Sep
30
2005
Statistics show that U.S. personal spending had its biggest drop since May 2002 in the midst of income drops.
We have long wondered what would happen to the economy once U.S. consumers started to work on restoring their balance sheets to fiscal sanity. For consumption driven economies, like the U.S., that could make for a serious recession — and a contraction of money supply should folks start to cut back their debt in a fractional reserve system. Of course, we know that politicians and The Fed don’t want that, but it would present another set of unprecedented variables for analysts to ponder. We remain in uncharted waters.
Sep
30
2005
Jim Jubak at MSNMoney has a decent article stating that he believes that the Fed has already lost the fight on inflation. We would tend to agree with him that the Fed is in a pickle — of its own making, no doubt.
We don’t entirely agree with Jubak, even if his premise is correct. Jubak, like most in the mainstream, fails to give the vast money supply creation and credit bubble its just due. Devastating a country’s savings apparatus and constantly milking wealth out of existing dollar holders is not good. This has happens constantly and has accelerated over the last few years. Directly we are seeing the effects in food and energy and other commodity prices jumping well ahead of formal CPI.
Indirectly, and much more surreptitiously, we have lost a ton of purchasing power given that inflation has — if you can believe it — made Chinese goods more expensive than they’d naturally be.
The bane of any policy maker is that Fed and Government can only do so much. Eventually they get trapped and only compound the previously made mistakes. We are in that phase. But expect the blame to be squarely placed on some other evil entity.
Sep
29
2005
Who is to blame for America’s negative personal saving rate? For its newfound asset-based saving strategies? For record levels of household sector indebtedness that are required to convert such saving into spendable purchasing power?
Who is to blame for open-ended federal budget deficits that have pushed government sector saving deeper and deeper into the red? For enacting multi-year tax cuts when private saving was at an all-time low? For embracing supply-side theories that presume such stimulus packages are self-financing?
Who is to blame for fostering a monetary policy that condones asset bubbles? For pushing the inflation-adjusted policy rate into negative territory for the longest period since the 1970s?
Who is to blame for America’s large bilateral trade deficit with China?
Unfortunately, the answers to the rhetorical questions posed above are painfully obvious,” says Morgan Stanley’s Stephen Roach, who posited each of these questions, and answered them in his most recent dispatch titled, “Who’s Blaming Whom?” Each question frames a serious structural problem that will inevitably be resolved, and perhaps not so gently as hoped given their severity.
This is a geo-political market as much as a global macro one. Know the details, and you’ll have a better chance at making smarter decisions.
If you also need more details on the seriousness of this problem, read our September 1, 2005 Commentary.)
Sep
28
2005
Americans have never, in the history of the republic, lived so far beyond their means. So says the Dallas News, writing about how, in the US, the financial cushion is frayed.
This is a solid mainstream observation. Will the media catch on in earnest?
Sep
27
2005
Tom Delay of the Republicans is suggesting that any further cuts in the budget would result in cutting to the bone. Yep. That’s your conservative party, settling for astronomic growth including the fattest, pork filled highway bill known to man.
In a roundabout way, Pat Buchanan criticizes the GOP for being the very party it purpoted to “throw out” in 1994. Say what you might about Pat, his numbers tell the tale few politicians bother to note.
His solutions, if anything, are far too modest to save a ship taking as much water as ours.
In the meantime, this does not mean our readers need play along with fiscal insanity of their own. Too many folks spend far more than they should, and they will be left in trouble should this country hit hard economic times. It has happened before, and it will again. That is a certainty. Save more, and invest with the current fiscal insanity in mind. In 1999 I told people that, with the dot-com’s, these would be stories we will tell our grandkids. The dot-com’s may be gone, but much of the fiscal insanity is not.
Sep
27
2005
“If America could be so ill-prepared for a hurricane hitting what has long been called the Hurricane Coast, what else might we be missing? In this apocalyptic frame of mind, your columnist notes that there has been a recent spate of conferences, journal issues and whole volumes examining whether the financial system might be a tad fragile, should disaster strike.”
That’s from The Economist, which continues, “There is arguably a drift towards greater risk-taking overall, especially when interest rates are low, so the system has not become any safer and may in fact be less safe.”
Seems that more mainstream press folks are at least beginning to question our economic reality. Could this be an indicator of an increase in momentum of those not paying attention suddenly realizing everything is not as balanced as thought?
Sep
24
2005
“People believe that artificially lowering the rate of interest by expansion of bank credit is a blessing….. They fail to realize that it is impossible to substitute additional bank credit for non-existing capital goods and that therefore an artificially created boom must collapse and turn into a slump. They hail the illusory prosperity which such expansion brings about in its initial stages, and are bigoted enough not to recognize that the following depression is the inevitable consequence of the preceding orgy of speculation.”
—Ludiwig Von Mises
Sep
22
2005
Well… Gold is in the news again, hitting 17 year highs.
When it comes to holding its purchasing power, which would you rather own? Gold or the US Dollar? And if it is gold, is this rise of the price of what many dismiss as a boring ornamental relic only a temporary phenom related to the category-5 hurricanes wreaking havoc on the gulf region’s oil production capacity? Or is there more to this than meets the eye?
Well, here is a record of the purchasing power of the US Dollar, overlaid with inflation:
test
Whereas, below is the exchange value of dollars to gold.
Continue Reading »
Sep
21
2005
Over at Bearing Asset Management, they say:
“Contrary to popular wisdom in this country, economic growth is not preordained. It requires certain economic conditions: free markets, individual liberty, respect for property rights, and sound money. Wealth is created by private initiative in a climate of limited government. It is stifled and destroyed by various government interventions such as taxation, inflation, regulation, subsidies, bailouts, confiscation, litigation, and market manipulation.
Economics tells us something about cause and effect. Government intervention in an economy always has negative consequences, whether intended or not. For example, during the late 1980s there was widespread belief that Japan practiced a superior form of capitalism with business and government in cooperation. The 1990s exposed a politically corrupted, severely maladjusted economy.
During the late 1920s and late 1990s in the United States, most mainstream “economists” believed central bankers could manipulate short-term interest rates in order to create their vision of economic nirvana: low inflation, rising asset prices, and smoother business cycles. Both “new eras” ended up being illusory as the artificially cheap credit fomented unsustainable economic bubbles. The late 1920s boom led to the Great Depression, lasting 12 years. The jury is still out on the 1990s boom and subsequent bust, but so far the most aggressive easing of interest rates in Federal Reserve history has proven impotent in resuscitating the economy. “
We couldn’t agree more. And when we received Bearing’s most recent Credit Bubble index update, we note that a tipping point might have hit:
We’ve talked long and hard about the bubble everyone ignores — The Credit bubble.
You see, Continue Reading »
Sep
21
2005
Note in this fine piece from the NYT how Congress created a pension insurance beast that now looms to create a massive problem.
By providing a false sense of security, workers no longer questioned if their pensions were solvent, or for that matter, cared if labor strong-armed too much to keep the company profitable in the long run — as if good times always last. Moreover, you can’t help but notice how the pension system subsidized bad behavior among pension sponsors and recipients (that includes management AND labor) by enabling insurance to be “sold” that didn’t bother to do what any insurer in the free market must do for survival: proper underwriting of risk. This penalized responsibility, and created incentives for the opposite.
Also on the hook should be Congress’ myopic and greedy pension reform in 1986, which forced many employers away from even, steady funding — so to collect taxes sooner than later. That’s because corporations and employees are able to deduct contributions into pension, and by delaying contributions, you increase tax collection for a few years. But by limiting even funding, it resulted in creating much larger contribution obligations for the future. This forced a ton of pensions to be closed in the late 1980s and early 1990s, since it defied normal business operation efficiency, and it is now haunting corporations with aging benefit bases (current and former employees) in a weak economy with sub-par returns on the pension assets.
Alas, this fiasco will cost probably as much as Hurricane Katrina before it resolves in the coming years.
Sep
20
2005
“The disparity between current account deficits and surpluses is now closing in on a record 5% of world GDP. Behind this imbalance lurks an important and potentially dangerous asymmetry: Deficits are heavily concentrated in one economy whereas surpluses are spread out widely over a large number of nations. This mismatch could well exert a very destabilizing influence on the coming rebalancing of the global economy.”
“…Today’s unbalanced world is in an extremely delicate state of equilibrium. The asymmetrical distribution of current account deficits and surpluses around the world means global rebalancing will involve an equally asymmetrical realignment in the mix of global saving. This is potentially a “hair-trigger” result for an already unbalanced world. America is having a highly disproportionate impact on the state of imbalance in today’s global economy. As such, there is much greater urgency for the US to raise its record low domestic saving rate than there is for any one country — or group of countries — to draw down surplus saving. Yet a US-centric rebalancing is very much a double-edged sword for a lopsided world: An increase in US saving would also crimp the major engine on the demand side of the global economy. Depending on the path of the saving adjustment — gradual or abrupt — the outcomes could range from a sustained shortfall in global growth to a sharp worldwide recession. ”
“…If the world’s dominant deficit economy — the United States — goes even deeper into deficit at the same time the world’s surplus economies start to absorb their domestic saving, America’s ever-mounting external financing pressures are likely to be vented in world financial markets. This, of course, is the stuff of a classic current-account adjustment — the case for a weaker dollar and higher US interest rates. As long as the non-US world was in an excess saving position, a major re-pricing of dollar-denominated assets could be avoided. But now, with an asymmetrical shift in the mix of global saving increasingly likely, it could well become all the tougher for the United States to avoid this treacherous endgame.”
–Stephen Roach, Morgan Stanley
Sep
20
2005
‘If the law supposes that,’ said Mr Bumble…’ the law is an ass - an idiot.’
–Charles Dickens
At my investment practice, we endure ever more cumbersome compliance requirements that not only treat those in our industry as “guilty” until proven innocent, but are also — simply — counterintuitive to helping our clients reach their objectives.
Here is an article detailing some of the garbage that is going on in our industry. This is hurting retail consumers since those in our industry who are trying to help are forced, instead, to spend countless hours each day wasting time complying with excessive regulation.
Meanwhile, there are some politicians who will claim that nobody is willing to help the little guy with not a lot of money, and so therefore the government must step in to fill the void. Well, Mr. & Mrs. Know it All Politician — you fools created the environment where those helping smaller clients cannot operate profitably.
The only winners in this mess are:
-Those with law degrees. (funny how this always seems to be the outgrowth of regulation…created by those with law degrees…)
-The mega investment firms that can absorb the costs of hiring swarms of compliance attorneys, and actually support making the barriers to competition as high as possible. Oh, and these companies were the ones doing much of the fraudulent stuff that caused the most recent overreaction by regulators.
-The Regulators who get paid to regulate - - it is big business these days.
-Prosecutors, who advance their careers not by finding actual criminal activity, but, rather, paperwork errors and compliance misdeeds.
-Politicians, who now have another bogeyman to use to scare citizens to vote.
As Dickens also noted correctly, the one great principle of the law is, to make business for itself.
You gotta’ love Chuck!
