American investors just don’t seem to get it. We had 15 central banks raise rates this year and five do so in the past month. The Bank of Italy is selling dollars and buying pounds and euros, and Wall Street and Washington are oblivious to what is going on. The Fed has stopped raising interest rates with official inflation at 5.4% and Bill Gross of PIMCO tells us rates will be cut again in early 2007 when inflation will be roaring. It isn’t what is coming in inflation – it is what is already in the pipeline that cannot be stopped and it is continuing.
Intangible growth is 90% of the economy. That is the service sector. About 90% of our tangibles are now manufactured overseas. That is why we have a current account deficit. Foreigners are willing to accept dollars for goods, but how long will that last if we have little for sale? The bottom line is those dollars represent the biggest scam in history. They cannot be redeemed for goods. As the US economy slows all those holding dollars are going to get very concerned about the value of those dollars. This is why there has been a rush over the past few years to buy American fixed assets with these dollars. It is part of the dumping process. Even the IMF tells us the dollar may be overvalued by 35%, and now that interest rates are not rising any further, and the return on the dollar is falling in the face of inflation, the dollar is bound to trade lower as the rush for real US assets accelerates. This evolutionary process of the decline of the dollar and the physical American economy can be directly traced to the closing of the gold window 35 years ago on 8/15/71. It took that long to ruin the economy and the final blow was free trade and globalization.
The conflicts in Iraq, Afghanistan and now Lebanon have obscured the US and world economies and their financial situation. We are only two weeks away from the end of summer and we are on the verge of reentering the real world. Another summer is gone and now it is back to reality.
It will be interesting to see what yields are next week on US Treasuries. On Monday, Wednesday and Friday of this past week the Treasury sold $44 billion of three, 10 and 30-year notes and bonds. The 10-year Treasury note is 37 BPS below the Fed funds rate. That is certainly suppression. How can one see lower yields in such an environment, and how can foreigners be expected to take such an abnormally low return? We believe bond investors are in for a surprise shortly, as rates rise again.
In not raising interest rates further, Fed Chairman Ben Bernanke has shown himself to be a true Keynesian inflationist. He says inflation will moderate over time, yes and cats can fly. He avoids discussing higher energy prices; war in the Middle East in three sectors – so far; the US war on terror; that all war is inflationary; that 15 other central banks are raising interest rates; that we have a major US oil pipeline down and it will be down three or more months; that Wal-Mart just raised wages 6%; that unit labor costs just took there biggest leap in six years and that China continues to buy all the commodities it can. How can he, facing the above, say inflation will moderate – where on Mars?
The TIPS spread to the 5 and 10-year shows that the market’s inflationary expectations are now heading back to the highs of late April-early May. This occurred after hapless Ben let us know how dovish he is.
An Opinion Research Poll conducted on behalf of CNN says 60% of Americans oppose the US war in Iraq; 61% said some troops should be withdrawn by the end of the year. Of those 26% want all the troops out now. 34% of others thought they should be maintained.
We remind you again that our President has drafted amendments to a war crimes law that would eliminate the risk of prosecution for political appointees, CIA officers and former military personnel for having humiliating or degrading war prisoners. The changes could affect how those involved in detainee matters act, and how other nations view Washington’s respect for its treaty obligations. George wants these psychopaths, who he gave orders too, to be let off the hook. We don’t believe this is fair and we urge you to tell Congress how you feel about it.
The four no-bid contracts by FEMA to house Hurricane Katrina evacuees have ballooned from $400 million to $3.4 billion. Where are the watchdogs Congress? The Department of Homeland Security is reviewing the contracts with Bechtel, CH2M Hill Co., Fluor & Shaw group to provide 150,000 trailers for victims, even as FEMA expects to competitively award at least $1 billion for similar work in future contingencies within days. Either there is lots of stealing going on, or monumental incompetence – and, it is probably both.
Halliburton subsidiary, KBR, is under investigation in London by the UK’s Serious Fraud Office over their part in an alleged plot to pay more than $170 million of bribes to win billions of dollars of work at a giant Nigerian gas plant. At the time of the alleged bribes, VP Richard Cheney was CEO of Halliburton.