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Newsletter - Galbraith, Recession and the View from Afar

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  • Newsletter - Galbraith, Recession and the View from Afar

    Galbraith, Recession and the View from Afar

    Trip to Toronto: Not the U.S. View

    View from the Toronto Hilton

    Travel to another country, even if only as far as to a neighboring one, is instructive in times of transition. I went to Toronto for a live TV interview last Friday and stayed the weekend. My wife, who joined me on the trip, asked questions along a line inadvertently set at our hotel bar with the query: "Do you have beer?" she asked the waiter. "No," he replied with only the hint of a smile. "This is a bar [pause] in Canada. Why would we have beer?" Over the next few days she asked the waiter at a sushi restaurant if they have any sushi, at a Korean barbecue if they have any barbecue, the salesman at the underground path mall store called "Just Batteries"... well, you get the idea. My line of questioning were confined to dull questions about the local and national economy, and U.S. foreign and economic policy, but I still had fun, too.

    EJ on ROB TV

    Few argue with the likelihood of an eventual dollar crisis event, including the co-anchors of the Report on Business show. Instead, everyone wants to know when it will happen. Timing the start of the technology stock bust in March 2000 and calling for a post technology stock bust recession in early 2001 was a piece of cake compared to timing the 2007 recession and dollar correction. The stock bubble collapse and post bubble recession were relatively localized and sudden events, while a housing bubble collapse driven recession and dollar collapse are slow, self reinforcing processes–and geopolitical. Throw in the LBO–I mean, private equity–and hedge fund bubbles, and we got a very unique stew. My advice is that, as with houses and the possibility of fire, better to insure against a dollar financial crisis before the event. Does a person really need to know when his or her house is likely to burn down before buying fire insurance? Seems to me the possibility, however remote, is sufficient motivation.

    As in the case of the NASDAQ bubble when I was writing about it betweem Q4 1998 and Q1 2000, I find today that most people I talk to are uninsured against a dollar crisis. This complacency is apparently a global phenomenon. In a letter to the editor in the Financial Times yesterday, John Grout, Policy and Technical Director of The Association of Corporate Treasurers, London, states: "Earlier this year you reported a Citibank survey's finding that large U.S. companies' exchange hedging was too short-term to have any real effect. Derivatives positions held by US non-financial firms were found by Wayne Guay and S.P. Kothari (Wharton and MIT) to be around one fifteenth of what was needed for a significant hedging–taken as covering a three standard deviation movement in relative currency values." In other words, firms in Europe are as relaxed about the dollar as individuals and households in the U.S. and likely elsewhere.

    Still, U.S. readers may be surprised by opinions commonly expressed by people I talked to in Canada, whether financial TV show anchors or Laura, a resident of the city who sat next to us at The Rex, a jazz club on the edge of the West Queen Street area. She is buying dollars–literally–and stuffing them in a safe box. She was old enough to remember Canadian dollars at 70 cents U.S. and believes that at around 90 cents today U.S. the Canadian dollar has peaked. Apparently she is not old enough to remember that the Canadian dollar traded at a premium to the U.S. dollar until the early 1970s when the Bretton Woods system of pegged exchange rates collapsed under the strains of the Vietnam War. As William B.Z Vukson points out in "Canadian Dollar Chaos," the event of the ungluing of the two North American dollars "...brought a sudden state of chaos to the historical relationship between the two ... As a series of Free Trade Agreements negotiated in the 1990s raised Canada’s dependence on one of the largest free markets in the world, the Canadian dollar appeared increasingly vulnerable to Canadian industrial and trade policy." Canada is typical of nations that export to the U.S. Economic dependency is great when all is well, but when your largest trading partner is acting the part of a reckless financial and fiscal–not to mention military–maniac, all of the Canadas collectively worry.

    Less surprising is that these opinions mirror the views commonly found in the mainstream Canadian financial press, which looks more like than CNBC. This partly explains why yours truly is on TV in Canada versus in iTulip, Inc's home country. Issues are harder to ignore when you are a relatively small economy as dependent on the U.S. economy as is Canada; while the U.S. hurdles full speed into a 2007 recession in an economic State of Denial that parallels its foreign policy and military adventures. Except for a belated admission of the obvious yesterday by our soon-to-be Defense Secretary that the U.S. is losing the Afghanistan and Iraq War, trading partners like Canada are already feeling the pinch and yowling.

    Take for example this commentary Monday by Jacqueline Thorpe of the National Post ,"So much for myth of a soft landing–Bad news all around hammers home reality"
    We now have a U.S. manufacturing sector officially contracting, a housing market falling apart brick by brick, and Canadian growth slowing to its weakest pace in three years.

    An ugly string of figures rudely intruded on our raucous stock-market party last week, driving home the cold, hard fact the North American economy is officially slowing.

    Phooey to the idea that U.S. housing may have already bottomed, that manufacturing could ride out one of the biggest auto restructurings in history, or that Canada could float through both.

    The way these data are going, the hoped-for soft landing will have fossilized by spring.

    North of the border, Canadian growth came in at just 1.7% for the third quarter, the weakest expansion in three years and following a mediocre 2% second quarter.
    My wife and I had dinner with friends who have built and run a Chinese imports company in Canada for over ten years. They are Chinese, from Taiwan. They report an unmistakable slow-down in business. The economy isn't making front page news yet, though. Mostly, the Canadian media are obsessed with the quagmire in Afghanistan. Canada dove right into Afghanistan with the U.S. after 9/11 but decided against joining the Iraq invasion in 2003–wisely, in retrospect. Although the mess in Afghanistan is serious, the U.S. the media are focused on Iraq; there are only so many military quagmire column inches and TV news seconds available.

    The Liberal party was turned on its head while we were there, with the professorial Stephane Dion taking the party leadership post in a surprise come-from-behind win in elections Friday. There, as in the U.S., politics are taking a turn, if not to the left, than at least away from recent so-called "conservative" politics–with its mantel of small deficits and limited, small government spending covering a reckless, fiscal profligacy below. Brink Lindsey, the director of research at the libertarian Cato Institute, was reported in yesterday's Washington Post, "Lindsey is not merely joining the large crowd of disenchanted conservatives who believe that the Republican Party has betrayed its principles–spraying money at farmers, building bridges to nowhere and presiding over the fastest ramp-up in federal spending since Lyndon Johnson. Rather, Lindsey is taking a step further, arguing that libertarians should ditch the Republican Party in favor of the Democrats." Maybe my small band of Libertarian Dems will soon be joined by a larger crowd. But should you assume that the current sorry state of affairs is new and that the dominance of Dems in Congress necessarily means more taxes and less war, I'm reminded of the wisdom of JK Galbraith, who's son Dr. James Galbraith was interviewed for last week.

    What's Old is New

    iTulip circa 1630
    The main theme of is tied to its name–derived, of course, from the Dutch tulip-mania of the 1600s, with the "i" a nod to the Internet version of financial mania around the late 1990s. When it comes to financial frauds, there is nothing new under the sun. Dr. Galbraith reminded me in the interview that his father believed you can't go back too far in time to find a meaningful parallel to frauds of modern times. JK said in "galbraithmoney" First Published 1975, the following about liberals, conservatives, war, inflation, and taxes:
    "No feature of American–to some extent of Anglo-Saxon–politics is so certain as the tendency of politicians to become first the captives, then the agents, of their opposition. In consequence, major initiatives are not taken by those who originally most favour them. Those so captured by an idea are too much in fear of their opponents. The action comes with the opposition accepts the need and wishes to disarm the original proponents. In the 1960s, liberal Democrats in the United States urged peace and international amity but continued the Cold War and plunged the country into Vietnam. They did so partly because they feared being called appeasers and crypto-Communists by the right. Richard Nixon, having impeccable credentials as a Cold Warrior, moved towards peace or accommodation with Moscow and Peking and withdrew, if very gradually, from Vietnam. Thus on foreign policy he outflanked his liberal opposition. When Professor Milton Friedman proposed a guaranteed income for the poor, it was considered (quite correctly) an act of creative imagination. When a Republican administration proposed it to Congress, it was a mark of conservative statemanship. When George McGovern, running for President, advanced a close variant on slightly more generous terms, it was condemned by conservatives as the dream of a fiscal maniac. As known and stalwart defenders of the dollar, the Republicans were able, in the early 1970s, to devalue it not once but twice. For anyone suspected of a more flexible attitude towards the integrity of the dollar, such action would have been exceedingly perilous."

    Politicians doing their enemies work (Page 133)
    If the principle of politicians becoming "first the captives, then the agents, of their opposition" holds, a democratic Congress may deliver, especially if joined by a Democrat in the White House in 2008, an unexpected increase in military commitments and spending, in a John McCain style "final push" campaign. The cause is less likely fear of being called appeasers than of being held responsible for losing the war, the political cost of which may be calculated to be worse than staying in. The Fed, for it's part, has been pushing Congress for years to take a more responsible position with respect to massive, unfunded social security and Medicare programs. In return for taking some political heat for raising taxes to address the problem, the Fed may deliver a somewhat more tolerant attitude toward inflation. It's a position that the Fed may not have much to say about if, as I have been predicting for years ala "Ka-Poom Theory," the Fed finds itself minding the dreaded Stagflation Godzilla, born of a rapidly declining dollar. A democratic White House is an increasingly likely outcome for an election that will arrive either during or slightly after a major recession that I'm expecting in 2007.

    Interview with Dr. james Galbraith

    Dr. James K. Galbraith is Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at the University of Texas. He teaches economics and a variety of other subjects at the university’s Lyndon B. Johnson School of Public Affairs. He holds degrees from Harvard (B.A. magna cum laude, 1974) and Yale (Ph.D. in economics, 1981), studied economics as a Marshall Scholar at King's College, Cambridge in 1974-1975, and then served in several positions on the staff of the U.S. Congress, including Executive Director of the Joint Economic Committee. He was a guest scholar at the Brookings Institution in 1985. He directed the LBJ School's Ph.D. Program in Public Policy from 1995 to 1997. He directs the University of Texas Inequality Project, an informal research group based at the LBJ School.

    In our one hour interview, Dr. Galbraith states that the housing bubble is collapsing slowly and will continue to do so for years. Falling energy prices are helping to blunt the impact. The duration and extent of economic impact are unpredictable, but past down cycles have lasted five to seven years. If the banking system gets hammered in the process, things could get ugly. Trade imbalances are extreme but not necessarily unstable. Inflation from a monetary policy standpoint is under control, although the dollar will not be the world’s sole reserve currency after we go through an inevitable international monetary system transition that’s likely to be initiated by a crisis, and a rough dollar transition has inflationary implications.

    The View from Europe

    Another key iTulip theme is that our economic problems are international. gets visitors from over 75 countries daily, and views from around the globe inform our positions daily. Occasionally our web hosting company's analytics tools pick up an especially interesting site, such dzam from The Former Yugoslav Republic of Macedonia. It includes a link to a 52 minute documentary on The End of Suburbia. If you think my ten to 15 year housing bubble correction scenario is tough, they offer a more drastic U.S. suburban housing price decline time period forecast: forever. Why does the U.S. housing market matter to blog readers in Macedonia? The extremes of debt, asset bubbles, and fiscal mis-management are creating worry world wide. To help bolster iTulip's broad historical and international view, and help U.S. readers see the U.S. through the eyes of not only father time but Europeans, Asians, Latin Americans, and Africans, to name a few key areas of the globe that contribute to our discussion of the unwinding of the U.S.-centric global economy and financial system, we have found and negotiated an arrangement with the European think-tank LEAP / Europe 2020.

    The Confidential letter, "GEAB N9 available December 2006 - Dollar / Real Estate / Stock Markets: US consumer's insolvency, a catalyst of the impact phase of the global systemic crisis" states:
    The American mid-term elections have now passed and, only a week later, as announced by LEAP/E2020 in GEAB N8 of last October 15, the “euphorisation” of US voters/consumers and world financial players seems to have already passed with them. The development process of the global systemic crisis has resumed its course, artificially stopped last July due to the upcoming mid-term elections, as shown by the recent changes in the Dollar's value and by the latest US economy indicators. In parallel, a series of topics which had curiously disappeared from the pages of financial media these last months is reappearing, such as the end of the “carry-trade” based on the Yen (1), increasing fears of the risk of implosion of the market for derivatives and “hedge funds” (2) and of course the uninterrupted fall of US real estate (3) with its procession of negative consequences on American growth (4) (all these developments generating from now on increasing reflection as to the health of the US banking sector, one depending more and more on unsound debt) (5). For the team of LEAP/E2020, all these trends, which mark the beginning of the impact phase of the global systemic crisis, have a common catalyst, and that is the insolvency of the US consumer in the framework of a generalized degradation of the quality of credit to all US financial and economic operators (6).
    iTulip makes this report and all others from LEAP/Europe 20/20 available to readers via a discount subscription. Enter referrer code 745HT7 after going here.

    Recession 2007

    Used Clothing: More popular next year?We visited an area off China Town that may become more popular when the weather warms and a recession is in full swing. The entire street is made up of used clothing stores. If my 2007 Recession prediction comes to pass, these might do a thriving business.

    The four part Recession 2007 series is now up to Part III. I plan to continue the series next week with Part IV.

    Crooks on Currencies Seminar

    The Sovereign Society is offering a seminar this Friday to help sort out the nature of recent declines in the U.S. dollar.
    Why the Breakdown in the U.S. Dollar is for Real and How to Protect Your Portfolio

    Your U.S. dollars are worth much less than they were last week. Join Sovereign Society Currency Director, Jack Crooks for an emergency teleconference/ interactive webinar on Friday, December 8th at 4:00pm EST to discuss this breakdown, and learn how to ride the dollar decline to profits:

    Teleconference Topics Include:

    Reasons for the Breakdown? Discover the economic fundamentals and technical analysis behind the breakdown.

    Forecast? Learn Jack's six-month targets for the major currencies.

    Three Ways to Play the Falling Dollar: Profit from Jack's top three currency choices to play now.
    A few of dozen bloggers and financial writers have been warning about the housing, private equity, hedge fund, junk bond, mortgage bond, and other bubbles for the past few years. Yet the collapse of these bubbles will lead to the usual round of editorials asking, "Who could have known?" And so it goes. Unlike the subways of Toronto (Music from the Toronto subway), few riding the asset bubbles express can face the music.

    The credo is that there are no new scams, only new suckers. Congratulations for not being one of them.

    Best Regards,

    Eric Janszen

    For macro-economic and geopolitical currency ETF advisory services see "Crooks on Currencies"
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    Last edited by FRED; 03-09-07, 01:01 PM.