Iran Calls the Bluff

[willstrickland]

Syria is next folks. The playing/manipulation of this one is, I must admit, absolutely brilliant. We're in there by this time next year. But that's another story...

 

Iran knows we're overextended and today they called the bluff.

 

"But Kharazi said: “I think that the American leaders are intelligent enough, that they have learned the lesson from Iraq and that they will not attack another country, especially Iran which is not like Iraq."

 

Russia is quietly backing them despite the US's concerns.

 

"Russia's Atomic Energy Chief, Alexander Rumyantsev has just returned to Moscow from Iran, having signed the deal and toured the facility. He's defended Russia's role in the deal.

 

"We are cooperating with Iran within the framework of current international law," he says. "We’re not breaking any rules set by the international community and laid out by the international atomic agency. So you can criticise us, but I don't understand what for."

 

Rumyantsev says the spent nuclear fuel from Bushehr will be sent back to Russia under the watch of the United Nation's Atomic Energy Agency. He says Russia has a long-established routine for transporting nuclear material; special containers, security guards, trains and surveillance."

 

The global balance of power is about to be up-ended, the sharks smell blood in the water. We're over-extended militarily, and we are extremely vulnerable finacially. The US economy could be brought down by China alone (hell Seoul caused a 170pt drop in the Dow by mentioning they might start diversifying some of their reserves and they have a tiny fraction of the dollar debt that China and Japan hold), all they have to do is start selling off their dollar reserves and the US economy will crash.

 

Of course the world economy will also crash. Would they do that to unseat us from the Supreme Overlord of World Power position we currently enjoy? Might not even need to. Our financial system is so leveraged, with so much excess liquidity and debt, it may collapse on it's own. The interplay of rare, unsustainable macroeconomic trends, and global power politics is fascinating right now.

 

Strange days indeed.

[bunglehead]

That Korean comment and the subsequent drop scared the hell out of me. It's not inconceivable that our economy could collapse under it's own weight. I really, really hope that doesn't happen. I'd much prefer to see the depression in old magazines and books than right out my front door.

I'm paying down as much debt in an accelerated fashion out of fear of this happening. I can't believe I would ever see things get this bad.

[klenke]

Will Strickland calls our bluff.

[Scourge]

How much military experience does Mr. Strickland really have?

Another cc.comer with all the answers.

[foolscongress]

yeah, the u.s. economy is about to tank. same nonsense we worried about in the nineties, eighties, and seventies. be calm, people.

[Mal_Con]

The truth of the matter is the economy (sic) has already tanked. We are no where near 2000 levels esp accounting for inflation after 5 years with not much improvement in sight. We have fost our edge in R&D to Europe and Asia which bodes ill. The biggest planes now come from Airbus not Boeing or Hughes and it is Europe that made the probe on Titan not NASA and Japan is more likely to have the first moon base.

[Off_White]

How much military experience does Mr. Strickland really have?

Another cc.comer with all the answers.

 

That's a stupid question. The issue is primarily economic, and bean counters and policy wonks know more about the big picture than grunts in the field. Will's a sharp cookie, and you're..... what, exactly?

[selkirk]

How much military experience does Mr. Strickland really have?

Another cc.comer with all the answers.

 

That's a stupid question. The issue is primarily economic, and bean counters and policy wonks know more about the big picture than grunts in the field. Will's a sharp cookie, and you're..... what, exactly?

 

Bald?

or was that rhetorical?

[willstrickland]

.

[willstrickland]

yeah, the u.s. economy is about to tank. same nonsense we worried about in the nineties, eighties, and seventies. be calm, people.

 

Were you old enough to remember the 70s? Apparently double digit inflation, soaring oil prices, a stagnant economy, and double digit unemployment was a good thing in your opinion? The only good thing about the 70s early 80s was the opportunity to buy long bonds with huge yields that would be worth a fortune when Volcker's leadership finally cracked inflation and rates dropped.

 

Yeah, the go-go bubble of the late 90s, that was healthy. The Nasdaq made a high over 5000 in spring of 2000 while the Dow topped 11,000. Today Naz closed around 2070, Dow around 10,800. Five years of significantly negative returns acconting for inflation.

 

Do you have any concept of what the results of a liquidity boom like we're participating in does? Add in the explosion of derivatives in finance and it's an ugly picture. This is simple simple concept. Inflation is a monetary phenomenon. Pump a bunch of money into the sytem and what happens? Inflation. "But the FED says inflation is contained and Uncle Bubbles Greenspan says we're in good shape". Please. Do you receive your food and fuel for free? The core CPI, the number the FED harps on, ignores the increases in food and fuel because they are volatile. PPI just had the largest jump in about 6 years. That will pass through soon enough. But the real place we're seeing the inflation from this liquidity bubble...Real Estate and other assets. Add in the sketchy nature of financing our current account deficit and the highly leveraged, increasingly fragile system of finance running over with derivatives and you have a genuine doom and gloom possiblity.

 

Don't be a lemming, protect your financial ass. I am currency hedged, short some high p/e techs, and long consumer staples, health care, and oil.

 

There is nothing much to worry about if you rent, have a negative net worth, and enjoy the service sector ("Fries with that?")

 

Denial, not just a river in Egypt anymore! But don't listen to me, take it from Paul Volcker:

 

"Below the favourable surface [of the economy], there are as dangerous and intractable circumstances as I can remember.... Nothing in our experience is comparable…But no one is willing to understand [this] and do anything about it… We are consuming… about six per cent more than we are producing. What holds the world together is a massive flow of capital from abroad… it’s what feeds our consumption binge... the United States economy is growing on the savings of the poor… A big adjustment will inevitably become necessary, long before the social security surpluses disappear and the deficit explodes…We are skating on increasingly thin ice."

– Former Federal Reserve Chairman, Paul Volcker

[bunglehead]

Well put Mr. Strickland. I've been trying to get this point across to some people, by dumbing it down, but this is clearer. Our gov't has us leveraged pretty heavily.

Greenspan is a fucking schill. I used to think he knows what he's talking about, but now that I've seen him change his tune to match whatever the current Administration has a hard on for, I know he's a tool.

most people don't want to think about this shit, and I sure hope it doesn't come back to haunt us as in: "I thought everything was fine, what happened?"

I've especially been trying to get through to my friends with large mortgage payments, and they don't seem to either care or get it.

[JoshK]

Yup, the government of the past 5 years has done a pretty poor job economically. The problem is we are running up a huge deficit for reasons I cannot understand. I would be all for dumping money into education in extreme amounts, even with debt, as that is where our real problem is going to be in 15 or 20 years...the fact that our citizens are going to be completely unedgimicated compared to the rest of the world, esp. compared to asian countries. We should also be pumping tons of money into new energy sources. Not only will it push our engineering and R&D but it's just one step closer to getting rid of a giant dependence that does nothing but hurt us. I would also like to see us pressure the Chinese to let their currency float. That has a good deal to do with our ever-increasing trade deficit.

 

The current administration has made the mistake of pushing our might militaraly without backing it up with the other nescessary factors that contribute to a nation's success. The problem is further ignored as the administration doesn't even place the military expenditures for Iraq in the budget.

 

I don't think it's the extreme doom and gloom some may think, but I completely agree that we need to start building our economic and political strategies around a concept of keeping America on top and working to get what we want. As it is, we are content resting on our laurels and expecting a powerful military to do it all.

[JoshK]

One more thing...I don't the airbus jumbo-spruce goose thing is an example of passing us in terms of engineering. Make something big doesn't make it better. I predict it ends up being a failuref...but who knows, i'm generally wrong.

[Fairweather]

Sorry Will, but your doom/gloom scenario is old-school. Iran will reform from within. The citizenry there are generally good people who are on the brink of an awakening. The mullahs are on the way out.

 

North Korea will be reigned in by China soon enough. Interesting to watch PLA troop movements along the N Korean border when big brother doesn't get the proper response from its rabid-dog neighbor to the south. And if little Kim-Jong tries to hand a nuke over to Al-Queda, well, GW will rightfully incinerate his ass with a couple of W-88's.

 

We'll deal with Syria in the shadows. No major troop action there. Sure, we may drop a bomb or two to let Basher know where he stands, but our Israeli friends know how to handle the kid.

 

I won't attempt to address the economic side of your post other than to say that China and virtually all other nations still seem to think that financing American debt is a safe investment. That said, I absolutely do share your aprehension about our debt-binge now approaching 7 trillion $$.($7,000,000,000,000 ...wow!) The projected annual budget surpluses of Clinton's last term should have been immediately commited to token debt-reduction.

 

And now for my prediction on the next flare up involving American troops.......

 

Venezuela

[JayB]

The Latin Americans look like they're all set to impoverish themselves to spite the gringos - again...

[willstrickland]

Iran will reform from within. The citizenry there are generally good people who are on the brink of an awakening. The mullahs are on the way out.

 

I agree with that. Within' 10-15 years I think.

 

We'll deal with Syria in the shadows. No major troop action there. Sure, we may drop a bomb or two to let Basher know where he stands, but our Israeli friends know how to handle the kid.

 

Juan Cole, a M.E. history prof at Michigan, wrote an intriguing look at Lebanon, it's people, and Syria and Israel's roles there and posted it this week. It's a bit long, but well worth the read and really brings home the complexity of the dynamics in region: http://www.juancole.com/2005/03/lebanon-realignment-and-syria-it-is.html

 

I won't attempt to address the economic side of your post other than to say that China and virtually all other nations still seem to think that financing American debt is a safe investment.

 

Well this is a really complex issue. They're running a huge trade surplus with us. The excess money is recycled into US Treasuries. Yes, the US$ is the defacto reserve currency of the world. Partially because our economic and geopolticial clout, and partially because oil is priced in US$ (which is partly due to the clout). So yes, they don't think the US will default on the debt.

 

But, do they think it's a good investment? Not really, especially over the last 3 years. The dollar is declining and they (Asian central banks) are taking large capital losses by holding those dollar assets. And our treasuries' yields are low. They are losing alot of money. And, China and Japan in particular are taking additional losses in the market operations to defend their currency levels from rising against the US$. Then add into the mix that the asian economic growth is predicated upon exporting to the US consumer. It is in their interest to continue to finance our deficit because if our economy slows, their growth will stall. Presumably at some point the capital losses argument exceeds the export based growth model argument. Or comes to the fore anyway. And I think that is evident now. The talk of diversifying reserves into more euros and yen from Seoul, Moscow, and Beijing and the recent meeting of asian central bankers to discuss the declining dollar indicate that the concerns are growing. China blew something in the neigborhood of $100B last year in operations to maintain the yuan's (or renminbi if you prefer) peg. So, IMO it's more like a necessary evil than a good investment. Yet another element is the OPEC countries and the very real possibility that they will begin to price, at least partially, in euros. The dollar is overvalued against asian currencies across the board, but until China loosens the peg, the asians are not willing to allow the currencies to rise much because it makes their exports less competitive with China.

 

We are in a tightening cycle that should go on for a while yet. And virtually every major tightening cycle involves a crisis at some point. With all the debt in the system now, and all the undercapitalized organizations with fat portfolios of derivative instruments, I think a crisis is imminent.

 

I've been looking for the next recession to hit around Q2 '06. That was my prediction a year ago and the data trends are supporting my case thus far. Stocks typically peak 6-8 months before the economy peaks. Avg market drop during a recession is close to 40%. The spooky part is the complacency. Bullish sentiment has been high, volatility is very low, and if you watch the markets on a daily basis and how they react to news the complacency is very obvious. All are signs of an impending correction.

 

The projected annual budget surpluses of Clinton's last term should have been immediately commited to token debt-reduction.

 

Indeed. We're running a deficit around 6% GDP. That's not sustainable. But when the GOP screams for tax cuts and making them permanent, but can't make the books balance, whatcha gonna do? I'm all for less taxes, as long as you can balance the budget. The long term implications are what Josh is getting at. We need to invest in our country and its people, not shackle ourselves to the Chinese. Instead, our personal savings rate is something like 1% and our consumption binge is being financed by reallocating 80% of the entire world's savings.

 

The really ugly part of this deal is our saving habits. We, as a nation, have become reliant upon defacto savings through asset appreciation (homes primarily, but also stocks/bonds). Home value goes up, people think they need to save less/can spend more because suddenly they have more equity. But the problem is, the asset appreciation in this case is not tied to fundamental values. In other words, the prices are going up at an unsustainable growth level because their is a ton of easy/cheap money pumped into the system. As credit gets restricted (i.e. FED continues to raise rates to control inflation), the housing market will stagnate and value growth rates will return to trend. The data is already showing new home starts continuing to rise while mortgage apps are dropping and rates are rising. Some of the "hot" housing markets may experience an actual decline in values, but most are likely to simply slow way down.

 

And now for my prediction on the next flare up involving American troops.......Venezuela

 

I can see that. BushCo really doesn't like Chavez. But without an oil supply disruption, I don't think we get involved. I mean didn't we already try to oust Chavez on the sly?

[Scourge]

Iran and DPRK are conspiring at this very moment to nuke the USA. Will Strickland please help us!

[chucK]

Iran and DPRK can wait. We needed to take out Iraq first. They were the true danger. Mushroom clouds!!

[Scourge]

Will Strickland now giving investment advise, is he God or the next Warren Buffet?

[Peter_Puget]

Employment

Since May 2003 — which was the debut period for Bush’s tax cuts on personal income, dividends, and capital gains — the economy has generated 3 million new jobs. The unemployment rate has dropped to 5.4 percent from 6.3 percent. Weekly unemployment claims have fallen to 300,700 — the lowest since late 2000.

 

Sidebar: Note the interesting attached graph. ( source) Did Clinton's change to the minimum wage cause the abrupt in crease in the graph?

 

 

Business

January factory orders for non-defense capital goods (excluding volatile aircraft) are 17 percent above year-ago levels, while shipments are running 14 percent ahead of last year. In other words, there is a capital-spending boom going on.

 

January chip sales rose 17.5 percent against the year-ago level, according to the Semiconductor Industry Association. Meanwhile, the transportation sector is white hot. Rail freight car loadings are 12.6 percent above a year ago and freight tonnage shipped by trucks is 20.6 percent above the year-ago mark. The Dow Jones transportation index has reached another all time high.

 

Output-per-hour by nonfarm companies has increased 2.8 percent over the past year, in line with the 10-year trend average. Because of all the technologically related efficiencies now in place throughout American business, unit labor costs are only 1.3 percent. And because labor costs are low, profit margins remain positive.

 

Net operating earnings for S&P 500 companies increased 22 percent in 2004.

 

Inflation

Lower tax rates, deregulation, trade liberalization, capital investment, and the technology-induced productivity surge are all counter-inflationary measures. The global spread of capitalism and growth, especially among emerging economies in China, India, and Eastern Europe, is what’s really impacting the commodity world. (ie increased demand) These economies require basic materials and industrial goods. So their commodity demands, which are commercial in nature, have led to raw-material price increases. Unlike the 1970s, central banks are not producing the excess money today that would raise future inflation.

This is why worldwide bond yields are historically low. Global credit markets are not demanding high inflation premiums. The worldwide commodity boom is a growth signal, not an inflation signal.

Growth is never inflationary. The current commodity boom is completely unlike the one 25 years ago when hard goods and real assets were used as inflation hedges.

[AlpineK]

You don't have much to say about the inverted curve (I think) between long term and short term interest rates Peter. Allen Greenspan called it troubling, and the present conditions have been a precurrsor of recessions in all of the last recessions.

 

Plus I hear the price of oil is going way up in the near future.

[Peter_Puget]

 

Greenspan

 

 

current episode, however, the more-distant forward rates declined at the same time that short-term rates were rising. Indeed, the tenth-year tranche, which yielded 6-1/2 percent last June, is now at about 5-1/4 percent. During the same period, comparable real forward rates derived from quotes on Treasury inflation-indexed debt fell significantly as well, suggesting that only a portion of the decline in nominal forward rates in distant tranches is attributable to a drop in long-term inflation expectations.

 

Some analysts have worried that the dip in forward real interest rates since last June may indicate that market participants have marked down their view of economic growth going forward, perhaps because of the rise in oil prices. But this interpretation does not mesh seamlessly with the rise in stock prices and the narrowing of credit spreads observed over the same interval. Others have emphasized the subdued overall business demand for credit in the United States and the apparent eagerness of lenders, including foreign investors, to provide financing. In particular, heavy purchases of longer-term Treasury securities by foreign central banks have often been cited as a factor boosting bond prices and pulling down longer-term yields. Thirty-year fixed-rate mortgage rates have dropped to a level only a little higher than the record lows touched in 2003 and, as a consequence, the estimated average duration of outstanding mortgage-backed securities has shortened appreciably over recent months. Attempts by mortgage investors to offset this decline in duration by purchasing longer-term securities may be yet another contributor to the recent downward pressure on longer-term yields.

[willstrickland]

Nope K, not inverted, but flatter than one would expect. Most likely attributable to a combination of heavy buying by the asians recycling their trade surplus as well as pension/retirement plans restricted in their purchasing choices. No 30yrs issued in a while, which would put more pressure on shorter issues.

 

C'mon Puget, those numbers are great...until you look at the trend. YOY levels are great, but let's see YOY growth trend numbers, not just sraight YOY. Productivity growth is slowing, so one would expect capital expenditures, particularly with the amount of cash on coportate balance sheets. And you know the unemployment rate just increased from 5.2 to 5.4 and the labor participation rate is low. While the "3 million new jobs" sounds great, lets put it in perspective: We only just "broke even" on jobs in Bush's tenure in December. That does not account for population growth. Job creation has not been keeping pace with population growth. It's amazing how the BLS has revised the monthly numbers down over and over again. You mention the 5.4 vs 6.4. I'd like to see a comparison of the unemployement rates adjusted for labor participation rate. That said, 5.5% is very, very low by US standards. The early 80s had levels hovering around 9-10%.

 

The employment numbers were the only thing to surprise to the upside last week. And a large part of the "surprise" that fueled the market on that release was that labor costs were contained, thereby easing inflationary concerns spurred by the PPI numbers from the previous week that showed the largest jump in 6 years. Salary stagnant, consumer spending up, trade deficit out of hand, personal savings extremely low and a new mindset of savings through asset appreciation in what is arguably a housing bubble.

 

This one gave me a chuckle:

 

"Unlike the 1970s, central banks are not producing the excess money today that would raise future inflation."

 

Not producing excess money? Are you joking? M3 is up 44% in 5 years.

 

"Lower tax rates, deregulation, trade liberalization, capital investment, and the technology-induced productivity surge are all counter-inflationary measures."

 

That's swell. But you know as well as I do that inflation is a monetary phenomenon and credit creation is at absurd levels. What do you consider an appropriate level of M3 growth?

 

"This is why worldwide bond yields are historically low. Global credit markets are not demanding high inflation premiums. The worldwide commodity boom is a growth signal, not an inflation signal."

 

Nor are they demaning a high risk premium. It's as much a function of liquidity and carry trades as anything. I agree commodities are being driven by growth. Assets, however, are another story.

 

My point is this: We are very near the top before the next downleg of a secular bear. Given the state of global finance, the trigger to the downside could be some sort of crisis and it will get ugly fast. There is no way in hell I would be broadly indexed for the foreseable future.

 

If you take economic banter from an internet site, particularly a CLIMBING site, to be usable investment advice...you are beyond help. Just send me your money now and it will save you the time and frustration of losing it. I promise I will invest it wisely...into 12pks of PBR cans and cases of ramen.

[Dru]

When ramen is outlawed, only outlaws will have ramen.

[Fairweather]

The biggest planes now come from Airbus not Boeing or Hughes and it is Europe that made the probe on Titan not NASA and Japan is more likely to have the first moon base.

 

I believe the Hyguens Probe that went to Titan was pretty simple as far as space vehicles go. It was launched off of the mostly American-built Cassini probe by a spring!

This euro-success is akin to throwing a disposable camera out the window of a Lincoln Navigator, IMHO.

 

And how are the euros' doing with their Mars exploration these days? What are they now...one successful orbiter and a half-dozen failures?

 

As far as the 'Airbus biggest plane'... that can only land at a half-dozen airports in the world and guzzles more fuel per passenger than the new Boeing 787?? That's your euro-centric progress?