-- Posted Monday, 24 March 2003 | Digg This Article
March 20, 2003
We live in dangerous times. But we also live in times where delusional behavior is raising the risks and intensifying the danger. An unchecked cancer is growing on our nation’s consciousness, fed by denial of degenerative hardship, grown from a layer of ignorance, inhibiting its ability to perceive reality and to properly make decisions for the future. The American public clings to a scintilla of hope that all will be well, jobs secured, threats eliminated, wealth restored, pensions returned to health. My January article “Predictions for the 2003 Year – Bear Claws” closed the preface with an admonition on pervasive delusion within the American psyche:
A dangerous multi-faceted delusion has caught our entire nation in its grip, characterized by naïve perceptions and acceptance of economic disinformation, fair stock values, safe haven in real estate, ultimate sanctuary in Treasury bonds, imminent economic recovery, quick resolution to Iraqi conflict, moderation of crude oil prices, and trust in failed re-tread federal government (Keynesian) and Federal Reserve (monetary) stimulus programs. Pervasive delusion breeds a climate for further accidents, errors, and additional financial losses. The new year will provide ample opportunity to toss much more cold water of reality on our faces. This bear has only begun to claw its way toward Main Street and Wall Street. A ray of hope lies in new the new Bush economic package and the Fed's willingness to forestall deflation. However, the harsh reality calls for political squabbling, watering down its best elements, and watching them fall short of accomplishing much more than procrastinating the time of reckoning. (JW, January 2003)
If anything, the delusions are becoming deeper, wider, more desperate, and departing farther from reality in just the first three months of this new year. A sense of profound denial lingers after the bust of the economic miracle, irresponsibly founded upon the greatest debt-generated speculative mania in human history. Could the New Economic miracle have been a mirage? Won’t our fabulous productivity pull us out of the morass? Doesn’t debt build wealth? Wasn’t the business cycle repealed? Can’t the Fed save our skins as in the past? Can’t the federal government just print enough money to rescue the economy? Didn’t the strong USDollar produce the world’s engine of growth and prosperity? What in God’s name went wrong? What are we missing? In short, the answer lies in “Economics 101” at a fundamental level. Our entire economics community supports a heretical system that produces apologists for perpetual debt abuse.
I have been astounded and dismayed by the pervasive level of delusion harbored within and widely shared by the American public. Denial of the shattered American Dream seems to be festering against a backdrop of alarming financial illiteracy which saddles citizens and investors of this country. We simply have no interest, nor ability, nor sources of learning, in order to raise our collective intelligence on financial matters. The end result has been the advancement of clinical delusion, based largely on the belief that all will be well, as prosperity is restored. Our empire will remain intact, as will our world dominance. Is such a view based in reality? I think not, and expect that a difficult transition is in progress as our nation sees a significant cutback in its collective wealth, as adjustments are forced upon our spending patterns at all levels, as the abusive expansion of debts are dealt with in draconian fashion. In this piece I hope to disabuse readers of many persistent delusions in support of fallacious views. My list of delusions outlines the neurotic condition of the American mindset.
World opinion and international impressions of the United States are hard to monitor. The world’s eyes surely see a nation which offers unlimited opportunity for individual success. They acknowledge a system which delivers tremendous reward for good ideas and innovative, if not revolutionary, approaches. They perceive a land where readily available credit can be used to build businesses, true engines of wealth and jobs. They observe a society which offers perhaps more economic fairness to people of diverse color and creed, than anywhere else in the world. They witness unnerving speed of change within our realm. The enjoy our unique contributions to the arts, films, jazz, and even our western cowboy genre. They benefit from and are grateful for huge charity and aid throughout the world. They detect incredible wealth in stark contrast to abject poverty, in wonderment.
Perception has an opposite side, sadly evident in recent years. The rest of the world is now steeped in consternation, looking at us and wondering if we have taken leave of our senses. They see a nation whose leaders are either fools or criminals, often inexperienced but overseeing large arsenals, thrusting the western world toward a dangerous war. They are catching their breath after an historically unprecedented speculative disaster struck within our financial markets. They witness a world financial system wretch toward a probable recession and possible depression, as failed discredited monetary and fiscal policy is repeated in unknowing blind futility. They suffer a nation with a superiority complex, stifling arrogance, and ignorance of international culture. They observe a nation conduct politics directed and motivated by big business and press photo opps. They watch a people beset by parallel burdens. Careless abuse of debt has hobbled our ability to maintain the current exalted standard of living. Thoughtless abuse of food has created a ball & chain to be dragged around, called obesity. They see a younger set who learn from television and video games instead of reading, take their fashion cues from the ghetto, and produce music that lately sounds more like bad poetry put to an angry beat. Yet we actually maintain the belief we are a shining beacon to the world, not only in business, but with an emulated culture. More delusion. Instead, we are increasingly the object of world scorn. We are causing big problems. We have been infecting the world with financial viruses which emanate from a debt-based system founded upon hazardous currency and uncontrollable deficit spending, whereby leverage and other gearing are employed in every corner, magnifying the risks.
Below are 69 individual delusions, each clearly identifiable and rampantly spreading. They start with the war and economy, drifting to the USDollar, Treasury debt and banking, gold, stocks, real estate, and miscellaneous areas.
MIDDLE EAST WAR FOOTING :
1. Iraq tensions obstruct capital investment, hiring, and consumer spending
Sure, plenty of uncertainty looms on the horizon. But the debt explosion of the 1990 decade together with misread final demand led to a bust. Capital spending has wound down since mid-2000, showing signs recently of extinction, as SunMicro’s CEO McNulty chooses to describe it. Industrial capacity is roughly 35% greater than warranted by current demand. Consumer spending is stretched from household debt exceeding annual income in aggregate. Hiring is troubled from bleak prospects of corporate profitability and flagging customer demand. As we proceed down the path that has been marked by paper-based asset writedowns, debt destruction, corporate insolvency, personal bankruptcy, buffeted by seemingly endless new credit and lower rates, realized through mortgage refinance, the economy continues to struggle. A slide into recession now seems certain, which will lead to an acceleration of negative influences likely to deepen the recession, and possibly even flirt with depression. No, Saddam Hussein is the scapegoat to our economic malaise, the direct result of our own devilish handiwork.
2. Saudis and Kuwaitis will compensate for any oil interruption
For starters, Kuwait has extremely little excess capacity. Certainly good will is expressed against a rising tide of fundamentalist power within its governing bodies. Saudi oil production has legendary excess capacity, which has already been running higher in response to the curtailment of Venezuelan oil production. They can surely increase further. But nothing can go wrong for Saudis to come to the rescue. No terrorist hits on their oil terminals… no political obstacles to save the American economy when Saudis are blamed for the World Trade Center attack… no other disruptions to oil shipments from Russia or Nigeria or Venezuela or (name 5 others). The entire Saudi nation benefits from higher oil prices. Kuwait, hosting US Military staging platforms, might sit as a primary target for Saddam’s SCUD missiles. No, when something goes awry, expect a crude oil price spike toward $70/bbl if we attack and seize, which would match the 1991 Gulf War peak.
3. expect the same fast Iraqi war outcome, same immediate stock rally response
Almost no similarities exist between the current war posturing and the Gulf War. I could name ten differences. The biggest are that now Saddam and his regime are entrenched on home soil, and the world is hardly aligned in support of our aggression. The cost was shared in 1991, but now must be borne by Americans alone. Hand-to-hand combat on Baghdad streets will not conclude quickly. Confusion will reign as non-combatants litter the battleground landscape. We cannot even clearly pinpoint Saddam’s location. Baghdad is a city of five million residents, larger than Metro Boston. Expect total chaos if war is waged on Iraq. Also, if 1991 is any indication, expect the war to become a spectator sport, diverting our citizens from the shopping malls. No, tensions might persist for many months even after the conflict subsides within the borders of Iraq, which then ushers in the nightmare of occupation, dealing with the complexity of a Kurdish homeland, and putting out fires.
4. US occupation of Iraqi oilfields will come without repercussion
From an Islamic or Arab perspective, I cannot think of anything that would more enflame this collection of one billion people into a worldwide frenzy. First of all, restoration of Iraqi oil production would require between $2 and $5 billion, since they have undergone neglect. I believe Saudi Arabia would be the target of violent reaction, for their continued support of US Military forces, and their continued hospitality for use of the Prince Sultan Airbase inside their borders, defiling holy lands. Arabs are likely to stick together when one of their own is attacked, or one of their nations is occupied by infidels, far more than we expect. No, any rational person would expect the nearby Arab Islamic world to absolutely erupt in protest, in public demonstrations, in formal diplomatic objection, culminating in outright violent retaliation.
5. US Military has bigger weapons, which will bring quick victory
This denies the tragic events of September 11th in 2001. US F-16 fighter aircraft and state-of-the-art communications systems failed to stop the attack. Large naval destroyers and aircraft carriers failed to stop the deadly smaller attack on the USS Cole in the Yemen port. We dictate the theatre of war operations, but not the theatre for terrorist activities. Where we isolate the enemy, we will have swift military victory, although with messy collateral civilian casualties. We may prevail inside Iraq, but what of retaliation outside Iraq? We will surely witness counter attacks, not the least of which will be a boycott of US financial markets and of the USDollar itself. Our stocks, bonds, and currency represent our greatest vulnerability, which our enemy realizes. No, our victories will be localized, while our setbacks will be distributed across the globe in financial markets and world sentiment.
6. war is good for our economy as a stimulus
Since when is destruction good for producing wealth, jobs, and prosperity? Diverting scarce capital for the purpose of bombs and bullets has never paved a road to riches. Instead, it greatly distorts elements within an economy, while costing tremendous sums of money. Will the investment result in a much better world, or spark new rounds of terrorism? The trickle down within the defense industry contains only two to three steps, and at exaggerated costs from longstanding relationships that are milked to the hilt. The multiplier effect within the private sector contains six to eight steps, as suppliers and contractors combine to build industries, which actually produce jobs and commercial benefits to an economy. No, war is unproductive.
7. democracy can be imposed in the Arab world
The Iraq region has not seen democracy in five thousand years. The Arab world has had a few episodes of democratic leadership, but the assassinations of Nasser and Sadat ended those examples in Egypt. Is Mubarak the leader of a democratic land, or is he held ransom by a strong and vocal Islamic community? Our plan to impose democracy steeps with arrogance, hegemony, and naïveté. The Arab culture is inconsistent with such a structure of government. A tribal culture that does not value education or advancement of women’s rights offers no foundation for the active requirements of democratic representation and leadership. Most Arab democracies have resulted in brutal dictatorships. No, any attempt to promote a democratic leader would be quickly seen as installation of an American puppet for conducting our business and furthering our interests, inviting a quick broad backlash.
8. Russia is our new friend and ally
Since the fall of the Soviet Union and the more concrete dismantling of the Berlin Wall, Russia has stood as a curious wolf in sheep’s clothing, in my opinion. They have promised and delivered on crude oil and natural gas supplies, offsetting and neutralizing the Saudi dominant position. Energy agreements benefit both the USA and Russia. But many rigid crusty ex-Soviet Army diehards remain in place. Supplying the underworld of terrorist commerce with dangerous weapons, the former KGB has become a menace. President Putin himself is ex-KGB, and thus is a likely master at deception and diplomacy. Already, longstanding NATO officials show concern and distrust. Secret military codes and protocols are being shared with not only Russians, but other eastern European nations that once lived under the Soviet Bloc. The Soviet Union supplied arms for 30 years to enemies of Israel and every terrorist state in the Middle East. Most Iraqi military hardware was built in the old Soviet Union. Old ties die slowly, while old habits die even more slowly. No, sooner or later, Russia will betray the United States.
9. German, French, Russian objections to Iraqi war center on humanitarian concerns
Business investment by German industries involves chemical plants, where much money is owed by Iraq. Business investment by French industries involves chemical plants, the supply of helicopter parts, and of weapons-grade plutonium. Much money is owed by Iraq. Business investment by Russian industries (and former Soviet Union contracts) involves oilfield and military equipment, where much money is owed by Iraq. All these debts would have to be rewritten or renegotiated, if the USA occupies Iraq and controls Iraqi industry. Controversy would arise on fair treatment, especially after the nature of direct French participation in weapons programs is revealed. No, these nations are primarily disturbed about threats to industrial investments with their Iraqi business partners, and might be embarrassed when an occupation reveals their extent.
US ECONOMY :
10. economic recovery will come in the 2nd half of this year
Like the chant of a mindless cult, this refrain is trotted out each spring following the failure of the recovery to arrive as predicted. Bear in mind that the chant is written by those who want the retail investor to remain fully invested for the long haul. Also important is avoiding a consumer pause, waiting for cheaper future prices. Each year this forecast becomes more laughable, as its fallacious framework from the previous year is not adequately explained. In fact, with each passing year, the justification for its next late arrival becomes even more naïve, insulting, and ludicrous. No, this incantation is getting old and might only work with imbeciles.
11. consumption can pull the US out of its recession
This belief points out the depth of ignorance when understanding how wealth is created at all. If incomes are not growing, jobs are disappearing, debt is still rising, and businesses are not investing in capital equipment, how on earth can continued consumption promote growth to form a strong foundation whereby the economy can grow? This absurd premise has been promoted ever since our mfg base disappeared and a service sector began to dominate. On several occasions, our leaders have urged us to continue our spending, even to raid our home equity to support spending. I believe we are caught in a trap, one which was entered as a result of excessive consumption, largely financed by debt. The economy is now slowing, as consumption has slowed. So we are deluded into thinking that more consumption can lead us out of the very same trap. Such twisted thinking leads me to conclude that our economic design team (i.e. economists) is so inept that they cannot properly discern the quagmire we are in. No, our economy requires the opposite – savings and investment, and a painful transition whereby excessive debt burdens are cleansed by whatever means.
12. the 2001 recession was little different from previous cycles
No resemblance whatsoever exists between this recession and any since World War II. A long recession in the 1970’s occurred as VietNam war debts came due, OPEC quadrupled oil prices, and price inflation hit our shores like a fierce firestorm. We endured the stupidity of Nixon’s “Wage Price Freeze” whose only accomplishment was widespread shortage. The recession in the early 1980’s could be characterized as a systemic reflex pullback following a monetary and fiscal stimulus that succeeded in extracting us from the previous morass, only a few years before. The recession during the Gulf War was from an energy price shock. No, this recession has come after a decade of debt explosion, a speculative mania, and an asset valuation bust, in the face of worldwide excess capacity, overflowing product surplus (with attendant liquidation) and wholly unrealistic expectations for technological expansion and demand.
13. double-dip recessions are unusual, and don’t occur very often
Again, a bold statement that flies in the face of history since World War II. Does anyone even study history? Every recession in the past fifty years has been accompanied by a follow-up recession, brought about by the economy’s inability to properly absorb the heightened stimulus required to extract businesses and consumers from the drag of the prior recession. Such beliefs seem to be almost as desperate as pathetic in nature. In the challenging 1970 decade marred by VietNam War cost reconciliation, OPEC price increases, and Watergate, we actually witnessed a triple-dip recession. Instead of rationally accepting a reality, we cling to false hope. Instead of accepting that we must reap what we sow, we attempt to forestall natural consequences, thus risking more dire outcomes. No, double-dip recessions are the norm, not the exception.
14. real estate equity extractions can sustain the economy
Alan Greenspan repeats this heretical statement periodically. Sharply lower interest rates in 2001 induced and encouraged the stock bubble to migrate and develop into a credit bubble. What resulted was yet another speculative mania, this time in real estate and its mortgage finance. Now the Master of Bubbles has seen fit to encourage homeowners to continue and sustain their profligate spending patterns, to sustain the consumption insanity, so as to keep the economy running on fumes. He has actively encouraged people to tap into their most stable and secure nestegg, which often serves as the basis of retirement security. In the process, households will have fewer resources to fall back on when the MAIN EVENT recession comes next, many of those same homeowners lose their jobs, and distress turns painful. If and when housing prices turn down, as they did in the late 1980’s, we will surely hear of negative home equity. No, tapping home equity is temporary and finite, only to leave people far more vulnerable on the next downturn, which might be now.
15. China is a constructive trade partner, lowering our costs
The transition continues that began around 1980. The United States began to ship its mfg jobs offshore, realizing lower labor costs. The jobs went to Japan and the Pacific Rim. Later assembly jobs went to Mexico with the advent of NAFTA. Now we see the next final stage, where China’s vastly lower labor costs severely undermine the entire Japanese economy and the PacRim to boot. A valid argument can be made that our increase in money supply is matched by increases in consumer debt, which are equivalent in magnitude to increases in the Chinese trade surplus with the USA. So we as a nation are hemorrhaging money, and this money was created by a printing press. The same quantity of money is being collected by China, which is building factories, creating jobs, increasing its standard of living, and filling its banks with gold and other sovereign bond reserves. Our prices are indeed lower, but this is a trap for US consumers. Our jobs continue to disappear, as do jobs among Asian export partners competing against China. When international pressures are forced upon Chinese leaders to honor commitments for entry into the World Trade Organization, they will revalue upwards their yuan currency, resulting in markedly higher prices for American consumers. Then the real problems arrive for our Treasury Bonds and longterm interest rates. No, China is rapidly gaining market share, and in several years will be both positioning itself as our adversary and competing for equal status on the world stage, where influence is parceled out.
16. Japan's bust has almost no similarity to the USA bust
Japan’s bust is 90% similar to the bust seen in the United States. Again, poor comprehension of history. They modeled their economy after ours, from the mfg foundation to the banking system. Their debt levels rose at a dangerous pace, while their asset base (stocks and real estate) appreciated into a speculative mania. Ditto for the USA. In fact, where we indeed differ, the USA displays severe comparative weaknesses that point to danger. We allow bankruptcies, and are seeing them rise without obstacle. We are an importing nation, and are seeing the stage set for rising import prices from dollar devaluation. We are an indebted nation, and are now subject to K-Winter vicious liquidation. We save inadequately, and cannot invest in capital formation without stacking more debt atop debt. We have a bloated overvalued currency, whose correction will wreak untold havoc on our economy. I am sorry to report that we careen down the Japanese path, but with more dangerous turns. The most recent similar signal is our 0% rate promotions for car sales, which is the current Japanese prevailing rate. Japan has gone so far as to offer negative interest rates on loans, to encourage spending. Is that what lies next for us? No, our bust is not only similar to Japan’s, but our differences point to dangerous additional vulnerability.
17. recent evidence of inflation’s return is good, seen in rising commodity prices
Some naïve observers proclaim early victory in the Fed’s battle to turn back the forces of deflation. We have seen early evidence of some price inflation, which have encouraged only the deeply illiterate. The American public is legion with ignorant and illiterate. We already have been dealing with rising employment costs -- wages, health, insurance. Now we are seeing higher producer prices for materials, as commodities generally are rising in price. The coup de grace is the spike in energy costs, both crude oil and natural gas. Production costs for businesses are now rising, even as pricing power is nonexistent. Household costs are now rising, even as job security is slowly eroding. No, we are witnessing “bad inflation” which leads to higher production costs and shrinking profit margins and upcoming job layoffs, complemented by higher household costs and shrinking budgets and reduced consumer spending.
18. capital investment can lead a recovery, with consumer spending and hiring to follow
Again, reality ruins this wishful thinking exercise. Instead, the evidence suggests that capital equipment purchase and investment typically comes 8-12 months following the pickup in spending by customers within that business sector. Surely we need capex to increase, which would be a solid shot of adrenalin to the economy. But that hardly suggests it will happen without the accompanying justification for large capital outlays by cash-strapped businesses. Demand must come first. Furthermore, lenders are less willing to lend to distressed firms. Abused in the last decade, secondary stock issuances are not now available as a source of funding. The bottom line is that mfg capacity utilization stands at 75%. Why would our business sector risk failure overextending capex in the face of historically high excess capacity? No, capex follows resumption of customer demand, does not lead it, and will be very slow in returning.
19. evermore fiat money is the prescription for the current economic condition
The United States economy is suffering from several decades of excessive monetary and debt expansion. This steady, relentless addition of money and debts created horrendous imbalances among the consumption and investment communities. We consumed to excess, thus creating large debts. We invested in production capacity to excess with attached debts, thus creating a surplus of goods. At the same time we neglected the messy and more difficult business of producing commodities, while gearing down their prices and burdening them with regulations. So we have deflation in finished product prices, as debts are liquidated. We have consumers exhausting themselves, as they run up debts even faster than income, and refuse to change their engrained lifestyles. We have inflation in materials costs, as their value rises relative to the unbridled increase in paper-based securities and money supplies. We maintain the heretical notion that a deep recession (or worse) can be averted if only we prevent the spread of illiquidity. The result would be the same if Jack Daniels were steadily supplied to an alcoholic during detox. We do not understand what plagues our economy. The inept economic advisors who led us to this mess have no solutions besides more of the same negligent defiance of nature. No, evermore printed money only delays the inevitable, plants seeds for future price inflation, and makes certain that the final recession is far more painful when it arrives.
20. the stimulus of lower interest rates will eventually succeed
Since January 2001, eleven interest rates have failed to stimulate the economy. We find rates now at the Fed Funds 1.25% target level. Yet economic activity remains subdued and moribund. Debt levels are too high. Final demand is extremely sluggish. Mfg capacity is still in excess. Asset prices are still in retreat. Income sources are still at risk. In fact, lower rates beget even lower rates as the economy slows, the absolute opposite of what bungling economists preach. Twice as much interest income is received as interest cost is paid out. So consumer spending is slowing down from lower rates, not stimulated. The income earners tend to be more docile grayhairs; the debt payments are made by more vocal younger “go-go” crowd. If lower rates were to succeed, they would have elicited a strong response by now. The same path in a post-bubble environment destroyed the economy in Japan, another fact denied by the incompetent economist community. No, lower rates ensure we proceed down the Liquidity Trap of zero interest with zero future and bank destruction, just like Japan.
21. fiscal stimulus will ensure recovery, whereas monetary stimulus so far has been sluggish
As the govt carries on with increased deficit spending, they will aggravate an already risk-laden situation with the USDollar and our Treasury debts. The trouble is overloaded debt, excess capacity, and now rising materials cost. Besides, the govt is likely to place the money in the hands of poor consumers, rather than the rich who invest in business and jobs. This perpetuates the consumption bubble that is bound eventually to dissipate. The real horror story lies within state govt fiscal books, where deficits are outright frightening. Hikes in state sales taxes, state income taxes, and local property taxes will offset any relief offered by the federal govt. So once more, the cure will be fleeting, leaving us with greater govt debt and nothing fixed. No, continued fiscal stimulus will raise the currency risk and eventually lead to higher longterm interest rates, delaying ultimate resolution by extending our unproductive consumption.
22. productivity increased in 1990's, and is still strong
This is not so much a delusion as a corruptly promoted myth. Productivity has increased at a steady pace of 2% annually for many years. Under Greenspan and Clinton’s supervision, we now double and triple count capital investments, thus greatly exaggerating productivity. The most recent ploy is to move software investment into the capital equipment category, which serves to amplify its effect through even more double counting. Our govt uses the same corrupt accounting methods decried in corporate fraud cases. Greenspan routinely relies on this productivity miracle as justification for both high stock share prices and expected economic revival, his alibi for failure. And the American people accept it on face value, knowing no better. When overcapacity drags on an economy, idle equipment will typically come into service during upticks in business demand. So the recent perceived (distorted) rise has come in the face of near-depression levels of capacity utilization. Such is hardly a signal of economic recovery. No, productivity is still around 2%, is steady, neither weak nor strong, and is not changing.
23. federal deficits don’t matter, since we can grow out of them
When our economy grew in the 1990 decade, our federal deficits grew from $4.5 trillion to $6 trillion. The Keynesian model dictates that during the prosperous years, government surpluses be drawn upon to pay down the debt. Instead, we increased it, vastly expanding our socialist system. When our economy falls into retreat during more challenging times such as recessions, our federal deficits usually escalate in dramatic fashion, as we are seeing now. Magnify those deficits when security and wartime concerns dominate. We have shown no discipline. Our deficits rise in good times, and rise faster in bad times. And worse, they threaten our Treasury debt, our longterm interest rates, and the viability of our dollar currency. Worse still, our Treasury debt is 45% owned by foreigners. Eventually our creditors will doubt our ability to repay at all. We advertise to young television viewers that their drug purchases support murder and other violent crimes against South American children. Let’s project the same phenomenon to a national level. Our federal debts owned by foreign nations are now supporting Islamic Fundamentalist movements, which finance world terrorism like seen at the World Trade Center. No, we never have nor never will grow out of federal deficits, which contribute to the spread of world conflict.
24. trade gaps don’t matter either, since they are good for the world economy
Of course trade gaps and balance of payments matter. When large, they register a dire signal, which cannot be dismissed. The global economy has yet to be recognized as a failed experiment. It will culminate in endless recession for economies with higher wage structures and overvalued currencies, most notably the USA. The message (largely ignored) is that we do not build what we consume, and must address the imbalance. Our largest export is debt. As a nation, we rely upon foreign capital to maintain our entire economy. The financial market response is designed to bring the system back into balance, by means of a currency correction. In our case, the dollar decline will be dangerous and vicious. We have for decades been creating Asian jobs, building economies abroad, supporting developing nations, while recklessly dismantling the entire US Economy and suffocating ourselves to death with debt. No, trade gaps indicate deep distress, which must be addressed with or without cooperation. The consequences will be certainly grim, like endless recession.
25. jobless rate is holding up well, still under 6.0%
The jobless rate is far higher than 6.0% since so many people are no longer even counted. If a worker has exhausted his/her unemployment benefits, then not only is that person out of subsistence income, but the govt prefers to consider him/her a missing person in their Enron-style accounting system. The Germans still count people whose jobless benefits have run dry, criticizing our methods. We shove them into the labor sewer, and out of the counting system. We do not even bother to estimate the young minority adults who rank among the unemployed. Experts in labor accounting estimate that our jobless rate is around 9.0% and climbing. Further distortions center on counting a person as “employed” even if he/she works only a few hours per week. No, our jobless rate is much higher, since we distort the reporting process in order to keep confidence and foreign investment high.
26. blame game: 1999 Y2K, 2000 soft landing, 2001 WTC/Enron, 2002 Iraq
Americans simply cannot come to grips with the reality of what ails us and what is failing in our system. Giant cracks in the entire system are being exposed, from debt structures to irresponsible central banking, to derivative gearing, to asset speculation, to corrupt accounting, to embezzlement, to distortions in economic reporting owing to govt vested interests. So we blame the stock bubble of 1999 on the Y2K snafu that never arrived. So we blame the tech/media /telecom/internet bust in 2000 on the healthy need for a Soft Landing. So we blame the recession in 2001 on the World Trade Center attack, the Enron fraud scandal, and general corporate malfeasance. And now we blame the stalling economy on Iraqi tensions and war buildup. This entire blame game is symptomatic of an addict in denial, coupled with a national abdication of responsibility. The Weimar Republik blamed their country’s problems on the Jews and the threat of a Zionist state. Have times really changed? Next year will likely place blame on higher energy costs and Arab withdrawal from our markets. No, the blame goes to our system, its designers, its leaders, our Congress, all participants – US.
27. depression could never happen again, since the system has designed counter-measures
After the Great Depression in the 1930’s, we installed safeguards and created institutions which were designed to prevent calamity from occurring again. But did we avoid the gratuitous granting of credit and usage of debt? Did we avoid speculative mania in stock prices? Did we avoid vast over-expansion in productive capacity? Did our govt leaders encourage the excesses? Did our corporate leaders corrupt the system with their own fraud, largesse, and embezzlement? In the 1930 decade, our Congress passed legislation that erected a firewall among the banking, brokerage, and insurance business. In 1997, Clinton’s Congress repealed the law, just in time for the bust, which is far from over. Depressions occur to purge a system from widespread and crippling excesses in debt, often coupled with irresponsible expansion of the money supply. Since 2000, debts have actually accelerated while the monetary base has expanded at an alarming rate. No, a depression is far more likely than it was even two years ago, since safeguards are removed and debts continue unabated. By treating the systemic ills with more of what caused the sickness, we put the nation at greater risk now of depression.
28. US capitalism prevails over all other nations, the world’s growth engine
Our version of capitalism might dominate, but let’s see if it prevails. Our type of capitalism unfortunately allows uncontrollable expansion of debt and the limitless supply of new money, together with unpunished large-scale fraud, not to mention the drone of paid legislative influence. The sun might be setting on Pax Americana. We will see; the jury is still out. It is not clear we have capitalism at all – it is more like DEBTISM. And this newfangled “financial engineering” is just a façade to conceal the fraudulent management of leveraged debt. Large institutions are not permitted to fail, provided their roots are in New York City. No doubt we operate as the growth engine. The world might for now continue to support us, knowing their future will diminish if we fail. They are desperate for us to snap out of it, and resume vigorous spending. However, our abuse of this engine status is reaching criminal proportions. Our dependence upon foreigners for their savings and capital seriously brings into question whether we are indeed an “engine” at all. Our chief export is clearly debt. Our national balance sheet is showing extreme hemorrhage. No, if we are an engine, we are a debt engine, and we can fail if the world cuts off our credit line which we abuse for a hedonistic lifestyle and colonialist foreign policy.
29. foreigners are taking jobs away from our citizens
My last job at a national retail chain was filled, after I departed, by an Iranian recent graduate. My former manager claimed he saw few American qualified candidates. Skilled technicians do not often emerge from American schools. Nintendo players do, hiphop singers and dancers do, World Wide Wrestling fans do, drunken college dropouts do, bankrupted college graduates do, since our school systems too often merely advance students instead of educating them. Heck, math is optional now in high schools after the second year. Every German high school exchange student I have known has jumped to the head of his class when entering our less skilled student force. Our high technology sector would never be so strong without skilled Indians and Taiwanese. Their skill and leadership has created thousands of jobs for Americans. Ignorance and hard times usually breed contempt for foreigners. No, our economy desperately needs highly capable foreigners, since our domestic workers are largely unskilled and often have poor discipline.
30. US service sector is bedrock, and will remain strong unlike the manufacturing sector
Clearly, the US economy is a service giant with over 55% of the GDP devoted to service. But now intercontinental telephone costs are low. But now the internet has provided zero marginal costs for shipping service products. But now English is widely spoken in lands which offer professional wages at a fraction of ours. India, Hong Kong, and other countries are undercutting our service sector, employing tens of thousands of highly trained workers. Customer support centers, software development, product testing, and other service enterprises are increasingly being provided by foreign sources. India has become an emerging software powerhouse, embarrassing Americans with better, more reliable software. Standards facilitate competition from abroad, while our overvalued currency and high labor costs constantly encourage foreign outsourcing. Many jobs have been lost in recent years. No, the trend has begun, whereby lower cost service businesses are being managed by foreign firms, sometimes with higher quality.
USDOLLAR :
31. USDollar will level off at equilibrium, stabilize, and not overshoot
More wishful thinking that defies all historical precedent. In almost every single case of currency correction in the last few decades, an overshoot occurs. It not only goes beyond the eventual equilibrium point, but can remain beyond that point for several years before evidence arrives that a correction has indeed been engineered amidst causal imbalances. The pattern has been that a currency corrects until not only the fundamentals behind the trade imbalance is rectified, but also confidence in that nation’s economy has hit a bottom. It continues until a renewal is seen in foreign investment and business. In the case of the USDollar, that point may never be reached. Our economy has little mfg capacity inherent as an industrial mechanism; outsourcing continues as a phenomenon in search of lower cost. Our leaders seem hellbent on blocking the currency correction by dismantling the monetary mechanism. They use the Exchange Stabilization Fund to prevent longterm interest rates from rising. No, the norm is for an overshoot in both price and time, and by God, we will see it in full glory.
32. USDollar is invulnerable to international backlash
Since the fall of the Soviet Union, international sentiment has gone from an extreme love affair, to an impasse, and soon to an actual falling out. The top in the USDollar valuation came with the launch of the free euro currency. Our leaders are engaging in diplomatic bully tactics now, largely squandering the sympathetic capital stored up from the WTC attack of 9/11. On the economic side we have functioned as the engine of growth. Soon foreigners might believe we are no longer present for their continued benefit, but instead we require them to be a supplier of credit for our profligate style. As we struggle, they struggle worse. Finally, our strong dollar has begun to produce diverse backlash in resentment. We coerced exporting nations such as the entire Asian continent and OPEC oil producers to recycle their surpluses into US Treasurys and Stocks. Their investments are at risk with the dollar devaluation underway. With 75% of world banking reserves invested in dollar-based USTBonds, their economies are at great risk. We may have led the world economy down an unfortunately destructive path. No, our abuse of the dominant role can quickly lead to international anger, disgust, avoidance, and abandonment.
33. European disunity and socialism obstruct the euro currency uptrend
Americans like to harp on European disunity. The US govt is beholden to lobbyists, debts are ballooning, spending is out of control, military complex is fostered, and corruption is rampant. Which is worse? We like to point the finger at European socialism, when our system is growing in socialist underpinnings each year. Arab petro-dollars are finding a new home in EuroBonds, in avoidance of our markets. European debt levels are nowhere near as deadly large as ours. European deficit spending is much less also. The EU boasts a trade surplus, in direct contrast to the US trade hemorrhage. Consolidations will come, but the new trend has just begun. No, the euro bull trend has more legs, as US securities are shunned, while Asians and Arabs alike will continue to diversify into European assets.
34. new USDollar is intended and designed to thwart counterfeiting
That is the official line of bull cookies. The last new dollar in 1999 with a metal filament and offset large faces was intended to thwart counterfeiting. Saddam’s revenge following the humiliating Gulf War defeat was to counterfeit with impunity at least $20 billion annually. The CIA is on record that Iraq printed perhaps as much as $50 billion in a single year. A credible argument can be made that we are in the early planning stages for a “DUAL DOLLAR” which will create a firewall to protect the domestic economy. We might be planning to allow the external dollars to be written down severely, which will have immense consequences to foreign-held Treasury debt. We will likely use the boogeyman tactic to divert attention toward drug cartels, crime syndicates, black markets, and rogue nations. However, a strong conduit will never be cut between an external dollar and a domestic dollar since each is backed by the US Govt, and laundering facilities that cross the virtual border will be a cinch. No, the Dept of Treasury used up that excuse with the last new dollar, now raising suspicions of a protective moat being constructed around our shores.
35. strong USDollar has benefited the USA for 20 years
The strong dollar policy has resulted in the impoverishment of the entire American economy, its workers, and its institutions, raising to extreme levels our indebtedness. We have displaced and hollowed out almost our entire mfg production. We have coerced foreigners to operate as creditors. We have encouraged consumption of cheap imported products beyond our means, resulting in crippling household debt. We have created an unlevel playing field for our corporations, resulting in the loss of American jobs. Service sector jobs pay less than mfg jobs. We did have a nice few years of benefits late in the 1990 decade, but that was fleeting and may have caused more of a disaster than we can admit. The last decade invited the world to participate in the greatest speculative mania in the history of mankind, which cannot be described in any other way. No, the strong dollar stripped America of its wealth and the engines that produce wealth, replacing it with colossal debts.
36. USDollar lower revaluation benefits far outweigh risks
The dollar cannot arrive at a more beneficial stable lower level without undergoing a painful transition whereby it declines in value over a period of time. The very dynamics of this process of change can unleash powerful forces that damage both our economy and financial markets. A vicious circle has begun, and will not end until the dollar undergoes a monumental correction. But at what value is the dollar properly adjusted? A declining dollar discourages foreign investors operating with shorter horizons. It raises the cost of all things imported, such as basic materials and energy supplies. It also raises the cost of imported finished products and components. In short we import “price inflation” just as inflation was exported in the last decade. Worse still, foreign banking systems will see leveraged damage to their loan portfolio capital requirements as their reserves fall in value. The only benefit is greater price competition among US exporting firms, except we don’t manufacture much in this country. Our chief export is debt, and eventually that will suffer. No, the risks lie in an endless worldwide recession, while the benefits are directed to a largely absent manufacturing base.
37. lower USDollar will close the trade gap, since our prices are coming down
If this were true, then the trade gap would not have increased 15% since last spring, even as the dollar declined 15% over the same time. Foreign economies weaken with a falling dollar, and can ill afford purchases of our finished goods. Farmers enjoy some benefits, to be sure. With a mfg base that has been shifted to Asian and Mexican locations, we have muted the currency translation benefit. Furthermore, ours is an economy gone utterly insane with consumption. We purchase finished goods and components from Asia, by and large. All govt stimulus is intended and directed towards sustaining our consumption trend, even with additional debt. So how would we close this trade gap? If our foreign customers are much weaker than we are, how can they lift their imports of our goods in a significant manner? I truly believe the trade gap will wind down to zero only if a world depression unfolds. No, a lower dollar will reduce the trade gap in a minimal fashion, and frustrate both our govt leaders and corporate executives, culminating in a USDollar freefall !!!
38. sovereign currency requires no collateral
Can you think of a single debt where creditors do not demand collateral? I cannot. The United States has probably sold off 60-65% of its gold reserves, which had operated as collateral for our burgeoning federal debt. If the dollar decline gathers momentum, as I expect, then we will see rising longterm interest rates. Not at first. We simply import too much. So as costs rise and import prices translate higher, we will see a new price inflation cycle materialize. Our economy will weaken precisely when our Treasury debt securities fall in nominal value. Losses will be amplified by currency translation when held in foreign hands. We do not “owe it to ourselves” any longer. A weakened economy will undercut our ability to repay our debts. No, collateral is not important in times of growth, but as foreigners see our economy achieve downward momentum, they might quickly object to the disappearance of our collateral.
39. Bank of Japan can suppress the yen forever
For many years the Bank of Japan has succeeded in keeping the yen currency at low levels, thus allowing their vast array of exporters to remain competitive in the great American supermarket shopping centers. The BoJ has debased the yen all too effectively, sending their economy to near death, as their banking system is now virtually worthless. Their federal debt is now 140% of their annual GDP. Despite their horrid conditions, and vampire-like kieretsus, powerful forces work in their favor. On a bilateral basis with respect to the USA, their trade surplus is 2.5% of GDP. This provides a capital flow that will be formidable to paddle against. Japan already has entered the twilight zone of accelerating money supply with no benefit to economic activity. Since 1971, the world monetary system has operated on the “triangle” made up by the dollar, the mark (now euro), and the yen. The first round of dollar devaluation came at the expense of the euro. Or is it gain? The next round will likely come versus the yen, signaled by recent new Nikkei index lows. A currency surprise is shaping up. No, with a weak dollar trend underway, and large capital flows favoring a stronger yen, the next moves will be toward a rising yen in the land of the rising sun.
TREASURY DEBT & BANKING :
40. financial derivatives are under control, they reduce spread and offload risk
Derivatives certainly contain and manage systemic risk, but they do not eliminate it. Instead, they concentrate risk within extremely leveraged pyramids of heightened risk. Corporate entities that embrace the risk must realize their limits. As counter-parties to the original contracts, they operate as systemic seawalls to withstand storm fronts. Not only can the derivative contracts be in danger of going bad from underlying asset prices, but the foundation of supporting capital can rapidly shrink from stock, bond, and insurance losses. Derivatives are put in place in order to neutralize a firm’s exposure to changing conditions between the time the contract is written and the time the contract is executed or expired. Large unexpected changes have delivered serious blows to the stock market, corporate debt market, and currency market. As a result, base capital has indeed diminished to extremely dangerous levels. The risk is now concentrated within a few elite counter-parties holding a massive number of contracts. No, with such spectacular losses realized, future surprises are more likely at some time to topple pillars of the economy like giant dominoes.
41. foreigners will never conceive of a default on United States Treasury debt
For decades foreigners have delighted in American opportunity for investment and participation in the great capitalism experiment. However, they are quickly discovering that the experiment was not so much due to innovation and business creation, as it was in debt explosion and currency saturation. Now those unchecked debts are causing a reversal of fortune. The back-pedaling has seen fit to crush the most risky debt securities such as telecom debt first. Weak retailers, overextended lenders, then airlines marched next into the debt inferno. Almost three years into the process, we watch as consumer debt and mortgage debt will soon come under scrutiny. As our nation’s Treasury debt kicks into high gear, many questions will be posed on payment and continued floating of this historically unseen monster debt load. The economy did not repay during good times. Foreigners will inevitably question how we can repay during bad times that seem not to end. No, the ebb and flow of foreign involvement has seen its flow, and will soon see its ebb.
42. US Treasury Bonds are safe, since guaranteed
The rush in the last two years by investors into US Treasury debt has been impressive and robust. Money has exited the stock market and higher risk corporate debt securities, finding safe haven in Treasury bonds, as well as less protected real estate and mortgage bonds. The powerful deflationary winds have benefited govt debt issuances. Minor cracks from oversupply have begun to chip away at residential housing, which has defied the entire economy’s poor health and general asset price declines. Recent Fanny Mae concerns have been raised by Fed Governor Poole, exposing mortgage finance’s insufficient structural foundations. As the USDollar continues its corrective descent, and as commodity and imported price inflation shows its ugly head, our USTBond yields on longterm securities will once again rise. If and when dollar depreciation magnifies bond losses from simple rising yields, investors will exit Trez bonds. Foreigners will exit twice as fast. The stage is being set now for bond losses. No, govt bonds are guaranteed, but they are not immune to either damage or momentum declines.
43. Social Security Trust Fund will remain solvent and viable
We as a people like to trust. If instead, one examines the trend on Sochacurity funds and benefits, it can be easily seen that benefits are gradually being cut while new age limits slowly undercut younger workers. Soon enough, benefits will be denied to those who lack need, those who have means. Cost of living adjustments are kept deceitfully low from false CPI calculations. Worst of all, the trust fund itself has been raided by grubby Congressional spendthrifts, and accounted for in a fashion resembling the Enron fraud. Senator Claude Pepper of Florida had been its leading defender. His retirement and death years ago signaled an end to that defense. The demographics work detrimentally toward its solvency. I am somewhat protected by fixed benefits, since my year of birth was before 1960. Not so for many millions of other citizens stuck in contributing into this black hole bottomless pit of govt fraud. No, as time passes, younger contributors will see larger slices taken from their paychecks (not tax deductible) and be promised progressively smaller future benefits (taxable). The system will survive, but the benefits will be reduced and narrowed.
44. money will always be safe in a bank
The Federal Deposit Insurance Corporation was established in order to protect from depositors losing their savings accounts and certificates in the event of a bank collapse. The 1981 Savings & Loan debacle exposed and highlighted the risk to savers. The original cost was over $800 billion from govt bailouts, a figure reduced to under $300 billion by means of the innovative Resolution Trust Company salvage efforts, expertly directed by Bill Siedman. In the last twenty years, banks have underwritten untold billions in loans for businesses and mortgages. If we suffer a systemic slow bleed for a prolonged period of time, which I expect, then banks will be left holding large portfolios of bad loans. The same happened to Japan, whose collective banking system is now worthless! In a wider series of bank failures, the FDIC will require huge federal infusions, since this self-insured protection has limits to coverage. No, FDIC will be overwhelmed in future years, and savers will at best be left with frozen accounts until govt insurance is resolved and fraud is investigated.
45. Greenspan is the greatest central banker of the 20th century
I am reminded of the Sports Illustrated cover effect, a sure sign of a career reaching its crest, or a team hitting its peak, only to see a decline. Sir Alan Greenspan, knighted before the Queen of England, after a tragic bust branded by his own imprint !!! The title of “greatest central banker” is given by Senator Phil Gramm, who strikes me as a “Economics D-student lackey.” But is he the greatest banker, or just the most accommodative central banker bartender? He did close his eyes to warning on “irrational exuberance” uttered by his own lips. Did he produce prosperity through unrestricted credit extension and mismanaged money supply? Did he ignore rising asset prices, declaring victory over inflation, while focusing too narrowly on the distorted hedonic CPI index? Did he build a collapsing foundation for debt only to risk economic depression? Time will tell. He reminds me of a drug dealer whose clientele saw ruin in addiction. Surely, his style of communication is hardly worthy of the word “communication.” The economics field is the province of the abstruse, and no doubt incomprehensible to the illiterate unwashed masses. No, Greenspan will be vilified as the economic recession proves endless, will be made a scapegoat for the magnificent wealth destruction nowhere near completion, and will see this upcoming calamity labeled “The Greenspan Depression.”
GOLD :
46. gold & silver short positions can hover indefinitely
The futures contract world has never seen anything like it. Short interest among gold futures now sits at more than two years worth of world production, wholly out of proportion with mining economics. The same can be said for silver short interest. Many of these contracts are offset by expected future gold and silver mine production, as mining firms hedged unwisely, often selling to great excess their future production. Some experts believed the shorts would witness calamity when gold surpassed #330 last autumn. They did not. However, shorts unfortunately either watch their portfolios dissolve completely by standing idly by, or suffer chinese torture from stepwise movement of critical lines in the sand. No, unprofitable shorts eat at balance sheets, and contribute to mounting longterm debt, eventually pressing for resolution.
47. USA monetary system will never return to gold standard
The United States will never re-employ a gold standard unless our country experiences desperation to save its currency from implosion and collapse, or unless the dollar’s descent threatens the US or world economy. On its face, this statement sound naïve, simplistic, and overly trusting. Kondratiev Winter works its magical devastation in sequential stages, in culling and cleansing the nation’s economic and financial landscape of excessive and abusive debt. The entire United States economy, its sovereign debt, and its dollar currency will in time be targeted by the K-Winter’s judgment over irresponsible debt. Unspeakable abuse of debt at every level has clearly exceeded anything ever observed in human history. Our entire nation will soon be subjected to ruthless debt liquidation, debt writedown, business failure, and personal bankruptcy. It will occur in stages though, not all at once, starting with the weakest indebted tree limbs, gradually working to prune among the stronger limbs. Perceived corrupt corporate governance during threats to debt default, reduced cashflows in the weakening economy, massive federal deficits, hemorrhaging trade gaps, incredible increases in required foreign capital flows, and a war effort viewed as reckless, these all contribute toward a potential abandonment of the USDollar. No, the USDollar Decline Vicious Circle will month by month gather momentum and almost surely reach crisis proportions ultimately, at which time our government will have few options besides a gold cover clause for our distressed currency.
48. Central Banks will never actively purchase gold again
The 1990 decade paid witness to the unrestrained drain of gold reserves from central banks led by England, Germany, Japan, and the United States. The 1999 Washington Agreement isolated the USA as the principal participant, as Europe’s bankers decided to retreat from this unwise process. Now the USA is doing the lion’s share of gold selling, and probably lending other nations enough gold to continue the charade of balanced overnight selling on the world market. Meanwhile, Asian central banks (most notably China and Russia) are buying gold to accumulate bank reserves. The deflation underway in Europe, Japan, and the United States goes one foot after another with the irresponsible extension of credit over decades inside their respective economies. Insane selling of gold should be regarded as parting from collateral to secure large sovereign debt. They also are running their printing presses overtime, thus debasing their currencies further. The debtor is running in both wrong directions simultaneously. An Argentine presidential candidate proposed just in early March a new gold-backed Peso. Gold convertibility can both prevent calamity and rebuild after calamity. Centuries attest to its stabilizing capability. The last 50 years attest to the instability bred by its absence in the currency. No, the certain upcoming world currency crisis will require and demand a gold backing of ailing currencies.
49. gold even now has no monetized role or function
Since 2000, debt has been defaulting, and stocks have been revalued downward. Many stocks have succumbed to 95% reductions. Even as capital has found sanctuary in guaranteed government bonds, the returning yields have reached such low levels that they no longer exceed price inflation levels. We have now negative real returns on shorterm Treasury yields. Against this backdrop, gold has come off its 20-yr bear trend and risen 30-40% off its low at $265/oz. Japanese citizens have found safety in gold. Many of the world’s wealthiest people have turned to gold, eschewing meager bond yields and retreating from stocks. As debts continue to be liquidated, as institutions continue to be threatened, as paper-based securities continue to be priced lower, gold will continue to be chased by those seeking safety in real money. Such pursuit of sanctuary from so many diverse asset classes speaks volumes about gold’s monetary role. No, gold is sound money and will see growing demand for at least the next three years as economies falter and monetary systems break down further. The next stage will see gold used to hedge against actual price inflation, as Asian imports rise in price following the inevitable upward revaluation in the Chinese yuan currency, combining forces with the lagged effect of simply monumental increases in our money supply since 2001.
50. higher gold prices will unleash huge new supply
A paradox exists which testifies to the inelastic supply for gold, at least in its initial stages of rising price. Miner hedgebooks consist of vast forward sales contracts for gold that went far beyond justification by the economics of mining and prudent money management. They got greedy, lured by leveraged profits under advisement by gold bullion bankers. Now miners are caught in a vise. Since mid-2001 they have been diverting valuable capital toward covering and buying back their excessive forward contracts. Gold mining firms have become principal buyers of gold on the world market! I find such a trend worthy of extreme derision. Wall Street investment bankers cannot yet assist the process with stock issuance, since the gold sector is painted as a pariah still. No, money is being diverted from operations and production toward the covering of losing forward contracts, thus obstructing and inhibiting supply.
51. our US gold reserves are safely vaulted in Fort Knox
We suffer from Enron-style accounting of our gold reserves. In fact, Enron probably learned the methods from the US Govt. Congress has shirked its responsibility in tracking our nation’s reserve wealth, placing total trust in the Federal Reserve, which hides behind security clouds. The IMF has promoted a type of accounting that recently saw confrontation by Portugal. The IMF allows leased and sold gold to be counted as vaulted gold on the books. Experts estimate that as much as 50-60% of United States gold reserves have been leased and sold, mostly by elite Manhattan crooks, in collusion with gold miners, in order to suppress the gold price and to satisfy greed. Their collusion keeps the USDollar aloft. No, much of our nation’s gold is gone, setting the stage for the Mother of All Scandals.
52. Islamic Dinar is a meaningless novelty
Such is claimed for any financial instrument or vehicle during inception. The Dinar is ridiculed and belittled in established circles as it undergoes birth pangs. So far, plans are for the Dinar to be used in settling bilateral commerce in the Islamic world on a quarterly basis. Efforts are underway for six major Islamic nations to use the Dinar for wider commerce, led by a credible Saudi Arabia. The stage is set for petro-dollars to build a new currency in future years, one with enormous potential and ramifications, in defiance of the western world’s sickly, debased, saturated currencies. The biggest effect of an emergent Dinar might be to extend or accelerate a USDollar decline, by diverting a major capital flow away from the dollar world and toward the gold world. No, the Dinar might join the Dollar, Yen, Euro, and Yuan later this decade as a major world currency.
53. reduced jewelry demand at higher gold price will hurt the bull market in gold
No question about it – gold jewelry demand slows when prices rise. However, a closer examination of history indicates clearly that longterm gold bull markets are based fundamentally on investment demand, not jewelry demand. Every past gold uptrend saw reduced jewelry demand which did nothing to forestall the growing mania for gold. At the depths of gold bear markets, jewelry enjoys a revival in demand, naturally. Gold bulls should revel in diminished jewelry demand, and tolerate it after substantial gains in the price of gold. No, waning jewelry demand is a positive signal for a growing gold bull market.
STOCKS :
54. factor upcoming energy cost cut benefit into stock prices, before recent cost hike
Recent increases in energy costs spell trouble for both production costs in corporations and utility & gasoline bills in households. The effect should be felt soon with reduced profits squeezing the business sector, putting more pressure to cut costs with job layoffs. On the household side, budgets have been strained with doubled heating costs for many homes, higher gasoline expenses, which undoubtedly will crimp consumer spending. I see no factoring of these effects into stock prices or economic stall forecasts. Instead, we see attempts to justify factoring in the benefits of reduced energy costs, on the expectation that prices for crude oil, heating oil, gasoline, natural gas will all come down after a quick resolution of tensions. No, investors cannot ignore the present ill effects, and accept only the anticipated beneficial effects.
55. dividend tax will have beneficial effect on stock prices
If dividends are miniscule, then the benefit will be small. Microsoft announced less than a 1% dividend, met with a yawn. Companies are strapped for cash, and will not be able to issue hefty dividends anyway. Besides, if they were able to pay dividends, the money must be diverted from profitable operations. With stock share prices languishing, companies will not be turning to the equity markets for new financing, such as secondary issuances, nor supporting those prices with sizeable dividends. This was a point made by Frank Modigliani, mentor to Stephen Roach. No, the end result is that dividends will be tiny since funds are scarce, and companies have little incentive to bolster share prices during this horrible downtrend.
56. Enron/ WorldCom were the end of accounting fraud and scandals
Neither Enron nor WorldCom have been resolved. Offshore banks and special purpose entities continue to contaminate the corporate accounting world. Some suspect that many billions of former Enron capital are still hidden. Legislation toward their disclosure continues to be blocked by special interest groups. Enron was only the beginning, aptly labeled “the canary in the financial coal mine.” Frauds continue to be exposed, but with much less attention given by the public. The Dutch firm Ahold is a recent example. Bristol Myers restatement of past years is another milder example. Earnings statements continue to be chockfull of “one-time” charges. My favorite is Ryder claiming that paint for their truck fleet is a one-time charge. No, accounting fraud marches on with less public attention or interest, having become part of the engrained and accepted landscape.
57. stock investing Long Term Buy & Hold strategy succeeds
From 1969 to 1982, stock returns were nil. From 1994 to 2000, stock returns were significant, encouraging individuals to remain invested through brief troubled times during those 6-7 years. Once again, a lesson learned from a longterm bull market is being transported into a bear market, with disastrous results. Greenspan’s Fed rescued the financial markets each time trouble surfaced. Now, we may be watching the bad brew results from numerous overrides in a bull market cycle, possibly creating a giant bear market. The longterm cycle over the ages often contains segments of time lasting years whereby the “paper” side of the finance world experiences adjustment. We are now knee-deep in such an adjustment period. Worse, a supercycle adjustment might be underway, dealing mercilessly with excess debts. The last one worked its natural magic from 1929 to 1932. No, LTBH is the mantra that Wall Street sells to the inexperienced public.
58. stocks are cheap, with attractively low valuations now
Cheap? Certainly stock prices are much lower than in 2000. The word “cheap” implies low relative to established norms. Standard & Poor published responsible accounting reports on S&P500 earnings for 2002 which exposed that real earnings were 20-30% lower than stated earnings. The result was a Price-Earnings ratio in the neighborhood of 40 times, using core earnings. This range is two to three times the norm. Proper accounting should factor in both pension funding and stock option dilution. Besides, if they are cheap, why are analyst earnings downgrades so routine? No, stocks are more overpriced now than before the Great Depression 1929 stock crash!
59. share buyback programs are a good signal for a stock
Investors have been seduced into accepting this as true. The immediate effect of corporations using treasury funds to purchase their own stock is for a share price increase. Closer scrutiny often exposes chicanery in the financing, with dastardly techniques such as extending longterm debt. Someday in the future, I expect to read about new stock issuance used to finance share buybacks. Diversion of corporate funds away from operations, away from investment in capital equipment, away from investment in labor training and benefits, and away from investment in Research & Development indicate neglect of the corporation, its core business, and its charter. This neglect usually takes a little time to bear poor fruit competitively. No, share buybacks are usually a device for management to use money unwisely in order to prop up the share price for future insider stock sales after large stock option grants.
60. management stock options provide an incentive to build the business
If handled with moderation, this might be true. Management does indeed respond to positive incentive and reinforcement. However, when debt is extended for share buybacks, when deceptive accounting is used to bolster earnings reports, when the size of management option packages are so huge, when heavy dilution to outstanding share capitalization takes place, when insider stock sales are executed quietly, one must question in whose interest the option packages exist. Recall that management controls the distribution of option packages, usually with rubber stamp approval by the Board of Directors. The experience from the last several years has been that poor competitive trends and negative earnings trends left businesses leaders with a big temptation to fleece shareholders via accounting fraud, in a criminal exit strategy. No, the majority of cases demonstrate that stock option packages invite corruption and abuse, from their sheer magnitude and potential for lucrative gains.
REAL ESTATE :
61. Real Estate is a tangible asset that will never lose you money
Since the stock bust of 2000, real estate has seen a massive influx of investment. Following the Fed’s numerous interest rate cuts, a mortgage finance bubble has developed. Fanny Mae and Freddy Mac, Government Sponsored Entities which support the mortgage finance industry, might be in trouble. However, a valid argument can be made that real estate property is not a hard asset, but rather a “hard asset impostor” whose value is primarily based upon available mortgage finance funding. The commercial niche has seen substantial value reductions amidst historically high vacancy. For now, housing has served well as a safe haven for capital. But cracks are showing, as coastal cities (plus Denver) have seen large losses in the high end. More importantly, across almost every single major city, supply of residential property is sitting on the market unsold. What is the value of an unsold home? We will find out. Mortgage debt has been abused with dictated appraisals, lax income verification, low down payment (high leverage), and widely reported abuse of cashback at contract closing. And a final blow might come from local govts, where fiscal distress has led to increases in property tax. I know of a few people who have already or plan to sell their homes in order to end their tax burden. The gap between rising housing prices and gradual increases in rental costs indicates a correction is near. At some point, job losses trigger such a correction. No, real estate is ripe for giving off gas for several years, since financing will soon become more difficult, job losses will escalate further, and the tax burden will only worsen.
62. FannyMae and FreddyMac represent stable fund sources
These Government Sponsored Entities are a house of cards built atop minimal capital foundations, supported by false expectations of government guarantees and willing naïve bond investors. I have never heard of Fanny Mae rejecting a portfolio of mortgages. They accept them all, good and bad, like a true burokracy, allowing only aggregate audits. A fortuitous cycle has benefited GSE’s. They purchase mortgage portfolios after issuing debt, then they hedge against these portfolios by purchasing 10-year Treasury securities. This hedging is so massive that it has an effect on increasing the TENS value and reducing the TENS yield. This in turn lowers mortgage rates and has, up to recently, increased the FNM share price. Now GSE’s capital structures have been called into question, with an underfunded base supporting a mountain of debt. A reversal of this pattern might lead to the absence of TENS purchases from Fanny hedges. Little if any regulation is in force to scrutinize the finance operations of these cancerous giants holding over $4 trillion in mortgage debt. An astounding figure was recently reported -- GSE’s accounted for fully 25% of the expansion in the US MZM money supply in 2002. No, Fanny and Freddy are a marriage destined for a stormy controversial divorce and bust from under-capitalization, in a matter of time.
63. Real Estate and car sectors are examples of the strength of our economy
In the majority of economic recoveries, the housing and automobile sectors realize their pent-up demand and lead the renewed spending cycle. Since 2000 however, extremely low mortgage rates have led to a considerable bull market in real estate. The refinance waves have contributed to the economy by delivering spendable equity. Greenspan reported recently that in three years, housing prices have surged over 30% in major cities. This occurred against a backdrop of falling asset prices and economic hardship! Housing prices have begun their long descent, starting at the luxury end, mainly in major coastal markets. The car sector has seen 0% financing with 0% down, essentially giving the vehicles away for payment to principal, relieving dealers of inventory, and keeping labor unions working. Now car sales are seeing 25-35% sales declines. We have no latent pent-up demand. Those who expect economic recovery are poor students of past recoveries. No, the housing and car sectors show signs of utter exhaustion, and will lead the economy into recession, not recovery.
MISCELLANEOUS :
64. press & news media are objective and unbiased
Surely, journalism is motivated to report the news accurately and fairly. In recent years, anchors find themselves celebrities, often basking in the limelight. Certain reports can set off mass herd movements among the listening, viewing, and investing audiences. Any normal human being would see his/her ego boosted, considering such mass sway. However, a strong controlling presence hangs over their business, influencing the news reporting. Financial conglomerates now own many media businesses, having long operated with banking and brokerage arms. The motives here are less than noble. When any arm advertises on a journal or channel, they can become angry if reported news discourages investors from investing in the stocks that the brokerage arm does investment banking business with. The same applies to negative news on its banking arm. When enough advertisers come from the same incestuous camp, pressure builds to bias the news and unduly emphasize the optimistic viewpoints. No, the advertisers have almost become partners, and now undercut objectivity, leading to growing bias.
65. CNBC provides a valuable news service, with both information and advice
I like to occasionally watch CNBC, but much less so than in 1999 and 2000. I confess an unabashed crush on Martha McCallum and especially Christy Musumeci. The channel does report much news. They do allow a rich diversity of guests to explain their views. But they have been very late in warning of any and all busted sectors and reversing asset groups. They almost never offer information about the torrent of earnings downgrades, which permit companies to exceed expectations, i.e. quietly lowered hurdles. Their enthusiasm is fast becoming a contrary indicator for a top in localized sectors. Their series on real estate last autumn indicated to me that a top was in place. Their bias against gold is often boldly blatant. They make no effort to conceal a positive slant, exposing clear intentions of bias in not pursuing the unfavorable side to stories. When JohnJ Murphy appeared in late February, his story of a gradual dollar collapse met with zero follow through. No, CNBC has an agenda, and has become as much a contrary indicator as an entertainment source.
66. pension system will deliver retirement income when called upon
The majority of American pension systems now show clear evidence of decimation, with TIAA-CREF a notable exception. Defined benefit plans within major corporations are woefully underfunded, if not fraudulently accounted for, showing annual losses but contributing toward quarterly earnings under absurd ongoing assumptions. They have been raided for ten years! Defined contribution plans are showing feeble expected payouts in future years. New legislation might soon allow for corporations to legally swap out of defined benefit formats, letting them off the hook after years of pension fund theft. Personal 401k and IRA accounts are worse than decimated, managed by amateurs who never heard of bonds, and still do not know what they are. No, our pensions will be nowhere near adequate, and together with paltry Social Security income, Americans will simply have to delay retirement or abandon the notion altogether.
67. shakeout of US airlines is largely completed, following WTC attacks
United Airlines and USAir are the most recent air carriers to enter bankruptcy protection proceedings. Most national airlines are operating in the red. Much of the blame can be placed upon the after-shocks of the World Trade Center attack, and the resulting fear of flying. People are staying closer to home, traveling less, with businesses resorting to conference calls more. Recent fuel cost increases only stress their finances further. The trend is for less travel, looking forward. Regional airlines are faring better, possibly because they choose to avoid unprofitable routes. No, we could very well see every national airline except Southwest Airlines eventually go bankrupt, inviting a national outcry for airline nationalization.
68. America (its capitalism, leaders, culture, way of life) is admired throughout the world
The image of America has undergone considerable change since the Clinton years, when we stole prosperity and were the beneficiary of an approving world impression. I believe the 1990 decade saw steady sales of our national gold treasure, for the unspoken purpose of subsidizing longterm interest rates to falsely generate economic prosperity and investment mania. The last decade also saw credit abuse to support multiple billions in malinvestment. Since 2000, our economy and financial markets have shown the ravages of debt implosion. Our leaders have been called into question for corruption. Our culture seems focused on video games, wrestling aberrations, drugs, eating disorders, sex, gambling, continued debt abuse, ghetto attire, and endless good life. Our high school students test poorly versus other industrialized nations, ranking last out of 17 nations in recent national results. Many Americans prefer to party and spend, rather than work and save. Our lifestyle is largely hedonistic, demanding immediate gratification. Foreigners certainly flock to our shores from Mexico, Ireland, South America, Eastern Europe, India, Taiwan, and China. In contrast, the Islamic World, pockets of Europe, and other corners of the globe are growing in enmity toward us. Many nations criticize us even as a small exodus of their citizens eagerly immigrate to the USA. The great bust has exposed America to criticism, and justifiably. A clear disconnect is developing, whereby we think the world admires us, when in fact they feel increasing disgust and disrespect. No, the world is more and more turning against the American ways, even as we are slow in realizing this fact.
69. Americans are entitled to perpetual wealth and good times
The “Ugly American” syndrome is making a comeback. We have produced many spoiled brats, accustomed to the good life, strong purchasing power, ample access to credit, good paying jobs. We seem incapable of calling into question the method and means for this wealth and party atmosphere. The wellspring toward our illusory wealth has been the abusive extension of debt and the simultaneous coercion of foreign economies to bestow upon us their savings, as we accumulate endless debts. We encourage Asian nations to serve as our manufacturing base, benefit from outsized trade surpluses, but recycle the capital back into our debt system. The game is finite and cannot last forever. We do have considerable innovation, but our financial violations of economic laws vetoes the benefits of innovation. What we boast of “financial engineering” has been laid bare as financial corruption, crazed leveraging, monetary exploitation, and extortion of foreign economies. We might be nearing the end of the Keynesian Monetarist bankruptcy game. No, Kondratiev Winter has arrived, and its deep destructive force has only begun to work on the greatest debt irresponsibility in the history of mankind, the United States economy, its citizens, corporations, states, and federal govt.
Jim Willie CB is a pseudonym used since 1998 on Silicon Investor. Jim works as a statistical analyst for a private consulting firm engaged in consumer packaged goods marketing research. He holds a Ph.D. in Statistics. His career has stretched over 22 years, involving work at Digital Equipment Corp in manufacturing consulting and marketing research, and work at Staples in retail forecasting analysis. Visit his free website to read other articles and material, as well as to enjoy light-hearted satire, under the name: "www.GoldenJackass.com." A low-priced paid subscription service is in the planning stages, with focus on a short list of Canadian Junior miner stocks. Many links appear for significant articles written by a wide array of top flight authors.
-- Posted Monday, 24 March 2003 | Digg This Article
