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Our March 1, 2008 Newsletter
Edition
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IN THE NEWS:
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DOMINICAN REPUBLIC
IS MEXICO'S CHIEF TRADING PARTNER IN THE CARIBBEAN
By Rubia Rodriguez - March 4, 2008
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Mexico considers the Dominican Republic to be its major business
partner in the Caribbean area and is the second largest receiver of
Mexican goods and its Latin American investments after Brazil.
Dominican ambassador to Mexico, Pablo Mariñez, has estimated that trade
of over US$3 billion between Dominican Republic and Mexico has greatly
assisted both countries. Maríñez, speaking during a reception in
the Dominican embassy in Mexico marking the 164th anniversary of
Dominican independence, stated that bilateral relations between the two
countries are improving greatly and that there are various trading
agreements and treaties now in effect.
.
http://www.caribbeannetnews.com/news-6443--18-18--.html
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EMERGING MARKETS MAY
FARE BETTER AS DEVELOPED WORLD STRUGGLES
By James Saft - February 12, 2008
.
It probably won't be pretty and it certainly will be volatile, but
massive investment in infrastructure and the absence of a debt bubble
will allow emerging markets to fare better, even as the developed world
struggles. Emerging markets have had a bad start to the year,
hurt by a growing fear that a recession in the United States would, as
it historically has, hit them harder. That seemed to dash hopes for a
decoupling, the theory that markets are no longer as tied to the
economic performance of the United States as they once were. But
a historic program of urbanization in emerging markets - and all that
entails: power, transport and a growing service sector - is highly
unlikely to be derailed and will provide a huge stimulus to offset
declines in exports.
.
Fixed investment, as in roads, rail, utilities and buildings, rose by
27 percent in China and India last year, according to Nomura
International, and at a combined $2.2 trillion is poised to exceed that
of the United States in the next two years. What it means is that
emerging markets will probably decouple more than most people believe,
said Shanat Patel, global emerging market strategist at Nomura in
London. Exports are much smaller than fixed asset spending but
people think an export-led slowdown will slow fixed asset spending
quite sharply. That would be the tail wagging the dog.
.
This is not to say that emerging markets are immune to global economic
trends. A fall in trade with rich nations will hurt. And when investors
take big hits in their developed world holdings, they will tend to sell
their emerging markets stocks and bonds too. So, if we accept
that the United States will have a recession and Europe and Japan
suffer too, what would that mean for emerging markets? It would
certainly hit exports. Andrew Garthwaite, a global strategist at Credit
Suisse, estimates that a 1 percent fall in developed market growth
would shave Chinese export growth by 3 percent and GDP growth by 1.3
percent. China recently reported 2007 GDP growth of 11.2 percent, so
such a hit would not be the end of the world.
.
Critically, we find global emerging market exports to other global
emerging markets have been resilient, as retail sales growth in both
Asia and Latin America have held up because: real rates are low,
savings ratios are high and leverage is low, Garthwaite wrote in a note
to clients. The leverage and savings issues are especially
important. The developed world, especially the United States, is coming
off a debt binge that artificially increased growth, profits and asset
values. Banks are having a tough time playing their part in a
recovery because losses are too big in proportion to capital, while
consumers are vulnerable, having borrowed too much and saved too little.
.
It is all pretty much the reverse in emerging markets. The ratio of
debt to equity at emerging market companies, including banks, is 35
percent, as opposed to 156 percent in the developed world, according to
Nomura data, while savings are high. Put it this way: A lot of
growth in the United States recently came from investment in things
like real estate, which is now going down in value, or in marble
countertops in expensive kitchens, which in the current context seem,
shall we say, extravagant. In contrast, Morgan Stanley sees $300
billion of investment in emerging market railroads over the next five
years. Let's see: Emerging markets have money and need
investment, while developed markets have banking problems and have
misallocated resources. So, where would you put your money -
marble countertops or railroads?
.
http://www.iht.com/articles/2008/02/12/business/rtrcol13.php
.
EDITORS NOTES:
Once again, nothing new for our readers. The developing or
emerging markets have economies operating on cash rather than credit,
for the most part in terms of consumer spending, AND while the national
savings rate in the US has gone negative, citizens in poorer developing
markets are still socking money away in their bank accounts. In
addition, while a recession in the US or Europe will no doubt hurt or
have its effects, it certainly can be surmised that the recession will
be far worse in the developing nations than it will be in the emerging
markets. To highlight the idea of continued government
expenditures for infrastructure in the developing or emerging markets
(in contrast to bridges falling down in the US due to lack of funds for
maintenance), certainly the new subway - monorail system and continued
highway projects in the Dominican Republic are some examples of
this.
.
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CHOMSKY: POORER
COUNTRIES FIND A WAY TO ESCAPE U.S. DOMINANCE
By Michael Shank, Foreign Policy in Focus - February 12, 2008.
.
Michael Shank:
In December 2007, seven South American countries officially launched
the Bank of the South in response to growing opposition to the World
Bank, the International Monetary Fund and other International Financial
Institutions. How important is this shift and will it spur other
responses in the developing world? Will it at some point completely
undermine the reach of the World Bank and the IMF?
.
Noam Chomsky:
I think it's very important, especially because, contrary to the
impression often held here, the biggest country Brazil is supporting
it. The Bank of the South could turn out to be a viable institution.
The Bank of the South is a step towards integration of the countries.
Could it weaken the IFIs, yes it can, in fact they're being weakened
already. The IMF has been mostly thrown out of South America. Argentina
quite explicitly said, Okay, we're ridding ourselves of the IMF.
And for pretty good reasons. They had been the poster child of the IMF.
They had followed its policies rigorously and it led to terrible
economic collapse. They did pull out of the collapse, namely by flatly
rejecting the advice of the IMF. And it succeeded. They were able to
pay off their debts, restructure their debts and pay them off with the
help of Venezuela which picked up a substantial part of the debt.
Brazil in its own way paid off its debt and rid itself of the IMF.
Bolivia is moving in the same direction.
.
http://www.alternet.org/audits/76657/
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EDITORS NOTES:
Not to beat the same old drum, but another example of economic
de-coupling. Why make mention? Because this may be part of
an important developing economic and investment trend to consider going
forward. In other words, the rise in prominence of the so-called
developing or emerging markets, and perhaps the decline of those other
previous world economic powers as well. Which is to say, some of
these other so-called developed wealthy nations still have substantial
military capabilities, but do they have a sufficiently healthy enough
economy to pay for it all going forward? Sort of like being the
proud owner of a limousine, but not having enough money to fill the gas
tank makes the ownership some what meaningless (if you do not have the
money to drive it). What does all this have to do with a news
story regarding the IMF, or the possible speculation of it's
decline? Who owns or is behind the IMF economically? Money
drives the politics, power and influence. Poor countries with no
money often find themselves out of the loop in terms of power and
influence as a result. Something to ponder as some of these
issues and trends possibly develop over the next decade.
.
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QUALITY OF LIFE
KEEPS AHA GENERATION ABROAD - February 7, 2008
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Escaping pressure kettle lifestyles has led to more Brits moving
further afield, and has resulted in a whole generation who are more At
Home Abroad (AHA), according to a global study of British expatriate
opinions and attitudes. The Nat-West International Personal
Banking Quality of Life Report, undertaken in conjunction with think
tank, Center for Future Studies, surveyed British expatriates from
across the world. It revealed that the desire for a better way of life
was a strong reason to leave the UK, with over a third (37%) of Expats
surveyed putting quality of life as their top factor for living abroad,
closely followed by standard of living (26%) and cost of living (20%).
Consequently, 92% of Expats surveyed feel they have a better quality of
life abroad, and 63% don't plan to return to UK shores, feeling more At
Home Abroad (AHA). The findings show: 87% confirming their life
abroad is better than expected, 91% are happier than they were in the
UK, 90% are financially better.
.
http://www.moneyextra.com/news/news-quality-life-037584.html
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THE FORCES DRIVING
THE MIDDLE CLASS INTO EXILE
By Minette Marrin - February 24, 2008
.
In all the anxiety about migration, which is an infuriating new
euphemism for immigration, little is said about emigration. Yet just as
immigration has hugely increased, so has emigration. In particular,
large numbers of skilled Britons are emigrating. Perhaps that does not
mean much and perhaps, in the churning melting pot of 21st-century
globalization, it does not matter much, but it is striking.
According to new figures from the Organization for Economic Cooperation
and Development, Britain is going through the biggest brain drain of
any country and its biggest exodus for more than 50 years; one in 10 of
our most highly skilled graduates has left and no other nation is
losing so many qualified people; overall, only Mexico has more
emigrants.
.
There are now more than 3.2m British-born people living abroad; of them
1.1m are highly skilled university graduates, according to the
exhaustive OECD report. Of these professionals, more than
three-quarters have lived abroad for more than 10 years. Their
most favored destinations, rather unsurprisingly, are North America,
the Antipodes, Spain and France. Figures from the Office for National
Statistics for 2006 show that 207,000 Britons left that year - one
every three minutes. Do we care? The British have had a long
history of expatriate life, more so than most countries, and in a time
of easy travel and global opportunity one might well expect it. It may
not be permanent anyway and, besides, huge numbers of highly skilled
foreigners are arriving here to replace the highly skilled natives who
leave.
.
All these changes are happening so fast that it is only possible to
guess at what they mean. What we are seeing is clearly a brain drain
but not, it seems, a net brain drain. It appears to be a net drain of
well educated natives. If so, there will surely be profound
consequences for British culture. It is difficult not to suspect,
despite the lack of hard evidence, that so many educated people, many
of them still young and keen to work, are leaving because they are
giving up on this country. At least that is what many of them say.
.
This country certainly has changed a great deal and fast. Nobody can
deny that in recent years society has become much less civil, much more
fragmented and newly divided into alarming ghettos; a large, disordered
underclass is growing of people who do not know how to bring up their
children, with disastrous results; schools and hospitals in some places
are not just bad but dangerous; the streets in cities are so
frightening for young people that more carry knives and use them; the
old are poor and neglected; we have lost our trust in pensions and in
banking.
.
More than anywhere else in the supposedly civilized world, we are spied
on, intruded on and cross-questioned by incompetent bureaucrats who
then lose our confidential details; in a country with a proud
reputation for freedom, our liberties are being eroded, either by new
laws or by politically correct conventions; our taxes are wasted on
incompetent government and public services; uncontrolled immigration
has inflamed anxieties about overcrowding, crime and public services as
well as national identity; Britannia is being struck off our coinage
for the usual daft reasons. And so on.
.
http://www.timesonline.co.uk/tol/comment/columnists/minette_marrin/
.
EDITORS NOTES:
Indeed, it is not that people are giving up on their country, but
rather that their country has given up on them (and this of course is
most prominent in the so-called industrialized wealthy welfare states,
which seem to be turning their backs in a variety of ways regarding the
middle class). Central bankers allow the value of the currency to
erode to nothing, inflation robs the purchasing power of the average
citizen, politicians continue to borrow and spend into oblivion, civil
rights have gone out the window as so-called democracies seemingly move
closer to what one may define as a police or militarized state, not to
mention that today's younger generation are finding it difficult, if
not impossible, to even consider the same kind of middle class
lifestyle that their parents had before them. Once again, this is
a driving force behind the trend we had spoken of many time before:
Trading Places.
.
In other words, the poor and unemployed elsewhere looking to seek out
their pot of gold in the so-called wealthy industrialized nations
(still believing in the myth), whereas the middle class in those very
same so-called wealthy nations are heading for the exit door as quickly
as possible (and often enough, heading for those very same developing
or emerging market countries). How will all this play out in
terms of demographics, economics and taxation? As tax revenues go
down (in part because of all the citizens that have moved away), and
social welfare spending goes up (in part because of the elderly baby
boomer retirees, and more costly social health care expenditures as
well), what kind of solutions will the politicians come up with to
bridge the gap? Quite honestly, we are afraid to ask and probably
would rather not want to know. After all - would you trust an
arsonist to all of a sudden get religion and come up with a fire
prevention program as the newly assigned fire chief? That is
really the proper analogy, if you want to assume the geniuses that
helped create the current environment are of any mindset all of a
sudden to change course and fix those very problems they created.
.
.
CREDIT CARD DEBT
RELATED TO HOUSING CRASH
By Jason Hidalgo - Reno Gazette-Journal - 2/10/2008
.
Like many Northern Nevadans, 34-year-old Jack Zenteno and his wife,
Betty, found their finances taking a severe hit from the area's housing
crisis. With no savings to draw from, the Zentenos found
themselves quickly racking up $30,000 worth of credit card debt, mostly
to pay for daily expenses. As more homeowners struggle with
skyrocketing house payments, several experts expect many of them to
start using their credit cards as a means to get by.
.
Anybody who is having trouble servicing their mortgage is going to try
using credit cards to finance those other expenditures, said Tom
Cargill, an economics professor at the University of Nevada,
Reno. I suspect you will find that a lot of the states that have
had the most serious mortgage problems and foreclosures will also tend
to have higher balances (on their residents credit cards). It's a
trend that holds true for Nevada, which has been hit especially hard by
the sub-prime mortgage crisis. Nevadans had the second-highest average
credit card balance in the nation at $7,645, according to Experian's
www.NationalScoreIndex.com site. California residents were fourth with
a mean credit card balance of $7,209. Mississippi residents had the
lowest mean credit card balance nationwide at $5,216. Nationwide,
the use of revolving credit fueled largely by credit cards kept
increasing throughout 2007, according to a recent consumer credit
report by the Federal Reserve. After a 5.4 percent increase in the
first quarter of 2007, use of revolving credit saw an 8.8 percent jump
in the third quarter. By November last year, use of revolving credit
rose by 11.3 percent.
.
http://news.rgj.com/
.
EDITORS NOTES:
We suggested to you before that while some retail sectors posted modest
gains or sales over the recent 2007 Christmas shopping season, and that
these sales were almost exclusively ALL debt related, based upon
borrowed money, or other wise simply put, via credit cards. In
other words, a FALSE signal of prosperity or sales growth, once you
peel back the onion or look under the hood, as they say. Credit
card debt rose at an 11.3% annualized rate in November 2007 after
rising at an 8.5% rate in October. By comparison for previous recent
years, credit card debt rose at a rate between 2% and 4% from 2003 to
2005. In other words, sales were up a modest 5 percent during the
2007 Christmas season in some sectors (but not all, as some sectors
reported a negative season) and yet credit card borrowing was up 11
percent. What does that tell you?
.
Indeed, credit card debt and automobile loans will be the next shoe to
drop. According to Moody's Economy.com and Equifax, roughly 5.7
percent of home equity lines of credit were delinquent or in default at
the end of last year (December 2007), up from 4.5 percent a year
earlier, AND roughly 7.1 percent of auto loans were in trouble, up from
6.1 percent. Personal bankruptcy filings, which fell significantly
after a 2005 federal law, are starting to increase again (personal
bankruptcies rose 48 per cent in first half of 2007).
.
Want to know what the real problem is? US consumers continue to
live a lifestyle they cannot afford, on someone else's money (despite
the headlines regarding the sub-prime issues, Joe and Jane consumer
still do not get it, and still insist upon borrowing money with credit
cards). The average personal savings rate in the United States,
which, after reaching a peak of $2,285 in 1984, dropped below zero with
an average MINUS (or negative) $322 in 2006. Until all this debt
can get worked out, and unless the average American consumer learns to
get his or her act together in terms of financial prudence, no amount
of interest rate cuts or free bonus checks from the government will
solve the problem. The solution is akin to Nancy Regan's famous
slogan - Just Say No (to debt, and spending money you simply do not
have). Will the American consumer ever get their own personal
financial house in order? So far it does not look like they want
to.
.
.
A LOOK AT THE
CONSUMER END OF A STUMBLING ECONOMY
By Charles R. Morris - The Washington Independent - February 12, 2008
.
One can pity Federal Reserve Chairman Ben S. Bernanke. No other federal
reserve chairman ever cut interest rates by a full 1.25% within just
eight days, as Bernanke has done. But the monetary skies remain as
leaden and thunder-clouded as ever. The stock market keeps quivering
downward, crowds thin at the malls, jobless queues grow. Wal-Mart
reports that customers are using their Christmas gift cards for
groceries. The hard reality is that the economy is facing a
one-two knockout blow from a collapse in consumer spending, plus a
shock-and-awe wave of asset write-downs that is wreaking havoc in the
financial sector. The more Bernanke floods the economy with easy money,
the worse the final reckoning is likely to be.
.
First the consumer. For decades, personal consumptions share of GDP
averaged in the 66 percent-67 percent range. In 2000, however, it moved
up sharply, hitting 72 percent in early 2007, the highest rate of
consumption in any modern country ever. How did consumers pay for
it? Well, not with their wage packets as median household incomes were
roughly flat in the 2000s. Instead, households doubled their debt load,
and personal savings rates dropped to zero. Almost all the new
borrowing was against houses. Very low interest rates and super-easy
mortgage rules drove house prices up 50 percent between 2000 and 2005,
one of the fastest jumps in history. As prices soared, consumers
refinanced again and again, rolling over the proceeds into pricier
houses and more consumption. Wall Streets economists looked on happily,
and constructed elaborate theories proving that the debt spiral could
continue indefinitely.
.
But as outstanding mortgages balances ratcheted higher and higher, they
finally smacked up against the ability of homeowners to service their
debt, no matter how low the interest. A tipping point was crossed last
year, when it dawned on markets that houses were overpriced and by a
whole lot. Home prices are now in free fall; price drops of 20 percent
to 30 percent will be required to get them back in line with incomes.
Stuck with heavy debt service and no cash left in their homes,
consumers are cutting back hard. The credit merry-go-round, in short,
has started to run backwards.
.
http://www.truthout.org/docs_2006/021208H.shtml
.
.
THIRD OF RECENT U.S.
HOMEBUYERS IN NEGATIVE EQUITY - February 12, 2008
.
More than 30% of U.S. homeowners who bought in the past two years owe
more on their mortgage than their house is currently worth, a housing
market research company said on Tuesday. The housing market
peaked in most U.S. markets in the past two years. Of home buyers in
2006, 39% of those with a median 10% down payment now have negative
home equity similar to 30% of those who purchased in 2007, said online
company Zillow in its quarterly home value report. With
consecutive declines over the past five quarters, we haven't seen the
housing market bottom yet, and it may very well get worse before things
get better, said Stan Humphries, Zillow vice president of data and
analytics. Even many markets that have been largely insulated
from recent declines, like some in the Pacific Northwest, reported
notable value declines in the fourth quarter, he added.
.
http://www.financialpost.com/
.
.
ONE IN 10 HOME LOANS
IS UNDER WATER: Economy.com
February 22, 2008
.
One-tenth of U.S. homeowners hold mortgages that are larger than the
worth of their homes, Moody's Economy.com said on Friday. Nearly
8.8 million homeowners, or 10.3 percent, are in over their heads, its
chief economist, Mark Zandi, estimates. As a result, millions of
U.S. homeowners have the incentive to abandon their properties.
With an already unwieldy supply of homes for sale, more inventory could
prolong a recovery of the hard-hit U.S. housing sector, suffering one
of the worst downturns in history. Zandi earlier this week told
Reuters he expects home prices to drop by 20 percent from their peak in
2006. He expects home sales to hit bottom this spring, housing
starts to reach a nadir this summer and house prices to trough in the
spring of 2009. The surge in foreclosures is putting further
downward pressure on the housing market because it adds to the
inventory of homes for sale, already at a lofty level.
.
http://www.reuters.com/article/domesticNews/
.
EDITORS NOTES:
This is nothing short of a mess, but of course no surprise to readers
of our newsletter. The good news is, US properties are now being
marketed to Europeans, who aside from perhaps taking advantage of the
drop in real estate prices also get the double benefit of having Euros
or Sterling to spend, meaning the actual cost for the US real estate is
50 percent off, once you factor in the currency exchange rates.
However, will the Europeans keep buying and are there enough of them to
pump up the US housing market? With estimates of an additional 20
percent drop in US housing values for 2008, we will have to wait and
see.
.
.
FOREIGN BUYERS EYE
U.S. HOMES: Many take advantage of dollar's weakness, but are they
getting skittish too? By Amy Hoak, MarketWatch - February
25, 2008
.
Some second-home buyers coming to the United States to scoop up
property in the shadow of Walt Disney World are finding that it is,
indeed, a small world after all -- especially when it comes to getting
a bargain. The current weakness of the dollar has led some
foreign buyers to projects like Lake Buena Vista Resort Village &
Spa, a condo hotel development in Orlando, Fla. About 64% of
buyers at the resort are residents of countries other than the United
States, said Larry Cohen, senior vice president of the development.
When they vacation there, they also stretch their money on purchases
from discount clothing to golf clubs, he said. These people buy
so much while they're here, they have to ship it back, he said.
.
But some industry watchers are wondering if foreign appetite for U.S.
real estate could be waning these days. International buyers could be
feeling some of the same jitters that domestic buyers are, concerned
chiefly about home-price drops to come. People are hesitant to
enter the market right now, given the uncertainties, said Lawrence Yun,
chief economist for the National Association of Realtors. That could be
the case for not only U.S. residents but for foreign buyers as well,
Yun said. Like Americans, these investors could be watching for a
bottom before they buy, said James Gaines, research economist for the
Real Estate Center at Texas A&M University. These buyers in
particular aren't pressured to make a move quickly, since a second home
or investment is often a purchase that can wait, he said.
.
http://www.marketwatch.com/news/story/weak-dollar-lower-prices-attract/
.
.
NY-NJ PORT AUTHORITY
TO EXIT AUCTION-RATE MARKET - February 21, 2008
.
The New York-New Jersey Port Authority on Thursday said it will redeem
$200 million of auction-rate paper and exit this market in six to eight
weeks after rates briefly spiked as high as 20 percent. Numerous
auctions of this type of debt have failed since late January because
investors were spooked by bond insurers' problems and dealers stopped
supporting the auctions. This has forced many issuers to pay high
penalty rates. For example, the rates on $100 million of the Port
Authority's auction-rate paper last week rose to 20 percent from 4.3
percent, agency officials said.
.
http://www.reuters.com/article/bondsNews/
.
.
AUCTION-RATE BONDS
FORCE PREDATORY YIELDS ON CITIES
By Jeremy R. Cooke and Martin Z. Braun - February 25, 2008
.
U.S. municipal borrowers from Camden, New Jersey, to Sacramento,
California, may face a third week of higher interest costs as failures
in the auction-rate bond market persist. Auctions run by banks to
determine the rate on more than $45 billion of bonds didn't attract
enough buyers last week, according to JPMorgan Chase & Co.
research. Even some successful auctions resulted in rates that were
twice what borrowers paid in January, as investors who submitted bids
demanded higher yields.
.
Investors enticed by rates that jumped as high as 20 percent are
seeking opportunities in the $330 billion market no longer supported by
dealers from Goldman Sachs Group Inc. to Citigroup Inc. and UBS AG that
for years committed their capital to prevent failures. Thousands of
unsuccessful auctions have driven up taxpayers' borrowing costs and
left investors in the securities unable to get their money.
Aggressive institutional investors have moved in to pick up
auction-rate issues at short-term rates ranging from 5 percent to as
much as 15 percent or more, George Friedlander, a municipal strategist
at Citigroup in New York, said in a report at the end of last week.
.
http://www.bloomberg.com/
.
EDITORS NOTES:
Allow me to explain what is going on. Municipal Government Bonds
are now being forced to offer up to 20 PERCENT
interest in the competitive bond auction market, as opposed to the
manipulated interest rates contrived by the US Federal Reserve (which
in turn effects other kinds of yields, interest rates and of course
mortgage rates as well). Which is to say, Municipal Governments
in the US are being forced to offer incredibly high interest rates in
order to entice investors to buy their bonds, which is nothing short of
unbelievable. Interest rates for bonds issued by The Delaware
River Port Authority of Pennsylvania and New Jersey soared as high as
12 percent recently, as just one example.
.
The other thing that is going on is, holders of older lower interest
rate bonds are having some trouble selling their bonds, and in some
cases, investors in municipal bond mutual funds are having trouble
liquidating out as well. Aside from the market mechanism at play,
so-called underwriters and market makers in these securities (Citibank,
Goldman Sachs, etc.) are refusing to step up and become the buyer of
last resort, and as a result, suggesting a somewhat illiquid market for
US Municipal Bonds. A direct quote from the article says:
The collapse accelerated as banks including Citigroup and UBS, which
have taken losses of about $162 billion from securities related to the
collapse of sub-prime mortgages, grew unwilling to commit capital to
support the auctions. State regulators are scrutinizing sales of
auction-rate securities by closed-end mutual funds after investors
complained they couldn't sell their holdings.
.
Of course, some supposedly savvy investors are attempting to scoop up
these bonds, with the attractive double-digit tax-free yields.
And in theory, government bonds, regardless of whether we are talking
about Federal Government or Municipal Government are considered more
credit worthy simply because unlike private companies facing liquidity
problems, governments can always increase taxes in order to collect
more revenue. Regardless, our analysis of all this is as follows:
.
First off, this credit crisis is much, much worse than is what being
portrayed by the mainstream media, and we would suggest caution
regarding the domestic US bond market for the time being, at least in
terms of liquidity issues. The true rate of inflation inside the
US is indeed in the double-digits and perhaps even approaching 20
percent, and finally, you can possibly witness a sell-off or drop in
value of a variety of bonds (corporate and government) to reflect the
fact that any financial instrument paying 4 percent interest (when
inflation is actually running at 15 percent) just does not cut it in
such an environment. In other words, why would you buy a US
Dollar bond paying 4 percent interest knowing the inflation rate is
double or triple that amount? You probably would not, and why
there is a very real possibility that the bond market could face a
correction to reflect this differential (regardless of the credit
rating, but rather more because the interest is not keeping up with
inflation).
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PLACES TO PARK CASH,
OTHER THAN A MATTRESS
By Brett Arends - February 23, 2008
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By now, anyone seeking a safe place to keep their money is probably
considering a sock or the mattress in the spare room. Many so-called
safe havens have frozen up, or worse. As for Treasuries, 30-year bonds
are yielding just 4.58% and 10-year debt just 3.79%.
Inflation-protected bonds, or TIPS, offer minuscule real returns. And
the values of all these bonds will plummet if long-term rates start
rising. As poker legend Herbert Yardley once remarked: I wouldn't
bet on this hand with counterfeit money.
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http://online.wsj.com/article/
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EDITORS NOTES:
Indeed cash is king is such an environment, but even better than cash
is an asset that holds its value. Gold, silver, commodities and
of course real estate (purchased for fair value and in another market
rather than inside the US, not priced in USD even better) comes to mind
as just some ideas to consider.
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READERS WRITE IN:
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You should do an article on petrodollar warfare. Check You-Tube
and you will come across what might be the most frightening economic
crisis the US is going to face, that oil will be moving out of the
dollar and into the euro and ruble..... the dollar will be greatly
devalued by then.
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EDITORS REPLY:
We are convinced you will not see cheap petroleum again, at least not
in our lifetime. Some people will argue the Hubert's Peak theory,
which basically says the world is running out of oil very quickly, and
therefore higher prices due to low supply and increased demand.
Others claim it is all a conspiracy by the oil companies. Either
way, the result is the same. However, looking at this from
another angle, it certainly is true that the US dollar has in essence
been backed by oil once Nixon took the US off the gold standard.
In fact, most of the world's commodities are traded in and priced in US
Dollars for that matter, which is why a devaluation of the US dollar
leads to higher commodity prices automatically by default (supply and
demand issues aside). Will the oil exporting nations dump the US
dollar altogether? Some have already started to move in that
direction, at least in piecemeal by using a basket of currencies.
In any event, if oil and other commodities are traded exclusively in
some currency other than the US Dollar in the future, then in that
moment, there will be no support for the old greenback in such a case.
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Regarding recent petroleum prices, you should take note that oil has
passed the US$100 per barrel mark and seems to have found a new
benchmark (gold also is flirting with US$1,000 per ounce - a new
record). What does all this mean for consumers inside the
US? Our speculation is that US oil companies are trying to
temporarily keep a lid on price increases at the pump due to the
current US political elections. But consider this. When
petroleum was US$20 per barrel, US retail gasoline prices were roughly
about US$1.20 per gallon at the pump. Now petroleum costs 500
percent more. Is it not logical that the retail cost of gasoline
at the pump should not also increase by 400 or 500 percent in
tandem? If so, this means that the retail costs for gasoline at
the pump inside the US should rise to roughly US$5 or US$6 per gallon,
representing a doubling of retail costs in terms of where they are at
the moment. Even if the US Federal Reserve was not running the
printing presses, this jump is fuel costs alone would be enough to
wreck havoc with the US economy by itself.
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