Vigilant Investor

Being the issuer of a global currency provides huge benefits that come with a curse. Increased private and public consumption possibilities come from the privilege of getting goods from abroad without the necessity of producing an equivalent amount of tradable export goods. While other countries have to export in order to pay for their imports, the sovereign who emits a global currency is exempt from adhering to the most fundamental law of economic exchange. This sets domestic resources free for the expansion of the state, particularly military power. The more such an imperial power extends its military presence around the globe, the more its currency becomes a global currency, and thereby new expansionary steps can be financed. Expansion becomes a necessity.

Over time, however, the divergence widens more and more between the weakening industrial base at home and the extended global role. With goods coming from abroad for which there is no immediate need to pay with sweat and effort, the domestic culture changes and power-hungry political elites emerge. In the private sector, the production of goods at home is substituted by fancy activities. This cycle has been the fate of all empires.

The current global position of the United States is similar to that of Spain in the period of its decline. Already economically hollow, Spain tried desperately to hang on to its outposts and “possessions” around the globe while the domestic economy became a public-service and militarized economy. In the end, it was the United States that gave the coup de grace to the Spanish Empire by taking away Cuba, Puerto Rico, and the Philippines. A new phase of US geographic expansion and dominance had begun and in 1898 the stage was set for the United States to become the imperial power of the 20th century.

History, and in particular economic history, always shows both: common features and differences, and indeed, the American Empire is different from some of the former empires. Yet what the United States has in common with the former imperial states is that at some point the military extension becomes too complex to be handled efficiently and thus the project becomes too expensive.

The discrepancy between the relative position of the US economy in the world on the one hand and the relative position of the United States as to its military presence and the role of the US dollar on the other hand is moving towards a cracking point. This leads to the conclusion that in a world where the economic strength of the United States is diminishing relative to other countries and regions, there will be less and less of a place for US dollar privilege.

That’s from Antony Mueller’s piece today over at Mises.org. We think it is a worthwhile read given the well worn, but more often ignored adage, those who do not know history are doomed to repeat it. Given his background in economics, Antony has a reasonable non-U.S. global perspective.

A part of vigilance is understanding the overall context in which we, as investors, are living. As part of the alternative media revolution, Vigilant Investor helps expand our reader’s scope of thinking in order to help avoid blind-spots in thinking and to better help connect the dots of otherwise detached information.

The following piece is from Congressman Ron Paul.

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January 29, 2007

The Pentagon recently reported that it now spends roughly $8.4 billion per month waging the war in Iraq, while the additional cost of our engagement in Afghanistan brings the monthly total to a staggering $10 billion. Since 2001, Congress has spent more than $500 billion on specific appropriations for Iraq. This sum is not reflected in official budget and deficit figures. Congress has funded the war by passing a series of so-called “supplemental” spending bills, which are passed outside of the normal appropriations process and thus deemed off-budget.

This is fundamentally dishonest: if we’re going to have a war, let’s face the costs– both human and economic– squarely. Congress has no business hiding the costs of war through accounting tricks.

As the war in Iraq surges forward, and the administration ponders military action against Iran, it’s important to ask ourselves an overlooked question: Can we really afford it? If every American taxpayer had to submit an extra five or ten thousand dollars to the IRS this April to pay for the war, I’m quite certain it would end very quickly. The problem is that government finances war by borrowing and printing money, rather than presenting a bill directly in the form of higher taxes. When the costs are obscured, the question of whether any war is worth it becomes distorted.

Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular. The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.

The result of this arrangement is inflation. And inflation finances war.

Economist Lawrence Parks has explained how the creation of the Federal Reserve Bank in 1913 made possible our involvement in World War I. Without the ability to create new money, the federal government never could have afforded the enormous mobilization of men and material. Prior to that, American wars were financed through taxes and borrowing, both of which have limits. But government printing presses, at least in theory, have no limits. That’s why the money supply has nearly tripled just since 1990.

For perspective, consider our ongoing military commitment in Korea. In Korea alone, U.S. taxpayers have spent $1 trillion in today’s dollars over 55 years. What do we have to show for it? North Korea is a belligerent adversary armed with nuclear weapons, while South Korea is at best ambivalent about our role as their protector. The stalemate stretches on with no end in sight, as the grandchildren and great-grandchildren of the men who fought in Korea give little thought to what was gained or lost. The Korean conflict should serve as a cautionary tale against the open-ended military occupation of any region.

The $500 billion we’ve officially spent in Iraq is an enormous sum, but the real total is much higher, hidden within the Defense Department and foreign aid budgets. As we build permanent military bases and a $1 billion embassy in Iraq, we need to keep asking whether it’s really worth it. Congress should at least fund the war in an honest way so the American people can judge for themselves.

Congressman Dr. Ron Paul

Give me control of a nation’s money and I care not who makes her laws.
Mayer Amschel Rothschild

Gold has been the timeless currency that always outlasts every nation’s ill conceived experiments with fiat and paper currency. As FDR (Franklin Delano Roosevelt) clarified when he made illegal the private ownership of gold, the barbarous relic is a threat to paper currencies that can be minted out of thin air at the whim of fiat collusion by government and central banks. Gold, as an alternative store of wealth,threatens that power to inflate precisely because it cannot be minted out of thin air and has been valued since time immortal.

Since the Fed was gifted the new power to legally print money out of nothing, and to do so by lending it into circulation with citizens on the hook, the dollar has lost 98% of its purchasing power. During the prior 125 years, when gold restrained those who would wantonly print dollars from nothing, $100 retained or gained purchasing power with the exception of wartime and during several banking fiascoes related to failed attempts to institute formal government central banks. Of course, the definition of a dollar was that they were redeemable, $20 to an ounce of gold. Runs on private banks dollars then the only option — were confined to the offending institutions that fraudulently issued dollar notes in excess of the gold they had in their vaults to back them. Runs on the bank forced honest banking, while placing the burden of prudent diligence on their clients. Bank collapses were far and few between, but when the occurred,the pain was confined to those involved, sparing the greater economy

But the allure of central banking is an aphrodisiac to those who would enjoy the benefits of having a banking monopoly. It is quite a privilege to be granted by the state the legal right to earn wealth without sacrifice or savings. Rather, it is earned by printing dollars — claims to wealth — out of thin air, and then lending it at interest to others, this is the nature of banking at all levels. Wealth these new dollars claim comes at the expense of those storing wealth in prior dollars.

Governments and politicians have always been quick to enfranchise such alchemy. After all, spending wealth confiscated through inflation is dramatically easier than arguing for higher taxation and the associated citizen sacrifice. That’s the dirty secret of inflation: it surreptitiously removes the purchasing power from all currency holders and immediately transfers that wealth to whomever the policy elite deem worthy. How the masses came to be convinced that inflation is a natural economic phenomenon — or in the case of mainstream economists, a necessary one… — we’ll never know.

All that background aside, we look at gold and how it presents a threat to the money empowered shuffling class and to politicians. Should gold provide a safe harbor for an inflation rate that, even at the far understated “official CP”I rate has confiscated well over 17% of your purchasing power since the end of 1999, the illusion of the dollar might be shattered. The reality that it is backed by nothing other than the overtaxed and overly indebted taxpayer and U.S. government might become all too clear. Hence, while it may seem at first blush to be a reach towards conspiracy theory, the impetus for maligning gold is plain for to see for all those who bother to look.

With that in mind, we’ve come across two pieces that we thought our readers would find interesting regarding the manipulation of gold prices by central banks and the major private-banking-cartel elite that largely feed at the Central Bank trough. The first piece gives a bit of a background for everyone, from the gold market novice to the knee-jerk conspiracy denier. The second notes a rumbling about changes that could be made related to such manipulation.

• The Gold Price-Fixing Conspiracy
• IMF gold trading rule changes set to boost the gold price

While there is evidence, nobody can say for sure; but you can’t connect the dots if you don’t have the necessary bits of information. So give both a read and use your head to understand for yourself!

Party may soon end for global financial sector

Slowing economic growth, increasing consumer debt and soft real estate markets could mean the party is over for the global financial services sector after stellar returns in 2006, a new report said on Thursday.

FT: US productivity growth lowest for decade

The US economy last year recorded its lowest rate of labour productivity growth in more than a decade, with growth in output per hour worked falling behind the EU and Japan. The fall casts further doubt on the ability of the Federal Reserve to cut interest rates as the US economy slows.

Research to be published on Tuesday by the Conference Board, the international business organisation, shows that US labour productivity in the whole economy grew by 1.4 per cent in 2006 as slower economic growth was combined with a rapid rise in employment.

Gail Fosler, the chief economist of the Conference Board, told the Financial Times that the fall in productivity growth was unlikely to be cyclical and the result of weaker gains in services’ industries, raising “concerns about the long-lasting productivity impact of information and communications technology”.

Davos Economists Say Derivatives Demand Creates Risk

Surging demand for derivatives is making financial markets more vulnerable to any slowdown in the global economy, said economists and executives at the World Economic Forum.

“You can easily get liquidity from the market every second for anything,” said Bank of China Vice President Zhu Min at a panel discussion on the global economy in Davos, Switzerland. “We really don’t know what the risks are.”

U.S. 2006 home sales drop biggest in 17 years

Sales of previously owned U.S. homes slipped 0.8 percent in December and took their biggest tumble in 17 years for all of 2006, leaving in doubt whether the worst of a housing slump has passed. The National Association of Realtors on Thursday said December sales ran at a 6.22-million-unit annual rate, lower than the 6.25 million that Wall Street analysts had forecast.

And, from the meddlesome government edicts department (certain special interests with strong lobbying influence hurried through the recent ethanol law. :

Hog farmers brace for high feed costs

A soaring demand for corn used to produce ethanol has hog farmers bracing for higher feed prices that threaten to put some producers out of business.

The price of corn is expected to climb to $4 a bushel, a level not seen in the last decade. The soaring price was the subject of a seminar Thursday at the Iowa Pork Congress, a two-day annual gathering for Midwest hog farmers.

Neil Dierks, chief executive officer of National Pork Producers Council in Des Moines, said the situation is so dire that some producers will opt to quit the business.

Aside from the dislocations produced in agriculture, Ethanol requires more input energy than it produces. It is currently economically unfeasible absent government edicts.

Reports the NYT,

“Wall Street’s big bet on risky mortgages may be souring a lot faster than had been previously thought.

The once booming market for home loans to people with weak credit — known as subprime mortgages and made largely to minorities, the poor and first-time buyers stretching to afford a home — is coming under greater pressure. The evidence can be seen in rising default rates, increasingly strained finances at mortgage lenders and growing doubts among investors.

Now, Wall Street firms, which had helped fuel the growth in the market by bankrolling and investing in subprime mortgage lenders, have begun to pinch off the money spigot.

Several mortgage lenders have recently collapsed. While the failures so far are small in number, some industry officials are concerned that they could be the first in a wave. The subprime sector, which produced loans worth more than $500 billion in the first nine months of last year, could shrink significantly.”

As we’ve been harping on much of the New Year, don’t take your eye off the Subprime market. It could well be the catalyst.

Despite all the talk through December about housing having bottomed, this just in:

Sales of existing homes fell in December, closing out a year in which demand for homes slumped by the largest amount in 24 years. The National Association of Realtors reported that sales of existing homes were down 0.8 percent last month, a bigger decline than had been expected. For the year, sales fell by 8.4 percent, the biggest annual decline since 1982, when existing home sales fell by 17.7 percent in the midst of a severe recession.

We typically enjoy reading Bill Fleckenstein’s observations on the markets and economy. In his most recent two dispatches, he’s addressed both housing and tech sectors.

On housing, Fleck quotes a few colleagues in the mortgage biz who confirm our own observations about housing:

“The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.

“I am truly worried about the aftermath once it is resolved. It truly becomes a vicious cycle. Each time guidelines are pulled back, fewer buyers can buy homes. Thus, lower property values, and more people underwater. The debt piles up on homeowners’ balance sheets, and people consume less.

This will, and should, take years to play out. (Federal Reserve Chairman Ben) Bernanke will yield to the Lobby and the Street, trying once again to lower rates and allow people to bail themselves out, while in turn allowing the buyout firms of the world to overpay for the companies they buy with easy money. The game is so rigged against honesty, it boggles the mind. I worry about our children having a chance to have a future, at this point.”

Not terribly cheery at all. And what of that pesky sub-prime mortgage industry that we’ve pointed to as leading the way to bigger trouble? Says another colleague:

“The subprime trade continues to evolve. Stage one was the turn in the housing market in July 2005. Ironically, stage two occurred in September 2006, a month after home builder stocks bottomed, when spreads on subprime home-equity loan securitizations started to widen. I think we are now into stage three, where some of the bigger listed subprime lenders start to get hit. That might bring the ongoing problems in subprime to a wider audience. Stage four is when a top-three-listed subprime lender goes broke, leaving various Wall St. firms saddled with bad loans. Stage five is when the market really gets it, and Eurodollars (at least for a time) start to rally hard as the market fears some kind of financial turmoil. We’re not there yet, as we are just now entering stage three, but do not take your eye off subprime for a second.”

Indeed. Indeed. You can read Bill’s own observations about these comments here.

You can also read his comments about what some lofty, mainstay tech companies that’ve been lured into over expanding capacity by the now tenuous credit bubble in a separate piece. Another friend of Bill’s shared a humorous analogy about one of the sub-sectors discussed:

“If (the industry) was driving a car at 80 miles per hour in a 55 mph speed limit zone, and then there was a sign saying ROAD CLOSED, HIGHWAY NOT FINISHED, 10,000-FT. CLIFF AHEAD, why does the DRAM (dynamic random-access memory) industry then accelerate the car to 120 mph? Damn the torpedoes, full steam ahead. These guys make the flat-panel industry seem rational!”

Of course, how would they know any better? Easy money always fills folks with euphoric confidence right up to the point where the rug gets yanked from underneath their best laid plans.

Add this article about Arizona Mortgage fraud to our previous comments about mortgage fraud:

A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals.

Left unchecked, cash-back deals cost homeowners and lenders millions of dollars and could erode confidence and values in Arizona’s real estate market.

Not only that. Given the numbers nationwide, it could cause a serious liquidity backlash among those willing to lend into such a fiasco given how many problems appear to be compounding in the entire housing markets, fraud or not.

The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. Neighbors may then discover home values in the area are exaggerated. Homeowners stuck with overpriced mortgages may never recover the difference. And lenders end up with bad loans that, in the long run, could hurt the Arizona real estate market, the largest segment of the state economy.

While the extent of the fraud is unclear, an Arizona Republic investigation into these cash-back deals found organized groups of speculators have bought multiple homes this way, leaving whole neighborhoods with inflated values. Add to these the individual deals done by amateurs who hear others talk about the easy money they made from cash-back sales.

State investigators and real estate industry leaders want more enforcement and greater public awareness to stop the spread of cash-back deals before the damage mounts.

Translation: “Hey. What say you, me and Clem close the barn door now that the cows have wandered off into another county?”

“Mortgage fraud in the Valley has become so prevalent people think it’s a normal business practice,” said Amy Swaney, a mortgage banker with Premier Financial Services and past president of the Arizona Mortgage Lenders Association.

As the saying goes, you don’t know who is swimming naked until the tide goes out. Such is life in the latter stages of an inflationary bubble. The front side is the fun side of any inflation. Just on the back slope of the peak is right about where these sorts of issues start getting revealed. The big question now is, what will policy makers do to prevent a steep slide, and more importantly, can they pull another rabbit out of the hat like the Fed did with 2001’s liquidity flood?

• Moscow confirms Iran missiles sale
• U.S. Missile shield in Eastern Eruope ‘threatens Russia’
• War With Iran Is Likely
• Retired Generals Slam Bush’s Iraq Plan
• Poll Finds 70% of Americans Oppose Troop Surge
• Almost $100 million unaccounted for in Iraq

If you think the housing deceleration has bottomed, you may want to visit the website Sacremento Area Flippers in Trouble. There you can find miles of listings like this one:

Losses of 20% to 30% ++ litter the site, and dozens of them each day.

Yes, certainly some of these folks are flippers, many of whom used creative financing to get themselves into this sort of mess.. But just imagine how many temporary buyers who squeezed into ARMs with the expectations that they’d be “moving out of the home in a few years, anyway” are facing similar upside down situations around the corner. Or, what about the subprime market that is currently imploding?

David Lereah of the NAR can tell us we’ve reached the bottom of the housing decline. You should believe him as much as you believe, in hindsight, the likes of Abby Joseph Cohen, who told us each week that the stock market had bottomed — from the first day it started dropping in 2000 until finally the stopped clock was right in October 2002.
Remember, such folks are in the business of selling you something. That’s their job. That’s why the get paid the big bucks. Record bonuses, even.
Don’t be a Fall Guy.

“I don’t think there has ever been a time in history when such a large proportion of the riskiest credit assets have been owned by such financially weak institutions . . . with very limited capacity to withstand adverse credit events and market downturns.

“I am not sure what is worse, talking to market players who generally believe that ‘this time it’s different’, or to more seasoned players who . . . privately acknowledge that there is a bubble waiting to burst but . . . hope problems will not arise until after the next bonus round.”

AAACK!!!! Good God! That’s from a piece in the Financial Times, where journalist, Gillian Tett, is commenting about receiving many such emails echoing the same sentiments from folks working at major credit institutions. (Definitely read the entire article!) The snippet above is from one particularly disturbing email, about which Tett continues,

He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds’ money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. “Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors’ capital - a 2% price decline in the CDO paper wipes out the capital supporting it.

“The degree of leverage at work . . . is quite frankly frightening,” he concludes. “Very few hedge funds I talk to have got a prayer in the next downturn. Even more worryingly, most of them don’t even expect one.“

Sweet Holy Moses!

But I guess we are just worry warts. (What credit bubble?)

Stay Vigilant!

Note: Most images in this piece can be clicked to enlarge.

There are yet more indicators in the news that we’re seeing only the tip of the iceberg with the break in the housing bubble:

NYT: D.C. Buyers Scarce, Many Condos Are for Rent

After six weeks of failing to lure more than a couple of dozen buyers, Mr. Franco and his partner, Jeff Blum, joined the builders of nearly 6,000 condominium units in the Washington metropolitan area who have decided in the last three months to recast their projects as rental apartment buildings.

Gee. We can’t wait to see what that will do to rent in the nation’s capital:

Industry analysts also point out that rents may start sagging if too many condos are converted into apartments too quickly. While rents were rising at a robust 6.1 percent annual pace in the Washington area late last year, according to the Bureau of Labor Statistics, some buildings in the suburbs have recently started promoting move-in specials and other incentives to lure renters.

Lest we forget that this is also the era of CondoFlip.com, now home of the patented level-1, level-2, and level-3 “panic sale” buttons, many condo buyers were not future residents, but rather aspiring real estate moguls seizing their rightful slice of the American pie. Developers and speculator alike will be deep underwater on these projects. Primary homeowners who squeezed into properties will also face difficulty should they need to sell. I can only imagine how many of these unfortunates are now realizing, with sudden clarity, that they have just lost at what was investment game of musical chairs.

Take the owner trying to sell a spacious two-bedroom condo for $879,000 in the former Columbia Hospital for Women, which closed in 2002, in the Foggy Bottom neighborhood of Washington. In 2004, the investor was so confident that he would make a handsome resale profit that he told his agent, Thomas P. Murphy, he wanted to buy five condos. Mr. Murphy said he flatly told his client he would only assist him in purchasing one unit in any one building.

“He needs $890,000 to break even, but the offers are at $800,000 to $840,000,” Mr. Murphy said. “He does remember that I told him he was not getting five of them.”

Could he rent the condo? Yes, but that option is not appealing, either. Mr. Murphy estimates that the unit could rent for $4,000 a month, far short of the $6,800 a month the condo costs in mortgage interest, maintenance fees, insurance and taxes.

Bubbleland, USA

Pity, if they only folks like this understood that they were buying into what was nothing more than an artificially expanding, money-supply / credit induced boom.
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“Americans have shown a complete lack of self-control,” said David Kostin, the investment bank’s US strategist. “The personal savings rate is at its lowest point ever and has actually been negative since April 2005. We believe that housing will soon become the proverbial ’straw that breaks the camel’s back’.”

Oy Vey! You can read the rest of this gloomy dispatch here.

We thought readers would find this series of charts of interest.

Of course, we’re told we live in an environment with inflation under control:

We’ve been posting updates on the sub-prime mortgage implosion that has begun. Here’s a reason why we worry about it only being the tip of the iceberg:

What’s happened to housing so far, by region:

We meant to comment on it before. Better late than never!

The Financial Times reported at the end of December, 2006, that the US dollar bill’s standing as the world’s favorite form of cash is “being usurped by the five-year-old euro”. Says FT.com, “The value of euro notes in circulation is this month likely to exceed the value of circulating dollar notes, according to calculations by the Financial Times. Converted at yesterday’s exchange rates, the euro took the lead in October.”

You can read the rest of the article here.

You can also read about changes in the bond market re euro debt vs. dollar debt, another indicator of a slow hissing in the dollar.