Wealth International, Limited

Finance Digest for Week of January 3, 2005

Note:  This week’s Offshore News Digest may be found here.


By historical standards, 2004 was an average year for most stocks, and well below average for the handful of companies that make up the Dow Jones industrial average. Despite a bumpy ride in the first nine months of the year, the Standard & Poor’s 500 -- one of the broadest indicators of the stock market -- rose 9%, or more than 10% when dividends are thrown into the mix. That is slightly ahead of the index’s average annual performance since the late 1920s. The tech-laden Nasdaq rose 8.6% to end the year at 2,175.44, one of its highest closes since mid-2001. The Dow, with an annual climb of only 3.2%, did worse than the other indexes and far worse than it did in 2003, when it rose 25.3%, but warmed investors’ hearts with its end-of-the-year rise -- in the 4th quarter, the Dow climbed 7.0%.

So what will the new year bring? On the strength of the recent rally, some Wall Street prognosticators are predicting the market could top its all-time highs in 2005. Longtime bull Ralph Acampora, chief technical strategist at Prudential Equity Group, predicted early this week that the Dow could top 13,000 by the end of this year. But other voices -- including some of Acampora’s own colleagues -- suggest that the market will slow next year, dragged down by rising inflation, hikes to interest rates, slowing profits and sell-offs by foreign investors who are tired of the declining value of the dollar eating at their investments.

Some investors are seeking a hedge against continued dollar weakness putting their money overseas rather than on Wall Street. Over the first 10 months of 2004, the net outflow of capital from the U.S. totaled nearly $52 billion, a 32% rise from the same period a year ago. On an annualized basis, it is the highest outflow of capital since 1997. Most of the money is being invested in the U.K., with U.S. investors buying a record-setting $12.3 billion in British bonds and equities in October. Japan was the next largest recipient of U.S. capital in October, netting $2.7 billion in U.S. investments.

Link here.

Economists expect a strong year for the U.S. economy, albeit with lower growth than in 2004.

Let the good times roll. Thanks largely to a rebounding national economy, many businesses are coming off a healthy 2004. “We have seen a significant turnaround from the period of 2001-2003 when our members were hit hard,” says Michael Smeltzer, director of the Manufacturers’ Association of South Central Pennsylvania, a trade group whose members represent a broad range of industries. A federal tax strategy that energized consumer confidence and the depletion of inventories in the supply chain were contributors to the turnaround, he says.

Many observers believe we are heading into a healthy period for revenues and profits. Smeltzer is one who foresees a strong year, especially in the capital goods marketplace. Most economists anticipate a slowdown in 2005. Rising oil prices are a major reason. Also expected to contribute to the cooling down on the business spending side is the expiration of the liberal depreciation allowance, along with a softening of export activity from a less dramatic decline of the dollar against the Euro and Chinese Yuan. The expected rebound in quality hiring did not occur in 2004, and that failure, along with the long-term decline in job totals over the last four years, has put a serious crimp in the consumer goods side of the economy. Recent reports, though, seem to cast a glimmer of light onto the formerly gloomy 2005 picture.

Link here.

Several hurdles stand in the way of U.S. economic growth this year.

As New Year’s revelers bade farewell to 2004 Friday night, they rang out a year that ended much better than it began. After three years of recession and anemic growth, the U.S. economy picked up steam last year -- creating more than 2 million jobs, boosting the GDP by an estimated 4.4% and driving the stock market to some of the highest levels it has seen since the collapse of the dot-com bubble. But as the economy lurches into the new year, it faces some strong head winds that could threaten its expansion. Many economists predict that GDP growth will fall this year by more than a full percentage point -- with predictions averaging about 3.3% -- and possibly more if oil prices spike or the dollar declines too sharply.

Among the troubling signs on the horizon: a weakening dollar, sluggish job growth, high oil prices, high housing prices, and burgeoning U.S. budget and trade deficits. Those five areas are likely to be among the top economic challenges of 2005.

Link here.

Reacting to a dollar with no muscle.

This is going to be the year the world learns to live with a cheaper dollar. How well it does that may have a profound effect on prospects for continued world growth. That, at least, is the predominant opinion as 2005 begins. The dollar’s travails dominated the market news in the year just ended and were all the more important because they influenced perceptions of other events. The big rises in gold and oil seemed larger when measured in dollars than they did when calculated in euros or yen. But the most important fact about currency markets in 2004 was that the dollar did not budge against the Chinese yuan, or against other Asian currencies that are effectively tied to the dollar. The big issue this year will be whether those ties are broken, and, if so, how markets and economies will react.

Link here.


Most mutual fund investors made money in 2004 and, in some cases, made out quite well. At the top of the heap were two types of specialized funds that focused on hard assets. One of those was funds investing in oil and gas, which are called natural resources funds. In fact, after a year of big gains in the prices of oil and gas, the expectation was that the natural resources sector would outpace every other sector in 2004. Surprise. Real estate funds pulled out the upset by narrowly posting the best sector return, soaring 30.7% despite the rise in interest rates. Gains by funds focused on oil, natural gas, lumber and coal did well enough to come in a very close second, at 30.1%. International stocks funds averaged a more than 16% gain. Gold prices set a 16-year price high, but the 51 funds with a gold orientation were the only sector of stock or bond funds to post a negative return last year, falling more than 9%.

Link here.

2004 ranks as 2nd-lowest year ever for mortgage rates.

For all of 2004, rates on 30-year mortgages registered their 2nd-lowest year on record. Freddie Mac’s weekly survey showed that rates on 30-year, fixed-rate mortgages increased to 5.81% last week, compared with 5.75% the previous week. For the entire year, rates on benchmark 30-year mortgages averaged 5.84%, second only to 2003’s 5.83%, the lowest annual rate in Freddie Mac’s record keeping. The rate came in under 6% for the last 22 weeks of the year.

Long-term mortgage rates remained well behaved even as the Federal Reserve boosted short-term interest rates five times this year. That is because inflation, while creeping higher, is not viewed as a danger to the economy, analysts said. Low mortgage rates powered homes sales and they are expected to end at record highs for all of 2004, analysts said. Some analysts believe rates on 30-year mortgages could climb to around 6.5% by the end of next year. That still would be considered low by historical standards. A few think rates could hit 7% next year.

Rates on 15-year, fixed-rate mortgages, a popular option for refinancing, rose to 5.23% last week, compared with 5.18% the week before. Rates on one-year, adjustable-rate mortgages increased from 4.17% to 4.19%. The nationwide averages for mortgage rates last week do not include add-on fees known as points. Each loan type carried a 0.6-point fee.

Link here.

Manhattan apartment prices junm 16% in the 4th quarter.

Manhattan apartment prices gained 16% in the fourth quarter as the city’s economy accelerated and income rose at the fastest pace in six years. The median price for a condominium and a cooperatively owned apartment rose to $670,000 from $580,000 a year earlier. The price was the highest on record after the second quarter’s $674,000. The 4th-quarter’s price gain was the largest since the first three months of 2004, when it was 21%.

Link here.

House in Hamptons sells for $45 million.

The New York area’s most expensive home is now an 18,000-square-foot Hamptons retreat has been sold for $45 million, situated on 25 acres of waterfront property on eastern Long Island. Known as Burnt Point, it has 14 bathrooms and is equipped with geothermal air conditioning. The buyer was Stewart Rahr, CEO of Kinsey Inc., a pharmaceutical distributor. Neighbors include Steven Spielberg, Calvin Klein and Ronald Perelman. The sale comes just weeks after billionaire News Corp. CEO Rupert Murdoch paid $44 million for a Manhattan penthouse where Laurance S. Rockefeller once lived.

Link here.

Going from bad to worse.

Franklin Raines, disgraced former head of Fannie Mae, proves that perfidy and failure is worth a retirement package measured in tons of money and benefits. Fannie Mae was originally set up to help poor people buy houses. Remember the phrase “poor people” because it is important. Instead, Fannie Mae has grown like the government cancer that it truly is, and is now so big that it is now one of the top two or three biggest corporations in the whole country! And not only that, but it is an absolute, total, colossal failure at its mission. Fannie Mae has actually driven up the price of housing to the point where not only can the POOR not qualify for a loan to buy a house anymore, but in some places even the middle class cannot afford to buy a house anymore, either! And why can’t these people afford to buy a house? Because housing prices have been going up in price at double-digit inflation rates for years now, thanks to Fannie Mae. And now houses just cost too damn much, and that is the horror of inflation.

Just why do they cost too much? Because Franklin Raines and his grubby friends (which is, of course, Congress, the courts, the banks, and the powerful friends of either one) at Fannie Mae provided seemingly unlimited funding to buy mortgages. And where did they get all this funding? From investors. And where did the investors get all that the money? From the Federal Reserve, which created it out of thin air and loaned it to the investors. And all this new money increased the money supply as it increased debt loads.

And here is where we take a short journey down a pleasant path that I hope will impress you. It is with great pleasure that I present a Mogambo Axiom Of Economics (MAOE): All money must go somewhere. Now, what I want as my reward for coming up with this brilliant new economic verity is to be the new head of Fannie Mae. If all it takes to get fired and received a multi-million dollar annual retirement package is to spend a few years growing into a malignant a cancer and be worse than a total failure, then THAT is the job I want!

Link here (scroll down to piece by The Mogambo Guru).


Will the drug addict go cold turkey in 2005? The addict I am referring to is the U.S. economy. And the drug it is addicted to is abundant cheap credit. Consumers have borrowed more ... and more ... and more ... to finance spending way beyond what they can really afford. Ditto for the politicians -- the federal government is now borrowing more than a billion dollars a day to pay for spending beyond its revenues. In the third quarter, dissaving (taking on more debt or looting savings) accounted for two-thirds of economic growth, higher incomes for only one-third. “The U.S. economy,” says Morgan Stanley economist Stephen Roach, “is an accident waiting to happen. That’s the message to be taken from a record shortfall in national saving, a record current account deficit, record levels of household indebtedness, a record deficiency of personal saving, and outsize government budget deficits.”

It is possible that Americans will go even deeper into debt. Rising incomes allow them to finance greater borrowing and household wealth continues to rise. But the odds against their going deeper into debt are mounting. Yes, 2005 could be the year when the U.S. economy starts to go cold turkey.

My expectations for 2005 include strength in most equity markets in the first half, followed by weakness in the second half as earnings growth evaporates and the outlook for economic and financial fundamentals deteriorates. However, Asian and natural resources countries and sectors should outperform, perhaps even deliver positive gains over the year as a whole. Gold should have a good year. After bottoming close to $400, I expect to see it hit highs in the $460-500 range. However in terms of other major currencies, such as euro, sterling and yen, the yellow metal will remain unimpressive. At least at this stage of its long-term bull market, it is essentially an anti-dollar play.

Oil prices are likely to remain above $40 a barrel (for the benchmark Brent crude). In a panic, they could soar towards $100. Without such a panic, prices may not reach as high as 2004’s peak of $52. Loss of upward momentum in global industrial production may bring about some weakness in the prices of industrial metals ... but not much. Even with slowdown, China’s economy will continue to grow, and with it, its demand for imported oil, metals and foodstuffs.

The dollar could rally strongly over the next few weeks, then resume its decline, falling as low as 66 euro cents (from about 73 now) before rallying again. Massive intervention by the Bank of Japan will continue to hold back the dollar value of the yen; there will be no significant shift in the dollar value of the Chinese yuan. Increasing speculation by hedge funds and banks will make currency markets generally more volatile. Bonds face headwinds of rising interest rates and inflation fears and abundant supply, but deteriorating economic fundamentals will restore their appeal -- especially in 2006, which could turn out to be the really tough year for investments generally. In the battle between inflation and deflation, deflation is likely to win -- which will favor low-risk bonds.

Link here.


The Federal Reserve’s Open Market Committee concluded interest rates were still too low “to keep inflation stable” and said rising prices may become a risk to stable growth, according to minutes of its Dec. 14 meeting. Some members were concerned about potential signs of “excessive risk-taking” in a low-rate environment, the minutes said, citing credit spreads and increasing numbers of mergers and initial public offerings. A weaker dollar, higher energy prices, diminishing competition in some industries and a possible slowdown in worker output per hour were among the forces that may drive prices higher, the minutes said.

Treasury securities and stocks declined after the report, which is the first time the Fed has issued minutes with a 3-week delay instead of six, giving investors more timely information on Fed deliberations before the next meeting. The Fed raised the benchmark overnight lending rate a quarter-point to 2.25% Dec. 14, the 5th straight increase since June.

Link here.


What kind of dream should a good and useful economist have on the first night of 2005? Turmoil in the foreign-exchange markets is one that immediately comes to mind. How far and how quickly is the dollar liable to go down? Exactly when will the 100 yen to the dollar line be breached? Sooner than later is the economist’s dream answer. Since we are in the realm of dreams, it should be further assumed that once that particular barrier has been broken, the distance to the 50 yen to the dollar point is likely to become considerably shorter.

Another kind of economist’s nightmare would be plunging bond prices and soaring long-term interest rates in Japan. This is actually a disaster waiting to happen. The dreamscape is one in which the Bank of Japan’s quantitative easing policy is the only thing standing between Japanese government bonds and collapsing prices. The third and ultimate nightmare is one in which the foregoing two things happen together. That is more fantasy than dream, critics would say. Economists who dream such dreams would no doubt be accused of not knowing their economics.

That would be justifiable criticism, to the extent that a soaring exchange rate indicates money pouring into the economy. If that money were to find its way into the bond market, bond prices would indeed go up rather than down. But in a nightmare scenario, people would hold onto cash rather than buy bonds that are being issued by an alarmingly heavily indebted government; all the more so if they were not so much buying yen for investment purposes as selling the dollar to avoid getting thoroughly clobbered in a 50 yen to the dollar world. The one saving grace of nightmares is that you usually wake up just before the ultimate disaster. But what if you don’t?

Link here.


Brennan Taylor has a good job, but spending $200 on his daughter’s 7th birthday seems like “an awful lot. I’m trying to set a strict budget for the household,” said Taylor, 34, a Madison, N.J., resident. “It’s pretty stressful.” Taylor’s finances and credit are hobbled by student loans -- a fifth of his income every month goes toward paying down that debt. Surging college costs have saddled many people like him with steep debt at the start of their professional lives.

A 2002 survey of recent graduates by student loan company Nellie Mae found the average student loan burden for a bachelor’s degree was $18,900, up 66 percent from five years earlier. Thanks to low interest rates and increased initial salaries, the average amount recent graduates were spending on debt repayment was 7% of their annual incomes. That number has been fairly unchanged for the last 10 years and is considered manageable. But many graduates’ debt burdens are well above average. And those who follow passions that are not bankable, make a few financial missteps or are just plain unlucky can find their debts are out of control.

Part of the problem is that bachelor’s degrees alone do not always cut it in today’s workplace. “The bachelor’s degree has become the new high school degree,” said Tamara Draut at Demos, a New York-based think tank. A graduate degree is necessary to reach the top level of more and more professions.

Link here.


Despite all the worried talk about the sliding dollar, both the financial markets and economic forecasters are taking it in stride. Conspicuously, nobody speaks of a dollar crisis at present or in the future. High-riding expectations of a strong year-end rally in the stock markets have been somewhat disappointed. Yet there have been two pleasant major surprises. One is the sharp fall of oil prices, and the other is the resilience of the U.S. bond market, defying not only the dollar’s weakness, but also the four rate hikes by the Federal Reserve. It appears to be a common view that economic growth in the eurozone and Japan is badly faltering again, with both countries flirting with new recessions. In contrast, the forecasts for the U.S. economy remain rather upbeat, hailing the plunges in oil prices and the dollar.

We stick to our diametrically opposite view that the U.S. economy is prone to sharply slower growth. It is the profligate consumer who has kept the economy afloat since 2000. What kept the consumer afloat is also no secret. It was mainly two events: First, inordinate tax cuts; and second, exploding ultra-cheap borrowing facilities, made available through the Fed’s creative bubble strategy and implemented by ultra-low short-term interest rates.

Together, the two have unquestionably contained the fallout from the bursting stock market bubble. They also had respectable effects in terms of U.S. real GDP growth during the second half of 2003 and the first half of 2004. Yet the most important aim of all the monetary and fiscal stimulus -- to set in motion a self-sustaining economic recovery -- has been flatly missed. A “self-sustaining” U.S. economic recovery urgently needs accelerating employment and income growth. Just the opposite is happening. In the third quarter of 2004, consumer spending accounted for 89.2% of real GDP. It is the familiar ruinous growth pattern. A viable economic recovery would require a strong contribution through sharply higher business investment and hiring. Both remain missing, although the recovery is entering its fourth year.

Gloomy reports about the eurozone economy always abound. With utter amazement, at the same time, we keep reading that the U.S. expansion remains firmly on track, particularly with sharply improving jobs data. Our view, in contrast, is that the U.S. economy’s recovery since 2001 peaked in the first quarter of 2004. To prevent a more painful fallout from the bursting equity bubble in 2000-01, Fed Chairman Alan Greenspan systematically blew three intertwined new credit bubbles: the carry trade bubble in bonds, house price inflation and the mortgage refinancing bubble. It was the policy of a desperado who did not care at all about adverse consequences in the longer run. In actual fact, the very imbalances that provoked the preceding recession have grossly worsened under the impact of the new asset and credit bubbles.

Link here.


For the 52-week period ending December 31, small-cap value funds saw an average return of 20.9% vs. a 7.4% return in large-cap growth funds. The Russell 2000 index -- the widely watched barometer for small-cap performance -- saw a year-to-date gain of 17% vs. a 3.15% rise in the Dow Jones Industrial Average over the same period. On January 2, the Russell 2000 index rocketed to an all-time record high, while the apex of the Dow’s advance has not exceeded a 3-year high.

The point we want to make is not the undeniable strength of the small-cap stocks, but rather what the mainstream “experts” suggest that strength means for the entire financial sector. In the words of one professional investment group, the muscle in the Russell 2000 index is “a sign of a rally that lies ahead for U.S. stocks in the New Year ... All of the foundations are now put into place for what looks to be a very, very nice 2005.” However, in our December 27 Short Term Update, we presented an Elliott wave labeled chart of the index that showed prices knee-deep in an “ending diagonal triangle” -- a pattern known for two things: they are commonly found at termination points, AND they indicate exhaustion of the movement at hand. Our analysis was clear: “The New Year should start off with a decline” in the Russell 2000 index. Since then, the index has lost 4% of its value.

The question is -- is this just a minor crimp in the small-cap rally? Well, nobody answers this question better than the January 3 Short Term Update with in-depth analysis of the Russell 2000 index, including potential downside targets and crucial support and resistance levels. Also, in the just-published January 2005 Elliott Wave Financial Forecast, we analyze the long-term picture of the small-cap sector with a labeled chart of the Russell 2000 index that shows two major cycle patterns closing their jaws: “One of the most compelling opportunities resides in the small cap sector.”

Elliott Wave International Jan. 4 lead article.


On December 2, 2004, silver prices had rocketed out of this orbit to hit their highest level in over a decade, and the financial press stories at the time were bullish, to say the least: “Up, up, and away ... silver prices top $8 an ounce for the first time since 1987 ... it’s an enormously exciting market right now ... Everything’s up.” (American Metal Market News Dec. 3) ... “Generally, gold is thought to be the most precious metal but when you take a closer look, silver takes on a new shine.” (Metalinvesting.com Dec. 6) ... “Old exploration maps are being dusted off by miners hoping to bore into the recent trend in silver.” (Associated Press Dec. 7) ... “It’s a great time for new converts to hop on the silver bullet.” (Bigpicturespectacular.com Dec. 8)

But in early December our analysis strongly suggested the soaring silver “star” was about fall back down to earth: “The divergence from gold coupled with record high bullish readings is a recipe for a top that could be at least as dramatic as silver’s previous decline of more than 30% in a month.” And, on December 2, silver prices began a steep selloff that slashed 20% off their value in just six market days. On January 5, prices fell to a 3-month low. Buying opportunity? Before you hitch your wagon to that particular star, you should check out our January 3 update on silver. After reading our analysis, you will see why the larger pattern unfolding in the metal could have a significant effect on the stock market.

Elliott Wave International Jan. 5 lead article.


A curious trend began to unfold in the mergers and acquisition market in early 2000: The number of deals began to fall, yet the value of those deals began to climb. Very few analysts noticed this divergence. The financial press at the time was too intoxicated by the AOL-Time Warner merger, which was supposed to be a new economy marriage made in heaven -- the ultimate coming together of “content” and the “channel” to deliver it to a waiting world. We know how that turned out. At the time we were the lone skeptical voice -- the Elliott Wave Financial Forecast said that the unfolding trend in mergers suggested a “prolonged and devastating bear market” in stocks. We likewise know how that forecast turned out.

Now, as 2005 begins, what we see in mergers and acquisitions is all-too familiar. A handful of big names and big deals get the headlines. Almost as an afterthought, the Dec. 14 Wall Street Journal noted that the volume of deals has slowed, “but dollar-value has soared”. Is this the only similarity between today and five years ago? No -- in truth there are many other equally strong similarities, going equally unnoticed...

Link here.


Writing Investment Outlooks is getting a little bit harder these days. “Don’t do this, don’t do that, can’t you reeeead the signs,” scream the in-house lawyers. Go easy on Iraq, careful about women and minorities, eliminate references to politics, religion, and sex, and for God’s sake do not mention any of our clients or their products, which by the way knocks out about 250 of the Fortune 500 and every major industry in the U.S. Actually, as you might have noticed, that has not stopped me from stirring up the politically and legally correct waters in recent years. But I suppose I tiptoe a little more carefully these days, if only in recognition that PIMCO’s a franchise and not a start-up and there are now many more livelihoods at stake than my own. Renting a soapbox right across the street in Newport’s Fashion Island could be a much less expensive way to vent my iconoclastic views I suppose.

And too, as many of you already believe, I am -- in Moody Blues’ parlance -- just a singer in a rock and roll band. There is nothing about being a bond market wiz that necessarily qualifies me to opine on world events, or anything else for that matter. The purpose of these introductory paragraphs, however, has always been to liven-up a somewhat unfathomable and inherently boring topic and in that I undoubtedly have succeeded beyond someone’s wildest dreams.

It was Bunds, not bonds that made the performance difference for us in 2004. That along with TIPS and some strategically timed forays into emerging markets. In a year that confounded most bond managers, because of falling, instead of rising intermediate and long-term rates, we managed to avoid extreme duration statements and instead profited by shifting money into reflationary beneficiaries in the U.S. (TIPS) and near deflationary economies outside our borders (Bunds). 2005 will witness a changing environment in some ways -- slower global growth, somewhat higher short-term rates -- but the dominant moneymaking themes in the bond market should be the following: 1) The Fed stays relatively low, 2) China revalues its currency, 3) Spread product underperforms, 4) Europe remains sick, and 5) Cash is Prince.

The successful 2005 bond strategy therefore, will likely be to avoid duration, avoid spread product and to flock to the stability of cash, TIPS, and foreign bonds issued by strong currency countries in an openly reflationary world. If so, bond market returns of 3-4% for the year may be all an investor can rationally expect, and if those Asian investors flee for the exits then longer duration portfolios might even wind up in the red.

Link here.


A very simple case can be made to show that world central banks will soon be forced to return to a pure gold-reserve system. If they want to save even a smidgeon of their former power, they really have no choice -- unless they prefer that the whole ship go down before they change course. Right now, international dollar reserves constitute the proverbial hot potato. Nobody really wants them, but no one can afford to drop them, either.

The best way to demonstrate the truth of this is to take a look at Asian central banks, especially those of China, Japan, and India. They are awash in dollars, and they know that dollars are falling and will continue to fall. They also know that if they simply keep them, their value will rapidly decrease over time, and if they sell them, their value will decrease even faster, while if they buy more to keep the dollar and their export-based (rather illusory) profits from collapsing, they will only delay the inevitable and build themselves an even bigger problem.

There can be no greater argument than this to return to a system where gold is held in reserve instead of fiats -- or any other country’s financial obligations (government and agency debt, etc.). Staying on a fiat-based reserve system simply is not an option. The more time is “bought” by these countries continuing to buy dollars to keep their own currencies low and the dollar system from imploding, the bigger the problem gets. All of the participants know very well that, eventually, a point of no return will be reached. Right now, they are still waiting, hoping -- against all better knowledge. But that will stop at some point in time, because it will become impossible to maintain.

The only hope they have right now is that, somehow, their tactics will enable another credit-fueled “boom” of the world economy -- but they really know better. They know exactly that credit-fueled “booms” are what brought us all to this juncture in the first place. Any more of this, and this pressure cooker will simply explode. That is not the kind of “boom” they want. The only viable alternative is the one thing they have collectively tried to abandon and have worked so hard to forever lay to rest. It will take some time to sink in, but sink in it will. Namely, only by exchanging dollars for physical gold reserves can they truly save their countries from this mess. Here is why. In the meantime, take advantage of artificially suppressed, pre-dollar collapse gold prices, and stop complaining about gold price manipulation. It is a pure blessing for those who are wise enough -- like the Chinese. The motto? Don’t fight it -- take advantage of it! Its days are numbered.

Link here.


The story in the financial markets had changed from a tragedy to a mystery. The collapsing dollar should have brought down prices of the assets it measures -- most notably, the prices of U.S. bonds, which are extremely sensitive to changes in interest rates or currency movement. There are about $10 trillion of U.S. dollar assets in foreign hands. Yet, bonds have not gone down -- at least in dollar terms, which leads us to pose the Ten Trillion Dollar Question: Why not?

We will not remind you of poor Mr. Asakawa. You have already heard enough about him. But how many times have people like him -- with, collectively, trillions of dollars’ worth of assets -- almost reached for the phone? How many strangers overseas have wondered if they should not say “SELL EVERYTHING” before losing more money on the currency exchange markets? And yet, they have not picked up the phone. They have not sold. Bonds, which would be the first things to be sold, have held their value ... or actually risen. Meanwhile, on the very same page, where the health of the bond market is reported, is an article assuring us that almost every sentient analyst and expert anywhere in the solar system now expects the dollar to fall more! “Prospects are grim for the dollar,” says the International Herald Tribune headline.

The tale we told in our book was that the U.S. economy seemed to be tracking Japan -- with a 10-year lag. We could not think of any particular reason why this should be so, except that the Japanese story itself was a classic. Markets boomed ... and then bubbled up to absurd levels. When the crack came, people did not believe it was possible that the Japanese miracle economy could go down. And for several years, it looked as though Japan, Inc. had suffered only a setback. But by the mid-1990s Japan was sinking. Asset prices were collapsing. Consumer prices fell. The credit expansion that had made Japan such an extraordinary success story in the 1980s turned into a credit contraction, which made Japan into an extraordinary failure story in the 1990s. If America were to follow the same pattern, its stocks and real estate would have to fall too.

Last year, U.S. asset holders -- principally Americans -- lost between $4 trillion and $8 trillion, when their assets were measured in euros. So, there we have a soupcon of how the Great Mystery might resolve itself. Why has the bond market not sold off with the dollar? The answer, we think, is because we ARE still tracking Japan, not perfectly ... but appropriately. The U.S. economy is sinking into a long, slow, soft slump -- where long-term interest rates will not go up, and good-quality bonds will not go down, at least, not in dollar terms.

If we are right, the great U.S.-dollar credit boom must be followed not by inflation, not by growth, not by a new boom, but by a great U.S. dollar credit bust. Marginal credits -- such as junk bonds, expensive stocks and leveraged real estate -- are likely to be marked down. Some of the markdown can be realized by a cheaper dollar. But the dollar is already too low on a purchasing power parity basis. Things are already too cheap in the U.S. and too expensive in Europe. And, though Europe has a current account surplus, the euro itself is paper too -- just like the dollar, and not much better. What is more, if the dollar were to fall too much -- that is, enough to fully deflate America’s credit bubble -- there would be Hell to pay. Mr. Asakawa and other foreigners are already sitting on the edge of their chairs, barely restraining themselves from picking up the phone. They could sell at any moment. If they were to sell, it would quickly take down the value of U.S. dollar assets, and push the U.S. economy into recession.

In other words, we do not doubt that the dollar will fall, but we doubt that that will be the end of the story. For the year ahead, we expect U.S. dollars assets to fall -- stocks and real estate, primarily. The price of credit is likely to rise -- especially short-term rates. But quality bonds are likely to be supported by the credit contraction itself -- people will covet secure income streams. Our guess is that the dollar falls against other currencies in 2005, but even more against gold and commodities. A rise in the price of oil, along with an increase in short-term lending rates, will help give American consumers the shock they need. They must start saving money sometime; 2005 seems as good a time as any. This shift in consumer spending would tip the U.S. into the long, slow, soft slump we have been expecting. Five years ago, we announced our “Trade of the Decade”. Just sell the Dow and buy gold, we said. We are now halfway into the decade. Our trade is up comfortably, but not spectacularly. We see no reason to change.

Link here.


Especially since November 2000, which I devoted almost entirely to the pending collapse of the U.S. dollar, we have spent a lot of time here explaining why the dollar is in such trouble. In the period from its peak in February 2002 to the time of this writing, the dollar has lost 57% against the euro, 75% against the NZ$, and 112% against the chronically pathetic South African Rand. It is down 25% from its peak against Turkish lira, which suffered 20% domestic inflation last year, leading the government to make a decision to knock 6 zeros off its banknotes. The U.S. dollar has even lost 124% against the latest incarnation of the Argentine peso, traditionally one of the world’s strongest competitors for the toilet paper of currencies.

But now, not despite the dollar being all over the world’s media as a disaster, but because of it, it is probably time for a bear market rally. By definition, the masses are trend followers, not contrarians. Regardless of what the long-term fundamentals of a currency may be, in the short term its price is set by the psychology of buyers and sellers. Right now everyone knows how badly the dollar has done, and they are all sellers. As I write, the euro has hit a new all-time high of $1.36 against the dollar.

Everyone and their dogs have finally become aware of the dollar’s problems. Therefore, I suspect that it is almost time for Business Week to run a cover story projecting the death of the dollar, ringing the bell for a temporary bottom. But the dollar is still (for the moment) the world’s currency. The recent anti-dollar hysteria will wear off and sellers will buy back a lot of dollars, simply because the dollar is still, for all its faults, a liquid and convenient holding. A rebound, however temporary, in the U.S. dollar will be helped along by the U.S. Government (USG) which wants to forestall the inevitable.

The prospect of dollar strength is almost certainly bearish for gold, because so far the strength in gold has been as much a mirror image of the dollar’s weakness as anything else. This strong correlation between the U.S. dollar and gold over the last few years confirms that there is a significant subset of the world’s financial community that now, correctly, views gold as a global currency. The cycle that is unfolding is, at this point, fairly predictable. Namely that the sheer volume of negative attention paid to the intrinsic flaws of the U.S. dollar will lead, in a natural progression, to a comparison with competing currencies, the euro and gold in particular. This is not going to happen overnight, but it is going to happen. In the meantime, I expect the U.S. dollar to stage a rally.

Gold stocks will move down as the dollar rallies, providing us with what I would consider a last-train-out chance to load up our portfolios with the best of the best. Does that mean that we should now sell, in anticipation of such a downturn? My inclination is, other than normal house cleaning and profit taking, no. There are a lot of very attractive companies to pick from, but given my view on the short-term outlook for the U.S. dollar, you may want to be a bit cautious to adding to positions over the next month. Despite my contrarian instinct that gold might have a rough month or two, nothing is changed about my mid- to long-term views on gold (it’s going to the moon) or the U.S. dollar (it’s going down the drain).

I suspect we will see a reversal of what has been a longstanding trend towards freer trade and freer markets. As the USG sees capital leaving the U.S. and the world dumping dollars, it is not going to solve the problem by controlling itself -- which is the only, and ultimate, solution to the problem. What they are going to do (and I recognize this is a radical prediction) is put capital and foreign exchange controls in place. We have already seen attempts by Bush to erect trade barriers; capital and FX controls are just points further up the continuum. Of course they will be completely counter-productive. Disastrous. But desperate men with power do desperate things.

The bottom line? Although I think the dollar is in for an upward bounce, the long-term downtrend is still very much intact. You should continue to buy gold and other commodities, especially on weakness. And get as many assets as possible outside of the United States now, while you still can.

Link here (scroll down to piece by Doug Casey).


The last year has been a good year for those inclined to fear the end of oil. High prices usually bring the worst out, and it does not help that Royal Dutch/Shell reduced its stated reserves by the equivalent of 4.5 billion barrels of oil (that is Saudi Arabia’s total production for 16 months -- an “accounting error” that has made Shell the poster child for how not to run an oil company) and that a couple of wise analysts have accused the ever-secretive Saudis of improperly managing their reserves to the point of exhaustion. But every since OPEC gained its feet and was able to exercise some power in the market beginning in 1973, high prices have always prompted panic that the global oil tank is running on empty.

The Western majors all “publicly” base their estimates of reserve life on the assumption that petroleum is a very finite resource, and expect current world reserves to last between 40 to 80 years, given improved field management, recovery techniques and relatively constant development. There is an estimated 1.2 trillion barrels of liquid crude oil in the world -- about 40 years reserves at the rate they are currently being used (80 million barrels per day). Of this, about one-quarter lies under the deserts of Saudi Arabia. Iraq’s reserves could be larger, but no one really knows and the Saudi reserves are well explored. Most forecasts expect that demand to rise by 50% to 120 million barrels per day by 2020, though anyone who works with statistical data will tell you that forecasts more than a year or two out are, at best, simple guesswork. In the 150 years human being have drilled for and refined petroleum, it is estimated we have used about 1 trillion barrels. The price rise last autumn was not the result of an overall shortage of crude, but a lack of light, sweet crude for gasoline in China. There is a lot of sour crude in the world, more than anyone can use. More than anyone wants right now.

It is also generally accepted in the industry, as I understand it, that we have probably found all of the major oil reserves that we are going to find. This, of course, could be very wrong. But the bet, right now, is that it is not. Sure, there are alternatives. There are huge bitumen deposits in Venezuela and Alberta, tar sands that combined hold more than twice the current estimated world reserves of liquid crude oil. But bitumen is costly to refine, a potential environmental nightmare to extract, and right now, only a tiny fraction of the crude in either the Athabasca oil sands or the Orinoco Belt can be recovered. The technology is pretty well established to make synthetic crude oil from coal (lots of North American coal too) or natural gas, or even turkey guts or pig manure -- if the price is right.

But none of that matters, because while synthetic crude, whether made from bitumen or natural gas, makes great diesel fuel, kerosene and fuel oil, it tends to make really lousy gasoline. Or very little gasoline. And I cannot emphasize enough -- right now, gasoline is what everyone wants. Gasoline is what makes the world go round. So the question is not “when will the crude oil run out?” but “how can we best use the petroleum we have until other economically viable alternatives present themselves?” (I am not holding my breath for fuel cells any time soon.) That becomes what folks in Washington call a “policy question”, which leads to think tankery, publication of “papers” and funny little books called monographs, conferences, government initiatives, and all manner of other sundry evils.

We cannot ignore the fact that this an industry interlaced with government from top to bottom, whether we are talking about the huge state-owned firms of the big producing nations or our own heavily regulated supermajors. That is the reality, lamentable and regrettable as it is. But as libertarians, we need to remember a few things. First, whatever ends up replacing petroleum will come in its own good time, later than we would like but probably sooner than we expect. It will come because it stores energy and power better than gasoline does and more cheaply to boot. Second, that new fuel will probably not come as the result of government-sponsored research. The kind of thinking and investing needed to find or make that new fuel probably cannot be done by government bureaucrats, scientists or regulators, who can only think incrementally and usually only consider efficiency and conservation, rather than entirely new ways of doing things.

I do not necessarily trust technology, but I do trust human ingenuity. Civilization as we know it will grind to a halt without the energy we derive today from crude oil, and that is in and of itself is motivation enough to make sure that future energy is widely available at prices people can afford.

Link here.


Call it the “Bad Boy” principle of American pop culture: Guys who got more notoriety than they ever dreamed of having, by doing stuff that you are just not supposed to do. Mike Tyson, Howard Stern, M&M, Dennis Rodman... heck, name your favorite. All of which naturally brings us to the U.S. dollar, and how it has shown recently that the “Bad Boy” principle does not carry over from pop culture into the financial markets. Today marked the fifth consecutive day in the buck’s rally, yet there is not a stock, bond, energy or currency market where “just not supposed to” applied more. Right now, the currency is at a 6-week high against the euro, a 1-month high against the British Pound, and a 7-week high against the Swiss Franc.

The whole world was bearish toward the dollar, but where is the notoriety? It has not been the lead story anyplace I have seen in the financial press, though this rally is the longest in more than a year. In fact, the media is so befuddled by dollar’s gains that their explanations amount to gibberish -- one story said it came on “optimism” over “faster U.S. job growth”, even as the Labor Department today reported the biggest jump in initial jobless claims in nearly two years.

Now on December 31, The Short Term Update said that “The Dollar Index is forming a bottom. The next move of consequence in the currency should be a rally.” Of course, one should not expect notoriety when your solitary voice is off key with a chorus which booms from the entire financial establishment.

Link here.


After a decade of relatively tame prices, consumers are starting to feel the “ouch” of inflation as the cost of everything from coffee, candy and home appliances is marching higher. It is not a sharp pain yet, and some call it hardly noticeable. But with companies such as Procter & Gamble, Hershey Foods and Whirlpool passing along the higher prices they pay for raw materials to their customers, it is beginning to get attention from people who shop in grocery, appliance and department stores.

It is also getting noticed by officials of the Federal Reserve, and that could mean higher costs for everything from car loans to home mortgages. Minutes of the Fed’s Dec. 14 meeting released this week suggest that central bankers’ worries about rising prices could prompt them to continue bumping up short-term interest rates -- which they raised five times in 2004 -- to keep inflation in check.

In the 12 months ending in November, the CPI rose 3.5%, while the change in the price of finished goods at the wholesale level increased 5%. But the supply chain, which seems to have absorbed most of the higher costs, may be reaching its tipping point. Analysts say a slowly improving economy is giving producers more confidence to pass on higher prices, especially as excess inventories dwindle and commodities, from green coffee to oil, stay at elevated prices.

Link here.


Refinancing in America skyrocketed 35% from 1993 to 2001, but from 2000 to 2003, foreclosures also climbed 45%. Many economists suggest that with volatile real estate and money markets, pinning all of your financial future on your house is not much different than taking a spin at the local casino.

And the high stakes do not stop with loans. A recent study by October Research shows 55% of appraisers say they have felt “uncomfortably pressured” to overstate property values, and 46% of those say they were asked to inflate the value by 11 to 30%. So if you are planning to refinance, the advice is: Don’t go overboard, or else your home could become a house of cards.

Link here.


The jarring swings in oil prices that gave investors and traders whiplash in 2004 are not preventing new investors from rushing into oil and other energy-related commodities this year. These investors are attracted by the promise of better returns than those offered by bonds and equities, bankers and traders say. Ultimately, the rising number of speculators could lead to even more price volatility in 2005 as they push the highs higher and the lows lower.

Speculation on oil prices is not limited to hedge funds, which were popular scapegoats for high oil prices last year. Some of the largest pension funds, insurance companies and endowments are moving more and more money into commodity indexes, which are heavily weighted in oil and gas futures. Wealthy private investors are also snapping up new oil price-related products. In November 2004, 64.4 million futures and options contracts for light crude oil, the industry standard, were traded on the New York Mercantile Exchange, the biggest oil futures market. That was an increase of 15.6% from the same month a year earlier.

Oil futures make up 40% of the Goldman Sachs Commodities Index, which attracted about $30 billion in investment by the end of 2004, about double the amount at the end of 2003 and up from $3 billion in 1998. Investors put an additional $10 billion into other commodities indexes by the end of 2004, according to Goldman.

In the past, commodities like crude oil and metals were often shunned by general long-term investors because they can vacillate as much as 100% in a year as economies rise and plummet and the ratio of supply to demand shifts rapidly around the globe. For example, crude oil prices peaked at a closing price of $55.17 a barrel in New York in 2004, up about 70% from the low of $32.48 a barrel for the year. This week, crude oil fell 3%t on Monday and rose more than 4% on Tuesday before settling at $43.39 a barrel yesterday, down 1.2%. But there is a growing belief that economic expansion in countries like India and China and delivery bottlenecks caused by a lack of investment in tankers, pipelines and refineries will ensure that prices of oil and oil-related products will not plummet.

That belief, though, has a dangerous downside if it turns out to be wrong. “The real question is, ‘Will incremental demand from China, India and other places cause sustained higher commodity prices or is this just a cyclical upswing?’” said Michael Parker, fund manager for Mirador Diversified Fund in New York. If it is cyclical, then many commodities and the companies that make them are “massively overvalued” and will go into freefall as new and old investors pull out, Mr. Parker said.

Clients responsible for increasing commodities index numbers are what bankers like to call the “real money” -- the pension funds, endowments and insurance companies that are seeking to diversify their multibillion-dollar funds. After 2000, there was a significant shift in sentiment regarding the equity markets, said Heather Shemilt, managing director of commodity marketing at Goldman Sachs. Investors seeking double-digit returns looked elsewhere.

The heightened attention to oil is spawning a range of new financial products, aimed at investors who would like to participate in the market but who cannot or do not want to trade oil futures. Some have introduced bonds that are backed by crude oil contracts, for example. In 2004, J. P. Morgan created a product called Brent buffers for wealthy Europeans that allows investors to reap the upside in North Sea oil prices over three years but not suffer from the downside -- unless the price of Brent crude oil drops by 40%.

Link here.


It is not uncommon for someone watching a tennis game on television to be bombarded by advertisements for funds that did (until that minute) outperform others by some percentage over some period. But, again, why would anybody advertise if he did not happen to outperform the market? There is a high probability of the investment coming to you if its success is caused entirely by randomness. This phenomenon is what economists and insurance people call adverse selection. Judging an investment that comes to you requires more stringent standards than judging an investment you seek, owing to such selection bias. For example, by going to a cohort composed of 10,000 managers, I have 2/100 chances of finding a spurious survivor. By staying home and answering my doorbell, the chance of the soliciting party being a spurious survivor is closer to 100%.

The same logic that applies to the spurious survivor, also applies to the skilled person who has the odds markedly stacked in her favor, but who still ends up going to the cemetery. This effect is the exact opposite to the survivorship bias. Consider that all one needs is two bad years in the investment industry to terminate a risk-taking career and that, even with great odds in one’s favor, such an outcome is very possible. What do people do to survive? They maximize their odds of staying in the game by taking black-swan risks; those that fare well most of the time, but incur a risk of blowing up.

A misconception of probabilities arises from the random encounters one may have with relatives or friends in highly unexpected places. “It’s a small world!” is often uttered with surprise. But these are not improbable occurrences -- the world is much larger than we think. It is just that we are not truly testing for the odds of having an encounter with one specific person, in a specific location at a specific time. Rather, we are simply testing for any encounter, with any person we have ever met in the past, and in any place we will visit during the period concerned.

When the statistician looks at the data to test a given relationship, say to ferret out the correlation between the occurrence of a given event, like a political announcement, and stock market volatility, odds are that the results can be taken seriously. But when one throws the computer at data, looking for just about any relationship, it is certain that a spurious connection will emerge, such as the fate of the stock market being linked to the length of women’s skirts.

I am frequently asked the question: When is it truly not luck? There are professions in randomness for which performance is low in luck: Like casinos, which manage to tame randomness. In finance? Perhaps. All traders are not speculative traders: There exists a segment called market makers whose job is to derive, like bookmakers, or even like store owners, an income against a transaction. If they speculate, their dependence on the risks of such speculation remains too small compared to their overall volume. They buy at a price and sell to the public at a more favorable one, performing large numbers of transactions. Such income provides them some insulation from randomness. Such category includes floor traders on the exchanges, bank traders who “trade against order flow”, moneychangers in the souks of the Levant. They never make it big, as their income is constrained by the number of customers, but they do well probabilistically. They are, in a way, the dentists of the profession.

Link here (scroll down to piece by Nassim Nicholas Taleb).


Now that Fannie Mae is undertaking a $9 billion restatement at the direction of the SEC, one legislator wants its former top executives to return bonuses that were based on the bogus profits. In a letter to Armando Falcon Jr. -- director of the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae -- Rep. Richard H. Baker (R-Louisiana) requested that the OFHEO “take action to recapture all bonus payments from executives that were awarded based upon the faulty and deeply flawed earnings statements of the enterprise.” Under pressure from the OFHEO, Fannie Mae chairman and chief executive officer Franklin D. Raines and chief financial officer J. Timothy Howard resigned after the release of the SEC report; they are now negotiating with the company over their financial packages. Baker’s request appears to apply not only to Raines and Howard, but to many other current and former top Fannie Mae managers. It could not be determined how many executives have been paid bonuses since 2001 or the total value of those awards.

This bid to “claw back” compensation is part of a growing trend. Late last summer saw an unsuccessful attempt, when a federal judge ruled that the OFHEO could not withhold more than $50 million owed to Leland Brendsel, the former head of Freddie Mac. In October, a judge ordered former Conseco Inc. chief executive officer Steve Hilbert and his family trusts to return $62.7 million plus interest to a subsidiary, Conseco Services. In 2003, the parent company had filed lawsuits seeking to recover a total of $670 million in stock-related loans from Hilbert, who left the company in 2000, and 10 other former directors and officers.

Another company that recently sought refunds from former officials was Nortel Networks, which is currently embroiled in an accounting scandal and has delayed restatements several times. Shareholders, too, are increasingly seeking to “recoup funds, enforce accountability, and bring about reforms in this area of governance” when they feel that “executives are being paid millions of dollars in undeserved bonuses,” according to a recent report by the Investor Responsibility Research Center.

Link here.


Propelled by persistently low mortgage rates, the housing industry is celebrating what is likely to be a 4th straight year of record sales. And for a 4th straight year industry executives are cautioning that sales are likely to decline at least modestly in the year ahead. “Each year we say we can’t do it again better and it won’t happen again better, and it does,” said Dale Mattison, a broker with Long & Foster in Washington, D.C. “Inventory is still low and demand is still high. The demographic and economic impetus in the market is still strong.”

One reason to believe home sales finally will begin falling this year: Long-term mortgage rates seem almost certain to rise given the Federal Reserve’s apparent intention to continue tightening credit. The central bank raised short-term rates five times beginning in June, but so far there has been little effect on 30-year mortgage rates, which are tied to long-term rates set in open markets. But if the Fed continues to raise short-term rates steadily, long-term rates will head higher, analysts say. Doug Duncan, chief economist for the Mortgage Bankers Association of America, predicted that the average 30-year mortgage rate will rise to about 6.3 or 6.5% by the end of 2005 from the current 5.81%. Others predict long-term rates could rise to 6.5% by midyear, with a chilling effect on the housing market. But so far there has been little sign that the market’s momentum is slowing.

Not everyone is so sanguine. Dean Baker, co-director of the Center for Economic and Policy Research, long has warned of a growing housing bubble, pointing out that home prices have been rising at an unsustainable rate. From 1975 to 1995, for example, the median price of existing homes sold rose just 10% after adjusting for inflation. Over the past decade the median price has risen 40% in inflation-adjusted terms. If mortgage rates rise by just 1.5% points, Baker figures home values could fall 15 to 20%. “You still have hugely overpriced markets,” Baker said. But the exact timing of a downturn is “very hard to predict. This is just like the stock bubble in the sense that there is a psychological element.”

Haseeb Ahmed, a senior economist at Economy.com, notes that the inventory of new homes for sale has risen to 418,000, the highest level since the 1970s. At current sales rates, that is 4.5 months of supply, which is considered relatively low. But a spike in interest rates could send that ratio higher “very quickly”, he said. Still, he said builders have far better access to information about the economy and interest rates than they did in the 1970s, when overbuilding led to a glut of supply on the market.

Most analysts say sharp price declines are likely to be limited to individual markets that suffer severe economic setbacks. “What would guarantee it would be widespread job losses in a regional economy,” said Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies. “Then the housing market is clearly at risk and very, very vulnerable.” Other scenarios that could have a wider impact are more unlikely, industry analysts say. The biggest danger is a sharp increase in inflation, perhaps propelled by soaring oil prices, that would send long-term interest rates shooting higher. Another concern is a collapse in the dollar that could send rates higher and choke the economy. Both those events are unlikely, said Duncan, of the mortgage bankers.

Link here.


China’s leading oil and gas group, China National Offshore Oil Corporation (CNOOC), is considering a $13 billion bid for its US rival, Unocal. The state-controlled group is interested in acquiring the U.S. company’s assets in Asian countries, including Indonesia, Thailand, Bangladesh and Myanmar. The third largest oil company in China is conducting a review of the assets of Unocal and the deal is still in its preliminary stages. Increasing consumption of fuel and dwindling domestic output has made Chinese companies look for overseas acquisitions. The two companies have not, however, confirmed the reports regarding a possible deal.

Link here.


The New York Stock Exchange said two membership seats were sold this week, one at a price that was a 9-year low. The first seat sold for $1.015 million, while the second seat sold for $1 million, a price not seen since Oct. 19, 1995, the NYSE said. The 212-year-old NYSE is a private association, which sells memberships, or seats. The NYSE has 1,366 members. NYSE seat prices are well off their record high of $2.65 million in August 1999. Seat values remain affected by concerns about the long-term value of an NYSE membership in light of the exchange’s plan to bring greater automation to the exchange that could bypass some members who work on the floor.

“Seat prices are cyclical, and reflect overall market and securities industry conditions,” NYSE spokesman Ray Pellecchia said. “Currently seat prices are impacted by factors like low levels of trading volume, low volatility and continued pressure on commissions.”

Link here.


The Federal Reserve mostly follows the trend in U.S. interest rates, though the financial press invariably makes it sound as though the Fed is somehow leading the way. During the Fed’s rate-cutting binge that began in 2001, the central bank merely did what lenders across the economy were doing: cutting interest rates to the point where households were willing to pile on new mortgage, auto, and credit card debt.

On those rare occasions when the Fed actually tries to get out in front of a trend, the trend will refuse to follow. The media will not describe it this way, because, well, the myth of an all-powerful central bank is stronger than mere facts. Still, the facts are plain. Mr. Greenspan & Co. raised the Fed Funds rate five times in 2004, yet the 10- and 30-year Treasury yields were virtually flat, moving from 4.244% to 4.216%. Of course, a big move may well be ahead for Treasury yields; indeed, this is precisely what our technical studies suggest will happen. But the size and direction of this move have nothing to do with the Fed’s monetary policy.

Link here.


British real estate has seen better times. Prices topped about six months ago, and since then the housing sector has been in a persistent, albeit slow, decline. Mortgage lending “continues to head south at an alarming rate”, and is now lowest in 10 years (The Guardian). Mortgage equity withdrawals are steadily dropping, too. All that has been pressuring home prices, which are expected to fall further in 2005 -- estimates vary from 2 to 6% (Reuters). No wonder, some say. The market simply had to cool off a bit. After all, British real estate has been some of the hottest on the planet. While the UK’s real (adjusted for inflation) house prices went nowhere for the last quarter of the 20th century, they more than doubled since 1998.

Predictions of a continuing slowdown are easy to come by in British press. Even the Bank of England came out with a couple of warnings recently about the vicious pace of house price inflation. What is more, many have already suggested that British real estate is, indeed, in a bubble. Yet despite this worrisome admission and an equally troubling downturn in house prices and lending, no one really expects a major slump. Instead, the consensus among economists, real estate agents and construction companies remains overwhelmingly positive. They back up their views with strong UK manufacturing figures and record-low unemployment. The British public shares this complacency and continues to favor investing in real estate over stocks. In other words, this may be a bubble, but ... well, it is the kind of a bubble that homeowners do not really need to worry about. Are experts just putting on a brave face to prevent a selling panic? Or is everyone truly and blissfully oblivious to a genuine danger?

It could be the latter. We observed a similar phenomenon shortly before the NASDAQ reached its all-time high in March 2000. U.S. investors were just as complacent about warnings of the overheated stock prices then. And even if they were concerned about an occasional warning, they did not act on it. We called it the “uh-oh” effect: “There are times in history when the percentage of naive investors is so high that occasional warnings from professionals are irrelevant to net market psychology.... [It] is in fact normal behavior at the biggest tops of all.”

The very word “bubble” implies a violent resolution. Financial bubbles are in the biggest danger of popping when the public recognizes them for what they are, but refuses to do anything about it. Is the UK’s real estate finally at that point? And what would happen to the recent strength in British stocks if the housing market tanked?

Link here.


Kiplinger magazine aimed a soft glove at us. Here, we pause to see what else is between the covers of the January issue ... and look for some brass knuckles. Kiplinger’s complaint was that some of the things we say are “over the top”. We do not deny it. Rather, we protest that we can never seem to get over the top enough. Nature, the markets, and the world itself are simply too ... over the top themselves. Life is full of surprises, absurdities, and humbuggeries. We have only words to describe them. Our words never seem to be enough. Catastrophe, disaster, horror ... where is the word that measures up to the “Death Wave” in the Indian Ocean, for example?

Kiplinger, on the other hand, lives in a different world. It is a world, as near as we can tell, where every thought is commonplace, every idea is convenient, and every stock always goes up. There is no shame in this. But neither is there any glory. Instead, Kiplinger must live day to day in the dreary dust of following the crowd, painting smiley faces on public buildings. We stand still in awe and wonder. What beautiful minds construct such a happy, unclouded world? Someone should check the water in their Washington, DC headquarters. Maybe it could be bottled. We look on the masthead, expecting to find Abby Joseph Cohen as Editor-in-Chief. But no. Instead, there is a Mr. Fred W. Frailey, who begins his opening letter with these intriguing words: “You hate me.”

We read on with interest to find out what the source of our animosity was meant to be. “Just six months ago, I declared on this page that I would not buy Google’s initial public offering because I didn’t have the stomach for the risk that would come with paying so much for the Internet stock,” he writes. So far, so good. But he figures readers are pretty mad, since Google went straight up afterwards. Mr. Frailey’s mea culpa included an admission that Google’s P/E of 118 “freaked me out”. There is nothing particularly astonishing about this. It should have freaked him out, in our opinion. But not buying Google had a strange effect on the Kiplinger editor. It made him feel “stupid”, he says. Why? Because the shares went up! He is so disturbed by it that it leads him to a breathtaking turnaround. In “atonement”, he tells us that he is buying the shares now -- at $181!

What kind of investment method is this, we wonder? Wait until shares go up in price -- and then buy them? We have no Googles in our portfolio to prove we are smart. And we certainly have no idea where Google shares will go from here. But we offer this free advice to Mr. Frailey: Think again. “Where to put your money now,” Kiplinger’s headline promises. It is a question loaded with traps and troubles; but it seems so innocent ... so easy ... so risk-free in the pages within. For there on page 21, we learn that all is well in the economy. How Kiplinger knows this, we cannot tell you. But they state it in such a matter-of-fact style, you almost believe it is true, rather than a mere wild guess. Of course, it is not. Kiplinger editors are merely reporting a consensus view -- one which is likely to be right, wrong, or somewhere in the middle. One thing it is not likely to be is profitable for investors, since everyone and his half-wit brother reads forecasts like this and invests accordingly.

We push on. Why not? It is all in good fun. “Given today’s interest rates, stocks are, at worst, fairly priced and perhaps even undervalued,” the magazine says. Nowhere do the editors admit that they have no more idea than anyone else. Nowhere do they admit that that is just one guess. Nowhere do they have the modest grace to warn readers that the exact opposite of what they forecast could also come to pass ... and that readers ought to at least take a few precautions. But what the heck, it is just money.

And over on page 40, they do acknowledge that things might not go entirely as planned. “Some professionals believe corporate profits could actually decline in 2006(!),” they allow. Then, they turn to their handy rolodex to call up some Wall Street shill pretending to be a pessimist. Stocks, says David Durst of Morgan Stanley in New York City, may return “half of what many people think,” -- or 6%! Wow ... what a bear! Won’t someone please stop that man before he cuts his wrists? We searched all 108 pages of Kiplinger’s January issue, but could find no clouds bigger or darker than Mr. Durst’s pathetic little wisp.

Au contraire, the sun is shining everywhere. On page 32, James K. Glassman tells us it is time to reconsider technology. Growth funds, too, are “ripe for a comeback” on page 54. Meanwhile, real estate will have “no bubble trouble”, it says on page 67. Instead, “look for another year of strong home prices.” And here we have another insight into Kiplinger’s strange world; it is a world with only buyers. People never sell. “The youngest baby-boomers are buying up,” says the magazine, “and the oldest are buying up or buying second homes.” What happens when the oldest of the oldest die? What happens when the sun goes down? What happens when they switch water companies at the Kiplinger’s headquarters?

Link here.
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