MarketVVizard's Market Thoughts

Top 890. Feb 9, 2004 1:09 PM

» MarketVVizard - Re: Re: Hussman

In response to message posted by azxcvbnm:

Another major wildcard that I have to keep in the back of my mind (when I think of shorting) is the currency factor. Faber talks a lot about this in his book (Tomorrow's Gold). The Dollar has been losing value over the last couple years. Lets say for example the dollar depreciated by 50% from here. The stock market (S&P) might rise 20% but you are still losing a lot of money as technically companies get "cheaper" in real terms. Total market caps can reach "bargain" levels in terms of gold or foreign currencies. This of course would imply run-away inflation -- something that is not considered likely by many reputable sources.

-- posted by MarketVVizard

Top 891. Feb 9, 2004 1:10 PM

» Normxxx - Re: Re: Hussman

In response to message posted by azxcvbnm:

Indeed. Japan is well ahead of us in the demographics derby and I wonder if we are not looking at our future in their 14 year plus downdraft. If so, Europe (recently touted by the stock market mavens as the place to be for 2004, should begin to go down about now.

Invest in the next generation; it may be all that we have left.

-- posted by Normxxx

Top 892. Feb 9, 2004 7:25 PM

» MarketVVizard - Mistakes Of Our Grandparents?

From ContraryInvestor

The Mistakes Of Our Grandparents?

The Mistakes Of Our Grandparents?...We hold the folks at the Bank Credit Analyst in relative high esteem for their quantitative skills. They are widely read among the institutional investment crowd, at least among those still taking the time to do some reading these days. A month or so back they put out their 2004 outlook. In very short fashion, they don't believe that any of the imbalances facing the economy or the financial markets will come home to roost in 2004. From our vantage point, that's pretty much consensus thinking right about now. They are believers that the great reflation in process as we speak will continue to reign the day and push both GDP and the equity markets ever forward. For the sake of the real economy and financial markets in 2004, we hope they are exactly correct. But what caught our eye in their outlook report were their comments regarding leverage. They began their basic dismissal of near term potential pitfalls of leverage with the following quote:

"Consumer short-term debt...is approaching a historical turning point. Having risen at an abnormally fast rate for ten years, it must soon adjust itself to the nation's capacity for going into hock...which is not limitless. Whether the rate of growth in consumer debt will slow down is no longer in question...it must slow down."

Sounds like something directly out of the modern day bear's manifesto, right? Those clever folks at the BCA go on to point out that what you see above was published in Fortune Magazine in early 1956. They additionally recollect further instances of bearish cries of wolf concerning system wide leverage in periods subsequent to that initial Fortune article sighting. The gist of their comments is that sounds of alarm over leverage have been going on for decades and at least so far, all calls for concern have been false dawns. We bring this up, because with the latest release of the Fed's Flow of Funds statement covering 3Q of last year, we again have the chance to update what we believe to be one of the most important pictures of the modern era. If we had to single out just one chart that we believe defines a generation and characterizes potential risk to the economy and the financial markets as a whole looking ahead, it would be the following. As you can see, the world today looks a whole lot different than it did when Fortune published the above quote in March of 1956, doesn't it? In fact, ironically enough, 1956 just about marked one of the lowest points for this relationship between total credit market debt and GDP in a century. Again, with all due respect to the ever-insightful folks at BCA, is now really the time to laugh off the foibles of history's debt obsessed worry warts? As investors, we always want to keep in the back of our minds the fact that broken clocks are correct twice a day.

We're not trying to pick on the folks at BCA by any means. There are plenty of pundits in the current environment who would concur wholeheartedly that leverage in our current system is manageable. As you know, so far that's been the case in the aggregate. Although household debt service payments as a percentage of disposable personal income rests at a record high as we speak, it's not wildly above levels experienced in the mid-1980's. Of course this line of thinking addresses current P&L issues and to a point ignores a separate issue that is the balance sheet. The collective household balance sheet, corporate balance sheet, and although not conforming at all to GAAP principles, the federal balance sheet. Leverage and credit expansion issues have been front and center with us for a good long time now. It's self obvious that we are living in a very special period of system-wide credit proliferation at the moment. Judging by the chart above, it has now become a period unique to US financial history.

Maybe more importantly, when looking at the chart above we need to realize that the spike in this ratio that occurred during the mid-1930's was not driven by a significant acceleration in leverage at the time. Rather, the graphical spike in the mid-1930's was brought about by a collapse in GDP during the depression. Fast forwarding to the present and the spike in this graph since the early 1980's has not been driven by a collapse in GDP at all. Quite the opposite, GDP has been expanding over the entire period since the early 1980's. The current spike in this relationship is indeed driven solely by significant acceleration in system-wide leverage. The two spikes in this graph have completely different root causes. Again, without sounding end of the world-ish, the current spike is potentially much more ominous in nature. Imagine what the current relationship would look like if GDP collapsed 30% (as it did in the depression).

There exists an old saying that people do not repeat the mistakes of their parents, but rather they often repeat the mistakes of their grandparents. We submit to you that this is important to remember not only from a broad social context, but also as it applies to the ongoing lessons being put forth by the financial markets each and every day. It's no wonder at all that cries of concern over excessive debt appeared in Fortune in the mid-1950's. Those cries were coming from folks with clear and direct memories of the late 1920's and 1930's. Leverage destroyed many a personal fortune as the economy collapsed in the 1930's. Today, piercing cries and worries over debt are really to be found in the bearish underground, not on the front cover of Fortune. As we reflect on the relationship in the chart above, we have to ask ourselves, are we repeating the mistakes of our grandparents?

Although a lot of folks continue to bemoan the fact that debt will ultimately be the death of us all, it's extremely hard, if not impossible, to attempt to pinpoint a level at which balance sheets become too overburdened and approach the point of collapsing on themselves. Especially as we live in a current environment absolutely characterized by excess liquidity generation. Much like Greenspan's bubble perception trouble of a few years back, we'll know system-wide leverage has become "too much" when servicing that debt inflicts observable pain and hardship. Certainly significant defaults would be a Greenspan-esque tip-off that we'd carried the party a bit too far, of course that will also be the time when trouble can no longer be papered over with a new round of lower cost credit. As with Greenspan's view of bubbles, we'll know leverage has become too much only in hindsight. From our perspective, quite possibly the key to ultimate resolution, or attempts at resolution, of the above charted relationship rests with interest rates. We suggest that possibly now more than at any other time in the modern period, US financial markets, aggregate corporate earnings, real assets and the real economy broadly are extremely dependent on the sustainability of low interest rates. We further suggest that our financial well being looking forward is not only significantly dependent on rates, but that possibly the US central bank is less in control of our interest rate and dollar value destiny long term than ever in its history as an institution. We bring systemic leverage up not as a prelude to an Armageddon discussion, but rather to suggest that looking forward, the financial flexibility of our entire system is possibly more limited that anything we have experienced in multiple generations. At least since our grandparent's generation to be specific.

Organic Fuel?...As we have watched the current headline economic recovery unfold over the last few years, we continue to assess the organic nature of the numbers advance. Hand in hand with the above chart, we need to focus on both organic and inorganic factors driving the current economy. In traditional economic recoveries, it is not uncommon at all to watch both the Fed and Administration act to initially stimulate demand through the lowering of interest rates, implementation of tax cuts, increasing government spending, etc. Hoping, of course, that any economic recovery will become self-sustaining as both payroll employment and wage gains accelerate. At least so far, the most important linkages between a stimulus led recovery and a self sustaining recovery, job and wage gains, are simply nowhere to be found. In good measure, the leverage you see in the chart above has been responsible for a big part of the advance in GDP over the past few years. In the following table, we lay out the nominal dollar growth in both real economic indicators as well as measures of credit acceleration over the period year-end 2001 through 3Q 2003. In essence we are looking at attributes of the most recent post recessionary period. Is the economy growing organically or not?

Economic Indicator	Nominal Dollar Growth (Year-end 2001 to 3Q 2003)

Total Credit Market Debt	$4.43 trillion
GDP	1.01 trillion

Household Mortgage and Consumer Debt	$1.42 trillion
Wages and Salaries	193 billion

Corporate Profits	$244 billion
Financial and Non-Financial Corporate Debt	1.90 trillion

The nominal numbers simply don't lie. Total credit market debt expansion has outstripped GDP growth close to 4.4 to 1. Household debt relative to wages and salaries has grown at a rate of 7.4 to 1. And corporate debt has grown just shy of 8 to 1 relative to corporate profits. To cut right to the chase, the numbers are clear on the fact that the economic recovery to date has been very significantly supported by meaningful acceleration in total credit market leverage, and implicitly by asset inflation in good part provoked by once in a generation lows in interest rates. There is no question in our minds that the Fed is completely aware of the importance of asset inflation in the current environment. In fact to suggest that the Fed isn't targeting asset values in its policies of the moment borders on complete naiveté.

Given that there has so far been zero net recovery in payroll employment since the end of the official recession, we assume that for the economy to continue its recovery trajectory ahead, interest rates need to remain low and asset prices (stocks, bonds and real estate) need to at least maintain their values, if not further expand in price. So far, the leveraging of inflated asset values system-wide is the horse that brung us as far as the current recovery is concerned. The table above tells us that there are very few organic vegetables growing in the GDP garden of the moment.

Weighing In On Interest Rates...We want to spend the rest of this discussion focusing on why our current economy and financial system may be more levered to interest rates than ever before in modern history. Interest rate issues go much deeper than simply acting as a catalyst for the current recovery. As we mentioned, US financial markets, aggregate corporate earnings, real assets and the real economy broadly are extremely dependent for now on the sustainability of low interest rates. It's much more than just households walking away from the mortgage refi game when mortgage interest rates pop up by half a point. Let's have a look at what we believe are very important systemic characteristics of the moment not being given enough attention by the mainstream.

THE STOCK MARKET

Starting from quite humble beginnings many decades ago, the financial sector is currently the largest sector-specific weight in the S&P 500, post the demise of the outsized S&P tech weighting over the last three to four years. There is no question that the rise of the non-bank financial sector has driven a fair amount of this sector weight expansion. We always like to check in on longer term S&P 500 sector weights given that reversion to the mean exerts such a powerful longer term gravitational force on financial assets of all kinds. In the modern era, the meaningful lift off in the ratio of credit market debt relative to GDP really began in the early 1980's. As we have mentioned too many times now, it's clear to us that we have literally lived through a period of generational change since the early 1960's with regard to the perception and use of leverage system-wide in the US. It just so happens that the lift off in the financial sector weighting within the S&P also began more than two decades back. From less than 5% of the total S&P in 1980, the financial sector now accounts for just shy of 22% of the total capitalization based weight of the S&P. A financial sector that is ultimately dependent on interest rates and rate spreads for its current profitability and forward growth prospects.

Quite simply, the potential forward total return of the S&P index as an investment has never been this dependent on the financial sector. A financial sector that has simply mushroomed during the greatest multi-decade bull market for interest rates in multiple generations. Moreover, as the broader economy and corporate profits faltered during 2000-2002, financial sector earnings came to dominate sector earnings power within the S&P. Even today, the financial sector produces more nominal earnings than any other SPX sector of the moment. As you can see, rising interest rates at some point will not just cause academic P/E multiple compression in stocks broadly, but will cut right into the earnings and stock price heart of the S&P's most important sector of the moment.

THE CORPORATE SECTOR

An article appeared in the NY Times last week proudly proclaiming that the "Debt-Heavy Economy May Be Too Jittery About (Interest) Rates". The author cited that by 3Q of last year, more than 70% of the debt of non-financial corporations was longer term, fixed rate debt, up from 60% in 1998. Corporate America has basically refinanced, right? We suggest this was a cursory analysis at best, and potentially very misleading as it applies to the forward sensitivity of corporate America to interest rates. We cover the US derivatives markets quarterly and have done so for years. It's a fact that interest rate swaps far and away make up the bulk of total derivatives outstanding in the US banking system. At last count, the notional value of swaps held by the big banks totaled in excess of $41 trillion. To suggest that interest rate swap vehicles have become important to the financial system, the corporate sector and real economy in the US is nothing short of an understatement.

Suffice it to say that interest rate swaps have become a key to modern corporate finance. CFO's across the land have taken meaningful advantage of the ability to "swap" longer term and higher cost fixed liabilities into lower cost, shorter maturity floating interest rate exposure. The ability of corporations to use derivative products to lower their total cost of capital has been a fantastic gift to corporate sector profitability and cash flow, and will continue to be so as long as short term interest rates remain low for a sustainable period. It's when the sustainability of anomalistically low short term rates ends that these contracts are going to have to be unwound and corporate cost of capital will rise by definition. The interest rate swap numbers make it clear that the macro balance sheet of corporate America is levered to short term interest rates as almost never before. As you know, in the economic recovery of the early 1990's, most CFO's were just getting up to speed on the academic concept of these vehicles as only a few adventurous souls were dipping their toes into the derivatives waters. In the early 1980's, swaps were still just that, an academic concept. We are convinced that in the current environment characterized by the widespread use of interest rate derivatives in corporate finance, total corporate balance sheet and P&L sensitivity to interest rate movements ahead is not to be dismissed as inconsequential. In fact, quite the opposite.

What we believe the author of the NY Times article may be missing is that even in a period of relatively low longer term cost of capital, many a corporation has still chosen to swap into floating short rate alternatives. A case in point is GE. A few years back Bill Gross at PIMCO pointed out the implicit risk in unbacked mega outstanding GE commercial paper. In response, GE issued a very large 10 year bond deal and took down some of its commercial paper outstanding at the time. In the press release that accompanied the longer dated bond issue, GE claimed that its total cost of capital would remain unchanged. This could only have been accomplished through a interest rate swap arrangement. Of course, on GE's books, you'll find the 10 year bond issue on their balance sheet, not the swap arrangement. There is no question that this technique has been repeated thousands of times over across corporate balance sheets during the last three to four years. How else would the chart above look like it does?

Lastly, we need to remember that the business of financing has become big business to corporations normally categorized as non-financial corporations. In fact, every time we hear someone characterize GE as an industrial conglomerate, we laugh out loud. Folks like GM have been making money on mortgage lending over the past few years as opposed to selling cars. Even hard core capital goods companies like CAT and Deere have finance subs that are definable profit centers. Without sounding melodramatic, we believe it's more than fair to say that corporate America has a very big stake in the sustainability of low short term interest rates looking ahead. In fact, dependency unlike any post recessionary period in modern history.

THE FOREIGN SECTOR

A few weeks back, the US Treasury released November 2003 numbers for foreign purchases of US Treasuries. As of October month end, the foreign community owned 41% of total marketable US Treasuries outstanding. As of November month end it was 42.2%. Will it be another 58 months or less until the foreign community owns all marketable US Treasury debt? Of course this is a sarcastic comment, but directionally the increase in foreign ownership of US Treasuries has been going straight up for the past few years literally by the month. When we broke apart the November numbers, 72% of total November Treasury buying came from five Asian countries - Japan, China, Hong Kong, Taiwan, and Korea. As you remember, in early 2003 the Fed threatened to essentially monetize US debt (buying bonds with money that was basically "printed" out of thin air) if deflation were to become a significant problem stateside. The Fed never had to make good on this threatened promise as Asia has been doing the job for them, deflation or no deflation.

We've focused on foreign exchange intervention in many a discussion and necessarily this has included an examination of foreign buying of US Treasuries in support of foreign exchange interventionist efforts. We won't go through another long explanation of the process by which this is happening in this discussion. You already know that a declining dollar has made foreign purchases of US financial assets of all types a losing proposition for some time now. But so far into this process, interest rates have behaved. The losses for the foreign community have really come in the form of exchange rate losses as opposed to absolute price destruction as a result of higher US domestic interest rates. A forward rise in interest rates would change this in a heartbeat. Of course what we don't know is how the dollar will react when interest rates eventually do rise meaningfully. Nonetheless, as we continue to move ahead toward the next interest rate up cycle, we do so with foreigners owning more US fixed income assets than ever before. For now, what this ultimately means remains to be seen. Maybe the foreign community will be completely content to suffer yet further losses in bond values as US interest rates rise. Or maybe a meaningful trajectory of higher rates will be the straw that breaks the proverbial camels back in terms of foreign support of US fixed income markets. In 2003, foreign holdings of US debt as a percentage of the total US debt market reached a new high.

Again, although we cannot forecast limits as to where the foreign community might eventually decide they simply own enough US fixed income assets, the following historical view of life does suggest that there might actually be a macro asset allocation comfort level at which the foreign community might undertake a small bit of asset allocation soul searching. In fact, we sure seem to be there right about now. As you can see, at least over the past three decades foreign holdings of US bonds as a percentage of total foreign holdings of US financial assets has not gotten much above the high 40's in terms of an asset allocation percentage.

Not only have anomalistically low interest rates been a big stimulant to our economy of the last twelve months or so, but low rates have also encouraged US households to continue to lever their own personal balance sheets to record levels in many cases. The foreign community helping to keep our domestic interest rates near four decade lows has allowed US consumers to extract record amounts of equity from their ever appreciating residential real estate. Ever appreciating for now. Has the kindness of strangers not only facilitated, but also helped deepen the very significant and meaningful financial imbalances both in the US and global economies? Killing us with kindness, if you will? Given that the foreign community now holds 42+% of US Treasury debt, we have the feeling that over the intermediate term the foreign community will have much more influence over the direction of US interest rates than will the Fed. Especially in terms of interest rates that apply to US consumers - intermediate to longer maturity rates. Slowly but surely as the years are passing, the Fed is ceding its true power over the domestic interest rate cycle to the global capital markets. Market participants can react in a short term manner to FOMC minutes all they want. Go ahead and rant and rave over every change of wording. But longer term the global capital markets are becoming our true interest rate master. More so now than ever before. At some point ahead, we are destined to live through a domestic interest rate up cycle with the foreign community owning more US debt than ever in history. Like it or not, in terms of the forward relationship between US interest rates and the willingness of the foreign community to finance US credit market demand for borrowings, it's a new era.

The factors we mention above are far from exhaustive in terms of detailing what we believe to be the very significant interest rate sensitivity of the broad US economy and financial markets of the moment. Yet these issues mentioned carry meaningful weight in our minds. It's not just that bond values will contract or equity P/E multiples will be pressured when interest rates ultimately start to rise. There is much more to be aware of when pondering the next US interest rate up cycle. Much more. We believe it will cut more broadly and deeply across the economy than possibly anything seen in the collective memory of the current generation. Just maybe, we should be asking our grandparents how they feel about the relationship between debt, the economy and interest rates. You remember, the same grandparents that probably paid cash for their first house.

-- posted by MarketVVizard

Top 893. Feb 10, 2004 5:40 AM

» Austrian - Re: Re: Hussman

In response to message posted by azxcvbnm:

The supply and demand issue is very real. I have a relative who wants to put money to work tax free to help educate my daughters. The best tax advantaged strategy is the 529 plan which mandates index investing in mutual funds. Such investment choices seems to offer an unnatural floor to the market reinforced by the marketing machine of the mutual fund industry. All of this buy and hold for the long haul is based on the academic concept of modern portfolio theory, which looks great looking back in time, but is a guess moving forward. Read JAPAN, deflation, wars, pestulance, terrorism, etc.

Like Hussman, I believe we are in a secular bear market with many years of treading water at best. Based on this belief (however erroneous) investing in a 529 plan, while tax deferred will be suboptimal at best and disasterous at worst. In my case, I am attempting to convince this relative that this avenue is really a dead end. Fraught with more risk potential than reward potential. As I've mentioned any number of times, I believe we are now in a secular bull market for commodities. Any significant investment should be made in this area for maximum reward for minimal risk.

Interestingly, because of the ERISA (retirement) laws which drive tax deferred savings into the markets, these funds are not really available for investments in new ventures via traditional banking mechanisms. Companies then have to leverage their equity and the bond market to access the capital markets. This changed the whole dynamic of modern banking leading to the new credit creation mechanisms we witnessed since the 1980s.

Related to savings. The government does not include retirement plans into savings calculations. This drastically understates the aggregate rate of savings in the US, which is still low or non-existent for the average American.

Regards,

-- Austrian

-- posted by Austrian

Top 894. Feb 10, 2004 5:53 AM

» Austrian - Housing

This, along with the abnormally low interest rates, would keep housing strong for a while longer. Probably creating a huge opportunity like the resolution trust when the economy suffers a significant downturn.

For the record, I think this is insane!

Regards,

-- Austrian

http://money.cnn.com/2004/02/06/pf/yourh...

Bill eyes zero-down mortgages

Ohio congressman unveils plan to let Federal Housing Administration offer no-down-payment loans.
February 6, 2004: 7:18 AM EST

NEW YORK (Reuters) - A congressional bill that aims to create federally insured no-down-payment mortgages for first-time home buyers was introduced this week.

Congressman Patrick Tiberi, an Ohio Republican and member of the House Financial Services Committee, sponsored a proposal that would allow the Federal Housing Administration (FHA) to offer a zero-down-payment product for first-time home buyers.

Lenders normally require a borrower to make a down payment for a mortgage as a financial cushion in case the borrower defaults.

The Tiberi-led bill, "The Zero Down-Payment Act of 2004" (H.R. 3755), was introduced Tuesday, the same day the Census Bureau said the home ownership rate hit a record high of 68.6 percent in the last quarter of 2003, equivalent to 72.6 million households which own their own homes.

FHA does not make loans directly to consumers. The agency insures mortgages that fit its standards so these home loans can be sold into the secondary market.

Normally, FHA requires a down payment that's at least 3 percent of the loan amount.

According to the Department of Housing and Urban Development, 150,000 people who otherwise would not meet current FHA standards would qualify for this type of zero-down-payment mortgage.

"A lot of consumers have the income to make mortgage payments and have a good credit record but can't overcome the hurdle of a down-payment," Kurt Pfotenhauser, senior vice president of government affairs at the Mortgage Bankers Association, said in a statement.

Under the proposal, families that qualify for no-down-payment mortgages insured by FHA would be charged a modestly higher insurance premium on their loans.

For example, on a $100,000 mortgage, a zero-down-payment family would pay about $50 a month more than a regular FHA borrower.

-- posted by Austrian

Top 895. Feb 10, 2004 7:17 AM

» Austrian - Europe G7 and Secular Shifts

Largely unreported in the domestic press German Chancellor Gerhard Schroeder resigned as the head of the German Democratic Party on Friday morning four hours before the start of the G7 meeting in Florida. The impact is subtle but profound, playing into larger secular shifts. Schroeder wanted to implement reform so Germany was less socialistic, with a smaller welfare safety net, more flexible labor laws, etc similar to the economic changes which occurred in the US in the late seventies and eighties. These reforms would lower German costs, increase flexibility, domestic consumption inevitably lead to a stronger economy. His resignation as chairman of his party indicates that German reform is dead. As Germany is the largest economy in Europe, this basically means EU reform is also dead. Statist and socialistic tendencies exist in three of the four largest EU economies Germany, France, and Italy.

Also not well reported is that Germany is in recession NOW. Germany is heavily dependent on exports for their economic strength. In a world saddled with debt and over capacity, their prospects for robust growth without reform seem dim at best.

The Euro is taking a dive, after Schroeder equated Bush with Hitler. The US basically told Europe to fix themselves and we would quit subsidizing their economies with a strong dollar policy. This led (among other reasons) to the firing of Treasury Secretary O’Neill and the hiring of Snow. Now the EU is in pain wanting the US to re-establish a strong dollar policy. This is not possible with the balance of trade deficit and federal deficits. A weaker dollar makes our goods more competitive in the global marketplace and makes EU goods more expensive, leading to increasing weakness in the EU.

EU Economy

The EU economy is weaker than advertised. The EU is constrained from stimulating their economies by the stability and growth pact (SGP), which basically says governments can not deficit spend over 2% of their budget. This means, unlike the US, which stimulates during times of economic weakness, the EU countries can not stimulate beyond the SGP. One could say the US Fed operates counter cyclically, stimulating when the economy is weak and tightening when there is strength. Based on the SGP, EU nations are constrained to operate in a pro cyclical manner, spending when times are good and not spending when the economy is weak. The SGP basically ties the EU hands to behave stupidly in a recession. While it is true that Germany and France have been in violation of the SGP the violations are not large enough to have a meaningful impact.

Between the Rock and the Hard Place

So the EU has weak inflexible economies, huge social welfare nets with no ability to stimulate due to the constraints of the Stability and Growth Pact.

The G7

The G7 meeting basically came out with a lame statement which meant different things to different people. The first key piece “We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and cooperate as appropriate. In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms.” This statement can be read in many ways, Japan says it does not apply to them, but China, EU is interpreting this means the dollar has fallen far enough, and the US has been silent, meaning the dollar drop will continue. The US is and has told Europe to goose step off. The markets ignored this statement as meaningless for good reasons.

The second important part of the G7 statement is “In our Agenda for Growth initiative, we emphasize supply-side structural policies that increase flexibility and raise productivity growth and employment.” This statement basically says countries in general and Europe specifically must reform from their socialistic bent to a more capitalistic bent Releasing economies from the yoke of Statist policies.

So what now?

The most likely outcome is fiscal and monetary stimulus by the EU and the death of the SGP and inflation targeting. This also hurts Ben Bernacke’s chances for becoming the next Fed Chair as inflation targeting is his baby. The impact of this action is that all major economies, US, Japan and EU would then be pursuing competitive currency devaluations. This should happen in the next 24 months, likely much sooner.

Transitionary phase

The transitionary phase will probably be volatile for commodities, gold and silver. Perhaps leading to mind numbing corrections as the Euro appreciates against the dollar. When it is realized what is happening the commodity correction will end.

Result

The secular shift into things really begins after the EU starts printing money. Gold and silver dissociate from the US dollar and begin to move up independent of US dollar valuation changes. This will lead to the next phase of the bull market in things and a gigantic opportunity.

Commentary

The more things change, the more they stay the same. This is history repeating itself with a slightly different twist. Competitive currency devaluations is the 21st century equivalent of the “Beggar thy Neighbor” policies of the 1930s.

Regards,

-- Austrian

-- posted by Austrian

http://www.compsych.com/jsp/en_US/conten...

Top 896. Feb 10, 2004 10:24 AM

» Austrian - Economic Recovery???

Self explanatory...

Reality of Financial Trouble Hits Hard for Employees, According to ComPsych
Calls for financial help are up 69 percent; 27 percent of polled employees report being 'one major setback away from financial disaster'

CHICAGO – Feb. 9, 2004 – Employees’ financial picture has worsened significantly since last year, according to ComPsych Corporation, the pioneer and worldwide leader in GuidanceResources® (employee assistance programs, managed behavioral health, work-life and crisis intervention services). Calls for financial help have risen 69 percent from 2002 to 2003, with the majority of calls related to debt, refinancing and failed investments.

In a Tell It NowSM survey, employees also reported a general lack of health in their financial picture. When asked how they would describe their financial situation, employees replied:
27 percent – I am one major setback away from financial disaster.
22 percent – I am worse off than last year, with less savings/income and more debt than before.
23 percent – I am about the same as last year, with no change in savings/income or debt.
22 percent – I am better off than last year, with more savings/income and less debt than before.
6 percent – I am in the best financial shape ever, with bountiful reserves and very little debt.

“Unfortunately, employees are grappling with the reality of unchecked spending,” said Dr. Richard A. Chaifetz, chairman and CEO of ComPsych. “Couples in particular are dealing with exploding debt as they try to maintain two-income lifestyles, even after one partner is laid off, or is working but underemployed.

“Many of these employees have been hit hard with the reality of their financial situation, and have called ComPsych’s FinancialConnectSM service for help. Through a combination of financial, legal and even marital counseling, we focus on providing unbiased information for getting individuals on the right financial track, so that their financial problems will not follow them to work.”

The survey was conducted from Jan. 12 to 26, 2004, receiving responses from employees of more than 700 ComPsych client companies nationwide.

-- posted by Austrian

Top 897. Feb 10, 2004 10:30 AM

» MarketVVizard - GDP/CPI games

We've talked about this before. I thought particularlly important were the warnings about TIPS which won't protect you against inflation (decline in the dollar).

QUOTES: Fleck: "In a social democracy with a fiat currency, all roads lead to inflation".

Sir John Templeton: "All currencies, not only the American dollar, but all currencies, always go down, mainly because of democracy. The voters will vote for a person who is going to spend too much, and so you have to expect all currencies to go down."

How the government manufactures low inflation
Some government data suggest computer and car prices, among many other things, are falling. But when was the last time you paid less for a car? Here’s why you should be concerned.

By Bill Fleckenstein

Please join me this week in a trip to the government department responsible for fun with numbers. Those D.C. statisticians may churn out their work with a straight face, but that doesn't mean we have to fall for it. Among the skeptics are Steve Milunovich of Merrill Lynch, Jim Grant of Grant's Interest Rate Observer, and, of course, yours truly.

In a recent report, Milunovich noted that the Bureau of Economic Analysis (BEA), whose job it is to compute the Gross Domestic Product each quarter, has "stopped reporting the real computer hardware shipment figure used to calculate real GDP growth, though it is still used in GDP calculations." The BEA, which is part of the Commerce Department, made this readjustment because it is "concerned the rapid price declines for computers made the figures misleading."

Let's stop and review the bidding for a second. Remember: GDP is the measure of goods and services produced in this country. The government decided that certain of its data series involved in calculating GDP were misleading. So, what did it do? Simply stop breaking them out. Makes sense to me; how about you?

This would be a humorous window into the lunacy of government calculations, were it not so important to many statistics. Regular readers of my daily column know that the magic of "hedonics" and all its attendant distortions is something that I have railed about for a long time.

Hedonics: 'miracle' tonic for an ailing economy For those of you who don't know, hedonics is the way the government transforms price declines into quality improvements. To wit, you buy a PC with twice as much power, so the government concludes that you really paid only half as much money for it. Hedonics is also the government's way of taking quality improvements and converting them into price declines when calculating the CPI. Sure, that brand-new Chevy you just bought cost 40% more than it used to, but it's a 40%-better car for a variety of reasons. So, the government says, the price didn't really go up. (I have oversimplified these examples, but you get the point.)

The idea behind the first case at least makes some sense, though the government carries it too far by acting as though improvements can be precisely measured. The problem with the second case is that those quality improvements are not voluntary. Since you have to pay the new price, it's sheer silliness to say that the price really didn't go up.

There are other ramifications as well. It turns out that the computer-spending component has materially warped GDP calculations in many of the last eight quarters. To put the numbers into perspective, from the second quarter of 2000 through the fourth quarter of 2003, the government estimated that real tech spending rose from $446 billion to $557 billion, when nominal spending only increased to $488 billion. That extra $72 billion represents the value the government imagines the improvement in computer quality is worth.

Now $72 billion doesn't sound like a huge amount in a $10 trillion economy, but at the margin, it makes a difference. And in fact, the contribution of this tech component to real GDP comprised about 12% of growth in the third quarter of 2003 and more than 30% of growth in the first quarter of 2003, i.e., a big chunk of the growth. Since real growth is a factor in the calculation of productivity and productivity growth, these statistics are also distorted.

Slippery CPI, iffy TIPs
Our government has admitted its Alice in Wonderland hedonic-adjustment exercise has produced numbers so distorted that it doesn't want to show them to you. Yet it continues to use the "analysis" and some of the data in calculations of real GDP, productivity growth and CPI calculations. This is one of the reasons I've never been a big fan of Treasury Inflation-Protected Securities, or TIPS. I have stated a million times that the government's calculated cost of inflation, in the form of the CPI, is a joke. So, I refuse to buy a security that's indexed to the CPI, unless the price of the security reflects my skepticism. TIPS may be better than straight bonds, but they're not as good as most people think. As you can see from these two examples, the government aims to cheat you in the calculation, and besides, TIPS don't protect you from a decline in the value of the dollar.

Grant on BEA balderdash
Further reason to be suspicious of all government data comes from the current issue of Grant's Interest Rate Observer, in which the ever-alert Jim Grant broke the story that "the Bureau of Economic Analysis is weighing a study to explore the merits of adjusting the prices of medical services for quality changes."

In other words, the BEA is considering the use of hedonics to lower the impact of rising medical costs on the CPI by subtracting the imagined value of quality improvements in medical care from the price we’re really paying. The government recognizes it has a problem with exploding health costs and is studying the use of that same quick fix which has "worked" when unwelcome rising prices have been an issue in other areas, i.e., to define the problem away. I would imagine that when the folks at AARP and organized labor find this out, they'll be up in arms. Maybe their clout can stop this nonsense before it gets even worse.

Take heed, enjoins Sir John
On a final note, I would like to share with readers a rather interesting comment that John Templeton, founder of the Templeton Funds, made to Paul Kangas during a PBS interview last Monday.

Templeton's quote will be instantly recognizable to folks who have read the longstanding header on my Web site, which echoes one of my most fervently held views: "In a social democracy with a fiat currency, all roads lead to inflation." (Readers of the Contrarian Chronicles may also refer back to my Nov. 17 column, "All roads now lead to inflation."

And now for Sir John's wisdom: "All currencies, not only the American dollar, but all currencies, always go down, mainly because of democracy. The voters will vote for a person who is going to spend too much, and so you have to expect all currencies to go down." In future columns, I'll have more to say about the dollar, the variables affecting it and why this should be of concern to you.

-- posted by MarketVVizard

Top 898. Feb 10, 2004 12:07 PM

» Normxxx - Re: Europe G7 and Secular Shifts

In response to message posted by Austrian:

No Austrian, as you can see, "Begger thy Neighbor" is still one or two steps away.

<img src="http://comstockfunds.com/files/NLPP00000..."

I missed German Chancellor Gerhard Schroeder's resignation (I bet Bush is happy). Is it for real? He seemed/seems to do it on a regular basis to whip the recalcitrants into line.

Excellent summary.

-- posted by Normxxx