Marc Faber is predicting a rebound in the markets, especially in mining stocks, Asian stocks and the strengthening of the US dollar.
PartI
Part II
Tuesday, January 27, 2009
Sunday, January 18, 2009
Credit Where Credit is Due
by Peter Schiff
This week, in a speech before the London School of Economics, Fed Chairman Ben Bernanke offered a perverse economic theory in his quest to gather support for never-ending Wall Street bailouts; “This disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt.” In other words, credit is the lifeblood of our economy, and the continued operation of credit providers is an issue of national security.
In truth, not all economies run on credit. But over the last decade, the United States became a bubble economy that needed unlimited credit to keep from collapsing. In a legitimate economy, it is not credit that fuels spending and investment, but simply income and savings. It’s too bad our Fed chairman does not understand the difference.
That American families now routinely rely on credit to make every-day purchases is a habit that needs to be broken and not encouraged. What we need in America is more restraint and less indulgence. For example, Americans in the current economy should not go into debt to buy new cars. Given the level of debt that weighs down the typical family, Americans should defer such purchases until they have paid down existing debt, or replenished their savings to the point where they can afford to pay cash. Until that time, Americans should continue driving their old cars. In the meantime, the untapped savings could be made available to local businesses that would use it to finance badly needed capital investments.
But such a drastic reversal in financial culture represents the kind of change that no one in the outgoing or incoming Administrations appears willing to consider. By providing perpetual support to lenders who have bankrupted themselves through bad loans, the government merely guarantees that bad economic behavior will continue.
Credit is indeed vital to an economy, but it does not constitute an economy within itself. The important thing to remember is that credit is scarce, and is limited by the stock of savings. Savings loaned to one individual is not available to be loaned to another until it is repaid. If it is never repaid, the savings are lost. Loans to consumers not only crowd out more productive loans that might have been made to business, but they have a far greater likelihood of ending in default. In addition, while business loans increase our capital stock and lead to greater productivity, loans made to consumers are merely spent, and do not create conditions that will make repayment easier. When businesses borrow to fund capital investments, the extra cash flows that result are used to repay the loans. When individuals borrow to spend, loans can only be repaid out of reduced future consumption.
One of the reasons we are in such dire straits is that consumers have already borrowed and spent too much. Many did so based on the false belief that ever-appreciating real estate would ultimately provide the means to repay their debts and finance their lifestyles. Now that reality has finally set in, why should the spending spree continue? The fact that a GDP comprised of 70 percent of consumption is currently contracting should not surprise anyone. In fact, such a contraction is long overdue and the government should not do anything to interfere.
In trying to perpetuate the illusion, the government wants to revive the spending spree that has led us to this disaster. But how can such actions possibly help? How will more debt improve the economy? Wouldn’t our circumstances be vastly improved if we paid off some of our debts and replenished our savings? Wouldn’t we be in better shape if instead of buying more stuff we concentrated on producing it?
The unpleasant reality is that years of bad monetary and fiscal policy have over encumbered our economy with debt and undermined our industrial capacity. The sooner we can begin to repair the damages, the sooner we can right the ship. If instead we merely administer more of the same, the ship will sink in a sea of inflation.
Mr. Schiff is president of Euro Pacific Capital and author of "The Little Book of Bull Moves in Bear Markets"
This week, in a speech before the London School of Economics, Fed Chairman Ben Bernanke offered a perverse economic theory in his quest to gather support for never-ending Wall Street bailouts; “This disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt.” In other words, credit is the lifeblood of our economy, and the continued operation of credit providers is an issue of national security.
In truth, not all economies run on credit. But over the last decade, the United States became a bubble economy that needed unlimited credit to keep from collapsing. In a legitimate economy, it is not credit that fuels spending and investment, but simply income and savings. It’s too bad our Fed chairman does not understand the difference.
That American families now routinely rely on credit to make every-day purchases is a habit that needs to be broken and not encouraged. What we need in America is more restraint and less indulgence. For example, Americans in the current economy should not go into debt to buy new cars. Given the level of debt that weighs down the typical family, Americans should defer such purchases until they have paid down existing debt, or replenished their savings to the point where they can afford to pay cash. Until that time, Americans should continue driving their old cars. In the meantime, the untapped savings could be made available to local businesses that would use it to finance badly needed capital investments.
But such a drastic reversal in financial culture represents the kind of change that no one in the outgoing or incoming Administrations appears willing to consider. By providing perpetual support to lenders who have bankrupted themselves through bad loans, the government merely guarantees that bad economic behavior will continue.
Credit is indeed vital to an economy, but it does not constitute an economy within itself. The important thing to remember is that credit is scarce, and is limited by the stock of savings. Savings loaned to one individual is not available to be loaned to another until it is repaid. If it is never repaid, the savings are lost. Loans to consumers not only crowd out more productive loans that might have been made to business, but they have a far greater likelihood of ending in default. In addition, while business loans increase our capital stock and lead to greater productivity, loans made to consumers are merely spent, and do not create conditions that will make repayment easier. When businesses borrow to fund capital investments, the extra cash flows that result are used to repay the loans. When individuals borrow to spend, loans can only be repaid out of reduced future consumption.
One of the reasons we are in such dire straits is that consumers have already borrowed and spent too much. Many did so based on the false belief that ever-appreciating real estate would ultimately provide the means to repay their debts and finance their lifestyles. Now that reality has finally set in, why should the spending spree continue? The fact that a GDP comprised of 70 percent of consumption is currently contracting should not surprise anyone. In fact, such a contraction is long overdue and the government should not do anything to interfere.
In trying to perpetuate the illusion, the government wants to revive the spending spree that has led us to this disaster. But how can such actions possibly help? How will more debt improve the economy? Wouldn’t our circumstances be vastly improved if we paid off some of our debts and replenished our savings? Wouldn’t we be in better shape if instead of buying more stuff we concentrated on producing it?
The unpleasant reality is that years of bad monetary and fiscal policy have over encumbered our economy with debt and undermined our industrial capacity. The sooner we can begin to repair the damages, the sooner we can right the ship. If instead we merely administer more of the same, the ship will sink in a sea of inflation.
Mr. Schiff is president of Euro Pacific Capital and author of "The Little Book of Bull Moves in Bear Markets"
Wednesday, January 14, 2009
Zimbabwation: Coining a New Term for the Coming Economic Disaster
by Tokyo Tom
Bob Murphy asks what we should call the upcoming severe recession and inflation:
"I think we are in store for a very severe recession (i.e. depression) and very big price increases. It will be stagflation but worse. So we need a catchy term. The two contenders I've come up with are infression and depflation, but the first is hard to pronounce and the latter is very easily confused with deflation. Any thoughts? Should I just punt and go with hyper-stagflation?"
My suggestion: Zimbabwation, which makes it clear that our troubles have misgovernance (with a heavy dose of ruling class theft) as its root cause.
Below is the chart for the adjusted monetary base (change from a year ago) (Click below to see a larger image)
Bob Murphy asks what we should call the upcoming severe recession and inflation:
"I think we are in store for a very severe recession (i.e. depression) and very big price increases. It will be stagflation but worse. So we need a catchy term. The two contenders I've come up with are infression and depflation, but the first is hard to pronounce and the latter is very easily confused with deflation. Any thoughts? Should I just punt and go with hyper-stagflation?"
My suggestion: Zimbabwation, which makes it clear that our troubles have misgovernance (with a heavy dose of ruling class theft) as its root cause.
Below is the chart for the adjusted monetary base (change from a year ago) (Click below to see a larger image)
Sunday, January 11, 2009
Energy Sector Developments
By Joseph Dancy. Financial Sense Editorial
Global energy demand correlates very closely with economic growth. As the global economy came to a sudden standstill in the last quarter energy use was impacted. Supplies quickly exceeded demand for both crude oil and natural gas.
Crude Oil Prices Remain in ‘Super Contango’ The crude oil futures markets are in a rare condition some have called ‘super contango’ - a condition where prices twelve or twenty-four months in the future are much higher than the current spot price for crude oil (charts courtesy of Financial Times).
The super contango is most likely being fueled by the credit crisis and the need of companies to produce as much product as they physically can to generate cash. The contango situation would normally create an incentive to delay production to a future date, and generally supports upward pressure on short term prices as such production is delayed.
What the super contango condition telegraphs, according to some analysts like Donald Coxe, is the fact that market participants realize that crude oil will not be in excess supply for long. As the global economy regains its footing demand will increase, and so will prices, all as reflected in the crude oil futures curve.
...Short term, over the next year, assuming no geopolitical unrest or internal disruptions in major exporting countries (including Russia, Iran, Iraq, Venezuela, Nigeria and Mexico) energy prices may remain below what we have seen the last few years.
Continue Reading
Global energy demand correlates very closely with economic growth. As the global economy came to a sudden standstill in the last quarter energy use was impacted. Supplies quickly exceeded demand for both crude oil and natural gas.
Crude Oil Prices Remain in ‘Super Contango’ The crude oil futures markets are in a rare condition some have called ‘super contango’ - a condition where prices twelve or twenty-four months in the future are much higher than the current spot price for crude oil (charts courtesy of Financial Times).The super contango is most likely being fueled by the credit crisis and the need of companies to produce as much product as they physically can to generate cash. The contango situation would normally create an incentive to delay production to a future date, and generally supports upward pressure on short term prices as such production is delayed.
What the super contango condition telegraphs, according to some analysts like Donald Coxe, is the fact that market participants realize that crude oil will not be in excess supply for long. As the global economy regains its footing demand will increase, and so will prices, all as reflected in the crude oil futures curve.
...Short term, over the next year, assuming no geopolitical unrest or internal disruptions in major exporting countries (including Russia, Iran, Iraq, Venezuela, Nigeria and Mexico) energy prices may remain below what we have seen the last few years.
Continue Reading
Friday, January 9, 2009
"Several Summary Tables Tell the Whole Nine Yards"
Click on the image above to see it larger.
Click here to see Matthew Simmon's complete presentation to the Houston Energy Institute on December 10, 2008 (2.7mb PDF file)
Peter Schiff Interview - Austrian Economics
...Tim: What do you think the Austrian school contributes the most to financial planning?
Peter: My investment advice is rooted in my understanding of economics. It is that understanding that allowed me to accurately forecast the trends of the last decade, and to have positioned my clients in advance to both protect their purchasing power and profit from what has already played out.
Tim: ... Do you think a trade deficit is always bad for a country?
Peter: No. Trade deficits are OK under certain circumstance. 1. An emerging nation imports capital goods necessary to enhance its productivity. 2. A developed nation, with a current account surplus, uses some of its investment income to finance the purchases of additional consumer goods from abroad.
The problem with our deficit is that we import consumer goods we can not afford to pay for with either exports or foreign earnings. As such we accumulate external liabilities that we will never be able to repay and our nation's future productive capacity continues to deteriorate. We are de-industrializing and are condemning ourselves and future generations to falling standards of living.
Tim: Can you elaborate more on the manner in which America is de-industrializing?
Peter: More Americans now work for government than in manufacturing. Most other Americans are employed in retailing, financial and other professional services, healthcare, and education. What we used to produce ourselves we now import. We "pay" for those imports with IOUs (dollars) yet we lack the industrial capacity to ever redeem them with genuine goods.
Continue reading
Peter: My investment advice is rooted in my understanding of economics. It is that understanding that allowed me to accurately forecast the trends of the last decade, and to have positioned my clients in advance to both protect their purchasing power and profit from what has already played out.
Tim: ... Do you think a trade deficit is always bad for a country?
Peter: No. Trade deficits are OK under certain circumstance. 1. An emerging nation imports capital goods necessary to enhance its productivity. 2. A developed nation, with a current account surplus, uses some of its investment income to finance the purchases of additional consumer goods from abroad.
The problem with our deficit is that we import consumer goods we can not afford to pay for with either exports or foreign earnings. As such we accumulate external liabilities that we will never be able to repay and our nation's future productive capacity continues to deteriorate. We are de-industrializing and are condemning ourselves and future generations to falling standards of living.
Tim: Can you elaborate more on the manner in which America is de-industrializing?
Peter: More Americans now work for government than in manufacturing. Most other Americans are employed in retailing, financial and other professional services, healthcare, and education. What we used to produce ourselves we now import. We "pay" for those imports with IOUs (dollars) yet we lack the industrial capacity to ever redeem them with genuine goods.
Continue reading
Thursday, January 8, 2009
Saturday, January 3, 2009
Peter Schiff Forecast for 2009
As you may have seen, Peter Schiff has an excellent track record in forecasting the economy. Peter Schiff uses Austrian Economics and believes in the Austrian Business Theory.
Peter Schiff correctly asserts that the recent rally in stocks is simply a rebound of last year's collapse in equities. He also mentions that it's great opportunity (probably once in a lifetime opportunity) to buy gold and foreign stocks since they are heavily oversold (Marc Faber mentioned on the post below that commodity prices are hovering at 2001 levels, meaning commodities will outperform paper assets)
Peter concludes with the point that even though the Dow may rise, it will only be paper gains and not gains in real terms.
Here's the chart of the adjusted monetary base: (click to see a larger image)
Peter Schiff correctly asserts that the recent rally in stocks is simply a rebound of last year's collapse in equities. He also mentions that it's great opportunity (probably once in a lifetime opportunity) to buy gold and foreign stocks since they are heavily oversold (Marc Faber mentioned on the post below that commodity prices are hovering at 2001 levels, meaning commodities will outperform paper assets)
Peter concludes with the point that even though the Dow may rise, it will only be paper gains and not gains in real terms.
Here's the chart of the adjusted monetary base: (click to see a larger image)
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