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Washington’s Bear Hunt

From all the action coming out of the nation’s capital today, you’d almost think the various government entities in Washington coordinated efforts against the oil, dollar, and housing bears. Almost.

First, it was crude oil. Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” to scare off oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices. Doh!

Next, dollar bears were targeted. Reuters reported:

The dollar rallied Tuesday, after a Federal Reserve official suggested that U.S. rates may have to rise to stem inflation and a top Treasury official repeated that a strong currency is in the interest of the country.

Treasury Secretary Henry Paulson reiterated on Tuesday that a strong dollar is important to U.S. interests and the underlying strength of the economy, as well as policies aimed at shoring up confidence, would be reflected in currency markets. At the same time, Philadelphia Fed President Charles Plosser said rising inflation could force the Fed to start raising interest rates even before labor and financial markets recover.

Gold for August delivery dropped $15.20 to end at $948.50 an ounce on the New York Mercantile Exchange.

Rising interest rates? Strong dollar policy? Looks a lot like jawboning to me. But don’t take my word for it. On July 15, Reuters ran a piece about legendary investor George Soros. From the interview:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said. However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession. Soros said.

“Therefore, his options are limited — he is boxed in.”

And how many times have we heard about this supposed “strong dollar policy” of ours? Actions speak louder than words, right? Back on March 17, Soros’ former partner, Jim Rogers, said during a Bloomberg Television interview:

Now, please, do we even bother reporting that anymore? Poor Hank Paulson, had a reasonable education, and a reasonably-good career, head of Goldman Sachs, now he goes around the world making a fool out of himself. Goes around saying we want a strong dollar, the next day he goes to China and says we want a weak dollar, and then he goes to Japan and says we want a weak dollar. I mean, you have to feel sorry for the guy. At least, I do.

Finally, it was housing naysayers who fell under the gun. From the CNBC website this afternoon:

Treasury Secretary Henry Paulson said America’s housing market could turn a corner and begin recovering within months, but it will take longer to resolve all housing-related problems.

“Obviously, it will go on beyond months with some of the issues in the housing market, but I believe we can get to the point within months where we turn the corner on housing,” Paulson said in a televised interview with Fox Business Network.

Sound familiar to anyone? From my post “Paulson Weighs In On Housing” from July 2, 2007:

Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage 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.” Beyond subprime mortgage woes, Paulson declared that the financial markets looked sound. He said, “Markets are volatile. I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

DJIA down 1,933 points since then, S&P 500 down 243 points, global credit crunch, $453 billion of write-downs, Bear Stearns, IndyMac, Fannie Mae, Freddie Mac… surprise!

Sources:

“Dollar Jumps on Paulson, Plosser Comments”
Reuters, July 22, 2008

“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Paulson: Housing Market Could Turn Corner Soon”
CNBC, July 22, 2008

Weekend Videos

Just got back to blogging late Friday evening. Had to entertain my relatives from Canada who are in. Like the Irish a couple of weeks ago, they shopped liked it was Christmas in July to take advantage of the weaker dollar. I know one thing for sure. Foreigners sure love our “strong dollar” policy…

“Oil Crisis”
Becky Quick
CNBC, July 18, 2008

From the CNBC website:

The House may vote on releasing oil from the strategic petroleum reserve, with Senate Majority Leader Harry Reid and CNBC’s Becky Quick.

You can view the 3 minute 18 second video here.

Note to Congress- there is no quick-fix for the energy crisis. I’m starting to consider donating funds to Jim Puplava’s proposed program, “No Congressman Left Behind.”

Apparently, it’s a non-issue now anyway, seeing that after oil prices suffered their biggest weekly drop ever, Yahoo! Finance asks tonight, “So is it time to declare the energy bubble popped?” By the way, the Associated Press is reporting that terrorists are trying to enter the United States with European Union passports. Good thing Congress wants to deplete oil stockpiles meant for a national emergency. Like a major terrorist attack, for example. If you think 9/11 was a one-off event, I have a bridge that spans the East River out in NYC that I can sell you for a really good price…

“Is government clueless about economy”
Jim Jubak
MSN Money, July 18, 2008

From the MSN Money website:

Washington is talking us into a deeper crisis. Neither the President nor Congress gets it: When you owe as much as the US does, keeping your overseas creditors happy is the most important thing, says Jim Jubak.

You can view the 4 minute 7 second video here.

Jubak said in the segment:

The Saudi government has gone into serious discussions about taking its currency off the dollar peg.

“Christmas In July”
The Dandy Warhols, “Little Drummer Boy” (1995)
YouTube Video Link

How Irish Tourists Saved The U.S. Economy

“There’s someone I want you to meet this weekend,” my girlfriend told me in June. Her relatives were coming in from Ireland for a family reunion in Chicago. “He’s travelling with his wife and her sisters. Maybe you guys could hang out and talk some football [soccer].” I met Connor that Friday night at the Water Tower Place in Chicago (from what I could understand, he wasn’t married, yet he did travel with a young lady and her sisters). While the conversation revolved mostly around the “beautiful game” and my plans for the “Great Escape” the next day to watch some of Euro 2008, he happened to mention that since he’d been in United States, he and the “Walsh girls,” as they came to be known by reunion participants, had shopped, shopped, and shopped some more. It seemed that every time I asked about Connor’s whereabouts, “he and the Walsh girls went shopping” was the response I got. On Sunday, the reunion shifted to Arlington Park Racetrack for thoroughbred racing. I saw the Irishman at the start of the day after he had just won a race, but didn’t see him later on. More shopping, perhaps? In the days that followed, my girlfriend joked to her sister that the Walsh girls single-handedly saved the U.S. economy. She also mentioned that she felt bad for Connor, as did I, as he was forced to endure the seemingly-endless spending sprees at the Chicagoland malls. However, this remorse was short-lived when her sister informed her that Connor bought just as much stuff as the Walsh girls did.

Robin Sparkles, “Let’s Go To The Mall”
YouTube Video Link

Anyway, I read a blog post by CNN’s Jack Cafferty earlier today that reminded me of our “economic rescue” by these visiting tourists from the Emerald Isle. Cafferty provides commentary and insight for CNN’s political program “The Situation Room.” He wrote:

The U.S. dollar just isn’t what it used to be. In fact, the dollar has been declining in value for 6 years now against other major currencies.

And, if you look around, it’s hard not to see the signs: hordes of vacationing Europeans are picking up bargains in the U.S., while Americans traveling overseas are hit hard with sticker shock. Canadians now flock here for shopping bargains, instead of the opposite. A Belgian company is attempting a hostile takeover of Anheuser-Busch, the largest brewer in the U.S. If the takeover goes through, it might be the first of many foreign takeovers of American companies.

While everything made in the U.S. is so much cheaper to foreigners, Americans are paying more for imported goods, while most are also grappling with rising food and energy costs. Since oil is bought and sold in dollars, the devalued dollar makes gasoline that much more expensive for Americans.

Some even suggest the continued decline of the dollar could one day lead to it being replaced by the Euro as the so-called “primary reserve” currency. There are stores right here in New York that now accept euros as payment.

Meanwhile, the message from Washington doesn’t seem to change much. President Bush has often talked about his support for a “strong dollar”, just last week saying “We’re strong-dollar people in this administration.” Really, Mr. President? You have presided over the most precipitous drop in the value of our currency in our nation’s history.

Source:

“Concern about sharp decline of dollar?”
Jack Cafferty
CNNPolitics.com, July 2, 2008

Peter Schiff TV Appearances

Peter Schiff, author of the book Crash Proof: How to Profit from the Coming Economic Collapse, appeared on FOX News Saturday morning and CNBC Tuesday morning. Schiff told viewers of “Fox Bulls & Bears” that the downturn in the U.S. economy goes beyond a “slowdown.” He warned:

We’re already in a severe recession, and it’s going to get a lot worse.

Commenting on the poor performance of the U.S. stock market lately, the president of Connecticut-based Euro Pacific Capital said:

This is a bear market. We’ve been in a bear market since 2000. The market’s going a lot lower, not only in nominal terms, but in real terms.

Later on in the show, Schiff gave a timeframe for how long he thought the bear market would last. He told viewers:

We are in a secular bear market. It’s been going on for 8 years. It’s going to go on for another 5 to 10 years.

As to where investors may want to look at putting their money, the host of the weekly radio program “Wall Street Unspun” said:

It’s [oil] probably going up to $150…

And, you know, trying to catch a falling knife in the financials? They have a long way to go down. I wouldn’t touch them…

Look at gold. You want to see a good chart, look at commodities. Look at foreign currencies.

At the conclusion of the show, Schiff predicted:

Well, this week Bernanke said the economy was going to improve and inflation was going to moderate. He was wrong on both counts. The economy is going to get a lot worse. Inflation is going to get worse. And you’ve got to get out of the dollar. It’s going to fall at least another 10%.

FOX News Appearance
YouTube Video Link

On Tuesday morning, Peter Schiff appeared on CNBC’s “Squawk Box,” and responded when asked who was responsible for the financial mess the United States has found itself in by saying:

Well, first of all, it’s the government, and when I say the government, I also mean the Federal Reserve, that has artificially kept interest rates much too low in this country, and in so doing, they’ve encouraged a culture of consumption, of borrowing to buy things. In America, we borrow to buy houses, to buy cars, to send our kids to school, to remodel our houses, to take vacations. And what we’re seeing right now is the fact that we can’t pay any of this money back. And the lenders are cutting us off, and this whole bubble economy that we have is now deflating. But it never would have existed if we had honest money. If we were on a gold standard and we had higher interest rates, we would have been saving, we would have been producing, and we wouldn’t be in this mess.

Schiff shared his views about how to avoid a financial armageddon. He said:

We need to raise interest rates dramatically. What’s that going to do? It’s probably going to bankrupt most of the financials. It’s going to bankrupt a lot companies. We’re going to have to go through a big retrenchment because we basically spent ourselves into bankruptcy. But we can’t keep trying to reflate the bubble. That’s what the Fed is doing. That’s what the stimulus is trying to do. They’re trying to get us to spend more money. That’s the problem. We’ve spent too much. So, we’re going to have to live through a severe recession. If we keep fighting it, all we’re going to have is higher inflation, higher oil prices, higher commodity prices, and eventually, we’re going to get something far worse than just a severe recession. We could have hyperinflation and a complete destruction of our currency.

You can access the 7 minute 16 second CNBC segment here.

Sources:

“Fox Bulls & Bears”
FOXNews, June 28, 2008

“Squawk Box”
CNBC, July 1, 2008

FDIC Ads: Should We Be Worried?

Leafing through the June 30 issue of Time magazine, I stumbled upon an advertisement from the Federal Deposit Insurance Corporation, or FDIC…

For those readers not familiar with the FDIC, their mission, according to their website, is to preserve and promote public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

Now, the FDIC says the ads were meant to commemorate the seventy-fifth anniversary of its creation as an “independent agency” of the U.S. government. However, some suspect there may be an ulterior motive for the ad program. Keep in mind that back on February 26, I discussed in a post how the fourth quarter of 2007 was the worst bank and thrift performance since the fourth quarter of 1991, whereas the FDIC classified 76 banks as “problem” institutions for the quarter (up from 65 a quarter earlier). In addition, it was revealed that the FDIC was looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

Additional justification for the FDIC to roll out a “reassurance campaign” appeared in the following months. On June 5, John Poirier of Reuters talked about an appearance by Federal Deposit Insurance Corporation Chairman Sheila Bair on Capitol Hill, and wrote:

An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, Bair told a Senate Banking Committee hearing on the state of the banking industry.

“There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past,” Bair said. “Uncertainties in today’s economic environment continue to pose significant challenges for the banking industry, households, and bank regulators.”

So far this year, four small U.S. banks with deposits insured by the FDIC have failed, up from three in 2007. The agency last week boosted its list of troubled banks to 90, which have a combined $26 billion in assets.

Ironically, the FDIC ad I came across featured a photo of the $100,000 Series 1934 Gold Certificate featuring the portrait of President Wilson, the largest denomination of currency ever printed by the Bureau of Engraving and Printing. Nothing more comforting than seeing the words “insuring” and “protecting” next to the image of a U.S. gold certificate with the phrase “one hundred thousand dollars in gold payable to bearer on demand as authorized by law.” Too bad those dollars sitting in banks across the United States haven’t been backed by the precious metal since 1971, when President Nixon abandoned the Bretton Woods Agreement and effectively took the U.S. off the gold standard. As the U.S Treasury says on its website:

Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything.

Oh, Tricky Dick, what another fine mess you’ve gotten us into…

Source:

“UPDATE 1-Bigger U.S. bank failures may be coming – FDIC”
John Poirier
Reuters, June 5, 2008

BIS: World Economies Could Crash On Scale Not Seen Since Great Depression

I’m always interested in hearing what the Bank for International Settlements has to say. After all, it’s the bank for central banks. According to the London-based online publication Banking Times on June 9 (hat tip WhatReallyHappened.com):

The Bank for International Settlements (BIS), the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.

In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

Reporter Gill Montia talked about the bank’s warning of a “Next Great Depression” in detail. Montia wrote:

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

The report points out that between March and May of this year, interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future.

The Bank for International Settlements is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks around the world, including the Federal Reserve. Established on May 17, 1930, it is the world’s oldest international financial organization.

Source:

“Central bank body warns of Great Depression”
Gill Montia
Banking Times (UK), June 9, 2008

Gold, Greenbacks, And Government Intervention

I remember reading a rather significant article by MarketWatch’s Peter Brimelow last fall. As someone who follows precious metals religiously, I had already been aware of the claims made by groups such as the Gold Anti-Trust Action Committee, or GATA, that the price of gold is being manipulated. However, on October 18, 2007, Brimelow let “the cat out of the bag,” so to speak, for the readers of that particular Dow Jones website. Brimelow wrote:

Nevertheless, for the longer term, the gold bug faction lead by Bill Murphy’s LeMetropole Cafe Website is cockahoop. It has long argued that the metal’s price has been repressed by what it calls “The Gold Cartel” an alliance between the official sector (central banks, the U.S. Treasury) and chosen instruments (key investment banks and co-opted bullion dealers and others) to create a financial assets boom.

Reason for rejoicing: The discovery by James Turk of the Freemarket Gold & Money Report that, as Turk puts it: “the U.S. Treasury quietly made a subtle change to its weekly reports of the U.S. International Reserve Position, which includes the U.S. Gold Reserve. This change was first made May 14… It says the U.S. Gold Reserve is 261.499 million ounces and importantly, that the gold is now reported ‘INCLUDING GOLD DEPOSITS AND, IF APPROPRIATE, GOLD SWAPPED’ (emphasis added).

This description provides clear evidence that the U.S. Gold Reserve is in play. Gold has been removed from U.S. Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price-capping efforts. Gold placed on deposit gets loaned out by these bullion banks, and then sold into the spot market to try capping the gold price.”

Intervention, pure and simple as that. No, manipulation. Which, by the way, isn’t as conspiratorial as it sounds. Brimelow pointed out:

It may seem like an arcane point. But I remember when the idea that central banks were systematically selling gold at all was dismissed as crankishness. Yet it’s now universally acknowledged.

And why would Uncle Sam want to cap the gold price? The MarketWatch columnist wrote:

Turk’s conclusion: “This new evidence provided in the U.S. Treasury report as well as the rising gold price itself suggest to me that we are now witnessing the last scramble by the gold cartel to cap the gold price. It is a vain attempt by them, acting under the instructions of the U.S. Treasury, to make the world think the dollar is worthy of being the world’s reserve currency when in fact everyone knows that it is not. In short, the wheel has fallen off the truck. The dollar is heading for a train wreck. Use whatever metaphor you want, but the message is clear - the dollar is in serious trouble…

Fast forward to the present day. According to MarketWatch’s Laura Mandaro tonight, currency traders now suspect that American and European finance officials engaged in some “arm-twisting” at last month’s G7 meeting in an attempt to provide support to the U.S. dollar. Mandaro wrote:

Gains of 2% to 5% in the U.S. dollar from a key low point last month, combined with recent press statements from anonymous senior finance officials, have fostered suspicions that the group of industrialized nations backed up their public statements with some backdoor negotiations.

Madaro referred to an analysis of euro and dollar trades by Greg Anderson, head of foreign exchange strategy at ABN AMRO, which suggested “the U.S. and Europe may have pressured central banks from the BRIC countries– Brazil, Russia, India and China– and sovereign-wealth funds to temporarily stop converting 20% to 40% of their newly accumulated U.S. dollar-holdings to the euro.”

This pressure, along with signs that the European economy is struggling, could help explain why the greenback has stabilized. Mandaro suggested that analysts now suspect finance officials, especially from the United States, changed tactics around the time of the G7 meetings. The MarketWatch reporter wrote:

The Treasury Department, while officially supporting a strong dollar policy, had been content to see the dollar slide since it helps U.S. exports, analysts said. That laissez-faire approach seems to have changed in the last two months, as the U.S. government has seen the weak dollar help push up oil, agricultural and other commodity prices to record highs.

Disturbingly, some are making claims of direct government intervention in the market. However, Mandaro noted:

But many currency analysts say such a direct intervention is unlikely.

For one, the United States’ foreign exchange reserves are relatively small at about $75 billion, making dollar buy-backs little more than symbolic.

And the G7 statement, at least at the time, didn’t suggest a direct intervention was round the corner. The last time the U.S. dollar experienced a coordinated currency intervention, when European monetary authorities in September 2000 convinced other G7 members to support the then-depressed euro, the policy statement specifically mentioned the euro. This most recent time, the statement just mentioned exchange rates in general.

The United States doesn’t usually intervene: From August 1995 through December 2006, the United States only intervened twice in the foreign exchange markets.

“Last time.” “Doesn’t usually.” And what’s to say government intervention isn’t occurring this time around?

So much for the notion of “free markets.”

Sources:

“Gold bugs: ‘We told you so…’”
Peter Brimelow
MarketWatch, October 18, 2007

“Dollar rally, leaks put fresh focus on G7 meetings”
Laura Mandaro
MarketWatch, May 15, 2008

Next Stop, Depression?

Back on March 29, ABC News’ David R. Francis talked about the economic forecast of Robert Parks, a finance professor at Pace University and former chief economist at three Wall Street firms. So, what’s so special about Parks that ABC News would be covering him? According to Francis, Parks is predicting that there is more than a 60% chance the United States will enter into an economic depression.

Even though the Federal Reserve has been cutting interest rates to stimulate the economy, Francis wrote:

Mr. Parks, however, doubts the cuts will do much to boost the economy. Rather, he sees a further steep fall in housing prices, continued major deficits in the federal budget and in the international trade balance, a tumbling dollar, and a weak stock market leading to a genuine depression with 30 to 35 percent unemployment, greater poverty, more loss of homes, plunging bond and stock prices, even some starvation.

Mother and child during Great Depression

Source: FDR Presidential Library & Museum

He also noted that Parks says he has never predicted a depression before.

The economist thinks that it’s a mistake to rely on money supply growth to help alleviate present economic conditions. Francis wrote:

As Parks sees it, Washington and Wall Street are mostly counting on Fed additions to the money supply to revive the free market and right the economy.

“Automatic recovery is in no way a reliable concept,” he warns, especially if deflation (falling prices) has begun. He recalls warning of the economic damage that the bursting real estate and stock market bubbles would wreak in Japan: That nation suffered stagnation from 1990 to 2001.

Source:

“Are We Heading Into a Depression?”
David R. Francis
ABC News, March 29, 2008

The Failing Fed

Following through on a recommendation yesterday, I read the post “5 Reasons Why the Federal Reserve is a Failure!” from Bankaholic.com. It’s a great piece (especially the part about the Fed awarding gold stars to those deserving detentions), and I think you’ll enjoy reading it over the Easter weekend. Having obtained permission to re-post it, here is the article in its entirety:

No single quasi-private institution has as much influence on the worldwide economy as the Fed, and as a leader can head this institution for an indefinite term, no one man is as influential on the markets as the Fed Chair.

The Dollar has plummeted in the currency markets and shows few signs of recovery or even stabilization. The new style and policies that accompanied Bernanke into office have made the Forex markets more volatile than ever and even more difficult to predict. An examination of what has gone awry can help Forex traders understand this new era at the Fed.

1. The Fed ignored the signs
The Fed has stated that it will never act as a regulator in any financial market, but it has the duty to use its influence for reform when it sees signs of consumer exploitation. Since as early as 2001, at least two senior officials inside the Fed urged its board to call for tighter regulations in the housing markets, especially in abuses that were clearly evident in the handling subprime mortgages. At the time, the White House was singing the praises of America’s new society of ownership, so the Fed took this cue and did nothing.

These deceptive loans were making possible the dream of home ownership to millions of Americans, even to those who could not come close to affording it. Now these same Americans are living through a nightmare of foreclosure and debt, much in thanks to the Fed’s willingness to ignore long-term repercussions and revel in immediate accomplishments, no matter how hollow and transitory they might be.

2. The Fed did too little too late
Other than advocating for reform, the Fed should have fully committed to a strategy of lowering target interest rates. Instead, Bernanke procrastinated, and when he did finally announce a cut, it was insufficient and ineffectual, at best. On December 11th, the Fed dropped its benchmark rate by a quarter of a percent rather than the half of a percent that had been called for by analysts and investors. Wall Street promptly responded, as the Dow plummeted nearly 300 points in one day.

The Fed might argue that this cut was prudent and that a more drastic cut would have unnecessarily fueled a rise in inflation. However, many view the Fed’s temerity in this matter as merely an extension of its inertial proclivity towards inaction.

3. The Fed kept interest rates too low for too long
Though this may seem to contradict the statements above, one of the reasons that the Fed might have hesitated in cutting rates is that they were already too low to begin with. Greenspan’s long tenure at the Fed was defined by a tendency to aggressively cut interest rates, which he began to do frequently in 1987 after the drastic correction in the stock market.

This initial move helped stave off disaster, but the further rate cuts of the late 1990s eventually led to the dot-com bubble. Rates should have been raised again in the early 2000s; if this had been done, the US might have avoided the furious borrowing that has led to the current credit crunch.

4. The Fed’s view of inflation is flawed
The Fed seems rather befuddled by this important economic indicator. The soaring costs of food and energy are a phenomenon is the US and worldwide, but the Fed does not take these developments into account.

The Fed’s analysis focuses on “core inflation,” which excludes a number of indices that it views as transitory, including energy and food costs. “Headline inflation,” which does take these costs into account, is favored by European economists, who view high energy prices as a long-term trend. By choosing to disregard the rising costs of a barrel of crude oil and a bottle of olive oil, the Fed is ignoring reality.

5. The Fed gives gold stars to those deserving detentions
Fed policy following the recent economic slowdown has done nothing but reward those who helped caused it. The majority of financial stocks have suffered of late, and justifiably so. However, the Fed seems dedicated to bailing out even the worst of the perpetrators with the recent set of economic interventions that it has enacted.

While working to eliminate any downturn in the market might seem feasible for short-term success, it is a purely shortsighted endeavor that will hurt the economy in the long run. In order for a free market to truly exist, bear markets must coexist peacefully with bull markets. Unfortunately, the Fed has its bright orange vest on and is going bear hunting. This is a doomed outing, and one that is going to get us all hurt in the end.

Source:

“5 Reasons Why the Federal Reserve is a Failure!”
Bankaholic.com, March 15, 2008

Charting A U.S. Financial Crisis

I came across some excellent Wall Street Journal charts this morning which show how the present financial crisis in the United States came to be. Like that old saying goes, “A picture is worth a thousand words.”

Sources: WSJ Market Data Group, Federal Reserve, Dealogic, Equifax, Moody’s Economy.com, National Association of Realtors, St. Louis Federal Reserve, Dow Jones Indexes

Article Source:

“U.S. Mulls Next Steps in Crisis”
Bob Davis, Greg Ip, and Damian Paletta
Wall Street Journal, March 18, 2008

Paulson, Bernanke: Coin-Operated Boys?

This morning, Bloomberg interviewed commodities investor Jim Rogers from Singapore (Bloomberg video link here). The chairman of Rogers Holdings spoke with Bloomberg’s Rishaad Salamat over the telephone about the U.S. Federal Reserve’s actions to calm financial markets, JPMorgan Chase’s buyout of Bear Stearns for $240 million, and his investment strategy. While I talked about the legendary investor’s money-making recommendations in Boom2Bust.com’s sister blog, Investorazzi.com, Rogers also had plenty to say about U.S. Treasury Secretary Henry Paulson and the Bush administration’s “strong dollar policy,” as well as Federal Reserve Chairman Ben Bernanke and the fire sale over at Bear Stearns.

Henry Paulson

BLOOMBERG: Do you really think so? We’ve had comments of those still in favor of a strong dollar policy.
ROGERS: Now, please (laughing), do we even bother reporting that anymore? Poor Hank Paulson, had a reasonable education, and a reasonably-good career, head of Goldman Sachs, now he goes around the world making a fool out of himself. Goes around saying we want a strong dollar, the next day he goes to China and says we want a weak dollar, and then he goes to Japan and says we want a weak dollar. I mean, you have to feel sorry for the guy. At least, I do.

Ben Bernanke

(Following a discussion of the depreciating U.S. dollar)
ROGERS: I mean, look, the Federal Reserve has just in the last week spent about $230 billion taking on loans, house loans, mortgages, out of the system. This man Bernanke was never elected by anybody. I don’t know where he gets the audacity to spend $230 billion of our money to bail out a few friends on Wall Street. This is totally outrageous. He’s next going to be in his helicopter going around the world collecting rent payments from people. I mean, who gave him the authority to do that, to destroy the dollar, to destroy our currency, to essentially destroy the American economy? And nobody ever voted for the man. It’s just mind boggling to me.
BLOOMBERG: Jim, and what about—
ROGERS: And here he goes and gives more of our money to Bear Stearns so these guys can continue to drive around in their Maseratis. You know, the reason they did it this way was if Bear Stearns had to declare bankruptcy… You realize that Bear Stearns paid out billions, billions in dollars of bonuses in January. Six weeks ago. If he put them in, if he let them go into bankruptcy, they’d all have to send back their bonuses. This is what they’re doing. They’re doing this so that they don’t have to give back their bonuses. That’s why they didn’t put it into bankruptcy. Jamie Dimon’s got a great deal, because Goldman, because the Federal Reserve is paying for it. The Federal Reserve is using taxpayer money to buy a bunch of Bear Stearns traders Maseratis.

Ouch…

YouTube Video Link

Source:

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

New $5 Bill Comes Out Today

Today, a new $5 bill goes into circulation. The re-designed note still retains the portrait of Abraham Lincoln, the 16th U.S. President, on the front and the Lincoln Memorial on the back. As I write this, the Federal Reserve is shipping the bills to banks, which will then send them on to businesses and the general public.

While most Americans see the makeover as a good thing, others refuse to part with their present toilet paper.

Source: Baron Bob

I know, stick to my day job…

The Return Of Dr. Doom

In last Thursday’s post I talked about a Bloomberg interview with Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report. “Dr. Doom,” as the press likes to call him, had some dire warnings for the Bloomberg TV audience on the U.S. economy. On Friday, MarketWatch editor Barbara Kollmeyer caught up with Dr. Faber as he spoke to a group of financial planners. The topics? A worthless dollar, a helpless U.S. central bank, and “a dire situation in which investors have just a few avenues left to turn to,” according to Kollmeyer.

Dr. Faber, famous for advising his clients to get out of the U.S. stock market one week before the October 1987 crash, said, “We may now have a hostile environment for all asset classes, with the exception of some real estate and commodities,” and noted that ALL asset classes have been rising since 2002, which hasn’t taken place for 200 years. Faber warned:

The current synchronized global economic boom and universal all-encompassing asset bubble will lead to a colossal bust.

The Swiss-born investment analyst predicted that financial markets will suffer from enormous volatility, with 20% movements up and down commonplace. Kollmeyer wrote:

He heaps much of the blame for global troubles on years of expansionary U.S. monetary policy that had a flawed fixation on U.S. consumption rather than boosting capital infrastructure and spending. Federal Reserve Chairman Ben Bernanke and his colleagues are clearly backed into a corner now as they cannot tighten money policy without causing a collapse of the entire financial system, he said.

According to Faber, “Easy money and debt growth has had a diminishing aspect on U.S. economic growth – ‘zero hour’ may have already arrived.” He suspects the United States has been in a recession for the past four to five months. Yet, with all the bad economic news pouring in, the Thailand-based investment advisor believes that investors are still too optimistic. He said:

Sentiment is not that bearish. The mood has stayed optimistic and asset markets are still vulnerable.

True to his nickname, Dr. Doom told the financial planners in attendance that:

In the long term, the dollar is a doomed currency. It will go to zero.

According to Ms. Kollmeyer, this produced some “nervous laughter” from the audience.

I’m not too surprised…

Source:

“‘Doom and Gloom’ has just begun”
Barbara Kollmeyer
MarketWatch, March 7, 2008

Recession? Send In The Fashion Police

Hell must have frozen over. Who would have ever thought that fashionistas would be discussing such “mundane” topics as the U.S. economy and recessions— unless, that is, they were involved in the business side of things? Yet, I’ve started to detect some of this chatter in world of fashion. Of course, just the discussion of such issues is reprehensible to some. According to one fashion blogger:

So many writers spend their days viewing society with a cynical magnifying glass — and oftentimes, bloggers are the worst….

I feel overwhelmingly bad about the state of… politics, celebrities, fashion, the world, etc. Instead of rose-colored glasses, I feel like I’m viewing things through black lenses. And goth is not my style.

Whatever you say. But some are actively discussing the prospect of a recession, and its potential impact on the industry. Yesterday, Isabelle O’Carroll wrote in the blog “Catwalk Queen” that:

We’re nearing the end of the fashion season and disgruntled rumblings are already being heard about the clothes. Even from designers such as Prada who usually wear their eccentric hearts on their sleeves the mood has been conservative and dare I say it a little sombre as the spectre of a US recession casts a shadow over the fashion world.

The hype surrounding the so-called ‘credit crunch’ which has led to repossessions and increasing debt in the US has sparked fears of a worldwide recession. The weak dollar has prevented buyers from large stores such as Saks Fifth Avenue and Barneys attending London Fashion Week. “London designers are the icing on the cake,” said Averyl Oates, the fashion director of Harvey Nichols. “And these days no one needs extra icing.”

With the prospect of an economic contraction looming, how have fashion designers responded? By attacking the recession head-on with even more opulent shows and extraordinarily creative designs. You go, girl! According to the Associated Press on February 25:

Luxury brands pulled out the stops in Paris on Monday with creative displays designed to ward off fears of recession that have cast a pall over the retail sector…

Guests including “Cashmere Mafia” star Lucy Liu watched the parade, set in a tent in the Tuileries gardens against a spectacular set of cascading water.

The no-expense-spared bash was Dior’s antidote to a retail climate undermined by fears of a U.S. recession, rising energy prices and a weak dollar.

“When times are tough, the mistake is to throw in the towel,” Dior CEO Sidney Toledano told The Associated Press. “I always use this metaphor: when the kids are not hungry, you have to cook even nicer dishes to stoke their appetite.”

“When times are tough, models grab orange mocha frappuccinos”
YouTube video link

Lauren Goldstein Crowe wrote on February 5 in Condé Nast’s Portfolio.com that:

You’d never know there was a recession looming from looking at the shows. They’ve been more opulent than ever…

Retailers fight recession in a number of ways. But for those at the top of the heap — stores like Bergdorf Goodman or Harvey Nichols — the best plan of attack is to bring in the most special pieces possible. Averyl Oates, the fashion director at Harvey Nichols said that while they are keeping an eye on the number of pieces they buy at the 8,000 pound mark, it is by and large, their lower priced goods that suffer in recession. It’s simply too easy for people to trade down to the high street for their jeans and casual clothes. But once you’ve worn a feather-adorned designer gown, or gold painted coat, or giant fur collared jacket, you’re just not going to be happy at Zara.

Will the fashionistas be able to defeat that menace known as recession? Will the author of this piece ever update his grunge-era wardrobe? Stay tuned…