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Weekly Wrap and Forecast - November 27, 2006

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  • Weekly Wrap and Forecast - November 27, 2006

    Weekly Wrap and Forecast - November 27, 2006

    Market Forecast
    Week: Mostly Cloudy Month: Periods of Heavy Rain Three Months: Stormy

    Key Economic Reports

    November 28 – Durable Goods Orders: Declines of -5% to -10% from previous period expected
    November 28 – Existing Home Sales: Declines from same period last year expected
    November 29 – New Home Sales: Significant declines from same period last year expected
    December 1 – Construction Spending: Declines expected ranging from -0.5% to -0.7%

    Details at

    Key Events

    Thanksgiving week in the U.S. ended with the dollar dropping to push the euro above the $1.30 mark and gold spiking to $639. Friday the Wall Street Journal ran the news that likely drove the dollar down and gold up, uttering in front page coverage for the first time the phrase "civil war" to describe the events of the day in Iraq after car bombs killed more than 200 Shias and "blind acts of revenge" were "tearing apart the very political and social fabric of Iraq." Long lost in the fog of war are official remonstrances made during the invasion in 2003 that anyone who dares suggest the potential for an insurgency is unpatriotic. Are events in Iraq and changes in language used to characterize them related to the action in the dollar and gold?

    It is worth noting that some of the darkest days for the dollar occurred after the world decided that the U.S. was going to lose the war in Vietnam, and before the actual event. Then confidence in the U.S. waned for years after the loss, and the dollar with it. Opinions that a U.S. loss has occurred in Iraq in all but name are circulating in the press outside the U.S. where dollars are purchased.

    Also worth noting is that a war is a gift that keeps on giving; when a war is paid for with taxes out of current income, or with currency printed in which case inflation is more or less immediate, most of the expense is absorbed in the present. If, however, the war is financed by foreign borrowing, as the Afghanistan and Iraq War has been, the expense must be paid later, either in the form of taxes raised or currency printed, or both, to repay the loan. With respect to a relative versus an absolute monetary measure of "winning" versus "losing" the war, "winning" implies the U.S. will be paying off the loans in the future to finance a military campaign which, as an economic activity, produced if not a direct gain then at least avoidance of a more significant expense in the future–in the words of one high ranking general there, the prevention WWIII. "Losing" implies paying in the future for an economic activity since 2001, estimated to cost $437 billion to date*, that possibly produced a very large negative return–if not WWIII, then likely other serious negative political and economic consequence (see: "The Coming End of the US Foreign Investment Bubble: What if we lose?"). The relationship between the Iraq war, the dollar and gold bears careful scrutiny from here on out, and we will investigate how the U.S. has financed the Afghanistan and Iraq War in greater detail and the implications in subsequent commentary.

    Another area of the world to keep an eye on is the world's greatest U.S. treasury bond and dollar buyer, China. Japan stopped buying U.S. debt in April 2004 and China picked up from there. Friend of iTulip James Fallows issued his first report from that country Friday, Postcards From Tomorrow Square in December's Atlantic Monthly: "Our man in Shanghai samples budget beer, survives subway scrimmages, and starts living the contradictions of China’s breakneck modernization." Fans of Fallows will recall his clear voice coming out of Tokyo in the late 1980s, one of the few that contradicted the popular belief that Japan was about to overtake the U.S., noting the weaknesses in a system of banking and private enterprise that many in the U.S. envied, weaknesses that led to a collapse in 1990 and Japan's economic difficulties in the 1990s. Even in this first report, he's leery of the expectation that he is there to confirm the prejudice that China in 2006 is–like Japan in 1989–a bubble waiting to burst.

    My prejudice is the opposite, that the U.S. economy is the bubble waiting to burst, and that the competitive advantages of totalitarian capitalism will allow China to continue its torrid rate of development and overtake its democratic counterparts in the West and East without the excesses and set-backs normally associated with such rapid growth. The efforts of western central banks to control market economies via interest rates and the money supply and China's state control of that plus everything from pollution to currency values do not reflect major differences in philosophy and practice between China and western capitalist democracies but degree of purview. China accomplishes continuous rapid growth by avoiding the vagaries of the democratic political process, such as the pushing and shoving over where the highways and nuclear plants are going to go, that inevitably occurs in nations where the government is not the largest property owner; "not in my back yard!" is not a phrase one hears in China. China can continue on its path of destiny, with some ducking and weaving as the leadership navigates the problems of rapid growth, without the distraction and interruption of elections. We look forward to Fallows' reports. If anyone can get to the bottom of things in China, he can.

    If there are storm clouds on the horizon, U.S. holiday shoppers don't see them. Black Friday brought them out in herds. Ms. iTulip is as astonished as I to witness shoppers jumping at products for a promised discount like trained seals through hoops for promised mackerels... except without the mackerels. They show up at a store that's invariably out of what was advertise, even at 5AM. The mystery is how this crude ploy–to get shoppers into stores to purchase a product at a discount only to leave with one that earns a higher margin that the shopper didn't intend to buy–keeps working. In our interview with Dr. James Galbraith to be published this week, we explore the question of how long they'll keep doing it, and implications of cutting back.

    * "Through FY2006, Congress has appropriated a total of about $437 billion for military operations, base security, reconstruction, foreign aid, embassy costs, and veterans’ health care for the three operations initiated since the 9/11 attacks: Operation Enduring Freedom (OEF) covering Afghanistan and other Global War on Terror (GWOT) operations, Operation Noble Eagle (ONE) providing enhanced security at military bases, and Operation Iraqi Freedom (OIF), Iraq.

    "In the last week of September 2006, the House and Senate are slated to consider the conference versions of the FY2007 defense appropriations bill, H.R. 5631, and the national defense authorization bill (H.R. 6122/S. 2766), both of which include an
    additional $70 billion for war costs. This $70 billion bridge fund is to cover war costs in the first half of the fiscal year plus $23 billion for reset — to repair and replace war-worn equipment. The Administration is expected to submit a FY2007 supplemental for additional war costs some time next year."

    "The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11," CRS Report for Congress, Foreign Affairs, Defense, and Trade Division, September 22, 2006

    For a layman's explanation of financial bubble concepts, see our book americasbubbleeconomy
    For guidance on how to play the coming currency corrections, see "Crooks on Currencies"
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    Last edited by FRED; 11-27-06, 03:17 PM.

  • #2
    Re: Weekly Wrap and Forecast - November 27, 2006

    1. 1985 marked the plaza accord: a meeting at the plaza hotel in nyc of representatives of the major industrialized nations, at which they agreed that it was time for the dollar to weaken. and weaken it did.

    it remains to be seen whether they can duplicate that feat, and be as cooperative and as successful in managing the dollar going forward.

    2. the friday after thanksgiving is always a low volume day, and all the senior managers are on a 4 day holiday. i don't think we can be sure about this move in the dollar and gold til the coming week.

    3. re china: the chinese industrial plant is geared to producing goods that sell in the u.s. and european markets. it is not clear to me that these same goods are the ones which will sell within china itself, nor am i clear on their ability to figure out what will sell in their domestic market, retool, and connect with or construct appropriate distribution channels. it will happen eventually, of course, but how efficiently and at what cost? [perhaps some reader of this knows more on this subject and can chime in.]
    Last edited by jk; 11-26-06, 12:39 PM.


    • #3
      Re: Weekly Wrap and Forecast - November 27, 2006

      thin trading in stocks but not currencies and gold.

      read the fallows piece. he says few of the products we find here are available there... all for export and too expensive for local consumption.

      very interesting article. i did not know the chinese government is only spending 3% of gdp on education, and that mostly for elite schools. why not spend some of that $1t on education? seems like a no-brainer.
      Last edited by metalman; 11-26-06, 06:10 PM.


      • #4
        Re: Weekly Wrap and Forecast - November 27, 2006

        Originally posted by metalman
        very interesting article. i did not know the chinese government is only spending 3% of gdp on education, and that mostly for elite schools. why not spend some of that $1t on education? seems like a no-brainer.
        With 1.3B population to control, which would you choose more educated people to try to control or more ignorant people to likely be able to control?

        Who is it that controls America? Presumably the elitely educated control the less educated.
        Jim 69 y/o

        "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

        Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

        Good judgement comes from experience; experience comes from bad judgement. Unknown.


        • #5
          Re: Weekly Wrap and Forecast - November 27, 2006

          Originally posted by Jim Nickerson
          With 1.3B population to control, which would you choose more educated people to try to control or more ignorant people to likely be able to control?

          Who is it that controls America? Presumably the elitely educated control the less educated.
          good point. took a page out of the usa "how to develop a populate of stupid, compliant, consumer-sheep" book.


          • #6
            Re: Weekly Wrap and Forecast - November 27, 2006

            Who is it that controls America? Presumably the elitely educated control the less educated.
            From Who Rules America? - Power in America: Wealth, Income, and Power

            For research purposes, the wealth distribution can be seen as the main "value distribution" within the general power indicator I call "who benefits." What follows in the next three paragraphs is a little long-winded, I realize, but it needs to be said because some social scientists -- primarily pluralists -- argue that who wins and who loses in a variety of policy conflicts is the only valid power indicator (Dahl, 1957, 1958; Polsby, 1980). And philosophical discussions don't even mention wealth or other power indicators (Lukes, 2005). (If you have heard it all before, or can do without it, feel free to skip ahead to the last paragraph of this section)

            Here's the argument: if we assume that most people would like to have as great a share as possible of the things that are valued in the society, then we can infer that those who have the most goodies are the most powerful. Although some value distributions may be unintended outcomes that do not really reflect power, as pluralists are quick to tell us, the general distribution of valued experiences and objects within a society still can be viewed as the most publicly visible and stable outcome of the operation of power.

            In American society, for example, wealth and well-being are highly valued. People seek to own property, to have high incomes, to have interesting and safe jobs, to enjoy the finest in travel and leisure, and to live long and healthy lives. All of these "values" are unequally distributed, and all may be utilized as power indicators. However, the primary focus with this type of power indicator is on the wealth distribution sketched out in the previous section.

            The argument for using the wealth distribution as a power indicator is strengthened by studies showing that such distributions vary historically and from country to country, depending upon the relative strength of rival political parties and trade unions, with the United States having the most highly concentrated wealth distribution of any Western democracy. For example, in a study based on 18 Western democracies, strong trade unions and successful social democratic parties correlated with greater equality in the income distribution and a higher level of welfare spending (Stephens, 1979).

            And now we have arrived at the point I want to make. If the top 1% of households have 30-35% of the wealth, that's 30 to 35 times what we would expect by chance, and so we infer they must be powerful. And then we set out to see if the same set of households scores high on other power indicators (it does). Next we study how that power operates, which is what most articles on this site are about. Furthermore, if the top 20% have 84% of the wealth (and recall that 10% have 85% to 90% of the stocks, bonds, trust funds, and business equity), that means that the United States is a power pyramid. It's tough for the bottom 80% -- maybe even the bottom 90% -- to get organized and exercise much power.