Stocks, Oil And Gold All Down At Once?

August 12, 2008

Elaine Meinel Supkis

As all our trade partners hike up the dollar, gold and oil fall. But so do stocks? Usually, when oil drops, stocks shoot upwards. But the world is different today. We are not in a bull market of anything except maybe bullets? Anyway, time to talk about world trade and why this mess isn't being cleaned up, it is spreading. And even investors are figuring this out. The bear attacks continue even though Bernanke walks along the dusky, dark road with his bucket of fishes and his gun drawn, scared of when the next bear will pop out.

The Trade Deficit and Job Losses

By PETER MORICI

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

...Together, petroleum, China and automotive products account for nearly the entire U.S. trade deficit, and no solution to the overall trade imbalance is possible without addressing these segments.

Petroleum products accounted for $36.4 billion of the monthly trade gap, on a seasonally adjusted basis. Since December 2001, net petroleum imports have increased $30.8 billion, as the average price of a barrel of imported oil has risen from $15.46 to $117.13, and monthly imports oil and refined products have increased from 353 million to 383 million barrels.
*snip*
China accounted for $21.4 billion of the June trade deficit, up from $21.0 billion in May and $5.5 billion in December 2001. The bilateral deficit is huge, because China undervalues the yuan, and this makes Chinese exports artificially inexpensive and U.S. products too expensive in China. U.S. imports from China exceed exports to China by a ratio of 4.3 to 1.

China revalued the yuan from 8.28 to 8.11 in July 2005 and since permitted the yuan to rise less than 5 percent every twelve months. Modernization and productivity advances raise the implicit value of the yuan much more than 5 percent every 12 months, and the yuan remains undervalued against the dollar by at least 40 percent.

China’s huge trade surplus creates an excess demand for yuan on global currency markets; however, to limit appreciation of the yuan against the dollar and euro, the Peoples Bank of China sells yuan and buys dollars, euro and other currencies on foreign exchange markets.
*snip*
Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost 3.8 million jobs since 2000. Following the pattern of past business cycles, the manufacturing sector should have regained more than 2 million of those jobs, especially given the very strong productivity growth accomplished in technology-intensive durable goods industries.

When China had a trade surplus with the US of around $6 billion, Germany and Japan had one well over $20 billion. The US didn't whine about the yuan back in 1986. The trade representatives had to confront our dearest and closest allies, Germany and Japan, and demand they fix this, pronto! Well, the 'fix' was for the mark and the yen to rise in value against the dollar. Unlike the Bretton Woods II Accords where both raised the value of their currencies very fast and the US got a small relief, the second time around, both said yes to the valuation change and then made it very hard for us to sell things in their countries.

What did they do? Well, Japan quickly crashed their economy thoroughly. And Germany united with a very poor East Germany. To pay for cleaning up the communist mess, Germany had to spend lots and lots of money, internally. Then, once that was done, they got rid of the mark and created the euro. So they still have a huge trade surplus with the US until just the last 2 years when the oil nations forced up the euro vis a vis the dollar because they buy lots of European stuff.

Japan simply killed its domestic market thoroughly and we can't sell so much as a pin to them. So of course, the trade representative in his editorial, whines about China. China's surplus didn't take off until something very fishy happened: Japan lowered the value of the yen to the basement, dropped interest rates to zero or a hair above zero and then set out to lend money to anyone who knocked on the door. Suddenly, China's economic ties to the US shot to the roof! So did Japan's, of course.

Even when the idiot who used to be in charge of negotiating trade mentions CARS in his editorial, he is very, very careful to NOT say 'German and especially Japanese cars'. Indeed, to my usual amusement, this hot, petty, stupid editorial manages to talk about our trade deficit with everyone BUT Germany and Japan! And we wonder why all our trade rivals run circles around our negotiators? Good grief. This man is stupid or worse, venal. He knows that Japan enjoys a terrific trade and currency advantage with us. Hell, recently, Japan has managed to drop the value of the yen tremendously against the dollar even while running vast trade surpluses. Toyota is now the world's #1 auto maker and US companies are going bust.

But he doesn't talk about this or the flood of funny money pouring into our nation, buying up all our infrastructures, establishing foreign-owned factories that displace native factories, buying up our financial systems, our real estate, everything including things that are nailed down, all are on the auction block. And he can't see the connection between the Japanese carry trade and our trade woes.

How Clinton and Bush slowed economic growth

By Raymond Richman, Howard Richman, and Jesse Richman

United States economic growth has slowed in recent years because of a surprising fall in business investment. Normally, when businesses make increased profits, they increase their investment. However, even though U.S. businesses have been making increased profits in their competition with foreign businesses since the dollar began falling in 2002, they have been reducing investment.

Partly, businesses have been doing so because the Clinton and Bush administrations permitted the foreign government currency manipulations that have made many past investments unprofitable, and they don't expect the next administration to do any different. But there is another reason: Presidents Clinton and Bush adopted incredibly destructive capital gains tax cuts.

Clinton and Bush were among the victims of the mistaken economics idea that cutting or eliminating capital gains taxes leads to prosperity. In fact, the exact opposite is true. Cutting other taxes increases economic growth, but cutting capital gains tax rates gives taxpayers an increased incentive to consume their assets, thus making the country poorer .

The capital gains tax cuts enacted in 1997 and 2003 under Clinton and Bush have reduced American savings and investment so much that American economic growth has slowed from about 3% per year to about 1% per year.

These three gentlemen were kind enough to share their latest book with me. They really are serious about changing the tax code! And I agree with many of their proposals. Yes, we need to pay taxes. No, it shouldn't be for goodies like rebuilding the rest of the planet as fast as our wars can destroy it. It can't be used for international rule. It shouldn't be used to protect Germany and Japan from Russia and China. The EU is now bigger and richer than the US so they should grow up and take care of their own messes.

I also agree with them that when taxes on goodies were cut, everyone went off and spent money on toys. Especially, rich people. They did NOT invest in 'industry'----they played petty stock value games using Japanese funds from the carry trade. The profits were then parked offshore. This, in turn, flooded the planet with American dollars and we saw the first wave of hyperinflation this year. Waves two, three and four are not far behind. History shows that they will come ashore here every three to four years, each one bigger and nastier than the last.

But why invest in America? If we have no protections, no VAT tax to crimp the 'consumer economy' and we refuse to have any tariffs or barriers, we end up broke. Anyone who fights with other weapons will win. We have to recognize that if our allies and trade partners do X, Y, and Z, we have to do the same or stop them from doing these things! Instead, we merrily go along as we please and then wail like an infant when we discover the mean, nasty Chinese are wiping our butts.

The Richman family:

In 2007, our 500 largest corporations were actually paying out more than they took in. They earned $587 billion in profits while paying out $589 billion for buybacks and another $246 billion for dividends . The result was a drop in investment by United States corporations, relative to peers in Germany, Japan and elsewhere. As a result of lack of investment, American economic growth slowed to a snail's pace.
*snip*
There is an effective tax reform alternative that would jumpstart the stagnating American economy. True consumption taxes (e.g. the FairTax, the Value-Added Tax, and the USA Tax) give capital gains an efficient treatment. They tax consumption, not the part of income that is saved. As a result they encourage people to add to their savings and thus build our country's future income. Consumption taxes encourage a society to accumulate capital whereas capital gains tax cuts encourage a society to consume it.

The treatment that consumption taxes give to capital gains is especially sensible. Any capital that is consumed is taxed. Any capital that is reinvested goes untaxed. Thus capital gains are taxed at the same rate as other income, but only if consumed. Gone would be the incentive for corporations to buy back their shares of stock. Gone would be the incentive for homeowners to consume the value of their homes.

Consumption tax systems are the ideal for maximizing savings and capital accumulation. In the 2008 presidential primaries, Governor Huckabee advocated completely replacing the entire income, payroll, inheritance, and capital gains tax system with a simple 23% sales tax, the FairTax. The result would be a tremendous increase in American savings and investment.

The 23% sales tax will be extremely unpopular. Hell, we see people shrieking about a .24¢ tax on $5 gasoline and they want it removed even though it is the only thing keeping our roads functional! We love consuming and our trade partners know this. I am against this sort of tax when we can simply put up tariffs that raise the cost or cuts the profits of imports and then this evens the playing field, funds the government and so forth. How simple is this?

A new blog, 'The London Banker'

“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”
- Mr John Mills, Article read before the Manchester Statistical Society, December 11, 1867, on Credit Cycles and the Origin of Commercial Panics as quoted in Financial crises and periods of industrial and commercial depression, Burton, T. E. (1931, first published 1902). New York and London: D. Appleton & Co

The difficulty is that the policies which financed highly leveraged unproductive works are extremely popular to the extent of representing the culture of at least two generations. While a deflationary recession/depression will make such policies even more costly and destructive than they have been in getting us to the critical point of failure, the same policies are such basic political drivers that without a culture change political and economic change become almost impossible.

It should be obvious that borrowing short through commercial paper to lend long on mortgages and credit cards to bad credits with inadequate collateral is not a sound business model. And yet somehow the alchemy of securitisation with a sprinkling of AAA pixie dust was widely accepted as turning financial lead into gold. It should be obvious that a house, once built, is not a productive asset as it produces no revenue but instead absorbs a high proportion of its owner’s income on mortgage interest, property taxes, maintenance and utilities. It should be obvious that credit card debt, once consumption goods are purchased, produces no productive income stream for repayment of the debt but instead becomes an obstacle to future consumption as debt service eats up a rising proportion of stagnant wages. It should be obvious that a car that weighs twice as much and uses twice as much fuel is not as productive as a car that is small and fuel efficient, and costing twice as much will harm more productive savings and investment with the excess debt borrowed for its purchase. It should be obvious that the financial sector, as intermediaries between savers and productive ventures requiring capital, should never rise to the point where it alone represents over thirty percent of economic activity. Nonetheless, markets all over the world carelessly followed the path of under-production, dis-savings and over-consumption as the path to prosperity rather than a betrayal of capital into hopelessly unproductive works.

In the middle of this giant banking morass are some smart bankers. And I bet, no one listens to them. This guy is pretty good and I welcome him to the online debate about how to save ourselves from the messes we make for ourselves. London, of course, has lived a charmed life since the collapse of the Empire. But like the US, it is a place deep, deep in debt, a place that has virtually no industrial base left and is rapidly going down the road to ruin. It is a slow process that has sped up this last decade as Britain tagged after the goofy US militarists on one deadly imperial adventure after another.

FDIC warns four US banks over liquidity

The cease-and-desist orders issued in June said the four banks needed to raise more capital, expand their loss allowances and better oversee and diversify their loan portfolios. A fifth bank was cited for violating consumer protection laws.

Losses on mortages and other loans have helped bring down eight US banks this year, including one small Florida institution on Friday. Last month, Indymac, a California lender with $32bn in assets, became one of the largest banks to go under in US history. It filed for Chapter 7 bankruptcy protection on Friday.

The banks receiving cease-and-desist orders in June were MetroPacific Bank in Irvine, California; Bank Haven in Haven, Kansas; Clarkston State Bank in Clarkston, Michigan; and Hastings State Bank in Hastings, Nebraska.

The banking collapse continues. If this were the old days, it would be nearly done by now. But thanks to our government, it continues and will grind onwards for a long, long time during which our own government will go bankrupt, too. This is thanks to dumping the dollar/gold peg. No one in our free-spending red ink government or banking system wants to talk about this. So they make fun of anyone talking about it. But online, it is being talked about more and more.

Global Housing Bubbles Deflating

Japan's Tokyu Land Pledges US$4.5 Bln In Urban Renewal Projects. “Nikkei: With foreign funds winding down their property investments in Japan, Toky Land Corp. will go on the offensive by spending as much as ¥500 billion (US$4.55B) through fiscal 2010 on urban renewal projects… The Tokyo developer is setting its sights mainly on Tokyo's Shibuya, Chiyoda, Chuo and Minato wards as well as other big cities including Osaka and Nagoya, with plans to spend an unprecedented 450-500 billion yen on 12 projects over a three-year period.” (Trading Markets, Aug. 12)

Japanese Property Feels The Pinch. “Japan has had little to do with the US subprime mortgage debacle and has avoided a UK-style housing bubble, but the country's real estate sector is suffering a painful credit crunch. Teikoku Data Bank, a private research group: In the past few months, an increasing number of real estate companies have gone under. In July, 43 developers filed for bankruptcy, a year-on-year increase of 79%. The bankruptcies were largely triggered by a failure to access funds… Even in the relatively healthy commercial real estate market, sales are not closing.” (Financial Times, Aug. 12)

Japan's carry trade is back. But Japanese can't access this except via proxy. So they all trade their yen they earn for euros. Or sometimes, dollars. So the entire Japanese profit/savings system is being conducted in other currencies. Japan is the world's #2 or #3 economic power house. And is doing this with virtually no domestic economy except on the slenderest of terminology. Even small island nations that didn't know what money was 50 years ago try hard as they can to have their own domestic currency! But not Japan!

This reminds me of Russia as it was falling. Dollars were the currency all wanted, not rubles.

FDIC Fund Strained by Bank Failures May Lift Premiums

(Bloomberg) -- The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a government insurance fund and raise premiums for all banks, from Franklin National of Minneapolis to Bank of America Corp.

The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the Federal Deposit Insurance Corp.'s fund $4 billion to $8 billion, in addition to an estimated $1.16 billion for seven closures through Aug. 1. Premiums for insuring deposits will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision is due by the fourth quarter.

Back to our banking collapse: see? The Federal government is the one insuring everyone and it is deep, deep, deep in the red and going deeper by the hour. How this is the fundamental basis for the entire world simultaneously raising the value of the dollar, is baffling. Except the entire world has a trade surplus with us! DUH! Gads.

The Fed's next move is down

The US Federal Reserve this week surprised no one by leaving its key rates unchanged and gave no indication that the committee was preparing to raise or lower rates any time in the foreseeable future. As always, the market reactions were much more interesting and unpredictable. In this case, bond markets barely changed, the US stock market jumped, and euro futures strengthened slightly against the US dollar.

And the Fed will drop it to 1%? Wow. They will claim, 'Wages are dropping, people are losing their homes and why should we reward savers? They suck! Death to all people who save their pennies in banks!'

Then, savers can take their money and use it to buy another currency and take advantage of realistic interest rates. Aw, that will be prevented by a global plan to prevent ANYONE from saving money. This takes us back to gold. As soon as commodity inflation is gone, then buying gold will be the only way to preserve funds.

Seriously. This is totally contrary to what all the gold bug sites say. But history says, hey! If banks want us to get nothing when we park our money there, why not park it under the bed, in the form of gold? So we shall see if my theory is correct.

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Comments

[DrKrbyLuv]

Great article! One can only hope that your recommendations regarding tax reform will take root. Since you mentioned gold...

Like many casual investors, I have been eying the prospect of buying gold to help protect my savings with the understanding that nothing is ever 100% safe. I began researching the market via the Internet and eventually began subscribing to several newsletters. The more I read, the more frustrated I became as the analysis and charts constantly led to the conclusion that the bull market was over-due. But, the price continued down.

I discovered that investment gold sources tend to focus on their expertise – investment gold. The problem is that they tend to miss two huge market variables; jewelry demand and supply through the scrap market.

In order to save other casual investors some time in making sense of the market I suggest that interested parties read the two following free reputable market analysis:

1) World Gold Council – Great place for many gold statistics and analysis
http://www.research.gold.org/supply_demand/
Be sure to download “Gold Demand Trends” (requires registration) or I can send you a .pdf

2) ERSTE Bank Special Gold Report
http://www.kitco.com/reports/erste/2008_07_14.pdf

Some highlights:

- Global gold jewelry demand dropped around 21% in the first quarter 08 compared with 07 YTD. This is an important key; over the last 5 years, gold jewelry represented over 60% of the total gold demand.

- Global industrial, electrical and dental demand for gold fell around 8%. These sectors traditionally represent close to 20% of the gold demand.

- Global scrap supply was up around 30% through in the 1st quarter 08. In past years, scrap gold accounted for around 23% of total supply.

- ETF demand doubled in the 1st quarter 08, compared to YTD 07. ETF demand came at the expense of other gold investments. Total investment demand relatively flat.

The interesting thing is that when the market finishes the price correction, gold demand will again surge and the scrap demand will diminish. Of course, anyone following gold is aware of the collapse of the juniors (exploration companies that explore for new deposits, or they may be a small mining companies with only one or two mines in operation) is reducing mining capacity. After the current correction, mining capacity will not be able to sustain more than a modest gain in demand.

There is a lot more to the story…hope you enjoy the links.

[Ralph]

I agree. Gold is the alternative to everything. The FED probably doesnt care either. Better off killing excess liquidity with Gold, than driving up food/energy. Gold hurts no one, creates mining jobs, and enforces discipline.

[Ralph]

Most gold jewelry purchased in the world comes from India. And they do not view gold as jewelry, but as sound money that is accumulated over time. Hence the reason they only buy pure 22k or 24k jewelry, never 14k %58.6 pure. Cool thing about gold is you can wear your wealth.

[Elaine Meinel Supkis]

Bad thing is, gold jewelry is easy to steal. Trust me on that one, big time. As a female who has had this happen.

[nsaxon]

WASHINGTON (AP) -- The government says the federal budget deficit soared in July, pushed higher by economic stimulus payments and $15 billion in outlays to protect depositors at failed banks.

Two points of interest.
1. The amount spent to save depositors has now been reveled to be 15 billion dollars.

2. The 15 billion came from the Federal Government not the FDIC Trust Fund.
My guess is there is no FDIC Trust Fund. It's been looted like every trust fund the Government could get their hands on.
Can you say Social Security?

Futhermore, it is my understanding that FDIC has marked Indy Max's mortage book at 50 cents on the dollar. Anyone else think it will prove to be 5 cents on the dollar?

[Anthony]

This is a preview of things to come. after further weakening of economy, and 2004 style macro economy running full blast.

So 2010 budget deficit is going to hit $1T/year? yikes.

http://blogs.usatoday.com/ondeadline/2008/08/budget-deficit.html

Budget deficit hits more than $102 billion -- in a month

The Treasury Department reported today that July's federal budget deficit was $102.8 billion -- or nearly triple the $36.4 billion deficit recorded in July 2007. That's even larger than the $97 billion deficit Wall Street economists had been predicting, according to the Associated Press.

[blues]

What will gold buy you? Six weeks. After that, the crowbar falls in. You get about six weeks to trade with gold.

After that, it's about rice and beans. And you better hide them beans! 'Cause the police/ military will want all the beans too.

The good thing about rice and beans is; they are immune to metal detectors! This is sound advice! Don't ignore the reality here. They will want anything you've got!

[blues]

I once saw the end of the rainbow. This thing ran right into the earth, right into a patch of grass. The grass glowed with the beauty of the rainbow. Somewhere in the back of my head, there was the old tale about finding the pot of gold. But the moment was much too sacred. It became a part of my life. Way too precious for mere profit. Rainbows do fall to the earth. And so will I. And you. Do not forsake that which is sacred. What you are is what the sacred is about. Your being is the temple.

[Elaine Meinel Supkis]

That rainbow was from last week when we got clobbered by over 5" of rain. It has been very rainy.

About the FDIC: I believe it is broke. But they lie about nearly everything so it is hard to see if this is true. But I am betting it is true, Nsaxon. Thanks for the information.

I have a lot of data and charts and graphs lined up for tomorrow. Interesting news. As I read it, I think, 'Why can't we arrest everyone who negotiated our free trade garbage?'

[DrKrbyLuv]

John Williams "Shadow Statistics" shows an inflation rate of over 12% and we know the current flood of liquidity will be gasoline on the fire, burning our buying power and consuming what's left of our economy.

A temporary smoke screen for sure. The sad reality is that the prosperity and living standards of 300,000 million Americans is being partially stolen but mostly destroyed by a government and fed gone mad with greed.

[calvino]

You missed the good news! Novolipetsk is buying John Maneely Steel from the Carlyle Group. They make steel tubes - pipes, artillery barrels and such, Anyhow, it is good to see our former rival now buying up our heavy industry, the world is such a different place, really emerging and emergent even. Even better, the Carlyle group is about to profit three billion US dollars on the transaction, having acquired Maneely two years ago from the family. That's what I call good business! Go Carlyle! Of course, America will profit even more. Merril Lynch is advising on the deal, as is JPMorgan, Goldman and GMP securities. Even such bitter rivals are willing to be social when it comes to a good cause. And everyone is asking how the investment banks will make money? Hah, see now?
Oh yes, Mitsubishi Bank just bought Union Bank of California, with 275 branches. Well the rest of the 35 percent they did not already own. Blue skies!

Sic semper tyrannis

[OC]

Shades of Argentina and Asian Dollar Crisis - the foreign banks came in and bought everything while IMF force cuts to all sorts of social spending driving up the crime rate and deaths.

Soon the rich will retreat to enclaves or leave for greener pastures leaving the rest to fend for themselves the best they can.

[DM]

By Anuchit Nguyen Aug. 13 (Bloomberg) -- General Motors Corp., the world's largest automaker, said it will invest $445 million for a new diesel-engine factory in Thailand and to upgrade vehicle assembly facilities as it seeks to boost growth in Asia.

[GK]

I agree with Calvino and OC that the big dollars to be made are now will selling off the carcass of the US economy. Treasonous.

'Sic semper tyrannis' is a most excellent phrase. Let's see if anyone can find a connection between the de-industrialization of the US and this scientific research the same Sick Tempered Tyrants, who love eugenics and depopulation, have most certainly sponsored?

Looks like the peasants are despoiling the fox hunting grounds...we must do something about this Eliza...

http://www.nbc11.com/news/17171725/detail.html

Devastating declines of amphibian species around the world are a sign of a biodiversity disaster larger than just the deaths of frogs and salamanders, University of California, Berkeley scientists said Tuesday.

Researchers said substantial die-offs of amphibians and other plant and animal species add up to a new mass extinction facing the planet, the scientists said in an online article this week in the journal Proceedings of the National Academy of Sciences.

"There's no question that we are in a mass extinction spasm right now," said David Wake, professor of integrative biology at UC Berkeley. "Amphibians have been around for about 250 million years. They made it through when the dinosaurs didn't. The fact that they're cutting out now should be a lesson for us."

[Tell]

"Inflation, manufacturing contraction and property bubble haunts Chinese government"...

http://tinyurl.com/5lrzm9

[Tell]

You may well like this link Elaine, another fearless blogger like yourself...

http://tinyurl.com/6a5re8

[calvino]

GK, I think I stand corrected by you. I have witnessed the awesome power of the PPT.

[Tell]

"Kuwait Readying for War in Gulf?"...

http://tinyurl.com/5gnypx

[Elaine Meinel Supkis]

Thanks for all the information! It is hard, keeping up!

YES, WE ARE SEEING TREASON HERE. And of course, to fight off the hag, Inflation, She Who Flies Faster Than Thought, our industrialists and our paper pushing industries are all going offshore as fast as humanly possible. The US people have to figure out, the dire enemies at the gates are not the Russians, certainly not Iran Kitty, nor the Chinese or Japanese or Indians: they are our own rulers, our own politicians, our own media which, incidentally, is increasingly owned by foreigners anyway.

We are trapped in this matrix which is set up to loot this country and drive us into IMF debt.

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