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Alan Greenspan Charged With Killing Off Middle Class, Setting Stage for Economic Collapse
Written by Felix
WASHINGTON—Alan Greenspan was arrested on Monday at the US Federal Reserve and formally charged with killing off large sections of the American middle class after police read the new book “Greenspan’s Fraud” by best-selling author and Economics Professor Ravi Batra.
“I have no regrets,” snarled Greenspan as he was led away in handcuffs. “I was only following orders.” Yet the Fed Chairman later broke down and confessed to the crimes, pleading guilty.
Greenspan has been killing off the middle class under a succession of US presidents from Ronald Reagan to George W. Bush, according to the new book. He helped extract trillions of dollars from the middle class to sharply enrich the rich and big business. Greenspan catered to the rich and powerful to maintain his lavish appointment as Chairman of the Federal Reserve, helping them shape government and economic policy in their favor.
Batra explains how Greenspan’s policies on Social Security, income tax cuts, and the minimum wage are reducing the middle class and leading toward perilous times.
Strangely, even as he harmed the middle class and created many economic crises, Greenspan has been worshiped like an oracle or wizard, and adored because he was seen as saving America from various economic crises.
Although overall taxes have been reduced since Ronald Reagan, taxes have increased on the poor and been greatly reduced on the wealthy, in a robber baron taxation policy.
“Greenspan’s fraud” is mainly a social security fraud which started in 1983 and continues until this day. It was based on Greenspan’s desire to raise revenues for the government without raising overall income taxes, which had been cut sharply mainly to benefit the rich in 1981. Instead of building up a trust fund with money invested on behalf of retired folks, it was used to reduce the Federal deficit.
From the beginning, the surplus from the social security trust fund was used to fund the operating expenses of the government, but that was not the intent of the original legislation. These funds were to be collected for retirement, not for the government’s expenses, but the government looted the Trust Fund surplus the moment it appeared. So Greenspan’s fix for social security was a fraud because the public was convinced that the money would be saved in the trust fund while his intentions were to use additional social security revenues to balance the budget.
Greenspan also cut interest rates and sharply expanded credit and debt. Wages are the main source of demand. Productivity is the main source of supply. So when wage growth lags productivity growth, there is inadequate demand. And so to shore up demand, debt must be created. Wages can be raised or debt can be created, but raising wages is something the establishment hates, and so they create more and more debt.
Thus people borrow huge amounts of money. The debt culture is so strong that despite wages lagging behind productivity, there is an explosion of demand, and so demand is ahead of supply, and that causes the enormous trade deficit in America. But in addition to the wage gap, the big reason for the US trade deficit is that the manufacturing base has been destroyed in the US, and one reason for that is Greenspan’s program of financial deregulation.
This financial deregulation enables foreign countries, particularly China and Japan, and foreign nationals to send money into America without any problems, which they couldn’t do in the past. All that money coming into America finances the trade deficit, and allows foreigners to buy government debt, making it possible for Americans to keep on consuming as much as they want. But in the process, because of the trade deficit, US manufacturing is destroyed. And since the US doesn’t manufacture much in America now, this trade deficit is really going to grow over time until there is some major disruption.
This process leads to sharply rising corporate profits initially, and such a profit rise creates a stock market bubble, which eventually crashes because one day debt growth slows down. After the recent stock market crash, Batra claims that Greenspan went back to his old machinations to create even more debt. He did that by slashing interest rates drastically.
The end result was the economy did stabilize but a real estate bubble developed in the process, and he thinks this bubble will also burst in the next two or three years or maybe even sooner. It is bound to burst because since wages continue to lag productivity, exponential growth in debt is needed for demand-supply balance, and that is simply impossible. So he thinks the next bubble to pop will be the real estate bubble.
Batra believes the Iraq war has helped keep the economy going by way of increased spending. He thinks that the US government has now used almost all its defenses against a credit collapse. The 2000 stock market crash occurred because of the falling government deficit. The government began to create a surplus in its budget, and because it shifted from a deficit to the surplus, there was a big fall in debt growth. There is a time when debt growth falls and then there is a crash.
Now they have re-inflated the market to another dose of debt creation. In fact there could soon be an inflationary depression resulting from a credit collapse all over the world. It would start out as a recession, but then quickly evolve into a depression because of the bursting of the real estate bubble as well as the Dow.
Real estate is now a very serious problem, and Batra believes there is a real estate bubble now. In order to support the economy in the aftermath of a stock market crash,
All the increase in the price of houses has enabled households to borrow a lot more money on the basis of their home equity. They are digging themselves into more debt, which means that a larger and larger portion of the income they are going to have to devote to servicing that debt is going to have to continue to rise.
What is more likely according to Batra is that there will be a housing default. There will be a crunch in the economy and the politicians will want debt forgiveness but the banks will not go along with that. A depression could be worse than the 1930s. Because every market, every area is in an imbalance.
Batra thinks an inflationary depression is a bigger possibility than a major deflation. Inflation is picking up now. Consumer prices are rising at the rate of 4% or 5% per year, and so inflation is coming back. The dollar is under pressure, so he thinks we are likely to see inflation along with a stagnant economy for the rest of this decade.
Batra doesn’t think there is going to be a deflation, at least not prior to the collapse. He believes oil prices are going to stay high. Money supply will keep expanding because of Greenspan’s policies, so he doesn’t foresee a deflationary scenario.
But he does think a housing collapse could lead to a deflationary collapse in the economy, two years or so after the housing collapse perhaps, but not right away.
Rogue
Crude Oil...I was also expecting a sizeable correction to possibly mid $40's in the next few months.
I am super bullish long-term as I believe Oil will see possibly $80 per barrel or more next year and Gold could reach $600.
I have little or no faith in the value of the US dollar and believe it will be "debased and depreciated" severely in the future.
Rogue
NXG.....Northgate Exploration starting to move and showing signs of life. Up 5% today at $1.20.
http://finance.yahoo.com/q/ta?s=NXG&t=1y&l=off&z=m&q=b&p=&a=ss&c=
This is one of my pick 6 picks. I think it can hit $2.50 by year end as the price of gold(I believe gold may reach $500 by December) and copper is very strong and will probably get stronger.
Rogue
CHAR.....it could very well double again this year from this level. It's just EXTREMELY overbought right here.
Looking to reload 1/2 of my position as the overbought consition works itself off. Hopefully lower than the current market price!
LOL!
Rogue
Protecting Your Savings From Inflation
Nick Barisheff
July 28, 2005
http://www.321gold.com/editorials/barisheff/barisheff072805.html
Historically, one of the primary reasons for owning gold, silver or platinum bullion has been their ability to preserve purchasing power during inflationary periods. Over the long term, inflation robs us of purchasing power. If not addressed, inflation also destroys the long-term value of personal wealth.
"The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income tax during years of 5 percent inflation. Either way, she is "taxed" in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 100 percent income tax but doesn't seem to notice that 5 percent inflation is the economic equivalent"
- Warren Buffett, "How Inflation Swindles the Investor," Fortune, May, 1977
This chart, prepared by Michael Hodges of the Grandfather Economic Report, shows the US dollar's loss of purchasing power based on the Consumer Price Index (CPI). This 87 percent decline means the 1950 US dollar could buy only 13 cents' worth of goods today.
The picture is similar in Canada. The inflation calculator on the Bank of Canada's website shows that a basket of goods costing CDN$100 in 1950 now costs CDN$863. This represents an 89 percent decline in the purchasing power of the Canadian dollar.
Today, most investors are not concerned about inflation because politicians and central bankers have done an excellent job of persuading us that inflation is under control and represents no threat. The core inflation rate in the US is reported to be 1.1 percent - a 38-year low. It certainly sounds good, but is it true?
What is inflation?
There is much confusion and disinformation about what inflation really is. The 1983 edition of Webster's New Universal Unabridged Dictionary defines inflation as:
"An increase in the amount of currency in circulation, resulting in a relative sharp and sudden fall in its value and a rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet demand."
But The Encyclopedia Britannica defines inflation as:
"An inordinate rise in the general level of prices."
Today, that's what most of us think inflation is: a rise in the price of goods and services as measured by the CPI. This definition, however, confuses the cause and effect. The cause of inflation is an increase in the money supply - the effect is an increase in prices.
Since 1971, when Richard Nixon eliminated gold convertibility for the US dollar, there has been no practical limit on the amount of money that could be created. As a result politicians are able to increase the money supply through credit expansion by ever increasing amounts. Today, the annual increases in the money supply are equal to the total money in 1971.
Over the last year the money supply in Canada, as measured by M3, has increased by 9.8 percent. With all the media interest surrounding the increasing US money supply (4.3%), it is surprising that the Canadian increase, at more than twice the US level, receives little attention. What we do hear from the media is that core inflation rates for both countries, over the same time period, is increasing by less than 2 percent annually.
What is the explanation for this disparity?
First, a large proportion of the increased money supply has gone into the equity markets and real estate. In those cases it is called "capital appreciation", but in reality it is just inflation of those asset classes.
Second, the reported CPI rate is carefully designed to understate to true rate by minimizing key expenses, such as energy costs, food and housing, which affect everyone's lives. In fact, energy and food costs are completely excluded from the CPI, because they are deemed too volatile.
A number of questionable tactics are used to distort other real price increases. Quality changes, euphemistically referred to as hedonic adjustments, are one method. Because a 2005 model computer has twice the speed and memory of a 1998 model, its purchase price is reduced by half for CPI calculations. The Wall Street Journal reports that hedonically adjusted computer prices have dropped 25 percent a year. Today, 46 percent of the CPI's weight comes from hedonic adjustments.
Over 30 percent of the CPI is devoted to rental prices. However, thanks to reduced mortgage rates and low downpayment requirements, many former renters are purchasing homes, suppressing rental demand and keeping rents artificially low.
Similarly, 30 percent of the CPI is devoted to used-car prices. Because of zero interest-rate financing and cash-back incentives, however, buyers are flocking to purchase new cars, thus increasing used-car inventories and suppressing resale prices.
Together, these tactics result in a CPI rate that is purposely distorted to reflect a modest inflation rate. A recent article by Jim Puplava entitled The Core Rate provides an excellent analysis of how the Boskin Commission recommended adjusting the method of calculating the CPI in 1996.
Bill Gross, managing director of the giant Pimco bond fund, recently stated: "My sense is that the CPI is really 1 percent higher than the official numbers and the GDP is 1 percent less. You're witnessing a haute con job."
Since every household must deal with double-digit increases for gasoline, utilities, food, professional services and housing costs, not to mention taxes and government fees, it seems obvious that the real inflation rate cannot possibly be 2 percent, but is more likely in the 6-8 percent range. This is confirmed by the fact that the Commodity Research Bureau Index (CRB), representing a basket of commodities has risen 77% in the last three years, US Agricultural products have risen 21% and oil has risen 223%. Since the price of oil affects nearly all products and services, increases the oil price will ultimately have a profound affect on all prices.
If the true inflation rate is 8 percent, then even those risk-averse investors who believe they have secured their capital by investing in Guaranteed Investment Certificates, at the current yield of 3 percent have, in fact, a guaranteed method of losing money on a daily basis.
Investors must not only minimize the risk of capital loss, but also seek returns that exceed the (real) rate of inflation, thereby maintaining the future purchasing power of their capital. Without accounting for both, investments can become a recipe for losing money. If inflation is in fact running at 5 percent above an investment yield, the capital will have eroded by 55 percent over ten years. After 20 years, it will have lost 93 percent of its original purchasing power.
No wonder Lord John Maynard Keynes said:
"There is no subtler, no surer means of overturning the basis of society than to debauch the currency. The process engages all of the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose."
Erosion of financial wealth
Loss of purchasing power isn't the only consequence of high inflation. Over the long haul, inflation can erode the value of accumulated wealth as well. There are two reasons for this.
First, as the money supply is increased through credit expansion, the compounding effects of interest payments can ultimately lead to hyperinflation, and eventually a complete economic breakdown. Goods and services become so costly that no one can afford them. A country's currency becomes worthless, international trade ceases and economic chaos ensues. A classic example of this occurred during the reign of the German Weimar Republic from 1919-1923. In 1919, one ounce of gold was 75 marks. By 1923, it was 23 trillion marks.
The second reason concerns side effects of the strong medicine used by governments and central banks to control high inflation rates.
In the past, inflation has been curtailed through domestic interest-rate manipulation. When inflation rises, the central bank imposes higher interest rates on the economy. In the 1970's, then Fed Chairman Paul Volker, raised the Fed Funds rate to 19% in 1981 in order to tame inflation. This action slows consumption, lowers price pressures on goods and services and brings inflation to heel.
Unfortunately, a high interest-rate monetary policy can play havoc with a country's capital markets particularly when the overall debt levels are as high as they are today.
Bonds and debentures are interest-rate sensitive. As interest rates climb, the market price of bonds, debentures and other debt instruments, such as income trusts, declines.
Mortgages can lose value just as bonds do. Rising interest rates choke off mortgage markets as borrowers look for alternative means of raising capital. Mortgage-based securities, such as mortgage mutual funds, see the value of their net assets drop along with their market valuations.
Although real estate is a tangible asset, it is very interest-rate sensitive. As rates ratchet upwards, the costs of buying, financing, maintaining and renting real property increase. Eventually, as interest rates rise, the market value of real estate begins to fall.
Increasing interest rates negatively impact the value of stocks, too. Rising rates crimp consumer spending. This slows corporate sales of goods and services and causes inventories to increase, profits to evaporate, stock dividends to shrink and stock prices to weaken.
Considering the total US debt, at over 305% of GDP, is more than twice the debt level of the 1970s raising interest rates today could have a devastating impact on today's over leveraged economy.
This puts Alan Greenspan squarely between the proverbial rock and a hard place. If he raises interest rates to subdue inflation and support the US dollar, he risks triggering an economic collapse. If he maintains current interest rates the US dollar may collapse, causing inflation to spiral out of control. If oil prices continue to rise, as a result of hitting Peak Oil, then monetary policy may not be enough to counteract the inflationary affects of rising oil prices.
Considering that the bulk of Canadians' wealth is typically distributed across bonds, real estate and stocks, there is a real risk that rising interest rates could depress all of these asset classes and destroy investor wealth.
Precious metals as a wealth preserver
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value." - Alan Greenspan
The above quote is from an article written by Allan Greenspan in 1966 entitled "Gold and Economic Freedom" in which he discusses the role of gold as money. Wealth preservation has long been an attribute of gold and silver bullion, and the reason they have functioned as money for over 3,000 years. Although prices of gold and silver, in local currencies, may have fluctuated during both inflationary and deflationary periods, precious metals have maintained or even increased their purchasing power in both instances.
During the 1970s the average annual increase in the CPI was 7.8 percent, while the average annual compounded increases in the prices of gold, silver and platinum were 42 percent, 43 percent and 29 percent respectively.
We are all familiar with the premise that you can always buy a man's suit with an ounce of gold. Well, I can remember that in 1971 the price of an average car was about CDN$2,300, or 66 ounces of gold, which at that time was CDN$35 per ounce. Since then, the dollar price of the car has increased 6-fold to CDN$14,000, but for the same 66 ounces of gold, priced at CDN$530 per ounce, I can now buy two cars. In 1971 the average price of a house in Canada was CDN$24,600, or 694 ounces of gold. Today the average house price is CDN$219,700 and with the same 694 ounces of gold I can almost purchase two houses. This relationship holds true for most other assets and commodities, including the Dow Jones Industrial Average, where the cost in gold ounces has either remained the same or decreased over the last 30 years. People purchase precious metals when the risk of owning other assets outweighs the opportunity for gain, profit or reward. When used this way, gold is like cash. But unlike cash and other asset classes, precious metals tend to hold their value during periods of high inflation.
This is because precious metals are negatively correlated to most other asset classes, and to cash and cash equivalents, bonds, mortgages, real estate and stocks in particular. This means that the value of precious metals tends to increase as the value of these other assets declines. This has recently been confirmed in a study by Ibbotson & Associates. An executive summary of the report is available at www.bmsinc.ca.
In an inflationary environment, an allocation of at least 10 percent to precious metals in a diversified investment portfolio helps to preserve the value of the portfolio by offsetting losses in other asset classes.
In periods of very high inflation, where interest rates have skyrocketed, precious metals have at least maintained and usually increased their purchasing power, because their value can never go to zero. Conversely, other asset classes have been completely destroyed by periods of hyperinflation.
This underscores the important distinction between precious metals, in actual bullion form as stand-alone assets. Cash, cash equivalents and currencies, bonds, mortgages, stocks and even real estate are all secured by a promise to pay the bearer. Bullion is not.
Maintaining purchasing power with gold
In his report entitled Gold as a Store of Value, Research Study No. 22 (London: World Gold Council, 1998) British economist Stephen Harmston proves a number of important points about gold's ability to maintain its purchasing power.
First, Harmston's analysis shows that, despite short-term fluctuations in price, gold has maintained its purchasing power over the very long term in Britain, France, Germany, Japan and the US.
Second, while gold has not held its purchasing power during every period of economic and social upheaval, it has held its purchasing power every time financial assets have declined in value.
Third, the inflation-adjusted price of gold has increased since 1971 and, as of 1997, gold's purchasing power remained in parity with the long-term rise in the cost of a typical basket of goods as represented by the CPI.
Harmston's fourth conclusion about gold is particularly noteworthy. Gold's surge in purchasing power during the 1970s occurred partly because of the removal of fixed pricing by the US government. As well, there was a general inflation-driven rise in the prices of other commodities during the 1970s and 1980s, and an increased worldwide demand for gold. As gold supplies expanded to accommodate this demand, gold's purchasing power reverted back to its historic mean which, according to Harmston's studies, was always equivalent to the long-term average rate of inflation.
Inflation rising
Today, there are signs that inflation is on the rise again, and that an inflationary spiral may be about to begin. Both the Bank of Canada and the US Federal Reserve Bank have indicated they will raise interest rates in response to increasing inflationary pressures.
If the money supply continues to grow as it has been, and the price of oil continues to increase inflation is sure to follow. It may now be a good time to allocate at least 10% to the ultimate form of inflation hedge - gold, silver and platinum bullion.
July 2005
Nick Barisheff
Nick Barisheff is the co-founder and President of Bullion Management Services Inc., which was established to create and manage The Millennium BullionFund.
The fund is Canada's first and only RRSP eligible open-end Mutual Fund Trust that holds physical Gold, Silver and Platinum bullion. www.bmsinc.ca
The opinions, estimates and projections stated are those of the author as of the date hereof and are subject to change without notice. The author has made every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions, which are accurate and complete. Neither Nick Barisheff, nor Bullion Management Group Inc. or any of its affiliates take responsibility for errors or omissions which may be contained therein. Neither the information nor any opinion expressed herein constitutes a solicitation for the sale or purchase of securities, and investors are encouraged to seek advice from a qualified investment advisor before making any investment decisions.
321gold Inc
Rogue
Hamish McRae: The rise of the yuan is an unstoppable process
http://news.independent.co.uk/business/comment/article302149.ece
Published: 28 July 2005
There are two possible outcomes for the world economy after the Chinese revaluation of the yuan last week. Unfortunately they cannot both be right.
They share the same starting point. While the revaluation is tiny - a mere 2 per cent - this is the start of the long-awaited and ultimately more marked revaluation of the Chinese currency, a revaluation that will bring other East Asian currencies up with it.
But then they diverge. One view, the majority one, holds that these revaluations will start to correct the present global imbalances, in particular the excessive US current account deficit and the corresponding surpluses in the rest of the world, in particular East Asia. Once the markets see the numbers are heading in the right direction rather than the wrong one, the flow of funds into the US that have been supporting the dollar will be sustained and the world economy can engineer a soft landing.
The other view, the minority one, is that the imbalances are not so much the result of an overvalued dollar but of US over-consumption. So, in the absence of any cutback by American consumers, the revaluation of the East Asian currencies will, in the short term at least, lead to a deterioration in the trade deficit and could trigger the long-awaited dollar crisis.
So which is right? I don't think it is possible yet to answer that one conclusively but what you can do is to be aware of the vulnerabilities so that if the tectonic plates do start to shift at least you will have a bit of warning.
The first thing to be aware of is that there is very little sign that the US consumer is about to cut back. There is talk of US borrowers being overextended and of there being housing "froth" - i.e. not a big bubble but lots of little bubbles. But if you look at the numbers, there is little sign yet of any fall-off of demand either from the personal sector or businesses. Rather the reverse: just yesterday there were some very strong results for durable goods orders in June, up nearly 9 per cent.
While there is strong domestic demand the US economy will suck in imports, particularly from the lowest-cost producer, which is China. There is some dispute between the US and Chinese authorities about the size of the trade gap. You can see the two sides' different estimates in the top graph. But there is no dispute about the trend: the gap is getting ever wider.
But if you look at China's trade performance with the world, rather than just with the US, the picture looks rather different. What interests China is its trade position with the world, not just its position with the US.
The bottom graph shows the growth of exports and imports for the past eight years. The two lines have stuck together pretty closely and in fact for much of this time China has not had much of an overall trade surplus. The general pattern has been for the trade deficit with the US to be balanced by a trade deficit with the rest of East Asia and naturally with the oil producers. But this year growth of exports has continued to bound upwards but the growth of imports has fallen back. The explanation is not yet clear but Capital Economics reckons that it is largely because China has got better at substituting domestic production for goods that had previously been imported: boosting domestic coal production, for example, to replace imported oil.
While it is impossible for an outsider to assess the precise thinking behind the Chinese acquiescence to US pressure to move on the currency, you can at least see why it has become acceptable to them to loosen the currency peg and allow the yuan to climb a bit.
So what happens now? Let's accept the widespread perception that this is the start of a more general realignment of East Asian currencies against both the dollar and the euro. As that rolls onwards, eventually it ought to start to correct the big trade surpluses that China has with the US and the eurozone. But it could take a long time and meanwhile things may get worse before they get better.
Followers of the tortured history of UK trade crises may recall the J-curve. That is what happens to the current account after a devaluation: the trade balance plotted on a graph looks like a J. The downward bit of the first few months is because the change in the values of the currencies more than offsets any change in volume. Since the US will be paying a tiny bit more in dollar terms for its imports from China and volumes will for a while be unaffected, its trade gap may well rise through the rest of this year. I somehow don't think the protectionists in Congress are going to like that.
Still, the job of markets is to spot turning points. It seems to me that once the markets do feel that a turning point in the current account is in sight - even if it is not showing in the figures - they may well give the US and the dollar the benefit of the doubt. There has, after all, been some recent evidence that the other US deficit, the fiscal deficit, has been narrowing thanks to strong tax receipts. We should not write off the possibility of a benign outcome.
The most alarming outcome is sketched by Avinash Persaud, formerly a currency expert at JP Morgan and then State Street, now a fellow at Gresham College. He thinks the unpegging of the yuan will make it more likely that the imbalances unwind in a destabilising manner.
His argument is that there will indeed be a revaluation of the yuan and other East Asian currencies and the fact that everyone expects further movement of these currencies is of itself destabilising. While this will make a minimal difference to the US trade deficit, it will cut China's growth in half and risk plunging the country into deflation similar to that Japan experienced in the 1990s.
Further, as China and Malaysia are joined by other countries and switch pegging their currencies from the dollar to a basket, a prop to the dollar will be removed. Result: a dollar crisis. When? "My guess is by September," Mr Persaud said.
That is brave indeed, breaking as it does the economists' rule: Give them a figure or a date but never both.
What can more safely be said is that loosening the peg between the yuan and the dollar is the very start of a seismic global shift. We cannot see how far or how fast the tectonic plates will move, or the consequences of that movement. But something unstoppable has begun.
Rogue
YGA.TO... GASTAR EXPLORATION LTD or GSREF.PK ....it's a natural gas stock that hasn't moved. Technically it looks oversold and could have a rally from these levels anytime.
http://finance.yahoo.com/q/ta?s=YGA.TO&t=1y&l=off&z=m&q=b&p=&a=ss&c=
Would any of the good "fundamental" guys out there care to put out an opinion of YGA.To??
Rogue
CHAR...sold half my position today. It's had a great run and my average cost was below $2.
Will look to re-enter on an oversold technical condition. Hopefully that will be lower than where I sold today....the $4.27-$4.30 area. There are some "gaps" below the current price that may eventually get filled.
If the momo guys run it some more....I'll "oblige" them with my remaining shares.
When to sell?...when to sell? LOL!!
Rogue
Kozuh...Luke Energy LKE.to. It would of been nice to have been alerted a couple of months ago to this company! The stock has practically doubled in that time.....it's too over-extended for me to chase now.
Got any energy ideas that haven't had a moonshot yet????
I like to buy BEFORE the crowd "booshes" them.
Rogue
Doomsday: The Final Months of the “Housing Bubble”
by Mike Whitney
www.dissidentvoice.org
July 27, 2005
http://www.dissidentvoice.org/July05/Whitney0727.htm
“The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.”
-- The Economist
I sold my home three weeks ago anticipating what I believe will be “Economic Armageddon” in the United States. It wasn’t an easy thing to do. My wife and I have lived in the same home for 25 years, raised both of our children there, and owned the property outright without any loans or mortgage. The house was paid for in “sweat-equity”, that is, by wielding a shovel day in and day out in my one-man landscape business. I don’t say that for sympathy, but to illustrate that we played by the rules, worked hard, paid our taxes, and took advantage of the American dream of home ownership.
All that has changed.
I sold my home for one reason: George W. Bush. He and his protégé at the Federal Reserve have submerged the country into a morass of “unsustainable” debt, disrupted the nation’s economic equilibrium and thrust us towards fiscal disaster. They’ve also generated a humongous housing bubble through their irresponsible and self-serving manipulation of interest rates.
The facts are astonishing.
The current housing bubble is “larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stock market bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.” (The Economist, June 16, 2005)
The banks have lowered the standards for home loans to such an extent that the traditional loan of 20% down and a fixed interest rate is virtually a thing of the past. Instead, those conservative practices have been replaced with “creative financing” schemes that put the entire housing market at risk.
Consider this: In 2004 “one-fourth of all home-buyers -- including 42% of first-time buyers -- made no down payment.” (New York Times, July 7, 2005)
No down payment?!
Sorry, but if a buyer can’t come up with at least $5,000 dollars for a down payment, he shouldn’t qualify for a home loan.
Equally troubling is the fact that “nearly one third of all new mortgages this year call for interest-only payments (in California, it's almost half)” (NY Times) This tells us that a large number of new buyers can barely make their payments, but are gambling that their property value will go up enough to justify their investment. This is “equity roulette.” a shell game that anticipates that salaries will go up while interest rates stay low.
Is that a reasonable judgment?
No, Greenspan has said that he will continue to ratchet up interest rates to head off inflation. This means that an economic slowdown is a near certainty. Remember, “class-warrior” Alan Greenspan lowered the prime rate to a ridiculously low 1% in 2002 to keep the economy humming along while $300 billion was sluiced into Bush’s “preemptive” war in Iraq and while the tax cuts were siphoning the last borrowed farthing out of the public coffers. The Bush tax cuts transferred an average of $400 billion dollars per year into the pockets of America’s plutocrats. Now, the country is flat broke and Greenspan will have to “incrementally” raise rates to stabilize the sagging dollar. This means a sluggish economy for most of us and doomsday for over-extended homeowners.
Greenspan assumed he could carry out his plan without too much unnecessary carnage. Unfortunately, gluttonous mortgage lenders have lowered long-term loans while the prime rate continues to go up. The banks, it seems, are addicted to the “cash cow” of shaky lending and are providing even riskier loans to new applicants. This has upset the Fed master’s strategy for a “soft landing”, and Greenspan has begun feverishly issuing warnings about an inevitable “adjustment” when the market bogs down. The bottom line is that the housing bubble is getting bigger by the day and increasing the potential for catastrophe.
The current problem is compounded by the dramatic surge of speculation in the housing market. As The Economist says, “A study by the National Association of Realtors (NAR) found that 23% of all American houses bought in 2004 were for investment, not owner-occupation. Another 13% were bought as second homes. Investors are prepared to buy houses they will rent out at a loss; just because they think prices will keep rising -- the very definition of a financial bubble.”
What will happen to these “speculative” buyers when the market “flattens out” or the economy takes a sudden dip?
And, what will happen to the US economy when the jobs that depend on new home sales vanish overnight?
“Over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private sector jobs created since 2001 have been in housing-related sectors, such as construction, real estate and mortgage broking.” (The Economist)
“Two out of every five” private sector jobs are now entirely dependent on an industry that is built on pure quicksand.
So, why would banks foolishly loan money to people who can’t even scrap together a few thousand dollars for a down payment or who can scarcely meet their “interest-only” obligations?
The reason is simple: because they are not the ones taking the risk. Mortgage loans are acquired by investment banks and chopped up into various securities where they are sold in mutual funds, hedge funds and pension funds etc. To some extent, this takes the lenders off the hook, but it also means that the shock to the system will be much more widespread when the day of reckoning finally arrives. If we encounter a major glitch in the economy the shock waves will be felt throughout the world. “Investors now hold $4.6 trillion in mortgage backed securities. That’s more than the outstanding value of the US Treasuries.” (NY Times) Think about it.
Shaky lending, interest-only loans, no down payments, a US government that is $8 trillion in debt due to Washington’s profligate spending, and a “ticking-time bomb” of adjustable-rate mortgages that will reset within three years -- the table is set for a disaster of Biblical proportions. If we hit a bump in the economic road ahead (rising gas prices? recession?) the “Land of the free” will be knee deep in bankruptcies and foreclosures. We’ll all be fighting for a soft spot under the freeway onramp.
The fatuous Greenspan believes that all this can be avoided by regulating the money supply.
He’s dead wrong, and I bet my house on it.
Note, the current dilemma could have been avoided if Greenspan had incrementally raised rates as the bubble began to appear. Instead he lowered rates to facilitate Bush’s war in Iraq. It was purely a political decision that “postponed” the economic pain of the conflict and allowed the Bush administration to shift the cost of the war onto future generations.
Consider, also, how Greenspan paved the way for the budget-busting tax cuts (which he enthusiastically approved) and how they have increased America’s debt by $3 trillion. This is real money that American workers will eventually have to pay back in the form of taxes and a higher cost of living. This “class loyalty” is strikingly at odds with his philosophy as a young man when he said, “Deficit spending is simply a scheme for the confiscation of wealth.”
So it is. And the $3 trillion dollars that evaporated on Greenspan’s watch was in fact stolen from the American people while the Fed chief concealed the crime behind the smokescreen of low-interest rates. In the final analysis, Greenspan will be seen as a greater traitor than Bush.
Mike Whitney lives in Washington state, and can be reached at: fergiewhitney@msn.com.
Rogue
Crude Guess: Most Analysts See
Yuan Move Lifting Oil Demand
(Wall of oil??? POILitics??? Chinese reversion to the mean???)
Investors wondering how last week's yuan revaluation will affect Chinese demand for oil and other key commodities can be forgiven for scratching their heads in confusion.
Commodity analysts issued a frenzy of research reports, many of them contradictory, after China moved to raise the value of its currency against the U.S. dollar by 2.1%. UBS analysts suggest that global oil prices might now rise with "possibly higher" Chinese buying. Merrill Lynch, meanwhile, offered what amounted to a three-pronged forecast: more demand for crude in the near term, "possibly" weaker demand in six to twelve months, and overall stronger demand in the long run.
Some analysts even contended investors shouldn't worry much about the revaluation at all, given its small size -- and the confusion it caused. "I'm certainly not going to get excited about it," said Jim Lennon, a commodities analyst at Macquarie Bank in London.
The truth is, it's still too early to know for sure how the revaluation will affect oil and other commodities, partly because it isn't clear if China will follow up with additional yuan increases and, if so, when.
But a few things are clear. First, a stronger Chinese currency gives Chinese importers more purchasing power to buy oil and other commodities. If the yuan's value rises further, so too would China's buying power. All things being equal, that should allow China to scoop up even more oil, iron ore, coal, nickel and other basic materials than it does today.
Second, the impact of China's beefed-up buying power, while important, is likely to be overshadowed in the long run by the overall performance of China's economy, which itself will be affected by currency revaluations. If currency revaluations result in a meaningful slowdown in Chinese exports by making them more expensive to the outside world, and overall growth ebbs, China's demand for oil and metals would inevitably drop.
But if the currency revaluations result in a more balanced Chinese economy by giving domestic consumers more power to buy autos, air-conditioning units and other commodity-intensive products, China's appetite for raw materials could wind up being sustained for many years to come. Right now, the consensus seems to be that the latter outcome is more likely, because few economic analysts believe the Chinese economy will slow substantially any time soon.
So ABN Amro Holding has advised clients to boost holdings of resource-company stocks, notably Australian mining concerns, as the Chinese currency appreciates. Like many banks, ABN Amro likes the two big regional players with the broadest exposure to minerals: Anglo-Australian mining giants BHP Billiton and Rio Tinto.
Similarly, UBS predicts that in the Asian-Pacific region, basic-materials stocks in general are likely to see "positive moves" as a result of the upward valuation of the yuan, although the bank remains less bullish about steel as China boosts its domestic production.
The picture for oil, however, is a lot more complicated. The latest data suggest that China's oil-import growth has already slowed, and the International Energy Agency in Paris recently downgraded its forecast for Chinese oil demand this year.
But it's unclear if those trends reflect a fundamental decline in underlying oil demand, or a temporary pause caused by imbalances in the Chinese marketplace. Many analysts prefer the second explanation, partly because they believe oil demand was restrained earlier this year as Chinese companies worked off stockpiles accumulated in 2004.
Also, many analysts believe Chinese refineries cut back on imports recently not because of weakening demand, but because of eroding profit margins. Because the Chinese government regulates domestic prices for refined petroleum products, keeping them artificially low, refineries can't jack up prices whenever their input costs rise. That may have encouraged some refineries to throttle down production this year rather than pump out refined products at a loss, or to shift some of their production to be sold outside of China.
In a move last week that drew less attention than the currency revaluation, Chinese authorities raised retail diesel prices by 6% and gasoline prices by 6.4%.
"This makes a big difference to the profitability of local refineries," which in turn should boost their ability to buy more oil, analysts at Barclays Capital said in a report late last week. Barclays recently predicted a ninth consecutive quarterly increase in the average global price of crude oil in the third quarter, with prices for West Texas Intermediate crude expected to average $60.10 a barrel. That would mark an increase of just under $8 a barrel from the previous quarter and would be the largest quarterly increase in the past two years.
Similarly, National Australia Bank warned in a recent research report that "reports of [oil demand's] death are greatly exaggerated." NAB noted that China's refiners plan to add about 330,000 barrels a day of new capacity during the next two years, with much of that capacity designed to handle lower-cost heavy and sour crude.
As that capacity comes online, the bank contends, it should give Chinese refineries more room to maintain profit margins even if consumer prices stay capped, which in turn should encourage them to keep buying oil.
As a result, "we may see a return to the demand growth I expected to see in China," which is greater than the recent trend, says NAB analyst Gerard Burg.
In the long run, China's oil consumption will still be driven by how well the economy holds up with a stronger currency, and by the overall cost of oil to the consumer, rather than by short-term issues related to refining capacity.
At least one analyst, David Thurtell of Commonwealth Bank of Australia in Sydney, still believes demand will ultimately cool. As some analysts note, continued increases in the yuan's value could give the Chinese government more room to raise consumer fuel prices without triggering inflation -- the one step that many analysts believe is needed before China can seriously curb its thirst for oil.
By Mr. Thurtell's reckoning, once all of China's moves last week are factored in, oil products are actually more expensive for the average Chinese consumer today than they were before the revaluation.
"At the end of the day, the outlook is for China to remain strong and commodity demand to keep going," Mr. Thurtell says. But "it's hard to see Chinese fuel consumption rising [a lot more] when they've just raised prices 6%."
Rogue
Interesting post from SI on Gold/Oil/China Re-peg and "Voodoo Economics"....
From: SliderOnTheBlack 7/27/2005 4:44:46 PM
Read Replies (1) of 275
$$$$ RINGING THE CASH REGISTER AND LOCKING IT IN.
But, before we get into that...and before I forget to link it:
A great Interview with John Williams on Puplava's Radio Program:
http://www.financialsense.com/Experts/2005/Williams.html
John Williams work on cutting thru hedonic manipulations on Inflation Stats and using GAPP Accounting + factoring in the unfunded liabilities of Medicare & Social Security vis a vis the Deficit; is a fundamental pillar to the entire Bullish Case for Gold going forward.
Here's his site:
http://www.gillespieresearch.com/cgi-bin/bgn
I agree with Williams on virtually all of his premises...and they are positive for Gold over the long haul... but, in Trading we must always balance the "long haul" vs. the "now" - especially if the "now" holds trading gains that are unrealized gains - as gains & profits aren't gains, or profits - untill we ring the Cash Register & sell and close out positions and put the money in the bank.
And that's what I just did... put it in the bank.
Why ?
... to borrow a favorite term of James Cramer:
We just didn't get any "Pin Action" off of the China Re-Peg.
From my contacts, the Gold Sector simply has NOT received adequate fresh inflows into the Gold Funds off of this news to break thru resistance here.
Now I am as bullish as anyone for the ultimate negative implications that China's move away from the US Dollar Peg has for the USD and the positive implications it has for Gold....along with the when, not if ultimate ramifications that the realities of inflation & the deficits as reflected in John Williams work linked above, will have..... BUT !
- no fresh cash inflows = no volume.
- no volume = no break thru resistance.
- no break thru resistance = no continuation of the rally.
- no continuation = gravity will pull us toward retracement & restest of this move.
...that leads to ANTICIPATING and not REACTING.
aka: RINGING THE CASH REGISTER & locking in the gains from this trade off of the April/May washout and that's what I've done today - Ka-Ching, rang the register and put it in the bank.
...30-40 Index points is simply too good of a trade and too much money to continue to let hang out there exposed for an overdue retracement/retest - especially with no Volume and no "Pin Action" off of the China Re-Peg.
Another significant factor here is that the Oil story is simply taking quite a bit of Natural Resource/Commodity Sector cash that would otherwise be coming into to Goldstocks.
And as I mentioned in an earlier post - the LAST Headline that the the Market wants to see immediately following the China Re-Peg, is:
"Gold/Goldstocks - Hit New Highs"
Given that the "smack down" factor is going to be high for a while and given that we didn't get any fresh cash/volume here... it's time to be a realist.
In my opinion, the Metal is simply going to have to do the heavy lifting for a while here and will need to carry the HUI Stocks over that 200 dma WALL of resistance on it's back.
I'm back to basically just a minimum core position here.
But, as a Trade, I now have 2 pretty good options:
1. Buy 'em back perhaps even cheaper and do it all over again...
2. Wait for a technical conformation and a Closing Print for the HUI at 207 or higher that holds (preferably) for 3 days in a row.
- that will take out both the prior high off of this move and the 200 dma for the HUI as well....and that is what we need.
The Cash that was out there Institutionally before the China Re-Peg... was deployed on the April/May washout. There is no reason for them to chase anything here and every reason to wait for a technical conformation that this is the start to a new upside leg that has sustainability.
This was a nice quick 40 point move off of the washout... my gains are now in the bank...and I got a helluva cheap cost basis on my core hold position....as traders, we can't ask for much more than that.
I've gotta be a realist here... we just didn't get the pop, or the cash inflows I expected.
Trading Discipline thus requires - Lock it in.
Time to let the market digest the Re-Peg... let the USD Spec Long & Gold Commercial Short position unwind a bit here... let the broad market that has been propped up & rallied here on hedonic voo-doo Economic numbers digest reality a bit...
I think we get a significant move in both Gold and Goldstocks before the years out... but, this one - is now IN THE BANK.
I am not going to risk giving back 10-15 Index points on what I feel, is now an overdue correction and retest for this move.
We got HUI 165 to 205.
...don't give it back on an overdue re-test and retracement.
We can always step back in on a technical conformation of the move to the upside.
This one's in the Bank - they aren't getting it back from me...
Slider`
Rogue
One of the more popular "alternative" news sites on the web is......
http://www.rense.com/
I've actually gleaned some nice investment ideas over the years from some of the "cutting edge" news.
At the very least it's an excellent way to entertain yourself instead of the "boob tube".
You can listen live and delayed to some very interesting radio talk programs also.
Rogue
Oil recovery in Utah may get a big boost
Deseret Morning News, Wednesday, July 27, 2005
Hatch says energy bill could make the state 'central' in U.S. strategy
By Lee Davidson
Deseret Morning News
Congress is poised to pass a long-sought energy bill that may finally help convert Utah's vast oil shale and tar sands into billions of barrels of oil.
"We've sought this for years, and now it's finally happening," Sen. Orrin Hatch, R-Utah, said Tuesday. "We have more recoverable oil (in the oil shale and tar sands) in Utah and Colorado than there is in all the Middle East . . . more than a trillion barrels."
House and Senate negotiators — including Hatch — on Tuesday tucked tax breaks and other production incentives into a sweeping, compromise energy bill. Both houses are expected to pass it by the end of the week.
Bogged down in debate over how to balance conservation and greater production, Congress has sought but failed to pass a comprehensive energy bill for four years. As gasoline prices escalated this year, President Bush challenged Congress to finally pass it before the August recess.
"It contains provisions that should make Utah a central figure in the nation's energy strategy for years to come," Hatch said.
At the top of that list, he said, are the tax and other incentives he pushed to help development of oil shale and tar sands.
"It has always been amazing to me that Canada recognized the potential of the large tar sand deposits in Alberta and developed a government policy to promote their development," while America did not do the same for Utah deposits, Hatch said.
As a result, he said, Utah imports a fourth of its oil from Canada — mostly from the tar sand operations in Alberta — while Utah's vast reserves sit mostly untouched.
Hatch said incentives in the bill "make production economical. This should get it going. With the price of oil at $60 a barrel, it should certainly get going."
Other provisions that Hatch said should help Utah's economy include a proposal he pushed to allow accelerated depreciation for new oil refineries, or refineries that expand.
"We have lost over 200 refineries (to closure) since 1970 and have not built a new one since then," Hatch said. A lack of refinery capacity has led to more oil importation, a trend the new incentives could help reverse, he said.
The bill also includes a Hatch proposal to simplify the application process for developing natural gas in tar sand areas on public lands, and another Hatch proposal to provide incentives for using geothermal energy to produce electricity. "Utah has some of the largest geothermal prospects in the nation," Hatch said.
The bill also contains provisions that Hatch pushed for years to give tax breaks to people who buy alternative-fuel and hybrid-electric vehicles. Tax breaks would be given for buying fuel for them and gas stations would have incentives to buy and install alternative fueling equipment.
Other provisions included in the compromise version of the bill would extend daylight savings time by a month on each end of the time change to save energy and new efficiency standards would be adopted for commercial appliances from air conditioners to refrigerators.
The bill also includes subsidies and tax breaks for wind and solar industries, along with the geothermal industry. Loan guarantees and other subsidies for clean energy technologies and new nuclear reactors are also included.
Contributing: Associated Press
Rogue
Chinese Yuan/US Dollar......I still fail to see the demand going forward for the US Dollar developing.
I like Oil and Gold long-term versus the US $......
From the Daily Pfennig::
<<I have to get to something that I've not really discussed about the Chinese announcement last week... And that is... If China really has gone to a true currency basket, does it not make sense that their reserves would match the weighting of the basket? In other words... If they say that 20% of the basket is yen... Then 20% of their reserves would be denominated in yen, and so down the line. That would mean that some serious adjustments are in store... And I think that the Chinese are throwing up a smoke screen to keep people from seeing this, by getting the markets all lathered up with words like "foreseeable future"...
Now, we know that the majority of Chinese reserves were held in dollars... With a small piece of euros, and who knows what else... If the reserve currency story has weight, and I believe it does, then there is some major dollar selling that's going to take place by the Chinese to adjust their reserves...
The Chinese, of course, don't want the world to know this, and won't sell in big chunks as to draw notice to the trades... But eventually someone will spill the beans... And then watch out! Again... That's my opinion...>>
Rogue
Housing Index Alert!..... I'm going out on a limb here. This may prove to be the "ultimate" top for these stocks after "all these years".
The multi-year run may just be over.........it wouldn't surprise me if this is "THE TOP".
It just may be time to FINALLY look to get short this sector of the market.
It certainly would fit into my forecast for inflation, interest rates, gold and oil.
Hot money will start leaving real estate soon!!
Got Gold?????
Rogue
CNR....Canargo Energy getting murdered today(-22%)...at .67 cents.
Anyone have an opinion on this one???
It's been awhile since it's been talked about on this board.
Rogue
The Rise to Ruin
Whiskey & Gunpowder
21 July 2005
Marc Faber and Dan Denning
Paris, France
***Rogue comment....a very good read!
http://www.321gold.com/editorials/denning/denning072205.html
by Dan Denning
It's been a good month for people expecting (and trying to hasten) the decline of civilization. The London bombings will pose a new challenge to the openness of Western cities (see Lord Rees-Mogg in yesterday's SI.) A Chinese general was quoted in the Financial Times as saying, "If the Americans draw their missiles and position-guided ammunition on to the target zone on China's territory, I think we will have to respond with nuclear weapons."
Is it a coincidence that the Chinese communists are sounding more belligerent precisely when their domestic situation is increasingly unstable? You may have missed it, but press reports around the world are again documenting growing civic unrest in China, unrest that's being brutally put down by an increasingly desperate government in Beijing. Outstanding Investments editor and Whiskey conspirator Justice Litle thinks not. He writes:
Depressing and frightening.
It feels like everyone is wishing they could turn back the clock about now. Beijing saying "why oh why did we think we could unleash free-market capitalism and hold on to power at the same time." Uncle Sam saying "why oh why did we casually rack up a $400 billion I.O.U. with these guys."
It feels like there's no way out. Free markets and totalitarian governments just don't mix. Beijing can't stem the tide of domestic dissent, which means the dear leaders are toast now or toast later. Nationalism is one of the few cards they have left in the deck.
Is there any way we avoid a major US / China conflict at this point, instigated by a desperate Beijing? I'm not seeing it.
I've said elsewhere I think the government in Beijing will collapse in the next ten years, perhaps in the next three before the Olympics, if things keep at this pace. "Everything that rises goes rightly to its ruin," wrote Johann Wolfgang Von Goethe. Goethe's quote precedes chapter five of The Bull Hunter, The Money Migration.
The fall of Red China's leaders will certainly disrupt global markets. But, as Dr. Marc Faber points out below, slower global growth (precipitated by a China slowdown) is not necessarily deflationary. In fact, Dr. Faber makes a compelling case for why inflation is a matter of time, regardless of low long-term bond yields and the Fed's conundrum.
We present Dr. Faber's case below.
Enjoy.
Regards,
Dan Denning
Marc Faber writes:
Everything in the world may be endured except continued prosperity. -Goethe
The path of least resistance and least trouble is a mental rut already made. It requires troublesome work to undertake the alternation of old beliefs. Self-conceit often regards it as a sign of weakness to admit that belief to which we have once committed ourselves is wrong. We get so identified with an idea that it is literally a "pet" notion and we rise to its defenseman stop our eyes and ears to anything different. -John Dewey
EVERY DAY I GET numerous e-mails from well-informed readers of my newsletter commenting on the housing market. Some support my view that Anglo-Saxon countries rein a colossal home price bubble, while others argue articulately that there is no such bubble.
As a result, I continually have doubts about my own views and concede that, as John Dewey remarked, "Self-conceit often regards it as a sign of weakness to admit that a belief to which we have once committed ourselves is wrong. We get so identified with an idea that it is literally a 'pet' notion and we rise to its defense and stop our eyes and ears to anything different."
I occasionally try to forget my economic background and rationalise investment bubbles. We all know that investment bubbles involve easy money, excessive credit growth, lax lending standards, leverage, "new era thinking", and a loss of touch with reality, excessive expectations about future profits, and so on.
However, often bubbles also involve a loss of faith in the value of paper money. Let me explain.
In the late 1970s, investors became increasingly concerned about accelerating consumer price inflation. Since consumer prices were rising at more than 10% per annum, the then prevailing view was that cash was depreciating by approximately 10% per annum.
People rushed into precious metals and drove the price of gold and silver to US$850 and US$50, respectively, in January 1980. At the same time, investors were dumping bonds, which became known as "certificates of confiscation". US long-term government bond yields soared to more than 15% in September 1981. I would argue that there was at the time a real panic about the role of paper money as a store of value.
Loss of Paper Money's Purchasing Power as a Result of Asset Inflation
Today, we have a similar situation. However, people are not concerned about paper money losing its purchasing power as a result of consumer prices rising, but as a result of paper money losing its value because of rising asset prices.
If, on given income of 100, consumer prices rise from 100 to 110 the real income will have declined by 10%. But if on an income of 100 and cash assets of 1,000 which only yield 2%, real-estate prices rise by 10%, both the income and the cash assets will have lost their purchasing power compared to real estate.
Therefore, if real estate prices rise for an extended period of time at a faster rate than incomes and interest rates on cash deposits, it is only natural that people become concerned that they won't be able to afford to purchase their own home in future.
Their concern about future affordability, which is nothing else than the fear of their income and savings losing their purchasing power, then induces them to purchase their homes now rather than later.
This incremental demand drives prices even higher and attracts speculators who want to capitalise on the rise in prices, which is driven first by the genuine buyers and later by themselves as well.
As a result, prices then overshoot and lead to even deeper apprehension about the loss of purchasing power of paper money on the side of the household sector. A general rush from liquid assets to" illiquid assets" inevitably follows and creates a bubble.
This is nothing new. The first well-documented instance of such a loss in the purchasing power of paper money was John Law's Mississippi Scheme. In 1716, John Law had opened, under the patronage of the French regent, a bank (Banque Generale), which issued paper money backed by gold. With the help of the regent, the bank became an immediate success. Its banknotes were very convenient, since the government accepted them for tax payments.
Based on this first success, in 1717 Law managed to convince the regent to grant his new venture, the Mississippi Company, a monopoly on all commerce between France and its French territories in North America, which included the present states of Louisiana, Mississippi, Arkansas, Missouri, Illinois, Iowa, Wisconsin and Minnesota, in return for accepting outstanding notes of the French government in payment for the Mississippi shares.
This arrangement basically amounted to nothing other than a partial conversion of France's government debt into shares of the Mississippi Company.
The operations of the company didn't prove to be profitable, partly because when it issued shares it hadn't received cash, but debts of the French government, which had been converted into shares of the Mississippi Company, and partly because very few French wanted to emigrate to the territories in America.
Still, the shares of the Mississippi Company performed well after the regent took over Law's bank and began to run its money printing press around the clock. (Presumably, Law gave him the bank in exchange for having obtained so many privileges.)
But, whereas John Law had always maintained a small balance of gold reserves to back up the paper money the bank issued, he now advised the regent that the public had gained sufficient confidence in paper money and, therefore, gold reserves in the bank's vault were no longer necessary.
As a result, in 1719, the government increased the money supply dramatically and lowered interest rates by lending money for as little as 1-2%.
The vast increase in the supply of paper money, combined with the ability to purchase shares in the Mississippi Company on margin, led not only to the shares rocketing towards the end of 1719 to over 20,000 livres (from 300 at the beginning of the year), but also to rapid price increases across France.
The cost of bread, milk, and meat had risen six-fold, while cloth was up by 300%. The horrendous inflation made the holders of Mississippi Company shares and of paper money nervous.
In January 1720, just two weeks after John Law had been appointed as comptroller general of finance(minister of finance), a number of large speculators decided to cash out and switch their funds into "real assets" such as property, commodities, and gold. This drove down the price of the Mississippi Company shares since the speculators could only pay for real assets with banknotes.
As confidence in paper money was waning, the price of land and gold soared. This forced Law, who still enjoyed the backing of the regent, to take extraordinary measures. He prevented people from turning back to gold by proclaiming that henceforth only banknotes were legal tender. (By then the Banque Generale had practically no gold left.)
Thus, payments in gold and silver above 100 francs were prohibited; in addition, the ownership of gold exceeding 500 livres in value was declared illegal.
(Severe penalties were imposed on people who hoarded gold. To enforce this most blatant expropriation, Law encouraged the public to turn informer by handing out large rewards to those who assisted in the discovery of gold, which was then confiscated.)
At the same time, he stabilised the price of the shares of the Mississippi Company by merging the Bank Generale and the Mississippi Company, and by fixing the price of the Mississippi stock at 9,000 livres.
With this measure, Law hoped that speculators would hold on to their shares and that in future the development of the American continent would prove to be so profitable as to make a large profit for the company's shareholders.
However, by then, the speculators had completely lost faith in the company's shares and selling pressure continued (in fact, instead of putting a stop to the selling, the fixed price acted as an inducement to sell),which led the bank once again to increase the money supply by an enormous quantity.
The result was another round of sharply escalating prices. (In four years, the supply of circulating medium had been trebled.)
John Law suddenly realised that his main problem was no longer his battle against gold, which he had sought to debase, but inflation. He issued an edict by which banknotes and the shares of the Mississippi Company stock would gradually be devalued by 50%.
The public reacted to this edict with fury, and shortly after Law was asked to leave the country. In the meantime, gold was again accepted as the basis of the currency, and individuals could own as much of it as they desired.
Alas, as a contemporary of Law's noted, the permission came at a time when no one had any gold left. The Mississippi Scheme, which took place at about the same time as the South Sea Bubble, led to a wave of speculation in the period from 1717 to 1720 and spread across the entire European continent.
When both bubbles burst, the subsequent economic crisis was international in scope.
Still, although accounts are not available about real estate prices during the monetary inflation and the subsequent bust of John Law's experiment with paper money, I suppose that early buyers of real-estate fared better than the holders of paper money, which lost all its value.
The economist Richard Cantillon fared even better. He kept his wealth intact, which he acquired from successfully speculating in the shares of the Mississippi Company, by converting his profits into gold and moving to Holland.
By doing so, Cantillon inadvertently followed an important investment wisdom, which states that once an investment mania comes to an end, the best course of action is usually to exit the country or sector in which the mania took place altogether, and to move to an asset class and/or a country that has little or no correlation with the object of the previous investment boom.Modern Day John Laws
I have no faith whatsoever in the Federal Reserve Board, nor in any other central bank around the world, doing anything other than printing money over the long term.
In fact, I believe that, given the very high levels of debt we have in the US and other industrialised countries compared to the size of their economies, the central banks have no other option now but to print an ever-increasing quantity of money.
I am a firm believer that Mr. Greenspan, Mr. Bernanke, and their colleagues in other central banks around the world are modern-day John Laws who, like him, will not only manipulate and intervene in markets but, over time, will also totally destroy the value of paper money.
Whereas John Law tried to fix the price of the Mississippi Company by printing money, the Fed chairman has tried (and managed - at least so far) to inflate asset prices through an extraordinary money and credit expansion.
Therefore, while long-term US government bonds could rally somewhat further in the near term, as the economy slows down, I very much doubt that they will provide a satisfactory return over their future life span, as money printing will lead to a loss of purchasing power of money.Future Loss of the Dollar's Purchasing Power
Countless speculators and future funds have lost much money this year by betting that the US dollar would depreciate against the Euro and other currencies. The mistake these speculators made was failing to understand that a currency can also depreciate or lose its purchasing power against other assets than just other currencies.
Thus, if all the central banks in the world were to increase their money supply in concert annually by, say, 20%, currencies could remain stable against each other but lose in value against consumer prices, precious metals, commodities, art, real estate, and so on.
I point this out because, although I have been positive for the dollar for the last six months, I remain a firm believer that it will go down or continue to lose its purchasing power, as it has done since the establishment of the Federal Reserve Board in 1913 - however, not necessarily against the Euro.
I recently had the pleasure of being on a panel with Jimmy Rogers, founder of the Rogers International Commodity Index (RICI) and cofounder of the Diapason Rogers Commodity Index Funds. The subject of the discussion was commodities.
As my regular readers will know, I am presently not particularly positive about industrial commodities (see also below), whereas I believe that agricultural commodities offer significant upside potential with about 15% downside risk.
Jimmy, however, argued that he was the world's worst market timer and that in his view this commodity up-cycle would last for at least another 10 to 15 years.
Based on the past, commodity cycles (Kondratieff price cycles) tend to last 45 to 60 years. Therefore, if we assume that the last peak of the cycle was in 1980 rally somewhat further in the near-term, as the economy slows down, I very much doubt that they will provide a satisfactory return over their future life span, as money printing will lead to a loss of purchasing power of money.
Hence, if Jimmy Rogers is right in saying that we are in the early stage of a commodity bull market that will last for another 10 to 15 years, a view that I share, then we should also assume that consumer price inflation will gather steam in the years ahead.
Needless to say, rising CPI inflation would further reduce the purchasing power of paper money and be negative for long-term bonds as well as for the valuation of equities (P/E contraction as a result of rising interest rates).
And while I don't think this will happen right away, as I shall argue below, in the absence of one's ability to time market events, the risk is obviously that even industrial commodity prices could continue to rise without much of a correction. This could be particularly true of oil.
We have argued for a number of years that oil prices (and uranium as well) have a significant upside potential. We based this view on Asian demand (3.6 billion people)doubling from 21 million barrels a decurrently to around 40 million barrels a day in the next 10 years or so.(Current daily global oil production is around 84 million barrels a day.)
Recently, however, I sounded a note of caution about oil prices, because some froth had developed as oil prices, at around US$55 to US$60 a barrel, were clearly not as inexpensive as they were a few years ago.
In 1998, the S&P was expensive and oil ridiculously inexpensive. Today, however, when about 20 barrels of oil are required to buy one S&P index, the undervaluation of oil compared to the S&P 500 is less compelling.
Still, we shouldn't rule out that we could go back to the S&P 500/oil ratio, which prevailed in the 1970s and early1980s, when less than five barrels of oil were required to buy one S&P index .
At the last major oil peak in 1980, it took less than three barrels of oil to buy the S&P 500!
If this were to happen again, it would imply - assuming an S&P 500 index of 1200 - an oil price of US$400... I mention this because I recently came across a paper by Eric Sprott, of Sprott Securities in Toronto.
Eric analyses the oil market with particular emphasis on the supply side. As our readers will see from Sprott's study ( Greg's note: I will soon publish this study if I can obtain the requisite permission ), if he is right about the supply of oil diminishing and I am not totally out of line with my forecast of Asian oil demand doubling over the next 10 years or so, then prices will rise dramatically.
As energy prices rise, geopolitical tensions will increase and lead to even higher prices. Eventually this will lead to World War III in the 2010-2015 period, as energy shortages become acute.Few Bargains and a Volatility Spike
In the 1970s, money's purchasing power was eroded by high consumer price inflation rates. Since the early1980s this loss of purchasing power of paper money has continued as a result of asset inflation. In particular, over the last few years, depositors have been penalised as real short-term interest rates have been negative
As we have maintained for some time, there are very few bargains in today's world of inflated asset prices. In fact, I only find relative values. Asian property prices ex Japan and Hong Kong are inexpensive compared to US and European property prices.
Asian shares are reasonably valued compared to equities in Western industrialised countries. Asian currencies are cheap compared to the US dollar and especially the Euro.
Grains are a bargain compared to oil and copper (farm product prices are at a 200-yearlow compared to energy) I should like to remind our readers that in drought periods grain prices can rise dramatically.
From their lows in 1968/69 to their highs in 1973/74, wheat rose by 465%, soybean oil by 638%, cotton by 317%, corn by 295%, and sugar by 1290%. Gold is also relatively cheap compared to oil. It now takes only seven barrels of oil to buy one ounce of gold.
These relative values aside, I continue to be concerned about several issues. Despite the fact that I always question my own views, it increasingly looks as if we have a gigantic bubble in selected real estate markets.
All the symptoms typically associated with an investment mania and bubbles are there. Can the bubble become even larger?
Possibly, but the end result will be even more painful than if the bubble begins to deflate shortly. The Economist concluded the editorial I referred to above by stating: The whole world economy is at risk.
The IMF has warned that, just as the upswing in house prices has been a global phenomenon, soapy downturn is likely to be synchronised, and thus the effects of it will be shared widely.
The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion. (The Economist , June 18 -June 24, 2005) assets such as homes and commodities have risen substantially in value.
Given the propensity of central bankers to print money, I find it difficult to envision an environment in which paper money would not continue to lose its value over the long term. The only question is: against what will paper money lose its value in future?
The US dollar remains vulnerable, but possibly not so much against the Euro as against gold and silver and other commodities such as oil and grains. At the same time as we have had a housing boom in the US, we have experienced an unprecedented investment boom in China.
If both turn down at the same time, the global economy could weaken more than is now perceived. Such a synchronised downturn in the US and China would almost certainly badly depress industrial commodity prices. This would, however, not alter our long-term favourable opinion of the commodities complex.
In a global downturn, the bond bulls might very well have the upper hand for a while longer. But I have no doubt whatsoever that central banks, led by the US Fed, would, faced with economic weakness, print money like never before. However, this time the money printing operation may not work.
In the same way that asset price inflation - unexpectedly, I might add - replaced CPI inflation in the early 1980s, in the near future CPI inflation and rising commodity prices could begin to exceed asset inflation rates, and in particular home price inflation.
This would likely depress long-term bond prices and lead to a very unappealing global economic and financial environment and eventually discredit central bankers and bring about the end of central banking as we know it today.
Given these uncertainties and the potential for oil prices to continue their ascent, I am surprised at the low-level of volatility. Low volatility, we pointed out at that time, tends to lead to big market moves, whereby the direction of the move isn't indicated by the low volatility.
Still, looking at the shape of stock markets around the world and at industrial commodity prices, some significant downside volatility wouldn't surprise us.
Regards,
Marc Faber
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321gold Inc
Rogue
C P POKPHAND CO LTD (CPKPY.PK)....another one to "squirrel" away for the long-term.
http://finance.yahoo.com/q/ta?s=CPKPY.PK&t=1y&l=on&z=m&q=b&p=&a=ss&c=
This is a food processor in Asia. A nice play on the growing "wealth" of Asia.
Rogue
Tsingtao Brewery Co Ltd (TSGTF.PK).....Put this one away for the long-term.
http://finance.yahoo.com/q/ta?s=TSGTF.PK&t=1y&l=on&z=m&q=b&p=&a=ss&c=
Chinese Brewery has Anhauser Busch as an investor. This should grow nicely as wealth is gained in China and the Chinese currency appreciates over time in relation to our US dollar.
Rogue
Jim Rogers on China's Currency
By Dr. Steve Sjuggerud
Chairman, Investment U
It's all over the news... China revalued its currency today, and it took the currency off the dollar standard. There's nobody better to ask about this than investment legend Jim Rogers...
Jim Rogers, if you didn't know, returned investors about 40 times their money in a decade, and then retired. Even more amazing, it was the decade of the 1970s, when stocks did absolutely nothing.
I first met Jim at a private black-tie dinner in New Orleans in the mid-1990s. We sat next to each other for the night, and traded investment stories, though mine couldn't compete with his... As the author of the bestsellers Investment Biker and Adventure Capitalist, Jim has no doubt logged more miles searching for investment opportunities than anyone alive.
We caught up with Jim by phone from Shanghai earlier this month, where he was apartment shopping. Jim latest book, Hot Commodities is also "hot" these days, and our own Jay Livingston quizzed Jim on commodities, the revaluation of the Chinese currency, and much more. With the news out of China today, let's cover Jim's thoughts on China as the first part of this interview...
Investment U: Let's talk about China. You're in Shanghai right now. Are you thinking about moving from New York?
Jim Rogers: Well, that's one reason we're here, because we're contemplating moving to a Chinese-speaking city, and Shanghai is at the top of the list - at the moment, anyway. Our child is bilingual. We have a 25-month-old baby girl, and she's bilingual. We got her a Chinese nanny from the beginning, whose instructions were to only speak Mandarin to the baby.
So she is literally bilingual, at age 25 months, and we're doing everything we can to encourage and develop that. It doesn't do any good to be bilingual at 25 months if you don't keep it up; you'll forget everything you ever knew by the time you're 25 years old, or even 12 years old.
There are a lot of exciting things going on in China, and in Chinese-speaking areas. And even if I'm wrong about the baby - teaching her Chinese - even if China's not going to be the next great country in the world, there's still a billion and a half people in the world who use Chinese, so it's not a complete waste. It's not like I'm teaching her Danish or something.
There are 7 million who speak Danish, and there are a billion and a half who speak Chinese.
IU: You talk in your book about the importance of the Chinese currency, the yuan (or renminbi) being allowed to float against other currencies instead of being pegged to the dollar, as it is now. When might the Chinese float the yuan, and what might happen?
The Chinese are moving more and more towards making it more convertible. They're letting Chinese institutions invest abroad now. Chinese tourists can get passports easily now... And they can take, I think, up to $6,000 if they go on a trip. So you're starting to see huge amounts of Chinese travel.
So they're taking very small steps toward making this a completely convertible currency. It will happen by 2007, under the terms of the World Trade contract they have - you know, they joined the World Trade Organization. And they've got the Olympics in 2008. So certainly by 2008, they're not going to be sitting around here with a blocked currency anymore.
The consequences? Who knows? I'm sure there are going to be unexpected consequences. There always are, when an event is greatly anticipated.
IU: Would you speculate on the possible rise of the yuan at this point? Some expect it will shoot up once it's freed from the dollar peg.
I know that hundreds of billions of dollars are being poured into China to take advantage of the rise in the renminbi. First of all, whenever something like that happens, it wouldn't surprise me if this renminbi didn't go down for awhile, because all those people who poured hundreds of billions into China to speculate have got to get it out.
But whether it goes up or down in the beginning, I don't care. I'm going to be buying more of it myself. Because longer term, the renminbi's going to be a big currency, a great currency.
The consequences, again, there have been hundreds of billions of dollars of speculation on the renminbi, and that always worries me. So I know there are going to be some surprises. I just wish I were smart enough to know exactly what the consequences will be and what the timing will be.
I'm not one of the people pouring money into China right now to speculate on the renmimbi, that's for sure.
IU: Is a hard landing in China inevitable at some point, as you suggest in your book?
Yeah, I don't remember if I specifically said... But real estate is where the major speculation has been, and that's where I'd expect the hard landing to center, if you will. It will reverberate out from there, of course. There will be other people who will suffer. That's my view.
I mean, some parts of the Chinese economy will never even know that there's a hard landing in Shanghai real estate, say, or that a bunch of real estate speculators in Beijing went broke. The guys out there producing coal, or building power plants, won't even know that there's a hard landing in other parts of the Chinese economy.
So I suspect it will certainly start with real estate, or something, and reverberate out... But parts of the economy will never know it.
IU: Should there be a hard landing in China, do you anticipate a major consolidation in commodities?
Yes, I do. Something's going to cause consolidations in commodities. We always have consolidations in every bull market in history, no matter what the asset class. In every stock bull market, there have been consolidations along the way.
Again, I wish I were smart enough to tell you exactly what's going to cause them, and the timing, but I'm not. It's pretty obvious to me that if we suddenly see headlines in the Wall Street Journal of some kind of turmoil in China, that commodities would be having a correction, or would go into a correction. But that would be a chance to BUY commodities.
You know, in the '80s and '90s, we had some huge corrections in stocks. In '87, stocks went down what, 35-40% in several months, but people who understood that this was in the context of a major bull market bought more stocks; they didn't panic and sell.
Likewise, in '94 or any of the other corrections along the way in the bull market in stocks in the 1980s and '90s, you made a lot of money. So if you see those headlines, I urge you to buy all the commodities you can. Probably buy all the China you can, too; but certainly, buy all the commodities you can, too.
IU: So if China slows down or crashes, that would be a tremendous buying opportunity in China and commodities?
In terms of commodities, yes... especially in terms of commodities, but also in terms of China.
But again, I wish I were smart enough... If we suddenly have a bird-flu epidemic throughout Europe, I suspect economies around the world will decline and scare people and commodities will slow down for a while. If Fannie Mae goes bankrupt, it's going to scare people. If China goes to war with Taiwan, it's going to scare people.
Something's going to cause consolidations, but buy 'em, don't sell 'em.
Next week, we'll share more of Jim's thoughts with you... specifically, on where he sees the greatest opportunities in the coming years. Don't miss it.
If you've never read Jim Rogers' book Adventure Capitalist, you're really missing out. It was probably the best investment book of 2004. Jim Rogers put out the book Hot Commodities this year. I recommend you read Adventure Capitalist first. Both books can be purchased from Amazon.com by clicking on the book titles above.
Thanks to our own Jay Livingston for chasing down Jim in Shanghai. Look for more of Jay's interview with Jim in next week's Investment U E-Letter.
Rogue
Here is a transcript of the Ron Paul questioning of Greenie re fiat vs. gold. It's worth a full read, but be sure not to miss Darth Greenie's last sentence. To laugh or cry?
The interaction between Greenspan and Ron Paul @ today's Humphrey
Hawkins session....
Rep Ron Paul: If indeed this is your last appearance before our
committee, I would have to say that in the future, I'm sure I'll find
these hearings a lot less interesting. But I do have a couple parting
questions for you.
Keynes, when he wrote his general theory, made the point that he had
tremendous faith in central bank credit creation because it would
stimulate productivity. Along with this he also recognized that it
would push prices and labor costs up. But, he saw this as a
convenience, not a disadvantage, because he realized that in the
corrective phase of the economic business cycle that wages had to go
down....which people wouldn't accept...a nominal decrease in wages.
But, if they were decreased in real terms it would serve the economic
benefit. Likewise, I think this same principle can be applied to our debt.
To me this system that we have today is a convenient way to default on
our debt....to liquidate debt through the inflationary scheme. Even
you in the 1960s described the paper system as a scheme for the
confiscation of wealth. In many ways, I think this is exactly what has
happened. We have learned to adapt to deficit financing. But in many
ways the total debt is not that bad, because it goes down in real
terms. As bad as it is, in real terms, its not nearly as high. But
since we went on a total paper standard in 1971, we have increased our
money supply, essentially, twelve fold. Debt in this country, federal
debt, has gone up nineteen fold. But that is in nominal dollars, not
in real dollars.
So, my question is this, 'Is it not true that the paper system that we
work with today is actually a scheme to default on our debt and is it
not true that for this reason... that's a good argument for people not
......eventually some day....wanting to buy Treasury bills because
they will be paid back with cheaper dollars?
Indeed, in our lifetime, we certainly experienced this in the late
1970s....interest rates had to go up pretty high. This paper system
serves the interest of big government and deficit financing because
its a sneaky way of paying for it and at the same time it hurts the
people who are retired and put their money in savings.
Aligned with this question, I would like to ask something dealing
exactly with gold. If paper money....today it seems to be working
rather well.....but if the paper system doesn't work? When will the
time come? What will the signs be that we should reconsider gold?
Even in 1981, when you came before the gold commission, people were
fighting about what was happening. And that's not too many years ago.
You testified that it might now be a bad idea to back our government
bonds with gold in order to bring down interest rates. So, what are
the conditions that might exist for the central bankers of the world
to reconsider gold?
We do know that they haven't given up on gold. They haven't gotten rid
of their gold. They're holding it there for some reason. So, what's
the purpose of the gold if it isn't with the idea someday they might
need it. They don't hold lead or pork bellies. They hold gold.
So, what are the conditions that you might anticipate when the world
may reconsider gold?
Alan Greenspan: "Well, you say, central banks own gold or monetary
authorities own gold. The United States is a large gold holder and you
have to ask yourself, "Why do we own gold?" And the answer is
essentially and implicitly the one that you raised. Namely, that over
the generations when fiat moneys arose and indeed created the type of
problems that you correctly identified...for the 1970s........although
the implication that it was some scheme or conspiracy gives it a much
more conscious focus, than actually as I recall it was occurring. It
was more inadvertence that created the basic problems. But, as I have
testified here before to a similar question, central bankers began to
realize in the late 1970s how deleterious a factor inflation was and
indeed since the late 1970s central bankers generally have behaved as
though we were on the gold standard. And indeed, the extent of
liquidity contraction that has occurred as a consequence of the
various different efforts on the part of monetary authorities is a
clear indication that we recognize that excessive creation of
liquidity creates inflation which in turn undermines economic growth.
The question is, 'Would there be any advantage at this particular
stage in going back to the gold standard?' And the answer is, 'I don't
think so because we are acting as though we were there.' Would it have
been a question, at least open, in 1981 as you put it...and the answer
is yes. When the gold price was $800 an ounce....we were dealing with
extraordinary imbalances, interest rates were up sharply, and the
system looked to be highly unstable and we needed to do something. Now
we did something. The United States.....Paul Volcker, as you may
recall in 1979 came into office and put a very severe clamp on the
expansion of credit and that led to a long sequence of events here
which we are benefiting from .... up to this date. So, I think central
banking, I believe, has learned the dangers of fiat money and I think
as a consequence of that we have behaved as though there are indeed
real reserves underneath the system."
. . .
Rogue
kipp...there will be winners and loser's going forward as the dollar weakens against the Chinese Yuan.
As an "oppurtunist" I will not seek moral judgement. I will keep an "open mind" to all the investment possibilities regarding the all the changes we will be facing.
I'm open to any sensible investment oppurtunities created by our "depreciating" currency.
Rogue
Well I'm putting my money where my mouth is........I actually think I do have an excellent chance at being THE winner of the pick six lotto.
I'm currently long some Gold futures now and have set a goal to take at least 6 figures out of the Gold futures market in the next 12 months.
I'm trading it actively now and am looking to build a good size position if I can for the move to $500 that I see coming. I'll be in and out of it as I probe for a bottom and position myself for the BIG BULL MOVE. I WILL pyramid when neccesary.
Oil at $35 in December is just wishful "Wall Street" thinking. We may probe into the mid/low $40 level worst case but by December we'll be back near $60 per barrel I believe.
I'd actually welcome a nice correction in OIL since I'm about 80% cash and would use that oppurtunity to "reload" good quality oil names.
Rogue
I like my "pick 6" stocks more than ever!!!!
The "trend is your friend" and the "mega-trends" are behind my picks.
I have four selections in Oil/Gas/Coal....CHAR.ob, CXPI.ob, EGY, HPCO.ob.
One pick in Copper/Gold/Base Metals....NXG.
One pick in China...,,YIWA.ob, a "dirt-cheap" hotel/restuarant company that should increase earnings with the growing Chinese economy and "appreciating" currency.
Man,seriously.......I think I'm going to win this contest thingy!!!!
Good thing I own a bunch of all my picks.
LOL!!
Rogue
Great article about todays "historic" Chinese currency news....
Who Says No One Rings a Bell?
By: Peter Schiff, Euro Pacific Capital
The old saying “no one rings a bell,” certainly doesn’t apply today, as China rang the “mother of all bells.” So deafening was its sound, that its vibrations will be felt around the world. Nowhere will the amplitude of these waves be more pronounced than in the United States.
China’s decision to change the nature of its currency peg means that it will no longer be in the dollar buying business, or by extension, the U.S. Treasury buying business. That means that America will be losing its biggest benefactor. China will no longer act as the principal enabler of America’s irresponsible extravagance, ending its subsidies to American consumers and borrowers.
Changing the nature of the yuan peg is a first step in the ultimate direction of either allowing the Yuan to float freely or possibly pegging it to gold. In the meantime the Yuan will remain undervalued, as it will likely be pegged to a basket of other currencies using current exchange rates that clearly undervalue the Yuan. Chinese imbalances will continue to grow, along with all the domestic inflationary implications that result.
However, the pressure on China to prop up the dollar will be greatly diminished. To maintain the peg against its new basket, Chinese monetary authorities will most likely now be buyers of those other currencies likely to be included in its basket, such as the Euro or Yen. Since its reserves are already disproportionately held in dollars, it will likely rebalance those reserves to more accurately mirror the basket to which the Yuan will be pegged. Such a rebalancing will only exacerbate the dollar’s decline. However, a declining dollar will not automatically require offsetting dollar buying by the Chinese as it has during the period of the yuan-dollar peg. As long as dollar weakness is offset by strength in others currencies in its basket, the peg can be maintained.
The implications for America are enormous. Far from being the panacea that American politicians proclaim, China’s decision to alter its peg could be the pin that finally pricks America’s bubble economy. For America, the direct result of this action will be the following:
1. Higher consumer prices.
2. Higher interest rates.
3. Reduced profits for American companies, particularly those dependent on domestic consumption and consumer debt.
4. Lower stock prices, as earnings decline and multiples contract.
5. The busting of the housing bubble, as tighter credit standards and higher interest rates squeeze current home prices.
6. Rising unemployment, as higher interest rates and vanishing home equity slow consumer spending and reduce jobs dependant on that spending.
7. A severe recession as a result of all of the above.
8. Rising federal budget deficits, as recession reduces tax revenue, while higher interest rates and escalating outlays increase expenditures.
In conclusion, July 21, 2005 will be another date likely to live in infamy. This time the aggressor is China not Japan, and the bombs are purely economic. Though there will be no immediate loss of life, and no American retaliation, the financial damages will be devastating. History will remember this date as the beginning of Chinese independence, and the beginning of the end of America’s ability to depend on China.
For those of you still holding onto portfolios heavily weighted in U.S. dollars, time is running out to protect your self. To learn about specific strategies specifically design to benefit from China’s action, please contact my office directly, visit my web site www.europac.net, or download my free research report The Powerful Case for Investing in Foreign Equities at www.researchreport1.com
http://news.goldseek.com/EuroCapital/1121972736.php
Rogue
Chinese Revaluation - An In Depth Look At What It Means For The Markets
Thursday, 21 July 2005
Printer Friendly
Written by Kathy Lien, Chief Strategist
After years of speculation, China has finally dropped its decade long peg to US dollar. As we have been predicting for some time, the one major currency pair that will be impacted the most by the revaluation announcement would be the Dollar against the Japanese Yen (USDJPY) and indeed the pair slid 200 pips or points following China’s announcement.
So what did China do?
- China adjusted the RMB peg to 8.11, which is 2% higher in value against the dollar
The pegged value of the RMB has been adjusted to 8.11 from 8.31. This rather modest revaluation of 2.5% will for the most part do little to reverse or relieve the US’ burgeoning trade deficit. It does however have significant political and market implications. (See market section) Immediate pressure on China to revalue its currency should move to the backseat for at least a few weeks. However, despite the move, we would not be surprised to hear some protests from US Senators that the revaluation move was too small and that China needs to make a much more concerted effort to allow the currency to increase in value, especially since 2.5% pales in comparison to the RMB’s predicted undervaluation of 30-40%.
- The daily trading band against the dollar is still 0.3%
China is hanging onto its 0.3% percent trading band against the dollar which means that even with this move don’t except a lot of volatility in the currency pair. Also, speculators will probably stick around for a while longer which means that even though China has announced a move on its currency, the topic of revaluation and further steps by China will remain in the limelight.
- China will move to a managed float against a basket of currencies
This is the real story. China is planning to move to a managed float against a basket of currencies. Not many details have been disclosed on this front but the People’s Bank of China has written the following on their website: “the trading prices of the non-US dollar currencies against the RMB will be allowed to move within a certain band” - which will be announced later by the PBoC. We suspect that China will take an approach similar to that of Singapore, which is to float their currency against a basket of other currencies within a tight trading band while not disclosing the exact percentage make-up of the basket to prevent speculators from attempting to manipulate their currency. Given that China exports a large percentage of its goods to not only the US, but also the European Union and Japan, the basket would naturally have to include Euros as well as Japanese Yen. This in of itself could be very positive for both of those currencies. Also, if you recall, those currencies were indeed apart of the currencies that China’s internal “interbank” system was trading in May.
What motivates China to do this?
China has many reasons to want to revalue their currency. The most apparent of which is the country’s political motivation to get approval for deals such as Unocal or the new speculation that they may dropping their bid of Unocal for other US oil producers. The US’ time stamp for a move by China in August could be an unwritten agreement between the 2 countries that would pave the way for a buying spree by the Chinese government and Chinese corporations. The revaluation also makes imports cheaper for China. This comes at a critical time when commodity prices are skyrocketing. The revaluation immediately makes prices of commodities such as oil 2.5% cheaper than they were yesterday.
What does it mean for the markets?
Treasuries - China’s move has ramifications for all of the financial markets. The most significant of which will probably be in US treasuries. As the world’s second largest holder of US treasuries, China’s revaluation and move to a basket float significantly reduces their need for US treasuries and could potentially take away a big buyer from the market. If this is the case, it will cause bond prices to slide and long-term yields to rally, which could offset some of the additional pressure on the Federal Reserve to continue raising rates. If China even begins to dump US treasuries, we could see the “yield curve conundrum” begin to fix itself.
Currencies - The reduced demand for US treasuries and the possibility of increased demand for other currencies such as Euros and Japanese Yen could be very negative for the US dollar. Right now, the dollar is holding somewhat steady against the Euro thanks to the fact that China has yet to announce the components within the managed float. Once they confirm that the Euro will be included in the basket, the single currency could skyrocket.
As for the Japanese Yen, which is the proxy for Asia strength, the currency should continue to benefit from news of China revaluation. Malaysia has already followed suit this morning by scrapping their own Ringgit peg and also adopting a managed float. Japan is quite pleased with the move and for the immediate term, it should eliminate any fears of Japanese intervention. The revaluation of the RMB makes Japanese goods more competitive on a relative basis against Chinese goods.
Stocks - The stock market should have a mixed reaction. Shares of companies such as Wal-Mart and Target have and will probably continue to sell-off because the revaluation means that their cost of imports will increase. So Wal-Mart and Target will either have to increase prices or take a cut out of profits. Shares of manufacturing companies that compete against China should rise along with shares of companies that are targets for Chinese acquisition. The revaluation makes its cheaper for Chinese companies to snap up US companies while at the same time possibility giving them more political sway.
Commodities - This could also be very positive for the commodity markets, with the revaluation immediately reducing the cost for commodities.
Is there more to come?
There will definitely be more to come in the world of revaluation. China has to still announce the details of their managed float against a basket of currencies. This announcement could result in another sharp move in the currency market. The 2.5% revaluation is modest at best - expect continued pressure on China to institute a larger revaluation. The managed float will allow them to gradually adjust the value of the RMB while at the same time maintaining an air of uncertainty and leg up over speculators. News of further Chinese bids on international companies should continue to flow into the market, especially since the country now has a massive amount of US dollars that may not need to be invested in as many US treasuries.
Rogue
NXG....Northgate Exploration. Just doubled my position today on news of Chinese Yuan appreciation against the US dollar that is coming. Now own 10,000 shares and FINALLY my average cost is below the current market price!! YEEHAW!
This is one of my "pick six" picks. I see at least a double on this one in six months to a year(currently $1.15). Copper prices are strong and I expect Gold to "rocket" sometime starting this year.
Chart looks to have bottomed on NXG and we're ready to rock now!!!
Rogue
GOOG....could be getting close to a top here soon IMHO?????
Look at all those bearish divergences on stochastics/relative strength and volume on that second chart of yours.
What puts would anyone recommend here? In the money puts expiring when? What about LEAPS? I'm not the world's greatest option pro.
Hard to pick a top here....but I think it's coming.
Rogue
valuemind...you stated "Chinese yuan is on the way to appreciate 10-20% within a few months".
If that is the case what will happen to the prices of all that stuff in Walmart and in every retail store in America that is made in China that we buy??????
Will the government be honest and reflect it in the inflation statistics??
What will happen to interest rates? Real Estate? Stock Market?
We are going to witness Greenspan's "conundrum"!!!
Very interesting times ahead indeed.
Got Gold????
Rogue
I agree Len.....I was just trying to sound like Kudlow or "Wall Street" for a change.
LOL!!!!
Rogue
Marc Faber And The Crisis Of Confidence
a good read!!!.....Rogue
http://www.aireview.com/index.php?act=view&catid=6&id=2238
July 15 2005 - Australasian Investment Review – (AIR)
Dr Marc Faber is described as a "foremost international commentator and celebrated contrarian investment guru". Dr Faber publishes a widely-read monthly investment newsletter, called the Gloom, Boom & Doom Report, which highlights unusual investment opportunities. He is also the author of several best-selling books.
Suffice to say, when Dr Faber speaks, the world takes notice, and last month the good doctor deigned to provide his skew on the ongoing outlook for global equity markets. Entitling his treatise "A Crisis of Confidence", Dr Faber sought to explain his reasons for recommending "a very cautious posture" in regards to equity investments.
Writing on June 15, Faber notes that since late April, the US stock market has rallied strongly. The S&P 500 is up by 5.5% but still down 1% year-to date. In particular, the Nasdaq 100 had a powerful recovery move. From its April 29 intraday low of below 1400, it rose by 11.2%. In Europe, several stock markets broke out above their March highs, with the exception of the UK market, but strong gains in equities were largely offset by Euro weakness.
Therefore, notes Faber, while the German DAX is up by 5.2% year-to-date, in US dollar terms it is down 3.2%. Similarly, the Swiss Market Index is up year-to-date by 8%, but in dollar terms it is down by 0.4%. In Asia, the performance has so far been disappointing. Faber suggests several factors that may have contributed to this powerful recovery move.
Strength in the US dollar and diminished worries about consumer price inflation, which propelled bond prices to their February 2005 highs, also contributed to an improvement in sentiment. In this respect, says Faber, it should be noted that by late April, investors’ sentiment had become rather gloomy. There were rumors about problems at several hedge funds and, following the dismal performance of the first quarter, and the inability of the stock market to rally in the usually seasonally strong month of April, investors were about to give up on equities.
So, suggests Faber, given the perceived problems in the hedge fund industry and the slowdown in global economic growth, investors figured that the Federal Reserve Board would shortly stop raising the Fed Fund rate and, if there was indeed a problem with some financial institution, the Fed would do what it had always done in the past, which is to ease and to print money. Each time the Fed tightened monetary conditions, something "bad" occurred. But equally, each time a crisis occurred, the response was swift and massive easing, followed by rate cuts.
Needless to say, says Faber, the "maestro" at repeatedly printing money in the wake of crises - and particularly since 1997 - was none other than Mr. Greenspan. In other words, investors now perceive that an economic slowdown, or a crisis at one or several hedge funds, will induce the Fed to refrain from raising rates further and once again to turn on the money printing press.
After all, MZM has been growing recently at its lowest rate in ten years, Faber notes. MZM stands for "money of zero maturity" and is another money supply measure used by the Fed alongside the traditional money supply measures of M1, M2 etc.
Faber believes the low growth of MZM is indicating currently much tighter monetary policies and, therefore, it is leaving ample room for renewed easing at the first sign of any problem for the economy or the financial system. And since investors have been conditioned over the last 20 years or so to buy into crises, because following each crisis the market has soared, they are now buying in expectation of a crisis, which would force the Fed to ease. Says Faber, "The present investment environment must therefore be described as bizarre!"
Faber believes investors are ardently longing for a poor economy or a financial accident, under the assumption that such eventualities will be favorable for the already highly inflated asset markets. However, and this should be weighted by investors carefully, suggests Faber, the strategy of buying stocks on the basis of slower economic growth or a crisis entails very high risk. "For one, we don’t know how severe any slowdown may be" he says, "Under some conditions, a slowdown could lead to a global slump - especially if the US housing market was to break at the same time that China’s economy, plagued by huge overcapacities, imploded."
Faber believes it is debatable whether, in such a situation, easy money would solve any problem for two reasons. In the past, whenever there was a crisis, there was a flight to safety. Investors immediately bought US government bonds in the hope that interest rates would come down and knowing that interest and principal on treasuries were 100% safe.
However, he says, it is far from certain that cutting the Fed Fund rate in future will produce the same reaction. It is possible that investors, seeing the Fed easing once more, will grow apprehensive about future consumer price increases and, instead of buying long-term treasuries, will sell them, thus increasing long-term interest rates. Faber asks, "If eight Fed Fund rate increases haven’t yet led to any bond market weakness but, rather, to strength, who is to know whether future cuts in short-term rates might not lead to bonds selling off?"
Also, he says, since most of the crises experienced over the last 15 years, beginning with the Persian Gulf crisis of 1990, were related to problems outside the United States, there was a flight of safety into US treasury bonds not only by domestic investors, but also by international ones. This, in turn, tended to strengthen the US dollar in times of crisis. But, Faber asks, what if the Fed were to embark on a massive money printing operation because of a really nasty economic surprise or financial accident in the United States? Would foreign investors still consider the US dollar and US bonds to be safe? "I doubt it", he concludes.
Under such circumstances, says Faber, a far more likely outcome would be a tsunami of US dollar selling and, along with it, selling of US dollar bonds. In the wake of massive selling of dollars and dollar bonds by foreign investors, interest rates would likely rise. In turn, this would force the Fed to monetize even more. A further loss of confidence in the US dollar would follow.
Faber’s question here is, "What would the [US] dollar sell off against, and what would investors perceive as a safe haven in such a situation? The Euro? Not very likely! Asian currencies? Possibly, but if China were to weaken simultaneously with the US economy it’s unlikely that Asian currencies would be viewed as a safe haven."
Faber supposes that in a crisis of confidence arising from an economic or financial problem in the United States of a scale that would lead the Fed to print money in massive quantities, only gold, silver, and platinum would be regarded as truly safe currencies, notwithstanding their current weakness.
There is, of course, he suggests, always the possibility that the global economy might weaken or that a crisis might occur while US residential property is still accelerating on the upside.
Faber believes under these conditions, the Fed would face a serious dilemma (a dilemma it faces already to some extent). Easy money might alleviate the economic or financial problems (though not solve them), but at the expense of extending the housing inflation further and making it even more dangerous for the economy once the housing bubble bursts at a later stage.
Faber has recently received many emails from investors questioning the view that a bubble had developed in some housing markets around the world. "Needless to say", says Faber, "these emails remind me of the emails I received in 1999 concerning my negative views about the Nasdaq."
There is another reason for labeling the current US stock market rally as a high-risk move, Faber suggests. Usually, strong stock market moves are led, or at least confirmed, by brokerage shares moving higher. While the world’s largest retailer, Wal-Mart, is no longer declining in price, its recent disappointing market action doesn’t suggest a very strong consumption environment.
High-tech shares have recently begun to outperform the market, and this trend could last for another few months as performance-minded fund managers shift out of economic sensitive companies into high-tech companies based on hope and momentum, Faber believes. And while this strategy may work for a while, it is also riddled with risks.
To illustrate his point, Faber offers the example of the semiconductor industry. The Sox Index, an index of 19 companies listed on the Philadelphia Exchange which produce semiconductors (also known as ‘chips’), has risen from its late April low by 15% and looks technically strong – albeit, in Faber’s opinion, near-term overbought.
Worldwide semiconductor sales, which recovered from their 2000/2001 slump, have recovered once more, but at $220bn annually are barely higher than in 2000. However, Faber notes, the composition of semiconductor sales has changed markedly since 2000. Whereas in the United States and Europe the recovery in sales has been tenuous at best (in the US, semiconductor sales are no higher than in 1995, because of product price declines and sluggish demand), in Asia, sales have been booming until just recently.
Faber believes that if certain commentators are right about a meaningful slowdown in the Chinese economy coming shortly, it is likely that Asian semiconductor sales will fail to rise, or may even decline, at precisely the time when large new production capacities will be coming into production. Says Faber: "This is hardly a very favourable fundamental outlook for this still highly valued industry!" And more ominously, "I also fail to see why semiconductors would be less economic-sensitive than the copper, shipping, or steel industries."
So once again, says Faber, by moving into semiconductor and other high-tech companies we are faced with a relatively high-risk trade, which may nevertheless work for a while due to the momentum players.
In summary, Faber and his team continue to recommend a very cautious posture regarding equity investments. Near term, the United States and most European stock markets, they believe, seem overbought, whereby following some consolidation further temporary bouts of strength cannot be ruled out. But investing in an environment of a global economic slowdown is a high-risk proposition for all asset classes, they say, as the severity of the slowdown or economic slump is unknown.
Faber concludes that "This is especially the case if one is faced with mostly inflated assets, a disproportionately large and highly leveraged financial sector, and a central planner - the Federal Reserve - that repeatedly intervenes in the free market for money and whose intentions are nebulous!"
Thus spake the guru.
Rogue
ABRX.....This could be a trading rally that I'm not personally buying into.
I think the price will retreat again after the trading rally fizzles.
Will it be de-listed to the pinks? Probably. Stock may become availabe alot cheaper then. Still folowing it and hoping to figure out if there's any value left in the company after all the lawsuits and whatnot???
Any other thoughts out there on ABRX???
Rogue
I'm sure you realize that all the destruction of these hurricanes is bullish for the economy. It "Destroys" and then jobs and economic activity is created by the "rebuilding".
Much the same as War stimulates the economy. Destroy/Rebuild.
Rogue
It almost seems that the "MO" or modus operandi of Wall Street is to "dream up' all these rosy scenarios for the bond market.
In my world I see a "disconnect" between inflation here in the US and interest rates.
I believe that this "disconnect" is in part wholy related to the "bubble economy" we have. Greenspan's "conundrum".
Old Fed Chairman Paul Volkler has spoken of this.
We'll see how it plays out.
Rogue
yielddude.....I'm looking for weakness in Gold the next few months. I think we may see $400 and if that level is not supported pricewise, we could see a push to $375 or so. Although it's possible it may just "wallow" around the current level and just act "sleepy" for a while too.
I'm not sure we WILL have a correction to that degree($400-$375) pricewise but it wouldn't surprise me. I don't think the selloff will breach $375 or so. If the "selloff" happens I would consider Gold an EXCELLENT low-risk speculative BUY.
We could then see a major move up in gold the next few years...... as I also forecast an intermediate term top in the US dollar(US Dollar Index 92.50 double top?) sometime this year before the US dollar selling continues in force once again.
The Chinese currency re-valuation against the US dollar is a wildcard that must be kept in mind. Even if it doesn't happen.....we may see tarriffs on Chinese goods. Not good at all either way for "inflation" if we are honest about it.
How will the Fed deal with the possible inflation??? We know what Paul Volkler did...15% long-term rates and 23% short rates). It's entirely "different" now of course....we're a debtor nation instead of a crediter nation as we were back then.
I'm sure the Real Estate market surely will be affected by all this.....any guesses?????
Rogue
TMR....Bobwins?/Anyone?.... The Meridian Resources Corp ......anyone own this?
Is this a good oil/gas play at these prices?
Rogue
SERVER ERROR....Go back to Raging Bull????
LOL!!!
Rogue
AMLS..... AMERSIN LIFE SCIENCE. Big seller today pushed price down to low of .07 cents today from previous close of .18 cents Friday.
Haven't seen any news??
I picked some up as a spec and it seems to be rebounding some now.....10 cent bid/11 cent ask.
I think someone mentioned this one before as a Bird Flu play or something.
Rogue
Batra.....I've read his books and he's got many valid points. We just haven't had the depression or crash he talks about. But his explanations of our economic problems are "valid".
This certainly doesn't mean that we won't ever have it(crash or depression or economic chaos).
Timing is everything..........will the "house of cards" last forever??
Stay tuned.
Rogue