There has been much talk about stock markets being poised to crash in October this year. And, we
are interested in whether stocks are poised to 'crash' here in October once again or not, because in a general sense it's
no secret from both technical and fundamental perspectives, they may do exactly that. Why do stocks have a tendency to crash
in October? Although we do not have time to delve into all the intricacies, the stars must be aligned, where in addition to
having suitable technical and fundamental circumstances, the investing public's sentiment must show complacency, which it
definitely does right now thanks to the Greenspan Put.
We have our favorite statistics reports - among them the Federal Reserve's Flow of Funds Accounts
of the United States (Z1) and the Bank of International Settlements' BIS Quarterly Review: International Banking and Financial
Developments. Both are issued quarterly (the latest editions released this past month) and each carry over 100 pages of dense,
statistical tables. We like to analyze these in detail. They are invaluable as they provide statistics that apply to the real
world of money and credit-the actual money flows revealing the impact of market values as well as raw, non-adjusted data that
is relatively free of "spin." That's a precious benefit to analysts who like to base their perspectives upon theory and causality
... unlike the "marketing-driven" spin of much of Wall Street's financial prognosticators.
Bond yields do not reflect real risks, so market discipline isn’t doing its job. Neither are
the Eurocrats. The EU’s fiscal requirements for euro members are being flouted left, right and centre; Italy will be the first
real test of whether even the new, watered-down version of them will prevail. So making tough decisions to reduce structural
deficits and keep debt from taking off falls squarely on the shoulders of national governments. And these are not very robust.
"The vast majority of homeowners have a sizable equity cushion with which to absorb a
potential decline in home prices". (two different versions of the same bubble?)
Greenspan hopes and prays that by fine tuning interest rates he can provide support for
the dollar and keep foreign interests - interested in buying our debt. However, the Fed Chairman also knows that if he raises
interest rates too much or too fast he will sink the housing market; and that he does not want to do. It has been the sea
of liquidity provided by Greenspan and company that has kept the economy going via the housing market. If the housing market
bubble bursts - the economy will be in dire straights. End of game.
Why do I always end up discussing the US consumer when talking about China? Because China’s
growth is heavily driven by US consumer spending. With interest rates creeping up; with a real estate market slowing down;
with a negative savings rate; with record energy prices; with wage growth that does not keep up with GDP growth; with producer
price inflation and with consumer price inflation indices picking up, to us it is a question of when rather than if consumer
spending stalls.
A Japan that does not rely on the United States for its security means that the BOJ will no
longer feel the need to cooperate with the Fed.As a result, a rearmed Japan will realize that it has an
even more powerful Dollar weapon than China (the second largest holder of U.S. Treasuries) does. Eventually, these two Asian
central banks will stop accumulating treasuries and possibly begin to unload them, which could trigger a Dollar collapse.
Even more threatening to the Dollar is a possible alliance among Asian countries with the desire to form their own regional
currency similar to the Euro. While all of these scenarios are just talk, the common denominator among them is a Japan which
no longer relies on America for its protection. The bottom line is that the more you hear about the changing role of Japan's
military, the closer we are to a major Dollar devaluation.
Despite the economic impact of Katrina, which dealt a stiff blow to America’s oil markets, the Federal
Reserve has once again raised interest rates by a quarter of a percentage point. With high fuel prices threatening to bring
on both inflation and recession, being a central banker is harder than it used to be.
The imperial government needs to spend more, because other sectors of the economy either cannot or
will not. Businesses are not investing. They are not hiring. They are not expanding. China builds 20,000 new manufacturing
facilities every year; almost none are built in the United States.
Consumers want to spend more, but they can't. They don't have any money. The interest on America's
$36 trillion worth of private and public debt must come to about $1.8 trillion per year. After making mortgage and tax payments,
and filling up the SUV, American households have very little left over. That leaves only the government. Yes, the Feds already
spend about $1 billion per day that they don't have. But the foreigners are still ready to lend on the full faith and credit
of the world's only true empire. Only the government can expand spending. Only the government can push the imperial economy
forward...and the empire itself closer to the brink.
Some economists argue that the imbalances in the world economy can be blamed, in part,
on a glut of savings from developing countries gushing into American assets. New reports from the IMF and the World Bank say
the problem lies elsewhere.
Mankind has long suffered from the consequences of assumptions that have received far
too little intelligent questioning. In considering how human society is to be organized, the premise has long been accepted
that “responsible” and “caring” behavior consists of men and women subordinating themselves to the authority of the state.
Collective activity is presumed to be orderly, while individual action raises the specter of social turbulence. Adherents
to such a point of view often end up contrasting “altruistic” politicians and government functionaries with “greedy” businessmen.
And we continue to extol the virtue of government plans. We know that socialism is a failed
experiment, as demonstrated by the failure of the Soviet Union, socialism's most devoted practitioner. My socialist colleagues
in the Legislature, however, think that they are smarter than the Russians and that socialism will work here in California
if we just have the right plan.
Capital markets may weather the shock of bad weather, but they will not do this at zero
price. All of the projects that might have been funded by the capital that it will take to re-build will be lost. The money
that the U.S. Treasury will suck out of the capital markets will be spent by the wonderful agencies who designed the levees.
Consider the national debt of the US, which is now pushing $8 trillion. The following
are increases in the national debt that have been mandated by Congress. In 2002 the increase in the national debt was $450
billion. In 2003 the increase rose to $984 billion. In 2004 the increase was $800 billion. This year, in 2005, the House passed
an increase of another $781 billion, although the Senate has not yet acted on this. In other words, in the last four years
the increases have totaled $3 trillion, which amounts to an increase of 50 percent in the total national debt.
Today’s complex, market-dominated financial system also creates more incentives than in the past for market
participants to “reach for yield”, more capacity to expand leverage, more scope to act on the age-old destabilising sentiments
of euphoria and gloom. In short, our financial system may be prone to new combinations of adverse “tail risks” that could
feed back on the real economy.
Important financial imbalances are building despite the low measures of perceived risk.
I’m fairly certain that Henry Luce wouldn’t recognize the world of business that FORTUNE covers today.
His American Century has given way to a Global Century, his all too heroic tycoons have been replaced all too often by CEOs
whose feet are made of basest clay.
The National Highway Transportation Safety Administration's elaborate proposal to update
the 30-year-old regulations that govern the fuel economy of U.S. pickups, minivans and SUVs released yesterday may or may
not end up make the United States less thirsty for oil. But it was clearly designed to help out the automakers most thirsty
for profits, the struggling General Motors and Ford Motor.
Therefore, the transport of grain and other bulk freight by rail to other ports will strain
the capacity of our rail system. Moreover, with the rise in the price of diesel fuel, the cost of rail-freight transport will
increase. In addition, some non-Mississippi River ports already are operating near capacity. Lack of manpower to operate ports,
pipelines and refineries in the New Orleans area also is likely to be an issue. Evacuated workers do not have homes to come
back to and essential services to sustain them and their families. In short, Hurricane Katrina has temporarily constrained
our economy's ability to produce goods and services. How long this constraint will persist is unknowable at this time.
The Fed gained considerable independence from the U.S. Treasury starting in the 1950s
when the U.S. government agreed to market rate financing in issuing its new debt. Moreover, the dynamic growth of U.S. financial
markets and globalization of markets put the Fed in the center of warding off systemic risks and moderating extreme business
cycle fluctuations. Increasingly, it was also recognized a very flexible fiscal policy that quickly adjusted to economic requirements
was unattainable.
It is an uncomfortable fact that millions of Americans have made the decision to live
in areas prone to this kind of disaster. Though Congress has authorised an immediate $10.5 billion relief package, Denny Hastert,
the speaker of the House of Representatives, has expressed doubt that large dollops of money should be spent on reconstruction
in a location as exposed as New Orleans (though he later backpeddled). But there remain important questions to be asked at
both the local and national level about the failures that led to Katrina’s destruction and chaos. It has provided yet another
reminder that decisions made without due regard for the consequences can prove painful indeed later on.
Today, there are no Jacksonians and Rueffs among the power elite. Critics exist at the
fringes. The mainstream opinion is one that favors central banking and central bankers -- and the old gold standard is a quaint
notion. Yet in the early 20th century, gold was still seen as the best way to restrict inflation. Allan Meltzer tells us in
his A History of the Federal Reserve , "The gold standard was an issue in several presidential elections in the United States.
Each time, the gold standard candidate won."
"Another participant mentioned, however, that recent sluggish growth of the monetary aggregates
suggested that the stance of policy was not overly accommodative." Can you believe that someone on the FOMC actually has put
"M" back in monetary policy? What's more, even a Fed Board staffer made a telling comment about the behavior of the monetary
aggregates. To wit: "Despite the recent slow growth of M2, its velocity remained low relative to the level that would be expected
based on its historical relationship with opportunity cost." So, not only has M2 growth been slow, but faster velocity growth
is not compensating for it.
If you ask me to name the proudest distinction
of Americans, I would choose- because it contains all the others . . . the fact that they were the people who created
the phrase "to make money." No other language or nation had ever used these words before; men had always thought of
wealth as a static quantity . . . to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were
the first to understand that wealth has to be created.
