Fig. 1 is a picture worth a thousand words to answer the question in the title. Just look at the number of inflation peaks right in the middle of recessions, and some just at the beginning of recessions. Amazing, isn't it?
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The single most important financial market indicator to predict the two most important economic variables - the GDP growth rate, especially recessions, and the direction of the inflation rate - is the yield curve: The shape of the graph of US Treasury rates as one goes from the short-term, 3-Month to 2-Year, to the long-term, 10-Year to 30-Year, rates. This is especially true in the climate of sustained inflation, no year-over-year negative inflation readings that has existed in the US roughly since 1965, when the inflation started to rear its ugly head as predicted by the long wave economic cycle. The yield curve is considered flat when the difference between the short-term and the long-term rates is insignificant and it is considered inverted when the long-term rates are lower than the short-term rates.
Fig. 1 is a picture worth a thousand
words to answer the question in the title. Just look at
the number of inflation peaks right in the middle of
recessions, and some just at the beginning of
recessions. Amazing, isn't it?
The most unmistakable signal of a flat, or inverted, yield curve is that the growth rate has already peaked and a recession is highly likely within the next 12 months. An even more unmistakable signal is that the rising inflation rate will start falling in 6-18 months from the date of the beginning of the inversion of the yield curve.
Fig. 2 shows the graphs of the inflation rate
and the yield differential, short-term (3-Month)
minus the long-term (10-Year). The negative
correlation between the peaks and the troughs is quite
obvious. It would be even more uncanny if the yield
differential were advanced by roughly 9 months.
Table 1: Yield-Inversion, Recessions and Future Decline In Inflation Rate
Table 1 surmises the timings of variables under discussion for the period of sustained inflation in the US since 1965.
Table 2 presents the rough sketch of the relationship between the Yield-Differential and the future direction of the inflation rate.
Why Recessions Have Become Necessary to Control Inflation in the US
Since the historical evidence is unmistakable, we need to understand why. There are two factors at play that collude to force the observed pattern.
1. The Fed Policy
On Friday, June 16, 2006, someone.... on Bloomberg TV made the following comment (emphasis is mine, although it was evident in the tone of the speaker as well):
"Fed has to CAUSE REAL PAIN to bring INFLATION UNDER CONTROL."
The reason that "Fed has to cause real pain" is because it is in the Damage Control mode after having done the damage itself by having pursued a policy of too easy a monetary policy for too long. That politics plays a role in it is undeniable, especially in recent years. The urgency to control inflation became so great during the late 1970s that the Volcker Fed was given the free hand, including "to CAUSE REAL PAIN," without regard to the politics. And causing real pain it did - the 1980-82 Double Dip recession was by far the worst since the Great Depression. But that is what it took to bring the inflation rate down to an acceptable level.
The easy money policies of the Fed in 1960s and 1970s were nothing compared to the policies of the Greenspan Fed, especially, during 2002-04 (when a lot was at stake for Bernanke, Bush and Greenspan). The Damage Control, handed to poor Bernanke, would cause Pain commensurate with the Damage. The 5-6% Fed Funds Rate under the current level of debt would cause more pain than the 20-22% rate under Volcker because of who is the pain going to be directed at - the households. People underestimate the damage that the potential 5% of homeowners walking away from their homes, over a period of 12-24 months, would do to the financial system and the economy.
2. The Economic Cause
The easy money and lending policies by bankers, governmental as well as private, always lead to speculation in financial markets as well as in the real economy. My favorite economist, Joseph Schumpeter, called this "banker's mischief." The building boom in many countries of the world during the past four years is directly related to the easy money and easy lending policies in the US, for the most part, as well as in EU and Japan. Dubai could easily be the poster boy of this extravagant building boom. The high crude oil and gasoline prices are mostly due to the debt-induced consumption, fed by easy money and easy lending policies in the US.
The easy-money-led and boom-driven demand creates inflation, and if the inflation lasts long enough it leads to what is called inflation expectations whereby the producers, or sellers, of goods and services think that they must keep raising prices.
THE ONLY FORCE THAT SUCCESSFULLY COUNTERS THE INFLATION EXPECTATIONS BY THE PRODUCERS IS THE SUSTAINED FALL IN THE DEMAND OF THEIR PRODUCE, GOODS OR SERVICES.
This takes place at the beginning of a recession. And the rate of inflation starts to come down. How far and for how long the inflation keeps falling is a function of how long the demand keeps falling. The best proof of this came during the 1980-82 Double Dip recession. When the inflation rate did not fall to an acceptable level, after the end of the first recessionary episode, an immediate and more severe second episode became necessary to keep the demand falling. Draconian monetary brakes were applied to accomplish this. The demand had be kept falling to keep the inflation rate falling. A simple mixture of economics and psychology, my dear Watson.
Recessions create their own falling demand, as people lose jobs, and if the demand was over saturated before the beginning of the recession the demand could remain low for a very long period. That is how depressions happen. And depressions create their own lowering of the demand when the depressionary psychology takes root among those who have the means to spend more. They decide that it is better to save and live modestly. Just because a McMansion in Silly.con Valley can be had for $250K in 2008, doesn't mean that one is needed; the 3 bedrooms, 1700 sq. ft., home that is currently owned would do just fine. Even a bargain is let go. And that gives rise to even greater bargains!
The Demand Destruction would cause the next
recession to turn into a depression. At that point the
Fed policy becomes impotent to boost demand. And
if the Federal government cuts taxes, cautious people
decide to save all that tax cut! Only the cautious
people would have most of the money to spend
during a depression. And current bulls and
profligates will suffer from envy.
One of the things that impressed me about these pre computer-age brokerage statements (from Estabrook & Co., 15 State Street, Boston, Mass.) is that they were clearly automated in some way, as if produced by a Teletype-style printer. Perhaps some ancient broker can enlighten me on how these were prepared.
Another thing I noticed was the inordinately high prices of the shares. Remember, this was during the Depression, and the purchasing power of today's dollar is roughly equivalent to a Depression nickel, so in today's dollars the share prices would be: Boston Elevated, $1360; Boston Electric, $1300; General Foods, $728; Gillette, $340; Timken, $1358; Bullard, $668; Boston Herald, $580; Nash, $180.
By my calculation the largest cash commitment to this portfolio (March 1938, with 15 Boston Elevated, 20 Timken, 30 Boston Herald Traveler and 100 Nash Kelvinator) was $2,738.31, or about $54,750 in today's money. That's a pretty good-size portfolio for a near-newlywed with a two-year-old daughter. I dare say, a darn sight better than the vast majority of today's young couples, most of whom are already deep in debt.
Most interesting is what eventually happened to the companies.
Boston Elevated was the (private) predecessor to today's eastern-Massachusetts MBTA public transit authority. The Boston El expired as a private entity in 1947, as the automobile supplanted train and rapid transit travel.
Boston Electric is now part of the electric and gas utility company NSTAR.
Gillette was a highly-successful consumer products company until 2005, when it was merged with Procter & Gamble.
Timken is still an independent publicly-traded company today as Timken Co.
I have had trouble finding information on Bullard. Today's Bullard is apparently a private company, specializing in industrial safety equipment. The 1930s publicly-traded Bullard invented the "hard hat" for construction workers, and was the Depression-era equivalent of a high-tech company of today.
I am old enough to remember both the morning Boston Herald and the evening Boston Traveler newspapers. The Traveler bit the dust sometime in the 1960s, I think. The Boston Herald, always an also-ran to the Boston Globe, was acquired by the Hearst newspaper chain and its format shifted from broadsheet to tabloid (adopted from the Record-American, also Hearst-owned). Then it was owned by Rupert Murdoch's newspaper chain; then it was bought out by its employees and is now privately owned.
Nash-Kelvinator merged with Hudson Motors to
form American Motors Corporation (think Rambler
and Jeep!), which was bought by Chrysler (now
Daimler-Chrysler) in 1987.
The problem is that after allowing a late 1990s stock market bubble and a 2003-2006 housing bubble, the Fed has basically lost control. It feels the necessity to fight inflation until further signs of economic softening show up, and by that time it is too late to avoid a likely recession. In our view the latest market correction is the first leg down in a new cyclical bear market that is a continuation of the secular bear market that started in early 2000. The decline has the potential to be particularly dangerous in view of the massive consumer debt buildup, record trade deficit and the many trillions of dollars of outstanding derivatives. - Charlie Minter
The Ratio of the Coincident to Lagging Indicators topped out months ago.... The US economy shall reach its peak and move into a quiet recession sometime in the last 3rd quarter or early 4th quarter of this year. - Dennis Gartman
As you recall, nominal retail sales in May increased by just 0.1%. Today's [June 14] CPI report shows the commodities (goods) component increasing 0.7% in May. Thus, CPI-adjusted May retail sales fell 0.6% month-to-month after a 0.3% decline in April. Even if June price-adjusted retail sales increase by 0.3%, real retail sales for Q2 are on track to contract at an annualized rate of about 3%. This compares with annualized growth of 13% in CPI-adjusted retail sales in the first quarter. Sure hope the economy is equipped with traction control! - Paul L. Kasriel
I've long doubted the usefulness of head-and-shoulders patterns, since they tend to be everywhere you look for them. Still, there's no denying that the one the Dow Industrial Average has been carving out since early March is quite a looker. Yeah, it needs a little more development on the right shoulder to give it proper symmetry. But otherwise, it looks good to go for an 800-point plunge. Does that sound bearish enough? Maybe to you, it does -- but not to me. For if this market is about to unravel the way I expect it to, a 3000 point leg down sounds about right. But a measly 800 points? That wouldn't begin to discount some of the more problematical trends that are in the pipeline already, including a real estate collapse and a run on the dollar. - Rick Ackerman
I think the stock market will be heading considerably lower into the fourth quarter this year. So except for dribs and drabs of oils and utilities, I'm on the sidelines - sitting mainly with T-bills and money market stuff along with gold which I will probably never sell..... As far as I can see, the first phase of the gold bull market is over. Accumulation time for the second phase lies ahead. And that's going to take time. - Richard Russell
In fact, some asset markets like India, Russia, the Latin American stock markets, copper, and other industrial commodities, are so over-extended that further 30% declines would not surprise me. Therefore, my advice is to sell rallies in stocks and commodities and take a holiday until next October. - Marc Faber
The various Ms are running at relatively low year-over-year rates -- MZM 3.9%, M2 4.5%, and M1 a measly 1.8%. This contrasts with the big inflation years during the '70s and '80s, when these aggregates were well over 10% (and sometimes north of 15%). Even the monetary base is growing at a 4% rate, less than one third of the pace of the early '90s. So where is the liquidity coming from? One place is Europe, where the European central banks are boosting money supply by a torrid 8% annual rate. While 'Helicopter Ben' may have a tough name to overcome in the months ahead, investors need to look elsewhere when complaining about excessive monetary growth. - Paul Nolte
The current market topped in 2000 and the collapse seen from 2000-02 ranks amongst the great crashes, especially the one in the technology sector. But commodities turned slowly up during this period - and in the early stages of a Kondratieff winter, commodities do turn up. That the current cycle has been supported by massive injections of liquidity from the US Federal Reserve and the Bank of Japan is merely a sign of how seriously the monetary authorities took the potential of a deflationary collapse. Alan Greenspan, who was perfectly well aware of both the Kondratieff cycle and Elliott wave analysis, always said that he wanted to be Fed Chairman at the time of a Kondratieff winter. His proposed solution was to inject huge amounts of liquidity that would stave off a collapse..... But we were fed by those liquidity excesses from Japan and the US, and it resulted in bubbles in the housing market and some emerging markets. The housing bubble has yet to fully implode but it remains a real risk.... Global rising interest rates and contracting liquidity played a role in the recent global market meltdown. The risk is now that the monetary authorities will tighten too much, triggering a bigger meltdown, especially if it is accompanied by a major geopolitical event. How they react after that is anyone's guess, but the suspicion is that they would once again flood the system with liquidity to try to prevent a meltdown. It is then that we could have our deflationary collapse where even commodities fall. - David Chapman
Financial professionals exhibit the same herding behavior that governs private investors, and the notion that fund managers are "less emotional" or "more rational" than shareholders is complete rubbish. - Robert Folsom
I am ultra bearish about US bonds for the long term. In fact, I recommend that each reader buy just one 30 Year US government bond, frame it and put it on his wall in his living room. You can then, in future, show your grandchildren how the US dollar and bonds became worthless. However, for the short term, I believe that the out-performance of equities compared to bonds, since 2003, has ended and that bonds will now rebound over the next three months.... I may add that bond bullish sentiment reached recently extremely low levels while commercials had record long bond positions - a powerful contrary indictor, which would support my take that the US economy will shortly badly disappoint. - Marc Faber
....there's another - and somewhat more complicated theory - being followed by billionaire George Soros. It goes something like this: While it is true that wildly printing money in a massive inflation would normally drive up prices (as money's purchasing power is watered down), in today's world if there are mechanisms that soak up all available liquidity - despite how much money is printed - you can get the strangely and contradictory situation where you have monetary inflation (printing) outrun by "money sponges" (think derivatives, which are doubling every year) such that you get a drop in available money to invest ("liquidity") which causes a de facto deflation.... The idea that we can have rampant inflation soaked up into money sponges does pose a serious problem for the Fed and other central banksters: How can they maintain control of the money system globally? The answer: They won't be able to. It's only a matter of "when" it all falls apart. - George Ure
Bernanke fears that today's economy resembles the one that began to overheat the 1970s. But he's wrong.... The price increases we're now witnessing are not due to excess demand over limited productive capacity, which causes inflation. They come mainly from soaring prices for energy and raw materials. These commodities are being bid upward because of China's rapid growth, but take a closer look and you see something else going on. Much of the increase in commodity prices is being driven by speculators who expect prices to continue to rise. In other words, part of what we're seeing are speculative bubbles. Such bubbles can burst any time. The fact is, the global market is glutted with productive capacity.... This is a recipe for deflation. Prices can begin to drop because buyers hold off, expecting further price decreases. It happened in Japan in the 1990s. It's already starting to happen in certain housing markets in the United States that had been red-hot but are now cooling so fast home prices are dropping. Deflation is often accompanied by stagnant or falling wages, which make it harder for consumers to afford to buy.... The Fed and other central bankers around the world are raising interest rates because they're fighting the last war. But they already won that war. Inflation is no longer our biggest threat. They ought to be worried about the war before the last one, and the specter of deflation. They're in danger of losing that war even before they know they're in it. - Robert Reich
Any day now, we expect China to blow up. Or the Dow to crash. Or the dollar to collapse. The whole world economy is a public spectacle, too, begun on a fraud (that central planning by central banks can create prosperity), and now deep into the farce stage (in which bankrupt Chinese companies expand production in order to sell products to insolvent consumers on the other side of the world). At some point, we look for trouble. - Bill Bonner
No button lights up on the central bankers' economic control panel telling them exactly when they are on their last bubble. Even if Bernanke were worried about a bit too much inflation, it is likely that he would attempt to postpone the inevitable crisis with one more dose of inflation. After all, central banks subsist on the conceit that they can manage the economy.... Examination of a number of speeches and academic papers by Bernanke and his cohorts at the Fed reveals a number of crackpot anti-deflation schemes based on the monetization of financial assets. These schemes are at minimum being studied by Fed researchers, and perhaps being prepared for implementation. Their writings and speeches all suggest that the deflation card is already off the table. - Robert Blumen
[Ben Bernanke] is an amateur with no knowledge of markets whose academic work revolved around how nations could avoid depressions by printing more money. - Jim Rogers
Ben Bernanke's brilliant, brilliant, brilliant idea is that the Fed gave up too easily in the 30s, and that he is now sure, since he is a self-styled expert, that administering more poison to a dying patient will, paradoxically, be the cure for poisoning. Therefore, look for lower interest rates regardless of inflation, and increasing Plunge Protection Team activities to gobble up stocks and bonds to keep their prices up. - Richard Daughty
Bernanke is trapped in "Wonderland" but unlike Alice has no way out. Bernanke gets to choose between hyperinflation and deflation. The moment he can not run fast enough, the US economy will implode. If he runs too fast, the value of the US dollar as well as the Fed's power will both come to a very abrupt stop.... Eventually Bernanke (like the Bank of Japan) will have to choose deflation. The reason is simple: hyperinflation will end the game, which in turn would eliminate the wealth of the Fed as well as all of their power. - Mike Shedlock
The Fed members' ability to still command credibility (after two bubbles in five years and various other blunders) continues to amaze me. But I suspect that, before this year is out, the Fed's credibility will be in short supply. The little rampage in gold about a month ago was just a taste of what things might look like when the Fed is finally understood to be trapped and not in charge. - Bill Fleckenstein
Last year in May we reworked CPI to put back in housing costs and to remove chain weighting and hedonic adjustments, using Fed estimates for the effects of each, and concluded that CPI was running at that time between 2% and 2.5% over the published rate. That suggests the economic growth reported for 2Q05 could in fact be flat or conceivably even negative. Since the Fed is convinced that GDP is growing nicely they could easily overshoot rate hikes as they belatedly wake up to inflation that has been brewing for years now. - Richard T. Williams
A lower dollar will not resolve the structural challenge the US is facing. A lower dollar will not re-create the US manufacturing industry. A lower dollar will not turn America into a nation of savers. We believe the pressures on the dollar will persist as long as there are not fundamental changes that will truly promote savings and investments. And to make it perfectly clear, we do not have an "ownership society" as long as the banks are the ones owning our homes. - Axel Merk
My wife was behind a woman in line at the grocery store, and she was saying as how "We owe $12,000 on our credit card and we don't know how we are going to meet the minimum payment"! And how did she pay for the groceries? With a credit card! Hahahaha! - Richard Daughty
There's no way all this debt can ever be paid off or even carried by stable economic systems. Forget that. This debt must be carried, handled, by ever increasing amounts of paper. That alone is a basis for perma-inflation. Maybe we've got a new word here -- "permaflation." - Richard Russell
There is evidence that the US is attempting to manage the decline [of the dollar] by purchasing its own debt. As Asian purchasing of US paper declined last month, the slack was taken up by Caribbean and UK banks that would not normally have the liquidity to make such purchases. Therefore, they are acting for a third party, and the only party that would buy dollars when a loss in value is inevitable is the US Treasury. By doing this, the US is hoping to prevent a sudden collapse of the dollar and the subsequent unwinding of the US and world economies in a fiscal disaster so profound that it will eclipse the Great Depression.... In other words, boys and girls, the dollar is doomed. - Edgar J. Steele
Financial crises often destroy the middle and lower classes. The rich figure out what is going on. They find ways to protect themselves. After all, how did they get to be rich in the first place? On the other hand, America's middle classes have no idea what is happening to them. They do not understand the Fed, credit bubbles, debt, or paper currencies. And why should they? They have public officials, and elected representatives, who are supposed to watch over those details for them! But their public servants lie to them...and set them up, leaving them unprepared for what could turn out to be one of the worst financial catastrophes in history.... The feds spared the nation a serious correction in 2001. But they did it at the expense of America's working classes, who were lured deep into debt in order to keep spending. Now that rates are rising, they find it impossible to continue. And they are left in a position you might wish upon your enemies, but not your friends. They are not only relatively poorer than they were - compared to the rich in America as well as the poor in Asia, whose incomes have been racing ahead - they are poorer in absolute terms, too. Their net assets are few. Their debts are many. And their incomes are lower than they were five years ago. When middle and lower classes finally figure out what has happened to them, they are not going to be very happy about it. - Bill Bonner
According to some estimates, hedge funds now hold some 30 percent of all credit derivatives and some 80 percent of unpaid and overdue debt. Many controllers and regulators are dismayed and upset about this development as risky credit transactions tend to disappear from their sphere of authority into unregulated "black holes" of hedge funds. These funds nevertheless are the bêtes noires of the world of money and credit. Central bankers, controllers, and regulators have no power over them, which gives them the power to take advantage of every turn and shift of money and credit policy. Fund managers not only may foresee the consequences of central bank policies but also anticipate the turns of policy to be made by the officials. Furthermore, their actions may either counterbalance or exacerbate the effects of central-bank moves, depending on which path is more profitable. If they curb the mal-effects, they will be ignored. If they expose them, they will be vilified and used as scapegoats for the economic harm "they" caused. In either event, let us remember that hedge funds not only are supplying the world with capital when and where it is needed but also are moderating the harmful effects of the business cycle. - Hans F. Sennholz
It has been calculated that the "wealth effects" on consumption have raised real GDP growth by 1.5 percentage points a year for the past five years. With nothing in sight to replace this monstrous asset and credit bubble, a sharp downturn of the U.S. economy is the most obvious conclusion. - Kurt Richebächer
Today's housing headlines will likely seem mild compared to the headlines 12 months from now. - Jim Stack
Forget that "soft landing" crap that the real estate industry is feeding you. By virtually every possible measure, the U.S. housing market is caving in: Sales are crumbling. Inventories are exploding. Order cancellations are rocketing. Builder confidence is plunging.... The market itself is now forecasting a real estate bust. Not a "soft landing." Not a "maybe-bust someday." It's forecasting an outright collapse, starting right now. - Mike Larson
Thanks to the young and reckless, today housing's vital signs look less than encouraging: 29% of mortgages assumed in 2005 are now underwater; 16% of those with mortgages pay over half of their income on housing, up from 2% five years ago; 22% of the $9.3 trillion residential mortgage market is now subprime; $2.7 trillion of adjustable-rate mortgages are expected to reset in the next 18 months with payments increasing on average 45%; total home inventories and the inventory/sales ratio are at record highs. On Main Street, Madison Avenue, and especially Wall Street, anything worth doing is worth overdoing. A good idea inevitably wilts under the sunlight of too much attention. So, too, the mortgage refi bloom is succumbing to over-exposure. - Kevin Duffy
Of the mortgages written in the last year, approximately worth $3 trillion, upwards of 29% have no equity in their homes. For almost a third of recent mortgages to be underwater suggests that potentially well over $1 trillion worth of homes could come to market as homeowners turn in the keys to banks and walk away from their failed investments. - Richard T. Williams
Languishing long-term interest rates relative to short-term rates are a persistent deflationary clue. Yield curve inversion is another. Emerging market stock market crashes taking place one-by-one, worldwide, point to the same outcome. So does the sudden, precipitous 2006 drop in the Homebuilders Index ($RUF). One by one, commodities will be taking unanticipated hits. Rampant, dot.com-style real estate speculation is already drying up nationwide as local markets soften one by one. Take it from this investment realtor: Real estate deflation has begun and will persist for a longer period than almost anyone can imagine.... Using history as our guide, our call is for a grinding asset deflation, a painful credit contraction, a potentially severe liquidity crisis (exacerbated by our country's currently negative savings rate) and an astonishing percentage decline in real estate values over the next ten years. The stock market is in the early throes of falling victim to the same fate. - Steve Moyer
U.S. commercial banks' mortgage-related assets are now over 60% of their total earning assets - a postwar record high. If the U.S. housing bubble were to go "whoosh," great damage would be done to the U.S. banking system. Ask the Japanese how an economy performs for a decade when its banking system is crippled. - Paul L. Kasriel
A realtor recently told my wife that our house had almost doubled in value since we bought it five years ago. But as I went outside to take a look, so as to convince myself of our good fortune, I saw the same walls and the same roof - except that now the walls seem in need of new paint - and the tile roof is begging to be cleaned. I won't even mention what has happened to our property tax bill. So I am not jumping for joy. It's just a place for my family to live - nothing but studs, bricks and a number in the real property tax rolls. Most any additional post-inflation value is simply "fluff" created through the wealth redistribution power of the Fed and its manipulation of interest rates. It's truly misleading how politicians of the two denominations always place home ownership as the pride and joy of our free enterprise system, and the effectiveness of their own parties. They are always touting the higher figures in home ownership. Yet, I would venture to say that homeowners today have overall far less proportional equity in their homes than their counterparts did three decades ago. - Ben Tanosborn
And if I understand the concept of "boom-bust cycle", housing prices will now go down. A lot. That's why they call it a "bust".... So, if you are a person whose standard of living depends on constantly extracting equity from the apparent appreciation in the "value" of your house during a seemingly-endless inflation in prices, then oops! Hahaha! The cruel joke's on you! This is how Father Nature takes care of the business side of life. Mother Nature, his wife, takes care of all that gardening, environmental and touchy-feely "love and caring" crap, and it is up to the stern dad to hand out the, as we say in the South, whuppin' as the required punishment for acting so irresponsible and stupid. And even if you aren't that kind of person, your business will be affected as they stop spending. Equity withdrawal is, in bare essence, nothing more than increasing the absolute level of your mortgage debt and negating the entire gain in your equity. Hahaha! They ought to give the Anti-Nobel Prize for Sheer Economic Stupidity for these people, but there isn't one. - Richard Daughty
A son of my friends has had a home on the market for some four months. He has lowered the price twice. Six weeks ago, where the original listing price was 787K, there were 312 homes listed below his asking price. Then he lowered the price to 762K and soon after that there were 342 homes listed below his new asking price. Recently, he has lowered the price to 750K and as of yesterday there are 380 homes listed below his price. Do you see what I see? He is falling behind the curve. His agent is clueless about what is happening. Not only are more new listings are coming on the market but others are lowering the price too. And those who are slow to act might remain behind the curve for a long time. - Jas Jain
I went to school in Berkeley, and of course it was a very liberal economics department. In fact my poli-sci teacher freshmen year was an admitted Marxist and he was teaching government to freshmen. But when I would take my econ courses I knew the answers that the professors wanted and so I would answer in my blue book what they wanted, and then at the end I would put an asterisk and say, "look, this is what I really think, here's how I really want to answer the question, but I can't answer it this way because I'd flunk your course. So I'm going to give you the answer that gets me an A, but here's what I really believe." I did that all the time and I think they used to get mad, but I still got decent grades. - Peter Schiff
"iPod City" is.... in Longhua, China. That's where some 200,000 Chinese laborers work to make those iPods.... The laborers are housed in dormitories of 100 people each; visitors from the outside world are not permitted; workers toil for 15 hours a day; employees make $50 a month - not even a quarter of the price of one unit; the iPod nano is made in a five-story factory secured by police officers.... And remember that Apple is just one of thousands of companies using Chinese sweatshops.... to manufacture expensive goods designed for the Western consumer who remains blissfully ignorant about the conditions that created that product. Why is it that we don't tolerate the exploitation of workers in our own country but turn a blind eye to exploitation 10 times worse elsewhere? What is happening to the American conscience and psyche that allows this kind of abuse? How is it that the U.S. government could continue to encourage the kind of corporate greed that results in manufacturing agreements with the fascists in Beijing? Why is it that we see no screaming headlines about the conditions of "iPod City" in the U.S. corporate establishment press? Where is our sense of right and wrong? Would we have been so glibly accepting of imports from Nazi Germany as we are of those made in the virtual slave labor conditions of the so-called "workers paradise" in China? No, there's a double standard that permits China, a totalitarian socialist country, to get away with abuses that would not be tolerated anywhere else in the world. Welcome to the New World Order - where we're OK with the worst kind of oppression, as long as we can't see it taking place. - Joseph Farah
The alleged "shortage" of U.S. engineering graduates is inconsistent with reports from Duke University that 30 percent to 40 percent of students in its masters of engineering management program accept jobs outside the profession. About one-third of engineering graduates from MIT go into careers outside their field.... When employers allege a shortage of engineers, they mean that there is a shortage of American graduates who will work for the low salaries that foreigners will accept. Americans are simply being forced out of the engineering professions by jobs outsourcing and the importation of foreigners on work visas.... A country that doesn't make things doesn't need engineers and designers.... If the current policy continues of substituting foreign engineers for American engineers, the profession will die in the United States. - Paul Craig Roberts [Nick's note: Also true for computer programmers.]
Under Florida's new law, career exploration will begin as early as sixth grade. By ninth grade, students will need to declare their career major.... Did you know what you wanted to do when you were in ninth grade? Do you wish the government had decided for you then what you would be doing for the rest of your life to earn a living? Would that seem like a heavy-handed restriction on your freedom to be self-determining? (In case you need help on this test, the right answers are No-No-Yes.) Students will be encouraged to select a career that will direct them either along a vocational track or a college-bound track. With the assistance (or coercion, perhaps?) of school career counselors, students will be channeled into the path that is "right" for them. But here's one of the big problems that is guaranteed to arise: If a ninth grade student who decides on the auto mechanic track, for example, changes his mind in the eleventh or twelfth grade, he's stuck without the schooling needed to go to college upon graduation. At that point, a vocational track student will not have taken courses needed for acceptance into college. Some of you may consider this a good idea since not everyone should be college bound.... Yet while a college degree is not needed for success, an academically sound education from kindergarten through twelfth grade is essential for every student regardless of their post-high school plans. It is the only way to have an informed citizenry. Perhaps even more critical, the federal government is not qualified to project the supply and demand of the workforce two years - much less ten - from now. Trying to do so is one of the stultifying aspects of centrally planned economies (remember the Soviet Union?). - Brannon S. Howse
All the Muslim populations polled [by Pew] display a solid majority of support for Osama bin Laden. Asked whether they have confidence in him, Muslims replied positively, ranging between 8% (in Turkey) and 72% (in Nigeria). Likewise, suicide bombing is popular. Muslims who call it justified range from 13% (in Germany) to 69% (in Nigeria). These appalling numbers suggest that terrorism by Muslims has deep roots and will remain a danger for years to come. - Daniel Pipes
When I was just entering my early teen-years back in the late Sixties I was sitting on the couch intently
watching Walter Cronkite as he reported on new developments in the Vietnam War. Sitting next to me was my
Aunt Nat.... At the time of her visit she was a very high-level operative for the CIA; in my eyes a highly
credible person. As we listened to Walter Cronkite report on the war, my Aunt suddenly BURST OUT in
laughter!! I was shocked at her spontaneous response to what I thought was very serious business.... When
the next ad came over the air she said, "It's been so long since I've watched the national news, I forgot how
funny it was." Her comments made such a profound impact on me at the time; I remember it like it was just
yesterday. I prodded for more information, but she absolutely refused to tell me anything of substance. She
was sworn to secrecy and lived her entire adult life with absolute adherence to the code of conduct mandated
by her superiors. The only thing I could finally get out of her was this: She told me that what I was hearing
from Walter Cronkite was maybe 5% of the truth and the other 95% was being told to the American people as
a way of formulating public opinion. The only other thing she told me was to NEVER try to figure out what
was really going on behind the scenes, because I would never know and it would only cause me unending
frustration.... I'm angry about the lies in the press! With the advent of this thing we call the internet, we can at
least get a glimpse of what is going on behind the scenes.... I think it's an absolute shame we have to dig so
deep to find TRUTH. Some of you will be like my wife who believes "ignorance is bliss" and still others will
know the truth, but choose to remain in denial. Sometimes I freak-out and think this will surely put me in some
big federal database as a dissenter, but the truth be known! I just hope someone from the goon-squad doesn't
come knocking on my door. Do we really have to live in fear of our own government? - Mike Hartman
The flip from bull stock market to bear in early May was accompanied by a sudden drying-up of bank liquidity, not just here in the U.S., but worldwide. Exactly what herd instinct caused all of the world's central bankers to move in unison to clamp down on their countries' bank lending, I don't know. Was it a conscious coordinated policy on their part? Or were they each protecting their own turf in reaction to one country's shift in policy.... in this case, Japan, which has announced its intention to end zero interest rates and which wiped out about three years' increase of printed yen in a few months' time this past spring?
Or, as I think may be possible, was this policy a reaction to a shift in international finance? ....in this case, the unwinding of the bond-carry trade, again as a result of the policy change in Japan.
Regardless, while liquidity is tight the markets will be bearish, not bullish.
Since the stock market has so far only corrected mildly in response to the international drying-up of liquidity, pressures are building for a sharp correction ahead, probably in the fall when investors' psychology "traditionally" turns negative. Though by no means guaranteed, I think you should at least be prepared for the possibility that stocks will crash in September or October. By "crash" I mean a drop of two to three thousand Dow points over a month's time, similar to the NASDAQ crashing in the spring of 2000. The circuit-breakers make it unlikely we'd see a "one-day wonder" like the 1987 Crash.
In the meantime expect a choppy, directionless summer.
In my opinion the risk of systemic failure remains
about 55%. I'll revisit this number in the fall as we
approach the crash window.
A. "Inheritance" - real (normalized) "dividend distribution" portfolio::
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $110,068.57 (see below)
Increase: $10,068.57 [+10.07%]
COMMENT on "Inheritance": A few more sales punctuate the portfolio since the last issue. BP was stopped out about 11% below its year's high, and I decided to keep Wells Fargo, one of the money manager's selections, as a "permanent" addition to the portfolio by selling enough shares to recoup about the original investment, and let the rest ride. (Warren Buffett is buying this stock.)
I also, finally, decided that Intel and Microsoft were worth more to me as tax losses than waiting for them to recover. Actually, Microsoft has been somewhat resistant to the June decline and might make an important bottom next fall. Intel, I'm not so sure.... it is doing some restructuring and appears to be regaining market share, but the whole PC business is likely to suffer in the onrushing recession and this will be an intense drag on most any tech-type stock..... but especially on those which the money managers haven't given up on yet.
I also sold the Deswell because it isn't acting well. The dividend is not consistent and did not provide protection when the Asian emerging markest sold off; also, its business..... injection-molded plastic parts for consumer audio gear.... is not very recession-resistant. Operating in a fascist country may eventually prove to be another negative for the company.
Deluxe is clearly not out of the woods yet, as the new management incurs losses from its restructuring. I'm watching this one.... if the turnaround does not become evident in the next few months, I will probably give up on it. (Changes in management do not necessarily guarantee success.... abandoned software projects sometimes sink companies.)
Adjusting for the stocks sold, the portfolio cost (normalized) is $107,463.74 with $78,742.23 currently in cash or near-cash.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $21,010.21
Increase: $10,311.21 [+96.38]
COMMENT on "PIG": I continue to "roll over" 3-month T-bills, one per month.
C. Roth IRAs - real portfolio:
SUMMARY - Roth IRAs:
Original cost: $28,776.19
Present value: $34,722.56
Increase: $ 5,946.37 [+20.66%]
COMMENT on Roth IRAs: Boring, boring.... rolling over 6-month T-bills.
D. TIAA/CREF 403(b) and IRA retirement plans; I switch between indexed stock/bond/money funds:
Gain for the period January 1, 1988 through March 31, 2002 (14.25 years): 223.43%. Compound annual rate of return for this period: 8.59%. (Gain excludes the impact of additional monthly cash contributions.)
A portion of my TIAA-CREF funds are currently in the process of being transferred to Fidelity Investments. Once this is complete, I will try to "pick up" the reporting of the performance of my TIAA-CREF retirement plans.
TIAA-CREF values, 10July2006: stock, 214.73; equity-index, 84.72; MM, 23.18; bond, 75.89; inflation-indexed bond, 45.56; real estate, 260.09; TIAA current yield in SRA, about 4.92%. Current money-market yield is 4.90%. COMMENT on NYSE "Timer's Trend": We are currently on a BUY signal of July 3, 2006. But I suspect this was negated on July 10 or 11.
COMMENT on NASDAQ "Timer's Trend": We're on a SELL signal given May 10, 2006.
NEXT ISSUE - will appear in July or August 2006. (Might skip July and do August this year.)