The Undollar Digest

The Coming Dollar Crisis. Why it's inevitable, and what you can do about it.

Doug Noland
“It is the very nature of Credit Bubbles that they function poorly in reverse."

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Marc Faber
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Jim Sinclair


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Thursday, November 03, 2005
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Monday, October 17, 2005
Doug Noland, Credit Bubble Bulletin,, 10/14/05:

[Selected Notes]

Broad money supply (M3) surged $41.7 billion, surpassing $10 Trillion (week of October 3) for the first time. M3 has now doubled in less than nine years, after reaching $5 Trillion during the first week of 1997. Over the past 20 weeks, M3 has surged $410 billion, or 11.1% annualized. Year-to-date, M3 has expanded at a 7.6% rate, with M3-less Money Funds expanding at an 8.6% pace.

The $59 billion August Trade Deficit was just shy of an all-time record. Good Imports were up 12% from a year earlier to a record $140.51 billion. Also at a record, Good Exports were up 13% to $76.67 billion. Import Prices surged 2.3% during September, “their biggest gain since 1990,” according to Bloomberg. Import Prices were up 9.9% from one year ago, a degree of inflation that is hard to ignore when an economy is importing $140 billion of foreign goods every month.

Bloomberg, 10/10: “U.S. companies will pay an average 9.9 percent more for workers’ health insurance next year, almost doubling the average employee cost of five years ago, according to a survey by Hewitt Associates…”

American Banker, 10/11: “Purchase volume on Visa International commercial cards jumped 27%, to $255 billion worldwide, in the 12 months ended June 30… ‘While it took 10 years for Visa and our members to reach $100 billion , and three years to achieve $200 billion, we’re rapidly on our way to accomplishing the global $300 billion milestone in commercial volume in just over a year,’ Aliza Know, a senior VP for commercial solutions…”

Associated Press, 10/14: “More than 48 million Americans will get a 4.1 percent increase in their monthly Social Security checks next year, the largest increase in more than a decade… The cost of living adjustment, or COLA, was announced Friday by the Social Security Administration. It will be the biggest increase since a 5.4 percent gain in 1991. The increase last January was 2.7 percent.”

Doug Noland, Credit Bubble Bulletin,, 10/14/05:

Commentary: More Trials and Tribulations of Wall Street Finance:

I do not argue that Wall Street Finance is necessarily inherently corrupt. Instead, I propose that a highly energized, market-based Credit system offering enormous and easily attained financial rewards openly invites abuse and corruption. What’s more, the combination of Federal Reserve easy “money” policies and overly abundant marketplace liquidity virtually guarantees a gold rush mentality of wealth-seeking endeavors – legal, legitimate and otherwise (Why did Willie Sutton rob banks?).

This week’s news of fraud and deception at futures powerhouse Refco should come as no major surprise. After all, the Wall Street Finance infrastructure that had coddled and financed the likes of Enron and Worldcom is these days more powerful and commanding than ever. Sure, there were some hefty fines to pay – but their relevance was readily diminished by a few years of historic windfall profits courtesy of the Fed’s ultra-easy monetary accommodation. Those pushing the (risk or statutory) envelope were emboldened and windfall fortunes only more handily procured.

I contend that the defining feature of Wall Street Finance is the propagation of excess and self-reinforcing risk (excessive speculation, leveraging, asset inflation/Bubbles, unsound lending, and malfeasance). The past few years have witnessed a veritable (blow-off) explosion of derivative trading and securitizations, areas particularly ripe for abuse and fraud. Nonetheless, my view is in stark contrast to chairman Greenspan’s and the consensus view that contemporary finance provides an unparalleled capacity to recognize, isolate and manage risk. For now, Mr. Greenspan’s sanguine view receives ongoing support from the potent elixir of abundant marketplace liquidity and rising asset prices. There are indications, however, that the environment is in the process of changing. As Warren Buffett has commented, “You don’t know who’s swimming naked until the tide goes out.”

With hedge fund returns lagging, recent revelations of improprieties (Bayou Group and Wood River) are likely the proverbial tip of the iceberg (there are, after all, 8,000 funds!). And to what extent market fluctuations (currencies, interest-rates, energy, oil, equities…) played a role in this week’s collapse at Refco, only time will tell. For now, we should expect the wrecking ball of destabilizing volatility across the spectrum of securities markets to continue to chip away at marketplace confidence and liquidity...Clearly, the market environment is becoming increasingly challenging for the leveraged speculating community. There will be ongoing pressure to rein in risk, counterbalanced by the necessity of posting positive returns.

While the end-of-week focus was on Refco and inflation data, Delphi’s bankruptcy was a decisive blow to the tottering auto sector. Auto and auto-related bonds were hit hard, while GM and Ford Credit default swap prices surged to levels not seen since last spring’s marketplace tumult. Yet - and a curious departure from that period’s market response - Treasury yields this week rose sharply instead of their typical precipitous decline at the first inkling of heightened systemic stress. It is very tempting to view this as a major marketplace development.

Confidence that the Fed would cut rates in the event of a bout of marketplace angst has for sometime underpinned not only the U.S. bond market but the stock and “risk” markets as well...[F]aith has held strong that bond prices would spike concurrently with any turbulence that might encompass the “risk” markets...A less accommodative and predictable Treasury market would mark a major development with respect to speculator returns and, importantly, market and liquidity dynamics.

Returning to our ongoing question: Why can’t booms last forever? Well, we can continue to focus on Financial Sphere inflation and the resulting strong inflationary bias that that has engulfed the global oil and energy sector. This development has now significantly altered the likely possibilities of Fed policy actions. The probability of a scenario of much higher rates has increased significantly, while the likelihood that the Fed would be quick to ease policy has largely diminished. And while market rates are adjusting to this new reality, I believe that market players have not yet adjusted risk portfolios to this much less hospitable backdrop...

...I don’t believe Credit is an insurable risk. Credit losses are not random, independent or quantifiable events, such as auto accidents, house fires, health issues or death. Credit, by its nature, is very cyclical and non-random.

The problem lies in the reality that the Credit insurance “business” will always appear extraordinarily profitable during the boom cycle (today in mortgages), with losses coming out of the woodwork on the downside (today in airlines and auto parts). Importantly, cheap and abundant Credit insurance incites greater lending, debt issuance and speculative excesses, fomenting problematic aged financial and economic Bubbles. Protracted Bubbles, then, guarantee commensurate down-cycles that prove devastating to the inflated Credit insurance marketplace. It’s the nature of the beast...

The rampant inflation in asset markets (homes and securities, in particular) has set the stage for Credit “insurance” disaster – including Credit default swaps, GSE guarantees, mortgage insurance, bond insurance, financial risk arbitrage and myriad federal guarantees. Perhaps even more than leveraging, this Credit Insurance Bubble is the System’s Achilles heel. Inflated home prices, reckless lending and corruption are today sowing the seeds for enormous Credit losses throughout ABS, MBS and the mortgage arena. But that is jumping ahead…

If I am correct, pieces are falling into place for the unavoidable adjustment to highly leveraged and speculative U.S. asset markets. I would expect stress in auto-related risk markets to be contagious. Higher market yields from this point are also problematic. The highly leveraged MBS marketplace is vulnerable to rising rates, wider Credit spreads and self-reinforcing hedging-related selling. The entire financial sector is vulnerable to the unfolding environment, and this reality should begin to manifest in widening sector Credit spreads. Further negative Refco revelations would likely push this process forward. Because of the complex nature of the expansive speculative Bubble, we are forced to analyze subtleties in various markets for indications of heightened risk aversion, de-leveraging and waning liquidity.

One would generally expect such speculative dynamics to ebb and flow depending on the prevailing sentiment of greed or fear. Yet this week Refco did remind us how prone fragile underpinnings are to sudden collapse. And, let there be no doubt, the shallow underpinnings of Wall Street Finance are - from here on out - highly susceptible to any slowdown in Credit expansion, any serious bout of risk aversion, or any meaningful move by the speculator community to de-leverage.

Thursday, October 13, 2005
Bill Fleckenstein, The Daily Rap,, 10/12/05:

I have been asked on several occasions who I think the next Fed chairman will be, and what qualities that person ought to have. I think the next Fed chairman is going to be Ben Bernanke. That's why Bush asked him to head up the Council of Economic Advisers, to study him up close and personal, making sure he'd be the kind of guy the administration wanted. Of course, Bernanke is exactly the opposite of what you'd want to have in a Fed chairman, and an even more clueless variation of Alan Greenspan...

Just as someone who's become addicted to a drug would go through some serious pain to beat the addiction, the problems that have been allowed to fester and multiply -- in terms of the debt levels, speculative activities, macro imbalances, etc. that have built up in the last 10 (or 20) years -- are not going to be cleared away without a major amount of pain.

I have advocated getting the process started by jacking up rates hard, promoting savings, taking the recession that will inevitably occur, and hope that the derivatives monstrosity that's been allowed to build doesn't get too out of control.

But who knows what's going to happen? It's a little unfair to ask somebody else to come in and clean up Greenspan's mess. The new person will only get all the blame, because most folks don't understand that the problems which will hit us were created during Al's 18-year run.

Ingredients for Fed Excellence

Meanwhile, if I was in charge (in which case, I'd also advocate a flat tax, tort reform and, most importantly, term limits), my choice for Fed chairman would have to:

1. Be completely politically independent. That's not to say he couldn't belong to one party or another, but this person should not be a politician of any sort, and the more independent, the better.

2. Show a firm grasp of the ramifications of asset bubbles.

3. Possess a demonstrable understanding of financial history.

4. Have a record of advocating sound policies for the "long term," vs. ones that are convenient for now.

5. Be well-versed in the classical Austrian School of Economics, which would mean that the person has an understanding of the monetarist's point of view. (For more information, click here for the Web site of the Ludwig von Mises Institute.

But more important than those individual qualities, I think the idea of what the Fed is supposed to do needs to be re-examined. Folks must understand that there is a limit to central planning. (I think the former Soviet Union demonstrated that quite well.) The Fed's first task ought to be more in line with the Hippocratic Oath, i.e., do no harm...

The current Fed is essentially in the price-fixing business. It has decided that it can pick the price for money (i.e., the right rate) that will make the world hum magically. (In this pursuit, it appears to be guided solely by the "applause meter.") The Fed only has two choices: fix the price of money (as it now does, poorly), or do what former Fed chair Paul Volcker did, which was to decide what the growth rate of money should be. As ephemeral a concept as money has become in the electronic age, and as difficult as it would be to create the right growth rate for money, it's a far sounder approach than trying to pick the right rate...

Wednesday, October 12, 2005
Doug Noland, Credit Bubble Bulletin ,, 10/07/05:

Commentary: Sphere Analysis

Sphere Analysis is these days one of the more useful tools available in our analytical toolkit. There is the Economic Sphere that comprises the makeup and functioning of the real economy (production, services, distribution, imports/exports, employment, spending on goods, services, and investment, etc)...

And there is the Financial Sphere, loosely embodying the Credit system, financial and asset markets, and the financial system generally. Its dynamics are of critical significance today, although it doesn’t fall within the context of most analytical frameworks and tends to be ignored. Credit inflation, by its very nature, is a product of Financial Sphere expansion. Inflationary manifestations, on the other hand, are both Financial Sphere and Economic Sphere phenomena, very much depending on the interplay between the nature of the financial system and the structure of the real economy...

I believe that the Federal Reserve made a serious policy error when it aggressively cut rates during the second-half of 2002 and held them at 1% through the first-half of 2004. And while I appreciate the conventional Wall Street view that the global economy was facing serious deflationary risks, this threat was exaggerated. Importantly, the King Dollar Bubble was already in the process of bursting as the Fed initiated its ultra-aggressive monetary stimulation...

The inevitable bursting of the King Dollar Bubble was to profoundly remake Monetary Processes. Liquidity from the unrelenting U.S. Credit Bubble was poised to spread across the globe, although our mortgage lending excesses guaranteed that global flows did in no way impinge domestic monetary conditions (liquidity abundance). The global liquidity onslaught would stimulate economies, markets and prices generally, especially energy, commodities and emerging markets that had borne the brunt of the one-dimensional King Dollar monetary regime.

Additionally, the weaker dollar would stimulate U.S. exports and fuel a major investment boom throughout U.S. basic industry (that had been similarly starved of finance during the tech/telecom/Internet boom). The falling dollar (recognizing the ill-structured U.S. economy) would foster only more egregious Current Account Deficits, ensuring that the liquidity spigot being opened to the world would in no time overflow with excess.

...[T]he weak dollar and newfound global liquidity would increasingly provide great leeway for domestic Credit systems (especially China and the emerging markets) to expand (inflate), a rather abrupt reversal from the forced discipline imposed by weak and vulnerable currencies and Credit systems. Synchronized domestic Credit Inflations also buttressed the flagging greenback, postponing a crisis that would have surely subverted Monetary Processes and impaired Credit-creating mechanisms. Wall Street asset and securities-based finance took strong hold throughout Europe and elsewhere.

Here at home, 1% Fed funds provided unneeded rocket fuel for a Mortgage Finance Bubble already well-advanced and demonstrating an especially robust inflationary bias. Similarly, ultra-loose monetary policy pushed the Global Leveraged Speculation Bubble to blow-off excesses. Liquidity flooded into the hedge fund community, only to come out the other side as even greater (leveraged) liquidity. Wall Street balance sheets ballooned to finance customer trades and their own leveraged holdings. The Credit default swap market became a frenzy of excess, supporting the global boom in debt securities issuance. An unparalleled Financial Sphere inflation created liquidity more than sufficient to inflate asset markets around the world.

It has been remarkable to observe pundits fixate on the deflation thesis throughout history’s greatest Credit Inflation. The Fed and conventional analysts focused their inflation analysis on the Economic Sphere. For sure, a rather convincing argument was presented that productivity and globalization had forever altered inflation dynamics, analysis that neglected the nature of evolving Financial Sphere and Inflation Dynamics. It also became popular to refer to inflated home and securities values as “wealth creation.” This was all well and good, except for the reality of a massive and relentless Financial Sphere Inflation.

There are myriad problems associated with uncontrolled Financial Sphere Inflations. For one, they take on a life of their own and become almost impossible to control. Conventional analysis completely ignores – is oblivious to - them. When the prevailing Inflationary Manifestation happens to be rising asset prices, there will be no constituency favorable to reining in Credit excess; increasingly powerful interests will, instead, ensure their survival. As we have also witnessed, monetary authorities will be unwilling to even acknowledge - let alone pierce - increasingly commanding Bubbles. Meanwhile, the combination of abundant liquidity and inflating asset markets ensure the amount of finance committed to speculative pursuits expands exponentially (nurturing a ballooning and unwieldy pool of speculative finance and a Global Liquidity Glut). To accommodate Financial Sphere excess is to make certain an escalating problem and future crisis...

It is my view that we are in the early stage of some rather profound changes in Inflationary Manifestations. Not only is there today a Global Liquidity Glut, U.S. securities markets are underperforming much of the rest of the world. Will the U.S. dollar and securities markets enjoy the traditional benefit of safe-haven status come the next episode of global financial tumult?...Here at home, we are at the cusp of a full-fledged energy crisis. Policymakers, executives, business owners, and households will now fear a cold winter, then a hot summer and another active hurricane season and another winter...

Financial Sphere expansion and Rooted Monetary Processes have for too long directed cheap finance for the construction of too many large homes, too many inefficient vehicles, and too much asset inflation-induced over-consumption. Worse yet, unending Financial Sphere expansion is providing a horde of purchasing power to global economies to compete against us for a limited supply of energy resources. Monetary Processes have fostered an economy that consumes too much energy and produces too little, concurrently with stoking a global liquidity environment conducive to price spikes and shortages. It is difficult to see this dynamic sustained for much longer.

Importantly, prevailing Financial Sphere (Credit Bubble) Inflationary Manifestations are being transmuted to the energy arena from the asset markets. This latest strain of inflation, by its nature, will feed directly through to goods and services prices. The longer it is accommodated by easy Credit and liquidity, the greater the self-reinforcing “secondary effects.” Heightened (traditional) inflation will promote various outlets of Credit growth, along with wage and benefit cost pressures, while stimulating a range of economic activity that will tend to underpin inflationary pressures generally.

It appears the Fed is quickly waking up to the risk. Not only is the Fed regrettably late to this recognition, the reality of the situation is that rampant energy inflation is a global phenomena and issue...

Here at home, the challenge for the Fed was to actually tighten liquidity and Credit conditions – to bridle the Financial Sphere expansion. But the Greenspan Fed – much to Wall Street’s satisfaction – focused on the Economic Sphere and system fragility rather than the Financial Sphere’s overwhelming inflationary bias. Financial Sphere Bubble Dynamics ensured that “measured transparent baby-steps” was never going to work. Instead, it accommodated the Mortgage Financial Bubble blow-off, the Global Liquidity Bubble, and the Great Global Energy Inflation. Financial Sphere expansion (note: growth in bank Credit, ABS, Wall Street balance sheets, “repos,” hedge funds and foreign official reserves) went to dangerous blow-off extremes and, hence, became much more difficult to control.

To what extent the Fed now recognizes its dilemma is unclear. And while the focus is on how high the Fed will (baby-step) push rates, this misses the larger issue: Financial Sphere expansion – The Credit Bubble – must be reined in. The mechanism creating the excess liquidity and Credit must be checked; dysfunctional Monetary Processes must be broken; and speculative impulses that have come to command liquidity dynamics in markets across the globe must be quashed. And if anyone has any notion that such a feat can today be accomplished without major financial and economic disruption, I suggest they read more financial history...

There are major Financial Sphere and Economic Sphere developments in the offing. There’s too much Credit being created and much of it misallocated. There is, as well, excessive and destabilizing speculation. These Credit Bubble facets - seemingly innocuous for quite some time - are finally imparting conspicuously deleterious effects on an increasingly maladjusted Economic Sphere. For good reason, the Fed is getting nervous. No longer can Federal Reserve and Wall Street analysts simply ignore Financial Sphere developments. And global central bankers have at this point surely given up hope that the Global Financial Sphere would commence the process of returning to some semblance of order and sustainability with the imminent slowdown in U.S. housing finance. Not only has U.S. mortgage growth accelerated this year, global central bankers are today facing the prospect of a global energy crises and systemic liquidity-induced asset Bubbles. They now likely recognize that ultra-loose global monetary conditions have lasted far too long and accommodated precarious excesses.

It’s going to be a very interesting – and I’ll bet tumultuous - fourth quarter. Central bankers are nervous connoting that the leveraged players are anxious…And when the boat starts to rock and we know that there are too many on the boat and too many all huddled together for safekeeping, well – unexpected things are bound to happen.

Stephen Roach, Chief Global Economist, Morgan Stanley, 10/07/05:

Transition Curse

The end of an era is nearly at hand. After nearly 18 1/2 years on the job, Alan Greenspan is required under law to step down at the end of his full term as Fed governor on January 31, 2006. Akin to the election of a new pope, the changing of the guard at the Fed is a rare and important event for the US and world financial system. In the past 27 years, it has happened only three times. In each of those instances, the transition did not go well -- financial markets quickly seized up, eager to test the mettle of the new central banker. My suspicion is that the curse of the Fed transition is likely to be in play again -- with potentially profound implications for increasingly vulnerable financial markets.

Historically, the Fed has always been a chairman-dominated institution. Yes, policy is made by committee -- a seven-person Board of Governors, joined by a rotating group of five of the 12 District Bank presidents (that always includes the representative from New York). While each member of the Federal Open Market Committee has one vote, the Chairman’s vote has always carried the greatest weight in the deliberations of the modern-day Fed. As such, it should not be surprising that financial markets take the transition to a new Fed Chairman as a very serious event. This one person has long been emblematic of the character of the institution.

The history of recent Fed leadership transitions does not read well in the financial markets. The last one occurred in August 1987, when Alan Greenspan assumed the reins of power. A little more than two months later, the US stock market crashed. Paul Volcker became Chairman in August 1979 -- a transition that that was quickly followed by a wrenching sell-off in the bond market. And the US dollar was in serious trouble from the very start of G. William Miller’s brief term as Fed chairman, which commenced in March 1978...

These conditions certainly didn’t make life easy in the early days of the last three Fed chairmen. Financial markets were stretched and vulnerable at these delicate moments of leadership transition. Investors had developed a sense of security in the incumbent Fed chairman and were uncertain as to how his successor would fare. The leadership transition at America’s central bank played on the “confidence factor” that always underpins financial markets. Going from the known to the unknown is invariably unsettling -- even under the best of circumstances.
Unfortunately, the circumstance surrounding the last three Fed transitions were far from ideal.

Alas, that is very much the case today. Saddled with a record current account deficit, the US is more dependent than ever on the confidence of foreign investors to fund ongoing economic growth. When Greenspan hands over the reins to his successor in early 2006, the current account deficit will be at least 6.5% of GDP. That’s more than four times the average external shortfall of 1.5% that prevailed during the three most recent transition points -- 1978, 1979, and 1987. Moreover, in a post-Katrina, energy-shocked climate, there is good reason to expect additional reductions in personal and government saving in the months ahead -- actually, deeper dis-saving (deficits) on both counts. As a result, already-depressed national saving should move even lower, prompting further deterioration in America’s already massive current account deficit. In other words, America’s dependence on the “kindness of strangers” is likely to increase significantly at precisely the point of an historically-delicate transition to a new a new Fed chairman.

And that, I’m afraid, brings me to the most controversial point of all -- the selection process, itself. With the consent of the US Senate, the choice of selecting a new Fed chairman falls to the President. Generalizing on the basis of George W. Bush’s most recent senior appointments, I suspect the President will look for three key traits in a new Fed chairman -- familiarity, loyalty, and a pro-growth bias. This is not meant to be critical. It is a carefully determined observation based on the President’s record. In the case of a Fed Chairman, those criteria imply that President Bush will probably not select the next Paul Volcker -- a tough, independent policy maker who might be predisposed toward “tight money.” While this is inconsistent with the President’s statement on this matter at a recent press conference, in the end, I still believe George W. Bush will opt for a trusted team player who shares the goals and objectives of his political agenda.

This could well pose a serious problem for US financial markets. With America’s external financing critically dependent on the foreign confidence factor, any doubts over central bank independence will not go over well. That’s especially the case for a US economy beset with record imbalances, a potential inflation scare, and bubble-like conditions in asset markets. Foreign investors have been extraordinarily generous in the terms they have offered for funding America’s external deficit. In part, that generosity may reflect the “Greenspan factor” -- the confidence that investors have in Alan Greenspan’s adroit management of periodic international financial crises. With the Greenspan factor about to be taken out of the confidence equation, any fears of an “easy money” Fed could well prompt foreign investors to exact concessions in those financing terms in the form of a weaker dollar and higher real interest rates.

As I look to January 31, 2006, those are precisely the risks I see in the immediate phase of the post-Greenspan era. The rocky financial market history of recent Fed chairmen transitions is a warning, in and of itself. America’s heightened vulnerability to the foreign confidence factor amplifies those risks. And President Bush’s appointment record points to a candidate who could seriously compound the perception problem. This is potentially a very tough combination. It leads me to believe that the curse of the Fed transition is about to strike again.

Monday, October 10, 2005
Doug Noland, Credit Bubble Bulletin,, 10/07/05:

[Selected Notes]

Freddie Mac posted 30-year fixed mortgage rates jumped 7 basis points to 5.98%, a 27-week high and up 16 basis points from one year ago. Fifteen-year fixed mortgage rates rose 7 basis points, to 5.54%. One-year adjustable rates jumped another 9 basis points to 4.77%, up 31 basis points in three weeks. One-year ARM rates were up 69 basis points from the year ago level…

Broad money supply (M3) jumped $20.3 billion to a record $9.984 Trillion (week of September 26), with a noteworthy 19-week gain of $359 billion, or 10.2% annualized. Year-to-date, M3 has expanded at a 7.1% rate, with M3-less Money Funds expanding at an 8.0% pace…

Financial Times, 10/04: “Oil exporters are the new kids on the global imbalances' block but being new does not make them unimportant: they have been the prime movers in driving trade imbalances higher in the past few years. The $40 a barrel increase in the price of oil since the beginning of 2002 has shifted $1,200bn a year from oil consuming countries to oil producers. The magnitudes are not just large in absolute terms. Middle East oil exporters now have a larger current account surplus than the whole of emerging Asia, including China, and their surpluses account for about 30 per cent of the US current account deficit. Include Russia, Nigeria and Venezuela and the importance of oil exporters cannot be overlooked.”

Bloomberg, 10/05: “North American railroad freight rates, already at ‘unprecedented’ levels, may rise faster in the next six months… according to a Morgan Stanley survey. The survey of 300 customers showed that shippers of coal, grain and other cargo expect an average increase of 5.6 percent, excluding fuel surcharges…”

PRNewswire, 10/07: “Almost one third (31%) of Americans say they are using more credit to pay the higher prices for energy and other consumer goods resulting from Hurricane Katrina, according to the Cambridge Consumer Credit Index. 19% say they are using less credit, while 50% say they are using the same amount of credit as they did a year ago.”

Reuters, 10/07: “U.S. inflation pressures climbed in September to their highest in over five years, according to a report on Friday that suggested the Federal Reserve was right to remain vigilant over price increases. The Economic Cycle Research Institute said its Future Inflation Gauge rose to 122.7 last month, its highest since June 2000, the tail end of the late 1990s economic boom.”

Friday, October 07, 2005
Bill Bonner, Daily Reckoning (

As the 20th century progressed American capitalism passed out of the hands of serious capitalists and into the hands of managers, caretakers, manipulators and middlemen. In effect, it has been collectivized...owned by millions of small shareholders, and directed by employee functionaries. Now, more than half of all stocks in the United States are owned by a group of 100 large money managers. And how many corporations do capitalists themselves run? Warren Buffett holds a light, but firm, hand on his enterprises. Bill Gates is unquestionably at the helm of Microsoft. But most large companies have fallen into the grip of professional CEOs, often celebrity managers who write popular books, pay themselves absurdly grand salaries, and drive their businesses into the ground.

A real capitalist can take a long-term view of things. He usually has enough money of his own already. His goal is to build a good business that can endure. He can build a factory, knowing that the return on investment may not come for many years. He is usually indifferent to quarterly profit reports. In fact, he may be willing to invest vast sums for a return far in the future, or hedge against the risk of loss by withdrawing from lines of business that are currently very profitable, things that few professional CEOs or money managers would tolerate.

Still, ask the people in the business class lounge and you’ll find they want to be just like Lee Iacocco or Jack Welch; they want to live in New York or London

From: The Rude Awakening, by Justice Litle ( 10/5/05


"One of the driving forces of this boom – and perhaps what really differentiates it from previous cycles – is the continued environment of low long term interest rates, which has flooded the financial markets with liquidity."
-Financial Times, 'A Favorable Wind for Investment Banks'

Muted applause is in order for Goldman Sachs, which recently turned in record quarterly earnings - up a pleasing 84% from last year's results. And it's not just Goldman that's faring extraordinarily well. White-shoe firm Lehman Brothers is breaking records too, with Bear Sterns and Morgan Stanley in hot pursuit.
The Amex Broker Dealer Index (XBD) is powering to new heights.

Hooray for the investment bankers, minting cash in their Savile Row suits and Hermes ties. These natty boys have the world on a string...But they also have a tiger by the tail. At the same time that Goldman shines, so does the "barbarous relic" known as gold.
At 17-year highs, the atavistic yellow metal is within sprinting distance of $500, even as the investment bankers cash registers are ringing. Strange, that.

It is stranger still that gold would rise from the ashes at the very apex of worship for that august institution, the Federal Reserve. This past summer, graduate student Erin Crowe opened an informal gallery of 18 sketches and portraits she had done of the great man himself, Chairman Alan Greenspan. After CNBC picked up the story, the phone rang off the hook. All pieces were sold at prices ranging from $1,000-4,000. According to The Washington Post, several visitors to the gallery were "telling stories of how they adored the Fed chairman, how he had saved the world and made them millions."

Gold's ascent to 17-year highs would seem to signal that inflationary pressures are also on the rise. If so, we all know what comes next: Rising interest rates and market pain, which means hard times for the investment banks. But this time around, for this strange interlude, both are sharing an upward trajectory. One or the other - Goldman or gold - is due for a fall from grace. But which?

The investment banks have long been riding a wave of persistent - and deliberate - asset inflation. When excess liquidity is pumped into the system, those who truly
prosper are the ones best placed to dip their hands in the river. As the Greenspan cash sloshes and flows throughout the U.S. asset markets, savvy players divert the cash flows toward themselves...just like a farmer irrigating a field.
The investment bankers, masters of prestidigitation, divert cash from many different activities, usually in the name of "advising." They massage the cash and trade it and hedge it; whisper in the ear of corporations deluged by it; and profitably surf the growing swells of debt created by it. There's no business like flow business.

It's an establishment-sanctioned rip-off, of course. Aggressive asset inflation is portrayed as a good thing, all the more so with John and Jane Doe participating via manic housing appreciation. But the real estate pump is a Ponzi scheme, designed to sustain the unsustainable via lines of credit.
The government does its part by rewarding reckless borrowers (tax-advantaged home equity lines of credit [HELOCs]) even as it punishes modest savers (capital gains taxes, hidden erosion, paltry returns on interest).

Like a home electricity meter steadily ticking over, life grows more costly by the hour, if not the day. But as asset values are pumped up with abandon, inflation measures are kept "benign" by the damping effects of stagnating wages and the quirks of our government's inflation-measuring mechanisms. And as asset values continue inflating, the bankers "make the middle" with big smiles on their faces.

Yet while optimists swear the sky is still blue, an ominous buildup of offshore debt is the dark counterpart to this falsely created prosperity.
None of this paper happiness is free; the piper's payment is simply delayed and delayed and delayed some more. When the center finally gives way, the man on the street (you and I) will find himself on the hook for it all - in the form of sharply higher taxes, sharply lower purchasing power or both - and facing the possibility of jarring societal disruption to boot.

When it happens, it will not be "just one of those things" that could not be foreseen or prevented. It will be the inevitable result of a deliberate policy -reckless asset inflation for dubious purposes - that has enriched the few at the expense of the many, with the many playing along out of greedy shortsightedness and an ignorance of history.

This rant is not anti-capitalist or anti-free market, by the way. Capitalism shuns redistribution in all forms, and heavily managed markets are not free.
The policies of the Federal Reserve and the gross failings of government, however, qualify on both counts.

But back to the original topic: If the investment bankers are riding high on an asset-inflation wave, gold is cresting on a far more ominous one. Those who buy gold anticipate the day when this supposedly benign asset inflation turns malignant.
The inevitability of the coming mess might be "good news" for gold investors, but bad news for the world economy at large.

The investment bankers might already sense the gathering thunderclouds that threaten to darken their sunny day. You can call them many things, but you certainly can't call them stupid. They see the writing on the wall, and they are taking appropriate action. Along with record profits, Goldman announced a buyback of $7.1 billion worth of shares, the largest in history by a Wall Street firm.
The Financial Times opines that this is actually a sign of weakness, not strength - a tacit admission by management that the good times are not sustainable. A massive share buyback will offset the dilution of hefty employee stock option bonuses, likely to be followed up by hefty duty cash-outs. From cash to stock to cash again, with a smoothly orchestrated change of hands. Time to get when the getting is good.

Whether or not the investment bank stocks have peaked, their latest victory lap comes at an especially delicate time for Fed Chairman Greenspan. He would not be keen to see asset values wither just as he is exiting his office.
Greenspan no doubt fears for his legacy, and may grow more bitter as his means of defending it slips away. How ironic to sustain the illusion all these long years, only to stumble in the home stretch. One almost feels sorry for the man. Almost.

In the end, the inflationary triumvirate of profligate government, accommodative Fed and self-serving bulge-bracket banks, so long a united front, will be carping loudly and blaming each other bitterly before all is said and done. And gold will be looking on...and cheering loudly.

Thursday, October 06, 2005
Bill Fleckenstein, The Daily Rap,, 10/05/05:

...The Fed is trapped -- now having to discuss and pretend to deal with the inflation that has been raging for some time. At the very same time, the economy is rolling over. One of these days, the Fed will cry uncle and then the dollar will cave in. But for the time being, people seem to think that the Fed is going to back up its tough talk. I continue to think that the Fed is much closer to concluding its program of tightening than most people believe...