Vigilant Investor

“Greenspan had recommended to a Senate committee that all economic regulations should have fixed lifespans. Senator Paul Sarbanes (D-Md.) accused him of “playing with fire, or indeed throwing gasoline on the fire,” and asked him whether he favored a similar provision in the Fed’s authorization.

Greenspan coolly answered that he did.

Do you actually mean, demanded the senator, that the Fed “should cease to function unless affirmatively continued?”

“That is correct, sir,” Greenspan responded.

“All right,” the senator came back, “the Defense Department?”

“Yes.”

The Senator could scarcely believe his ears. “Now my next question is, is it your intention that the report of this hearing should be that Greenspan recommends a return to the gold standard?”

Greenspan responded, “I’ve been recommending that for years, there’s nothing new about that. It would probably mean there is only one vote in the Federal Open Market Committee for that, but it is mine.”

— From Bill Bradford’s “Alan Greenspan and Ayn Rand” published around 1997.

In light of some of our other posts in the past few days, we thought this quote might get a laugh from our readers:

“The bottom line is China’s economy has evolved to the extent that they need to consume more and save less.”

That’s Senator Charles Schumer at a news conference in Hong Kong this past Saturday. (He’s also cosponsored the bill that would apply a 27.5% tariff on all Chinese imports to the U.S. unless China allows its currency, the yuan, to float more freely - just what the cash-strapped U.S. consumer finally needs is higher prices!)

Can he actually be serious? The U.S. is spending its way to oblivion (note the debt clock to the top right) and consumers are heavily in debt and spending their savings. Yet that’s the model Chuck wants other nations to pursue.

Chuck may get his trade war. But the spend yourself to riches “consumption = growth” myth will bring nothing but problems for anyone willing to throw caution to the wind.

“In times of change, learners inherit the Earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.” — Eric Hoffer

“The future has a way of arriving unannounced.”

–George Will

George Will, Eric Hoffer

We wake today to learn that gas prices have jumped about 15 cents per gallon in the past two weeks as silver hits a 22-year high and gold worked back to a three week high of $563, still down from its $573 high water mark in early February.

Meanwhile, Deutsche Bank and other major investment banks are moving large numbers of back-office jobs to India. The Financial Times says those jobs are higher skilled jobs, and the move is designed to “take advantage of the low cost of employing highly-educated staff in India”. Deutsche Bank is moving half of its back-office, while JPMorgan Chase is planning on hiring 4,500 graduates there in the next two year with hopes of moving 30% of its back-office offshore by the end of next year.

Ladies and gentlemen, this is no longer call centers and IT… These are high paying service jobs suffering from universal effects of global labor arbitrage. The West, with its big government promises of free lunches at all levels, with little concern about the crippling costs of chaining them on the back of the economy, is paying a fat bill of its own making.

And so the tangled web weaves itself over to the New York Times, where the headline reads “Retraining Laid-Off Workers, but for What?” The story tells the tale of displaced workers — airline union types arguably not in the leanest of industries — being retrained by local and state governments. Its not going terribly well given the pesky trend of globalism and the lack of anything being done in Congress to stop the flow of jobs abroad. Of course, government sponsored training co-opts hundreds of millions out of the economy where that money might have contributed to jobs instead of taxes — perhaps the NYT ought to Continue Reading »

“If these folks suddenly get the idea that we don’t really trust them enough to do business with them, and begin acting the way human beings do when they get poked in the eye, you could be looking at 8 percent mortgage rates, 6 percent unemployment, $4 gasoline, a $1.50 euro and a 9000 Dow.”

That’s Steven Pearlstein, Biz columnist at the Washington Post earlier this month commenting on the arrogance of the U.S. to “not give a damn what the rest of the world thinks about us.” We commented on it then, as well, and think it bears repeating with all the talk of the “global savings glut” theory conundrum. After all, when you consider all the $ hundreds of billions held by foreigners, you probably ought to understand just how much your low interest rates and, for that matter, the economic growth of the past few years, has become dependent on their good graces.

Here is a quick list of some of those holdings:

Source: Federal Reserve

Meanwhile, in a letter made public earlier this week, Ben Bernanke was talking up the global savings glut once again. (See his March, 2005, remarks here.) This theory, to use Bernanke’s own words, is “somewhat unconventional in that (it) take(s) issue with the common view that the recent deterioration in the U.S. current account primarily reflects economic policies and other economic developments within the United States itself.”

The savings glut theory complains that “excess savings” in Asia and the rest of the world ends up flooding the U.S. with demand for U.S. debt-issues, which results in depressed rates. After all, although the Fed funds rate is controlled by the Fed, market rates for market oriented debt instruments are determined by the willingness of investors willing to part with dollars in exchange for a specific rate of return. This is/was Greenspan’s “conundrum” — that despite the Fed raising its rates, bond rates — and by inference, the rate of lending — remained quite low.

This problem serves to compound not only the U.S. trade deficit. It also encourages consumers to be more comfortable with assuming debt than they otherwise would be with higher rate loans, which results in the degradation of the U.S. consumer’s balance sheet on average. Moreover, this explains the unusual schizophrenic signals that have been common to the so called “recovery” since 2002.

Yet the Bernanke’s of the world seem to think - with this savings glut talk - that saving is a bad thing, and that instead consumption is better. In other words, it is because the Chinese and Japanese save that the U.S. is having these problems.

I suppose if everyone spends everything they have, we’ll all spend ourselves to riches. It is the utmost example of the conventional wisdom among those who “run the show” and worship at the alter of
Continue Reading »

• Gas prices flying back up
• Irritation rises along with gas prices
• In Motor City, anger yields to pragmatism
• Oil prices end week above $64 a barrel
• Cost of Iraq war could surpass $1 trillion
• Iranian oil bourse hits wall
• Home sales drop-off rekindles talk of housing bubble
• Home sale prices fall as sellers lose edge
• Bernanke says “saving glut” still valid hypothesis
• Ga. to lose 1,300 textile jobs
• Minimum Wage Emerges as Election Issue
• State revenues — weakest growth in 2 yrs
• Futures predicting 5% fed funds rate
• Bernanke Says Yield Curve Doesn’t Signal Slowdown

“Life is lived forward, but understood backward.”

–Soren Kierkegaard

If one were to take the Fed’s M3 data and calculate an average annual increase in M3 over Greenspan’s 18.5-year reign, you would find it to be 9.97% (from $3,620.1 billion in August 1987 to $10,298.70 billion in February 2006, seasonally adjusted: (10298.7-3620.1)/3620.1 = 184.89%; 184.49%/18.5 = 9.97%/yr).

Greenspan’s legacy over almost two decades is a 10% average annual increase in the broad money supply. Yet the average person is so fixated (if at all) on CPI as the formal indicator of inflation, he is perplexed as to why food and energy costs — and housing — seem to be climbing more and more. For that matter, he should also look at the inflating price of stocks in the face of low dividends and P/E ratios still well above historic averages.

Given the substantial structural problems lurking beneath the surface of our economy, its amazing that when this sort of info is mentioned to folks who ought to know its implications, there is nothing but a complacent yawn — as if the old rules of economic gravity have forever been suspended.

Vigilant folks are not so indifferent.

(Special thanks to Antony Herrey at Newport Property for the number crunching.)

Alan Greenspan, Money Supply

“A man never tells you anything until you contradict him.”
– George Bernard Shaw

Today is the last day that the Federal Reserve will officially track and publish M3 figures, as well as a few of the components that contribute to this broadest of money supply indicators.

While I don’t really buy the explanation for discontinuing M3, I also don’t find it to be on the level of conspiracy some make it out to be. After all, the Fed’s most blatent forms of its own money creation will still be easily seen in M2 and M1.

Here’s a nice graph showing the various indicators of U.S. money supply (click image for fullsized):

Now, M1 is the best indicator of cash-liquid money circulating out there. The problem is that M3 components can have the same effect as real cash-type money when in the hands of high finance. That is to say, through the use of M3 tools, for a very small real dollar amount, a “player” can leverage-up and create the supportive effect of multiples of that real dollar amount. These tools, in other words, can inflate specific asset classes, or be used to support those that might experience a pop of sorts. Hence, when they are being used, they should be followed.

That said, those components will likely still be published, but not so conveniently as they have been by the Fed.

The struggling motor giant, GM, is working to get its house in order by offering between $35,000 and $140,000 to buyout 100,000 hourly GM employees and $35,000 for about 30,000 Delphi employees. The numbers are staggering, and indicative of a system that was so out of touch with reality, it took the pointed gun of junk bond ratings and the threat of bankruptcy for GM and the bankruptcy of Delphi for both management and the United Auto Workers to face reality.

We’ve been pointing out that GM is a bellwether of sorts for the United States in general. Facing massive obligations for pensions and healthcare promises, as well as wages that simply were not sustainable, the overhead for GM was crushing. Meanwhile, their foreign competition simply has been making a product that offers a better cost vs. quality tradeoff.

This is the the gun pointed at all U.S. businesses that are facing competition — from home or abroad.

Unfortunately, the U.S. Government will feel no such pressure to restructure and cut any time soon, and hence our debt clock will continue to chug along as it does every second of the day in the top right corner of our site. And so, the U.S. Debt ceiling is simply raised and taxpayers, their kids, grandkids and future generations yet unborn, will be left holding the bag.

Well, at least so long as foreigners continue to finance our massive debts at record low rates. Once it is decided that $3.5 Trillion annual federal deficits (that’s the real figure if you apply GAAP and the present value of future promised benefits to the balance sheet, as we require of ordinary businesses) are no longer a great investment in a country with little private savings and a penchant to run up more and more debts. Once they cut back on our debt, our rates will rise and our costs of financing the debt will climb further and further.

Eventually, even the U.S. government and its indifferent voting public will face the music. When? We don’t know for sure, but with history as our guide, such fiscal irresponsibility is never stopped until the political elite are faced with no other options than to address the problem. Change is in store — eventually.

GAAP, Federal Deficit, Trade Deficit