Noch was Erbauliches zum Wochenende

verfasst von R.Deutsch, 26.08.2001, 11:36

BEST OF BILL BUCKLER

August 20, 2001

At present, the U.S.A. is hauling 64% of global capital flows into its own financial
system and economy. That leaves 36% of these global capital flows to travel back
and forth between all the other nations on earth.

That 64% is a horrendous global imbalance. In terms of total economic output,
the U.S. economy only amounts to 24% of global GDP. Less than 10 years
ago, in 1992, global capital flows into the U.S. were under 20%.

Once inside the U.S. financial system, this imported money is quickly lent out
and spent. And then, a very large portion is re-exported. The funds flow out
again and yet more imports flow into the U.S. Based on U.S. Treasury data,
foreigners hold more than 40% of the $US 3 TRILLION of Treasury debt in
private hands. Foreigners also hold about 46% of TOTAL U.S. corporate
bonds and about 11% of TOTAL U.S. equity.

An Ocean Of Money Behind The U.S. Dam:
The much vaunted “Strong U.S. Dollar Policy” is the “dam”. If this dam breaks -
i.e. if the U.S. Dollar starts a sudden fall - there would be a tidal wave of Dollars.
This massive outflow of U.S. Dollars would leave a trail of enormous economic
wreckage behind it, not only inside the U.S. but right around the globe, as
foreigners started to tally up their losses.

The ONLY thing that is currently holding up the international value of the U.S.
Dollar is a DAILY $US 1 Billion plus inflow of foreign funds.

This global situation is NOT sustainable. The U.S. simply cannot go on
absorbing 64% of the world’s capital flows and adding it to its debts. Over the
last 12 months, the U.S. current account deficit was $US 449 Billion.

Greenspan - Approaching The End Of The Line:
U.S. consumer prices are now climbing at an annual rate of 3.2%. The Fed stands
with a Fed Funds Rate of 3.75%. That is a REAL interest rate of uncomfortably
close to ZERO - 3.75% minus 3.20% equals 0.55%. The Federal Open Market
Committee (FOMC) next meets on August 21. Everyone expects another 0.25%
rate cut, bringing the Fed Funds Rate down to 3.50%. The U.S. government
routinely understates consumer prices. Suffice it to say that even if consumer
prices do not climb between now and August 21, another 0.25% Fed rate cut would
bring REAL interest rates to ZERO - or LESS!

U.S. Stock Markets: Approaching The End Of Earnings:
Both foreign and American holders of U.S. shares must be wondering when the
long-awaited upturn in U.S. corporate earnings is going to appear. These earnings
are needed fast to validate the sky high present prices for U.S. shares. The Nasdaq
has taken its lumps but the main indexes, the Dow and the S&P 500, are still to take
theirs. Were U.S. share prices simply to return to historical mean valuations, then
the Dow would stand at about 5000, the S&P at close to 600, and the Nasdaq at
600 to 800.

With U.S. capital investments collapsing by a huge 13.6% in the second
quarter, it should be obvious that there is nobody inside corporate U.S.A. who
wants to make any new and/or additional investments in capital plant or
equipment. Their problem is that they already stand with gross excesses of
REAL capital.

The Last Ditch - The U.S. Consumer:
Or, more precisely, the ability of the U.S. consumer to BORROW. Jane
D’Arista of the Financial Markets Centre has reported that through the first
quarter of this year, U.S. household borrowing increased by $US 539 Billion
compared to a $US 96 Billion increase in personal incomes. U.S. consumers
borrowed $5.61 for every $1.00 that they earned.

At the end of the first quarter, total U.S. consumer debt stood at $US 7.2
TRILLION, double what it was in 1991. Moody’s has reported that “bad
loans” (more than 180 days in arrears) have climbed by 21% over the past
year. “Late loans” (more than 30 days in arrears) climbed by 16% in the
MONTH of June. The American consumers’ ability to continue to borrow and
then to consume is the last line of defense against a huge U.S. and global
RECESSION. That line is wearing very thin indeed.

If The U.S. Stock Market Breaks First:
A large downwards break in the main U.S. stock market indexes (the Dow and the
S&P 500), especially if it happened comparatively gradually, would be the safer
option for both Americans and foreigners. It would be safer because it would be an
advance warning of DANGER. Yes, there would be considerable losses, but
investors would have time and reason to sell out and take their losses, preserving
some of their money. Those that didn’t would hang on until their losses were just
“too big” for them to sell.

Those individuals (sadly, they are always the majority) would hang on all the
way down, hoping in every rally and then despairing when the rally didn’t go
high enough. It is these people who always sell out in a panic at the BOTTOM
of a bear market.

Nonetheless, a large downside break in the huge U.S. stock markets would
give some people the chance to get clear and get out with some money. For
many others, a break in the U.S. stock markets would be the signal to alter
their own financial or corporate and business affairs, up to and including paying
off some unwanted debts, selling certain unneeded items, gaining cash and
liquidity, and getting set in a long term viable economic and financial situation.
To do this now - in advance - takes more inner certainty than most people
have. But given a solid signal to act and act NOW, many such people would
have a more than useful chance to get themselves into a better financial situation
than their current one.

If The U.S. Dollar Breaks First:
This is the more dangerous possibility. If the U.S. dollar breaks first, as it falls, it
will take investments in ALL the U.S. markets down with it. Foreign investors will
be hit immediately. If they don’t start to sell immediately, U.S. stock and bond
markets might not even react. The U.S. stock markets might even rise as U.S.
exports are now seen as being more globally competitive. A break in the U.S. Dollar
is even more insidious for Americans since, for a while, internal U.S. economic
effects may not show up at all.

But show up they will. First, the prices of U.S. imports will start to climb. And
seeing this opportunity, every producer of similar goods inside the U.S. will
take the chance to raise their prices and margins. Shortly after that, the cry of
“INFLATION” will cover the U.S., and the pressure on U.S. interest rates will
begin to grow. When U.S. rates begin to rise - U.S. bond prices will begin to
FALL.

U.S. debt paper in all its myriad of forms will start to lose value. American as
well as foreign holders of U.S. debts will start taking portfolio losses --which
will get bigger and bigger. Some of them will go BROKE. At the same time, a
falling Dollar will put increasing UPSIDE pressure on U.S. interest rates, which
will hit over-indebted U.S. corporations right on their bottom lines. American
consumers will be looking at higher servicing costs for their oceans of debt.
This will force them to STOP consuming. There go retail sales, and with them
go corporate earnings. As the pressure increases, the U.S. stock markets
WILL break - and the chances are that the break will NOT be “gradual”.
Earnings are nowhere to be found in the U.S. economy.

At some stage in this process, the people of the United States will realize that
their nation is IN a RECESSION. When enough of them realise this, the real
POLITICAL danger will start.


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• Noch was Erbauliches zum Wochenende - R.Deutsch, 26.08.2001, 11:36