Monday :: Jan 2, 2006

Inverting The Curve On The Road To War


by pessimist

"Who cares about the current account now?" asked Christoph Suetterlin, a currency trader in Zurich at Bank Sarasin. "It's a side issue. The dollar's a good investment with rising interest rates, and it's likely to stay that way."

This sounds like it should be good news, especially to our wrong-wing friends who love to spout about how well the economy is doing. But none of these neo-econs has to make not only his living off of this news, but that of those who choose to rely on their economic judgement to increase their own largesse.

Fiscal conservatives don't get wealthy by trusting every happy talk investment statement that comes along. They tend to pay attention to those who have demonstrated a lengthy period of wise investment strategy - someone like the Wizard of Wall Street, Warren Buffett, who has this to say:


Dollar drop still coming, Buffett and banks agree
MONDAY, JANUARY 2, 2006

The investor Warren Buffett and the biggest banks in the currency market - Deutsche Bank, UBS and Citigroup - missed the dollar's rally in 2005. Buffett, the chairman and chief executive of Berkshire Hathaway, lost almost $1 billion betting on a decline in the dollar last year against currencies like the pound, which suffered its biggest loss since 1992. These investors and analysts missed the gain by focusing on the U.S. trade deficit instead of a widening gap in interest rates in the dollar's favor, driven by eight Federal Reserve rate increases.
But for 2006, they are standing by their old predictions.
"There are signs the Fed may stop raising rates, so the dollar may go down," said Benedikt Germanier, a currency strategist in Zurich at UBS, the large foreign exchange trading bank. Last year was "a headache for dollar bears," he said.
Buffett and the analysts say they were not wrong, just early. Analysts at Deutsche Bank, UBS and Citigroup predicted that the dollar would weaken to a new low against the euro, with the European currency rising to $1.40. Instead, the dollar rose 14.4 percent as the euro fell to $1.1838 at the end of the year. The dollar also ended the year at ¥117.945 in New York, up 14.7 percent against the Japanese currency.

Buffett, who has been selling the dollar since 2002, said the currency should fall because the trade deficit, which grew to a record $68.9 billion in October, keeps widening. Buffett said the United States must introduce tariffs to make imports more costly and do more to promote exports.

Bankim Chadha, head of macrocurrency research in New York at Deutsche Bank, predicts a drop in the dollar, with the euro at $1.27 by the end of 2006.

Mansoor Mohi-Uddin, head of currency strategy at UBS in London, expects a euro rate of $1.30.

Steven Saywell, chief currency strategist at Citigroup in London, sees a bearish $1.36 for the euro.

Together, the banks account for about 37 percent of the trading in the $1.9 trillion-a-day market for foreign exchange, according to Euromoney magazine.

And that ain't just Crawford hay, is it?

There is another economic prognosticator who doesn't like the pending portents - a man who came closest to predicting what the US economy was going to do in 2005. He has this to say about the recent Inversion of the Yield Curve:


Bonds: A leading forecaster warns about Treasury yields

The U.S. bond market's most accurate forecaster, who plies his trade a long way from Wall Street, says yields are sending ominous signs about the economy.

James Smith, who teaches finance at the Chapel Hill branch of the University of North Carolina, turned out to be the top forecaster in Bloomberg's January 2005 survey of 66 economists. He predicted that the benchmark 10-year yield would end the year at 4.49 percent.

For 2006, Smith predicts that the yield will climb to 4.53 percent. Core inflation, which excludes food and energy prices, "remains under control," he said, tempering any rise in yields. Beyond 2006, Smith said, the bond market is waving a caution flag on the economy.

Two-year Treasury yields last week rose above those on 10-year notes, creating an inverted curve for the first time since December 2000. Such an inversion preceded the last four U.S. recessions.

"When the curve inverts, run for the exits," said Smith, who served as an economist for the Fed from 1975 to 1977. "It will stay that way until the Fed realizes it caused a recession in 2007. Investors should start planning for a recession."

Some already are:


The inverted yield curve is surely a warning for equity investors

Throughout 2005 US equities drifted sideways, trading in a narrow band, and the Dow Jones Index ended the year almost unchanged from the start.

But the absence of any major stock market downturn, particularly in the feared month of October, left some observers wondering whether the still booming economy was being ignored by the stock market.

Well, stock market[s] try to discount futures, not the present, and that is why equities are listless despite the US economy still growing like there was no tomorrow, for debt is mounting and structural imbalances persist that markets know can not go on forever; tomorrow always comes.

Eventually the US consumer has to begin to flag.

And when consumers have nothing left to spend, our consumer-driven economy grinds to a halt.

[T]he US stock market rally [which continues] since the nadir before the invasion of Iraq is now very long in the tooth. Everyone knows that stock markets move up in bull phases and then down in bear phases, and we are already overdue for a change of direction. House prices are beginning to slow and pullback and that is signaling an end to the use of home equity as a kind of cash machine for consumer spending. Energy prices, higher interest rates and falling house prices are inevitably going to weaken the US consumer, and consumer spending is what mainly drives the US economy these days.
This is not going to be good news for stocks.

Inverted yield curve

Perhaps just because last October did not produce a crash as some expected, Wall Street decided that there was not going to be one.
But is it not more likely that the evil day of reckoning was just postponed?
Right at the end of 2005 the US Treasury yield curve inverted, with long rates now below short term interest rates. That usually, though not always, signals a recession ahead, and that is always bad news for equities. Financial shares have already begun to weaken, as the difference between the short and long term yield is the profit margin of the sector, and it has just vanished.

Remember: according the the previous article, the inversion of the yeild curve preceeded the last four recessions. Investors would certainly be more charry of the latest economic news than our wrong-wing neo-econs seem to be:

Now what the inverted yield curve signals is that bond holders do not believe that the Federal Reserve will be able to hold interest rates at present levels for very long. Something is going to give way and force the Fed to undo its rate tightening.

The response of the Federal Reserve would doubtless be to flood the market with cheap money - and it has already conveniently ended the publication of M3 money supply figures from March - but US consumers might finally take fright and stop spending if they are worried about the economy, and that would be a self-fulfilling prophesy.

Considering how good-paying jobs are in the same sort of decline as bond yields, that consumer reality moment isn't far off!

The intelligent investor would surely look hard at equity holdings right now in all major stock markets for when the US catches a cold, those who depend on trade with the US may come down with pneumonia.

In addition, once the nations which hold US debt instruments hear the sneezing, would they not begin to impatiently clamor for payment? After all, they are no different than the typical investor - just magnitudes of order larger. Their response will likely match this observation:

Once investors perceive that the good news for profits is coming to an end, they may all decide to sell stocks.

And Federal Treasury Bond debt instruments.

This is the classic formula for a stock market crash, or major correction.

This may well be the moment Bu$hCo has been working for - the economic collapse of the United States.

It took just such a collapse before German citizens would support the fascists in their bid to take power - an effort that almost literally began with the Armistice fifteen years prior to Hitler being asked to take over the governance of Germany by an ailing and almost senile President von Paulus.

In the name of national security, the German citizens willingly gave up most of their rights - especially that of voting - in trade for a sense of security. The State provided much in the way of daily necessities to those who worked for the defense of the Fatherland, and the idea that anyone would get rich instead of performing a 'necessary duty' disappeared from the minds of most Germans. Those of us who remember our history know what happened next.

Think about how much easier George would be having it right now if he could follow in Adolph's hob-nailed bootprints!

If such a major economic collapse were to come to America, it won't resemble the Great Depression of Hitler's time in any way. It will be more like the Balkans of Bill Clinton's time, with neighborhood groups warring on each other over the smallest of reasons. People will then rightly fear for their health and well-being, and will quickly call for a return to law and order - a condition which would require the invocation of martial law and the exercise of summary 'justice'.

At that point, the Republic will have fallen, and the Empire will have burst forth from its ashes.

The Bu$hCo Forever War will have begun, for the rest of the world will then have no reason to asssume that there remains any restraint or civility in the government of what had once been the Great American Experiment. There will be no reason left not to prepare for war with the PNAC Petroleum Empire, for it seeks to dominate all the world through the capture of the world's energy resources. They have clearly stated their aims.

We Americans may not remember our history, but it is quite clear from recent international controversies that Europe and Asia remember theirs. They will not submit easily to such a totalitarian pretender. They have been quietly preparing for this moment since the ($)election of King George by the $COTU$ Regency in 2000. They know from the poor showing by Hizz Hindni$$ during the Spy Plane Crisis that he's more bluster than buff, a quality he has since broadcast in Iraq for three years. They know that he is vulnerable, and too much of the resources necessary to fight wars are not produced domestically.

Thus, the United States in now in the unenviable supply position that the Japanese Empire found itself during WWII - and many nations and other organizations are already willing and able to strangle the vulnerable import lifeline George would need to conduct his war. He would at some point welcome an excuse to use nukes against these enemies - and make that usage his deadly legacy to history.

Still glad you voted for this Bozo, Red Staters?

Kiss your kids while you can.

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