As yet we do not know, for example, what will become of the US housing bubble, if indeed
it is a bubble. We do not know how painful the eventual unwinding of the US enormous budget and current account deficits will
be. And we do not know whether inflation -- which is higher today than when Greenspan took over at the Fed in 1987 -- will
continue rising and require a sharp rise in interest rates to bring it back under control. In other words, judgement day for
Greenspan lies somewhere in the future, although probably not too far.
Never has a changing of the monetary guard taken place with the U.S. economy in so precarious
a position. When Paul Volcker arrived, everyone knew the economy was a mess. Volcker’s obvious job was to clean it up. Today,
the general perception is that Alan Greenspan will leave the economy in great shape, and that Bernanke’s job will be to keep
it that way. However, nothing could be the further from the truth. Wall Street’s positive reaction to the appointment of Ben
Bernanke is yet another example of how completely clueless most investors are when it comes to the Fed and the precipice over
which America’s economy now teeters.
US Federal Reserve Bank Chairman Alan Greenspan is confused - why are long-term interest
rates so low? Is what he calls "too low" a risk premium courtesy of his successful policies? Inflation runs at an 18-year
high. Will gold climb further, and the dollar resume its decline?
Every few days, a senior Fed official expresses concern regarding the effect of high gasoline
prices on inflation. These comments are always phrased in the way a meteorologist would report on the weather, as if the phenomenon
in question is an act of nature. Even stranger, these statements imply that only the Fed can hope to save us from this natural
Ben Bernanke, current chairman of the administration’s council of economic advisors, is
President Bush’s nominee to succeed Alan Greenspan as chairman of the Federal Reserve. We believe will see more fine tuning
of monetary policy with potentially negative implications for the dollar. We have extensively commented on Bernanke for over
Last year, as the Fed first began to raise rates, I made two observations. If the Fed
does what they almost always do, they will raise rates higher and go longer than anyone at the beginning to the cycle believed.
Secondly, I suggested that the Fed would like to see a little inflation come back, as well as significantly higher interest
rates, before they have to deal with the next recession or slowdown.
"The optimists' 'Dow 40,000' forecast, in my view, is off by at least one zero. If history
allows the Dow to fulfill its normal Elliott wave destiny, it will ultimately prove to be off by two zeros. (For the full
roundtrip forecast that A.J. Frost and I graphed in our superbullish 1978 book, see Figure 8-3 in Elliott Wave Principle.)"
As the same time as reporting losses that were worse than the gloomiest expectations,
General Motors has announced a breakthrough in negotiations with its unions that will reduce the firm’s crippling health-care
liabilities. But GM is likely to need more big cost cuts to avoid sliding into bankruptcy.
There is no longer a constituency in academia or anywhere else for higher inflation. Instead,
there is now an entrenched monetary-policy technocracy that, while it may argue over technicalities, subscribes to a clear
consensus that controlling inflation is the Fed's No. 1 job. Unlike the Supreme Court, there are no raging ideological battles
at the Fed that will require the new chairman to choose sides. "It's irrelevant what somebody's politics are," says Frederic
Mishkin, a professor at Columbia University, a former chief economist of the Federal Reserve Bank of New York, and a member
in good standing of the monetary-policy technocracy. "It just matters whether they would be a good central banker."
Dealing with pension and health-care problems is distracting America's bosses from their
core business—assuming managing legacy costs has not become just that: GM has been described, not wholly in jest, as a pension
hedge fund and health-insurance business that happens to make cars.
If the stock market's falling were not bad enough the bond market has also been falling.
We note that we have failed to make any new highs in the recent up cycle. This is not unusual as we note that since the major
low was made at the height of the 1970's inflationary period in September 1981 that the bond market has made interim lower
highs on three other occasions before moving later to new all time highs. We have labelled our key highs and lows since those
lows in 1981. Lows are generally more predictable occurring on average every three years (1981, 1984, 1987, 1990, 1994, 1997,
2000, 2002, and 2004).
An icy wind is howling through the futures world. Accountants, brokers and bankers standing
too close to the door left open by Refco's Phillip Bennett may yet catch pneumonia. This latest American business scandal
will not destroy the financial system, but it will dissolve much of the trust that holds it together.
In the U.S., common stock share prices are in U.S. dollars, and so are the various averages and indexes
of these share prices. This includes the Dow Jones Industrial Average -- the DJIA or Dow - the most-quoted market indicator
by the media.
The purchasing power of the U.S. dollar has shrunk over time. In August 2005, $100 bought what $78,
$55, $28, and $16 bought 10, 20, 30, and 40 years earlier, respectively.
So, meaningful examination of the Dow over time must be done on a purchasing power basis. The Dow
over time, shown as purchasing power -- what it could buy - is called the "Real DJIA"
The long-term Real DJIA is a "severe roller-coaster" on a 3.5 decade time scale. (The Real S&P
is similar.) This dominant historical reality is overwhelmingly relevant to long-term stocks-holders and to the Social Security
personal accounts issue.
The Fed has painted itself into a corner: to stop inflation from taking over, it would
need to put a serious dampener on consumer credit. Because of a much greater sensitivity the consumer has towards interest
rates now than in the past (because of the high debt load), such medication would not only throw the country into recession,
but could easily lead to a depression. If the Fed was truly vigilant and raise interest rates sufficiently to stave off inflation,
we would destroy the over-extended housing market. The problem is that the housing market may already be past its peak, and
while interest rates have been climbing, monetary policy continues to be accommodating. Add to the equation that Bush will
appoint a successor to Greenspan in the coming months; he is likely to favor someone close to him, someone favoring growth
over fighting inflation.
Before silver is done, however, not only should/will/must it revert to the historic
gold/silver mean ratio, suggesting a commensurate price for silver of $62.50 per ounce once gold becomes fairly priced.
However, silver's scarcity should cause it to surpass even gold's price. Even if I am dead wrong about any upcoming
increase in the price of gold, today's gold price alone, when divided by 40, suggests a "mean-ratio value" for silver of $11.75,
which is a tidy 60% rise over today's actual silver price!
With housing prices continuing to outpace both income and inflation from coast -to coast,
it is hard not to see a housing bubble, according to a comprehensive report published today in Standard & Poor's CreditWeek.
The report looks at the implications of the bubble for builders, bankers, and owners in the United States and abroad, as well
as in the structured finance and REITs markets, from both the credit and equity perspectives.
The US housing boom is peaking. We still have statistics indicating that its going strong,
but also clear indications that it is slowing. It is my view that should the US consumer slow decidedly, there will be little
incentive for the Chinese, say, to keep supporting the USD. They may decide at some point to go ahead and try to focus on
their Asian markets, as might Japan, figuring that the US is toast anyway for a decade. Should that happen, I am sure we will
be looking at a very serious possibility of a real bonafide USD crisis. Basically they would be saying, the US consumer market
is maxed out, and not worth saving.
If the “saving glut” really is here to stay, there are two main possibilities. The first
is that America's consumers will continue to barrel along and the imbalances between America and the rest of the world will
increase further. The second is that Americans themselves will start saving again, perhaps because the housing market falters
or because high petrol prices begin to bite. With the rest of the world still determined to save too, that would send the
global economy into a tailspin.
The key question to ask about the effect of rising prices on demand for petroleum products
is this: Will rising prices cause demand for petroleum to fall faster than depletion reduces the total available quantity
of the substance?
Because if depletion reduces the amount of available oil, and there is still strong marginal
demand for every barrel, the long-term price will rise. Any reduction in nominal price is a temporary market phenomenon. Call
it a trading opportunity.
A wide range of commodities are hitting multi-decade and all-time highs including oil,
natural gas, copper, uranium, and now gold among many others. The inflation induced economy hit industrial commodities
first as the ever increasing expansions sucked up the normalized supply levels. Gold has lagged many of these since
the big demand for gold materializes once the inflation is widely recognized. A dumbed down public easily fooled by
bogus economic statistics and hedonic measurements are only now awakening to accelerating inflation. Gold is close to
record low levels in terms of many other commodities such as oil.
If an exchange between two parties
is voluntary, it will not take place unless
both believe they will benefit from it. Most
economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.
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.