almost two years.

As the interest rate on savings accounts has fallen, small, risk-averse savers have been hit hard. Someone with $100,000 in a savings account in 2000 was earning $2,000 to $3,000 a year. For the last two years, he has earned under $1,000 a year, maybe as little as $600. Last May, one survey reported the following: the typical saver was losing money!

Bankrate.com's spring 2003 survey of passbook and statement savings interest rates shows that interest rates are continuing to plummet. Once again, rates have reached an all-time low since Bankrate.com began tracking these rates in 1987.

The national average interest rate for passbook accounts is 0.60 percent. That's down from 0.80 percent last fall and 0.87 a year ago. Passbook accounts, in which customers track their deposits and withdrawals in a little book, are fairly rare.

Traditionally, passbook accounts have paid less than the more modern statement savings account. But in this survey, the results are equally dismal. The national average for statement savings accounts is 0.60 percent, down from 0.82 last fall and 0.92 a year ago.

If you put $500 in a savings account and left it there for a year, you'd get $3 interest, since the rate and the yield are the same. If you were in the 27 percent tax bracket, that $3 would be whittled down to $2.19. Subtract 3 percent for inflation and you have about $487 in buying power.

That was May. By October, the national average for banks was under 0.4%.

In July, the rise in currency and the decline in time deposits accelerated. It is understandable why. People who held time deposits were being paid so little for their thrift - negative, after taxes and price inflation - that they might as well pull their money out of the bank.

A person who has currency can buy and sell without leaving a paper trail. He can pocket any profits. He has his money close at hand.

Someone else can send money to relatives abroad. I heard recently that Mexicans sent $14 billion to relatives last year. Most of that money, I suspect, was in currency. I also imagine that more than $14 billion was sent. Immigrants send money home. The paper dollar serves as a second currency in third world nations.

The Fed decided to stimulate the economy in 2001 by pumping in new money. Lo and behold, this policy is now backfiring. It has produced such low rates of investment return for savers that they are pulling currency out of the banks. This has created an anomaly: a fall in the money supply, or at least a fall in the various money supply statistics.

There may be better explanations out there for the anomaly of a falling money supply, however defined, despite a stable monetary base. What amazes me is that there is so little discussion today in the financial press about the existence of this anomaly, let alone its implications for financial markets.

Pushing on a String

This phrase has been used to describe central bank policy in a time of recession. The central bank increases the monetary base, but commercial banks don't respond by lending to the public. They buy government bonds instead. The problem is, this phrase has not generally been applied to an economy that is in a recovery phase. It is always applied to an economy in a recession.

The Fed today is not pushing on a string. It is sitting on the string. It is not pumping in new money. It is pulling reserves out of the system, though so slowly that this may be a statistical blip. But the money supply is falling, according to standard measures. Yet prices continue to rise, although in the low 2% per annum range (median cpi).

The economy seems to be recovering. The stock market is up. Gold is up. The euro is up. The dollar is down internationally. Yet from the statistics, we learn that the Fed is not inflating, the money supply is falling, and prices are rising, but only mildly.

Thus, all of the major forecasting systems seem to be stymied. There is no pattern that makes sense, according to the economic models that I am familiar with.

I see this as a warning. Be suspicious these days of anyone who has a quick explanation. You now have seen the charts. The charts at present do not seem to conform to any theoretical framework of economic explanation that I see in newsletters or the financial press.

Newsletter writers must exude confidence in their systems, but this confidence ought to be related at least loosely to the basics of monetary policy. It is better to point out the anomalies than to conceal them for the sake of preserving an illusion of confidence.

Money is not the whole story, but it is a large component of any financial story. What we are seeing is Federal Reserve policy - monetary stability - that is being thwarted by individual decision-makers beyond the Beltway and beyond the New York financial district. The Fed isn't pushing or pulling on the monetary string, but depositors are making decisions to pull out currency. There may be other factors in the decline of the money supply, but the currency component's direction is the most obvious: upward. This produces a downward move in time deposits.

There is another plausible explanation, one suggested to me by Joe Cobb. People may be switching from time deposits (0% reserve) to checking accounts (10% reserve), thereby shrinking both M-2 and MZM, but not M-1. Seasonally adjusted, M-1 is falling, but not seasonally adjusted, it is up slightly. This would suggest the public's loss of faith in saving at today's rates, but not a run into currency. But there is this limiting factor at work: the advent of "sweeps," in which customers' money in checking accounts (10% reserve) are moved overnight to savings accounts (0% reserve), and then moved back into checking accounts the next day, has reduced to 30% the number of banks bound by reserve requirements. Perhaps Alan Greenspan will offer his opinion on this the next time he testifies to Congress. This assumes, of course, that some elected official bothers to ask him.

One thing is clear: the Fed is pursuing a stable money policy with the main tool that it has: the monetary base. All discussion of the U.S. economy today should begin here.

Conclusion

What we have been seeing is a fall in the dollar internationally that is not based on the Fed's pushing on the string by pumping in new money. Right now, Fed policy looks neutral. But the fall in the money supply is not neutral.

The recent rise in gold's price is not taking place as an inflation hedge. It is taking place parallel to the decline of the dollar against the euro. There is something more fundamental going on here than traditional inflation hedging, or so it seems to me. There is a move against the dollar that is not based on fear of inflation. I think we are seeing the beginning of a shift away from the dollar as the world's primary reserve currency. What has prevailed since 1940 is beginning to change.

I am cogitating on this. Who knows? I may come up with an answer and win the Nobel Prize in economics. The question is: Will the Nobel Committee pay me in dollars or euros? I'm hoping for euros.

At the age of 25, Gary North was the youngest elected member of the Economists' National Committee on Monetary Policy. He has served as a senior staff member of the Foundation for Economic Education and as a research assistant to U.S. Congressman Ron Paul.

http://www.dailyreckoning.com/body_headline.cfm?id=3692

syr:sss

syracus

22.01.2004, 07:30

DEFLATION HAS ARRIVED

By Bob Prechter

"The deflationary potential is historically large...we risk overwhelming deflation in every corner of the globe."

- Conquer the Crash (2002)

Virtually everyone - and I do not use that word lightly - believes that inflation will accelerate. Stock-market bulls think that the economy is going to boom, bringing inflation. Economic bears expect an inflationary, if not hyperinflationary, monetary crisis. Economists believe that the Fed can inflate at will and is committed to an inflationary policy. The general population is convinced that prices of their homes and property can only go up. The few articles mentioning deflation in recent months have declared the prospect for it "dead."

This consensus is not merely overwhelming but reflects a belief as vast and deeply held as a religion. Investment News in September reported a survey by the National Association for Business Economics in Washington. It revealed, "None of the respondents to the May survey, all of whom were responsible for making macroeconomic predictions, predicted a decline in the consumer price index during the next two years." USA Today confirmed the fact, reporting, "Not one economist [of 67 surveyed] said it was 'very likely' the economy would slip into deflation." That is a consensus!

Against this backdrop of opinion, M3 since September has fallen over two percent, its largest decline in 60 years. This is different from a lack of inflation. It is real, actual, deflation. What's more, M3 has declined despite the strongest quarter of economic growth in decades, the lowest interest rates in half a century and a central bank committed verbally and by action to facilitating the expansion of credit! There is no interest rate spike or recession to explain away the decline in the money supply.

The dichotomy between what is happening and what people think will happen is colossal. Inflation is dead. Deflation is here, now. The monetary trend is no longer close to the edge of the cliff; it is beginning to slide down its face. As this is written, not a single major newspaper, magazine or TV network has done a story on the dramatic contraction in M3. People are so drunk with inflationary certainty that they can't even see that deflation is happening. And if they do, they don't believe that it is meaningful.

Why is there such a consensus that deflation is unlikely, if not impossible? Many people believe that the Fed is virtually omnipotent and can manipulate the money supply (and therefore the stock market and the economy) at will. Is that so? On June 25, 2003, the Fed lowered the federal funds rate for the 13th time in a row, to one percent.

Most observers think that the Fed still has that one percentage point of "ammo" left. But consider: The U.S. has a thriving money-market fund industry, which costs one percent of assets per year to administer. As it stands now, investors are getting extremely low returns from money- market funds. If the Fed were to let its funds rate drop to zero and other short-term rates fell along with it, money- market investors' return after fees could go negative. This event would make holding cash more attractive than holding debt, a situation the Fed surely wants to avoid. The monetary system appears to have reached the point at which pesky reactionary forces will come into play if the Fed tries any more "deflation fighting," no matter what the mechanism.

Why did I put the term "deflation fighting" in quotes? Commentators tell us that the Fed is fighting deflation by aggressively lowering its interest rates, but is that an accurate assessment? After all, the result of deflation - its primary outward symptom - is lower prices. And what has the Fed been doing? It spent over a year lowering the price of renting money. Within that period, in fact, the Fed lowered prices more than anyone! It has participated in the initial phase of the deflationary process as if it were a merchant on the street discounting its wares to a disinterested public. It did so in response to slack demand for its product - credit - just as the auto manufacturers and others are doing with their products. Deflationary psychology brings about lower prices, and the Fed has been lowering its prices. It is powerless to stop the trend.

A persistent decline in the money supply will have consequences. Some things will have to give. One of them will be prices for goods and services. To the astute observer, a change in prices has been in the wind for some time. The PPI has been flat for three years, and now even the CPI has had a down quarter. A severe deflation will also devastate the economy, as it has done in each of the rare times it has occurred over the past 300 years. With M3 dropping, it should be only a matter of months before the economy follows suit.

Are economists concerned? Well, besides the deflation opinion cited above from last year's polls, the only other time that I have ever seen a 100-percent consensus in a survey was...a few weeks ago! In separate year-end surveys of economists, The Wall Street Journal and Business Week independently reported unanimity that the U.S. economy would expand throughout 2004. That's right: not one dissenter. If it is usually wise to bet against a large majority in finance, what does it mean when there is no detectable minority?

I think that the continual denials that deflation can happen, against a backdrop of evidence to the contrary, appear to be part of a typical social psychological progression toward a credit crisis, which in turn will lead to economic contraction. The money supply might rebound for a quarter or two as the stock market and economy top out this year, but at the largest degree of trend, the credit bubble - 70 years in the making - has burst.

In 2001, there was little talk of deflation. Statistics relating to newspaper stories show that by late 2002/early 2003, it had become a commonly used word, even if most writers used it simply to dismiss the idea.

The next word that should begin to slide into the public lexicon is depression. I would like to offer quotes from authorities on the low likelihood of depression, but my diligent staff can find literally no mainstream economists, academics or Wall Street strategists even discussing the possibility. It is too remote even to mention! The term "depression" is where the word "deflation" was a few years ago, i.e., outside the general consciousness. Although no one is using that term now, in coming years it will be everywhere. The first phase will be widespread insistence that a depression can't happen, which will be a big clue that it is happening.

The two "d" words at the end of the subtitle to Conquer the Crash, i.e., "Deflationary Depression," were anticipatory. The book was published at a time when the likelihood of these two events occurring was (and still is) considered - as one economist said at the time about deflation - as remote as "being eaten by piranhas." My advice: Keep your toes on the riverbank.

Regards,

Bob Precher,
for The Daily Reckoning

syr :rolleyes:

syracus

26.01.2004, 12:49

Wonder why the FED wants a dollar collapse, read on......

The endgame is near, the FED knows it too.......a dollar collapse is THEIR ONLY WAY OUT............and will break middle America in half, but these bastards DO NOT CARE! RR is correct gold, or get your MONEY OUT OF THE US DOLLAR AND FAST! read on

--------

Inflation is good if you are the one creating it, manipulating it, telling the citizenry that it is under control and to beware the deflationary Bogeyman! It works for creating and waging wars.

Does inflation have some serious positive benefits?

The view of many economists that inflation can be a good thing is, from an economic point of view, unobjectionable. Indeed, it is hard to see why, from a theoretical standpoint, that it should be at all controversial. Inflation in the sense that it is most commonly understood is just a way of looking at changes in the prices of traded goods and services. Clearly, from the standpoint of those selling those goods and services, higher prices are welcome. And that is precisely the point. Whether or not it is “good” depends really on who is receiving and who is paying those higher prices.

There are nevertheless problems associated with this way of looking at things because changes in goods and services prices do not actually represent inflation or deflation. These are correctly understood to be states of change in the value of money, and this is a very different thing than changes in the prices of goods and services. All the consumer price index tells you is how profits are shifting in the markets for goods and services. Of itself, it tells you nothing about the value of the unit of account.

This point is far from academic. It has been correctly pointed out over the years by a number of observers that by arbitrarily excluding changes in the prices of certain assets that conventional inflation measures only capture part of the change in monetary value. In the modern American economy this can be readily seen in action. Money in its modern format can be exchanged for bananas or stocks, which is to say that stocks and bananas are substitutes for one another. Over the last ten years or so it has been fashionable on Wall Street to talk about deflation, as in “China is exporting deflation because of its low wages.” At the same time, the price we have had to pay for future earnings of the S&P 500 has soared. Do low or falling wages represent deflation? Not necessarily. They may be symptomatic of it, but they are not proof.

A more serious discussion of inflation requires that its legal, institutional, ethical and moral dimension be examined. It is not for nothing that in ancient times the priestly caste monopolised the business of money and the truth of the matter is that in some ways things have not changed much. Because money has varied functions as medium of exchange, unit of account, and store of value, it is important, indeed vital, that it be dependable. That is the reason, and in my opinion the only reason, why gold is attractive as money. Because of its unique characteristics, it is dependable.

That is why inflation is problematic, and why even those who argue that it can be positive base their conclusions conditionally on inflation being both moderate and predictable. This may well be so over the course of the ordinary business cycle, but it is far from obvious, at least to me, that it is so or even can be so over a longer credit cycle. The reason for this is that such cycles are long. To get a feel for this consider: the last time the US economy was in a similar position as it is in today was some thirty-five years ago. Does anyone seriously think that the Federal Reserve has a planning horizon that long? In the mid ‘80s Paul Volcker was asked why he had done such and so and he replied that in central banking one deals with yesterday’s problems today, not with tomorrow’s, or words to that effect. This was nothing more than an honest description of the realities of politics.

Indeed, the real problems with inflation do flow from politics, because there is no more political act that the granting of the right to issue money. Today we are living with the consequences of the Federal Reserve Act of 1912, which created the Federal Reserve System, a collection of private corporations owned by the very institutions that it supposedly regulates, and which profit from the money monopoly that Congress granted the Fed.

The creation of the Fed represented the triumph of expedience over principle and of partisan profit over national interest, so what else is new? The Trusts that the Fed’s creation was nominally meant to control were granted ownership of the Fed. The demand of some reformers of the day that the trusts should not be allowed to control the nation’s money but that the government should do so was met by Congress in the breech: Congress nominally accepted the responsibility and then delegated it back to the Trusts. And that is where matters still rest.

The significance of this to the question before us here is that this laid the groundwork for a changed attitude toward debt and inflation both amongst the captains of industry and in society generally, and the Fed’s primary role during the 30s became that of debt accommodation. To be sure, this was at first exercised with circumspection but after America emerged unchallenged for all intents and purposes from the Second World War, circumspection crumbled. The result was Nixon’s expedient abrogation of America’s international treaty obligation, and expedience has governed national monetary and fiscal policy since, as it has for a century at least.

That expedience has led to the progressive consolidation of monopoly control over industry after industry, and the wholesale looting of public assets on a scale not seen since the land grabs in the early days of the Republic. Monopoly control over the monetary system has made easy the financing of all this with debt ultimately backed by the obligation of citizens to pay taxes, which is to say with other people’s money. Another way of putting this is that in monetary terms this has been financed by inflationary debt accommodation by the Fed.

The Fed’s ability to do this rests on the degree of prevailing popular belief in the legal fiction that it is independent of political control, and that it will perform its duties in a proper fiduciary manner. This is the most transparent fiction, and has resulted in laughable expedients over the years by both the Fed and the government to maintain its “credibility.” So, for instance, in the early ‘80s when house price inflation was soaring, it was dropped from the inflation indices in favour of “imputed rents” that were not soaring. Hedonic pricing was another wheeze that has allowed the harnessing of Moore’s Law in computer performance to the price indices. The Treasury together with the Fed seeks to control the prices of gold, exchange rates and so on, but piously intone that targeting asset prices (i.e. stocks) when they are going up is improper, but supporting them when they go down is responsible behaviour. The Fed has “granted” to its owners the right to self-regulate their market derivatives

businesses, which is to say to value their own balance sheets, in flagrant disregard of its Congressional charter, and promoted the extension of this right to include credit derivatives under the terms of the new Basel II Accord.

I doubt that even JP Morgan, who reportedly once told a friend that he lost sleep at nights worrying about an antitrust suit being brought against him, would have in his wildest dreams imagined that he and his kind could, never mind would, get away with this. That the Bushes and the Rubins of our world are not only getting away with this but with much else besides says volumes.

It is no accident of course that as the Fed has pushed interest rates toward zero and the administration has opened the bond floodgates that corporate profits have soared. Workers have not participated in this, and wages are stagnant. Jobs are being created, but in other countries, such that the Fed’s inflationary debt accommodation flows straight through to the bottom line. The Wall Street euphemism for this is that this is higher “productivity” but this is nonsense in any economically meaningful sense of the term. When one looks at personal debt statistics in the United States it is not “productivity” that comes to mind but “predatory lending.” This is a straightforward inflationary siphoning of money from one end of the economic spectrum into the pockets of the other end.

So, gentlemen, in answer to the question at hand I can only answer: it depends on which end of that spectrum you are.

Inflation: It’s Not Just a Good Idea, It’s the Law.

The law in question is the Federal Reserve Act of 1913. By giving a small cartel of bankers the exclusive right to create unlimited money and credit, the Act virtually guaranteed long term price inflation. Since 1913, the US dollar has lost almost 95% of its purchasing power. This loss in purchasing power is a direct result of a massive increase in the supply of money that has occurred since the founding of the Fed.

Historically, spokespeople for the Federal Reserve always maintained an illusion that the Fed was dedicated to fighting the forces of inflation using its power to set short-term interest rates. Nowadays, there is not even a pretense of fighting inflation. Fed governors have now declared deflation, a fall in the money supply and general price levels, to be public enemy number one. Recently, Fed governor Bernanke stunned the world by admitting that the central bank could and would use the power of the mythical money printing press to create inflation if necessary. Fed Chairman Greenspan publicly lamented that “an unwelcome fall in inflation” would be disastrous to the economy. What is an “unwelcome fall in inflation” anyways? Heck, I would gladly welcome some deflationary relief against sharply rising energy, food, insurance, housing, and medical costs. Why is to my advantage to pay more for everything that I buy?

To be fair, Messrs. Greenspan and Bernanke actually have something to worry about. The massive increase in “money” that I mentioned at the beginning of this essay was a little misleading. The Fed actually creates relatively little money in the sense of the dollar bills that you hold in your wallet. That is true fiat currency. Created from a printing press and backed by nothing, these bills at least have some tangible reality and carry no hidden obligations or interest liabilities. Most of what we call money that is carried in bank accounts, money market funds, brokerage accounts, etc. are actually just credits. There are few, if any, actual bills backing any if this “money.” Money today is almost entirely a balance sheet entry. The money that you and I hold in our various accounts is actually just somebody else’s debt. These debts are packaged as securities and traded as money. They come in the form of Treasury bills, commercial paper, repurchase agreements, and a menagerie of other exotic debt securitie

s that people and institutions accept as payment in lieu of actual cash. Since these are all just debts, they posess the two fundamental characteristics of debt: interest payments and maturity. All issuers of these securities are obligated to pay interest and to reimburse the creditor full face value at maturity. So what happens if some of the issuers of these debt securities default on their obligations? Big Trouble.

The quirky design of the Federal Reserve System makes it rather inefficient at creating and distributing cash-type money, but in coordination with member banks it is fabulously efficient at creating debt. This is called “fractional reserve banking” and it allows your local bank to create gobs of new money via lending, all mediated and facilitated by the Fed. Fractional reserve banking is something like a pyramid scheme (remember Mr. Ponzi?). As long as only a few people try to cash in, the system works fine. But like all pyramid schemes, it needs a constant flow of new funds to keep the game going. Since almost all of the money in existence carries a compound interest rate, the supply of new money or debt must increase by at least as much as the interest expense to support the system. This is where the inflation comes from. Don’t believe me? Look at the chart of M3 broad money supply.

Since 1960, there has hardly been a single year when this broad measure of money materially declined. This is a good thing because it allowed the money game to continue and the country to prosper and grow. Should the money supply start to decline, there would not be enough money to pay interest expense so debts would start to default at an increasing rate. Since debt is also money, disappearing debt will further shrink the money supply in a vicious circle. This is what Greenspan and Bernanke are so worried about. They MUST keep inflation above a minimum level to ensure the proper functioning of the monetary system. It’s not their fault; they did not design the system.

Eagle eyes looking at the above money supply chart may see a little “hook” at the end of the graph. Is that a downturn in the most recent money supply data? Let’s zoom in and see.

Yes, it’s true. M3 money supply has been contracting since Sept 2003. All of the other money measures M1, MZM, and M2 are also contracting. What’s worse is that money velocity is falling also, making the existing money stock less potent. If this trend continues there will almost certainly be trouble in the US economy. This is because the US is incredibly indebted at all levels. Personal, corporate, municipal, state, and federal debt are at record levels and growing at an increasing rate. Increasing debt requires increasing money to service the debt. If insufficient money is available for debt service, much debt will default and the economy will spiral downward.

Why is the money supply falling? It seems that nobody really knows for sure but there are probably a number of causes relating to overcapacity, global competition, trade deficits, bubbles bursting, etc. Maybe the country just can’t take on any more debt.

What is the Fed to do? Unfortunately, they have already exhausted almost all of the tools at their disposal to “reinflate” the system. They have reduced interest rates to near record low levels in an effort to entice even more borrowing. But as we have seen, more borrowing only increases the strain on the system and the Fed is near the end of its effectiveness using its conventional policy tools. They have threatened to go “unconventional” using untried and aggressive tactics but this will only further weaken an already battered US dollar and may destabilize financial markets. The Fed is in a box and there is little left for them to do except to jawbone the economy into recovery.

It seems that we are near an endgame of some sort. There are people who think that it will end in hyperinflation and those who argue for deflation. It’s possible that we may experience both simultaneously in different markets. The debt situation can only be resolved by either depreciating the currency (inflation) or liquidating the debt (deflation). Investors must prepare for either scenario. This is why many thoughtful advisors are stressing the need for some precious metals and hard assets as part of a sound portfolio. These are the few asset classes that will weather this storm.

leider ohne Link, wohl Mogabmo-"G" :sss

syr :cool:

syracus

01.02.2004, 18:09

Nur ein Auszug, die "Einleitung". Ist schon so lang genug :eek:. Aber es lohnt sich :p....

US MARKETS

It looks like we may only have five banks left in a few years, at the rate banks are being bought out. This fits right in with the elitists' desire for a one-world bank. JP Morgan Chase has merged with Bank One, a $60 billion deal.

We believe the overriding goal of the invasion of Iraq is to create a permanent military presence in that country, from which to dominate the Middle East including neighboring Iran. This is the geopolitical aspect of the goal of PAX Americana. The removal of a dictator and theft and cronyism are secondary issues. The Bush neocons want to assert the US as a full-fledged global empire, seizing sole responsibility and authority as planetary policemen and dictators. If you do not believe this, look at US presence in Germany and Japan 58 years after the end of World War II. This is not about containment, just as Rome did not stoop to containment; it conquered and so will the Bush neocons. Americans do not appreciate the true extent of their ambition. Americans understand little about anything. What is most disturbing in this process of world denomination is that these elitists are subjugating the American people. Again, war and terrorism are just covers to hide the impending financial and economic failure we face as a nation and as a world. The pre-emptive attack on perceived enemies under the cover of terrorism is a scam and much worse is the suppression of the American people who are too dumb to understand what these evil people are up too. The efforts speak in blunt terms of what it calls "American Internationalism", which is ignoring international opinion if it suits US elitist interests to do so. They are always on the offensive. This is a program of permanent US military domination of every region on the globe, unfettered by international treaty or concern and applies equally to the American people. All of this is available via the Project for the New American Century for those who can read. This has nothing to do with political conservatism and everything to do with global fascism. This, of course, includes a massive financial burden for the American people. The report calls for military spending of 3.8% of GDP and the $379 billion requested by the Bush neocons is almost that percentage. It urges development of small nuclear warheads required in targeting the very deep underground bunkers that have been built by potential adversaries or some errant small country that doesn't agree with George W. Bush. All of today's developments were laid out in the early 1990's as part of the conspiracy's plan for world denomination but very few were looking and listening. Only a handful of researchers including us saw and dispersed the message, but few were listening. This global mastery is going to cost America dearly in wealth and lives. The rest of the world will cower and withdraw except for the few that our government will attempt to annihilate. Yes, there will be no disruption in oil supplies and Iraq will be used as an object lesson to all other countries. This is the lure of empire and along the way our leader will commit some terrible crimes so be prepared for them. You ask what can we do? Our answer is we don't know exactly, but we know the changes have to come from within from the American people either politically or otherwise.

In order to garner new taxes Mr. Bush is busy closing loopholes such as cutting credit on income earned abroad, which means double taxation. It also extends the timetable on foreign property holdings to make them eligible for credits. The elimination of municipal leasing so more funds will flow to the federal government. Not being discouraged are collection agencies that the government uses to collect money from you in their behalf. You could call it corrupt privatization. New appraisal requirements for charitable gifts. Those who renounce citizenship will be taxed on worldwide income for 10 years after leaving the country. If you do not give notice that you no longer want to be an American, you are taxed forever. If you renounce you are only allowed 30 days a year in the US and you must file an annual report. At the same time, our President is going to legalize 12 million illegal aliens. There are a huge range of new penalties for failing to comply. Isn't it nice to know you get to pay for George's excesses? As we used to say, in your guts you know he's nuts.

An Arizona state legislative committee has approved a resolution calling for the dissolution of the federal government in the event that it abolishes the US Constitution; declares martial law or confiscates firearms. If they have to proceed along those lines, they'll need the approval of 34 other states. Joseph Stumph, well known author and historian said, "We're proposing that if things get as bad as they could get, that these states won't allow the federal government to put us into a one-world government." A similar proposal will be entered by Stumph in his home state of Utah. The issue now must pass the Arizona House. If passed it would then have to be approved by voters.

The Baltic Dry Index, a barometer of the dry-bulk freight market for important commodities such as iron ore, grain and coal, closed over 5,000 for the first time ever last week and ended another 68 points up at 5,459 on 1/14/04. China's voracious demand for raw materials, particularly for iron ore and coal has fuelled the enormous demand for Capesize ships, vessels in excess of 80,000 dead weight tons in size. Ninety-five percent of the world' s trade is transported by sea.

The EU has asked for a go ahead from the WTO to slap trade sanctions on the US that could run into billions of dollars of duties on US goods. We suspect that such sanctions and duties would bring a backlash in Congress and we think that's great. Brussels has been sitting on WTO authorization to implement $14 billion in duties. Congress will not repeal the Byrd amendment and that means the beginning of the end of free trade.

Vice-President Dick Cheney painted a grim picture of what he said was the growing threat of a catastrophic terrorist attack on the US and warned that the battle, like the Cold War, could last generations. He expressed these thoughts at a major address at the Los Angeles World Affairs Counsel, a subsidiary of the Council on Foreign Relations. He said one of the legacies of this administration will be some of the most sweeping changes in our military, and our national security strategy as it relates to the military and force structure, and how we're based and how we used it in the last 50 or 60 years, probably since WWII, changes are that dramatic. He also said the administration will have some of the most sweeping changes in our military into even more overseas bases so the US can wage war quickly around the world. We call this perpetual war for perpetual peace.

Our FBI has blacklisted the almanac as a terrorist tool because it contains so many facts. As you know they have already recognized our libraries as a terrorist threat and under Patriot Act I, have already seized library records. While the FBI chased shadows, 2003 was crowned the year of the lie. Just about everything out of Washington was a lie and that covers a multitude of things. The biggest lies are WMD, the CPI, PPI, unemployment numbers and the capture of Saddam Hussein, who in fact was captured by the Kurds. His Spiderman capture was a stage show. Over in England there was the WMD lie and the David Kelly lie. The lies of the media are so overwhelming that we could never cover them all. 2003 was a very good year for liars; they got away with most all of them.

George W. Bush and Congress have rolled back the payroll clock. People fought and went to jail for a 40-hour week. In fact, my father was one of the first members of the Teamsters Union in the 1930's under Jimmy Hoffa. Corporate America is back to where workers were in the 1930's. We need balance in our economy and we need renewed rights for labor or we will all be working for slave-wages again. Eight million workers will lose millions of dollars in overtime. Corporate America does not care about its workers. If they do not like it, corporations will just move the jobs overseas. Last year, both House and Senate representatives passed an amendment to the proposed rules that preserved overtime pay protection for most workers. The amendment was later dropped from a spending bill under intense pressure from George W. Bush. The Labor Department is totally unresponsive and has published information for employers on how to legally avoid paying overtime to low-income workers who would be eligible for it. There it is the official policy of Mr. Bush to screw American workers whenever possible for the benefit of elitist transnational corporations. This administration is an international disgrace. Last year, the Labor Department investigated more than 31,000 worker complaints and recovered $212 million in unpaid overtime wages, a 21% increase over 2002.

James Jesus Angleton, Chief of the counterintelligence for the CIA was a bitter man. He felt betrayed by the people he had worked for all his life. He realized at the end that they were never really interested in American ideals of freedom and democracy, they only wanted absolute power. He told author Joseph Trento that the reason he got his job was because he agreed not to submit "sixty of Allen Dulles' close friends to a polygraph test concerning their business deals with the Nazis. We in a way went through the same conversion of understanding of what was really happening in a few years. We had advantages over Angleton, we had street smarts and he believed all that Ivy League propaganda. That is when we realized there was a conspiracy 44 years ago. Upon entering counterintelligence school I was immediately told that the British and US had broken the Japanese diplomat code in 1936 and they knew everything the Japanese were doing and knew when Pearl Harbor was to be attacked long before it happened. Thus, early on, we were jaded and after that there were thousands of other incidents revealed to us. It was then that we knew who the real enemy was. Incidentally, we knew about Prescott Bush and other illuminists financing the Nazis in 1958. Now it is becoming common knowledge. It is a very small move from the Bush's treason to that of Adolph Hitler whom the Bush's and others financed. All our knowledge brings responsibility and we like Angleton get stuck with it. We did the right thing; he took the easy way out. Yes, Virginia there is a conspiracy.

http://www.howestreet.com/trainwreck.php?Id=25&PHPSESSID=ac1b374687bed40ac1d2b81b5a6ab1a6

syr:schaf:

Ursus Maritimus

01.02.2004, 21:10

One World Bank ?

Melde mich als CEO

Syracuse und Jean Ziegler kommen in den Verwaltungsrat.

Allan Greenspan wird ausgebootet.

Gruss Ursus der Fabulierer

syracus

03.02.2004, 17:51

:hihi :)

syracus

03.02.2004, 19:39

Stock market bubble waiting to burst
Commentary: Players beware: The house isn't buying

By Charles Biderman
Last Update: 12:01 AM ET Feb 2, 2004

SANTA ROSA, Calif. (CBS.MW) -- The current stock market is a bubble waiting to burst.

At TrimTabs, we view the stock market essentially as a casino. Public companies are the house, while investors are the players. The basic premise of our approach is that stock prices in the casino are determined mainly by liquidity -- the supply of shares and the money available to buy them -- rather than fundamental value.

There are two major reasons why we think that the current stock market is a bubble. First, the house has not been buying much lately, either through stock buybacks or purchases of public companies for cash. Second, the players have been buying heavily, which usually occurs at or near market tops.

When the players are buying and the house is not, the market will begin to decline once the house begins printing more shares than the players' cash can absorb.

On the surface, corporate buying looks active enough. In the four weeks since Christmas, the weekly dollar amount of newly announced cash takeovers has averaged $450 million, and the weekly dollar amount of newly announced stock buybacks has averaged $3.9 billion.

Yet corporate buying has been highly concentrated in a few large-capitalization names, which makes it appear stronger than it actually has been. Since Christmas, a mere seven cash takeovers and 18 buybacks have been announced.

Recent buyback figures would be far more bullish if buyback activity were more broadly based. For example, in December 2003, the dollar amount of buybacks totaled an impressive $26 billion, but only 43 buybacks were announced. By contrast, in October 2002 -- the recent bottom in the stock market -- the dollar amount of buybacks was $15.4 billion, but the number of buybacks reached 130.

Given current stock valuations, the lack of broad-based corporate buying is not surprising, and we doubt that it will strengthen any time soon.

Instead of buying, both public companies and the insiders who run them have been selling new shares to eager investors. During the first three weeks of January, new offerings have averaged a healthy $4.1 billion weekly -- and January historically has been a slow month for new offerings. At the same time, corporate insiders have been selling heavily. While insider selling generally slows during the holidays, insider selling reached a $3.4 billion average weekly pace in November and a $2.4 weekly pace in December.

In January, insider selling declined to $2 billion weekly, which is not surprising because January is an earnings reporting month, and blackout periods prohibit many insiders from selling. Insider selling should surge in the weeks ahead if it follows its historical pattern.

Flooding the market with fresh cash

There is a second major reason why we believe that a bubble exists: the players have been clamoring to buy stock, which they usually do at or near market tops. Over the past few weeks, inflows of cash into the stock market have been extremely heavy.

Online brokers are reporting strong inflows directly into equities, and we estimate that $13.6 billion poured into all U.S. equity funds during the first 13 days of January. This inflow is the largest inflow during the first 13 days of the month since this bull market began in April 2003. It is entirely possible that inflows into U.S. equity funds in January could top the all-time record January inflow of $28 billion in January 2000. We all know what happened shortly after that.

What are the sources for all of this cash?

First, individuals are eagerly chasing the stock market gains of the past nine months with year-end bonus money and retirement plan contributions.

Second, many companies have been pouring money into their pension funds over the past two months to close massive gaps between plan assets and future liabilities. Much of this new money is finding its way into the stock market.

Investor optimism about equities has reached extraordinary levels, which is another contrary indicator. On Jan. 23, the CBOE Volatility Index (VIX) closed at 14.74, its lowest close since November 1996. In its most recent survey, the American Association of Individual Investors (AAII) reports that a record high 69.5 percent of investors are bullish, 17.1 percent are neutral, and a mere 13.4 percent are bearish. The eight-week moving average of bullish AAII investor sentiment has climbed to 64 percent, which is higher than at any time during the 1999-2000 bubble.

Bubble will burst when corporate selling overwhelms inflows

If the stock market is a bubble, why have we been mostly fully bullish since the end of October 2003? The answer is simple. Massive inflows from individuals and pension funds, combined with limited corporate buying, have far outweighed corporate selling.

The stock market will face headwinds as it enters a less seasonally strong period. The new offering calendar has been growing recently, and the pace of insider selling is likely to accelerate in February because blackout periods that have prevented insiders from selling have been lifted.

In sum, the new offering calendar and insider selling could easily drain $50 billion from the checking accounts of stock market intermediaries in February -- but that $50 billion is only a guess. In addition, inflows should weaken somewhat in the coming weeks. Many individuals have spent their year-end bonus and retirement fund ammunition, and pension fund inflows should slow by the end of February.

We are awaiting confirmation that the supply of new shares via offerings and insider selling reaches at least $10 billion weekly before we turn bearish. Right now, the stock market casino is doing an outstanding job of separating the players from their money. At some point soon, the house will flood the market with a torrent of new shares that will soak up all of this cash. Then it will be time to sell. Of course, exactly when the top will occur will only be known in hindsight. It could be as soon as February, but it could also be several months from now. It all depends upon how maniacal individual investors want to be in throwing good money after bad.

Editor's note: Charles Biderman is the president of TrimTabs.com, an investment research firm.

http://custom.marketwatch.com/custom/earthlink-net/mw-news.asp?guid={3A2C5BB5-EC2B-4154-B3C4-E349D6D7EE55}

syr :rolleyes:

syracus

04.02.2004, 20:53

Soros Eyes Dueling Bubbles in China and U.S.

William Pesek Jr

Feb. 4 (Bloomberg) -- George Soros gets lots of headlines, as might anyone who once made $1 billion betting against the British pound and got called a ``moron'' by a Malaysian prime minister.

Yet the 73-year-old Soros has a knack for cutting through the cacophony of modern capitalism. He's doing it again, shining a spotlight on two bubbles -- China's economy and U.S. deficits - - that have more to do with each other than many appreciate.

Soros's views could be hyperbole. Just like markets, investors are sometimes right and sometimes wrong. And Soros may be talking his position; he predicts a continued drop in the U.S. dollar. ``China,'' he told Bloomberg News in a televised interview last week, ``is in sort of an incipient asset bubble.''

Investors should listen to Soros. Not because he's an influential market guru. Not because of his profitable 1992 bet on the pound's fall. Not because then Malaysian leader Mahathir Mohamad accused him of speculating against the ringgit in 1997. Soros's alerts about the world's biggest economy and its most dynamic are important because many facts are on his side.

`Very Dangerous Game'

China's asset bubble makes it ``very difficult to find vehicles for investing'' there, Soros said. That's a problem when you consider China is the only real source of growth in Asia, a region increasingly dependent on its demand for goods.

In the U.S., record current account and budget deficits are spooking investors who wonder if the world's No. 1 economy is living too far beyond its means and that a day of reckoning is near. The euro gained 16 percent versus the dollar in the last 12 months, while the yen gained 14 percent.

``Since the decline of the dollar in the short term is beneficial for the U.S. economy, the authorities actually like it,'' Soros said. But when currencies drop they ``tend to actually pick up speed'' and ``it's a very dangerous game because it can get out of hand.''

Not one to hide his distaste for U.S. President George W. Bush, Soros donated $12.5 million during the past year to two independent advocacy groups opposing Bush's re-election.

Bigger Imbalance?

All this does get at a bigger, less politically motivated point. The global economy is harboring two dangerous bubbles and the question is whether they will collide or amalgamate into an even bigger imbalance.

The U.S. is by far the biggest economy, and China is the most energetic. U.S. demand is supporting many industrialized economies, and China is doing the same for developing ones. It would be best for all involved if the world's two locomotives continued to run in the same direction.

Imbalances make that unlikely. U.S. deficits recently drew a strong rebuke from the International Monetary Fund. The U.S. trade and current account gaps exceeded a record $500 billion in 2003. The U.S. has never been more dependent on debt and foreign capital to finance its way of life.

China's economy, meanwhile, is attracting the same breed of investor who bet on Boo.com, Globe.com and Pets.com a few years back. Excitement over Chinese initial public offerings harkens back to the Wall Street of the late 1990s. Last month, investors ordered 1,604 times the $25 million of stock offered by vegetable and fruit processor China Green Holdings Ltd. It had some investors joking that the company must sell tulips.

China's Risks

A gold-rush mentality is pervading boardrooms of multinational companies. So excited are executives about cheap labor and land that they're willing to look past risks. China's banking system is shaky and social unrest could increase as Beijing liberalizes its economy. Analysts worry China may overheat.

The U.S. and China are complimentary entities in a number of ways. Cheap Chinese goods are fueling global deflation and allowing the Federal Reserve to keep U.S. interest rates at four- decade lows. The Bush administration also is doing its all to toss stimulus at an economy creating few jobs.

China also is buying up huge amounts of U.S. Treasuries to maintain its currency peg with the dollar. Those purchases are helping the U.S. finance its excesses and avoid a destabilizing crash in the dollar.

For China, it means increasing access to U.S. consumers and global clout. Asia's No. 2 economy already is eclipsing Japan's global influence and giving Beijing powerful leverage abroad.

Widening Crack

Yet conflicts loom as the U.S. gears up for this year's presidential election. China is being accused of using an undervalued currency to steal U.S. jobs. The biggest clash may be between dueling bubbles and two nations that don't want to find themselves without a chair when the music stops.

What if these two bubbles collide? The good news is that the global economy is on sounder footing than it was in the late 1990s -- and in better shape to withstand problems. The bad is that a crash in either the U.S. or China would have big implications globally. At the very least, all this is a widening crack in the veneer of optimism flowing through markets.

Soros may be wrong about all this. More likely, though, his fears will prove prescient.

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_pesek&sid=aPH09lHxfkME

syr :rolleyes:

syracus

05.02.2004, 09:27

The U.S. job machine's broken

Wednesday, February 4th, 2004

The Bush administration has a big problem. Last year, the President and his aides promised that their tax cut would give America what it needed most: jobs. Never happened. Total job creation was supposed to average out at 306,000 a month, but not even a third of that has been achieved. The numbers clearly undercut the Bush claim that tax cuts for the wealthy would generate jobs for the middle and working classes.
The jobless recovery we're now in is unlike anything the American economy has ever seen. Typically, the Great American Job Machine energizes our economy. New jobs beget more income, which begets more spending, which begets more hiring, incomes and spending. What we're seeing now, however, suggests that there may be something fundamentally wrong in the engine room of the American economy.

In the recoveries of the mid-1970s and 1980s, America was generating about 300,000 new jobs a month within six months of cyclical upturns. In the early 1990s, this expansion slowed to about 200,000 a month, and we had to wait a full two years for that.

This time, we have seen not a deceleration in job creation, but a net loss - the sharpest in any period since the Great Depression, especially in manufacturing. No work and not much in the way of wage increases either. Ouch!

What's going on? International competition and outsourcing have hit some sectors hard. In the past decade, China became the world's workshop. In this decade, India is becoming the world's back office. Cheap bandwidth and the Internet permit companies to tap into a huge supply of English-speaking, educated, dedicated workers, happy to take knowledge-based jobs for 10% to 20% of what American employees receive.

"Offshoring" is moving up the food chain of services to include professions like engineering, design, accounting, legal work, actuarial and insurance work, medical services and financial analysis.

That's why virtually all the jobs created in the latter part of 2003 were concentrated in the most sheltered segments of the workforce. It also explains why some 80% of the 2.5 million manufacturing jobs lost are gone for good. The result is that too many of America's jobs today cannot support a full household, at least at the level that most people feel appropriate to a middle-class lifestyle.

This has profound consequences for America's politics. They are outlined clearly in a new book, "Downsizing in America," by William Baumol, Alan Blinder and Edward Wolff. Of the 100 million men and women with full-time jobs in 2001, the authors note, more than half earned less than $35,000; 84% earned under $65,000; 10% made between $65,000 and $100,000; while only 5.7% made above $100,000. Overall median earnings were a mere $33,636. Most middle-class families would feel that $65,000 is needed to maintain a family in a middle-class lifestyle. If you lower the bar, only 32.8% of jobs paid more than $45,000 annually.

How are people coping? Not easily. The authors say that in two-thirds of households with wage earners, the workers hold two or more jobs. Even for families with kids, two-thirds of the mothers work, although fewer than half the households have adults with two full-time jobs.

There is no doubt that the Great American Job Machine has simply not kicked back into gear. The optimists hope businesses will soon deliver on job creation. But that has not happened, and it won't happen. What is happening is a spectacular improvement in productivity that has more than accounted for the economy's total growth since the recession ended.

Productivity gains, alas, are also the cause of so many jobs disappearing. As long as far fewer employees can churn out more and more complicated products than before, the number of workers or the hours they work simply has to fall.

Productivity has at least succeeded in lifting profits and stock prices. This has produced a boom on the capital side of the economy, but not on the labor side, for it has not yet increased either jobs or workers' pay. This has been masked in part by tax cuts, by a huge buildup of personal debt and by the extraction of money from the increased value of assets, especially homes, made possible by record- low interest rates.

To continue our tradition of creating more new jobs to replace the old ones we destroy, we'll have to rely on more than dramatically stimulative fiscal and monetary policy. We must do a better job of preparing more and more of our citizens for knowledge-based employment, especially through increased K-to-12 education.

Happily, there is reason to hope. We have a hardworking, entrepreneurial population and a bottom-up economy responsive to energy, talent, effort and new ideas. Our universities are the envy of the world. Our post-university, on-the-job training in business is unsurpassed.

But it is clear that we are going to have to think hard about jobless economic growth. How that is managed will be critical to our nation's economic policies, including its trade policies. As New Hampshire demonstrated, it also will be a critical component of our politics.

According to the polls, New Hampshire voters supported John Kerry because they felt he was the best man to be able to stand up to Bush on issues of national security. But look closer and you'll see they really want someone to challenge the President on the gut issues they really care about: jobs and health care. As New Hampshire goes, so goes the nation.

http://www.nydailynews.com/news/ideas_opinions/v-pfriendly/story/161031p-141229c.html

syr :rolleyes:

syracus

07.02.2004, 15:08

Blaming everyone but themselves

Feb 6th 2004
From The Economist Global Agenda

Europe’s economy is too restrained, say the Americans. America’s is too gluttonous, say the Europeans

IN BOCA RATON, Florida, on Friday February 6th, finance ministers and central bankers from the world’s seven largest economies will meet to discuss how to keep the world economy bouncing along happily. It will not be easy. The American and European economies in particular are beginning to look like ill-matched partners on a see-saw: each blames the other for throwing the world economy out of balance. The European economy is too puny and restrained, say the Americans. The Europeans, for their part, complain that they alone are having to bear the consequences of an American economy that is overindulging itself. They are both right.

Neither American households nor their government seem able to live within their means. The Bush administration will overspend this fiscal year by $521 billion. Its budget for the next fiscal year, unveiled on Monday, fantasises about halving that deficit by 2009 and dares not look any further forward than that. A more sober (and sobering) examination of America’s fiscal prospects suggests deficits of $400 billion or more until 2009, and worse to come when the baby boomers begin to retire. For the White House, these are problems for the future; specifically, the future that begins after Mr Bush’s second term ends. But others, such as Robert Rubin, a former treasury secretary, warn that the financial markets, looking forward to deficits as far as the eye can see, may take fright. Tomorrow’s chickens can come home to roost today.

The White House gives Mr Bush's budget for 2005. The US Treasury Department, the Federal Reserve, the US Department of Labour and the Department of Commerce give economic, monetary and fiscal information. The Levy Economics Institute keeps track of America's economic imbalance. Robert Rubin, Peter Orszag and Allen Sinai at the Brookings Institution warn of the potential for fiscal disarray in America. The ECB and the European Commission provide economic and monetary information for the euro area. The Institute for International Economics publishes research on economic-policy issues.

The government’s rampant borrowing would be less worrying were it offset by saving in the private sector. In the early 1980s, for example, President Ronald Reagan ran a deficit that was even bigger than Mr Bush’s as a proportion of GDP. But at that time, the private sector (households and corporations combined) was saving far more than it is today, according to calculations by the Levy Economics Institute.

Short of savings of its own, gluttonous America is relying instead on the savings of foreigners. Overseas investors bought $83 billion-worth of American securities in November alone, the latest month for which figures are available. Can this continue? The Europeans fear that it cannot. As American assets lose some of their appeal, the dollar will lose its value. Its fall against the euro has already been “brutal”, in the words of Jean-Claude Trichet, president of the European Central Bank (ECB). Worth more than €1.19 in July 2001, the dollar now fetches less than 80 euro cents.

To put an end to this brutality, the Europeans want Mr Bush to rein in the federal deficit. Some might even want Alan Greenspan, chairman of the Federal Reserve, to tighten monetary policy. Mr Greenspan’s counterparts at the Bank of England have already shown him the way: on Thursday, they raised interest rates to 4% in the hope of restraining Britain’s indebted consumers. But Mr Greenspan is unlikely to be swayed by the force of their example. He has resolved to be “patient” before raising rates.

Mr Bush, for his part, has an election to fight—and fiscal austerity wins few votes. On the contrary, he will claim that his tax cuts have delivered growth and jobs. They have certainly delivered some of the first, but not much of the second. The economy needs to create more than 140,000 jobs per month just to keep pace with the growth of the labour force. Last month, firms added 112,000 workers to the payrolls; in December, they added just 16,000. This is a poor return on tax cuts that cost the Treasury $195 billion in the 2003 fiscal year. For that money, Mr Bush could have hired 2.5m people to dig holes and another 2.5m to fill them, paying them all America’s average annual wage.

In reply to their critics, the Americans will argue that, in economics, thrift is often a vice and gluttony a virtue. If it were not for America’s overspending, the world economy would stagnate. If Europe is not as over-extended as America, it is only because Europe is not pulling its weight. Its modest recovery in the second half of last year, for example, was export-led, piggy-backing on stronger growth elsewhere. Unless domestic demand picks up, Europe’s “fledgling” recovery may already be past its prime.

The Europeans see the G7 get-together in Boca Raton as an opportunity to vent their frustration at the rising euro. But the strengthening currency is an opportunity as well as a threat. It gives European consumers more spending power, if only they would use it. By curbing inflation, it also gives Mr Trichet an opportunity to cut interest rates, if only he would take it—the ECB held rates steady at its meeting on Thursday. In all, Europe’s problems are more likely to be resolved in Frankfurt than in Florida.

http://www.economist.com/agenda/displayStory.cfm?story_id=2402772

syr:sss

syracus

12.02.2004, 18:11

Probing Greenspan's Easy-Money Madness

By Peter Eavis
Senior Columnist
2/12/2004 7:04 AM EST

Alan Greenspan's most successful ruse has to been to make his speeches so dull that they mask the monumental gamble he is taking with the U.S. economy. But the Fed chairman's testimony before Congress on Wednesday clearly indicates that he believes he has won that gamble.

A growing number of Fed critics have complained that, when faced with the prospect of economic slowdown, Greenspan slashes interest rates, leading to a massive extension of easy credit. The extra debt may keep the economy afloat for a while, as it has since the crash of the Nasdaq economy and the Sept. 11, 2001, attacks.

But it does much more harm in the long run by preventing necessary restructuring of the economy, driving down saving, inhibiting future spending and endangering the long-term health of the banking system. This column has made this charge against Greenspan on numerous occasions. Raising doubts about the effects of easy money is hardly a wing-nut obsession. Two central banks -- the Bank of England and the Reserve Bank of Australia -- recently have mentioned credit growth when explaining why they have hiked interest rates.

But one line in Greenspan's testimony Wednesday shows that he is unfazed by the soaring debt levels of the U.S. He said: "All told, our accommodative monetary policy stance to date does not seem to have generated excessive volumes of liquidity or credit."

Greenspan was pushed to provide actual numbers to support his case. In fact, he couldn't talk about debt in the economy without mentioning some pretty hairy numbers. "Home mortgage debt increased about 13% last year," he noted. "The growth of nonfederal debt, at 7.75%, was relatively brisk in 2003," Greenspan added.

So where was the good news on the debt front? Well, Greenspan is encouraged that "the low level of interest rates and large volumes of mortgage refinancing activity helped reduce households' debt service and financial-obligation ratios a bit." He must be referring to the Fed yardstick that measures households' payments on financial obligations as a percentage of disposable income. Yes, it came down "a bit" in 2003 -- to 18.09% in the third quarter of last year, from 2002's high point of 18.29%. But above 18%, it is still at historically high levels.

Greenspan also defended the massive increase in household debt last year by arguing that "the rise in home and equity prices enabled the ratio of household net worth to disposable income to recover to a little above its long-term average."

You realize what the head of the nation's monetary system and the most powerful actor in the global economy is doing here? After five years of volatile stock markets, he's asking us to rely on equity prices. As for house prices, they could fall steeply as the credit binge slows down. In fact, Greenspan concedes that the buoyant housing market and boom in mortgage refinancing "are not expected to continue at their recent pace." But, of course, the central banker does not predict what will happen to house prices when that pace slows right down.

Easy money causes much long-term damage to the economy. Under Greenspan, credit growth was rampant through the late '90s, which led to excessive investment by businesses, particularly in high-technology items. This investment led to the Nasdaq boom, but it took only a small uptick in interest rates to cause the whole technology sector to collapse in 1999 and 2000.

Greenspan has never accepted the blame for creating the boom that led inevitably to the bust. The Fed's Monetary Policy Report to Congress, which also came out Wednesday and accompanies Greenspan's testimony, refers to "a glut in long-haul fiber-optic" that had built up earlier. But how did the glut ever get there in the first place? Easy money, of course.

Greenspan's policies haven't done anything to increase the nation's pitiful saving rate. In fact, his low interest rates have played a big role in keeping the nation's personal saving rate at around 2%. In the Monetary Policy Report, the Fed appears almost surprised by this. The central bank notes that households did not save more as their wealth fell during the stock market slump. Why might this be? Well, the Fed thinks the answer may be that households wanted to "take advantage of the attractive pricing and financing environment for consumer goods."

And who created this advantageous financing environment? The Fed, of course.

That's what central banks do. They are set up precisely to influence how much credit is in the economy. When America gets crushed by its debt mountain, it will be the Fed's fault. "The Federal Reserve's duties include conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices," according to its mission statement.

Greenspan has done all he can to influence money and credit conditions. Unemployment is coming down and prices are stable, so it looks like he hasn't done so badly on that front, either. But it all comes back to the debt totals. As Wednesday's testimony shows, Greenspan thinks they're not too high. But if they are, his monetary policy gamble will unwind in the most horrible fashion.

URL: http://www.thestreet.com/markets/detox/10143159.html

syr :rolleyes:

syracus

17.02.2004, 13:48

Global: Living Beyond Our Means

Rebecca McCaughrin (New York)

No matter how you slice the data, foreigners and Asian central banks in particular have become important lenders of last resort to the US. Yet US authorities continue to downplay the risks of growing dependence. Greenspan’s claim during his semiannual testimony to Congress that outright selling of US securities by Asian central banks would not have a material impact on interest rates is the latest case in point.

In our view, it’s hard to buy the argument that a retrenchment by foreign central banks would not have an impact on Treasury yields. Overseas investors and central banks hold $1.4 trillion, or 36%, of the $3.9 trillion outstanding stock of US Treasuries. Japan and China are two of the largest foreign sources, collectively holding $669 billion. That’s not small change. And the pace of accumulation has shown no signs of abating. Demand in the latest US Treasury auctions has been very strong, with foreigners snapping up nearly half of the $56 billion in auctioned securities. In January, Japanese authorities spent a record $67 billion intervening in FX markets (presumably targeting US government assets), and the new fiscal year draft budget proposes an additional ¥43 trillion (raising the total to ¥140 trillion) for intervention.

Imbalances can last for a long time.

Such large dependence and renewed speculation that Asian central banks may be considering alternatives to recycling their massive reserves have sparked fears of a retrenchment by central banks. This is an unlikely prospect, in our view. First and foremost, as long as maintaining currency competitiveness remains the overriding concern, central banks will have little reason to alter their reserve management strategy. Historical precedents are also telling. There have only been two occasions since the mid-1970s when central banks sold US Treasuries. In 1979, they sold $22 billion against the backdrop of raging inflation and the switch in Fed policy from controlling interest rates to controlling the money supply, and they sold $5 billion in 1999 when the supply of Treasuries began to shrink and central banks began to substitute holdings with agencies because of the heightened market risk and lower liquidity of Treasuries. This suggests that a retrenchment could be triggered by (1) a shrinking supply of US Treasuries, (2) the emergence of credible substitutes, and/or (3) a change in FX policies, none of which seems likely to materialize in the near term.

A flood of FX reserves.

How did we get into this bind in the first place? Reserve accumulation was initially a response to the Asian currency crises in the mid-1990s, as Asian economies attempted to rebuild investor confidence, strengthen their debt repayment capacity, and improve their external liquidity position. Since then, the region has aggressively built up its reserve stockpiles, doubling its holdings in just six years. As our colleagues in Asia note, much of the growth in reserves during the 1990s came from swelling trade surpluses (and large FDI inflows in the case of China). However, these factors are no longer the key drivers of reserve accumulation (see Andy Xie, Tighten Capital Controls, Please, February 4, 2004). In China, the trade surplus and FDI inflows accounted for just 20% of the rise in reserves last year. Likewise, in Japan, these drivers accounted for less than half of the reserve accumulation. Instead, overseas Chinese speculating on the yuan and investing in the domestic economy and a series of oversubscribed IPOs have contributed to the rise in China’s reserves, whereas in Japan, massive investment in equities has been driving reserve accumulation. This suggests that a leveling off in FDI and narrower trade surpluses will not necessarily rein in the expansion in reserves.

The allure of US assets.

Most central banks are opaque in the way they manage reserves, so it is not possible to determine exactly how reserves are invested. But piecing together different sources, we can roughly estimate the share of China’s reserves that are recycled into US Treasuries. (Open capital accounts in the rest of Asia make it more difficult to determine the ratio for the whole region.) From US Treasury data, we can determine total Chinese investment in US government securities, and based on China central bank data, we can strip out commercial bank investments (the only other China entities permitted to invest in overseas securities). What do the data show? For most of 2002, roughly 40% of China’s reserves were recycled into US Treasuries and agencies, rising further to 56% in 1H03. But the recycle ratio slid to just 17% in Q3, possibly in reaction to the G-7 communiqué — recall that there was a sharp pullback from all US securities in Q3 by most foreign investors. Since then, though, the ratio has returned to about 30% (adding in the $4.5 billion in reserves removed for state bank recapitalization). Given that the bulk of China’s reserves are held in dollars, the share of reserves recycled into US assets should remain at least at 30%, if not higher.

Bottom Line.

Growing exposure to foreign lenders heightens the risk of a reversal, but in our view there are other more pressing risks. For one, private investors — who tend to be less steady and more profit-driven — have also ramped up their exposure to US Treasuries in the last several years and now hold nearly as much as central banks. In fact, US exposure to central banks should be applauded, we believe, as they provide a buffer to the vagaries of private investors. A sell-off by central banks is not the straw that will break the camel’s back, in our view, especially as long as currency competitiveness remains a key priority.

http://www.morganstanley.com/GEFdata/digests/latest-digest.html#anchor0

syr :rolleyes:

syracus

19.02.2004, 13:10

February 17, 2004

Money Supply and the Presidential Election

by Clif Droke

Undoubtedly, you've read about the slowdown in M3 money supply in recent months. Many newsletter writers have addressed this subject and even the Financial Times has been commenting on it of late. Of course whenever the mainstream financial press starts talking about an issue of major financial significance it means the trend has reached its conclusion and is about to reverse. True to form, M3 has been increasing in the past few weeks after plummeting for a good part of 2003.

So what does this mean? I put no faith in M3 as a stock market timing mechanism but it can often be used to gauge the strength or weakness in the overall economy. Major changes in M3 usually take about 6-9 months to show up in the economic numbers. This means that most people will start to notice a gradual decline in the strength of the economy by the summer months (perhaps earlier) and this relative economic weakness (not a full-blow recession, mind you) will likely continue into the fall months...just in time for the presidential election! You see, I believe the slowdown in M3 is being engineered by the Fed to get G. Bush out of office, and at election time his opponent can point to the economy as being "soft" and we all know that the economy is a major hot-button issue in elections. "It's the economy, stupid!" as Bill Clinton would say.

Respected newsletter writers Harry Schultz (of the HSL newsletter) and Bert Dohmen (of the Wellington Letter) have stated their belief that the economy is headed downward without any Fed intervention around election time. The reason are plentiful: "jobless recovery" from outsourcing to China and India, P/E bubble, extremities in credit and debt, monetary dysfunction. On top of all this gold, silver, and oil are reflecting the latent problems within the economy. So without the M3 "swerve" by the Fed things look bleak indeed. I do believe, however, the Fed will come to the rescue -- indeed, they already have started -- and by the time the elections are over we'll see the results of their rescue efforts.

Of course once the election is over and (presumably) Bush loses, the economy will rebound in early 2005 since it will take that long for the rate of change in M3 to hit the economy. This will allow whoever wins (Kerry?) to take credit for the rebound, even though it was all the Fed's doing. This is "How the Federal Reserve Runs the Country," as per the title of a famous book from a few years ago.

One other reason I feel Bush's loss is already written in stone is the treatment he's received recently from the mainstream press. This is the same press that supported him unquestioningly during the Iraqi war, despite the lack of evidence for so-called "Weapons of Mass Destruction." Yet now, despite capture of Saddam, the media have abandoned him and are casting stones in his direction. This is not a good sign for Bush. Kerry is on a major roll, and it's rare that an incumbent has looked this bad this early into an election campaign.

Many will ask, "Why would the Fed want to remove Bush from the White House when, from their standpoint, he's done a good job?" Good question. Despite what you're political affiliation may be, on paper at least one can't deny he helped resuscitate the economy and financial markets through his inflationary policies (which would include the war effort). He also captured Saddam, a long-term outstanding "bad guy" from his father's presidential term. I believe we can find the reason for the Fed's wanting to get rid of Bush in some of the latest news headlines: "Bush wants to send men to the moon again;" "Bush looks to forward manned mission to Mars;" "Bush calls for drastic expansion of the space program," all to the tune of billions of dollars. More recently, we find a caricature of Bush holding an ax on the front cover of Barron's with the headline "He's Still At It." The headline further states that Bush would like to eliminate the capital-gains tax, the dividend tax, and the estate tax. Barron's then asks, "But what about the burgeoning budget deficit? Red meat for the Democrats."

Here lies the answer: the Fed wants to install a Democrat into the White House this fall in order to keep inflation from getting out of hand. Democrats are known for their taxes. Having a Democratic president would mean taxes, taxes, and more taxes -- not to mention a repeal of the Bush tax cuts. These new taxes would act to absorb the excess inflation created by Bush and will serve to further the Fed's long-standing policy of trying to keep the economy on an even keel (or what passes for it!)

What does the slowdown in M3 mean to you and me as traders/investors? I think aside from a potentially weaker economy by mid-year, the market will fulfill my forecast of a mostly "sideways" or range-bound trading pattern. This will likely be a rather loose trading range, which is good from a trader's standpoint. New all-time highs? I'd say the odds are an even 50/50, but even if it happens it probably won't stick -- perhaps a brief spurt above the previous highs and then a quick reversal back down below the highs. Then probably an economic rebound in 2005 along with climbing stock markets...just in time for the new (presumably Democrat) president to take the credit for it!

http://www.safehaven.com/showarticle.cfm?id=1292

syr :rolleyes:

syracus

21.02.2004, 16:06

China's material needs

The hungry dragon

Feb 19th 2004 | BEIJING, LONDON, NEW YORK AND TOKYO
From The Economist print edition

http://www.economist.com/images/20040221/D0804WB1.jpg

Nowhere is the impact of China's growth clearer than in the world's commodity and raw materials industries. No industries will lose more if that growth slows

AFTER difficult times that had lasted nearly a decade, mineral and metals producers from around the world have seen their fortunes improve spectacularly during the past year. They largely have China's booming economy to thank for this. In 2003, China's GDP grew by a reported 9.1%, its fastest rate since 1997—driven by the material-intensive construction and automotive sectors. Ravenous China's oil imports rose by 30% last year, exceeding Japan's to become second only to America's. China accounted for half of the world's consumption of cement, 30% of its coal, and 36% of its steel (of which imports jumped by 50%), according to China's National Bureau for Statistics. Copper imports rose by 15%, and nickel imports more than doubled. This helped to lift The Economist metals-price index by around half from a year ago, and by 75% from its low after September 11th 2001.

This, in turn, has done wonders for the share prices of firms such as Rio Tinto, BHP Billiton, WMC Resources, and Alcoa—each of which are up on a year ago, by 20%-90%. Goldman Sachs recently raised its profit forecast for these and similar firms, predicting that “China will remain a powerful driver of global demand growth for many commodities in 2004 and beyond”.

True, not everyone is happy. Rising global commodity and material prices hurt consumers everywhere, not least in America—though the fall of the dollar, in which many commodities are priced, should ease the pain of the price rises in much of the world, especially in Europe.

Higher input prices are hurting some of the marginal steel producers and copper smelters. Japan's Sumitomo Metal Industries and Nisshin Steel are switching to lower quality inputs to hold down costs: in fiscal 2004, Nisshin expects to raise its use of low-iron material by half to 30% of its total iron-ore consumption, compared with fiscal 2000. Recently, due to higher ore prices, several Japanese copper smelters said that they will cut production.

For the most part, though, the commodity and materials firms are being energised by the growth opportunity presented by China. David Humphreys, chief economist of London-based Rio Tinto, says that China will become increasingly central to his firm's planning, despite accounting for less than 10% of its current business. That figure understates China's significance, because “the truly important thing is the growth segment, and that is where China is so dominant. What is now taking place there is on a scale that has no real precedent.” For some commodities, such as iron ore, China in effect accounts for all the world-wide growth, he adds.

Rio Tinto plans to form a joint venture with Mitsui, Nippon Steel and Sumitomo Metal Industries in western Australia to improve the efficiency of production and increase the speed with which output is shipped. Mitsui, which has an established partnership with China's mighty Shanghai Baosteel, plans to build ten more steel-processing plants in the country, raising capacity from 1.3m tonnes per year to 3m. Although BP last week said it has sold its 2.1% equity stake in China Petroleum and Chemical (Sinopec), the British oil giant still plans to invest a further $3 billion in China over the next five years, on top of the extensive activities it already has there.

http://www.economist.com/images/20040221/CWB442.gif

China itself is doing its utmost to benefit from the strong demand it has created—and, it hopes, to reduce its exposure to supply bottlenecks, which have been a chronic headache. (In November, six Chinese copper smelters announced plans to cut back production because of inadequate supplies of copper concentrate.) One strategy is to acquire equity stakes in resource-based businesses around the world. This may be a good selling opportunity for overseas shareholders. Ren Haiping, of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences in Beijing, acknowledges that Chinese firms, with their state-owned, central-planning pedigrees, have much yet to learn about wheeling and dealing in the wider world. “They will, of course, make mistakes and bad deals, and there are lessons that will have to be learnt. But the government is prepared to tolerate this because it understands that this is the path China needs to take,” he says.

Spend, spend, spend

Notable examples of recently acquired Chinese stakes, which may or may not pay-off, include a planned joint-venture between Baosteel and Companhia Vale do Rio Doce, a Brazilian iron ore producer, whose sales to China grew by 33% a year in 1998-2002, to build one or two steel mills in Brazil, capable of producing 4m tonnes of steel a year. Worth perhaps $2 billion, it will be one of China's largest overseas investments so far. In January, Sinopec won a contract to develop natural gas in Saudi Arabia. China has also invested hundreds of millions of dollars in oil projects in Gabon and Algeria. And it is participating in aluminium, copper, nickel, and iron-ore projects in Jamaica, Zambia, Peru, Australia and Papua New Guinea.

The Aluminum Corporation of China recently announced plans to invest over $1 billion in a new aluminium project in Vietnam. It will not only provide most of the capital and technology, but also arrange the necessary railway construction. It plans at least ten other projects abroad to meet domestic demand for aluminium, which it expects to triple by 2020.

Though the future looks bright, there may be a few clouds on the horizon. The uncertain scale and effectiveness of Chinese activity in the raw materials markets ought to temper the optimism of foreign firms. So too should the risk that China's economy will go off the rails—though there have been encouraging signs of late that the government is applying some gentle pressure on the economic brakes to avoid unpleasantness later. It is also possible that today's high prices are giving misleadingly upbeat signals. Rick Holmes, a metals trader at Mitsui Australia, though generally bullish, says that a significant, but unknowable, portion of Chinese commodity buying is for arbitrage and speculation rather than physical demand.

Even so, dealing with China is far simpler for foreign commodity businesses than it is for other foreign direct investors, manufacturers or retailers. In China, as elsewhere, they need not worry about finicky or unfamiliar consumer tastes, trademark piracy or cut-rate copycat producers. As long as China needs more materials than it has, their businesses will thrive.

http://www.economist.com/business/displayStory.cfm?story_id=2446908

syr:sss

syracus

24.02.2004, 12:48

Two Presidents: parallel lives, parallel fates?

William R. Thomson
February 24, 2004

US President George Bush (Bush43) and Philippines President Gloria Macapagal Arroyo (GMA) would, at first glance, seem an odd couple. The first, Bush43, is the President of the world's hegemon; the second, GMA, is the President of a small, struggling South East Asian nation. But first glances are deceptive. The reality is that their fates are intricately intertwined as has been the fate of the Philippines since the US first landed there in 1898.

As if to symbolize this relationship, both arrived in office on 21 January 2001 in disputed circumstances and both face the increased possibility of exiting office at elections scheduled in May this year in the Philippines and November in the United States.

Both Presidents are unique in being the children of past presidents. In Bush's case he is only the second president in US history to the son of a past president. The previous case being that of John Adams and his son, John Quincy Adams, two hundred years before. In GMA's case, she is the only offspring of a past President of the Philippines to occupy Malacanang Palace. Her father, President Diosdado Macapagal, was in office from 1961-65. Running for re-election, he was defeated by Ferdinand Marcos, who was running for the office for the first time.

They are both the children of privilege, educated at the top schools, Harvard and Yale in Bush's case, Georgetown in GMA's, and trained from an early age to aspire to public office. Whilst Bush affects a populist Texan demeanour, he like GMA reflects his background and lacks the common touch.

In his controversial election in 2000, Bush famously lost the popular vote but was elected by a razor thin margin in the electoral college after the US Supreme Court, packed with Republican appointees, declared him the victor in the hotly disputed Florida election, whilst refusing to allow a state-wide recount and disallowing various appeals. To add to the conspiratorial air of things, Bush's brother, Jeb Bush, the Florida Governor, controlled the Florida count and the family's Svengali James Baker, the former Secretary of State to Bush's father, masterminded the legal process.

GMA was elected Vice President, in her own right, in the 1998 election that brought President Estrada to power. When he was removed, as the result of a middle class uprising against his incompetent, corrupt rule, GMA was declared president by the Philippine Supreme Court after the Armed Forces had switched allegiance to her.

Since coming to power both Presidents have had to struggle with the effects of a global recession triggered first by the meltdown from the bubble economy of the late 1990s in the US and its after effects combined with the so-called war on terrorism, in the aftermath of September 11. President Bush has overseen the most dramatic deterioration in the nation's finances as he first slashed taxes then piled on both domestic and defence expenditures to meet newly perceived threats and buy off special interests. The currency is now in the midst of a severe decline as it adjusts to a record current account deficit and the economy is failing to produce sufficient jobs to reduce unemployment.

GMA has had her own insurgency in the south to handle and has failed to get a hold of national finances as the country's tax revenues have plunged and the fiscal deficit mushroomed. Of equal importance, whilst personally honest, she has singularly failed to get a grip on corruption, which is now, by common acceptance, at near record levels.

But she has, like her father before her, firmly aligned herself with the United States in the war against terrorism, expecting American military and developmental assistance in return. This decision is controversial in the Philippines in its own right, but of more importance is whether she can show progress in raising the living standards in the country. In this, her record is poor, both in absolute terms and by comparison with her neighbours such as Thailand and Malaysia.

Their fight for re-election

Both Presidents have the fights of their lives to be re-elected and the omens are not especially favourable at this point.

President Arroyo

GMA is the first to face the electorate with the election scheduled for mid May. She faces several candidates; two of them serious, the others spoilers, and the winner will be the candidate with the most votes. There is no run-off election. The candidate leading in the opinion polls at present is an uneducated, unqualified actor named Fernando Poe jr., universally known by his initials as FPJ. Like Estrada before him, he is popular with the masses since he has been playing Robin Hood characters on the big screen for forty years and sorting out the bad guys from the good. He is backed by a fairly unsavoury group of ex-Marcos cronies. If allowed to run in a multi-horse race, he might be almost unstoppable.

Efforts are underway to discredit him saying that he in ineligible because, as the illegitimate son of an American mother, he should have taken her nationality and cannot be classified as a native born Filipino, a constitutional requirement for the Presidency. As far-fetched as the case may seem, the decision is in the hands of the Philippines Supreme Court, most of whom owe their loyalty to GMA. A decision is expected this week. If it goes against Poe he can be expected to appeal - to the courts and to the masses.

An unfavourable decision could well lead to civil disturbances if Poe's supporters believe the election is being stolen from them. At that point, the military could once again influence events and a former police general and current Senator and presidential contender, Panfilio Lacson, might play an important role. Although popular among the Filipino Chinese community, he is feared as a potential strong man.

But GMA has some important cards in her favour. The Church supports her as does the US Administration. (Throughout their contentious history, the candidate supported by the US has never failed to win. Uniquely, in the last election, when Estrada won, the US had a hands-off policy.) GMA is also the first sitting President since Marcos to face re-election and, therefore, the first to control the counting procedures under the Commission on Elections. A decision to drop electronic voting machines in favour of paper ballots has already been taken recently.

GMA's position would be considerably enhanced if the candidate of the middle classes, former Senator Raul Roco, could be persuaded to stand down.

The final result is therefore uncertain at this point but Mrs. Arroyo's candidacy is severely troubled. Peace and continuity would best be served by her winning but that does not appear easy in a fair election at this moment.

If she fails, she will go down like her father after one term because she was seen as ineffectual although, in fairness, good governance is presently severely constrained by the constitutional set-up that protects the wealthy few with their entrenched and vested interests. Constitutional change is a necessary but not sufficient criterion for progress. Without it the threat of civil instability cannot be discounted in the medium term.

President Bush

President Bush, facing the electorate, has a much tougher fight on his hands than anticipated even a month ago. Having engaged in what the world sees as an illegal, preemptive war in the Middle East he is now facing tough questions on both his foreign and domestic policy in the United States.

Suddenly, he faces the prospect of facing a war hero opponent with credible political experience. The wider societal trends may be turning again in the Democrats favour. The Republicans have always been split between the authoritarian conservatives and the free market libertarians. Reagan was the latter. Many of Bush's supporters in 2000 thought he was also. Instead, in the wake of 9/11, his opponents claim his policies have a McCarthyist anti-civil rights authoritarian tinge, and are in thrall to the large corporations at the expense of free competition.

In what is expected to be a close election, the critical factor is likely to be turnout of the candidates' core voter blocks. The Democrats are motivated, if only to get Bush out, whilst some of Bush's supporters from 2000 are demotivated.

History does not favour Bush. The Adams family served only one term each. In addition, Bush is the fourth President in US history to lose the popular vote but be elected on the basis of the electoral college. All the previous three such presidents served just one term.

William R. Thomson
wrthomson@btconnect.com
February 23, 2004

Bill Thomson is Chairman of the Siam Recovery Fund and advises governments and several asset management companies and institutions in Asia. He was formerly Vice President of a major international bank in Asia and is a former US Treasury official .

Quelle (http://www.321gold.com/editorials/thomson/thomson022404.html)

syr:sss

syracus

25.02.2004, 21:33

Lang, spannend und doch gibts alle Grafiken und alle Originallinks nur auf der eigentlichen Seite mit dem Link unten. Sonst wird's zuviel Arbeit :p!

The Great Inflation Train Wreck

2004: The Year of the Monkey
Russ Winter and Jim Willie CB
Feb 25, 2004

[After reading and discussing the thoughts and analysis of Russ Winter for well more than one year on Silicon Investor, I concluded that the community which is interested in world economic conditions should be permitted to share in his work. I am certain readers will share my view, after they read his assessment of the current evidence of widespread and rampant price inflation. -Jim Willie CB]

As this is written in late February, 2004, almost all market and economic observers are asking "What has been the effect of the Great Reflation orchestrated by the Federal Reserve and other central banks?" Most seem to be fixated on the notion that poor US labor markets will allow hyper-easy monetary policies to continue on, "patiently" to quote Alan Greenspan. The authors believe the markets are badly offside with this benign sentiment, and see something altogether else in store. We see material evidence of surprisingly high inflation, bottlenecks, and a worldwide subsistence or sustainability crisis.

First, a brief and to-the-point review will follow of the impacts of the Great Reflation within the United States. Extremely low interest rates have encouraged American households to expand household mortgage and consumer credit by $1,424 billion between Nov 2001 (officially the end of the recession) and year end 2003. During this same period, wages and salaries rose $193 billion. Household debt expansion grew relative to wages by 7.4 to 1. We leave the discussion to others, on whether such a debt expansion or credit bubble in the face of weak wage numbers is sustainable. Suffice it to say, the numbers speak for themselves in terms of the success of the low interest rate and tax cut stimulus on the US economy, at least in terms of job creation. The verdict is poor, and that's being kind. However, the global effect of the massive stimulus is quite another story, and that's our interest here and now. The subject of unintended consequences caused by the Fed's Reflation Initiative is discussed by Jim Willie in a recent work: "Broken Cycle: Permanent Intervention."

The US fiscal and credit policy has arguably been a major factor in the economic transformation of Asia over the last several years. It been reported that in China nearly two million people a month move from the countryside to the city, in effect creating twelve Asian cities the size of Philadelphia every year. Although movement from rural areas to the cities are part and parcel to emerging economies, this recent Asian experience is in a class of its own. So the question begs, why has this happened? We believe it has largely to do with the US credit bubble that has kicked this process into overdrive. Additionally, years of bail outs, rescues, and market interventions have contributed to a pervasive sense of global moral hazard. In China and elsewhere in Asia this manifests itself with the notion that maybe, just maybe, Americans have invented a perpetual wealth machine. Perhaps they think Americans really don't suffer bad years after all, and have actually abolished the economic cycle, which would be a big improvement over life in rural China, or Vietnam. Indeed, perhaps they sense such a free ride, that they pack up and go to work in that stainless steel toenail clipper factory in town. Once there, they will go with the "free ride" until such time as significant and unsustainable strains are put on the global resource supply chain of metals, energy, water and food. We submit that "until such time" has arrived. That time is now!

The Great Reflation & Stimulus (of Asia) has now suddenly created a worldwide spike in resources and input goods prices, as well as bottlenecks in transportation. The result is the real threat of a subsistence crisis (henceforth loosely termed "the train wreck"). One reason for the spike in resources is the fact the most commodities and resources are priced in US dollars, and it's no secret that the US Dollar is the weakest major currency in the planet. The reaction of the markets is straightforward and clear, we think. They wish to be paid in real terms. The recent comments of Saudi energy minister Ali Naimi says it all. "The falling value of the dollar means that oil prices were artificially inflated." His use of the word "artificially" may either be an expressed leap of faith, or perhaps diplomatic politeness? Regardless, his point is made:

"don't pay us with funny money."

The second component of the train wreck is the voracious appetite for input goods and resources that comes from selling to western markets and from building an Asian metropolis like Philadelphia every month. The new Chinese urban dweller is typically not going to a shanty town either. Standards of living are improving in Asia, and that translates into even more resource consumption. China became the world's largest consumer of copper in 2002, and now accounts for 20% of world consumption and 80% of world growth. Copper inventories as of this writing (2/18) are at 313,000 MT, the lowest in eight years. See current primary and scrap metal prices.

Prices are rising widely on the LME (London Metal Exchange), COMEX, and NYMEX, which freely trade in copper, aluminum, nickel, tin, lead, zinc, iron, steel, specialty steel, stainless steel, nickel alloy, chrome, titanium, ferrochrome, cobalt, molybdenum, antimony, manganese, titanium, tungsten, vanadium, and wolframite.

Even more alarming is the rate of decline in supply, prompting Pierre Lassonde of Newmont to state, "at this rate there won't be a pound of copper above ground on the planet in May." China is one of the largest consumers of alumina, zinc, lead, and nickel as well. Lead has the lowest inventories since June, 1991. Nickel is a particularly vulnerable metal commodity today. Used primarily in stainless steel production, one week's inventory (15,000 tonnes) above ground is now available. Stainless steel production in 2003 was up 8%, as was nickel consumption. China has added one million tonnes of stainless steel capacity for 2004, which requires an incremental 40,000 tonnes of nickel. The anticipated 2004 shortage of nickel is estimated by Inco at 75,000 tonnes, or 10% of annual demand. There are two major nickel mines expected to come on stream, Voisey Bay, and Goro, but not until 2H2006. China itself is not well endowed with resources, particularly the aforementioned. Moreover, what they do have is difficult to exploit, generally low grade, and located in remote areas suffering from poor infrastructure.

China has also become the fastest growing economy for energy. In Dec 2003, crude oil imports surged 23% y-o-y to 2.5 million barrels per day. Demand in China for crude oil is running 5.43 mb/d. The Energy Information Agency (EIA) indicated that crude oil stocks for the Pacific (eastern Asia) in Nov, 2003 was 155 mb, which is roughly 25 mb below the 1997-2002 average. Petroleum inventories in the US are also exceedingly low at 628.8 mb (on 2/6/2004), some 42 mb below the five year average. The world can now ill afford a geopolitical disruption from the usual cast of characters.

Although China once stockpiled large food and grain inventories, those are largely gone now, sold cheaply over the last few years to neighbors. The USDA release of 2/6/2004 stated the following, "Although grain stocks are still a state secret, MY 2004 ending stocks are forecast to be less than half of MY 2003, and the state held wheat reserve is reportedly extremely low. Grain production fell to its lowest level in a decade in 2003. Demand exceeds production, exports will decline, and imports increase." Other threats to Asian food supply would of course be avian influenza (aka "bird flu") which could wipe out their poultry production.

This brief synopsis gives the reader a glance into current Asian and Chinese demand characteristics. Importantly though, how does this translate in terms of impacts to the global economy, including the US? Primarily by creating shortages, bottlenecks, overheating and high prices (inflation). As the Asians scarf up commodities and goods throughout the world, they have smashed records for global freight costs on almost a weekly basis. The Baltic Dry Index, a barometer of the dry-bulk freight market for commodities such as iron ore, grain, and coal, is now up close to 300% from last spring.

A broker with Clarkson's in London exclaimed, "You only see this once in a lifetime, once in two lifetimes." Tanker rates for oil cargo from the Persian Gulf to the Gulf Coast of the United States are running $3 per barrel, double the average over the last five years. The expectation is that demand will continue to run high for shipping as China will kick off importing large quantities of South American soybeans from March to May.

If shipping weren't expensive and in short supply, this is all occurring against a backdrop of unusually low inventory levels for all kinds of key commodities around the world. The USDA in February revised world coarse grain ending stocks down to 100.47 million metric tonnes, the lowest level in a quarter century. That's about a month of usage (risky) versus a norm of about two months. This has of course resulted in large grain prices gains of late, and would be made all the more critical should important crops come up short, given the vagaries of nature.

As of this writing there is growing concern about drought in the hard red winter area of the US:

Low inventories run the gamut in food now. The USDA semiannual report on cattle supply came in at 94.882 million head as of Jan 1, 2004, the lowest level since 1959. Year end US soybean stocks were just reported to be the lowest in twenty seven years.

Should the US be complacent about food and energy prices? We think not. American consumers have enjoyed a multi-decade benefit of lower real prices and bountiful crops. Chart 1 illustrates this. See the Details.

Notice the steady decline in spending on nondurable goods (food and energy). Note that spending on durable goods has stayed steady, the same. Also note how money once spent on the nondurable food and energy goods sector has been diverted into supporting the service based economy (chart 4). Finally note the story in chart 3, which shows the couple percent drop in money spent on energy goods, the benefits of the cheap fuel interlude of the 1980' and 1990's. The next stage of the US version of the energy train wreck may be gasoline.

We feel that the other major element of the 2004 train wreck will be food inflation (conveniently excluded and dismissed by the Federal Reserve). Good cropland cannot be turned on like a switch either. In one high potential region, the cerrado of Brazil, it usually takes a half decade of land development to lower soil PH levels sufficiently to grow crops like soybeans. Additionally, these resource regions lack good storage and transportation systems.

FOCUS: Miners Face Delivery Cost Pressures Amid Boom

The big communist era stockpiles (and dumping) are gone. Plus modern farming is energy intensive, a special problem right now.

So referring back to our charts, we can see that prior to the train wreck now underway, US consumers spent 3 or 4% on energy goods, and 14% on food. In dollar terms that is about $300 billion on energy and $900 billion on food. Now calculate a shift or diversion to 5% on energy, and 16% on food, and an extra $200 billion in consumer spending is needed for subsistence items. Although farm value constitutes 19% of food dollar costs, other input items are also seeing price inflation: packaging making up 8% of food dollar costs, transportation and energy making up another 8%. Taken from the December PPI and Bureau of Labor reports, the energy components y-o-y of the CPI:

http://www.321gold.com/editorials/winter/winter022504/table1.gif

For PPI food inflation, the seasonally adjusted annualized rate for three months:

http://www.321gold.com/editorials/winter/winter022504/table2.gif

What would a subsistence crisis look like? Perhaps much like January, 2004 retail sales numbers, which saw more spending diversions.

http://www.321gold.com/editorials/winter/winter022504/table3.gif

So the train wreck scenario can be described as a demand pull inflationary event driven by runaway demand from Asia into crude goods and commodities held in short supply. This in turn is now leading to serious cost push inflation into intermediate and finished goods. An additional speculative element, even a hoarding component has been emerging and shown itself. Like other carry trades engendered by one percent fund funds rates, commodity trades are "no brainers" for practically any monkey on the planet. Simply borrow cheap in US dollars and pile into commodities and goods in short supply. This has been a winning trade on both the dollar short trade and the commodity long trade.

Ludwig von Mises described this behavior as the "crack-up boom" and said, "Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities will not cease to rise, everybody becomes eager to buy as much as possible and restrict his cash holdings to minimum size. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This was present in the great inflations of the twenties, and was called the flight into real goods (Flucht in die Sachwerte). If the credit expansion is not stopped in time, the boom turns to crack-up boom: the flight into real values begins, and the whole monetary system founders."

To the author the current inflationary outbreak has a certain crack-up boom feel and smell to it. For those who are paying attention, it certainly has been rapid. Given that the US Fed and Wall Street have chosen to fiddle as the evidence gushes forward, the reader will need to depend on other more reliable sources outside the Land of Oz (aka The Fed) to gauge this inflation. We would suggest going real time into the trenches with purchasing managers as an excellent starting point.

Please review the following Purchasing Magazine Online links:

ISPI gains 2.5% on major metals price push

And another round of sheet metal increases for April:

UPDATE - Nucor, ISG raise prices on sheet steel

OSB leads new explosion in lumber pricetags

Market mavens agree that aluminum ingot is inflating

Steel mavens forecast spike in sheet prices

Industrial leadtimes are skyrocketing

Diesel prices explode at pumps nationwide

LDPE is inflating

Cobalt tops January's movers and shakers list

Heating oil costs expected to go up

Look out for price hikes in chemical industry

Shipping rates are up

Trucking rates to rise

Another excellent source for tracking input goods inflation is the weekly commodity update put out by EDC.

Weekly Commodity Update from Feb 16, 2004

The charts speak for themselves. Note the big price surge in 2X4 lumber, and oriented strand board over just the last five weeks:

Strand Board:
1-9-2004: 310
2-13-2004: 486 (this product was below 200 last spring)

2 X 4 lumber:
1-9-2004: 337.5
2-13-2004: 394.50

And finally, overlay charts showing three component indexes of commodity and input inflation:

CRB Commodity Price Indices

The JOC-ECRI industrial price index shows petroleum and metals especially going parabolic of late:

JoC Online: Industrial Price Index

Apparently the Fed would have one believe this is all benign, and that other factors such as wages and labor are all that matter. To us, slack wages simply spells a further "squeeze" on heavily indebted Americans, not low inflation. And unfortunately, in the real outside of the Land of Oz, the impact of these shortages and bottlenecks are becoming acute. We recently spotted a news account from the Korean Times that describes our train wreck theory perfectly:

StockTalk: The Epic American Credit and Bond Bubble Laboratory

This 1/6/2004 steel shortage article out of the Middle East really caught our eye too.

And how have the increases in input prices played back in the USA? Inflationary, given the evidence. It looks like those Chinese-made stainless steel toenail clippers, might be getting more expensive, or soon to be in short supply?

Import prices:

Nov 2003 +0.5%
Dec 2003 +0.5%
Jan 2004 +1.3%

Even using the familiar trick of excluding "volatile" energy, import prices for the last three months rose 1.1%, equal to 4.4% annualized. Even export prices demonstrated the new inflationary footprint, rising 1.2%, equal to 4.8% annualized.

China may have to pass costs on as well, given their own emerging inflation.

StockTalk: The Epic American Credit and Bond Bubble Laboratory (#8006/8245)

Perhaps a timely yuan currency repeg might make at least those expensive imported commodities more affordable in US dollar terms? Can China afford to absorb the new costs of exporting to America? A rather unnoticed change in Chinese tax law makes that even more difficult now than otherwise. Effective Jan 1, 2004 rebates on tax payments that Chinese businesses could claim for products sold outside of China were cut. For instance, on microwaves, small appliances, and air conditioners, the tax rebate will drop from 17% to 13%. We will be watching closely for Chinese price increases to protect their already thin margins.

How about US based firms selling at home? That question is up in the air, and a critical piece of the picture. Early evidence is mixed. We believe most of the crude and intermediate goods producers are passing on these new inflationary costs. At the finished goods level, we are still looking for strong evidence. The February Empire Sate surveyed showed that prices paid were strongly on the increase: 39%, versus decrease of only 5%. Prices received were punky: increased 15%, versus decreased 11%. This would suggest that at this stage a great cost squeeze is on finished goods outfits and possibly retailers. Perhaps these pressures will encourage US based firms to speed up the outsourcing of the one input cost they truly control, labor. Certainly that topic could be the grist of further articles from the authors or others?

Russ Winter and Jim Willie CB
February 24, 2004

Quelle (http://www.321gold.com/editorials/winter/winter022504.html)

Es gibt keine Inflation und im Irak herrscht Friede, Freude Eierkuchen :schaf:.......

syr:sss