No, this discussion is not about oil.
The credit crisis really puts the free in free market. The freest market is supposed to be the United States, and the evidence in favour of that argument is mounting. It's just not what you think. Free, in this case, means a free ride for a select group of people. Wall Street never looked so good, or bad, depending on your perspective.
From early 2004 until mid-2007, the big Wall Street investment banks made $250-billion (U.S.) in profits. (That's Bank of America, Citigroup, JPMorgan, Morgan Stanley, Goldman Sachs, Lehman Brothers and Merrill Lynch.) During the past year, they've written off $107-billion. Keep in mind as we follow the money that if you include smaller dealers and commercial banks, the profit number swells and the writeoffs are even bigger.
As fate would have it, the writedowns, mostly garbage subprime loans, equal almost perfectly the amount of money Washington will dole out in stimulus cheques to get the economy going again. The House of Representatives Speaker said last year that the stimulus package would create 500,000 jobs. She got the number more or less right, but it was actually a loss of jobs.
Meanwhile, recent figures show that of the money that's been mailed and spent, only a 10th has gone to new spending.
The rest of it has been consumed by inflation (that is, because prices have gone up, even if consumers take their money to the mall, they're not helping the economy much).
Inflation is partly a product of easy money or low interest rates.
Why does the Federal Reserve keep interest rates low? To stimulate the economy, which is being ravaged by the housing recession. The housing recession, meanwhile, was fuelled by Wall Street's greed and recklessness, aided and abetted by the easy money and the fraudulence of builders, appraisers and mortgage brokers.
Back to Wall Street to start connecting the dots. According to the New York State Comptroller's Office, the big banks paid $33.2-billion in bonuses in 2007, down only slightly from 2006, an even more splendid year for subprime origination. During the past four years, bonuses closed in on $100-billion, not far off the writeoffs and the stimulus package.
Back to Washington, whose coffers are bare, meaning that $107-billion is borrowed money. Borrowed from whom? Savers, mostly foreign. Borrowed by whom? The taxpayer of course. So in effect, the stimulus package is simply a matter of the cash-strapped, highly indebted U.S. consumer borrowing to spend (or pay debts) to save the economy. Not good.
It's pretty clear what's happening. Ultimately, the people are borrowing to pay Wall Street bonuses. After all, these handsome rewards are based on the earnings of the banks, but they're not real earnings, since the assets that produced them are subsequently written off. The bubble that created these bogus earnings was inflated with the help of low money costs and lax supervision of financial firms.
The bursting bubble is roughing up the economy so badly that the government has to borrow to stimulate spending, which it fails to do. It might also have to borrow $25-billion to bail out government-sponsored mortgage insurers, including Fannie Mae. And since the government is really just the people who are getting hurt by the slowing economy, with no bonuses to comfort them, is this not the greatest transfer of wealth in history?
And we haven't touched on other largesse the people have extended Wall Street, such as the loan guarantees that helped JPMorgan buy Bear Stearns.
Karl Marx has nothing on these people. But Groucho might.
And you can argue that some of the losses are marked to market and might be reversed and that some of the bonuses were paid to people who had nothing to do with subprime. Probably true, but hair-splitting I say.
As individuals, we can learn a lot from these lessons -- especially what not to do.
Wednesday, July 23, 2008
Wednesday, July 2, 2008
INFLATION - The Next Crisis
One thing we find truly amazing about the markets is that they’re much more than just investments. Markets provide a way of peeking into the future, if you understand what they’re trying to tell you.
These lessons are ongoing but it’s fascinating and like a giant puzzle.
MARKETS TELL THE STORY
Sometimes the messages are pretty subtle. But other times they’re major, signaling massive economic, political or geopolitical shifts.
Most interesting is that the markets lead. So it’s important to recognize that whatever a market is telling you, it’s not going to be obvious when that market gives the signal. The message will become obvious later.
Let’s take gold as an example. It started moving up in a major bull market in 2001, and it’s been rising strongly and consistently ever since. Gold always leads inflation, so it was telling us that inflation was eventually going to head higher. That didn’t happen for quite a while, but now it’s another story. Plus, gold’s been telling us much more…
INFLATION ON THE AGENDA
I’ve been writing about inflation for a long time and why we thought it was coming back in a big way. As the years passed, the evidence became more overwhelming.
But most people haven’t been paying much attention. Aside from concerns about high oil and food prices, there are plenty of other things that are more worrisome.
In the U.S., for instance, consumer confidence fell to a nearly 30 year low and a recent poll showed that 81% feel that the U.S. is on the wrong track. This is primarily due to the war, the slowing economy and the housing situation.
And while these conditions remain serious, along with a slew of other concerns, like the heavy debt load, soaring foreclosures and so on, it’s important to recognize that this is the current situation. It’s not what’s coming.
What’s coming is higher inflation and it could prove to be more serious than most people think, at least based on what we’re now seeing.
NOW IT’S HERE...
Suddenly, there’s a lot of talk about inflation in official circles and that wasn’t the case before. But over the past couple of months, comments or inflation warnings were made by the Fed, the European Central Bank and the Bank of England. Government officials are speaking out, and so is the press. The International Monetary Fund was the most direct, warning that global inflation has re-emerged as a major threat to the world economy.
As I’ve often pointed out, inflation has been creeping back and it’s gaining momentum. In the past six months, for example, we’ve seen some huge double digit annualized jumps in U.S. wholesale prices, along with soaring money supply.
But what’s happening in other countries is even more interesting and it’s intensifying the global inflation concerns, which gold saw coming way back when.
Globalization boom...
As you know, many developing nations have been booming, thanks to globalization. This is taking place all over the world and this growth is much greater than in the developing countries.
It’s estimated that half of the world is leaving poverty behind as standards of living improve. That’s especially true of the BRIC countries, which are the emerging market leaders (Brazil, Russia, India and China). It’s also true of many Asian countries, as well as many of the Eastern European, Middle Eastern and Latin American countries.
As living standards improve, people in emerging nations are able to buy things they couldn’t afford before, like food and cars. This has greatly increased demand, and it’s put massive upward pressure on agricultural commodities and oil. It’s actually been the driving force behind the commodity boom.
Heating inflation
Over the years, I’ve taken quite a few trips to developing countries and we’ve seen grueling poverty up close. It’s a terrible situation and the fact that millions of people are escaping this lifestyle is a good thing, but like most things, there’s a price to pay. In this case, it’s inflation.
Inflation is picking up in most countries, for example, inflation is above 15% in many emerging countries like Vietnam, Latvia, Estonia, Pakistan and Egypt. It’s more than 10% in a lot of other countries and it’s a huge concern in Russia, China and India.
The bottom line is that inflation is at a 10 year high in emerging countries and The Economist says that two-thirds of the world’s population will probably suffer double-digit inflation rates this Summer. This is a huge deal and it explains why officials are concerned, but there’s more…
SOARING MONEY SUPPLY... GLOBALLY
Global monetary policy is now the loosest since the 1970s and money supply is growing almost three times faster in emerging countries than in the developed world. As you know, that’s the direct cause of inflation.
Plus, as The Economist points out, there are alarming similarities between emerging economies today and the rich world in the 1970s when the Great Inflation took off.
For example, in many emerging countries policymakers view the inflation rises as a short-term phenomenon and they’re taking superficial measures to deal with it.
So the causes are similar and the results will be the same for everyone, no matter where you live. As we’re already seeing, commodities, food, oil, building materials and so on… they’re all going up.
IN SUMMARY
It’s still to be seen how this will end. But so far, this inflation rise is coinciding almost perfectly with the commodity cycle. If this continues, and I believe that it will, then there’s a lot more inflation to come in the years ahead.
What’s currently happening also strongly favors the outlook for gold and the other commodities. It’s going to boost demand for gold as a safe haven during inflationary times and these ongoing developments are telling us to stay with commodities, gold and precious metals positions.
In fact, gold’s been telling us this all along. Now we’re starting to see why.
These lessons are ongoing but it’s fascinating and like a giant puzzle.
MARKETS TELL THE STORY
Sometimes the messages are pretty subtle. But other times they’re major, signaling massive economic, political or geopolitical shifts.
Most interesting is that the markets lead. So it’s important to recognize that whatever a market is telling you, it’s not going to be obvious when that market gives the signal. The message will become obvious later.
Let’s take gold as an example. It started moving up in a major bull market in 2001, and it’s been rising strongly and consistently ever since. Gold always leads inflation, so it was telling us that inflation was eventually going to head higher. That didn’t happen for quite a while, but now it’s another story. Plus, gold’s been telling us much more…
INFLATION ON THE AGENDA
I’ve been writing about inflation for a long time and why we thought it was coming back in a big way. As the years passed, the evidence became more overwhelming.
But most people haven’t been paying much attention. Aside from concerns about high oil and food prices, there are plenty of other things that are more worrisome.
In the U.S., for instance, consumer confidence fell to a nearly 30 year low and a recent poll showed that 81% feel that the U.S. is on the wrong track. This is primarily due to the war, the slowing economy and the housing situation.
And while these conditions remain serious, along with a slew of other concerns, like the heavy debt load, soaring foreclosures and so on, it’s important to recognize that this is the current situation. It’s not what’s coming.
What’s coming is higher inflation and it could prove to be more serious than most people think, at least based on what we’re now seeing.
NOW IT’S HERE...
Suddenly, there’s a lot of talk about inflation in official circles and that wasn’t the case before. But over the past couple of months, comments or inflation warnings were made by the Fed, the European Central Bank and the Bank of England. Government officials are speaking out, and so is the press. The International Monetary Fund was the most direct, warning that global inflation has re-emerged as a major threat to the world economy.
As I’ve often pointed out, inflation has been creeping back and it’s gaining momentum. In the past six months, for example, we’ve seen some huge double digit annualized jumps in U.S. wholesale prices, along with soaring money supply.
But what’s happening in other countries is even more interesting and it’s intensifying the global inflation concerns, which gold saw coming way back when.
Globalization boom...
As you know, many developing nations have been booming, thanks to globalization. This is taking place all over the world and this growth is much greater than in the developing countries.
It’s estimated that half of the world is leaving poverty behind as standards of living improve. That’s especially true of the BRIC countries, which are the emerging market leaders (Brazil, Russia, India and China). It’s also true of many Asian countries, as well as many of the Eastern European, Middle Eastern and Latin American countries.
As living standards improve, people in emerging nations are able to buy things they couldn’t afford before, like food and cars. This has greatly increased demand, and it’s put massive upward pressure on agricultural commodities and oil. It’s actually been the driving force behind the commodity boom.
Heating inflation
Over the years, I’ve taken quite a few trips to developing countries and we’ve seen grueling poverty up close. It’s a terrible situation and the fact that millions of people are escaping this lifestyle is a good thing, but like most things, there’s a price to pay. In this case, it’s inflation.
Inflation is picking up in most countries, for example, inflation is above 15% in many emerging countries like Vietnam, Latvia, Estonia, Pakistan and Egypt. It’s more than 10% in a lot of other countries and it’s a huge concern in Russia, China and India.
The bottom line is that inflation is at a 10 year high in emerging countries and The Economist says that two-thirds of the world’s population will probably suffer double-digit inflation rates this Summer. This is a huge deal and it explains why officials are concerned, but there’s more…
SOARING MONEY SUPPLY... GLOBALLY
Global monetary policy is now the loosest since the 1970s and money supply is growing almost three times faster in emerging countries than in the developed world. As you know, that’s the direct cause of inflation.
Plus, as The Economist points out, there are alarming similarities between emerging economies today and the rich world in the 1970s when the Great Inflation took off.
For example, in many emerging countries policymakers view the inflation rises as a short-term phenomenon and they’re taking superficial measures to deal with it.
So the causes are similar and the results will be the same for everyone, no matter where you live. As we’re already seeing, commodities, food, oil, building materials and so on… they’re all going up.
IN SUMMARY
It’s still to be seen how this will end. But so far, this inflation rise is coinciding almost perfectly with the commodity cycle. If this continues, and I believe that it will, then there’s a lot more inflation to come in the years ahead.
What’s currently happening also strongly favors the outlook for gold and the other commodities. It’s going to boost demand for gold as a safe haven during inflationary times and these ongoing developments are telling us to stay with commodities, gold and precious metals positions.
In fact, gold’s been telling us this all along. Now we’re starting to see why.
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