Vigilant Investor

No doubt, there are quite a few problems behind why oil has jumped above $128 a barrel.  Never mind hooey arguments about greedy oil companies that resonate with the economic illiterates among the loudmouth media and the complaining voters.

While we don’t have much good to say about any politician on the matter of energy, we really can’t disagree with President Bush’s observations about pressuring the Saudi’s for more output:

“Our problem in America gets solved when we aggressively go for domestic exploration. Our problem in America gets solved if we expand our refining capacity, promote nuclear energy and continue our strategy for the advancing of alternative energies as well as conservation,” he said.

“One interesting thing about American politics these days is those who are screaming the loudest for increased production from Saudi Arabia are the very same people who are fighting the fiercest against domestic exploration, against the development of nuclear power and against expanding refining capacity.”

This, said Bush, after noting that Saudi output really is not the ultimate solution to the U.S. price problem.  Mind you, many in the U.S. Congress are wagging their fingers at the Saudis — like candidate Hillary Clinton — for not increasing their production significantly enough to alleviate U.S. price pressures, as if the world should rotate around the U.S. dilemma.  The same folks giving grief to the Saudis are the same ones who refuse to allow the U.S. to develop its own energy resources as Bush notes above.

Not that the Republicans have been any great movement as of late to get anything done themselves, with R candidate John McCaine having been a pivotal vote in the Senate preventing the development of Alaskan reserves.  Indeed, the U.S. has not built a new refinery in three decades, and refuses to allow development of both oil and clean burning coal, not to mention nuclear reactors.  Even environmentalists are preventing air windmills, much to the happiness of those with fancy homes on the coasts who loath having their million dollar views ruined by windmill farms harvesting the constant ocean breezes.

Hypocrisy aside, we’re not hearing one of the core causes for skyrocketing energy costs: plain old fashioned inflation. And by “inflation”, we don’t mean the modern misuse of the word to describe the consequences of inflation — rising prices –, but rather the actual cause of the rising prices: climbing money supply.   The world is now awash with dollars thanks to a steady thirty years of the Fed and the U.S. banking system creating dollar after dollar with its fractional reserve, fiat privilege.

Looking at the money supply graph, you can see that the various measures of U.S. dollars have been on a steady rise since the 1980s, and especially ramped up in the 1990s.   Most were lulled to sleep about the ugly effects of inflation due to two factors, both of which served as siren songs for the unsuspecting public and the herd of sheep hitting their record bonuses on Wall Street:

1. Inflating nice asset prices like stocks, bonds, and houses
2. Exported inflation dollars bought cheap goods made abroad, a honeymoon that lasted until the last few years, when foreign nations were flush to the gills with dollars and ready to part with them to buy things that were not so easily printed and common — and very essential, like energy!

With today’s 75 basis point rate cut – we see continued evidence as to whom the Fed really serves. As we have long said, it’s not you and I – it’s the Big Wall Street Banks. The “Big Rip-Off” of your savings continues. Jon Markman gets right down to it…

We’ve been hammering on this long before we started Vigilant Investor in April of 2005. Our primary theme: The U.S. Economy has been operating on a false paradigm that would catch up to it and result in serious pain.

Yet now we learn that Moody’s — smarting from loss of credibility due to reckless ratings in the mortgage backed debt market, and scrambling to regain face without exacerbating the problems it helped enable — is warning the U.S. it needs to scale back its roaring costs of entitlement. Surprised? Not if you’ve been a regular reader of Vigilant Investor or read the Ernharth Group 2007 wealth report.

Yet many intra industry types have mocked us and those like us, smugly laughing off our warnings as ridiculous, which today only serves to indict the paradigm in which the majority of people have been operating. Some even said we were cranks because our warnings lacked economics degrees, which only serves to remind me of the admonishments 10 years ago from the mainstream press, that folks like Matt Drudge were implicitly unreliable because they lacked journalism degrees.

Here we are today with a great majority of the most pertinent news and analysis coming not from the mainstream press, but from alternative sources like ours!

Yet if you have any doubts, consider the mistakes of the popular pundits, economists, and policy makers:

1. They failed to grasp there was a housing bubble.
2. They dismissed that it would impact the credit markets, let alone the economy.
3. They asserted subprime problems would remain contained.
4. They believed the market plummet of February 2007 was a one off event, indicating nothing more serious.
5. They believed the subprime market was too small to be a contagion for the credit markets.
6. They were bottom feeding on mortgage brokers and other financial companies in March of 2007 under the banner “The Worst is Over”
7. They were doubling-down bottom feeding on those same stocks in August following the collapse in June and July that finally exposed the problem as very serious.
8. They were promoting soft landing scenarios in September 2007
9. They continue to promote “the worst is over” type assessments, believing Fed liquidity will solve the problem.
10. They believe, if any mistake was made, it was the Fed failed to come to the rescue with more liquidity in time to help out.

So, the question is, do you still believe them?

We admit we’re patting ourselves on the back, but we do so only to remind our readers that they need to seriously be thinking through this environment in the context that the majority of players have been operating under the delusions of a false paradigm.

How do we know? Continue Reading »

You know everyone is thinking it – so there, we asked it!

In an era where the world’s most famous supermodel insists on being paid in Euros (not Dollars), and rap stars flash Euros vs. Greenbacks – it’s a logical question. Especially when you consider that Gold/Silver backs NO government currency on the planet, and that as the U.S. continues to export inflation by printing/degrading the Dollar – foreign nations will follow suit to protect their exports, etc. In other words – ALL paper money is becoming more worthless by the day.

As OPEC nations meet, they discuss among other things, skyrocketing production costs. We also learn sentiment exists that OPEC has lost the ability to lower prices by increasing output. How can this be? Sure, demand has increased dramatically over the decade. However, we think the primary reason is that prices have a long way to go to accurately reflect the massive (and continuing) increase in the global money supply. In other words “real inflation” – not the bogus, rigged figures central bankers use.

Hey, say what you will – rap stars and supermodels are up on the latest trends. As soon as they catch on – they just won’t be wearing their bling – they’ll be getting paid in it. Either that, or they’ll be converting whatever “paper” they are getting paid in as fast as they can into Gold and Silver. It doesn’t take a genius to figure out what widespread behavior like that will do to the price of the precious metals.

As always – opportunity knocks!

You know, we’re continually amazed as we witness an extremely interesting phenomena. Really amazed. Turn on any evening financial television show and you’ll hear the pundits demagogue on how Treasury Secretary Paulson must defend the Dollar. Bemused, we ask –“with what?” Today, Mr. Paulson accused the Chinese of unfair competition for not letting their currency appreciate. He also intimated that letting the Yuan strengthen would help stave off protectionist sentiment in the U.S.

The Chinese must be shaking in their boots! A debt addicted, debt laden, cheap foreign import dependent U.S. — much of who’s debt is financed by and cheap goods imported from the very same Chinese, effectively threatens said Chinese with protectionism if they don’t let their currency strengthen further. What?!

Common sense tells any rational person that the Chinese hold all the cards – are playing them well – and evidently intend to continue doing so. The Chinese have sat back silently and watched us bleed money (which we’ve had to borrow) — in Iraq. Just yesterday, they announced they will likely follow supermodel Gisele Bundchen – and begin to divest themselves of the rapidly depreciating Dollars they are awash in. Will they buy Gold? Silver? Agriculture? Oil? Corporations? We think all of the above – and more. China dumping Dollars is bad for the U.S. Soon the world will follow – and a nation addicted to debt will have to raise interest rates to continue to borrow. The last thing any person, business, or country severely in debt wants is the cost of their debt service rising.

And if the Yuan does strengthen dramatically, the cost of Chinese imports will rise correspondingly. What do you think that will do to the price of goods at Wal-Mart, Target, et al? How will paycheck-to-paycheck mainstream America handle that? We think not well.

An ancient Chinese curse states, “May you live in interesting times.” Well this is going to be interesting.

Protect yourself accordingly.

Don’t read too much into the reports that housing is on the mend based on yesterday’s numbers showing new home sales have picked up. As we’ve reported before, new home sales number never include the cancellation numbers that have been running at a very brisk pace according to homebuilders’ disclosures. Bary Ritholz has some good commentary on that, as well as statistical significance.

What’s in store for housing? Well, it would appear the consensus is catching up to your editor here at Vigilant Investor. Reports CNNMoney:

The battered markets for real estate and home building still have farther to fall, according to a range of economists who spoke Wednesday at a forecast conference sponsored by the National Association of Home Builders. The economists agreed that the problems with home finance markets will continue to hit housing into next year, and that even when there is a recovery, it will be a slow process that will see weakness continue into 2009.

Gee… don’t go out on a limb, now, Ok?

While most said they believed the overall U.S. economy can weather the housing downturn, several saw significant risk of a recession. Mark Zandi, chief economist of Moody’s Economy.com, said that large areas of the country will fall into recession, if they haven’t done so already.

Ok.. the mainstream catching on… What else? Continue Reading »

Qatar and Vietnam are now on the list of countries backing away from dollar support. This reaffirms serious problems for the dollar and consumers going forward, and in the case of Vietnam, could lead to a cascade of other Asian nations following suit.

Countries worldwide have been accepting hundreds of billions U.S. deficit dollars as payment for their goods and services (o.k. — primarily goods). Central management of currencies and economies being all the rage these days (even in the U.S. with its “Federal” Reserve), those managing economies piling up dollars have been faced with a monetarist dilemma: what do you do with all those dollars? If you sell them in exchange for your own currency, your native currency will gain in strength — thus crimping your exports to the insatiable United States’ consumers. So, the plan is to inflate your currency (e.g. print new supply) so that your currency has parity (maintains existing weakness) vs. the dollar, thus keeping the export sector of your economy alive and well. With the U.S. earlier this decade bloating its own money supply to ward off Y2K issues, 9/11 side effects, a plummeting stock market from 2000-2002, and an emerging 2001 recession, U.S. consumers were flush with newfound dollars (often vented through their home equity) and, hence, foreign nations seeking parity have been quite busy deflating their own currencies.

But like all government meddling, there is no free lunch. By pursuing a dollar supportive policy, economic gravity has taken over creating a great deal of inflation in these export managed foreign nations. (After all, units of the local currency have increased far faster than has the availability of goods and services.) Stated another way, these economies have been subsidizing their export sector and the U.S. consumer at the expense of the majority of their citizens, who find their native currency buying less and less real goods each year. In other words, accommodating the dollar and U.S. consumers is hardly a policy that can continue indefinitely.

And so we learn from Ambrose Evans-Pritchard,

“The Saigon Times said this morning that the State Bank of Vietnam was abandoning the attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy is causing the economy to overheat, driving up inflation to 8.8pc… Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings of its $50bn sovereign wealth fund from 99pc to 40pc, switching into investments in China, Japan, and emerging Asia.”

Continue Reading »

Putin Dissolves Russian Government. Looks like Putin is prepping the system for his hand picked successor. Say what you might about Vlad, he’s definitely looking out for Russia’s power interest firsts. Clearly a Russia Chinese pact has formed in order to offset the hemispheric influence of the United States on what is clearly their side of the world. Just recently Putin resumed the practice of keeping bombers in the air for the first time since the end of the Cold War, while also claiming as Russian territory large energy rich areas above the arctic circle as Russian territory despite the insistence of most governments that it is open territory. With the energy resources held by Russia, they certainly have a bargaining chip, with Europe’s thumbs in the screw as a primary client.

UK troops are being sent to Iranian border while U.S. Officials are crafting plans for bombing Iran. As we suspected some time ago, Iran and Syria would be on the list of priorities of Bush’s administration and both are frothing to the forefront. After nearly a week of silence, today the U.S. confirmed that Israeli warplanes launched airstrikes inside Syria, the first time since 2003. Word is that the Israelis suspect that North Kroea is selling nuclear material to Syria and that the Syrians may have a nuclear installation. Its been slow, but the new axis of evil is gelling into a likely military target.

Continue Reading »

We’re live 3:30 NYT to discuss the recent weeks events with the giant credit bubble unwind. Has the Fed been nearly as liquid as many suspect, or have they been stingy? The market seems to think all is ok, but should it be so quick to jump back on the carry trade and drive equities yet higher?

Join our live worldwide streamed talkcast today. Call in. Chat. Just listen or download for later!

The financial wires lead the market plunges today by reporting that BNP Paribas SA, France’s biggest bank, has halted client redemptions from three large investment funds because it was having difficulty “fairly” pricing their holdings in the wake of the sub-prime implosion and the growing reverberations that this ‘tip of the credit bubble iceberg’ has sent through the credit markets as a whole. With 1/3 of their money supposedly in subprime securities rated AA or higher, the fund still dropped 20% in two weeks.

Once again we find that nobody wants these assets — there are no buyers, hence they are not marked to market. Such is the environment today with the once super-easy credit environment drying up dramatically in just a few short months.

From Bloomberg:

“There are securities which simply can’t be priced because there is no trading in them,” Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in Bedford Hills, New York, said in an interview today. “There are no bids for them. Asset-backed securities, mortgage loans, especially subprime loans, don’t have any buyers.”

The French bank joins Bear Stearns Cos. and Union Investment Management GmbH in stopping fund redemptions. Dutch investment bank NIBC Holding NV said today that it lost at least 137 million euros on U.S. subprime investments this year.

That’s hardly a confidence builder. Nobody wants to buy them.

Then, at what price model will they be booked at? And, are we still contained to subprimes? Hardly! Separately, reports Bloomberg in an article titled “Subprime `Tsunami’ Hits Asset-Backed Commercial Paper Market“:

“Companies are extending payments on commercial paper backed by home loans for the first time as the subprime mortgage crisis spreads to debt perceived to be among the safest in the market, according to Moody’s Investors Service.”

Folks, they’re talking about money markets — that cash equivalent most people use in their brokerage accounts. Granted, if you read the article, its far from a fatal outcome they are describing (although a small number of money market funds have reported large losses already), but we remind readers, there’s still lots of fallout ahead — who knows where the contraction will hit?

We say it all the time, and we’ll say it again: Continue Reading »

We’re big fans of Bill Fleckenstein and provide the following three pieces as “essential reading” for providing perspective on the global macro / geo political environment supporting present market valuations.   We recommend you read with a glass of wine.  As always, start from the oldest (bottom) and read up to today.

• The market’s game of musical chairsby Bill Fleckenstein, 6/18/2007
• Public pension funds take a risky gambleby Bill Fleckenstein, 6/11/2007
• The damage of the dollar glutby Bill Fleckenstein, 6/4/2007

Signs are mounting that support for the U.S. dollar is beginning to wane as dull demand on new 2-year and 5-year Treasury notes are providing more evidence that foreign central banks are tiring of the dead-weight associated with dollar denominated currency reserves. This is crucial factor when you understand the relationship between these reserves and the U.S. economy.

These reserves are kept for two reasons.

One is to protect the native currency from currency raiders like George Soros from swooping in and crippling their economies.

The other is to maintain trade parity with the United States. In this case, a strong dollar relative to the native currency translates into exports to the U.S. — essential for many export-dependent emerging economies that lack internal demand for their own production. Foreign manufacturers have little use for dollars in their nations, hence when they earn dollars, they convert them into their native currencies — which translates literally into selling dollars into the market at market exchange price vs. their own currency. As with any commodity, this naturally increases the demand for their own currency and decrease the demand for dollars, resulting the dollar losing its purchasing power in their own nation — thus depressing their export dependent economies.

Hence, governments and their central banks intervene by keeping dollars and dollar denominated assets, like U.S. Treasuries, in reserves, while simultaneously they inflate their own currency supply to offset the increased demand. The net consequences it that parity between the dollar and their own currency remains, and trade is not affected. This artificial demand has had the effect of artificially depressing the borrowing / credit rates in the United States and globally. Contrary to what many debt apologists say — experts who believe that low rates and massive debt in the U.S. is a sign that foreigners are finding great deals in the U.S. and that debt is good (yes, they do say this) — these low rates merely reflect central planning intervention by the world’s governments and central banks, the U.S. included. (Now, for some reason many who agree that central planning in a sense of the Eastern Block economies is bad can, in the same breath, say that such meddling is good when its left in then hands of central banks and other economic policy meddlers…) These are not market rates. These are artificial, below market rates! Adjustments taking place as central banks back off are proof of this!!!

Now, the real problem is emerging in that Continue Reading »

China will invest $3 billion of its $ 1.2 trillion in reserves into the U.S. buyout-fund firm, Blackstone.

Stephen Schwarzman, Blackstone’s chief executive, called this all a “historic event that changes the paradigm in global capital flows”. You bet it does. This historic announcement is important on several fronts:

• Is this the start of the long awaited change where Bejing backs-off its torrid pace of “vendor finance” dollar accumulations, which have provided key support to the dollar and have enabled the depressed U.S. interest rate environment?
• Will this start a trend of central banks publicly entering the capital markets in order to diversify reserves? While it will certainly please the private equity dealmakers to play with more central bank liquidity, will it lead to the further politicization of asset pricing?

So far the IMF seems to think the first issue is a non-starter. Says Forbes:

Speaking at a press conference on the sidelines of a meeting of finance ministers from the Group of Eight leading industrialized nations, Rodrigo De Rato said he was not concerned about the impact China’s move could have on the U.S. dollar and U.S. Treasury bonds.

“It’s rational that emerging economies who have very high levels of reserves diversify their investments,” Rato said. “It has happened in other cases, and I don’t think we should consider that as extraordinary.”

“May you live in interesting times,” indeed.

The latest data released today shows that the New York Fed’s Factory Index stays near a two-year low, Japan’s export stocks rise, and China’s economy grew at a 10% rate last quarter. American retail sales are up, and the savings rate lingers around zero. All the while, total U.S. Credit Market Debt is at an all time high.

Translated – Americans are either spending all the money they earn (or can borrow) – and it does not look like they are buying many things made in the U.S.

The U.S. Homebuilder Confidence Index falls to the lowest level of this already terrible year, and U.S. homes going into foreclosure have doubled compared to the first quarter last year.

Translated — People who build homes aren’t feeling too good about their business prospects. They shouldn’t – since the housing backlog is about to increase as lenders are forced to put more homes back on the market which they have foreclosed on – while at the same time they tighten their lending standards.

Gold breaks through $690, Silver $14 an oz. Both precious metals (i.e. real money) – look to break key price levels. Oil stays resiliently above $60. Prices in the supermarket and at the gas pumps are increasing steadily – and picking up pace. The Fed is concerned about the economy slowing – yet per the recently released minutes from its Open Market Committee meeting, perhaps more worried about rising prices.

Translation: Unlike the classic Mullet Hairstyle (Kentucky Waterfall, Tennessee Top-Hat, or Hockey Hair — depending on your preference) – which is all “business up front and party in the back” – the massive amount of credit infused into the economy is just the opposite. As a nation, we’ve had the “party up front” running up the tab — but now we are forced to confront the rising prices and other serious consequences, which are part of the “business in the back.”

More key economic data to come this week – and of course, we’ll be happy to tie it all together for you in simple, plain English

“For every problem, there is a solution that is simple, neat, and wrong.”
– H.L. Mencken

As is all too common when an economy starts developing problems, the blame game gets shifted into high gear. Industries with difficulties shout about who or what is costing them profits and jobs, while politicians — always eager for a parade to lead into election day — jump to the head of the line, clamoring for immediate adjustments to right the wrongs. And so it is that we have watched the trade war tension mount between the United States and China (and the $800 billion trade deficit), with Congress and the president growing more comfortable with the idea of passing punitive measures against offending nations.

And so it is we find these headlines:
Continue Reading »