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Quotes For The Week

A hat-trick of quotations for you…

The rejection of the package is good because it shows that some people in the U.S. are still sane. A bailout will not buy the U.S. a way out. The government is less powerful than markets in fixing this mess.

-Marc Faber, in a September 30 phone interview with Bloomberg

Sometimes I think we need to put out an ad: “No, we don’t have any more jobs than you do.”

-Jodi Royal-Goodwin, the redevelopment agency director for Reno, Nevada, in response to an influx of homeless people coming to the city looking for jobs

Altogether, we have had eight years of no gains in real median wages, flat stock market returns, and minimal net new jobs. Despite what you have heard, after adjusting for debt spending, population growth and realistic adjustments to the GDP deflator, there have only been 3 or 4 quarters of GDP growth since 2005. If you adjust for military, government and minimum wage positions – i.e. jobs funded by tax payers and jobs that don’t pay anything - there have been absolutely no net new jobs. Bush’s largest gains have been with inflation, oil and food prices, debt, trade deficits, bankruptcies, foreclosures, and healthcare costs. If an assembly of the world’s leading economic strategists were to design the most destructive economic disaster possible, they could not match the results of Bush’s tenure. Even the most loyal Bush supporters will admit he has been an absolute disaster – that is if they’re being honest.

-Mike Stathis, Managing Principal of Apex Venture Advisors and author of America’s Financial Apocalypse, in a Market Orackle (UK) piece from September 14

Pollyanna Creep

Once in a while, I’ll refer to individuals who are overly-optimistic as Pollyannas. The term comes from the 1913 children’s novel Pollyanna, which is about a young girl of the same disposition. You’ll know them when you meet them. Their favorite song is Bobby McFerrin’s “Don’t Worry, Be Happen.” In case you’re still a little hazy about the concept, here’s a good example of a Pollyanna in action. Just last week, when all hell was breaking loose on Wall Street, there was a comment on a Chicago Tribune piece which basically said, “Don’t worry, this will pass, it’s all just part of a cycle, the U.S. economy will soon recover and boom again, yada, yada, yada…” Which sounds great— if you believe in a financial system that is devoid of evolution (or de-evolution, for that matter.)

Now, there are some who believe that the U.S. government suffers from something called “Pollyanna creep.” Richard Siklos of The Globe and Mail (Canada) wrote last week:

That’s the dark thinking behind what is known as “Pollyanna creep,” a phrase coined by an economist named John Williams. Mr. Williams, who lives in California, runs a website called Shadowstats.com that trades in the idea that some key U.S. government statistics have become so optimistically misleading as to become essentially useless…

Over the past few years, some of Mr. Williams’ views on economic indicators - the consumer price index in particular - have been echoed by more well-known investment community figures such as bond investor Bill Gross, strategist Stephen Roach, and James Grant. “The numbers are misleading, and Wall Street uses the numbers to help sell their products,” says Mr. Williams, whose chief bugaboos include GDP and unemployment rates.

“Recently, I’d contend that what we’ve been getting is absolutely junk on the GDP,” he adds, despite recent official figures that GDP grew 3.3 per cent in the second quarter, after a small increase the previous quarter. “There’s no question that we’re in a recession, and probably have been in one since the last quarter of 2006. It didn’t start with the housing mortgage crisis.”

According to Mr. Williams, all the big measures have had their methodologies revised over the past few decades to paint the U.S. economy in the best possible light - and this has occurred regardless of which party was in the White House. However, he says, changes in methodology were always spelled out at the time - with rationales for doing so - so it’s not as though this has gone on in the dark of night.

Williams isn’t coming way out of left-field with his allegations. Back on June 9 Elizabeth MacDonald of FOX Business talked about a new book by Kevin Phillips, a political and economic commentator for more than three decades and onetime Nixon strategist, and wrote:

Monkeying around with government data started in the early ‘60s, Phillips says, during the John F. Kennedy administration. It appointed a committee to weigh changes to unemployment data, at a time when unemployment was soaring.

Out-of-work Americans who had quit searching for jobs–even if this was because none could be found–were then labeled “discouraged workers” and excluded from the ranks of the unemployed, though they were previously classified as such, Phillips notes.

In fiscal year 1969, the Johnson administration, with Congress’s blessing, orchestrated a “unified budget” that chucked in taxpayers’ Social Security funds with the rest of the federal budget, a change that let the government get its mitts on taxpayer Social Security funds for the very first time to use for all sorts of spending programs, including pork barrel projects.

The move, though, masked emerging deficits in Social Security funds, as taxpayer funds that were drawn down were replaced with treasury bonds, essentially more government debt.

Next, President Richard Nixon asked his Federal Reserve chairman Arthur Burns, to concoct a new inflation number that would be split off from traditional headline CPI, dubbed “core” inflation, Phillips says.

This new-fangled “core inflation” would simply knock out, due to nettlesome “volatility,” nettlesome food and energy prices. The new number could be shouted from the hilltops and blasted through newspaper headlines whenever the true CPI number was terrifying. It’s a number the markets are still too obsessed with today, though some seem to be surfacing out of this delusion…

I do go on. Let me continue with the cooked government data story.

In 1983, Phillips says the Reagan administration monkeyed around even more with inflation data, when the Bureau of Labor Statistics (BLS) decided that housing, too, was overstating CPI.

So, the BLS swapped in what it calls an “owner equivalent rent” measurement, what homeowners would pay to live in their homes if they were renters. But that number likely understated housing costs as it is based on overall rent, which stayed flat in most of the country during the housing bubble.

So, the government has cooked up its own housing inflation number that likely understates home prices, Phillips argues, and in turn has understated housing inflation during the recent housing boom by three to four percentage points.

Moreover, Phillips says in the 1990s, the CPI has been subjected to three other adjustments, all delivering a downward bias and all dubious:

*Product substitution: If flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon, he says;
*Geometric weighting: Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption
*And, most strangely, hedonic adjustment: An unusual bit of monkeyshines by which the government says that product improvements in things like computers, cell phones or television actually amount to a reduction in price, so a $2000 laptop with a built in camera is less expensive than a $1500 laptop without one.

Pollyanna creep in the inflation data continued under the Bush administration. In 2006 it stopped publishing the M-3 money supply numbers, which captured rising inflationary impetus from bank credit activity, Phillips says.

Under the Clintons, Phillips says, the nation’s employment figures were massaged and kneaded too.

In 1994, the Bureau of Labor Statistics redefined the work force to include only that small percentage of what it called “discouraged workers” who had been seeking work for less than a year, Phillips says. The longer-term “discouraged”-some 4m U.S. adults who simply are not working-fell out of the main monthly tally. Some now call them the “hidden unemployed.”

The Clinton administration also dropped the number of households sampled for the data, from 60,000 to 50,000, making the number more rickety.

But a disproportionate number of the dropped households were in the inner cities. So, along with a new adjustment formula that is believed to also have cut black unemployment estimates, poverty figures get to look a lot less worse, Phillips says.

So remember this. The next time you hear some economic numbers that seem too good to be true, that might very well just be the case. And as for Pollyanna? Depending on which version of the story you happen to be reading, in the end Pollyanna is paralyzed either from being hit by a car or falling off a roof.

Sources:

“Lies, damned lies and overly optimistic statistics”
Richard Siklos
The Globe and Mail (Canada), September 22, 2008

“Does the Government Manipulate Economic Data?”
Elizabeth MacDonald
FOX Business, June 9, 2008

Ron Paul On The Proposed Government Bailout

U.S. News & World Report Associate Editor Luke Mullins got the chance to speak with political maverick and one-time candidate for POTUS, Congressman Ron Paul, about the government’s proposed massive intervention in the U.S. financial system. From his piece, “Ron Paul: This Bailout Won’t Be The Last”:

I recently chatted with Rep. Ron Paul (R-Texas) about the gigantic financial bailout that the government is preparing to undertake.

Some excerpts from the interview:

What’s your take on this huge financial bailout?
“It’s more of the same. More debt and more inflation and more pressure on the dollar. Ultimately, although the markets are responding very favorably at the moment, I think it is going to be devastating to the dollar and to our financial situation in this country.”

Dr. Paul sees some nasty stuff coming down the road. So do I.

You can read the rest of Mullins’ interview with the Texas congressman here.

U.S. Economy Headed Towards Doom And Gloom?

This morning I came across two pieces which were notable in that they painted a gloomy picture for the U.S. economy going forward. Jonathan Burton of MarketWatch talked about TCW Group’s Jeffrey Gundlach’s economic outlook, and wrote:

An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation’s top financial institutions.

Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning.

“This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund . “This is no market for old-school thinking.”

Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022.

“If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said.

Burton talked about Gundlach’s credentials for making such statements. He wrote:

As a forecaster, Gundlach didn’t just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end.

The MarketWatch reporter noted:

Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said…

Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said…

The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.

Said Gundlach: “None of us have ever seen this, and it’s no market for old men, but risk aversion is the order of the day.”

Someone else who sees massive problems ahead for the American economy is Harvard economic professor and former chief economist of the International Monetary Fund Kenneth Rogoff. He wrote on the Financial Times (UK) website last night:

Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.

In other words, $1 to $2 trillion. Rogoff continued:

True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible…

The Ivy League professor talked about the potential fallout from allocating so much money to deal with the escalating financial crisis. He wrote:

It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.

Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.

Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

A new banana republic?

Sources:

“The worst is yet to come”
Jonathan Burton
MarketWatch, September 18, 2008

“America will need a $1,000bn bail-out”
Kenneth Rogoff
Financial Times (UK), September 17, 2008

U.S., Europe Headed Towards Another Depression?

For some, warnings of a U.S. economic slowdown go beyond a recession. From the CNBC website this morning:

The end result of the global economic slowdown may be the U.S. announcing national bankruptcy as the government cannot afford the bailouts that it promised and the market will not bail out the government, Martin Hennecke, senior manager of private clients at Hong Kong-based Tyche, told CNBC on Thursday.

“We expect a depression in the United States. We expect a depression, very possibly, also in Europe,” Hennecke said on “Worldwide Exchange.”

Hennecke, who previously worked as an investment adviser at Hong Kong’s Bridgewater Ltd. and is a frequent guest on CNBC and Bloomberg Television, explained:

The estimated $300 billion cost of the Fannie/Freddie bailout will probably be considered as a loss that the government will have to take, therefore passing it on to taxpayers, he explained.

“We already have $3 trillion of debt, as far as the U.S. government is concerned. These debt figures across the U.S. economy are rising very sharply.”

When the government can no longer pass the United States’ “immense debt” on to taxpayers, it will turn to the holders of U.S. dollars, leading to the eventual downfall of the currency, Hennecke said.

“Definitely, it (the dollar) is not a safe place to be invested in, as real inflation is closer to 10 or 11 percent than the actual inflation numbers given by the U.S. government,” Hennecke said on “Worldwide Exchange”.

“Better than Charmin?”

Source:

“Bailouts Will Push US into Depression: Manager”
CNBC, September 11, 2008

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World’s Highest Paid Investment Adviser: U.S. Faces Hyperinflation Or Depression

I don’t think I’ve ever mentioned this, but I am extremely grateful to Peter Brimelow over at MarketWatch. Without his column, I wouldn’t have access to the insights of Harry Schultz, the highest paid investment consultant in the world. For those readers not familiar with Mr. Schultz, I talked about him back on December 13. From that post:

Have you ever heard of Harry Schultz? I sure have, and to this day I am still in absolute awe of the money this man earns. Mr. Schultz, publisher of the International Harry Schultz Letter, is the highest paid investment consultant in the world at $3,500 an hour (or $4,900 an hour if you require his services during the weekend).

Brimelow talked about Schultz’ latest U.S. economic forecast this past Monday on MarketWatch. He wrote:

Harry Schultz’ The International Harry Schultz Letter was posted last night right about the time the Fannie Mae-Freddie Mac bailout was reported. But Schultz anticipated it, writing sarcastically:

“Flash: As we go to press, the US Government reveals plan to take over Freddie Mac and Fannie Mae, the biggest bail-out by taxpayers in history. It also wipes out the shareholders! Sunday selected to avoid stock market action same day, just as bank closures are told after market close Friday. That tells you what shape markets are in when government and CEOs hide behind holidays.”

Schultz had earlier made his overview clear (I’m translating slightly from of his text-message style):

“Fed maneuver room approximately gone. Any $US injection big enough to avert a depression triggers runaway inflation. If not big enough: depression. US on knife-edge. Gold helps you either way.”

This apocalyptic vision is consistent with his earlier predictions, such as one I discussed in a February 18 post. Brimelow stated back then:

Schultz writes: “It’s a derivative crisis, stupid!… 9,000 U.S. banks failed in 1929-1932; look for new records… Hyper-inflation is a distinct possibility; stay awake!”

Among his more colorful recommendations: “Buy a few local non-rare gold coins of whatever country you are in for emergency/barter use, smallest denominations… Keep 6-12 months cash at home/office/ lawyer-doctor office. Pretend an emergency is coming, because it may be.”

…and from that December 13 post:

Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae.

Note the bailout prediction for Fannie Mae.

Fast forward to Schultz’s latest forecast. Brimelow wrote:

Schultz suggests just two alternative scenarios, both equally appalling:

“If Bush bails them all out, the die would be cast for inflation unseen in the West since 1923 Germany. If no bail: Hello, 1929.”

Gee, thanks.

Brimelow talked about what Schultz thought was going to happen next, and what those hoping to be one step ahead of the herd should do about it. He wrote:

In his latest issue, Schultz summarizes:

“Widespread stagflation will probably now build more inflation than stagnation, then gradually morph into more stagnation than inflation. Then, deflation takes over, and ultimately, depression. All this over next 9 years.”

“For the moment, seal off major wipe-out risks. Exit all money funds and currency time deposits, step up gold & oil positions, move into 1-2 year government bonds (non-US $) in First World nations. Swiss first choice. Think not of yield; think of an ark’s life preserver around your neck.”

Schultz, notes Brimelow, is currently negative on the U.S. stock market. But, the Swiss-based investment adviser predicts an upside target of $1,600 an ounce for gold as he believes its recent plummet in price is merely a correction.

Source:

“Unraveling according to schedule”
Peter Brimelow
MarketWatch, September 8, 2008

Quote For The Week

A home is to live in. For most people, seeing real estate as an investment that will surely appreciate is risky business. For one thing, while prices are already down in many parts of the country, they might go lower. So the cheap house you buy now could still sink in value. And while we’ve become accustomed to 6 or 7 percent returns on real estate, historically prices have just kept pace with or barely exceeded inflation. It’s probably wise to buy a home you want to live in rather than an investment with four walls.

-Jim Guest, President of Consumers Union, the independent non-profit publisher of Consumer Reports, in the September 2008 issue of the monthly publication.

Quote For The Week

Financial analyst Eric King talked about gold and silver on the Financial Sense Newshour this weekend, and warned listeners:

But I want people to listen carefully to what I’m about to say to them. Do not listen to statements made from this government. Ignore them. Ignore statements made by Paulson, who is retiring in November right after the election. They have been consistently wrong in all of their statements. They have lost control of the system, in my opinion, and the system is breaking right now. The United States banking system is insolvent, and they are trying to keep this hidden from people and try to get more suckers to put more money into these banks, but the suckers are not lining up anymore. A big tax bill is going to be laid on the American public, and as Greenspan stated in Belgium, the Federal Reserve, and even the Treasury, stands ready to create money without limit. We are about to go into that phase now where we are going to have very serious money printing, and the Fed knows it, Paulson knows it, the Treasury and Bernanke know it, and because of that they had to crush these metals ahead of that…

Consumer Blues

Who HASN’T noticed escalating prices these days? Judging from recent purchases, from flowers for my girlfriend to car washes to movie tickets, it’s pretty apparent to me, at least, that the cost of living is on the rise. According to Reuters’ Herbert Lash and Richard Leong this morning:

Consumer prices jumped at the sharpest rate in more than a quarter century during June, and consumers coping with soaring costs received their smallest income gain in a year, the government said on Monday.

The Commerce Department said personal incomes edged up 0.1 percent after rising 1.8 percent in May. June’s rise was the smallest since April 2007, when income was flat.

On a year-over-year basis, prices rose 4.1 percent in June, up from 3.5 percent in May, for the biggest annual gain since May 1991.

An inflation gauge tied to consumer spending jumped 0.8 percent in June, its steepest gain since a 1 percent rise more than 27 years ago, in February 1981.

Source: bobmccarty.com

Source:

“June inflation jumps, incomes barely rise”
Herbert Lash, Richard Leong
Reuters, August 4, 2008

Say Goodbye To Your Pay Raise

Think you’re getting a raise in 2009? Think again. According to the Wall Street Journal’s Sarah Needleman last week:

Despite the weak U.S. economy, employers nationwide are expected to raise workers’ salaries next year at the same rate as they did this year, a new survey shows. But the increase may be offset by rising inflation rates and lower 2008 bonuses tied to company performance.

Rank-and-file workers can expect to see their base pay rise by an average of 3.5% in 2009 — the same amount they received this year, reports Watson Wyatt Worldwide Inc., a global human-resources consulting firm. High performers are projected to fare better, gaining an average of 4.4% in base pay, while mediocre performers are likely to see their paychecks increase by 2% or less…

But even with a 3.5% raise, most workers will likely find that extra cash consumed by rising costs for everything from food to gasoline. The latest report from the U.S. Labor Department showed inflation rising at a brisk 5% in June — more than the raise most employees will receive in 2009.

“Inflation has crept up to a pace where even your better-performing employees won’t make up the difference,” says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. “They’re going to be losing ground relative to inflation.”

Quicksand Scene, “Blazing Saddles” (1974)

The situation looks even worse if you’re like me and don’t buy the government’s inflation data. On May 22, MarketWatch’s Rex Nutting noted that PIMCO’s Bill Gross discussed the flawed data in his June “Investment Outlook” on the PIMCO website. Nutting wrote:

Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. “Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?” Gross wondered…

The consumer price index is being understated by at least 1% per year because of these factors, Gross said. And if inflation is understated by 1%, then gross domestic product has been overstated by that same 1%. Other critics have put the error much higher.

Other critics like John Williams, an economic consultant who publishes the monthly newsletter Shadow Government Statistics. Ted Rall noted in a Yahoo! News piece last week that Williams calculates inflation is actually running at an annualized rate of 9.95%, when you factor out all the tinkering that’s been done to the data over the years.

But what about bonuses? The news isn’t much better. Robert Trumble, professor of management at Virginia Commonwealth University and director of the Virginia Labor Studies Center in Richmond, told the Journal that bonuses tied to company performance will likely be significantly less this year than last. He said:

Bonuses are definitely going to be down. The economy as a whole is down and most [bonuses] are performance-related.

Sources:

“Inflation May Offset Pay Increases in ‘09”
Sarah E. Needleman
Wall Street Journal, July 25, 2008

“U.S. inflation understated, Pimco’s Gross says”
Rex Nutting
MarketWatch, May 22, 2008

“RECESSION, YEAR 8”
Ted Rall
Yahoo! News, July 24, 2008

The Next Great Depression

Taking it down a few notches today, I enjoyed a nice cigar from the Dominican Republic this afternoon out on my balcony here in the Windy City. Kind of bummed out that one of my suppliers raised their prices, though. Too bad. I almost pulled a JFK and ordered a stockpile of cigars last year after Washington Democrats were looking to increase the tax cap from a nickel per cigar to $10 a stick— or 20,413%. Unbelievable. By the way, never heard of the JFK cigar story? Well, if you have time, I highly recommend you watch the following video (a little over 3 minutes long) of Pierre Salinger, JFK’s secretary, telling the story (and other cigar-related ones)…

YouTube Video Link

While puffing away, I got the chance to listen to a portion of last weekend’s “Financial Sense Newshour” broadcast. Jim Puplava and John Loeffler have been talking about a financial crisis window for a while now, which they expect to take place between 2009 and 2012. Puplava and Loeffler had this to say last weekend:

JOHN: So looking forward, say, 12 to 24 months, we would say, given where we’re going, we can probably look towards higher gold and metals prices; there will be another money crisis – another currency crisis – and all it would seem like they’re [Congress] doing right now is staving off the day of reckoning. Let’s face it, we said that 2008, that’s the ramp up to 2009 to 2012 – it’s accelerated a little more than I thought it would be and it’s a little more violent than I thought it would be, but nevertheless we’re still on that; and somewhere in that window, all of this stuff begins to fall apart and you can’t tell what’s going to trigger it, but it will go.

JIM: It’s going to trigger. And I think that the thing that’s scaring the heck out of them [Congress] is all of this is starting to unfold – whether it’s $4 gasoline at the pumps, headline inflation with foods, banks going under, stock market manipulation – all of this – and they’re desperately just trying to buy time to get elected because you’ve got 535 people in Congress who are worried about keeping their jobs. And what I think is going to happen is as this worsens the country is going to lurch very hard to the left in the November election (we’re going to get into this in the next segment) and then as a result of the policies that are going to put us in place, that is going to give us our great depression that I anticipate.

By 2010, the United States is going to be in a major depression.

And then, what is going to happen is we’re going to lurch – almost do a 180 degree turn – and lurch very hard to the right as one disaster after another unfolds upon the country.

Great cigar, not so great forecast…

Source:

Financial Sense Newshour
3rd Hour, Part 2
FinancialSense.com, July 19, 2008

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

No Recession? Bunk!

Does anyone still believe in the economic data being churned out by the federal government? From MarketWatch last Thursday:

Brian Pretti, chief investment strategist for East Bay-based Mechanics Bank, has one word for those who keep saying the nation is not yet in a recession: “Bunk.”

“We are still wringing out the excesses of the financial sector,” Pretti says, “and not only is the period of reconciliation–or deleveraging–not over, but we will be living with it for some time to come. We’re in a recession; there’s no other word for it.”

Then why don’t the numbers tell the story?

“Officially, a recession is defined as two consecutive quarters of negative, inflation-adjusted, gross domestic product (GDP) growth. But if you use the wrong inflation assumptions (called the deflator in the GDP reports), the conclusions are wrong, too.”

To illustrate, Pretti points to recent deflator factors used by the Fed to estimate GDP. “For the first quarter 2008, it was 2.7%, for the fourth quarter 2007, 2.4%, and 1% for third quarter 2007,” he says. “Where did the government come up with those numbers that are quite different than the CPI numbers? Since September 2007, the price of crude oil is up 100%; retail gasoline up 69%; natural gas 95%; and the Commodity Research Bureau index for foodstuffs is up 27%. The true nature of inflation in the US has been anywhere between 4-5%, and that means we’ve already been in a recession for a number of quarters.”

The year-over-year inflation as measured by the Consumer Price Index rests at 4.9% as of the June report, which was released yesterday. It highlights Pretti’s point–and calls into question the prior figures that have been used. “No wonder the financial markets aren’t buying the idea that the economy is ‘holding up,’” Pretti says. “Their negative behavior is telling us headline GDP numbers may not exactly be reflecting reality!”

Source:

“Wishful Thinking Aside, It’s a Recession, Folks”
MarketWatch, July 17, 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