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Our December 31, 2007 Newsletter
Edition
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YEAR END REVIEW: BEN'S WORLD WIDE
BUBBLE?
.
Since
we are now closing out the 2007 calendar year, this is the point in
time we usually offer some year end comments regarding economics and
other related issues. We cannot address everything, but we can
certainly do so in regards to some of the more notable or important
items, and one of the most disturbing things we see happening of course
is inflation (double digit US inflation, and increasing single digit
inflation elsewhere - world wide), and a possible global real estate
run up, courtesy of Ben Bernanke and the US Federal Reserve (please
note this is going on as US real estate continues to devalue). Is
Ben to blame personally? The answer is no, but the economic and
fiscal policies of the US Fed have motivated a number of reactions by
consumers, investors and foreign governments as well.
.
On
the issue of foreign governments, the Chinese government has recently
vehemently denied, and has taken issue with the comment, that they are
exporting inflation. The truth is, they are correct in part, even
though, every day low prices are not so low anymore due to increases by
the Chinese. Stated more plainly, the Chinese simply have been
reacting to a devalued US Dollar by increasing their prices.
Which is to say, anytime a currency devalues, and you are selling your
products priced in that currency, the prices MUST rise to compensate
for the devaluation (that is inflation in basic terms, prices go up as
the purchasing power of the currency or value of the currency goes
down). And so, oil has gone up in part for this very reason
(other issues of course play a factor as well specifically with oil),
copper, bauxite and even talking Tickle Me Elmo's perhaps made in a
factory in Ghuanzhou, China.
.
We
reported to you previously, that after a run-up in so-called hard
commodities, that you should expect to see a run up in soft commodities
(wheat, corn, beef, etc.) and of course retail food prices as a
result. This has been the case as you already know by visiting
the supermarket. Why has this happened? Well, if all of
these items are traded in US Dollars on world markets, and the US
Dollar is in a devaluation free fall, once again, the prices must go up
to compensate. Stated another way, because the US Dollar has been
used as a sort of base currency for world trade, by exponentially
inflating the money supply and devaluating the US Dollar, it truly has
been the case that Ben Bernanke and company has exported inflation to
the world, and not the Chinese. This is why you are hearing talk
from other countries about dumping the US Dollar, either as a peg to
their own currencies, or even in terms of world commodity prices.
Other countries do not want inflation, and that means getting rid of
the cause - which happens to unfortunately be the US Federal Reserve
Note.
.
Remember
of course that bankers are scared to death of deflation, because all
their loans made against real estate or other assets go negative if the
asset value declines below the value of the loan. For this
reason, bankers managing a fiat currency system will always opt for
inflation, and asset bubbles over deflation, if it comes down to making
a choice between the two. Much of this though is like a dog
chasing his tail, going round and round until he collapses in
exhaustion. Uncle Ben (Bernanke) has publicly stated before, that
the error made by the US Federal Reserve during the Great Depression of
the 1930's was to cut back on credit and restrict the money supply, and
he is determined not to make the same mistake. Of course, the
other danger you face by running the printing presses is to run the
risk of hyper-inflation, not to mention the destruction of the value of
savings accounts owned by middle class citizens. And so, during
the Great Depression, you had very high unemployment, falling asset
prices (declining housing and commodity prices), and in general,
everything became cheaper. Why? Simply because the US
Dollar strengthened in value, conversely as prices fell (however, today
US home values are falling while at the same time that we have rising
commodity prices). The result was that finding a job and putting
money in your pocket became harder back then, but if you had money or
were working and could get some cash in your hands, everything went on
sale for you (prices, home, food and labor costs came down). The
problem during the 1930's depression was, a notable portion of the
population was unemployed (about 25 percent) and out of cash.
Today, we have a very different scenario in more ways than one, which
why this is not your Grand-Fathers Depression nor your Fathers
Stagflation.
.
The
problem is that economic theories are just that, theories. Application
of certain policies or theories, based upon past experiment or
experience, is contingent upon all other things being equal, in order
to get the expected or same outcome. And so, the question: Is the
US economy in the same socio-economic situation it was during the Great
Depression or even during the Stagflation of the 1970's? The
answer is NO, and this is why simply inflating the money supply will
not solve the problem this time, even though it might have arguably
helped before in theory (speaking of the depression specifically and
not the scenario of the 1970s). In economic terms, sort of like
trying to teach a new dog old tricks, although the new dog is a
different breed, so to speak.
.
The
US still was an exporting nation during those previous time periods,
with major manufacturing industries solidly in place. In
addition, the US was still a net lender to the world, and not a net
borrower, not to mention that the national debt and trade deficits were
nowhere near what they are today (in fact there was no trade
deficit). Plus, consumer psychology was quite different, and the
expectations of the average consumer as well. Back then, most
average people were not invested in the stock markets or had the
expectations of a certain level of middle-class affluence as we know it
today. What has changed is the economic expectations of the
average American citizen, and thus the psychological motivation to go
into debt (and use one's home as an ATM machine) to fund this expected
lifestyle when income or other investments did not allow for it.
.
Indeed,
actual income for the average middle-class person has fallen over past
decades, remained stagnant, or otherwise has not kept up when inflation
and rising costs for housing, education and medical care are
factored. The result then has been, individuals going into debt
to continue funding a lifestyle not affordable otherwise. It has
truly been a fool's game played by both politicians and individual
consumers as well. Where this ends up is anybodies guess, but our
speculation is that it will not be positive, unless other things change
as well, which we do not see happening, at least not yet. Running
the money alone will not do it, but rather other fundamentals much
change.
.
One
of the most glaring things that has happened recently of course, has
been the flow of funds out of the US and into foreign markets.
All that extra liquidity and paper money the Fed has been printing
would seem to be flying the coop, rather than re-inflating the domestic
US housing bubble, or being lent out by the banks (the credit markets
seized up in August and again in November as even banks now are
refusing to lend money to each other, which is why this new US$40
Billion loan pool was recently organized by the Fed). Individual
citizens have been investing abroad both because the US real estate
market is in a decline (deflation of real estate prices) and perhaps as
an inflation hedge against a falling US Dollar as well. Along
with that, one would hope and think that American consumers would have
been shaken out of this speculative mindset they had earlier, but
apparently they have not. Instead of speculating with domestic US
real estate, some have been doing the same with foreign real estate now
(see news articles below).
.
The
only saving grace has been, since such buyers have found it very
difficult to borrow money in these various countries, or they have
found the interest rates to be extremely high (mortgage interest rates
in the Dominican Republic range from about 12 to 18 percent, and are
adjustable), they have often made these purchase for cash in these
other countries. But how? It could be that some people have
been taking home equity loans on the US real estate, and have paid cash
for the foreign real estate. To be sure, many people have been
buying real estate for cash in these other markets out of personal
savings, without taking any kind of loan to do so, and most of our
clients fit that bill. The problem is knowing what percentage of
recent sales fits into each of the categories overall, to determine if
that dog still can hunt (if these foreign real estate markets will
continue to run up 20 percent, 30 percent or whatever amount). In
other words, the wild card with real estate purchased outside of the US
by Americans is: Were they purchases done with actual saved cash, or
were these purchases made with borrowed money (funds borrowed inside
the US, and the foreign real estate paid for in cash)? Our gut
instinct is, looking at various pieces of information, that certainly
some of the foreign markets were driven by speculation and now the
speculators are in fact getting washed out, which is why real estate
sales have dipped in some of these markets recently (the speculators
are now gone, and thus a percentage of sales as well).
.
Any
market fueled by speculation and debt, is a major disaster in the
making. However, one could make the argument that the American
banks will get stuck with the disaster, whereas the banks in the
foreign countries where the property is located will not (they were not
involved). Which is to say, if this has been going on (borrowing
in their home country to buy real estate abroad), then certainly one
could walk away, literally to a non-mortgaged property in another
country. Regardless, while the US real estate market continues
with its difficulties, and while some of the foreign markets may not
see the spectacular gains they have posted in the past, in the least,
we do not foresee any US style declines (which is why some of these
foreign holdings may be a worthwhile alternative). However, we
cannot discount the fact that some Americans seen to have been buying
foreign real estate based upon the greater fool theory (that some other
American fool will come along and pay even more). But, assuming
you are paying cash for a home (and are not looking to play the
speculation lottery) when contemplating a real estate purchase in a
foreign country, then you should be in good shape over the long
term. Even though the Wall Street Journal news article below
reports that Dominican Republic real estate could go up by 50 percent
next year (in 2008), I would say such a prediction a bit too
enthusiastic to be taken as a sure thing (although we think it
plausible to see appreciation in your foreign real estate for 2008 as
opposed to a continued depreciation regarding US real estate, you
should not expect to see 50 percent gains).
.
Indeed,
real estate has gone up by 20 percent or more in past years in the DR,
Belize, Panama and Costa Rica, but this is no guarantee for next year,
even though we remain optimistic overall for some markets and for
certain specific reasons. Which is to say, prices remain low
compared with those in the U.S., particularly for waterfront properties
(lower sale prices have not been recorded for higher end properties
inside the US just yet because builders have been giving cash rebates,
in some cases up to 20 percent, free cars, free swimming pools and
other inducements - anything to keep a reduced sale price from being
recorded). However, the dollar generally buys much more house in
these countries than it does in the U.S., because labor and land are
less expensive. Aside from all this are the carry costs and
maintenance (annual real estate taxes, etc.). Many municipalities
in the US are broke, or to use the term of Chrysler's CEO,
operationally bankrupt. A number of staff are being laid off
already in some municipalities. Couple that with road maintenance
and other municipal services being scrapped, and the upkeep will be
left to wallow in some jurisdictions. Cape Coral, Florida is just
one such example (there are many, many more). However, this is
not the scenario in other developing markets.
.
Is
it a valid idea to consider a real estate purchase in the Dominican
Republic, Argentina, Uruguay, Panama, etc. in 2008? The answer is
still yes, but it all depends upon where exactly you are buying and
what you are paying. Certainly your motivations should not be
because you might become a millionaire overnight. Analyzing the
market, we can conclude that the run up in Vietnam, India, Belize,
Dominican Republic, Costa Rica, Panama and so on is directly related to
foreign cash in tourist areas, and local cash in other cases.
Either way, for the most part, it seems to be predominantly cash and
not debt (and if debt, substantial equity, as the local banks in these
countries have not been involved with this no money down, no income
verification nonsense in terms of domestic mortgages). The
foreign owned property areas (read tourist) have certainly seen the
most, shall we say, run up in this regard. This is why you need
to evaluate your purchase, and one good thing is that the speculators
are getting choked off as their access to cheap, borrowed money is
becoming difficult (which will slow down the price increases, and this
is a positive as far as we are concerned, as it restores some normalcy
to the market. We would rather see a steady increase of say, 7
percent annually, for twelve years straight than some kind of shorter
term boom and bust cycle, with wild gyrations).
.
However,
do keep in mind that there are an estimated 8 Million US citizens
currently living outside the US as expatriates (we think there are
more, and this number is simply a statistical guess offered up by some
US politicians and the IRS), and the projection is that roughly 10
percent of the almost 80 Million baby-boomers will be joining them
(meaning, we could be looking at 20 Million or more Americans living
outside of the US going forward). The truth is that even US
government bureaucrats have no idea how many people have already
expatriated because there are no hard and fast statistics, but the
point remains that this is still going to be a growing market (real
estate purchases abroad in reasonably priced markets due to this
demand). The only thing is, to highlight once again, certainly
the so-called sub-prime credit crisis is starting to flush out the
speculators, but there is and there will continue to be a segment of
the population in North-American and Europe that will be leaving and in
turn buying real estate abroad in less expensive locations
accordingly. If not for any other reason, many will do so as a
safer place to live and to escape the deteriorating economic and maybe
social conditions of these high-tax welfare states. I know this
all sounds like a very negative prediction or chicken-little
commentary, but my reply is, go and visit Cape Coral, Florida or a
number of other municipalities to get a glimpse of what is going
on.
.
Regardless,
one possible fallout from all this money flowing out the door (out of
the US, going elsewhere) could be a nervous knee-jerk reaction by the
politicians, claiming some new initiative to fight money laundering or
whatever, in order to stop the leakage. In 2007, it is estimated
that remittances back home by both US based legal and illegal
immigrants total some US$32
Billion Dollars. Factor in all
the middle-class and other American citizens getting their money out
with due haste (and buying US$200,000 homes for cash as opposed to an
illegal immigrant sending US$200 home to family members), and we are
talking about some very big numbers all told. Along these lines
in terms of recent government attacks against money laundering or
so-called illicit transfer of funds, an interesting article dated
titled: December
17, 2007Government's Laundering Claims Unfounded, by Kevin Reed,
states:
.
Money
laundering is not as rife as the government has claimed, and new
regulations will only increase red tape burden on business, advisers
have warned. The new rules, which move beyond its original scope
to include retailers and jewelers into reporting customers who could be
involved in money laundering, have been introduced without compelling
evidence that it is a problem, reported the Financial Times.
.
http://www.accountancyage.com/accountancyage/news/2205867/
.
In
summary, what does 2008 offer for individual investors and
consumers? First off, Ben Bernanke is between a rock and a hard
place (the man must be gulping Maalox as if it were Evian water right
about now). The US Fed has to choose between continue cutting
interest rates with the hopes this will assuage or reduce the current
economic crisis in the mortgage and credit markets OR raise rates to
try and choke off the inflation (that they themselves created), and as
well, to make US debt still attractive to foreign investors. In
other words, the choices are double-digit inflation and an attempt to
re-inflate the housing bubble, or a worsening of the recession that is
already under way (which could mean even more home foreclosures, higher
unemployment, etc.). We believe Bernanke will come under
tremendous political pressure to cut rates, considering it is an
election year, and it will be interesting to watch how this falls
out. Regardless, any meddling or central planning will only
prolong the crisis (such as ordering interest rates for existing home
mortgages to be frozen, while other interest rates possibly go up if
the later choice is adopted). Either way, the next credit crisis
may be personal credit card debt, and even though home mortgages may be
frozen, credit card debt issues will take a toll.
.
The
thing about globalization is that it cuts both ways. Many people,
including politicians, want to have their cake and eat it too.
They want all the benefits, but do not want to talk about or suffer the
downside. Which is to say, the domestic US companies moved the
manufacturing abroad, and that was all well and good, as it played into
the game plan of keeping inflation out of retail consumer prices in the
US, Canada, etc. Now of course, we are seeing individual citizens
moving themselves and their money up and out, which is causing some
consternation and shock as well (and now we are seeing recently arrived
immigrants moving back home to whence they came from also). No
one thought individual North-American and European citizens would
consider expatriating in droves to another country, and yet they
are. Why? Because real estate is cheaper, cost of living
and labor costs lower, there are no sub-prime mortgage problems, both
income and real estate taxes are usually lower, you often do not have
problems with drugs and gangs in the schools, and so on. In
short, money has been flowing out of the US and into foreign markets
like never before, but the new thing is that a good portion has been
individual citizens as opposed to institutional investors or companies
doing it alone. For this reason, we suspect a political backlash
could be brewing, which we have hinted at before. Meaning, watch
out for any attempts to further curtail asset transfers abroad (and as
the Boy Scout Motto goes, Be Prepared, but it with financial
relationships set up and dual citizenship as well, which is the boy
scout equivalent of a compass and a rain slicker in your
backpack).
.
Some people of course question our motivations for discussing such
topics, or otherwise ask: Do we think the US economy, and the world
economy, is headed for doomsday? The answer is no, as such
economic problems have a tendency to work themselves out eventually,
although some people will experience misfortune and pain along the way
(and certainly deservedly in some cases). The real problem
however, is leadership (or lack thereof), plus policies and decision
making, that may prolong the situation, or perhaps even make it worse
unnecessarily. In addition, the main concern of ours is that the
wrong man will be made to suffer for the ills of others, which is to
say, perhaps our clients, who did not foolishly embroil themselves in
debt, speculation or other ill fated behavior. However, if
history is any guide, this is exactly what could and probably will
happen. We are seeing signs of this already. Inflation or
devaluation of the money supply being just one problem that punishes
the saver or the pious man, while trying at the same time to help the
idiot who voluntarily got himself into trouble. The economist
Joseph Schumpeter called market correction mechanisms an economic cold
shower that weeded out the foolish, or otherwise made a clean sweep of
all the bad apples as it were, preparing the solid (and cleaned up)
footing for the next market expansion. However, this cold shower
mechanism is not permitted to work, at least not by lunatic politicians
pandering to get re-elected. Instead, large banks and other
financial institutions that idiotically loaned money with no collateral
or income verification end up getting bailed out with public tax-payer
funds, or are aided by the running of the presses (ergo,
inflation). The individual that should have known better, who
borrowed the money, also is given a pat on the head and is in effect
rewarded for being foolish as well. No one of course wishes ill
on another person. But at the same time, why should the man that
drives a ten year old Totyota Corolla on purpose, that has denied
himself certain things in order to make sure he is solvent and his
family protected going forward be made to suffer from the devaluation
of his savings, from higher income, payroll or real estate taxes simply
because he is the only one that still has the funds? Such is
grossly unfair and is truly punishment for sound behavior.
.
What is needed is a severe change of attitude, behavior and
culture. Money is not the problem, nor the Chinese, the Arabs or
even swamp gas. What is indeed the problem in terms of the US
economy, is a developed culture of leveraged credit and debt, both by
government and individual consumers as well, which we do not see as
changing direction. Even now, Christmas sales are up a meager 2
to 4 percent, yet credit card debt has gone up 7 percent. What
does that tell you? That consumers continue to borrow money to
fund their spending, putting themselves even further into hock.
And what will the reaction be by politicians? To bail out the
dopey credit card companies that continue to send free credit cards in
the mail to people they darn well know are not vetted to ascertain if
they are good credit risks, or have the where with all to pay it
back. And who will pay for the bail out? You know who.
.
Why are the economies in developing countries in such good shape?
Increased exports aside, the real answer has to due with consumer
psychology. Rice farmers in China, India and elsewhere often
enough save 20, 30 or 40 percent of their meager incomes, and otherwise
pay cash for anything they buy. American consumers, on the
aggregate, save nothing, and in fact continue to go deeper into debt
with borrowed money. Even the US government continues to borrow
more and more, and now are in hock to foreigners because there is no
money saved to borrow in the US. Using a very recent case in
point, we can look no further than an emergency cash infusion of US$5
Billion each to Citibank and Merrill Lynch. Where did that money
come from? An American bank? Another US corporation?
No, foreign governments, namely the United Arab Emirates and
Singapore.
.
In India they recently attempted to set up consumer financing and
leasing operations for car purchases. Know what happened?
Many of these places had to close up shop because Indian consumers
wanted nothing to do with it, and instead preferred to continue paying
cash for automobile purchases. This is why the consumers in these
countries, and the local economy will not suffer as the US conceivably
might in the coming years. This is the primary difference between
the two economies, and why you need to think about your investment and
maybe even relocation options accordingly. In any event, that is
our take on what we see unfolding and by the way, Happy New
Year.
.
.
IN THE NEWS:
.
.
THE
MIAMI HERALD TO OUTSOURCE COPYEDITING, AD WORK TO INDIA
Associated
press - December 28, 2007
.
The
Miami Herald is outsourcing copyediting of a weekly community news
section and some advertising production work to India, a newspaper
editor said Friday. Starting in January, copyediting and design
in a weekly section of Broward County community news and other special
advertising sections will be outsourced to Mindworks, based in New
Delhi. Earlier this month, The Sacramento Bee, also owned by the
McClatchy Co., announced it would outsource some of its advertising
production work to India.
.
http://www.iht.com/articles/ap/2007/12/28/business/
.
EDITORS
NOTES:
This article was brought to our attention by Fred in Florida who
writes: That #@&% Miami Herald is sending more #@&% jobs
abroad. I am canceling my #@&% subscription in the morning
(end of quote). Yes Fred, we know how you feel.
.
.
U.S.
EXPATS FACING TAX STICKER SHOCK
By
Sharon Reier - December 28, 2007
.
You
could say American expatriates were ambushed in May 2006, when the U.S.
Congress passed a new tax law - retroactive to the previous January -
that raised the tax bracket on anything U.S. expats earned overseas
beyond a fixed amount, and put a cap on expat housing allowances.
While some Americans who work overseas and filed U.S. tax returns in
2006 have already felt the pain, it appears that 2007 will be the year
of sticker shock, according to Steven Horton, a certified public
accountant practicing in Paris, whose clients include a roster of
long-term expats. The United States is
one of the few countries that taxes on the basis of citizenship rather
than residence.
.
http://www.iht.com/articles/2007/12/28/america/ATAXES.php
.
EDITORS
NOTES:
And so, just like the American Express commercial, membership has it
privileges, but in this case it happens to be higher
taxes.
.
.
THIS
IS THE SOUND OF A BUBBLE BURSTING
By
Peter S. Goodman - December 23, 2007
.
Two
years ago, when Eric Feichthaler was elected mayor of this
palm-fringed, middle-class city, he figured on spending a lot of time
at ribbon-cuttings. Now, most of his visions have shrunk. The
real estate frenzy that once filled public coffers with property taxes
has over the last two years given way to a devastating bust. Last
month, the city eliminated 18 building inspector jobs and 20 other
positions within its Department of Community Development. They were no
longer needed because construction has all but ceased. The city
recently hired a landscaping company to cut overgrown lawns surrounding
hundreds of abandoned homes. People are underwater on their
houses, and they have just left, Mr. Feichthaler says.
.
http://www.nytimes.com/2007/12/23/business/
.
EDITORS
NOTES:
The mayor of this Florida enclave says people have just skipped town
and abandoned their middle class homes, but our question is:
where have they all gone? In regards to one of our main concerns
about the social impact, Mr. Mike Scott, the County Sheriff says:
People that might not normally resort to crime see no other
option. People have to have money to feed their families (end of
quote). Indeed, we can foresee some social issues. Know
what a serious problem for Wal-Mart is these days?
Shoplifting. Even the American farmers are getting robbed.
As copper has gone up from about 75 cents per pound in 2004 to more
than $3 today, thefts of costly copper wiring from farms have reached
epidemic proportions in some areas of the country. Ladies and
gentlemen, lock up your pipes and secure your toilets. Scary
stuff.
.
.
ANOTHER
YEAR, ANOTHER SET
By
Roxana Popescu - December 28, 2007
.
Homeowners
who want to sell, but are determined to hold out until prices recover
to the highs of the real estate bubble, need a reality check, according
to Lewis Altfest, a financial adviser in New York. This decline
has legs, he said. In inflation-adjusted terms, real estate values in
the United States and Europe will go down for a number of years, so
waiting isn't going to help them. His advice: Individuals need to
change their mind-set. Instead of look how much money I have made, they
should be saying, I've made a ton of money, maybe I'll have to take 20
percent off the top. Even if you have got the cash and are
tempted to do some distressed real estate investing, Altfest said you
should not be interested unless the price is 25 percent under the
current market price.
.
http://www.iht.com/articles/2007/12/28/business/MYEAR.php
.
.
GREENSPAN
SEE EARLY SIGNS OF U.S. STAGFLATION - December 17, 2007
.
The
U.S. economy is showing early signs of stagflation as growth threatens
to stall while food and energy prices soar, former U.S. Federal Reserve
Chairman Alan Greenspan said on Sunday. In an interview on ABC's
This Week with George Stephanopoulos, Greenspan said low inflation was
a major contributor to economic growth and prices must be held in
check. We are beginning to get not stagflation, but the early
symptoms of it, Greenspan said. Fundamentally, inflation must be
suppressed, he added. It's critically important that the Federal
Reserve is allowed politically to do what it has to do to suppress the
inflation rates that I see emerging, not immediately, but clearly over
the intermediate and longer-term period. But cutting rates can
have the unwanted side effect of pushing up prices, so the Fed finds
itself in a tricky position of trying to revive growth without spurring
inflation. Last week, U.S. data
showed that wholesale inflation rose at the highest rate in 34 years,
while consumer prices rose the most in more than two years.
.
http://www.reuters.com/article/bankingFinancial/
.
EDITORS
NOTES:
Greenspan is essentially trying to warn that the political pressure
should be taken off to allow the Fed to raise rates rather than lower
them, to combat the growing inflation. Who will win the day, the
politicians or the central bankers? We will have to wait and
see. Regardless, we have said before, simply because the US
economy takes a dive, this does not mean things will be as bad
elsewhere. The comment that the US economy is the world's largest
is also not true, but merely hubris and wishful thinking. The
European Union actually now has the world's largest economy, and you
had better believe than China, India and even the Mercosur Countries
could conceivably overtake both with time. Along these lines, see
the following:
.
.
BRAZIL
PLEASANTLY SURPRIZED BY YEAR-END NUMBERS
By
Alexandre Rocha - December 19, 2007
.
Brazil's
processing industry should end this year with a 5.8% growth rate and
contribute to a 5.3% expansion of the Brazilian economy. The estimates
were disclosed by the National Confederation of Industries (CNI) this
Monday, December 18, in BrasÃlia. The GDP is going to
grow by
twice the average rate in recent years, and industry is driving this
growth, as it is expanding more than the other sectors, stated Monteiro
Neto.
.
http://www.brazzilmag.com/content/view/8987/1/
.
EDITORS
NOTES:
One other key quote from the article is: Contrary to what happened in
previous years, the foreign market did not influence the rise in
industrial output. Instead, domestic demand played a key role this
year. According to the CNI president, there has been a strong increase
in consumption by Brazilian families and government. Why is this
important? Because once again, what seems to be happening is that
there is a reduction in US living standards as many of the middle class
move down the economic ladder, where as in Brazil, it would seem that
the opposite is happening. Also, despite what is going on
economically in the US, Brazil is doing well regardless.
Therefore, any negative economic scenarios involving the US economy
will not have as much of an impact in some other markets as you might
suppose. New car registrations are up 27 percent in Brazil for
2007 and are expected to be up another 18 percent in 2008.
.
In
relation, Mr. Christian Deseglise, global head of emerging markets for
HSBC is quoted in an December
28, 2007
article from the International
Herald Tribune as
saying:
.
Over
the past five years, the emerging markets, represented by powerhouses
like China and India, outperformed the developed market by 10 percent a
year, according to Morgan Stanley Capital International's benchmark
index. But the frontier markets - emerging-markets-to-be like the
United Arab Emirates, Kazakhstan, Nigeria and Vietnam - did even better
when taken as a group. Since October 2001, the Standard & Poor's
IFC frontier markets index, which includes 20 economies, rose 553
percent, while the MSCI emerging market index managed a 430 percent
rise. The surprise was that frontier markets displayed lower
risks than their emerging-market equivalents. Deseglise looked at eight
periods of major global market correction since 2002, and found that
frontier markets did better than mainstream emerging markets.
Even with mild recession in the U.S. and a little impact on the
commodities, I believe frontier markets will continue to do well, he
said
.
.
U.S.
FOOD INFLATION PARALLELS 70s ON ETHANOL BOOM
By
Christine Stebbins - December 14, 2007
.
Rising
U.S. food inflation, now a 25-year high, is reminiscent of the 1970s
and will continue for the next five years due to growing world
economies, increased food demand and a sharp expansion of corn-based
ethanol production, a top food economist said on Friday. During the next five
years, food inflation is forecast to increase by an average of 7.5
percent, well above the 2.3 percent average of the past 10 years.
.
http://www.reuters.com/article/environmentNews/
.
EDITORS NOTES:
The article says that: during the next five years, food inflation is
forecast to increase by an average of 7.5 percent, and ultimately, the
consumer is going to have to absorb those increased costs. In
addition, we have no doubts that taxes are going to go up, social
welfare benefits will most likely be cut, the national debt keeps on
going just like the energizer bunny, and the white color jobs are
continuing to go overseas (the latest being newspaper jobs, of all
things). Then again, look at the bright side. Dick Cheney
says we can all sell stuff on E-bay.
.
.
CONSUMER
INFLATION ACCELERATES IN NOVEMBER
By
Greg Robb, Market-Watch, December 14, 2007
.
Consumer
inflation increased at the fastest pace in more than two years in
November, and analysts said the report wouldn't sit well with the
Federal Reserve. Consumer prices rose 0.8% in November, led by
higher prices for gasoline, the Labor Department reported Friday.
But energy wasn't the entire story. Prices of apparel, drugs, housing,
and airline fares also spiked. The numbers were worse than
expected. Economists said the weaker dollar was also playing a
role in boosting inflation.
.
http://www.marketwatch.com/news/story/consumer-inflation-accelerates-nov/
.
EDITORS NOTES:
Me thinks they might be underestimating the rate of inflation just a
bit, but what's a few percentage points among friends?
Regardless, the real issue is that wages, after adjusted for inflation,
have fallen for two straight months. However, this also is not
any new news really. If you look at average middle class incomes
over the longer-term, for the past 15 years or so, the fact is that net
or true income for the average worker in the US has fallen in general,
once you factor in the accurate inflation rates (as opposed to the
convoluted official inflation statistics, which are bogus and do not
include food or energy). However, this baits the question:
Is the US becoming the new cheap labor market for Europe? See
below:
.
.
THE
LURE OF MADE IN AMERICA
By
Aude Lagorce, December 14, 2007
.
Forget
about China, the U.S. is the new hot spot for global firms looking for
lower production and transport costs, increased supply-chain
flexibility and a crack at wooing the world's most demanding
customers. France's Alstom, a maker of high-speed trains and
power turbines, this week became the latest European firm to unveil
plans for a facility across the Atlantic. The group said it will build
a $200 million plant in Chattanooga, Tenn., to mitigate the impact of
the weak dollar on its margins and to get closer to some of its biggest
customers. In recent months, companies ranging from car makers
Fiat Spa and Volkswagen AG, to German steel behemoth Thyssenkrupp AG
and South Korean consumer-electronics maker Samsung Electronics have
either publicly debated or set in motion plans for a U.S. plant.
Long-term, a very high euro level is not good news, Chairman Patrick
Kron told French radio Europe 1 in an interview. We are in a
heavy industry and exchange rates that change at the pace they're
changing at add to the difficulty, he said. The dollar has lost
roughly 20% against the euro in the last two years. It's also declined
about 14% against the British pound. Partly as result of that
depreciation, Alstom and other large firms with global exposure are
taking a fresh look at the U.S. as an attractive location for new
facilities.
.
http://www.marketwatch.com/news/story/made-america-more-appealing-dollar/
.
.
CHRYSLER
CEO: WE'RE OPERATIONALLY BANKRUPT - December 21, 2007
.
Chrysler
Corp., the troubled automaker bought by private equity just four months
ago, is scrambling to sell assets amid indications of huge losses, as
access to cash becomes increasingly scarce, according to a published
report Friday. Someone asked me, Are we bankrupt? the Wall Street
Journal quoted Chrysler boss Robert Nardelli telling employees at a
meeting earlier this month. Technically, no. Operationally, yes.
The only thing that keeps us from going into bankruptcy is the $10
billion investors entrusted us with.
.
http://money.cnn.com/2007/12/21/news/companies/chrysler/index.htm
.
EDITORS NOTES:
Operationally bankrupt? Is that anything like, a little bit
pregnant? Interestingly enough, regarding the once behemoth
American car company named Chrysler, the wall street journal reports on
December 4, 2007
that: In July (2007), the company signed a landmark deal with
Chrysler LLC to sell a series of small cars made by Chery under the
American auto maker's Dodge brand. Chrysler has said it plans to start
selling the cars in Latin America and other developing markets next
year and aims to have them on the market in the U.S. and Western Europe
by 2009. The pact marks the first time that one of Detroit's Big
Three has outsourced the production of entire vehicles to a Chinese
company. The deal also sends a warning to high-cost workers in the U.S.
and Europe that even more of their jobs could be at risk (end of
article quote).
.
Our
Foo-Yuck theory, once again (and a message to the American employee -
don't you dare ask for a raise, regardless of cost of living
increases). In any event, I can tell you whom is NOT
operationally nor technically bankrupt: India's TATA Motors. Ford
is reported to be selling it's Jaguar and Land Rover Brands in order to
raise cash, and TATA has bid US$2 Billion for it (I wonder what kind of
shape Ford is in, operationally or otherwise?). The question is
not have you driven a Ford lately, but rather: Have you Taa-taa-ed in a
TATA? To tell the truth, they make a very good quality and
inexpensive car (based on Suzuki technology) and Indians buy them for
CASH (no leasing or financing).
.
.
IS
ANOTHER FINANCIAL BUBBLE IN THE CARDS?
By
Sharon L. Secor - December 17, 2007
.
Even
as the shock waves of the sub-prime mortgage meltdown are still shaking
the foundations of the American economy, rumbles are beginning to be
heard of another market rocking event on the horizon. It seems that
another bubble may soon burst, its fragile surface already showing the
signs of a slow leak due to hits taken from the foreclosures crisis
fallout. Credit cards are beginning to show weakness, and with $920
billion in credit card debt held by Americans, trouble in this market
has the potential to be just as traumatic for the markets as the
sub-prime mortgage meltdown, following a similar road to the bottom.
.
Several
of the nations biggest banks have expressed concern about the trends in
consumer credit card spending. American consumers
are spending more than they earn, carrying record setting levels of
debt. Meanwhile, savings are at their lowest point since the Great
Depression. While these conditions are not new, there have been
indications of change in the handling of these high debt levels by
consumers that some analysts find troubling. Credit card issuers have
begun to notice an increased use of cash advances, smaller payments
made against account balances, and a creeping rise in defaults.
.
http://www.americanchronicle.com/articles/
.
.
HOUSEHOLD
DEBT: CREDIT CARD USE, BALANCES INCREASE
Monday,
December 17, 2007
.
American
families are using credit cards to bridge the gaps between wages and
higher costs of living, and balances have grown dramatically since
1989, according to Borrowing to Make Ends Meet: the Rapid Growth of
Credit Card Debt in America, published by Demos. The report found
disturbing trends in sky-rocketing credit card debt, the nonprofit
group said. It also discusses how these trends relate to the housing
market crisis and the increase in predatory and sub-prime lending in
the financial services sector.
.
http://www.courierpostonline.com/
.
EDITORS NOTES:
Has the American consumer turned back to using credit cards once again,
now that the home equity ATM machine has been turned off? We hope
not, but the numbers say otherwise. Despite some of the news
about the consumer spending numbers being not as bad as some predicted
(the average report is a 2.5 percent increase in Christmas sales,
although some clothing retailers report a 5 percent drop) , it is also
reported that credit card debt grew
7% to $920.1 billion, year over year, in the third quarter of 2007. In addition, the value
of credit card accounts at least 30 days late jumped 26% to $17.3
billion in October of 2007. Defaults rose 18% to nearly $961
million in October as well. Bank of America had the highest
delinquency volume, with overdue accounts valued at $5 billion. Bank of America defaults in October of 2007
were almost 200 percent higher than in October 2006.
.
.
NATIONS
REAL ESTATE WOES HEAD TO MEXICO
By
Marla Dickerson, Los Angeles Times - December 14, 2007
.
The
ripples of the U.S. real estate boom began washing up on the shores of
this beach town a few years ago. Californians, feeling flush from the
steep run-up in housing values stateside, pulled equity from their
primary homes and snapped up vacation properties in northern Baja
California as if they were buying $10 lobster dinners. Ground
zero was this mid-sized community about 20 miles south of Tijuana,
where developers sold hundreds of condominiums on spec. Most jacked up
their prices as their projects filled, fueling a sense of urgency among
U.S. buyers to get in while the getting was good.
.
We
nearly had fistfights over choice units, said Michael Coskey, sales
director of the Residences at Playa Blanca, a 274-unit development
under construction north of Rosarito whose average condo is priced at
$500,000. We were all appealing to people's greed. Greed
has turned to regret for some investors who now can't sell their
Mexican properties. Upward of 40
percent of the condos in some northern Baja projects were purchased by flippers who
intended to resell them before construction was completed. Their aim
was to pocket a fast profit in an area where prices had been
appreciating 20 percent to 30 percent annually in recent years.
But with contagion from the U.S. sub-prime mortgage debacle spooking
many would-be purchasers and credit drying up, the Baja real estate
market is flagging. Speculators are starting to sweat.
.
Californian
Chris Romero's biggest worry two years ago was missing out on the
action. He had his eye on a $200,000, two-bedroom condo in a project
called La Jolla Real in Rosarito. No more. With the development
nearing completion, he's finding buyers scarce and competition fierce.
Rosarito is littered with so-called resale units whose owners are
looking to unload them. Romero is offering a $5,000 bonus to
anyone who can bring him a buyer. His $290,000 asking price is
negotiable. And he's willing to provide financing. It's going to get
worse. More inventory is on the way. About 7,000 condominiums are
in the pipeline from Tijuana to Ensenada, with an additional 5,600 in
the planning stages, according to the Association of Resort Developers
of Baja California. The average price is about $300,000, but some
luxury units run into the millions.
.
http://www.modbee.com/business/story/152169.html
.
EDITORS NOTES:
Once again, if you are buying real estate with speculation in mind, and
with borrowed money, you are asking for trouble. The 60 year old
Mr. Romero, mentioned in the article, was clearly gambling, and
possibly with his retirement funds. Not a smart idea, and why you
need to know if you are buying into a greed frenzy that will eventually
fizzle out. Indeed, the article states that Mr. Romero's
motivation was fear he would miss out on the action, just as a gambler
gets caught up with emotion in the casino. However, the house
usually wins (in this case the developer) and the gambler walks out
with empty pockets in these kind of
situations.
.
.
SOUTH
OF THE BORDER, THE MARKET'S STILL HOT
By
June Fletcher, The Wall Street Journal - Dec. 14, 2007
.
The
housing slump has sent many Americans shopping south of the
border. Existing-home prices in the U.S. dropped 4.5 percent in
the third quarter from a year ago, according to S&P/Case-Shiller.
But they are still climbing in much of Latin America and the
Caribbean. Buyers are being enticed by the kind of double-digit
appreciation that has all but disappeared in the States. In addition, a
growing number of new developments are targeting Americans looking for
good deals and a lower cost of living.
.
Since
2003, annual home-price appreciation has been running at 20 percent in
the Dominican Republic, and could reach 50 percent in the near future,
according to Boomerang Unlimited, a Napa, Calif., real-estate
investment advisory firm. In San Pedro, Belize, the average price of a
2,200-square-foot home was $697,500 in September, up 18.6 percent from
a year ago, according to a study by Coldwell Banker; the price of a
similar property in San Jose, Costa Rica, was up 20.7 percent, to
$389,900, the study said. Prices remain low compared with those
in the U.S., particularly for waterfront properties. Because Americans
generally buy and sell properties throughout the region in dollars, not
the local currency, home prices don't fluctuate with the various
exchange rates, as is the case in Europe. What's more, the dollar
generally buys much more house in these countries than it does in the
U.S., because labor and land are less expensive.
.
Americans'
appetite for investment opportunities is helping to spur a building
boom in some areas. In Panama, 170 residential-building projects are
under way, mostly marketed to Americans, and 100 more are in the
pipeline, according to Panama Legal, a law firm based in Panama City.
Among them, a 1,500-acre resort and marina by Naples, Fla.-based
developer Todd Gates. The project, on Isla del Rey, one of the Pearl
Islands near Panama City, is slated to open in 2009 and will have
condos, villas and single-family homes ranging from $275,000 to $1.4
million. It's like Florida was in the 50s, Mr. Gates says.
.
Some
buyers are buying sight unseen. Shams Deitrick, a Walnut Creek, Calif.,
financial adviser, recently bought a furnished, two-bedroom ocean view
villa for $375,000 in Canto del Mar, a new 35-unit development in the
southern Costa Rica town of Dominica; the project has already sold out.
All I saw was the Web site, which showed a sloth 30 feet from the unit,
and monkeys everywhere, Mr. Deitrick says. He snapped up the home
on the advice of a gym buddy, who said his own Costa Rican properties
have quadrupled in value over the past four years. Although Mr.
Deitrick isn't looking forward to the daylong flight to Dominica when
he visits for the first time in February, he says he's glad he bought
the property: It just doesn't make sense to buy in the U.S. right now.
.
Preston
Thompson, a retired Clearwater, Fla., hospital administrator, hopes to
make some money in the Dominican Republic as a serial renovator, moving
into homes, fixing them up, and selling them. In July, he bought a
2,100-square-foot house for $265,000 on the beach in Cabarete, quickly
added $50,000 worth of improvements, and put it back on the market for
$489,000. If the property sells, he and his wife plan to repeat the
process.
.
Earlier
this year, Geoff Folsom, a Thousand Oaks, Calif., businessman, bought a
4,500-square-foot oceanfront penthouse, with its own private swimming
pool, in Trump's Ocean Resort in Playas de Tijuana, Mexico, a 30-minute
drive from San Diego, Calif. He paid $3 million for the property, about
half the cost of similar resort units he looked at in the States.
Property taxes and maintenance costs are lower than in the U.S., too.
.
http://www.azcentral.com/business/articles/1214biz-ShoppingBorder1214-ON.html
.
EDITORS NOTES:
First off, as a comment to the above news item: DO NOT buy real
estate because some guy in a health club told you to, DO NOT buy real
estate site unseen off the internet based upon jazzy photos, and last
but not least, DO NOT speculate into expensive real estate with
debt. Do of course buy some good properties that you are happy to
live in, or otherwise whereby you are getting much more home for less,
assuming that is the case. An example would be the gentleman
mentioned in the article that bought a US$3 Million property in
Tijuana. He says it cost HALF than the exact same thing inside
the US, and his carry costs are much lower. A clear case of a
buyer making a sound decision, as to where to live, based upon costs,
value and other expenses going forward (as opposed to mere speculation
regarding a get rich quick idea).
.
.
VIETNAM
SEES FEVERISH PROPERTY MARKET
By
Fei Honghai, Thai Thanh Van
.
Thirty-year-old
construction engineer Cao Xuan Lam has never imaged he could easily
earn so much money after only one year of engaging in realty business
in Vietnam's Hanoi capital. In the country with annual per capita
income of over 800 U.S. dollars, Lam, previously owning two apartments
in western-style blocks, has just made a profit of nearly 50,000 U.S.
dollars from selling one. Like Lam, many speculators in Vietnam
enjoy their newly-found wealth from a real estate bonanza that has
doubled urban property prices over the past year. They ecently,
hundreds of people in southern economic hub, Ho Chi Minh City, have
queued since mid-night to try to buy flats on a site where the
developer has not start any construction yet.
.
Besides,
the country's high inflation rate this year has made banking interests
less attractive, leading to the fact that some people have withdrawn
their deposits to pour money into the real estate market. This has also
helped push up property prices. The boom has also been driven
partly by a fast-growing flow of foreign direct investment in the
country, which reached the biggest-ever level at over 15 billion U.S.
dollars in the first 11months of this year.
.
http://news.xinhuanet.com/english/2007-12/14/content_7248402.htm
.
EDITORS NOTES:
I bring to your attention the comment that Vietnamese are taking money
out of the bank to invest in real estate. In other words, they
are paying CASH, and are not buying with borrowed money. Will the
property price increases continue over the long-term? If history
and common sense is any guide, probably not at these same rates.
But, then again, it will not turn into a banking, mortgage or credit
crisis scenario either, reducing the chances of severe declines (even
though the upside may not be as good as before), as buyers in this
market are simply exchanging fiat paper money for a hard asset (real
estate) which over the long haul, will retain its value better than the
paper money will. However, one trend pushing the housing market
is the return of Vietnamese from abroad. The San Francisco
Chronicle reports in an article by Andrew S. Ross (December 16, 2007)
titled Some Economic Engines That Are Driving Vietnam:
.
Attracted
by the growing economy, increasing numbers of the Vietnamese diaspora
(an estimated 6 million Vietnamese live abroad, including more than
500,000 in California), are returning home with their skills and
capital to open small and medium-size businesses - boutiques, online
music services, bars, restaurants, office equipment franchises. Others
are applying their Western know-how at Vietnamese corporations and
local companies. I have friends working in architecture, banking, oil,
real estate - all from the U.S. or France, said Nguyen Qui Duc, founder
of KQED radio's now defunct Pacific Time, who returned last year from
San Francisco to live full-time in Hanoi (end of news quote).
.
We
reported in our last newsletter that Brazilians are leaving the US in
droves and are heading back home to Brazil. Now the Vietnamese
are leaving too, it would seem, for the very same reasons. This
of course has already been going in for some time already, in terms of
Indians working in Silicon Valley that have gone back to India as
well. I wonder if this is some kind of trend? Are
immigrants who once were escaping from their previous countries now
escaping from America too?
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