Dumping the Dollar – U.S. Government Bonds Aren’t Supported By China Anymore

Dumping the Dollar

This might be the biggest news item of the year:

Business Insider
By Vincent Fernando
August 20, 2010

Earlier this week we highlighted how cut its holdings of U.S. government bonds by the largest ever monthly amount in June. Expanding this thread, it should be noted that China’s U.S. debt ownership has fallen to $843.7 billion in June from $938.3 billion in September 200,9 according to U.S. Treasury Department released Monday. This equates to nearly an 11% reduction by China.


Yet interestingly, the 10-year U.S. treasury yield has fallen over the same period, despite the meme that China’s voracious U.S. debt buying supports keeps America’s bond yields low. (Note that China’s U.S. debt holdings encompasses more than just ten-year U.S. bonds, however. )

Now, obviously China continues to support the market by owning a vast quantity of government bonds, in fact the most of any nation as of June, but China’s reduction in treasury holdings since September 2009 seems to imply that U.S. treasury yields can fall, and thus treasuries rally, even as China pares back its ownership substantially (11% is a lot for less than a one year period).

This makes the U.S. government bond rally, or bubble depending on your view, even more peculiar. You can’t blame it on China propping the market with its standard dollar-recycling activities anymore, it seems.

The “paradox” of declining yields and declining Chinese demand dissolves once one grasps the real forces at play. As a perspective commenter (“Jonathan”) notes,

You won’t say what’s right there in the open and beyond blatantly obvious. It’s not peculiar what’s happening, it’s trivially easy to figure out.

It’s the Fed supporting the US Government bonds directly. In fact, the only thing keeping the US Government from being eaten alive by its debt is the Fed; the only keeping the housing market from absolutely collapsing into the abyss is the Fed holding down rates. There isn’t any other sovereign power on earth that is still buying large quantities of US debt (nobody can afford their own debt much less ours too). Only one entity has the purchasing power and the clandestine ability to be doing this without it showing up on the data sheets.

In other words, China has begun its pull back from supporting the US dollar to infinity, and will begin to allow the dollar to collapse through dilution as they hedge off their dollar holdings. The next 24 months will bring substantial real inflation accordingly, easily traced by jumps in the price of commodities.

The game is nearing an end.

I have two points to add.

  1. The Fed might consider its strategy necessary, but it’s inherently self-defeating. The Central Bank can increase demand for U.S. bonds by, essentially, creating money out of thin air and buying up Treasuries. In the short term, this will force rates down; indeed, since the Fed can create unlimited amounts of funny money, it could push rates down quite low. But only for a time. At some point, foreign buyers will grasp that the Fed’s actions are inflationary, and they’ll demand much higher interest rate, or else exit the market, much like China is doing. The “end game” Jonathan refers to is that point at which the Fed is the only major buyer in the U.S. bond markets: a bizarre situation in which the rates on U.S. debt might be forced down quite low through the Fed’s infinite buying power, while outside the U.S. debt market, the economy is experiencing extremely high interest rates and runaway price inflation.
  2. In June, people like Tim Geithner, Larry Summers, and Chuck Schumer were praising Beijing’s announcement of its decision to remove the Yuan’s long-standing currency peg to the dollar and allow floating exchange rates. (See my post “The End of Chimerica.”) It was assumed that the dollar would weaken vis-à-vis the Yuan, making American exports more attractive and helping to rebuild America’s manufacturing base. (Whether these economists actually believe this is an open question, but let’s assume that they do.) The most direct way for Beijing to maintain its currency peg (which entailed suppressing the value of the Yuan) was for it to print Yuan and buy dollars, most often in the form of U.S. Treasuries. (The currency peg was, in this way, a central component of the “Chimerica” arrangement of massive U.S. government and consumer indebtedness and low-wage Chinese manufacturing.) The problem is, ending this arrangement will likely lead to something far more dramatic than a putatively advantageous weak dollar — a serious collapse in the bond U.S. market.

“Jonathan” put it best, “the game is nearing an end.”

Economic forecaster: ‘Greatest Depression’ coming

Economic forecaster: ‘Greatest Depression’ coming

Daniel Tencer

Raw Story

Collapse of middle class means there’s no fuel for recovery, Gerald Celente argues

The US economic recovery in recent quarters is little more than a “cover-up” and the world is headed for a “Greatest Depression,” complete with social unrest and class warfare, says a renowned economic forecaster.

Gerald Celente, head of the Trends Research Institute, told Yahoo!News’ Tech Ticker that there’s no risk of a “double-dip recession” because the first “dip” never ended.

“We’re saying there’s no double dip, it never ended,” Celente said. “We’re looking at the Greatest Depression. There’s no way out of this without [rebuilding] productive capacity. You can’t print [money to get] out of it.”

Celente, who has been credited with predicting the 1987 stock market crash, the collapse of the Soviet Union and the subprime mortgage crisis of recent years, said the US and other developed countries can expect to see the sort of social unrest the world witnessed in Greece this year once government attempts to shore up the economy fail and lawmakers turn to “austerity measures” to plug gaping budget holes.

“You’re going to see it all over the world,” Celente said. “What they call austerity programs … What are they doing? They’re bailing out the banks and they’re making the people pay for it. And the people don’t like that.”

Celente pointed to a near-riot that took place last week in Atlanta when 30,000 people showed up to be put on a housing waiting list, saying that the event is a harbinger of what’s to come.

He also argued that the way unemployment is measured today masks a much larger joblessness crisis because “once you’re off the unemployment rolls, you’re no longer unemployed.”

Celente said the current unemployment rate, if it were measured as it was measured during the Great Depression, would be around 17.5 percent. And he expects that number to rise to around 22 percent in the coming years.

“One of the good businesses to get in to may be guillotines,” Celente quipped. “Because there’s a real off-with-their-heads fever going on. People are really fed up.”

Celente argued that the conditions needed for an economic recovery simply don’t exist. “Let’s go back to the 1990s. We’re in a recession. What got us out of it? The Internet. It wasn’t a government policy, and Al Gore didn’t invent it.”

But today, Celente argued, there are no new booming industries pushing towards economic expansion. And the US middle class may not have the right skills to take up the challenge.

“We went from a country that used to be merchants, craftspeople, manufacturers, to clerks and cashiers,” Celente said. “We have to bring manufacturing back to America.”

Celente agreed with his Tech Ticker interviewers that the green economy, which seeks to replace fossil fuels with alternative and renewable energy sources, is a good place to start on an economic recovery, but he said the Obama administration’s handling of the issue was misguided.

Celente pointed out the US has committed $54 billion for nuclear power expansion, and has also committed to “clean coal” — neither of which he sees as being large drivers of the green economy.

The government is “not putting money where it should go,” he said.

Bad economic news stuns investors

Bad economic news stuns investors
Arab states cut financial aid to Palestinians

Investors ‘stunned’ by bad economic news on Thursday

Investors were “stunned” on Thursday by a bunch of job news stories that indicate that the economy is spiraling downward.

  • The first shock was more people filed claims for unemployment benefits last week than at any time since November, according to the Washington Post. Forecasters had expected the number of claims to fall to 450,000 or so, but instead they rose to 500,000 last week, heading back toward the record 640,000 per week that was reached in March, 2009.
  • Manufacturing activity in the mid-Atlantic region has fallen sharply in August. A growth index published by the Federal Reserve of Philadelphia was predicted to rise to 7.2 this month from 5.1 in July, but instead it fell to a negative value, -7.7, indicating contraction instead of growth, according to Bloomberg.
  • The yields (interest rates) on two-year notes issued by the U.S. Treasury fell to a historically low level — 0.48% on Thursday, according to Bloomberg. Yields on 10 year and 30 year bonds are also at record low levels. This means that financial institutions are putting as much money as possible into safe Treasuries, rather than risking the stock market, where they might hope to get returns higher than 0.48% per year.
  • Similarly, yields on “safe” German bonds fell to historically low levels, while yields on Greek bonds have risen to the crisis levels of May, prior to the European bailout, according to the Telegraph. As we’ve reported several times, Greece’s economy is in a death spiral, as businesses close and unemployment skyrockets. The high yields on Greek bonds indicate that investors believe that Greece will default.

In June, I posted a report about an apparent worldwide decline in economies around the world, and that we appeared to be headed once again to a worldwide freeze in trade and transportation, just as happened at the end of 2008. (See “7-Jun-10 News — Globally, May was a month of ominous events.”)

Since then, I’ve reported on one trend after another that confirms that trend. It seems increasingly certain that things will be pretty bad in the fall.

From the point of view of Generational Dynamics, the worst is yet to come, including a major stock market crash and financial crisis.

Additional links

Arab states have cut financial aid to the Palestinian Authority (PA), and countries like Saudi Arabia are not fulfilling their promises. The PA will face a serious liquidity crisis in September, and will have difficulty paying salaries. Reuters

Russia and Belarus have been on bitterly disagreeable terms since the breakup of the Soviet Union in 1991, but relations may improve after the coming presidential elections, since they may result in the defeat of Belarus president Alexander Lukashenko after 16 years in power. Spiegel

The U.S. State Dept. said on Thursday that a new agreement for the start of direct peace talks between Israel and the Palestinians is close to completion. I wonder how long it will be before someone pisses someone off again, and the whole thing collapses? VOA

(Comments: For reader comments, questions and discussion, see the 20-Aug-10 News — Bad economic news stuns investors thread of the Generational Dynamics forum. Comments may be posted anonymously.) (20-Aug-2010) Permanent Link

19-Aug-10 News — France orders expulsion of Gypsies
The Mosque at Ground Zero

France’s president Sarkozy orders expulsion of up to 15,000 Gypsies


Gypsy populations in Europe <font face=Arial size=-2>(Source: WSJ)</font>
Gypsy populations in Europe (Source: WSJ)

The Roma — also known as Gypsies or by the politically correct euphemism “travelling people” — are a semi-nomadic ethnic group that have been persecuted for centuries. The was even a Nazi holocaust of Romas. Today, there are some 350,000 Gypsies in Europe, mostly in eastern Europe. (Roma people are not Romanians except, of course, when they live in Romania.)

There are some 15,000 Gypsies living in France, many living in unathorized refugee camps or abandoned buildings. France’s President Nicolas Sarkozy has ordered a crackdown on Roma living in some 300 unauthorized campsites, according to Radio France Internationale.

By the end of the month, 700 Roma will be returned to their countries of origin, usually Bulgaria or Romania, and more will be expelled in the months to follow.

The expulsion of the Gypsies is part of a larger law and order plan by Sarkozy, according to WSJ (Access). Other measures proposed by Sarkozy and his political party are to strip French citizenship from people of foreign origin who were convicted of trying to kill police or other public officials, and to imprison the parents of delinquent children.

The law and order drive is popular with the French people, but the expulsion of the Gypsies is causing widespread human rights criticism, according to Agence France-Presse (AFP). Romania’s foreign minister expressed the view that the economic crisis was causing “xenophobic reactions” in France.

France’s Green Euro-MP party called Sarkozy’s policy “state racism,” according to AFP, and a Le Monde editorial says that the policy activates “racist impulses.”

From the point of view of Generational Dynamics, xenophobia is a characteristic of generational Crisis eras, resulting in political conflicts in mild cases, and in full scale wars in the worst scenarios.

The Mosque at Ground Zero

We see a similar dispute of this kind going on in the U.S. with respect to the proposal to build a mosque next door to the Ground Zero site where the World Trade Center was brought down by Islamist terrorists on 9/11/2001. This has resulted in a drama of almost comic proportions, with a lot of politicians saying things and making fools of themselves. The NY Daily News reports that Nancy Pelosi, who is arguably the nation’s politicizer-in-chief, is accusing her opponents of politicizing the issue, and is calling for an investigation of the finances of those who oppose the mosque, as if the families of 9/11 victims need to be paid to oppose the mosque.

On the one hand, you have a great deal of xenophobia, as well as a lot of people who are genuinely offended by the idea of a mosque at Ground Zero. On the other hand, you have the loony left that couldn’t care less about the mosque, but see it as an opportunity to humiliate the United States.

Outside of those who sympathize with the victims of 9/11, no one actually believes the strongly held opinions they claim to have. This is shown by the fact that no one cares about the Greek Orthodox church that used to stand near Ground Zero, according to Fox News, but no one is applying the same principles to the Greek Orthodox Church that they’re apply to the mosque.

Muslims themselves have a much more sensible view of the dispute. Memri quotes Al-Arabiya director Al-Sharq Al-Awsat as saying that, “The majority of Muslims do not want or need a mosque near ground zero,” and adds:

“Because the idea of a mosque right next to a site of destruction is not at all an intelligent one. The last thing Muslims want today is to build a religious center that provokes others, or a symbolic mosque that people will visit as a [kind of] museum next to a cemetery.”What the citizens of the U.S. fail to understand is that the battle against the 9/11 terrorists is not their battle. It is a Muslim battle – one whose flames are still raging in more than 20 Muslim countries… I do not think that the majority of Muslims want to build a monument or a place of worship that tomorrow may become a source of pride for the terrorists and their Muslim followers, nor do they want a mosque that will become a shrine for the haters of Islam… This has already started to happen: [the Islamophobes] are claiming that a mosque is being built over the corpses of 3,000 U.S. citizens who were buried alive by people chanting ‘Allah akbar’ – the same call that will be heard from the mosque…”

Additional links

Japan and India are close to signing a nuclear cooperation agreement, where the Japanese will build nuclear reactors in India. This corresponds to the agreement that China has to build nuclear reactors in Pakistan. As I’ve said in the past, I expect Pakistan to be allied with China, and Japan and India to be allied with the U.S. in the coming Clash of Civilizations world war. South Asia Analysis Group

Swat Valley in northwest Pakistan used to be a favored and glamorous vacation spot for Pakistanis and rich Europeans alike. But first there was the devastating earthquake of 2005; then there was the invasion of the Taliban, and their reign of terror; and now the astonishingly vast floods have made the region a disaster zone. Spiegel

No heavy rains are forecast for Pakistan this week, but even without more rain, the floods will last at least until the end of the month. RFI

The unemployment rate is as high as 70% in some parts of Greece, as the country’s draconian austerity measures reduce the country’s budget deficit, at enormous social cost. As shops and businesses shut down, Greece appears to be in a death spiral, with no end in sight. “Things are starting to simmer here,” says an unemployed shipbuilder. “And at some point they’re going to explode.” Spiegel

After years of debate over whether low-fat diets were better or worse than low-carbohydrate (Atkins) diets, the question has been resolved: They’re both equally effective, or ineffective, depending on your point of view, but neither is better than the other. NY Times

(Comments: For reader comments, questions and discussion, see the 19-Aug-10 News — France orders expulsion of Gypsies thread of the Generational Dynamics forum. Comments may be posted anonymously.) (19-Aug-2010) Permanent Link

18-Aug-10 News — The collapse of the Gaza tunnel economy
Pakistan’s government is snubbing flood aid from India

The collapse of the Gaza tunnel economy

The May confrontation between the Israel Defense Force (IDF) and the “freedom flotilla” that tried to break the Gaza blockade has had an unexpected consequence.

That confrontation resulted in the deaths of nine Turkish citizens, and resulted in international outrage and demands for Israel to end the blockade.

Israel never agreed to end the blockade, but they ended up changing the import rules: Anything can be imported into Gaza except for a specific list of items, things like weapons or building materials that Hamas, the terrorist group governing Gaza, could use to build bunkers.

Up until that time, there was a vigorous “tunnel economy” in Gaza. Thousands of Gazans were employed digging tunnels under the wall separating Gaza from Egypt, and then smuggling all kinds of goods through those tunnels.

But now that many of these goods can be imported legally, the tunnel economy is going through a “depression,” as the people who built, maintained and smuggled goods through the tunnels are now mostly unemployed. The unemployed include people who were some of the best paid Palestinians in Gaza, earning some 120 shekels ($32) a day, according to Reuters.

At their peak, there were 2,500-3,000 tunnels in operation, but now there are just 50 operational tunnels, with only 10 working at any one time, according to the article. Palestinian merchants now buy their goods from Israel, rather than from smugglers.

The end of the tunnel economy is actually a disadvantage to Hamas, according to CS Monitor. Hamas has benefited in two different ways from the blockade: first by generating international sympathy and playing the victim, and second by shifting the economy to the black market that it largely controls.

However, Hamas remains firmly in control of Gaza, as the Palestinian Authority remains in control of the West Bank. As I’ve been writing since 2003, from the point of view of Generational Dynamics, the region will be re-fighting the genocidal was between Jews and Arabs that followed the partitioning of Palestine and the creation of the state of Israel in 1948.

Additional links

Pakistan’s government is refusing to acknowledge or accept millions of dollars in flood aid offered by the Indian government, just as they snubbed aid from India after the 2005 tsunami. This is what my mother used to call “cutting off your nose to spite your face.” Times of India

In four days, Russia will deliver nuclear fuel to Iran’s Bushehr nuclear reactor. This means that after four days, Israel can no longer launch an attack on Bushehr, for fear of triggering widespread radiation. Jerusalem Post

The Pentagon has released its annual report on the military capabilities of China. We will have more to say about this report in the coming days, but suffice it to say that China is fully capable of a large-scale missile attack on the U.S. and the Pacific fleet. Department of Defense

An analysis of the Afghanistan war concludes that the U.S. withdrawal from Afghanistan will leave the Taliban in control of “vast areas” of the country. Memri

Pakistan’s Inter-Services Intelligence (ISI) agency now says that homegrown Islamist militants have overtaken the Indian army as the greatest threat to Pakistan’s national security. This is the first time since Partition in 1947 that India hasn’t been viewed as the top threat. WSJ (Access)

A new book debunks the myth that Hitler was a heroic soldier during World War I who was radicalized by the war, leading to the birth of the Nazi movement. Newly discovered letters and papers suggest that Hitler was referred to as a “rear area pig” (Etappenschwein) by his comrades, and that the heroic story was fabricated by Nazi propagandists. Independent

I actually met chess champion Bobby Fischer once, when we were both teenagers and I was in NYC and made an improptu visit to the Manhattan Chess Club. He was kind of a childhood hero of mine — until he lost by default to Spassky in 1974, and then later turned into a Nazi. Anyway, he died in 2008, and a nine year old Filipina girl has been claiming to be Bobby Fischer’s daughter, but a DNA test proves that she isn’t. BBC

(Comments: For reader comments, questions and discussion, see the 18-Aug-10 News — The collapse of the Gaza tunnel economy thread of the Generational Dynamics forum. Comments may be posted anonymously.) (18-Aug-2010) Permanent Link

17-Aug-10 News — Iran announces new uranium enrichment centers
‘Hindenburg Omen’ predicts stock market crash

Iran announces ten new uranium enrichment centers

Western governments are alarmed by reports by the state-controlled Press Tv news service that Iran will begin construction of ten new uranium enrichment centers next year.

Currently, Iran’s Natanz enrichment facility is enriching uranium to a level of 20%, and another facility is already under construction. An Iranian official is quoted as saying, “Studies for the location of 10 other uranium enrichment facilities have ended. The construction of one of these facilities will begin by the end of the (current Iranian) year (March 2011) or start of the next year.”

Iran claims that they need to produce 20% enriched uranium for a medical research reactor, but former U.N. weapons inspector David Albright, in an interview with the LA Times says that these reasons aren’t credible.

According to Albright, Iran already makes far more than enough 20% uranium to fuel the medical research center. He asks, “Why are they doing this? This could just be centrifuge people trying to be more efficient, or it could be that they want to make 20% material that is way beyond what they need for the research reactor, so you do have to ask: Is there a hidden weapons motivation?”

This comes at a time when many people are wondering if either Israel or the U.S. is planning a military strike to take out Iran’s nuclear capabilities. The Arab countries don’t want Iran to have nuclear weapons either, and both Saudi Arabia and the United Arab Emirates have recently indicated that they might approve military action.

Iran’s statements on Monday were alarming. One would not be blamed for wondering if Iran were intentionally trying to provoke an actual attack.

Iran’s strategy

I’ve described Iran’s strategy many times, but a summary is appropriate here.

Iran’s last crisis was was the 1979 Great Islamic Revolution, followed by the Iran/Iraq war that ended in 1988. Like any crisis war, it unified the country behind its leaders.

Today, Iran is in a generational Awakening era, and last year experienced massive student protests, along with political opposition that’s expected to last for years. The geriatric leaders are desperately searching for a strategy that will unify the country again behind its leaders, just as occurred in the 1980s and 1990s.

The strategy they’re using is the strategy that worked in 1979 — blame everything on the Great Satan (the U.S.), and even provoke a military action that will force the population to support its leaders, just as the Iraqi invasion of Iran did. (See “China ‘betrays’ Iran, as internal problems in both countries mount”),

From the point of view of Generational Dynamics, this strategy works during a generational Crisis era, but cannot possibly work during a generational Awakening era. Even a U.S. military strike will not unite the Iranian people behind their leaders, as the students will blame the government for provoking the strike.

Iran is a schizophrenic country, with a bitterly anti-American and anti-Western leadership, but where the younger population is generally pro-American and pro-West, and have no particular desire to see Israel pushed into the sea. Iran’s leaders are aware of this, and their attempts to reverse those attitudes cannot succeed during an Awakening era.

However, even the younger population favors Iran’s nuclear program. They know that Saddam used weapons of mass destruction (poison gas) during the Iran/Iraq war, and the Iranians are surrounded by countries (Pakistan and Israel) that already have nuclear weapons.

On the other hand, the Israelis and the Arabs are extremely anxious about the possibility of Iran obtaining a nuclear weapon, and it’s possible that a military strike on Iran will occur.

As I’ve said in the past, it’s my expectation that when forced to choose in the Clash of Civilizations world war, Iran will be on the side of the West.

Additional links

The internet is buzzing about the “Hindenburg Omen,” a set of technical indicators that supposedly indicate an imminent stock market crash. The conditions for the Hindenburg Omen were met last week, but other analysts claim that it’s all meaningless. CNBC

Swaziland has the highest HIV/Aids infection rate in the world, and the lowest life expectancy, but experts are puzzled about why Swazis have resisted all attempts to change the behaviors that put them at risk for AIDS. Reuters

On Sunday, Financial Times reported that the Barack Obama had personally warned Turkish Prime Minister Recep Tayyip Erdogan that the U.S. would refuse some armed sales to Turkey, if it doesn’t change its position on Iran and Israel. But Turkey’s President Abdullah Gül denies that any such threat had been made. Zaman

Israel’s Prime Minister Benjamin Netanyahu began a visit to Greece on Monday to develop closer Israeli-Greek ties, just as relations between Israel and Turkey have been souring. Greece and Turkey are historic enemies, but both Greece and Israel deny that they’re forming an alliance against Turkey. Deutsche Welle

Pakistani flood victims blocked highways on Monday to protest the lack of government help. Public anger has grown after two weeks of floods, and hundreds of villages have been marooned. The situation continues to deteriorate. Reuters

(Comments: For reader comments, questions and discussion, see the 17-Aug-10 News — Iran announces new uranium enrichment centers thread of the Generational Dynamics forum. Comments may be posted anonymously.) (17-Aug-2010) Permanent Link

Time Is Running Out for the West

Time Is Running Out for the West

by Ambrose Evans-Pritchard

Recently by Ambrose Evans-Pritchard: The Death of Paper Money

Time is running out for the West

Moody’s expects Britain’s public debt to reach 90pc of GDP within three years. Photo: Alamy

“Genuinely adverse debt dynamics were only expected to materialise in 15 to 20 years. The crisis has ‘fast-forwarded’ history, eroding all the time available to adjust, ” said the group’s quarterly Sovereign Monitor.

Moody’s fears that the US will crash through its safety buffer by 2013 if growth falters (adverse scenario), with interest payments topping 14pc of tax revenues. The debt-to-revenue ratio has already doubled in three years to 430pc.

The US, UK, Germany, France, and Spain are all at risk of an “interest rate shock”, either because they must roll over a cluster of short-term debt (US, France, Spain) or because deficits are so large.

Countries that “fail to demonstrate the level of social cohesion required to stabilise debt” will lose their AAA rating. “Intra-generational” conflict between young and old requires careful handling. States that delay pension reform risk spiralling downwards.

Moody’s said the world had changed since Europe’s debt crisis. None of the large sovereign states can still assume it is credit-worthy. “The burden of proof now falls on governments,” it added.

Britain has the safety cushion of long debt maturities, but the structural deficit is causing debt “to grow an unsustainable rate”: the UK is clearly one of the weaker countries in the AAA peer group.

Moody’s expects Britain’s public debt to reach 90pc of GDP within three years. It warned that any slackening in fiscal tightening by the Government squeeze would lead to a “sharp rise” in funding costs if growth also slowed, with a nasty effect on debt dynamics.

The warning appears to vindicate the Coalition’s claim that immediate belt-tightening is needed to restore confidence and head off a gilts crisis where markets would impose harsher measures.

The current crisis differs starkly from the “one-off” debt spikes after the Second World War, when young economies were able to outgrow the debt burden. This time the threat lies ahead as the aging crisis drives up pension and health costs on a static tax base. “While the current stock of debt is large, it is dwarfed by the accumulation of future liabilities if policies do not change.”

The Overvalued Part of a Market Cycle

by Richard Daughty
The Daily Reckoning

Previously by Richard Daughty: Geithner’s Delusional Recovery

//

I had just gotten home from arguing with the in-laws about how they were idiots for not buying gold instead of those stupid stocks and mutual funds, and their laughter was still ringing distastefully in my ears when Eric Fry here at The Daily Reckoning put up a chart of the P/E ratio of the S&P500 over the last 30 years since 1981.

Interestingly, in 1981 the stock market was in a kind of a funk and the Price/Earnings ratio was hitting about 7, which is on the low side, whereupon (thanks to Congress authorizing tax-deferred retirement accounts in 1982) the stock market proceeded for the next 20 years or so, in fits and starts, to rise to, stunningly, a P/E ratio of almost 30 in 2000, whereupon it promptly turned over and has been falling, in fits and starts, for the last 10 years as the price of the S&P went down. Wow! What a ride!

Of course, it has been an entire paragraph where I did not snarl at something, or heap Mogambo Disdain And Scorn (MDAS) on the despicable Alan Greenspan, Ben Bernanke and the whole worthless Federal Reserve, Congress and Supreme Court, so let me say that buying the S&P500 in 2000 for $1,600 to get a P/E of 30 was, if you are even fleetingly familiar with P/E ratios over the last century, absolutely ridiculous, and the morons buying the S&P500, or recommending it, at such stupidly-overvalued prices should have their names and faces posted somewhere in a database of “investing idiots and miscellaneous dangerous lunatics.”

I say this because the historical record is crystal-clear: When the P/E ratio goes above 22 or so, it won’t be long until the price of the stock falls enough so that the Price/Earnings ratio is back down in the upper teens in a bull market, and back down to around 5 in a severe bear market, whereupon it won’t be long until the price rises again on its way to “overvalued” status. That’s the nature of cycles.

There are those who think that this historical record-stuff is just old history, now rendered meaningless in an age of monumentally stupid governmental deficit-spending, pandemic crushing debt, and a despicable Federal Reserve always, always, always creating yet more, staggeringly more, tragically more, catastrophically more excess money, which is what caused the problems in the first place!

On the other hand, there are those who do NOT regard the lessons of a couple of centuries of P/E ratios to be irrelevant, and who last think that Wednesday is still considered “current events.”

Like, for instance, my wife, who wanted to question me about where I was until almost midnight last Wednesday, which is, I figure “the past” because I have forgotten almost all of it.

So, I told her, “Hey! Hold on! That’s ancient history! Why even bring up that old, useless stuff unless you are spoiling for a fight with me, which leads me to ask a question of my own, which is ‘Hey! You want get into a fight with me? Huh? Is that what you really, really want? Huh? Is it? Huh? Huh?”

Well, it was, alas, as she is one who also thinks there is valuable information in old data, like what happened last Wednesday or, if you ask her, what happened with this whole P/E thing. And she would be right, as I note that the S&P500 is currently sporting a P/E of around 15 – which is surprising in that we are in a recession and the S&P 500 is still 30% below its high of over 1500 in 2000, ten years ago! Hahaha! Idiots!

So, with every stinking ounce of Unshakable Mogambo Certainty (UMC) I can muster, I say that the price of the S&P500 will fall, in fits and starts, until its P/E ratio gets down to less than 7, probably less than 5, and maybe less than 4.

And this is assuming that earnings don’t fall, which they will, and so I wouldn’t be surprised if the S&P500 fell to less than 200.

And, with special emphasis to in-laws everywhere, anyone buying a broad basket of common stocks and bonds, but not buying gold, silver and oil to protect themselves against the roaring inflation in consumer prices that will result from an idiot Federal Reserve creating massive amounts of money so that the government can deficit-spend those massive amounts of money, is a moron.

Surprisingly, buying gold, silver and oil is an investing strategy made especially for us morons, because it requires no thinking and, “Whee! This investing stuff is easy!”

August 19, 2010

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning, and other fine publications.

Copyright © 2010 Richard Daughty

“Without A Revolution, Americans Are History.”

“Without A Revolution, Americans Are History.”

By Paul Craig Roberts

The United States is running out of time to get its budget and trade deficits under control.  Despite the urgency of the situation, 2010 has been wasted in hype about a non-existent recovery.  As recently as August 2 Treasury Secretary Timothy F. Geithner penned a New York Times Column, Welcome to the Recovery.

As John Williams (shadowstats.com) has made clear on many occasions, an appearance of recovery was created by over-counting employment and undercounting inflation. Warnings by Williams, Gerald Celente, and myself have gone unheeded, but our warnings recently had echoes from Boston University professor Laurence Kotlikoff and from David Stockman, who excoriated the Republican Party for becoming big-spending Democrats.

It is encouraging to see a bit of realization that, this time, Washington cannot spend the economy out of recession. The deficits are already too large for the dollar to survive as reserve currency, and deficit spending cannot put Americans back to work in jobs that have been moved offshore.

However, the solutions offered by those who are beginning to recognize that there is a problem are discouraging. Kotlikoff thinks the solution is massive Social Security and Medicare cuts or massive tax increases or hyperinflation to destroy the massive debts.

Perhaps economists lack imagination, or perhaps they don’t want to be cut off from Wall Street and corporate subsidies, but Social Security and Medicare are insufficient at their present levels, especially considering the erosion of private pensions by the dot com, derivative and real estate bubbles. Cuts in Social Security and Medicare, for which people have paid 15% of their earnings all their life, would result in starvation and deaths from curable diseases.

Tax increases make even less sense. It is widely acknowledged that the majority of households cannot survive on one job. Both husband and wife work and often one of the partners has two jobs in order to make ends meet. Raising taxes makes it harder to make ends meet—thus more foreclosures, more food stamps, more homelessness. What kind of economist or humane person thinks this is a solution?

Ah, but we will tax the rich. The usual idiocy. The rich have enough money. They will simply stop earning.

Let’s get real.  Here is what the government is likely to do.  Once the Washington idiots realize that the dollar is at risk and that they can no longer finance their wars by borrowing abroad, the government will either levy a tax on private pensions on the grounds that the pensions have accumulated tax-deferred, or the government will require pension fund managers to purchase Treasury debt with our pensions. This will buy the government a bit more time while pension accounts are loaded up with worthless paper.

The last Bush budget deficit (2008) was in the $400-500 billion range, about the size of the Chinese, Japanese, and OPEC trade surpluses with the US. Traditionally, these trade surpluses have been recycled to the US and finance the federal budget deficit. In 2009 and 2010 the federal deficit jumped to $1,400 billion, a back-to-back trillion dollar increase. There are not sufficient trade surpluses to finance a deficit this large. From where comes the money?

The answer is from individuals fleeing the stock market into “safe” Treasury bonds and from the bankster bailout, not so much the TARP money as the Federal Reserve’s exchange of bank reserves for questionable financial paper such as subprime derivatives. The banks used their excess reserves to purchase Treasury debt.

These financing maneuvers are one-time tricks. Once people have fled stocks, that movement into Treasuries is over. The opposition to the bankster bailout likely precludes another. So where does the money come from the next time?

The Treasury was able to unload a lot of debt thanks to the Greek crisis,” which the New York banksters and hedge funds multiplied into “the euro crisis.” The financial press served as a financing arm for the US Treasury by creating panic about European debt and the euro. Central banks and individuals who had taken refuge from the dollar in euros were panicked out of their euros, and they rushed into dollars by purchasing US Treasury debt.

This movement from euros to dollars weakened the alternative reserve currency to the dollar, halted the dollar’s decline, and financed the massive US budget deficit a while longer.

Possibly the game can be replayed with Spanish debt, Irish debt, and whatever unlucky country swept in by the thoughtless expansion of the European Union.

But when no countries remain that can be destabilized by Wall Street investment banksters and hedge funds, what then finances the US budget deficit?

The only remaining financier is the Federal Reserve. When Treasury bonds brought to auction do not sell, the Federal Reserve must purchase them. The Federal Reserve purchases the bonds by creating new demand deposits, or checking accounts, for the Treasury. As the Treasury spends the proceeds of the new debt sales, the US money supply expands by the amount of the Federal Reserve’s purchase of Treasury debt.

Do goods and services expand by the same amount?  Imports will increase as US jobs have been offshored and given to foreigners, thus worsening the trade deficit.  When the Federal Reserve purchases the Treasury’s new debt issues, the money supply will increase by more than the supply of domestically produced goods and services. Prices are likely to rise.

How high will they rise? The longer money is created in order that government can pay its bills, the more likely hyperinflation will be the result.

The economy has not recovered. By the end of this year it will be obvious that the collapsing economy means a larger than $1.4 trillion budget deficit to finance. Will it be $2 trillion? Higher?

Whatever the size, the rest of the world will see that the dollar is being printed in such quantities that it cannot serve as reserve currency. At that point wholesale dumping of dollars will result as foreign central banks try to unload a worthless currency.

The collapse of the dollar will drive up the prices of imports and offshored goods on which Americans are dependent. Wal-Mart shoppers will think they have mistakenly gone into Neiman Marcus.

Domestic prices will also explode as a growing money supply chases the supply of goods and services still made in America by Americans.

The dollar as reserve currency cannot survive the conflagration. When the dollar goes the US cannot finance its trade deficit. Therefore, imports will fall sharply, thus adding to domestic inflation and, as the US is energy import-dependent, there will be transportation disruptions that will disrupt work and grocery store deliveries.

Panic will be the order of the day.

Will farms will be raided? Will those trapped in cities resort to riots and looting?

Is this the likely future that “our” government and “our patriotic” corporations have created for us?

To borrow from Lenin, “What can be done?”

Here is what can be done. The wars, which benefit no one but the military-security complex and Israel’s territorial expansion, can be immediately ended. This would reduce the US budget deficit by hundreds of billions of dollars per year.  More hundreds of billions of dollars could be saved by cutting the rest of the military budget, which in its present size, exceeds the budgets of all the serious military powers on earth combined.

US military spending reflects the unaffordable and unattainable crazed neoconservative goal of US Empire and world hegemony. What fool in Washington thinks that China is going to finance US hegemony over China?

The only way that the US will again have an economy is by bringing back the offshored jobs. The loss of these jobs impoverished Americans while producing over-sized gains for Wall Street, shareholders, and corporate executives. These jobs can be brought home where they belong by taxing corporations according to where value is added to their product. If value is added to their goods and services in China, corporations would have a high tax rate. If value is added to their goods and services in the US, corporations would have a low tax rate.

This change in corporate taxation would offset the cheap foreign labor that has sucked jobs out of America, and it would rebuild the ladders of upward mobility that made America an opportunity society.

If the wars are not immediately stopped and the jobs brought back to America, the US is relegated to the trash bin of history.

Obviously, the corporations and Wall Street would use their financial power and campaign contributions to block any legislation that would reduce short-term earnings and bonuses by bringing jobs back to Americans. Americans have no greater enemies than Wall Street and the corporations and their prostitutes in Congress and the White House.

The neocons allied with Israel, who control both parties and much of the media, are strung out on the ecstasy of Empire.

The United States and the welfare of its 300 million people cannot be restored unless the neocons, Wall Street, the corporations, and their servile slaves in Congress and the White House can be defeated.

Without a revolution, Americans are history.