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» collguy - Re: The World Turns Ugly

In response to message posted by Normxxx:

I don't think Bush is the kind of guy who believes in stop losses. He's more like the kind of guy who would have doubled up on his WCOM position at say $5.

-- posted by collguy

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» Normxxx - Nobody Can Stop This Runaway Train

International Perspective: Nobody Can Stop This Runaway Train

by Marshall Auerback | April 13, 2004

In spite of the persistent refusal of Mr Greenspan to recognise it as such, a number of us identified the late 1990’s high tech stock market for what it was - a bubble. Even when it began to burst, there was still a persistent reluctance to acknowledge it as such. But with the NASDAQ still down more than 60 per cent from its peak, NASDAQ stocks still at unprecedented valuations, and the integrity of the earnings of this sector in question, it is now generally conceded by most (even the Fed) that a bubble did indeed exist.

The fallout from this high tech collapse has been much less according to form. Based on the experience of other financial manias, history suggested that the bursting of this particular bubble would generate a hard landing. It did in the corporate high tech sector globally. But, with an amazing debt-fuelled 6 per cent annualised rate of take off in real US consumer spending in Q4 2001, and the extraordinarily resilient follow through for the past 2 years (culminating in today’s stunning March retail sales figure, the biggest increase in a year), it appears that the US consumer has weathered the fall in stock prices -but only thanks to the generation of a series of other mini-bubbles, all symptomatic of a global credit system run amok.

We confess to have been taken by surprise by this extreme credit induced expenditure on the part of debt-saturated US households. Many observers acknowledge that it now sets the economy on a path of even higher private debt relative to income – a path that is (correctly, in our view) deemed not to be sustainable. The debate now is about the timing of the presumed inevitable end to this private credit bubble. And as the debate has intensified, so too have the warnings from abroad.

The latest salvo comes from the International Monetary Fund, in their recent “Global Financial Stability Report”. In it, we find themes regarding the risk of asset bubbles in a low fed funds rate environment, the use of excess leverage in overly crowded trades, and the difficulty of executing a smooth exit strategy from this condition. These themes should sound familiar to readers of this web site. The IMF is remarkably clear headed about the precipitating conditions and propagating mechanisms of financial stability from the current macro/market set up:

“Low short term interest rates and a steep yield curve provide powerful incentives to boost leverage, undertake carry trades, and seek yield by going out along the credit risk spectrum. There is a real risk of investor complacency in a low interest rate environment. An unanticipated spike in yields and volatility in the US treasury market could also trigger a widening of credit spreads in mature and emerging markets and encourage an unwinding of carry trades and leveraged positions.

In this environment, policymakers and regulators must be vigilant for excessively leveraged or concentrated investor positions.”

Who do you think the IMF has in mind here? While acknowledging that “the withdrawal of monetary stimulus could trigger a widespread reassessment of asset valuations”, and conceding that the move toward monetary tightening must be “carefully managed and clearly communicated to the markets”, there is an implicit rebuke to those on the Fed, who persist in giving a green light to hedge speculation by indicating a huge reluctance to raise interest rates imminently. In spite of the removal of the assurance on January 28th that interest rates would remain low “for a considerable period”, the Fed has continually made it clear from the top down that they once again do not perceive bubbles as having been formed, and also have concluded that even in the event of a policy-induced bubble they feel confident in their ability to control the fallout. Kohn's recent speech was directly targeted at Steve Roach and their other critics on this front; he went through every area and more or less said, “Bubble? What bubble? No bubble here!”

The real enabler has been Chairman Greenspan himself, of course. Rather than issue mea culpas for having been present at the creation of the biggest stock-market bubble in modern times, maybe all time, he has focused his commentary over the past year on what a marvellous job the Fed has done in responding to the bubble, which in any case by his lights they never could have recognised or dealt with in advance. It is this extraordinary complacency, or hubris in Mr Greenspan’s case, which ultimately sets the stage for the coming debacle, which the IMF and others have continued to sound the alarm about.

At the most recent Fed Monetary Policy Committee meeting, even the soon-to-retire “inflation hawk”, Robert Parry, wanted a half-point reduction in the Fed funds rate because he was worried about what appeared to be a faltering economy, according to a recent Washington Post piece by columnist John Barry, long considered to be a Fed mouthpiece. In addition to these comments from the "inflation hawk", last week St. Louis Federal Reserve President William Poole made the following remarks:

``There is no regular and reliable relationship between inflation in materials prices or goods at an early stage of processing and retail price inflation,' said Poole, who is a voting member of the Federal Open Market Committee, which sets interest rates. ``We do not want to respond to inflation noise, which would add further instability to the economy.'

As market commentator, Jim Bianco, wryly noted: “The ‘inflation hawk’ wants to cut rates again and the Fed is arguing that commodity prices have little to do with inflation.” Bianco has helpfully collated a random sampling indicating something to the contrary:

The Wall Street Journal - Price Increases in Asia Fan Inflation Fears in U.S. As Production Costs Rise, Imports Could Get Pricier; Fed Not Eager to Boost Rates

Sharp increases in global commodity prices are beginning to push consumer prices higher in Asia, boosting the odds that inflation will be exported to the U.S. and elsewhere in the months ahead. Consumer prices had been holding fairly steady, or even declining, in much of Asia in recent years, as the region's economies worked off excess capacity amid the global downturn. But as Asia heats up again, price pressures are building, in large part because of China's ravenous appetite for raw materials. Oil prices have shot up and are hovering around $35 a barrel, while the prices of other raw materials, including scrap steel and copper, are double or more what they were just 18 months ago. As a result, consumer price inflation, while still extremely low in Asia by historical standards, has accelerated in recent months. The most significant turnaround has occurred in China. That country's inflation rate, though easing slightly in February, has jumped in recent months, including a 3.2% surge in January, compared with the year before. That comes after prices were nearly flat or declining through much of 2002 and 2003.

The New York Times - Prices for Plywood, and Its Alternative, Keep Pushing Higher

Lumber and plywood prices have shot up so rapidly in recent months that they are tearing the profit out of home construction for some builders and threatening to dent the booming housing market.

Associated Press - Soaring steel prices may cost consumers

Soaring steel prices, a boon to a troubled U.S. industry, also have a downside: American consumers eventually will pay more for automobiles, refrigerators and even roller coaster rides. Analysts and other industries say it's just a matter of time.

The Kansas City Star - Soybean prices hit consumers

Soybean prices, which have climbed to levels not seen in 15 years, renewed their upward trend Wednesday, and consumers are starting to feel the effect. A recent check by the American Farm Bureau Federation found that out of 16 basic food items surveyed, vegetable oil gained the most in price in the first quarter of 2004 over the fourth quarter of 2003. The nationwide survey found vegetable oil had increased 48 cents to $2.76 for a 32-ounce bottle in the first quarter of 2004.

We cite these examples to illustrate that something is clearly giving way: pressure is building for the Fed to remove its overly accommodative monetary stance - despite the open recognition and admission by them that there is no easy way to back out of the credit morass they have created and nurtured over the past decade.

The risk, of course, is having read this report or seen references to it in the financial media, the leveraged speculating community may begin to try to hasten the arrival of some of these risks by betting the Fed has no easy way out, starting with a bet on a “spike in yields and volatility in the US Treasury market” which “could also trigger a widening of credit spreads”, as the IMF document suggests. If in fact aggressive professional investors do anticipate such repercussions, and begin to put on trades to benefit from them, they will have a good chance of initiating a self-fulfilling prophecy which would place the Fed in even more of a policy pickle. Such policy dilemmas, after all, can be the means to make a killing, as George Soros illustrated when he took on the Bank of England in 1992 in its sterling defence.

But they can also be the means to further huge financial disruptions, as any Asian policymaker around during the late 1990s can attest. Thus far in the US, credit expansion has proven so virile over the past two years that if the dynamics of the recent economic recovery become cumulative or self reinforcing, it may persist through a multi year expansion and the ultimate fallout could be much worse.

What are the driving factors here? For one thing, the recovery of house prices in the US since the days of “recession” in 2001 has metamorphosed into a fully-fledged real estate bubble. The re-establishment of a positive trend in equity prices has set into motion once again the full dynamics of rational destabilising speculation, except that, this time around, participants (as Leon Cooperman recently illustrated) no longer believe in the fantasies of new era never ending growth and profit miracles but are playing along cynically only because the Fed has orchestrated everyone else to do so.

Cynically gaming a self fulfilling prophesy is surely a difficult and dangerous exercise. As for the US balance-of-payments and current account with the rest of the world, in such an environment Goldman Sachs’ chief global economist Jim O’Neill has simulated a likely outcome with US external debt, now at a hefty 25 per cent of GDP, rising into the 40 per cent – 50 per cent range - a level that is characteristic of LDC debt delinquents.

But how can the current dynamic be halted? How, for example, does one stand in the way of a housing bubble mischaracterised by Franklin Raines, as a “piece of the American dream”, even though the explosive growth in mortgage finance has, as our colleague Doug Noland has vividly demonstrated, become a hugely destabilising part of the American financial landscape? In this case, the ultimate investor purchases an instrument which he believes to be government guaranteed; consequently, the entire private credit risk is believed to be socialised through GSE intermediation or insurance. For all of the tough talk now meted out by Treasury Secretary Snow, or various members of Congress, when the crunch comes, will the government truly withdraw this implicit guarantee?

In fact, it is almost nonsensical to speak of a “credit system” in the US any longer, since the use of the term “system” implies that there is some underlying rational structure, ultimately controlled by a responsible regulating entity, such as a central bank. As Doug Noland has illustrated time and again, this is a completely fictional construct: the whole US system today in effect works toward credit “dis-intermediation”, rendering some form of external constraint virtually impossible. Asset backed securities, convertible bonds, financial commercial paper, structured finance, the proprietary desks of the commercial banks, and the hedge funds all slice and dice credit out of any recognisable classical form that is still taught in Economics 101 textbooks: we see nothing more than acts of financial engineering, which eventually drive a wedge between the ultimate borrower and the ultimate lender so as to render the whole process unrecognisable.

Similarly, the use of derivatives, particularly those of the OTC variety, are of such complexity and opacity, that it is virtually impossible for the market to exert any kind of discipline, since most do not understand the nature of the credit or the complexity of the risk being held in the portfolio, thereby engendering mis-pricing in the risk premiums. By the same token, for regulators to understand and thereby deter a huge potential source of destabilising financial speculation (assuming, of course, that they want to deter, which is questionable in the case of the Fed), they need to have some understanding of the underlying instruments which are the source of so much financial destabilisation. But in most instances, the authorities seem reluctant or unable to tackle the problem (as the examples of Enron and Parmalat vividly illustrate) until disaster strikes. So it is absurd (for the Fed in particular) to laud the use of derivatives as (in the words of Mr Greenspan) “more calibrated than before to not only reward innovation but also to discipline the mistakes of private investment or public policy”, when neither the market participants, nor the regulators, can properly calibrate the risks involved.

For all of the warnings of the IMF, it is clear that in today’s environment, both the Fed, and the leveraged speculating community whose interests it persistently champions, may have more instruments to keep the credit spigot open than most of us realise. This is why the rise in commodity prices has been so telling: something is finally cracking in the system in spite of persistent denials of its relevance. Whether this is occurring because of the increased activities of leveraged hedge funds or a surge in genuine end-user demand is almost beside the point because both are two sides of the same coin: global liquidity run amok. China is a prime example of this two-sided coin, as this where some of the consequences of the US policy strategy are being felt owing in part to the dollar/RMB peg. The unsustainable boom in productive capacity creation there (and the corresponding parabolic rise in commodity prices) can be traced back to the Fed-induced borrowing and spending boom over here, and the rock-bottom financing rates for risky ventures enabled by the sharply positive yield curve, precisely the sort of issues touched on by the IMF report. But no amount of warning, however well intentioned, is going to stop this runaway train until the wreck inevitably occurs.

-- posted by Normxxx

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» Normxxx - Is the United States Mimicking Europe?

Is the United States Mimicking Europe?

By David Apgar | Thursday, April 15, 2004

Many people believe that the current wave of transatlantic strife is mainly due to profound disagreements over Iraq. But things are hardly harmonious on the economic front. Contrary to conventional wisdom, the most overlooked aspect of the Bush Administration’s economic policy is that it imitates those of its current European nemeses.

It is amazing enough to recognize just how much the Bush Administration subscribes to the old European model of a state-directed economy that serves highly concentrated interests.

Catering to corporations

Even more disconcerting, though, is the inevitable result of such a peculiar U.S. economic strategy. It pits transatlantic partners against one another — precisely because of policy convergence, not divergence.

What has traditionally characterized the European model is distrust of the direction which individual consumption gives an economy.

That model typically caters to the needs of large corporations in areas like tax, subsidies and cautious accounting reform, regardless of the price paid by small business, investors — and entrepreneurial spirit.

A consistent theme

While this has long been considered the hallmark of continental European economies, it stands in clear contrast to the economic model that characterized policymaking in the Reagan, Bush I and Clinton Administrations.

For all the bitter political differences between these administrations, their economic policies followed a consistent theme.

A good mix

Between 1984 and 2000, the U.S. mix of tax simplification, revenue base enlargement, trade promotion, spending discipline and careful advances in antitrust and regulatory policy achieved one overriding purpose: It cultivated enterprise.

As a whole, plain and simple, these policies reinvigorated the U.S. economy — even though they were not designed to please big business.

These administrations’ focus on expanding individual and entrepreneurial choice redirected investment from fixed resources — notably real estate — toward entrepreneurial businesses.

Bush buying into Europe

In contrast, the current Bush Administration buys into a model of wealth generation that is essentially European.

Some say this is because President Bush really knows only the world of “extractive” businesses. Whether making money from oil in the ground or taxpayer willingness to fund a new baseball stadium, his business focus was on tapping existing resources — rather than creating new ones.

Executive debt?

Others say it is because he deeply distrusts the wild rides of technology-based growth and, even more, the coastal areas from which nearly all technologists seem to deliver their innovations.

Still others argue that the Bush Administration is instinctively corporatist, because it seeks to concentrate resources — and thus increase leverage over the economy.

Many just think the president focuses on his enormous debt to a small number of mostly Texas corporate executives.

A telling complaint

Either way, what matters at this stage is not just that the current Bush Administration is abandoning a long-term U.S. consensus on economic policy.

At least equally worrisome is that the U.S. reversal of its economic course has profound — and troubling — implications for transatlantic relations.

Clash across the Atlantic

As long as only one of them pursued European-style corporatism, it was possible for Europe and the United States to work together.

But when both sides of the Atlantic believe that the role of government is to promote what they believe to be national interests from the center — and at the expense of innovation and individual choice — there is bound to be a clash.

The mutual focus on corporate competitiveness clearly burdens the transatlantic relationship.

The European complaint about the dramatic expansion in U.S. steel tariffs (since removed) and agricultural welfare programs, for example, is telling. The trouble, apparently, is that those policies are too, well, European.

A heavy burden to bear

The same is true of regulatory policy. The U.S. Justice Department’s decision to dismantle its own case against Microsoft has the ring, whatever the merits, of a European state’s support for a national champion.

But there is worse news for both sides than just an increase in tension. In fact, that tension may make European economies’ reliance on U.S. innovation and entrepreneurial energy untenable.

Some would say it is rich to claim that Europe in any way relies on U.S. enterprise. But without the United States, it is hard to imagine how European states could both maintain generous social safety nets and lever technology advances into economic growth at the same time.

Status quo under pressure

After all, European companies share technology benefits from the competitive free-for-all in the Darwinian economy across the Atlantic — without having to abandon stifling controls over markets that prevent such innovation in Europe.

Two convergence-related trends may make this convenient arrangement untenable.

Still not back on track

First, the present Bush Administration is far less preoccupied with fostering innovation than its predecessors. In fact, it is diverting resources to the government.

Moreover, it has been reluctant to push for the investor transparency that might get initial public offerings — and thus venture capital — back on track.

Second, what innovation does occur in the United States is more likely to be security-related — and thus closely held.

In today’s transatlantic economy, it is not just Europeans who deprive their consumers systematically of choice and concentrate resources on a handful of producers at the expense of innovation. Under the Bush Administration, the United States of America no longer pursues a fundamentally different strategy.

Supporting corporate champions

We now see governments directing their economies to support corporate champions on both sides of the Atlantic — and often focusing on the same scarce commodities.

This convergence of economic strategies exposes the transatlantic relationship — and ultimately the entire Western alliance — to a world that will sorely miss its old economic pluralism.

http://www.theglobalist.com/DBWeb/StoryI...

-- posted by Normxxx

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» Normxxx - THE INTERNATIONAL FORECASTER

THE INTERNATIONAL FORECASTER April, 2004

By: Bob Chapman | April, 2004

US MARKETS

Here is some food for thought. Confidence among US business leaders is stronger than at any time in the last 20 years. Based on March’s bogus employment growth figures they expect a return to strong profitability. The jobless recovery is over. Those bogus jobs for March, which we are sure will repeat in April, will guarantee higher interest rates, which guarantees lower stock, bond and real estate prices. That is why gold and silver are going up – they are real money. Wait until these business leaders see what inflation has in store for them.

The 10-year Treasury note is doing its magic. A rise in its rates has triggered a rise in mortgage rates, which has dampened demand for home loan refinancings. The MBA says their refinancing index declined 15% to 4,126.7 from the previous week’s 4,857.6. That is still over 50% of all mortgage loans. Last week we said if the 10-year stayed at 4.22%, we would see mortgage rates at 5.80%. The 10-year backed off to 4.17% and the 30-year mortgage rate was 5.75%. The MBA measure of demand for loans to buy homes, the purchase index, rose by 7.6% to 477.5 from 443.8 in the prior week. Their seasonal adjusted market index, a measure of activity fell 7.2% to 1,012.9. Sir Alan Greenspan still encourages Americans to leverage themselves as much as possible.

Higher oil prices are going to start raising havoc soon. Of course, gas pump prices have already taken their toll and will continue to so do. Businesses either raise prices or have lower profits. It is just that simple. Businesses that hold out on passing on their costs will simply see their share prices fall. Oil’s effect on the economy is enormous, not the piddling 8% that the elitist experts would have us believe. We use oil in almost everything we use. Any price higher than $32.00 a barrel spells trouble.

March import prices rose 0.9% reflecting the drop in the dollar and an increase in costs of oil and other raw materials. Oil was up only 0.2%. This was the sixth straight increase following a 0.4% increase in February. The expert economists were wrong by 30% again, what geniuses. Imports, including petroleum, last month cost 1.2% more than in March 2003. On the other hand, exports rose 0.9% in March, the seventh straight increase due to the lower dollar. February was up 0.7%. The 12-month increase was 3.4% in March, the biggest since the 4.1% in the year through November 1995.

Prices for agricultural products shipped abroad surged 3.3%, the seventh consecutive gain. Over the past 12 months, such costs increased 20.7%, the most since 24.8% in the year ended May 1996. Costs for non-agriculture exports rose 0.6%, the same as in February. Now get this, St. Louis Fed President, William Poole, rejected several conventional inflation signals, including commodity prices, as reliable near-term indicators of retail prices. It is obvious a desperate Fed has to lie about the cause and effect of inflation.

Isn’t anyone getting the message? Sales of stocks by US corporate insiders flashed a bearish signal for the eleventh straight month in March. They sold $3.5 billion of their own companies’ stocks in March, which was down from $5.1 billion in February. They have sold so much maybe they are running out. The ratio of sales to buys was 28.4 versus 54.6 in February. This is a one-year sell signal, which shows you the extent of market manipulation by the “Plunge Protection Team.” These executives are bailing out and you should be too.

Soybean prices are in the process of doing to food prices what oil is doing to gasoline prices. Worse yet, other food ingredients have doubled like butter, eggs, wheat, etc. This is pure commodity inflation and it certainly won’t end prior to the end of the year. Soybeans touched $11.00 [an old refrain runs through my head, "Beans in the 'teens!' Beans in the 'teens!'], up from $4.00 not that long ago. Food prices will rise at least 3.5% this year. It is surprising that retail prices are really just starting to go up.

Overall household debt is $9.4 trillion, of that $6.7 trillion is mortgage debt and $745 billion is credit card debt. Borrowers have little or no savings and the delinquency rates are high at 2.68%. If cardholders miss a single payment, their 3% interest rates immediately jump to 18%, which just about buries them. Another factor is rising interest rates that are just around the corner. Bankruptcies nationally are already at record highs and those seeking credit counseling are becoming an epidemic and rates haven’t even moved up yet. This time the elderly are going to get hit very hard. Try living on $800.00 a month from Social Security when you are in your 80’s with $8,000 in credit card debt. It is not a pretty picture and it will get worse.

Consumer credit grew $4.2 billion in February or at a 2.5% annual pace to $2.02 trillion. Auto loans were up $2.6 billion and revolving credit and credit cards rose $1.6 billion. They just keep on piling it on.

The overseers of Fannie Mae and Freddie Mac want them to provide more liquidity in the home-loan market so that homebuyers across the country have access to mortgages and to promote affordable housing and homeownership for lower income Americans. Both agencies are virtually giving away homes to people who have no financial qualifications to own them, and these idiots want them to just give everyone a home. Of course, Fannie and Freddie are overjoyed. They believe because 75% of white Americans own homes every minority and illegal immigrant should also have a home. This is just another redistribution of wealth and an increase in our debt burden. When this thing collapses it will be a nightmare as all these people lose their homes.

Wal-Mart’s rock bottom wages and benefits cost taxpayers hundreds of millions of dollar a year in basic housing, medical, childcare and energy needs that the retailer fails to properly cover for its employees. More of their employees’ families are on welfare, then any other company in the county. They have created a major burden for the taxpayer. Wal-Mart is also the largest importer of Chinese goods, some 10% of their exports. Fifty-three percent of Wal-Mart’s clothing comes from China. Wal-Mart is America’s largest corporation and is a black stain on our economy.

Last year the UAE sold its gold to make what they call a diversification of assets and what we call an order to sell by the White House.

Over the last two weeks, there has been a reduction of 2500 silver contracts by commercial shorts. If this continues it could turn into a stampede as the naked short position explodes. It is the function of the Comex to guarantee that there is enough silver in inventory to cover the reserve position. Silver will probably have its explosion before gold and it could be the trigger to take down the entire financial edifice. That is because the silver manipulation is more visible than that of gold. Silver has been illegally depressed and the numbers are there for all to see. The shorts are short 478 million ounces of silver. Yearly production is about 590 million ounces; yearly demand is 840 million ounces, a deficit of about 250 million ounces. The shortfall heretofore has been met by above ground inventory, which we contend is gone or almost totally gone. Comex holds 125 million ounces of silver. That means one large buyer could take delivery of the Comex reserve. If they did, prices would go crazy.

Gold shares have done very well over the past four years. The majors have made fine gains, but it is evident that they have come under selling and shorting pressure over the past four months. Traders, funds and hedge funds trade. That is how they make their living and it has to be expected. We watch the major gold shares all day every day and we can promise you with great assurance that these shares are being shorted by the gold cartel. That does not mean they will not perform well, they will.

It is now time to really concentrate on juniors ad exploration stocks. These are the stocks with the potential to go from $0.50 to $50.00. They did it between 1976 and 1981 and they will do it again. Majors are losing reserves as they produce. That is because they did not spend the money that they should have over the past ten years on exploration. They do not have the reserves for replacement in the pipeline. They have merged and that has helped them, but the easiest way for them to replace those reserves is to buy them.

That means junior and exploration stocks will take on a completely new valuation. It takes two to three years to find an ore body. Only about one or two companies out of 100 finds an ore body. It then takes one to two years to complete feasibility and then two to three years to get into production. Thus, you are looking at four to eight years to make a mine. Financing was so difficult to get during the 1990s that little exploration was done by exploration companies and it has only been since 2000 that money has become available again.

On top of this, regulatory bodies have done everything within their power and then some to destroy the mining industry at the grassroots. That means the place to be is in exploration companies. They do not have declining reserves; they have what majors need, expanding reserves. The gains in these stocks in the year’s ahead will be enormous. Gold production is falling. That means the price of gold has to go up. The overhang or inventory of above ground gold for sale is dwindling. Of 32,000 official tons in reserve, we estimate that between 22,000 and 28,000 have been sold or leased.

This is not as good as the silver inventory situation, but it is very good. You have declining production, declining official reserves, very little new reserves in the pipeline and investment demand growing as investors flee fiat currencies, particularly the US dollar in which gold is denominated. In just Newmont, Anglogold and Barrick gold production for 2003 was off 30%. This year there will be a number of producers whose production will fall 5 to 10%. These major producers without reserves in the pipeline have to buy production to survive due to very poor management decisions and hedging during the 1990s.

Hans Welteke, son of Bundesbank President Ernst Welteke, said his father clashed with German Finance Minister Hans Eichel over the use of the central bank’s gold reserves before taking a leave of absence in conjunction with an investigation by the Frankfurt prosecutors’ office. In addition, the Bundesbank is resisting efforts by the government to install Deputy Finance Minster Caio Koch-Weser as its new president, which it considers a political attack on its independence.

This, of course, is Gerhard Schroeder’s idea. He and Welteke had been collaborating on the gold sale behind the scenes. Koch-Weser wants to sell more gold than Welteke did. Chancellor Schroeder’s popularity is so low with the people and his party he would do anything to regain favor and spending piles of money from gold sales would help him politically. Schroeder wants to increase spending to 3.0% of GDP by 2010 from 2.5% presently.

One group of politicians wants to use any proceeds to cut debt and the other to ostensibly spend it on research and education, which is a farce. Presently, by law it must be spent on debt reduction. In the middle of this political fight Welteke looks like he will lose his job and Hans Eichel is struggling to keep from being dismissed. As much as he wants to get his hands on the money, Schroeder cannot fire Welteke and Eichel at the same time. Schroeder’s party, the SPD’s popularity, has dropped to 29% versus 48% for Helmut Kohl’s CDU.

This is a party fight, between a group of socialist and Marxists, over who gets to spend the money from gold sales. Only 500 tons can be sold under the agreement by Germany. This does not affect any further gold sales over the next five years. Their phony sale is to make a bookkeeping entry, which allows further spending. The gold has already been leased or sold. In all probability leased. Thus, the gold is gone. This is what they are not telling you.

-- posted by Normxxx

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» SteveT - U.S. Industry Sees Rise in Global Economy, Prices

http://www.reuters.com/newsArticle.jhtml...

U.S. Industry Sees Rise in Global Economy, Prices
Thu Apr 22, 2004 03:49 PM ET

By Joseph A. Giannone

NEW YORK (Reuters) - If you think talk about a global economic boom is wishful thinking, perhaps you should listen to Caterpillar Inc.'s Chairman and Chief Executive Jim Owens.

Owens, whose construction and mining equipment maker is a benchmark of American industry, didn't mince words on Thursday about his expectations for a dramatic economic recovery.

"It appears the world economy will have one of the strongest, broadest recoveries in years," Owens said as Caterpillar reported a three-fold profit increase that blew away Wall Street forecasts.

"Economic stimulus in the United States is producing strong growth and the Asian economies are improving on last year's outstanding performance," said Owens, who also cited the positive impact of low interest rates.

Until recently, profit growth was driven by slashing costs. Yet Caterpillar's results not only show higher sales, they provide more evidence that manufacturers are finally gaining the ability to raise prices.

This pricing power is something that has been denied to most U.S. manufacturers for a long time. Now it's showing up in a number of industries.

"It's fairly apparent that pricing power is gradually being restored," said Federal Reserve Chairman Alan Greenspan, speaking to Congress this week.

For example, Leggett & Platt Inc. on Wednesday reported a 28 percent profit increase even as steel prices escalated. The Missouri manufacturer of furnishings and fixtures noted its ability to pass on cost increases.

"Most customers understand that no manufacturer can absorb cost increases of this magnitude," the company's Chairman and CEO Felix Wright said.

Textron, a conglomerate that makes everything from Cessna aircraft to golf carts, reported strong gains in its industrial businesses, where higher steel costs were partly offset by customer surcharges.

"We are encouraged by the recovery that appears to be underway in many of our markets," said Lewis Campbell, Textron's chairman, president and CEO.

Illinois Tool Works, where quarterly revenue rose 17 percent, reported "strengthening in the company's end markets."

Diesel engine maker Cummins Inc. on Thursday reported strong first-quarter earnings and boosted its profit forecast for the year. The Columbus, Indiana, company expects to pass on steel and copper price increases to some customers.

This pricing power shift reflects an expansion of the recovery that began in the first quarter of last year, Goldman Sachs chief U.S. strategist Abby Joseph Cohen said. That strength is evident in most corners of the globe, with the notable exception of Europe.

"We see that the U.S. economy is staying stronger, for longer, than many had expected," she said. "The real surprise has been in Japan, where the recovery has been fairly dramatic."

She said this bodes well for economically sensitive stocks, including technology and industrial firms that will benefit from increased capital spending.

Others say manufacturers are perfectly positioned.

"This pricing power will continue. We're in the sweet spot here," said Jon Brorson, managing director for growth equities at Neuberger Berman, which invests $60 billion in assets.

That said, the world isn't yet firing on all cylinders.

Minnesota-based 3M, another industrial giant, said sales volumes surged 12 percent in the first quarter, but pricing declined by nearly 1 percent.

Even in the U.S. where pricing advanced 0.2 percent, that marked a retreat from a 0.5 percent pricing increase in the fourth quarter.

Still, Brorson expects today's favorable conditions -- a weak dollar, low interest rates and higher capital investment -- will continue to help big U.S. industrials.

"Add all that up and, longer term, these companies are onto something," Brorson said.

(Additional reporting by Susan Kelly)

-- posted by SteveT

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» Normxxx - A WARNING FROM MOSCOW

Greenspan Is to Blame

By Alexei Bayer | Tuesday, Apr. 27, 2004
The Moscow Times

Alan Greenspan, chairman of the U.S. Federal Reserve, is a unique figure in American history. Appointed by Ronald Reagan in 1987, he has survived four presidents and remains the longest-serving top government official. Some years ago, a magazine put out a canard describing a Greenspan shrine at a Wall Street firm. Such was the reverence for him among financial market professionals that the story was widely believed.

Since financial markets are now a vital part of the modern world, his power and influence transcend that of any of his predecessors. When he hinted last week that U.S. interest rates will eventually go up, bond yields spiked around the globe and stock markets tumbled. Even the buoyant Moscow bourse lost almost 3 percent on April 21.

Greenspan has become all but irreplaceable. His current term expires in June, and President George W. Bush has already stated that he can have his job for another four years. Senator John McCain, campaigning for the Republican presidential nomination in 2000, promised famously that if Greenspan died, he would prop him up in his chair and let him carry on -- perhaps taking a cue from the treatment of Lenin by his Bolshevik cohorts.

This is particularly ironic since U.S. policymakers like to extol the virtues of the American economic system and encourage others to emulate it. Could it be that the fate of the world's largest economy and its largest financial market, accounting for 46 percent of the total global stock market capitalization, is riding on the shoulders of a 78-year-old former economic consultant? After all, a solid economic system should not depend too much on those who administer policy. It is high-wire acts and magic tricks that are completely reliant on the skill of the performer. There's something here that doesn't quite add up.

In fact, there is a major problem with the Bush-Greenspan economic boom. It has been largely based on fiscal stimulus, resulting from two rounds of tax cuts and runaway military and domestic security spending. The budget deficit is forecast by the Economist Intelligence Unit at nearly $500 billion this year and at $700 billion by 2008.

Central banks are supposed to balance lax fiscal policy with tight money. In fact, their function was once described as taking away the punch bowl just as the party gets going. But Greenspan's Fed just keeps serving liquidity without restraint. U.S. interest rates are at 1 percent, which is both a 46-year low and below the level of inflation.

Had this been a developing country, like Russia or Argentina, such fiscal and monetary profligacy would long ago have led to the dispatch of worried IMF officials. But the United States is different: It has the dollar, the world's reserve currency. Foreigners will accept dollars in return for their goods and services, regardless of how many of them the Fed keeps printing.

This has allowed Americans to consume much more than they produce -- to the tune of more than $600 billion per year, to be exact. This means that the United States borrows about $1.5 billion per day from abroad to maintain its lavish lifestyle.

You can't keep borrowing forever, however, even if you print the world's reserve currency. The dollar has already shown signs of fatal weakness, and its current rebound is probably just a pause before further declines. In fact, it has been mainly held up by foreign central banks as they try to prevent their currencies from rising against the greenback. Asian central banks alone added $600 billion to their reserves during 2003, and foreigners now hold $800 billion worth of U.S. Treasury bonds, or 20 percent of all U.S. federal debt.

Central banks will continue to support the dollar. Spurred by fiscal and monetary stimulus, the U.S. market is the only source of demand growth in a world plagued by excess supply. Foreign producers not only keep exporting to the United States, but hold their prices down for fear of losing shares in this crucial market.

These factors have kept U.S. consumer price inflation low. Still, excess liquidity has to go somewhere. Having been burned on the "new economy" boom in the late 1990s, Americans remain weary of the stock market. Instead, they are busy buying homes, and a potentially devastating bubble has developed in the real estate market. To cite just the most outrageous example, the average two-bedroom apartment in Manhattan now sells for nearly $1 million.

When the housing bubble bursts, it will be much more painful than the deflation of the Internet bubble, and it will take much longer to mop up. This is why the Fed won't raise U.S. interest rates any time soon, and even then only by a modest margin. The worldwide gorging on liquidity is likely to continue for a while longer.

Foreign economies have benefited from U.S. fiscal and monetary largesse. Even though central banks offset their dollar purchases by issuing domestic bonds, they are nonetheless drowning in liquidity. Real estate bubbles are now plaguing all dollar-bloc economies, from Britain to New Zealand, and emerging stock markets have long entered the bubble stage. While the IMF estimates output growth this year at 4.6 percent, the Emerging Markets Free Index compiled by Morgan Stanley has jumped by over 60 percent in the past 12 months.

Eventually, this will all come to an end. When or how is difficult to predict but, as one famous economist once said, things that can't go on forever usually don't. There will be hell to pay, and emerging economies, such as the Asian tigers, China or, most notably, Russia, which have their own indigenous imbalances to contend with, will be hit especially hard. But for now the feast just goes on.

http://www.themoscowtimes.com/stories/20...

-- posted by Normxxx

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» Normxxx - The EU core that wasn't

The Bear's Lair: The EU core that wasn't

By Martin Hutchinson | 2/23/2004 10:35 AM

WASHINGTON, Feb. 23 (UPI) -- British prime minister Tony Blair's Berlin summit last week with French president Jacques Chirac and German chancellor Gerhard Schroeder raised fears in other European Union members that the three leaders were about to form a "super-core" that could preserve Franco-German dominance of the EU's agenda even after the EU expands to 25 members in May. When looked at closely, however, there is no economic basis for more than occasional agreement between the three countries.

It's clear why a closer alliance is attractive for all three leaders. For Chirac and Schroder, the entry into the EU of ten new countries, albeit mostly small ones, changes the dynamics of the EU, and reduces their ability to dominate the process.

Under the current voting structure, Germany and France together have 20 of the 87 votes in the Council of the European Union, but in their statist, Federalist moments, even when Spain and Italy are ruled by the right, they can usually rely on additional votes from Belgium (5) Greece (5) the Netherlands (5) Portugal (5), Sweden (4), Ireland (3) Finland (3) and Luxembourg (2) for a total of 52 votes out of 87, enough to preserve dominance even if a smaller ally defects on a particular issue. (While 62 votes out of 87 are required to take a formal decision, the ability to control an ordinary majority is crucial in day to day activities.)

After November 2004 (there is a 6 month transitional delay) the above coalition could muster only 135 of the 321 votes at stake, nowhere near a majority. Even if you add reliable statist allies Cyprus (4) and Malta (3) together with Hungary's current leftist government at 12, you get a total of 154, still less than the 161 needed for a majority. Hence they need to add another big member to the coalition. Poland (27 votes) would do it, but is too unreliable and apparently heading into financial crisis, while Italy and Spain remain ruled by the right (Spain might change sides in its upcoming April election, but probably won't.) So the ideal solution is to add Britain, which with 29 votes gives the core coalition 183 votes, enough to keep a majority even if a minor ally or two defects, although short of the 232 needed to make a formal decision.

For Tony Blair, the calculus is a little different, but also favors a close working arrangement. While coming from a country that (at least since Margaret Thatcher's reforms of the 1980s) is rather more free-market oriented than its Continental neighbors, Blair leads the more statist of the two major parties, and is under criticism from the left wing of his large parliamentary majority for not being statist enough. Further, the rapid rise in public spending under Blair and his chancellor of the exchequer Gordon Brown has produced large British budget deficits, which in turn have required and will require tax rises that converge lighter-taxed Britain towards the overtaxed Continental countries, thus reducing the element of "destructive competition" in tax systems.

Most important, since the new EU constitution may well be presented to national parliaments for ratification later in 2004, before the next British election, Blair wants to avoid any disputes with the EU core in the run-up to the election, in the hope that he can ratify the constitution without holding a referendum (which the constitution would almost certainly lose) and without the opposition Conservatives having a major populist election issue with which to beat him. Hence Schroder and Chirac's commitment to greater "reform" (which they need to carry out anyway to prevent their economies falling into a black pit of public spending as their baby boomers retire and claim generous state pensions) can be presented to the gullible mushy middle of the British electorate as a genuine conversion by our friends in Europe to the greater free market openness and economic liberalism that is supposedly Britain's gift to the EU.

In the long run, it won't work. When dealing with the 10 new members of the EU, particularly the 8 from Eastern Europe, and with the next 2 members, Bulgaria and Romania, scheduled to join the EU in 2007, Britain's interests and those of France and Germany diverge, because of the different natures of their economies.

Germany, and to a lesser extent France, are primarily manufacturing nations, whose economic strength derives from the great efficiency and superb quality of their manufacturing workforce. Automation has reduced this advantage somewhat (as young and cynical London merchant bankers we used to joke that the German economy had problems because "robots are even better at being Germans than are Germans themselves.") Nevertheless, as the painful process of integrating the former East Germany has demonstrated, the principal threat to German manufacturing capability is a cheaper workforce with educational and quality standards similar to those in Germany itself. In other words, after 10 years of post-Communist restructuring, the workforces of the Czech Republic, Slovakia, Slovenia, the Baltic States and to a lesser extent Poland and Hungary.

Britain isn't like this. The British automobile industry isn't threatened by East European competition, it disappeared two decades ago after Britain entered the EU (given its inefficiency, poor quality and appalling labor relations, it would probably have been devastated by a customs union with Haiti!) Britain is pre-eminently an entrepot economy, with trading links worldwide rather than merely in Europe, and with skills in banking, insurance and consultancy for which the East European countries continue to have a large appetite.

This difference has already been demonstrated in the different attitudes of the three countries to East European immigration after May 2004. France and Germany have long made it clear that such immigration, the "free movement of labor" that is supposed to be a central principle of the EU, would be prohibited until after a transition period of close to a decade. They're right; East European skilled labor represents a threat to the highly skilled but heavily unionized manufacturing labor of France and Germany.

Britain, on the other hand, initially took the position that East European immigrants would be welcomed. Again, this was rational; East European immigrants in Britain's internationally trading service industries would simply make it easier for such industries to get business in Eastern Europe -- a win/win proposition if ever there was one.

Regrettably, the politics of immigration have intervened. The new EU entrants of Eastern Europe naturally have a high percentage of the impoverished; in particular, a total of around 1.5 million Roma, communities that are poorly integrated into local society, and that tend not to have taken advantage of the educational opportunities available. Moreover, Britain in the last decade has suffered a huge influx of "asylum seekers" -- around 500,000 per year, 1 percent of the population, mostly from countries far poorer than the new EU entrants -- which the government, hampered by "politically correct" and naive EU legislation, has proved unwilling or unable to control. There is thus a natural fear that allowing free entry to a new wave of the impoverished will put inordinate further strain on Britain's welfare and education systems, and further immiserate the less skilled of the British themselves.

The fear is legitimate, but overstated. The problem can be resolved simply by barring the welfare and free education systems to new East European immigrants for a moderate period (say 3 years) while allowing the immigration itself. That way, the immigration will be moderate in volume, and biased towards the highly skilled immigrants which any sensible society wants. The best solution for Britain in relation to East European immigration is not the restrictionary system imposed by France and Germany, but moderate liberalism guided by enlightened national self-interest.

There is a further potential for friction, in the area of financial services. The indigenous British financial services capability was devastated by misguided legislation in the 1980s, and now exists only within the bowels of enormous foreign banks, several of them German. However, the removal in January 2006 of the implicit state guarantee for the German landesbanks is likely to cause a major financial crisis in Germany, adversely impacting the credit-worthiness and hence transaction capability of the very London bankers that are the core of British economic success. With numerous high-paid and influential Britons losing their jobs owing to German financial ineptitude, you can expect a serious deterioration in Anglo-German economic relations, which must inevitably have political ramifications.

Therefore, while it is in Blair's natural political interest to establish closer relations with France and Germany, it is in Britain's natural economic interest to establish closer links with the new EU members from Eastern Europe, which will inevitably be in economic conflict with the EU's Franco-German core. The new core "troika" will last only until this divergence becomes obvious to all concerned.

-- posted by Normxxx

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» Normxxx - STRATFOR NEWS BITES

STRATFOR NEWS BITES

Washington as Target: D.C. Through Al Qaeda's Eyes
The nation's capital remains a key target for an al Qaeda strike. Speculation on what could be hit, and how, typically fails to take into account al Qaeda's own targeting criteria and objectives. The good news is that most of the scenarios that excite public concern are unlikely to happen because they would not serve the group's broader interests. The bad news is, other factors argue in favor of a spectacular strike in the Washington, D.C. area that will likely involve another attack by aircraft, a car bomb, or a “dirty bomb” involving medical-grade radioactive material.

Credibility and Strategy: Terror Alerts in the United States
Terrorism warnings issued by the federal government are often more complex than the American public presumes. Though some public warnings are, in fact, intended to be such, it is crucial to recognize that the FBI and Department of Homeland Security frequently might have another audience in mind - including al Qaeda itself. Likely motives for terrorism warnings include site alerts, deterrent alerts to help shape the U.S. security environment and keep al Qaeda off balance, and enemy-engineered alerts used as disinformation campaigns.

China: Trying to Mend Foreign Relations 20-AUG-04
Tensions with its neighbors have prompted Beijing to replace a vice foreign minister. The downturn in China's foreign relations could be the beginning of a negative trend as East Asian nations cast a nervous eye on the Asian giant.

Muqtada al-Sadr: From Radical Leader to Mainstream Politician? 20-AUG-04
Militant Shiite leader Muqtada al-Sadr's militia is vacating the Imam Ali shrine complex in An Najaf. The departure likely involves a deal requiring al-Sadr to join mainstream politics, but the silence from all sides on how this integration process will evolve suggests details are being negotiated -- and that each side wants to save face.

Tenuous Peace in Iraq Doesn't Mean Cheaper Oil 20-AUG-04
The resolution -- using that term lightly -- of the An Najaf standoff will likely result in renegade Iraqi Shiite leader Muqtada al-Sadr's entrance into Iraqi politics. Across the border, Iran is threatening to attack U.S. allies in order to secure its national interests. Between these two developments, oil markets are about to enter a period of greater volatility -- and even higher peaks.

FSU Net Assessment: The Coming Showdown in the Caucasus 20-AUG-04
Russian President Vladimir Putin continues to consolidate his power atop the Mount Olympus of Russian politics, while his inward approach to solving serious problems at home has given other former Soviet Union states the leeway to arrange their affairs. Meanwhile, the small state of Georgia -- where the first victims have fallen in a lead-up to possible war -- is grabbing the geopolitical spotlight.

As Russia Goes Western, China Pays the Tab 20-AUG-04
Russia's Yukos crisis has put Russian oil exports to China at risk. The degrading situation is a miniature of the troubles that overall Russia-China relations are suffering -- and will continue to suffer.

Hungarian Shake-up Illustrates Problem for EU 19-AUG-04
Hungarian Prime Minister Peter Medgyessy resigned from his post Aug. 19 over a rift in his ruling coalition. Though the Hungarian government will not collapse since another member of his Hungarian Socialist Party will be named to the prime minister's office, prime ministers of two other eastern European states -- Czech Republic and Poland -- have quit since their countries joined the European Union in May. The frequent political turnover in central and eastern Europe will pose problems for the Council of the European Union, as ever-changing heads of government might pose difficulties in creating and sustaining European Union policies.

China: Fear of Capital Flight 19-AUG-04
Chinese markets reacted poorly to a government plan to allow the country's insurers to invest abroad -- showing a new and dangerous apprehension in the country over capital flight.

Iraq: The Calm Before the Storm? 19-AUG-04
Fighting came to a lull in the holy city of An Najaf the night of Aug. 19. Comments from both sides indicate this could be the calm before the storm.

Iraq: Facing Decisive Action on al-Sadr? 19-AUG-04
Following reports that Shiite leader Muqtada al-Sadr rejected an ultimatum from the Iraqi government, a new round of heavy fighting erupted Aug. 19 around the Imam Ali mosque in the Iraqi holy city of An Najaf. Faced with an untenable situation, the Interim Iraqi Government must decide how far to go to flush out al-Sadr and his militia.

Iraq: Militant Groups United By Common Enemy? 19-AUG-04
Al Fallujah guerrilla commanders met with radical Shiite leader Muqtada al-Sadr in An Najaf to discuss cooperating against U.S. forces Aug. 18. The most likely form of cooperation would be transferring the Al Fallujah militants' skill and experience to the numerous -- but untrained -- members of al-Sadr's Mehdi Army.

Indonesia: The Upcoming Battle for Votes? 18-AUG-04
Indonesian presidential candidate Susilo Bambang Yudhoyono is facing a tough race against incumbent Megawati Sukarnoputri in the country's Sept. 20 runoff. A tight race greatly increases the chance for election violence.

Iran: Threatening Israel to Get to the United States? 18-AUG-04
Iran has threatened to attack Israel's Dimona nuclear plant if Israel carries out strikes against Iranian nuclear facilities. Iran is attempting to drag Israel into the ongoing U.S.-Iranian dialogue, figuring that any "Zionist" threats will only bolster its negotiating power. The United States, in turn, wants to keep any Israeli retorts as mum as possible -- and in this specific case, Israel will cooperate.

Iraq: Learning From the Al Fallujah Model 18-AUG-04
If Muqtada al-Sadr and his militia withdraw from sacred areas in the southern city of An Najaf, jihadists and nationalist militants likely will find safe haven at a premium in the city -- unlike what happened in Al Fallujah.

Iraq: A Mark of Legitimacy for Al-Sadr? 18-AUG-04
Shiite militant leader Muqtada al-Sadr, battling U.S. forces in An Najaf for a week, reportedly has agreed to a cease-fire deal brokered by the Iraqi National Convention. Though the deal is unlikely to spell the end of al-Sadr or his militia, it does offer a mark of legitimacy to the fledgling Iraqi authority -- and to Washington's ability to show progress in Iraq.

Saudi Arabia and Iran: Warming Relations? 17-AUG-04
Saudi Crown Prince Abdullah bin Abdel-Aziz said Iran was a friendly and brotherly country to the kingdom, Iranian state-owned radio reported Aug. 17. Though the source of the report places a question mark on what the Saudi ruler actually said and meant, the context in which the report surfaced suggests that Iran and Saudi Arabia begrudgingly could be coming to terms with each other. Both countries have an interest in the type of republic that emerges in Iraq, and both face external and internal threats.

Turkey: Another Step Toward Civilian Control 17-AUG-04
Turkey appointed the first civilian secretary-general to its powerful National Security Council on Aug. 17, continuing a shift in the country's politics from military domination to civilian control. The biggest loser might be the United States.

Musharraf and the Islamists: An Uneasy Relationship? 17-AUG-04
Pakistani Interior Minister Faisal Saleh Hayat has accused Jamiat-i-Islami (JI) -- the country's largest Islamist political party -- of providing shelter to jihadists. This statement comes after earlier reports that Islamabad was planning to crack down on JI. Pakistani President Gen. Pervez Musharraf is not likely to go after a mainstream Islamist party whose existence benefits his regime. Instead, this is a pre-emptive move to ensure JI will not steer the moderate Islamist Muttahidah Majlis-i-Amal (MMA) alliance -- parliament's largest opposition group -- into participating in an anti-Musharraf movement.

The Unique Vulnerability of Iraqi Oil 16-AUG-04
Iraqi militants set an oil well on fire in eastern Iraq on Aug. 16. Although the destruction of a single oil well will not affect the country's production, Iraq could for all practical purposes fall off of the global energy map should the tactic catch on.

Venezuela: Can Chavez Be Defeated? 16-AUG-04
Venezuelan President Hugo Chavez survived a recall referendum Aug. 15, garnering a 58 percent share of the vote and keeping his position for two more years. The opposition contests the results, claiming that it, not Chavez, won 58 percent of the vote. Chavez's victory marks the third time in as many years that the opposition has failed to oust him, and his rivals are running out of ways to contest his power. If the opposition is to have any chance of success, it will have to find a way to unite itself in time for the 2006 presidential election.

Turkey Offers 'Solution' to Caucasus Tension
Turkey's prime minister recently visited Georgia, proposing a potential solution to the ongoing crisis. If it is implemented, which is quite possible, it would mean a Russian withdrawal from the country, but without a humiliating loss of face.

Shifting Power in the European Union
European Commission President Jose Manuel Durao Barroso announced his commission lineup Aug. 12 in Brussels. Germany received the industry portfolio and a commission vice-presidency, and the French commissioner got transport and a vice-presidency. The United Kingdom received a vice-presidency and the trade portfolio. Keeping Germany and France out of the top economic posts is Barroso's way of containing their influence over EU legislation. Giving the United Kingdom the trade post will help smooth relations with the United States.

Al-Sadr's Movement: More Than an Army
A U.S-Iraqi military operation launched Aug. 12 in an attempt to neutralize the Mehdi Army. The purpose of the operation is to deny radical Shiite leader Muqtada al-Sadr an armed force, but it does not seek to eliminate him. The offensive will not result in a political weakening of the renegade leader. It will alter the nature of his movement -- a high number of casualties would energize the public support, which al-Sadr could then galvanize in the form of protests as an alternative to an armed insurrection

Iran: Backed Into Al-Sadr's Corner?
Iran is nearing the crunch point at which it will need to decide to abandon its hopes for Iraq, or be prepared to face down the United States via an alliance with al Qaeda.

How Will Beijing Respond in Koguryo Debate?
The stakes are rising in the diplomatic dispute between China and South Korea over the ancient Koguryo kingdom after Seoul linked the issue with its ties to Taiwan. Beijing will likely make a reciprocal move in order to prevent other countries from bringing their relations with Taiwan into every diplomatic dispute they have with China.

-- posted by Normxxx

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» Normxxx - Choices and Echoes

Choices and Echoes

by Gary North | October 6, 2004

Forty years ago, Phyllis Schlafly wrote a little paperback book, A Choice, Not an Echo. That was the year of the paperbacks, which marked the arrival of conservatism: Haley’s A Texan Looks at Lyndon and Stormer’s None Dare Call It Treason.

Today, four decades later, the choice is between Skull & Bones Member A and Skull & Bones Member B. Some choice.

This year, it’s Yale vs. Yale. In 2000, it was Yale vs. Harvard. Some choice.

Over the last four years, the stock market has gone nowhere. The official, on-budget Federal deficit has soared. The trade deficit has soared. The savings rate has tanked. Outsourcing is continuing. The nation is at war. What is the next President going to do about all this?

President Bush says "More of the same, but this time, it will work." Senator Kerry says "More of the same, unless I change my mind again, but this time, it will work." Neither man has offered specifics to prove that his strategy will make things better. In fact, the absence of specifics is the hallmark of this election.

When you hear no specifics, you can be sure of one thing: the specifics are either unbelievable, or scary, or irrelevant. This creates uncertainty. Uncertainty is bad for the stock market.

The fact is, the world economy is beyond the ability of politicians to shape, short of nuclear war. The more interdependent the economy is, the less influence that politicians in any nation possess to gum things up or make things better.

I HAVE GOOD NEWS AND BAD NEWS

The good news is that we are seeing the erosion of state power. It is happening slowly. Politicians gain votes by promising to make things better. The fact is, there is very little they can do to make things better. What is even more amazing, there is progressively less and less they can do to make things worse.

The state’s loss of economic influence, one way or the other, upsets the socialists who write the textbooks. They prefer to ignore it. Meanwhile, the loss of state power seems unbelievable to anti-socialists, who have spent their lives battling the socialists who write the textbooks. They cannot admit that the system of government spending is in autopilot mode, no matter who wins elections.

Here is the amazing fact: if Hillary Clinton is elected in 2008, it won’t make much difference in the way the economy works. The Federal government’s influence over markets is steadily declining because of the growth of world trade and the free flow of capital across borders. This process is unlikely to be reversed. It is going to accelerate.

To say such a thing is anathema to political conservatives, who think politics really does matter, and also to political liberals, who think Hillary really would make a difference. When compared to the difference that Franklin D. Roosevelt made, Hillary Clinton is an echo, not a choice. The election of Hillary Clinton would make far less difference than the three-time non-election of William Jennings Bryan.

This means that the Federal government cannot protect most Americans from the economic consequences of their individual actions. This is bad news for socialists, who believe in the creative power of the state. It is also bad news for people who are not able to compete economically.

As a reader of odd-ball economic reporting, you are not among the broad masses of people who go about their daily lives in a kind of trusting fog, hoping for the best, and unaware of larger trends around them. You are probably able to compete. Your job is not on the line, and even if it is, you are flexible enough to jump ship before it sinks.

But for tens of millions of American voters who still think that politicians are in a position to protect them from economic forces that seem to threaten them, a Presidential election year offers what they think is hope. The bad news for them is that it doesn’t. Yet that is really not bad news. It’s very good news. But it takes economic understanding to recognize this.

I think Jacques Barzun and Martin van Creveld have got it right: we are seeing the decline of the nation-state. Barzun, who has been writing for over six decades, argued in the Epilogue to his masterpiece, From Dawn to Decadence (2000), that the state can no longer defend its citizens from rising crime. It will go bankrupt when the bills come due for state-funded retirement and medical programs. Van Creveld made the same two points in his 1999 book, The Rise and Decline of the State.

Voting will not reverse this process. That’s good news. But it’s bad news for those citizens who have bet their economic futures on the ability of the state to deliver what the politicians have promised.

This year, neither candidate has promised much. The specifics are not there. Bush is going to make us safer, somehow. Kerry is going to save American jobs, somehow. Bush is going to make the Middle East more democratic, somehow. Kerry promises the same, somehow. And every day, there is another car bombing.

Car bombings are highly specific.

THE NAME OF THE GAME

Every four years, American voters are given the opportunity to decide who will be President for a four-year term. Voters have no direct control over the real political rulers of America: five Supreme Court members. A five-to-four decision by the Court is the court of final appeal. Voters are not part of this decision-making procedure.

Similarly, voters have little control over the House of Representatives. Of the 435 seats, only about 30 are up for grabs every two years. The incumbents are overwhelmingly favored. State legislatures have gerrymandered the districts so as to guarantee the re-election of most Congressmen. This pleases incumbent Congressman because it guarantees their future. The fact that this process reduces the voters’ choice is quietly hailed as the way to go by incumbents. It also frees up donors’ money for Senate races and the Presidential race.

The Senate is up for grabs these days because of the Republicans’ paper-thin majority. So, to the extent that the voters possess marginal influence over the outcome of politics, the Presidency and a few tight races for the Senate are where the action is.

The gigantic size of the Federal bureaucracy, with its predictable and ever-expanding budget, is barely affected by politics. The bureaucrats in fact rule America. Unless challenged by a combination of all three branches of government, with budget cuts to match, the day-to-day operations of the national government are not going to change. Over 1.2 million civilian employees are protected by Civil Service laws. Union representation and in-house bureaucratic traditions protect most of them from suffering negative consequences for their actions. A President can hire and fire only a few hundred of these people. The faces at the top change every four years or eight years. The actual operations of these bureaucracies change little. Every year, another 80,000 pages of fine-print regulations are promulgated in the Federal Register. The system keeps rolling along. Voters have nothing to say about it one way or the other.

Choice? No. Echo? Yes.

THE VOTERS ARE CATCHING ON

Interest in politics is constantly declining, all over the economically developed world. The percentage of eligible voters who actually vote is constantly declining in nation after nation. One by one, voters conclude that their input does not matter, that no matter who they vote for, the system will not change significantly. They ask themselves: "Why bother to vote?"

The answer is not what we are told in high school, let alone college: voting is a religious act. This was understood by the ancient Greeks, who regarded political life as central to religious life. But in a society that promotes the separation of church and state in the name of the separation of religion and politics, it is not politically correct to admit the truth, namely, that exercising the franchise is an act of promoting one’s religion, i.e., one’s worldview. It means picking up a ballot instead of a gun, so that people you approve of will possess the lawful authority to pick up a gun in your name.

This is what politics is: the right to decide who picks up a government-provided gun and then tells other people what to do or not do. We can fool ourselves as voters by refusing to admit this, but when push comes to shove, and political issues seem to be life-and-death issues, we go out and use our ballots to make sure that "our guys" have control of the guns.

So, the name of the political game today is two-fold: (1) to distract voters’ attention from the hard reality of politics, namely, that it’s all about who controls the biggest guns; (2) to convince swing voters that the party’s program is best for them, which really means that the party’s appointees can be trusted with the guns. No candidate is willing to admit in public that he and his agents intend to stick guns in the bellies of the political losers, but this really is the plan. When a politician says "Trust me," he means, "Trust me to use the gun on that guy over there, not you." He’s lying, of course. He intends to stick the gun in your belly, too.

Voters are beginning to figure out that the guns will be used on them, no matter who is elected, and there’s not much they can do about this. How does a patriot act today? He takes off his shoes before boarding a plane. "Your photo ID, please."

The bureaucracy holds the guns, and no President can do much, one way or the other, to prevent the bureaucrats from using these guns in a way that is convenient to them. The system is too large to control. Bureaucrats respond to only one pressure: the threat of a budget cut. Because modern politics is all about increasing the budgets of bureaucracies, there is no believable threat facing the bureaucrats with the guns.

Voters therefore stay home on election day by the tens of millions. They respond rationally. They regard their time as valuable. They know that the vast bureaucratic bog is unaffected by politics. They can be motivated to come out and vote only by promises of significantly more goodies from the system at the expense of the losers. But because they have learned that taxes keep rising and regulations keep increasing, no matter who is elected, they don’t show up at the polls.

THE ART OF DECEPTION

Politics is the art of deception. A politician who tells the truth is more likely to scare voters than excite them with a vision of meaningful change. Kerry wins; Dean loses. The parties fear one thing above all else: to scare the swing voters so badly that they come out and vote for the other party.

Both parties have most of their reliable voters in their hip pockets. When you are in someone’s hip pocket, expect to be sat on. Your interests will be sacrificed for the sake of the quest for uncommitted swing voters.

This is why there are so few ads on TV for Kerry and Bush in states where the polls indicate that the outcome is assured. Most of the TV ad budgets are allocated for a few swing states. You want to know how important your state is, or your block of your party’s vote is? Follow the money. Check the ad budgets. (This is not easy.) As of mid-July, four states had received big chunks of the money from both parties: Ohio, Iowa, Missouri, and Wisconsin. Seven states were at the bottom: Arkansas, Michigan, Minnesota, Oregon, Washington, and (amazingly) Pennsylvania.

This allocation process is rarely discussed publicly because neither party wants to tell its core voters that their interests are marginal to their party’s elite. The interests that count are the undecided swing voters’ interests in those states where (1) there are a lot of electoral votes at stake and (2) the polls indicate a very tight race.

These swing voters are undecided because they are not sure if they will benefit, net, from the guns in the hands of the bureaucrats if this party or that party is victorious. The Presidential candidates therefore try to say things that pull in swing voters. They avoid saying things that would pull swing voters to the polls to vote for the opponent.

This means that candidates avoid specifics. The more specific a promise, the more specific the price tag. The more specific the price tag, the more this will tend to scare voters, who are aware that taxes are more predictable than fulfilled political promises are.

"Who will pay for all this?" Above all other questions, this one is the one politicians prefer to avoid. Everything they do is designed to obscure the answer to this question. It’s why candidates seek to avoid offering solutions. They do not publish detailed position papers on how they intend to distribute the bills.

The distribution of the bills is the central question facing politicians today. The public has learned from experience that political promises are unlikely to be fulfilled. This is why candidates do not propose specific new programs. They are content to promise the fulfillment of existing promises. Bush’s prescription drug benefits for Medicare represent the first major new welfare program in three decades. He did not campaign heavily on this platform in 2000.

The specifics that we as voters need to hear are related to the central political question: "Who will pay for all this?" Problem: swing voters will come out in droves to stay off this list. This is why the candidates campaign on generalities. No politician ever says, "You’re on this list for this percentage of the bill." That’s because he fears the wrath of those on the list, which always includes members of his core constituencies.

WHAT THIS MEANS FOR INVESTORS

If Kerry wins and the Democrats take the Senate, this will be meaningful for a few treaties and a few Supreme Court confirmations. The Kyoto Treaty on carbon dioxide emissions might be confirmed under Kerry, if the Democrats win the Senate. But maybe not. Democrats in rust belt manufacturing states probably will vote against confirmation.

The Supreme Court and the Federal courts are said to be a reason to vote for Bush. This same Republican argument pops up every cycle. There is truth to this. Politics is conducted in the courts more than in the legislatures, contrary to what the Constitution’s Framers expected. But the Republican appointments to the Court have not been inspirational.

For investors, it is more significant what the central bank of China does than which candidate is elected President in November. A world economy is beyond national politics. There are major players, of course. The United States is the major player, with China and Japan also very powerful. This is well known, but psychologically, investors tend to forget.

We have moved into a new economic world in which political parties are constrained by past promises and present budgets. Discretionary income is marginal. Economic power has moved decisively toward market forces and central bank policies. Bond markets and currency markets have more influence than political parties do. Clinton’s political operative, James Carville, said it best. He said he wants to be reincarnated as the bond market, because that’s where the real power is.

Economists like to say that economic change takes place at the margin. Short of major wars, so does political change. Swing voters in swing states must be catered to. A political party that goes too far in proposing policies that swing voters perceive they will be expected to pay for will suffer a defeat.

The result is mush-mouth politics, gridlock, and a refusal of politicians to face the looming reality of the Social Security/Medicare bill, which must be allocated.

We hear that "this is the election of the century." This is nonsense. Roosevelt/Landon, maybe. Roosevelt/Parker, probably. Not Kerry/Bush.

The new President will have to play ball with the bond market. This pressure is going to increase over the next four years. Carville is right. This is where the power is in a world with no gold standard.

The biggest problem is Iraq. If the bond market starts to fall, getting out of Iraq will become top priority. Getting the Federal budget under a semblance of control will then be the #1 priority.

So far, this Administration has not faced this pressure. It is unlikely that the next Administration will be so lucky.

CONCLUSION

America’s economy is becoming less and less dependent on the Federal government. The Federal government is 25% of the economy, but the economy is more and more part of the world economy. This is good news for liberty. The bond market responds to international economic pressures more than it does to a President’s whims.

Stocks may rise because of a reduction of political uncertainty. But political uncertainty is minor compared to central bank uncertainty.

This means that voting has become marginal economically. The voters perceive this. Defenders of democracy may wail in despair at the refusal of voters "to do their civic duty." Their wailing will do no good. Neither James Carville nor I hopes to be reincarnated as the Electoral College.

-- posted by Normxxx

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» Normxxx - China Dumps Dollars

AMERICA'S ADDICTION TO ASIAN CREDIT
China Dumps Dollars for Oil & Gold

Todd Stein & Steven McIntyre, The Texas Hedge Report | October 15, 2004
Courtesy of http://www.texashedge.com

<img src="http://www.321gold.com/editorials/texash...">

Safeguarding one's access to vital natural resources such as oil and gas is crucial to nation's long-term prosperity. But telling soldiers and their families that they are fighting in part to protect against the threat of $10.00/gallon gasoline is not exactly good for morale or public relations. Protestors chanting "No blood for oil" would have a field day if the White House press secretary made an announcement such as, "Good news, the Baghdad Museum has been looted, 1,000 American troops have been killed, but we have secured 90% of Basra's oil fields."

Skeptics would tell you that part of the reason why American and NATO troops remain in Afghanistan after overthrowing the terrorist-harboring Taliban is to get a foothold in the game for Caspian Sea oil. Whether or not you believe these skeptics, it is a fact that multinational energy companies have developed a renewed interest in building gas and oil pipelines linking the Caspian region with the lucrative international market of the Arabian Sea. This activity has worried the three large powers in the Central Asian region: Iran, Russia and China. All three of these countries have indirectly (or sometimes directly) supported America's enemies over the last three years with either military or financial assistance. While Iran and Russia have long supplied America's adversaries with arms, the fact that China has stepped up its efforts in this arena marks a disturbing trend.

China, which President Bush has called a "strategic competitor," will see its demand for industrial energy more than double over the next 15 years. China's electricity demand has doubled within the last decade and is likely to quadruple by 2019. Could China's recent shenanigans in the region be a small baby step for an energy-hungry power getting restless?

<img Align="Left" src="http://www.321gold.com/editorials/texash...">As can be seen from the chart, China was a net exporter of oil until about ten years ago. Today, China is the world's #3 consumer of oil behind the United States and Japan. Given its population and need for infrastructure, we can confidently predict that China will sooner or later overtake both nations and become the world's leading importer of oil, bringing it into conflict with the developed world.

China has already invested billions of dollars into pipeline projects in Central Asia and the Middle East and has strengthened its relationships with governments from energy-rich states. For example, China is Sudan's largest trading partner and the most important foreign investor in Sudan's oil industry. China National Petroleum Corporation has a 40% stake in the international consortium extracting oil in Sudan, and it is constructing refineries and pipelines, enabling Sudan to benefit from oil export revenue over the last five years. Recently, China deployed thousands of troops to Southern Sudan to protect its pipeline interests while Western oil companies have been withdrawing from the war-torn African nation. Sudan has been accused of using its oil revenue to purchase arms for its wars against its black African population in its Darfur region. In a classic example of realpolitik, China has threatened to veto a resolution that would consider U.N. sanctions against Sudan's oil industry if Khartoum does not stop the genocide. Could Chinese PLA troops in Sudan be a first step in China's growing expansionism throughout Eurasia?

Like Britain a century ago, the United States has greatly over-borrowed in an effort to control access to the world's energy supply and at the same keep its domestic economy firing on all cylinders. As competition for diminishing oil resources threatens U.S. dollar hegemony over world oil transactions, expect to see increased Chinese political and military presence in the Middle East. The presence of Chinese PLA troops in Sudan, in our opinion, marks the middle kingdom's entrance into the great game. China's next move could come in the form of massive dollar devaluation when they decide to unload their supply of accumulated greenbacks. China just recently released six billion of those greenbacks for its purchase of Noranda Mining -- Canada's biggest mining company. Keep your eyes open for stepped-up greenback dumping by China in exchange for natural resources such as oil-bearing properties or perhaps more mines. We predict that in the near future, Saudi princes will decide to denominate some of their oil transactions in Yuan (or at least something other than dollars) and invest their profits into shares of China Mobile or PetroChina instead of Citigroup.

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

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