Posts Tagged ‘Economy’
By Chris Puplava
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
While most investors are familiar with the Dollar Index, it is actually a poor tool in gauging the strength of the USD given its weightings and only being a six currency basket. To truly see how the greenback is performing on a global scale one needs to look at more than six currencies and include precious metals. When one does this it is truly amazing how much the purchasing power of the USD has declined since 2009 after two rounds of quantitative easing (QE), and it is this loss of purchasing power that has the potential to at least cause another growth scare like 2010 or even a bear market.
The Biggest Loser
As I pointed out in a recent article, the USD Index has broken a three year trend line, which largely resembles a similar setup in the 1970s. When that break occurred stocks suffered in real terms and commodities went screaming higher with gold advancing more than 350% in two years. Whenever the USD Index has approached this 3-year trend line support I take a look at how it is performing versus world currencies over different time periods to see if it is beginning to strengthen and indicate a change in trend.
What you see below is the USD versus 30 world currencies and 4 precious metals over 6 different time periods. If the USD was in the process of staging an intermediate bottom you would begin to see more and more currencies and precious metals declining relative to the USD on a short term basis (1 day, 5 day, 1 month) but we simply aren’t seeing that. Shown below, only 8 currencies/metals are declining relative to the USD yesterday and over the 5 day , 1 month, and 3 month horizons, the USD is still declining against 2/3 of the currencies below.
Stepping back just a bit further in time we can see that the USD has lost a great deal of its purchasing power from a global perspective, particularly versus precious metals. Since 2009 and after two rounds of quantitative easing the USD has declined more than 75% versus palladium, 69% versus silver, and 39% versus gold. The USD has also lost a great deal of purchasing power versus commodity currencies like the Australian Dollar, Brazilian Real, and Canadian Dollar. Clearly, when looking at the USD from a global perspective, cash has been trash thanks to Helicopter Ben Bernanke and a Congress and President that have extended U.S. debt to the stratosphere.
What a Weak USD Means to You
Given the U.S. economy is now primarily a service economy by exporting its manufacturing base overseas, it is important to keep in mind that we are far more susceptible to import inflation. Thus, one of the major trend components in import inflation is the USD as commodities are priced in dollars. Shown below is the inflation rate for import prices (blue line) along side the annual rate of change in the USD Trade-Weighted Index (orange line—shown inverted for directional similarity and advanced several months). The close relationship between the USD and import price inflation could not be more clear with the recent weakness in the USD hinting at even higher import prices in the months ahead. This is certainly not going to be good news to consumers already struggling with high food and energy prices.
What a Weak USD Means to Corporations
One of the things I argued for as to why there was still pain ahead in the middle of 2008 was the extremely high level of corporate profits relative to their normalized levels (“The Worst Is Yet to Come”). Essentially, corporate profit margins tend to reverse and move back towards the long run average, and we were still well above historical norms back in the summer of 2008—a strong reason for why I was not ready to turn bullish on the markets.
Yet again, the extreme in corporate profits is causing me to turn more cautious on the economy and stock market as the drivers that helped corporations boost their margins (shedding payrolls while sales recovered) is largely behind us as payrolls are now being added again. Additionally, while inflation was quite tame in 2009 and for most of 2010 it is picking up momentum and a weak USD ahead will only exacerbate the problem. Shown below are current corporate profits relative to normalized levels (historical average times Gross Domestic Product), which imply significant downside risk for the earnings seasons ahead. As of the end of last year, corporate profit margins were more than two standard deviations above normalized levels (see red line in second chart below), with 2007 representing the last time this occurred.
What a Weak USD Means to the Economy & Stock Market
The current rising inflationary pressures we are seeing are coming from the 15% decline seen in the USD Index since last summer, and further USD weakness ahead will only compound the problem. Higher inflation cuts into corporate profit margins as well as reduces consumer’s discretionary spending levels as they are forced to pay more for less. Inflation levels are leading economic indicators as it takes time for consumers to respond from ticker shock and change their spending habits, and current inflationary trends portend a decelerating shift for the economy ahead.
Seen below are three different Federal Reserve regional surveys with both the headline index and the price index for the surveys shown together, with the price index shown inverted for directional similarity and advanced owing to their leading tendencies. As you can see all three price indexes (red lines) haved moved sharply higher (lower in chart since inverted) and indicate we are likely to see lower national ISM and regional ISM numbers ahead.
Why is this important to you as an investor? Well, there is a strong correlation between the ISM numbers and the year-over-year rate of change in the S&P 500 as seen below. Given the price indices for regional ISM’s are forecasting lower headline ISM numbers in the months ahead, we can also expect the stock market to be at risk with flat to negative returns. That said, with QE 2 still in force the price weakness forecasted by the regional ISM price indexes may have to wait until QE 2 comes to a close in June.
Source: ISM, Standard & Poor’s
What Does it All Mean?
The last time we were in a similar scenario was late 2007 to early 2008. While I am not forecasting another crash like the one seen in late 2008, I do believe we can see the same trends. What were the characteristics of that time period? A weak USD, rising inflationary pressures, lower retail sales, lower corporate profit margins, and outperformance by commodities in general and precious metals in particular. If the USD accelerates its current decline then commodity based investments would be the most likely beneficiaries. Additionally, defensive sectors like consumer staples, health care, utilities, and telecommunications will likely outperform the more cyclical sectors such as technology, consumer discretionary, and financials.
Read the entire article HERE.
by Robert Lenzner
Mar. 27 2011 – 1:20 pm
It’s a sign of the times, when gold and silver are making new highs in precious metals markets and investors everywhere are worried about the value of their paper money.
Those old coins in the bottom of your attic trunk just got marvelously valuable, if two full-page ads in the NY Times today is any proof. You are asked to bring your old Buffalo nickels. I used to have some, but they are long gone.
Try to find those old silver quarters and dimes or pre-1966 paper money in “Brand New Condition” and you could collect a small fortune–a very small fortune. Up to $300 for a $100 bill.
You’re also being invited to bring in wrist watches (up to $70,000 for a Patek Philippe, $20,000 for a Rolex), sterling pitchers, flatware and candlesticks, gold wedding bands ($100), diamonds (1 carat, $4,000), even costume jewelry, or wheat pennies (whatever they are) at 20% over face value.
Five days at eight hotels in NYC area sponsored by Anderson, Carter, Bascom & Assoc., who warn “You should not clean your coins! You may hurt their value!
Under the heading “Important Economic Information” there is the suggestion that high prices for your gold and silver may not last forever. “We have studied the investment and collectibles markets for decades, and in the past during times of economic uncertainty (which is happening now), there have been dramatic price declines in many areas of the jewelry, coin, and collectible markets.”
Hmmm! I’d like to know when this economic certainty is coming. Doesn’t seem too likely to me, what with global markets, spiking food and fuel prices, political instability, sovereign debt issues, radioactive nuclear plants, and the need to get the U.S. budget into balance.
Read the entire article HERE.
WASHINGTON (AP) – Higher energy costs and the steepest rise in food prices in nearly four decades drove wholesale prices up last month by the most in nearly two years. Excluding those categories, inflation was tame.
The Producer Price Index rose a seasonally adjusted 1.6 percent in February, the Labor Department said Wednesday. That’s double the 0.8 percent rise from the previous month. Outside of food and energy costs, the core index ticked up 0.2 percent, less than January’s 0.5 percent rise.
Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose.
Energy prices rose 3.3 percent last month, led by a 3.7 percent increase in gasoline costs.
David Resler, an economist at Nomura Securities, said the jump in prices is likely temporary, echoing remarks made by the Federal Reserve on Tuesday. Much of the increase in food prices was due to winter freezes in Florida, Texas and other agricultural areas, Resler said. Turmoil in the Middle East is a major reason that motorists are facing higher gas prices.
“Both food and gasoline prices are going to stop rising so rapidly,” Resler said.
But John Ryding, an economist at RDQ Economics, disagreed, noting that consumers will feel the impact for some time.
“We do not buy the Fed’s reassurance that these pressures will be temporary and we believe the public, seeing these strong increases in food and energy … will not be marking back down their inflation expectations,” Ryding said.
Gas prices spiked in February and are even higher now. The national average price was $3.56 a gallon Tuesday, up 43 cents, or 13.7 percent, from a month earlier, according to the AAA’s Daily Fuel Gauge. Rising demand for oil in fast-growing emerging economies such as China and India has pushed up prices in recent months. Unrest in Libya, Egypt and other Middle Eastern countries has also sent prices higher.
But economists expect the earthquake in Japan to lower oil prices for the next month or two, which should temper increases in wholesale prices in coming months. Japan is a big oil consumer, and its economy will suffer in the aftermath of the quake. But as the country begins to rebuild later this year, the cost of oil and other raw materials, such as steel and cement, could rise.
Oil prices fell sharply Tuesday as fears about Japan’s nuclear crisis intensified. Oil dropped $4.01, or 4 percent, to settle at $97.18 per barrel on the New York Mercantile Exchange.
Prices rose 1 percent for apparel, the most in 21 years. Costs also increased for cars, jewelry, and consumer plastics.
There was little sign of inflationary pressures outside of food and energy. Core prices have increased 1.8 percent in the past 12 months.
Separately, the Commerce Department said Wednesday that home construction plunged to a seasonally adjusted 479,000 homes last month, down 22.5 percent from the previous month. It was lowest level since April 2009, and the second-lowest on records dating back more than a half-century.
The building pace is far below the 1.2 million units a year that economists consider healthy.
Read the entire article HERE.
Feb. 16, 2011, 8:30 a.m. EST
By Jeffry Bartash
WASHINGTON (MarketWatch) – U.S. wholesale prices jumped 0.8% in January as gasoline costs rose again, the government reported Wednesday. And core producer prices, which exclude the volatile food and energy categories, rose 0.5%, marking the largest increase since October 2008. Economists surveyed by MarketWatch had predicted a 0.9% gain in overall producer prices and a 0.3% increase in the core rate. Producer prices have risen 3.6% over the past 12 months on an unadjusted basis. The core rate has climbed a slower 1.6% over that span.
Read the entire article HERE.
By David Lew
February 02, 2011 at 14:15
China is taking several initiatives to raise the country’s reserves in gold and silver in an attempt to globalize the Yuan. The main strategy is to buy gold and silver reserves when prices of these precious metals fall.
According to a report published by the Economic Information Daily, the Chinese central bank, the People’s Bank of China, is chalking out plans to buy gold and silver reserves these days considerably as their prices are currently down.
Gold prices have come down by nearly $100 in the last few days. Silver prices that have been also following gold prices in the last one year have fallen thanks to the rise in US dollar value.
China has ambitious plans to make its currency Yuan globally competitive. Several analysts have been predicting that in few years the Chinese Yuan will overtake the US dollar as the global currency.
According to the Chinese Central bank adviser Xia Bin, China should increase its reserves in gold and silver, said the report from the Economic Information Daily.
“Increasing gold reserve at the time of prices dip is the strategy of internationalizing the Yuan,” the report said.
China, the largest producer of gold, had announced last year that it would considerably step up gold reserves in the next decade to the tune of 10,000 tons. Currently, the Chinese gold reserves stand less than 1200 tons.
Even though there were rumors that the People’s Bank of China—the Chinese central bank—would bid for IMF gold reserves, nothing happened in 2010. Officials said that there will be big gold buying by China in 2010.
Bullion prices climbed around 30% in 2010, gaining for the 10th year, on the back of macroeconomic factors such as European debt crisis, depreciation of US dollar against the major counterparts, strong demand from India due to various festivals and occasion etc.
Investment appeal in precious metals surged last year as a safe haven in order to protect the wealth. China wants to stable its currency, and greater use of its currency for international trade due to reducing reliance on the dollar. All these factors may force to China to increase its gold and silver reserves.
“The report is a positive factor for gold prices in the mid-and-long term, Hwang Il Doo, a senior trader at Seoul- based Korea Exchange Bank Futures Co., said today. Still “it didn’t have immediate impact on prices as gold’s gain has more to do with the unrest in Egypt at the moment.”
China’s total gold consumption may increase 15% in the first half, driven by enhancing demand for a safe investments and a hedge against inflation, according to the China Gold Association in Last week.
The Shanghai Gold Exchange said total gold imports by China surged almost five hold in the first 10 months of the last year from the entire amount shipped in 2009. Total shipments were 209 metric tons during that period against with 45 tons in 2009, said exchange Chairman Shen Xiangrong.
Silver is shining in China as the country is all set to maintain the No. 1 status as the top global silver producer and consumer. Silver output from China is going to surge in China for 2011, driven by the boom in the industrial metal from across the world.
According to a new research report from China Research Intelligence (CRI), an important feature of China’s silver market is that the domestic price is higher than international market price.
“Domestic price of silver in China is not completely synchronized with the international price and it lags behind with too large fluctuation, resulting in increasing risk of downstream silver consuming enterprises,” said the report.
The CRI report said that China urgently needs to improve the formation mechanism of domestic silver price and seek appropriate trade modes to maintain values and avoid risks. It will be the general trend to introduce silver futures.
Read the entire article HERE.
The financial collapse that so many of us have been anticipating is seemingly closer then ever. Over the past several weeks, there have been a host of ominous signs for the U.S. economy. Yields on U.S. Treasuries have moved up rapidly and Moody’s is publicly warning that it may have to cut the rating on U.S. government debt soon. Mortgage rates are also moving up aggressively. The euro and the U.S. dollar both look incredibly shaky. Jobs continue to be shipped out of the United States at a blistering pace as our politicians stand by and do nothing. Confidence in U.S. government debt around the globe continues to decline. State and local governments that are drowning in debt across the United States are savagely cutting back on even essential social services and are coming up with increasingly “creative” ways of getting more money out of all of us. Meanwhile, tremor after tremor continues to strike the world financial system. So does this mean that we have almost reached a tipping point? Is the world on the verge of a major financial collapse?
Let’s hope not, but with each passing week the financial news just seems to get eve worse. Not only is U.S. government debt spinning wildly toward a breaking point, but many U.S. states (such as California) are in such horrific financial condition that they are beginning to resemble banana republics.
But it is not just the United States that is in trouble. Nightmarish debt problems in Greece, Spain, Portugal, Ireland, Italy, Belgium and several other European nations threaten to crash the euro at any time. In fact, many economists are now openly debating which will collapse first – the euro or the U.S. dollar.
Sadly, this is the inevitable result of constructing a global financial system on debt. All debt bubbles eventually collapse. Currently we are living in the biggest debt bubble in the history of the world, and when this one bursts it is going to be a disaster of truly historic proportions.
So will we reach a tipping point soon? Well, the following are 25 signs that the financial collapse is rapidly getting closer….
#1 The official U.S. unemployment rate has not been beneath 9 percent since April 2009.
#2 According to the U.S. Census Bureau, there are currently 6.3 million vacant homes in the United States that are either for sale or for rent.
#3 It is being projected that the U.S. trade deficit with China could hit 270 billion dollars for the entire year of 2010.
#4 Back in 2000, 7.2 percent of blue collar workers were either unemployed or underemployed. Today that figure is up to 19.5 percent.
#5 The Chinese government has accumulated approximately $2.65 trillion in total foreign exchange reserves. They have drained this wealth from the economies of other nations (such as the United States) and instead of reinvesting all of it they are just sitting on much of it. This is creating tremendous imbalances in the global economy.
#6 Since the year 2000, we have lost 10% of our middle class jobs. In the year 2000 there were approximately 72 million middle class jobs in the United States but today there are only about 65 million middle class jobs.
#7 The United States now employs about the same number of people in manufacturing as it did back in 1940. Considering the fact that we had 132 million people living in this country in 1940 and that we have well over 300 million people living in this country today, that is a very sobering statistic.
#8 According to CoreLogic, U.S. housing prices have now declined for three months in a row.
#9 The average rate on a 30 year fixed rate mortgage soared 11 basis points just this past week. As mortgage rates continue to push higher it is going to make it even more difficult for American families to afford homes.
#10 22.5 percent of all residential mortgages in the United States were in negative equity as of the end of the third quarter of 2010.
#11 The U.S. monetary base has more than doubled since the beginning of the most recent recession.
#12 U.S. Treasury yields have been rising steadily during the 4th quarter of 2010 and recently hit a six-month high.
#13 Incoming governor Jerry Brown is scrambling to find $29 billion more to cut from the California state budget. The following quote from Brown about the desperate condition of California state finances is not going to do much to inspire confidence in California’s financial situation around the globe….
“We’ve been living in fantasy land. It is much worse than I thought. I’m shocked.”
#14 24.3 percent of the residents of El Centro, California are currently unemployed.
#15 The average home in Merced, California has declined in value by 63 percent over the past four years.
#16 Detroit Mayor Dave Bing has come up with a new way to save money. He wants to cut 20 percent of Detroit off from essential social services such as road repairs, police patrols, functioning street lights and garbage collection.
#17 The second most dangerous city in the United States – Camden, New Jersey – is about to lay off about half its police in a desperate attempt to save money.
#18 In 2010, 55 percent of Americans between the ages of 60 and 64 were in the labor market. Ten years ago, that number was just 47 percent. More older Americans than ever find that they have to keep working just to survive.
#19 Back in 1998, the United States had 25 percent of the world’s high-tech export market and China had just 10 percent. Ten years later, the United States had less than 15 percent and China’s share had soared to 20 percent.
#20 The U.S. government budget deficit increased to a whopping $150.4 billion last month, which represented the biggest November budget deficit on record.
#21 The U.S. government is somehow going to have to roll over existing debt and finance new debt that is equivalent to 27.8 percent of GDP in 2011.
#22 The United States had been the leading consumer of energy on the globe for about 100 years, but this past summer China took over the number one spot.
#23 According to an absolutely stunning new poll, 40 percent of all U.S. doctors plan to bail out of the profession over the next three years.
#24 As 2007 began, there were just over 1 million Americans that had been unemployed for half a year or longer. Today, there are over 6 million Americans that have been unemployed for half a year or longer.
#25 All over the United States, local governments have begun instituting “police response fees”. For example, New York Mayor Michael Bloomberg has come up with a plan under which a fee of $365 would be charged if police are called to respond to an automobile accident where no injuries are involved. If there are injuries as a result of the crash that is going to cost extra.
Read the original article HERE.
“Black Swan” author Nassim Taleb appeared on Bloomberg Television’s “Inside Track” this morning to talk about QE2. Taleb compared U.S. central bank policy makers to the managers of Long-Term Capital Management LP, the hedge fund that failed in 1998.”
Posted on Tuesday, July 20, 2010, 12:00AM
by Robert Kiyosaki
The world knows BP is a disaster, a monster of a disaster. BP’s disaster makes Hurricane Katrina look like a rain shower.
Every time a TV news station shows oil gushing from a broken pipe — one mile below the ocean’s surface — the world gets sick. Scenes of oil-soaked pelicans struggling for life both angers and saddens us. The financial losses endured by small businesses and fishermen cannot be imagined, let alone conveyed by the media interviews. BP is a disaster with a scope beyond comprehension.
I was in England when President Barack Obama blamed and criticized BP for this tragedy. His criticism sparked the anger of the British. Politicians wanted him to tone it down, to be more careful in his choice of words. British Prime Minister David Cameron told Obama not to “go after BP for the sake of it.” Virgin’s Richard Branson said he was “kicking a company while it was on its knees.” Their concern was not for the environment or those suffering the ravages of this disaster. Their concern was for the pensioners who are counting on BP for a secure retirement.
On June 17, London’s Daily Mail ran a headline screaming, “Obama Bullies BP into £13.5bn Fund for Oil Spill Victims… but British Pensioners will Pick Up the Bill.” The British are angry with Obama for pressuring BP to suspend dividend payments and set aside $20 billion for the cleanup. Obama’s strong-arm position has not only affected British pensioners, who own 40% of BP, but American pension funds, who own 39%, as well. In other words, the economic damage of the BP disaster goes far beyond the Gulf. The damage is spreading to pensions, pensioners, and portfolios all around the world.
An Atmosphere Changed
While in London, I decided to go to dinner at Canary Wharf, ground zero for the next BP. Only a few years ago, Canary Wharf was one of the centers of the financial universe. Condo prices were sky high, offices were packed, and high-paid bankers filled Canary Wharf with wealth and excitement. Today, Canary Wharf seems to be dying. It has lost its vibrancy. Many restaurants and offices were nearly empty and there were few lights to be seen in those once-high-priced condos.
And Canary Wharf’s ‘BP’ stands for Bomb Production. Canary Wharf is much like AIG, a factory for exotic financial products known as derivatives. The problem is that most people do not know what these murky and mysterious products are – and that includes the people who make them or buy them. It’s why Warren Buffett has called derivatives “financial weapons of mass destruction.” That is how powerful they are. During World War II, a ship exploded while loading bombs for transport at Port Chicago, California. The explosion flattened everything for miles. It is said that the ship’s anchor, which weighed tons, was found more than six miles away. Derivatives — financial bombs — have the same power if they accidently detonate inside a bank’s balance sheet.
The subprime disaster was a result of financial bombs — derivatives — exploding in financial institutions such as AIG and Lehman Brothers, as well as banks and financial institutions throughout the world. After the bombs AIG manufactured exploded, AIG received $181 billion in taxpayer funding and immediately sent $11.9 billion to France’s Société Générale, $11.8 billion to Deutsche Bank, and $8.5 billion to Barclays Bank of Britain. U.S. taxpayer money was going to bailout banks around the world. During the last three months of 2008, AIG was losing more than $27 million an hour. That is how powerful these derivatives can be. The problem I see is this: There are many more such bombs still sitting in balance sheets all over the world.
Financial Bombs All Over the World
Military bombs are classified by weight: 500-, 750-, and 1,000-pound bombs. Financial bombs have interesting labels such as CDO (collateralized debt obligations), ABS (asset backed securities), and CDS (credit default swaps). While they sound exotic and sophisticated, when put in everyday language, a CDO is simply debt sold as an asset. And CDS, or swaps, are simply a form of insurance.
Since the insurance industry is strictly regulated, and the bomb factories producing CDS did not want to comply with insurance industry regulations, they simply called them ‘swaps,’ rather than insurance.
To make matters worse, rating agencies such as Moody’s and S&P (and even Fed Chairman Alan Greenspan) blessed these financial bombs as safe, sound, and good for you. It was almost as good as the pope blessing these products. In 2007, the subprime boom busted, and we know what happened from there.
The problem is that approximately $700 trillion of these financial time bombs are still in the system. While people watch the BP disaster in the Gulf, few people are aware of the other BP, the financial bomb production that is still going on. If this derivative market begins to collapse, we will see another BP disaster.
Can’t Clean Up the Next Disaster
Most of us know there is not enough money in the world to clean up the Gulf. The same is true with the $700 trillion derivatives market. If just 1% of the $700 trillion derivatives market goes bust, that is a $7 trillion disaster. The entire U.S. economy is only $14 trillion annually. A 10% failure, equating to $70 trillion, would probably bring down the world economy. As with the BP Gulf disaster, there is not enough money in the world to clean up the next BP disaster.
Read the entire article HERE.
by Dan Armstrong
Posted: 07.12.2010 at 8:13 PM
New types of money are popping up across Mid-Michigan and supporters say, it’s not counterfeit, but rather a competing currency.
Right now, you can buy a meal or visit a chiropractor without using actual U.S. legal tender.
They sound like real money and look like real money. But you can’t take them to the bank because they’re not made at a government mint. They’re made at private mints.
“I sell three or four every single day and then I get one or two back a week,” said Dave Gillie, owner of Gillies Coney Island Restaurant in Genesee Township.
Gillie also accepts silver, gold, copper and other precious metals to pay for food.
He says, if he wanted to, he could accept marbles.
“Do people have to accept dollars or money? No, they don’t,” Gillie said. “They can accept anything they want or they can refuse to accept anything.”
He’s absolutely right.
The U.S. Treasury Department says the Coinage Act of 1965 says “private businesses are free to develop their own policies on whether or not to accept cash, unless there is a state law which says otherwise.”
That allows gas stations to say they don’t accept 50- or $100 bills after a certain time of day in hopes of not getting robbed.
A chiropractic office in Lapeer County’s Deerfield Township allows creativity when it comes to payment.
“This establishment accepts any form of silver, gold, chicken, apple pie, if someone works it out with me,” said Jeff Kotchounian of Deerfield Chiropractic. “I’ve taken many things.”
Jeff Kotchounian says he’s used this Ron Paul half troy ounce of silver to get $25 worth of gas from a local station.
Read the entire article HERE.