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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (6822)	2/3/2004 10:18:41 PM
From: Jim Willie CB	Respond to of 110194

Porter Stansberry from Daily Reckoning: Stocks are vulnerable to a new bear market because their valuations, on average, are not sustainable. But valuations alone will not trigger a bear market. The worst thing that can happen to stocks right now would be rising interest rates. Maybe Amgen trading with an earnings yield of 2.5% is acceptable to someone... but only because 10 year bonds are only yielding 5% or so. If bonds were yielding 10%, growth stocks would be trading at 12 times earnings. And the Dow would fall in half. This spring, I think, that's what will happen... I won't pretend to have a firm grasp on when interest rates will begin to move higher. But I believe it could begin as soon as this spring. I don't know why, but interest rates tend to rise in the spring. It will start in late March. And really get going in April. Let me explain why. Dr. Kurt Richebächer points out that the last time interest rates were this low in the United States was the late 1950s. Back then the dollar's value was still tied to gold. Money had a firm value. And people weren't afraid to save it. In all, U.S. (consumer, corporate and government) savings totaled 12% of GDP. So, when someone (individuals, corporations or the government) wanted to borrow money, there was plenty of money available. What about today? How much capital is available inside the United States economy? Well, in last year's third quarter, U.S. corporations borrowed $49 billion. They didn't save anything. The U.S. government - you know it didn't save a penny. According to its own accountants, it is currently $43 trillion in the hole. Looking only at the government's bills that were due in 2003, we should see a $300 billion deficit - the largest ever. The consumer is borrowing too - more than $700 billion in 2003. We're all borrowing! All of us. Nobody is saving. Back in 1959, on the other hand, total borrowing came to about $56.8 billion inside an economy that produced $507 billion in GDP (debts were 11% of GDP). Our borrowing could easily by financed by our saving (12% of GDP), with some left over to lend to others. Not anymore. In 2003 alone, our borrowing came to $1.3 trillion. And we did not furnish this cash from our own coffers - in fact we didn't save at all. Instead we borrowed from foreigners. And they're not very reliable. Foreigners are sensitive to the falling value of our currency. They fear we might not pay them back in dollars that are worth as much. For example, the dollars we pay them back might not buy the same amount of oil as it did when they lent it to us. In 1998, only seven dollars would buy a barrel of oil. Now it takes more than $30. Most of our borrowing comes from Asia. Asian people like gold. It wasn't long ago that $260 dollars would buy an ounce of gold. But now it takes more than $400. Someone in Asia lost 35% of the loan they made us. They won't keep making that mistake. Why is the dollar losing its value? Simple - the more dollars the government prints, the less value they have. M2 - a measure of dollars in circulation widely cited by economists - has a tight and long-term negative correlation to the dollar's purchasing power. M2 has been increasing by about 6.5% a year since 1995. Nine years of that rate of inflation implies a 60% devaluation of the dollar. This overhang of dollars, combined with our own profligate spending, will make foreigners very reluctant to hold our currency. Federal government spending is up 21% in only two years. Consumers have withdrawn more equity from their homes than ever before. We're not a good credit risk. There are two things that might trigger a rapid move higher in interest rates. First, the price of energy could, at any moment, spiral higher, triggering inflation and vastly higher interest rates. But even without a sudden commodity or currency event like this, sooner or later the Fed will have to come in and take the "punch bowl" away from the consumer, before he spends not only all of his kids' money, but their kids' money too... ------------ Porter Stansberry is the editor of Porter Stansberry's Investment Advisory. The former editor of several well-known financial letters, including Latin American Index, China Business and Investment, and The Fleet Street Letter, Mr. Stansberry is regularly quoted in leading financial journals, such as Barron's and World Money Analyst .For more information about his latest research