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Jim Rogers: ‘Madman’ Bernanke Leading U.S. To Disaster

On Monday, Bloomberg caught up with legendary commodities investor Jim Rogers in London. Bloomberg’s Sal Giangrasso interviewed George Soros’ former partner, who told listeners that the September interest rate cut was “a mistake” which the Federal Reserve might repeat again on Wednesday. Rogers claims that the Fed does not care about the U.S. dollar and want it to decline. He also notes that despite their actions, long-term interest rates aren’t going down. As a result, Rogers says:

This is a disaster for the United States. I would urge everybody listening to your show to figure out ways to start getting money out of the U.S. dollar. I’m certainly doing it.

The chairman of Beeland Interests also had this to say about Federal Reserve chair Ben Bernanke:

I know that the mandate of the Federal Reserve was to maintain a sound currency. We now have a madman at the head of the Federal Reserve whose main goal, whose whole intellectual career is studying the printing of money. Now America has given him the printing presses and he is running them as fast as he can.

What are we going to do, Sal, when we have real problems in the economy? What are we going to do when the stock market is down 36% instead of down 6%? He’s going to be running those presses until we run out of trees.

Your can access the Bloomberg interview here.

Double-Digit Decline For Home Prices?

Tired of all the bad news coming out of the U.S. housing market? Me too. The Associated Press reported this weekend that many private economists are forecasting U.S. home prices, which exploded during the housing boom, will fall by around 10% before housing bottoms out late next year. Median existing home prices increased 54% during the boom which ended in late 2005.

According to David Wyss, chief economist at Standard & Poor’s, home prices have declined close to 4% from their peak set in early 2006, when measured with the Standard & Poor’s/Case-Schiller home price indices. Wyss predicts that before we see a turnaround in housing, prices will fall by 11%. Wyss is not alone when it comes to having a negative forecast. Even the National Association of Realtors is predicting the median home price will fall by 1.5% in 2007. Mark Zandi, chief economist at Moody’s Economy.com, predicts that median existing home prices will fall 10.4% (using the NAR gauge) before things get better. The Associated Press notes that these latest forecasts, if realized, would be “the biggest downturn in terms of prices since the Great Depression of the 1930s, when home prices dropped by about one-third.”

Economists stress that the projected fall in U.S. home prices must be seen within the context of a 54% price increase during a 5-year housing boom. According to Zandi:

We had a surge in investor demand, an explosion in the availability of credit and builders who became overly optimistic. All these things came together to whip the market into a frenzy, creating a huge bubble that is now bursting.

Throughout the 20th century, U.S. home prices consistently rose only about 1% a year (when adjusted for inflation) in response to rising incomes and growing population.

Buffett: “Fairly Significant” Chance For U.S. Recession

CNBC’s Becky Quick, who is a co-anchor on the morning program “Squawk Box,” traveled exclusively with Warren Buffett on his Far East tour. On their flight back to the United States, the legendary investor talked about the likelihood of a U.S. recession sometime soon. From the CNBC website earlier today:

Becky: Caterpillar suddenly looking a lot less optimistic about the economy, worrying about a recession itself. Does any of this become a game changer as we start to hear from more and more companies in the earnings season?

Warren: Well, we’ll find out. Business has slowed down some, not as much you might think. Unemployment has been very good but we won’t know that we’ve been in a recession until well after we’ve been in it. It could easily happen. A lot of the ingredients are there for it. I will guarantee you, you are young, in your lifetime you will see 6 or 7 recessions, probably. That is just part of capitalism. And I don’t know, I don’t know exactly when they will happen. I don’t know how deep they will be, but they will happen and sometimes they will be exacerbated in various ways by mistakes people have made in investment markets or maybe in the housing market or something of the sort. But that is just part of a market system. And you know, if I had to pick the chances that we are going into a recession, I would say they are fairly significant, but I don’t know anything that you don’t know.

As to the significance of a U.S. recession on the global economy, the “Oracle of Omaha” had this to say:

Becky: If the U.S. does go into recession, do you think it’s going to be the type of thing that catches around the globe like a cold? Are other economies going to get dragged into it?

Warren: Well, historically they’ve always said that if we get a cold, the rest of the world gets pneumonia or something. But, we are still very important in the U.S., and we are still very linked in many ways. But we aren’t as important as we used to be relative to the rest of the world.

In a post from last week, I noted how Warren Buffett is negative on the U.S. dollar and also feels the subprime crisis has another 6 months to 2 years to play out.

Sunday Edition: October 28, 2007

Alarm Bells For America

The freedom of the press is one of the great bulwarks of liberty, and can never be restrained but by a despotic government.
-Thomas Jefferson, 3rd U.S. President and Declaration of Independence author

In my 11 years of public sector employment, I worked with a number of civil servants who always placed the public interest first. Then again, I also had the displeasure of working alongside some incompetent and unprofessional individuals who looked out only for themselves. Thinking I had seen everything, I was upset to learn from the Washington Post this weekend that the Federal Emergency Management Agency (FEMA) staged a fake press conference last Tuesday as FEMA employees posed as reporters and asked questions, while real members of the press listened in on a telephone conference line and were unable to ask questions. According to the Post, FEMA announced the news conference about 15 minutes before it was to start, making it unlikely that reporters could attend. However, to “accommodate” the press a telephone conference line was set up so reporters could listen (but not ask questions).

During the briefing, Vice Admiral Harvey E. Johnson Jr., FEMA’s deputy administrator, called on questioners who did not disclose that they were FEMA employees. Johnson answered questions regarding the recent California wildfires with an emphasis on FEMA’s improved response since Hurricane Katrina in 2005. For example, one question was, “Are you happy with FEMA’s response, so far?” Johnson replied, “I’m very happy with FEMA’s response so far. This is a FEMA and a federal government that’s leaning forward, not waiting to react. And you have to be pretty pleased to see that.” After the stunt had been discovered, White House press secretary Dana Perino said on Friday that “it is not a practice that we would employ here at the White House. We certainly don’t condone it. We didn’t know about it beforehand… They, I’m sure, will not do it again.” I’m not so sure. According to the Salem-News (OR) yesterday, in 2005 a political operative was busted after asking President George W. Bush simple and easy questions while posing as a White House reporter.

This action was a little too Stalinesque for my taste. In present-day America, it seems the public interest is increasingly becoming subjugated to self-interest. For our purpose, let this incident serve as a reminder that the next time you hear “don’t worry, be happy” from Washington or Wall Street when it comes to our economic health- be wary. Do your own research, filter out the “noise,” and make up your own mind.

Washington and Wall Street will continue to pursue their best interests, which may not always be the same as yours and mine…

Chicago Immune To Housing Woes?
Last Thursday, the Illinois Association of Realtors announced that the average price paid for an existing home in the Chicagoland area rose 5.9% in September. On Friday evening, four members of the local media appeared on “Chicago Tonight” and discussed the topic of “Slumping home sales unnerve the real estate market here.” One of the guests, Daniel Miller, business editor of the Chicago Sun-Times (number ten U.S. newspaper based on daily readership), said that if you’re a prospective homebuyer in the Chicagoland area- now is the time to buy. One of the other panelists nodded his head in agreement with the comment. In this morning’s real estate section of the Chicago Tribune, a piece made reference to a recent report from the Headrick-Wagner Consulting Group out of Naperville, Illinois, that says Chicago home values increased 2.8% from last year.

After seeing all this, am I supposed to believe that Chicago is immune to the housing woes afflicting other major metropolitan areas in the United States? Or, are these guys just reminding the world why we’re called the “Windy City”? (Note: some believe Chicago got this nickname not because of the weather, but rather Chicago politicians and their propensity to “blow a lot of wind.”)

Here’s what I know. Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, told the Wall Street Journal last Thrusday that home values, as measured by the S&P/Case-Shiller U.S. National Home Price Index, are likely to fall about 7% this year and a similar amount in 2008. The Journal’s quarterly survey of housing-market conditions in 28 major U.S. metropolitan areas shows that inventories of unsold homes are still rising in most of them, prices are generally falling, and overdue loan payments are piling up. This applies to Chicago as well. The most recent data for the S&P/Case-Shiller Home Price Indices shows that U.S. home prices in major cities were falling at their fastest rate in 16 years. For 10 major cities (including the Chicagoland area), home prices fell 0.6% in July and were down 4.5% in the past year, the sharpest decline since 1991. Robert J. Shiller, Chief Economist at MacroMarkets LLC and a creator of the index, said on September 25 that:

The decline in home prices clearly continued into the summer months. The year-over-year decline reported for the 10-City Composite is the lowest since July 1991… The further deceleration in prices is still apparent across the majority of regions, with 16 of the 20 metro areas showing a drop in their annual growth rate from what was reported in June.

Focusing solely on Chicago, from June to July home values increased 0.1%, according to the S&P/Case-Shiller data. This followed a rise of 0.2% from May to June. However, when we look at the previous 12 months, the value of a Chicago home declined by -0.9%. According to the Wall Street Journal, housing inventory in the City of Chicago also increased 5.4% year-over-year in September.

My own research leads me to believe that the Chicagoland residential real estate market is not as rosy as some would like you to believe. This may be due to my use of the S&P/Case-Shiller Indices. Back in February, O. Emre Ergungor, an economist at the Federal Reserve Bank of Cleveland, said, “Despite their potential weaknesses, the Case–Shiller Indices are still an improvement over other house price indices commonly cited in the media, one published by the Office of Federal Housing Enterprise Oversight (OFHEO) and another by the National Association of Realtors (NAR).”

As Daniel Miller said, it is a buyer’s market in Chicago. Just not right now, or else you’ll probably lose money.

Parting Shot
CNBC talked to Swiss investment analyst Dr. Marc Faber on October 22 about the U.S. economy. Faber is famous for advising his clients to get out of the stock market one week before the October 1987 crash. Discussing the outlook for the U.S. housing sector with Dr. Faber, CNBC said:

Manhattan is the great exception to U.S. trends, continuing to rise in price even when strong U.S. regions show signs of decline. But Faber says that in the bigger perspective, New York property is as vulnerable to a credit bust as any major metropolitan areas, such as “Hong Kong, Zurich and Frankfurt.”

His real-estate advice: “Buy a farm and learn to drive a tractor.”

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

More Pain At The Pump

Back in the late nineties, I picked up a used Toyota Corolla. I was driving about 30 miles each way to work at that time, so I needed something economical. My logic was (and still is), if it gets me there and back safely, that’s all I care about. Yet, my buddies never stopped “reminding” me that I drove a “piece of crap.” Of course, most of them drove SUVs (I’d driven every Jeep model since the late eighties ‘til that time, and wasn’t impressed). It’s been a while since I’ve talked to those guys, but I wouldn’t be surprised to see them crying at how much it costs to fill up their urban “tractors” these days. And some analysts are predicting more pain at the pump to follow. Earlier today CNN Money said experts are predicting U.S. drivers will see $3 gasoline before the new year. The all-time high of more than $3.18 was reached back on May 18, 2007. One of those interviewed, Stephen Schork, publisher of industry newsletter The Schork Report, declared that, “$3 gasoline in this market is unavoidable. At this rate, we’re going to see $4 a gallon.” Even with oil around $90, U.S. drivers have been pretty lucky. AAA said that the national average price for gasoline this month has risen barely one cent from $2.81 in September. But some analysts think this is all about to change. While the refiners are paying top-dollar to acquire the more expensive crude, they haven’t passed along the extra costs to consumers…yet. Kevin Norrish, a commodities analyst at Barclays in London, told CNN Money, “That doesn’t seem sustainable,” and predicts that refiners will likely scale back gas production- just as demand picks up for the holidays. Schork thinks that a lack of refining capacity will lead to a “struggle” to produce both gasoline and heating oil, resulting in the importation of more gas during the holidays. With the tumbling U.S. dollar, he notes that this will be an expensive undertaking.

In last Sunday’s post, I talked about how the national average for self-serve regular unleaded gas was up 4.92 cents per gallon over the previous 2 weeks to $2.80 a gallon, according to the latest nationwide Lundberg survey of about 7,000 gas stations. Survey editor Trilby Lundberg told Reuters last weekend:

While gasoline prices moved up just under a nickel in that period, crude oil prices are up the equivalent of 18 cents per gallon. That missing 13 cents and more will probably turn up at the pump and soon because it represents margin squeeze over months for refiners, jobbers and retails — those who make, deliver and sell gasoline.

Lundberg also predicts the average price of gasoline will exceed $3 per gallon in the coming weeks.

Ouch. If prices at the pump get really nasty, you may see a next-generation SUV on a road near you…

Two-Thirds Of Americans See 2008 Recession

According to a Bloomberg/Los Angeles Times survey taken of 1,209 adults between October 19-22, 65% of those polled say they expect an economic recession in 2008. 51% of respondents said the economy is doing poorly at the present time, as opposed to 46% who are more upbeat about our economic health.

The present outlook is the gloomiest since February 2003, according to Bloomberg. As recent as June did 57% of survey respondents think the U.S. economy was doing well. Poll respondent Roger Sharp, a 63-year-old retired procurement analyst from Milwaukie, Oregon, said, “I’m starting to think there’s a good possibility of recession. The housing industry is driving the economy down and people are starting to get laid off from jobs that have been around for a long time.”

Such negativity was reflected in today’s release of the Reuters/University of Michigan consumer index, which indicated consumer sentiment fell in October from the prior month, reaching its lowest level since May 2006. Richard Curtin, director of the Reuters/University of Michigan Surveys of Consumers, told MarketWatch today, “Each downward step in confidence increases the probability of recession, which is still below 50%, but not comfortably so.” Falling home values, higher food prices, and higher fuel prices are expected to make consumers “much more cautious spenders,” according to the survey.

Buffett The Dollar Slayer

When E.F. Hutton, er, Warren Buffett speaks, people listen. The “Oracle of Omaha,” the legendary stock market investor now worth $52 billion according to Forbes magazine in March, told reporters during his first trip to South Korea that he expects the U.S. dollar to weaken further. Buffett said, “We are still negative on the dollar. We bought stocks in companies that are earning their money in other currencies,” while visiting a Berkshire Hathaway subsidiary in that country. “We are gaining foreign currency exposure that we like,” Buffett added. The dollar fell against its major counterparts earlier today, after a larger-than-expected decline in the durable-goods orders for September increased market expectations of an interest rate cut by the Fed.

The 77 year-old investor also weighed in on the subprime mortgage crisis in the United States. Buffett said that the subprime problem could last anywhere from another 6 months to 2 years.

Warren Buffett has been negative on the U.S. dollar for quite some time now. If you recall, back on June 14 I talked about his outlook for the greenback:

On October 26, 2003, Warren Buffet wrote a piece for Fortune entitled “Why I’m not buying the U.S. dollar.” Although a little dated, this article, and Buffett’s subsequent bet against the dollar, gives us insight as to where Mr. Buffett thinks the U.S. dollar and economy are going. Buffett said, “I started way back in 1987 to publicly worry about our mounting trade deficits — and, as you know, we’ve not only survived but also thrived. So on the trade front, score at least one ‘wolf’ for me. Nevertheless, I am crying wolf again and this time backing it with Berkshire Hathaway’s money.”

According to an October 18 Reuters article, Buffett bet more than $21 billion against the U.S. dollar amid concerns over mounting U.S. trade and current account deficits.

Hide And Seek

Kudos to MarketWatch, as I didn’t encounter the following anywhere else in my research today. A congressional report conducted by the Joint Economic Committee said that 2 million subprime-mortgage foreclosures will occur by 2009 if home values continue to decline. The report also estimated that $71 billion in housing wealth will be eliminated, and the states will lose $917 million in property tax revenue. Joint Economic Committee Chairman Senator Charles Schumer (D-NY) and other lawmakers used the findings as ammunition in their attempts to convince the White House to step up foreclosure prevention counseling, let Fannie Mae buy more loans, and encourage loan servicers to work out modifications with borrowers.

Back on June 5, I talked about some of the foreclosure projections in my post for that day. To recap:

Based on a survey of the nation’s 100 largest real estate markets, HousingPredictor.com predicts that at least 2 million residential properties will be foreclosed within the next two and a half years. Another study by the Center for Responsible Lending predicts an even worse scenario. This non-profit organization, which focuses on abusive lending practices, is forecasting a total of 2.4 million foreclosures nationwide. The figure exceeds the 2 million homeowners thought to have been created by the housing boom (2 million being the most optimistic estimate).

As you can see, the JEC numbers are not that far off these earlier projections. It is estimated that there are approximately 80 million homeowners in the United States today.

Jobs Pull A Houdini

Back on October 5 when the latest U.S. employment numbers were released, President George W. Bush praised the September data and declared the revisions added up to 49 consecutive months of employment growth, the “most on record for our country.” Pretty impressive, I thought, although I questioned what kind of jobs ware actually being created. And then I read the BusinessWeek piece on Yahoo! Finance last night, which said:

It’s official. This is the worst year ever for layoffs in the U.S. financial-services industry — and there’s still more than two months to go.

Party poopers. Anyway, Chicago-based outplacement firm Challenger, Gray & Christmas reported that as of this month, finance companies had announced 130,000 job cuts for the year to date. This number is more than double the 50,000 cuts announced in 2006 and way ahead of the previous record of 116,000 back in 2001. BusinessWeek said fallout from the subprime mortgage crisis and from risky corporate bonds and loans are the culprits undermining the finance companies.

Back on October 4, I talked about how job losses in the mortgage industry were rising sharply. According to an Associated Press article from October 3, mortgage lenders had accounted for nearly 70,000 layoffs from January to September. In the same post, I noted that Bloomberg had predicted on September 10 that close to 100,000 mortgage company jobs would be eliminated in 2007. Been there, done that. According to the BusinessWeek article, almost 80% of the job cuts took place in the last 2 months. Disturbing.

Alarmingly, the pink slips in the financial services industry aren’t stopping with the mortgage companies. According to last night’s article:

The job cuts have spread well beyond brokers in the subprime mortgage business, though. Senior mergers-and-acquisitions bankers, financiers, and traders are getting the ax, too. On Wall Street, losses stemming from a liquidity crisis (BusinessWeek.com, 9/17/07) are leading to the first major job cuts since 2003.

Experts believe that job cuts in investment banking are about 10% of the workforce so far. However, just this evening MarketWatch is reporting that Bank of America is cutting roughly 3,000 jobs and launching a strategic review of its investment banking business after recent poor performance from the unit.

More to come?

Jim Rogers Dumps His Dollars

Tonight Bloomberg is reporting that legendary investor Jim Rogers is shifting all his assets out of the dollar and buying other currencies, including the Chinese yuan, Japanese yen, and Swiss franc. Rogers told a crowd in Amsterdam gathered for an investors’ meeting organized by ABN Amro Markets that:

I’m in the process of — I hope in the next few months — getting all of my assets out of U.S. dollars. I’m that pessimistic about what’s happening in the U.S.

The 65 year-old commodities guru is forecasting that the Chinese yuan will quadruple in value over the next decade, while the U.S. dollar continues to lose value. According to Rogers:

It’s the official policy of the central bank and the U.S. to debase the currency.  The U.S. dollar is and has been the world’s reserve currency, the world’s medium of exchange. That’s in the process of changing. The pound sterling, which used to be the world’s reserve currency, lost 80 percent of its value, top to bottom, as it went through the whole period of losing its status as the world’s reserve currency.

The greenback has been falling for more than 5 years now. While the U.S. dollar lost 8% of its value last year against a basket of foreign currencies, it is already down another 7% to date.

Seeing that Rogers is pessimistic about the economic prospects for the United States, what are his feelings about bonds, a traditional safe haven? He said the bull markets in bonds and stocks are “over,” according to Bloomberg, and that “Bonds will be a terrible place to be for many years and will in fact be going down for many years.”

Such warnings from George Soros’ former partner are not new. Back on June 14 I talked about some of Jim Rogers’ forecasts, which included his thoughts about the potential for a U.S. recession. In that post, I brought up an iTulip interview with Rogers from April 3, 2007, where he predicted a recession would occur soon. Rogers had this to say:

I see a recession, and for a variety of reasons. Automobiles are in recession. Housing is in recession. There’s been an inverted yield curve for a while. You have a slowdown in business spending. The subprime mortgage and junk bond markets are a disaster happening or waiting to happen in the financial area. There are plenty of things going on. Plus we’ve had recessions every four to eight years since the beginning of time, so there’s nothing unusual about the fact that we’re about to have another one.

Peak Oil

How much do you know about “peak oil”? I first became familiar with the term back in 2005 while reading Jim Rogers’ Hot Commodities on a plane bound for San Francisco. Real disturbing stuff. Peak oil is the theory that the worldwide production of oil has reached or is about to reach its zenith, after which production levels will decline. Investors such as Boone Pickens, chairman of Dallas-based BP Capital LLC, and analysts like Matthew Simmons of Houston investment bank Simmons & Co. International support the peak oil theory. Optimists claim peak oil won’t occur until between 2025 and 2040.

Today, the German-based Energy Watch Group released a study that shows global oil production peaked in 2006. The report, which is entitled “Crude Oil: The Supply Outlook,” said that world oil production has already peaked and will fall by half as soon as 2030. It warns that extreme shortages of fossil fuels will lead to wars and social upheaval. Official industry estimates put global reserves at about 1.255 gigabarrels, or the equivalent of 42 years’ supply at the current rate of consumption. However, the Energy Watch Group believes that the true number is about two-thirds of the official estimate. Furthermore, while global oil production is currently about 81 million barrels a day, EWG expects that to decline 7% a year to 39 million barrels by 2030. The group predicts a significant decline in gas, coal, and uranium production as well. Hans-Josef Fell, the founder of EWG and the German MP responsible for the country’s support system for renewable energy, told The Guardian (UK) on Monday that, “The world soon will not be able to produce all the oil it needs as demand is rising while supply is falling. This is a huge problem for the world economy.”

Here are some notable excerpts from the report:

The major result from this analysis is that world oil production has peaked in 2006. Production will start to decline at a rate of several percent per year. By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame.

The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life.

The International Energy Agency, anyway until recently, denies that such a fundamental change of our energy supply is likely to happen in the near or medium term future. The message by the IEA, namely that business as usual will also be possible in future, sends a false signal to politicians, industry and consumers – not to forget the media.

Sunday Edition: October 21, 2007

Something Wicked This Way Comes
It was only a matter of time before prices at the pump went up with oil hovering around $90. According to the nationwide Lundberg survey of about 7,000 gas stations, the national average for self-serve regular unleaded gas was nearly $2.80 a gallon on October 19, up 4.92 cents per gallon in the past 2 weeks. Survey editor Trilby Lundberg told Reuters this weekend that:

While gasoline prices moved up just under a nickel in that period, crude oil prices are up the equivalent of 18 cents per gallon. That missing 13 cents and more will probably turn up at the pump and soon because it represents margin squeeze over months for refiners, jobbers and retails — those who make, deliver and sell gasoline.

At $2.80 a gallon, gas prices are 60 cents more than at this time last year. The all-time high of more than $3.18 was reached back on May 18, 2007. High gas prices act as a drag on the economy. The more they rise, the more consumers have to spend on fuel and the less they have to spend on other goods and services, which drives the U.S. economy. Lundberg noted that the average price is likely to exceed $3 per gallon in coming weeks.

G-7, G-Whiz
Talk about sending the wrong message. The Group of Seven (G-7) finance chiefs ended their weekend meeting without offering verbal support for the U.S. dollar.
The G-7 consists of the United States, Japan, Germany, France, Britain, Italy and Canada. G-7 finance ministers meet several times a year to discuss economic policy. While the officials urged China to speed up appreciation of the yuan, it did not comment on the prevailing dollar weakness against other currencies, most notably the euro. Analysts have said this silence was largely expected, since U.S. leaders are hoping a weakened currency will boost American exports and reduce the massive current account deficit. Yet, should the decline in the dollar’s value continue to accelerate, foreign investors may sell their dollars and move their cash into other markets where interest rates are rising and whose economies appear better off. The American economy will suffer. An Associated Press article from September 25 talked about such a scenario:

If foreigners’ buying habits change, that could have a broad impact on financial markets- and U.S. consumers, too. For instance, if they sell their U.S. Treasury holdings, or don’t buy new government bonds or notes, then Treasury prices will go down and yields will go up. That will likely send mortgage rates higher since they are pegged to the 10-year Treasury note. That could unravel any good that has come from the Fed’s rate-cutting action and put the economy in a precarious spot. It makes you wonder why this administration isn’t doing more- or anything- to help the dollar.

Currency traders interpreted the silence as meaning official attempts at propping up the greenback are unlikely, according to Reuters earlier today. Michael Woolfolk, senior currency strategist at The Bank of New York Mellon, said “The G7’s statement effectively gives a green light to continue selling the dollar.” Traders may refocus this week on slower economic growth in the U.S., high oil prices, and the housing slump. Phyllis Papadavid, currency strategist at London-based Societe Generale, told Reuters that, “There’s acknowledgment that the fundamentals in the U.S. economy aren’t up to scratch at the moment, and in that regard the dollar isn’t in the clear.”

The greenback has been falling for more than 5 years now, and recently hit a new low against the euro and 26-year low against the pound. While the U.S. dollar lost 8% of its value last year against a basket of foreign currencies, it is already down another 7% to date. Still, Washington claims to support a strong dollar policy. On October 16, U.S. Treasury Secretary Henry Paulson said:

In terms of the upcoming G7 … the strong dollar is in our nation’s interest. I have said repeatedly that, and currency values should be determined in competitive markets, based on underlying economic fundamentals.

Actions speak louder than words, Mr. Secretary.

Follow Through
In a post from last Thursday, I talked about how overseas private investors sold a record amount of U.S. securities in August. According to the U.S. Treasury Department earlier in the week, the total holdings of equities, notes, and bonds fell a net $69.3 billion, after an increase of $19.5 billion in July. The outflow from U.S. assets was a record high and the first since the financial market crisis back in 1998.

You may be interested to know that former Federal Reserve Chairman Alan Greenspan said in a speech earlier today that the recent performance of the U.S. dollar may be tied to overseas investors unwilling to buy more U.S. debt. Speaking from Washington, D.C., Greenspan said, “Obviously there is a limit to the extent that obligations to foreigners can reach.” According to Bloomberg, the popular, yet controversial, economist noted that the dollar decline may be “an indication America is approaching this limit.”

Parting Shot
Back on July 2, I wrote about U.S. Treasury Secretary Henry Paulson and his views on the troubled U.S. housing sector:

The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.”

In my August 1 post, I talked about how Secretary Paulson felt that housing’s economic fallout was contained:

According to Reuters, “Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was ‘largely contained,’ despite losses in a number of financial institutions and a long period for subprime issues to move through the economy.”

Fast forward to October 16. The former Goldman Sachs chairman had this to say to Georgetown University’s law school:

But let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.

Good grief…

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Foreign Investors Dump U.S. Assets

In the midst of the credit market upheaval, overseas private investors sold a record amount of U.S. securities in August. According to the U.S. Treasury Department on Tuesday, the total holdings of equities, notes, and bonds fell a net $69.3 billion, after an increase of $19.5 billion in July. The outflow from U.S. assets was a record high and the first since the financial market crisis back in 1998. The previous record decline of $21.2 billion took place in March 1990.

The monthly net Treasury International Capital System (TIC) flows, which include non-market flows, short-term securities, and changes in banks’ dollar holdings, revealed an outflow of $163 billion in August, compared with an inflow of $94.3 billion in the prior month. Private investors overseas led the outflows, selling a net $141.9 billion in U.S. assets in August.

According to the Wall Street Journal yesterday, official holdings are of greater importance to the foreign-exchange market, given their massive size. Foreign official holdings in Treasuries fell by a net $29.7 billion. The Journal noted that the TIC data “gave no indication that central banks are shunning the greenback in any significant fashion.” Yet, the two largest holders of U.S. Treasury securities reduced their holdings in August. Japan, the largest holder of U.S. government debt, decreased its holdings by $24.8 billion (4%). China, the second-largest holder of Treasuries, lowered its holdings by $8.8 billion (2.2%).

The sell-off of U.S. assets came at a time when China, South Korea, and Qatar joined Singapore and Norway in setting up sovereign wealth funds to invest excess foreign exchange reserves from export revenue to improve returns. Robert Rennie, chief currency strategist at Westpac Banking in Sydney, told Bloomberg yesterday that, “Asian central banks are becoming more conscious of increasing returns. We’re seeing moves to create sovereign wealth funds, which by definition suggest a structural shift away from Treasuries.”

Are We In A Recession?

That’s what nearly half of Americans are saying, according to findings released on Thursday from a CNN-Opinion Research Corporation poll. The National Bureau of Economic Research, which officially dates the beginning and end of a U.S. recession, explains that:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

46% of the 1,212 Americans polled said that the United States is currently in a recession, marked by a significant decline in economic activity. African-Americans were more apt to say that we’re in a recession, compared to 42% of Caucasian-Americans.

Personally, I don’t know if we are at that point in the game just yet. However, the danger of such a negative outlook on the U.S. economy lies in its ability to affect our purchasing decisions. Decrease consumer spending, and you increase the probability for an economic recession in the United States.