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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (23513)	2/14/2005 9:33:12 AM
From: Crimson Ghost	Respond to of 116555

Beware the bear From Warsaw Business Journal by Zbigniew Piekarski Have you heard of Dr Kurt Richebächer? He is 86 years of age, lives in Cannes and is an economist of the Austrian school. "In the end, the Davos crowd drew its greatest comfort from the passage of time-that an unbalanced world survived yet another year without a disruptive outcome in financial markets." Stephen Roach, chief economist for Morgan Stanley Have you heard of Dr Kurt Richebächer? He is 86 years of age, lives in Cannes and is an economist of the Austrian school. Former Fed chairman Paul Volcker once said: "Sometimes I think that the job of central bankers is to prove Kurt Richebächer wrong." Back in 1996-1997, Dr Richebächer warned his readers that the Asian Tigers "were teetering on the edge of a cliff" and these countries were about to face "tremendous currency turmoil." In July 1997 the currencies began to fall like dominoes. The Doctor knows In 1999, at the height of the Internet boom, Dr Richebächer took a close look at companies' balance sheets. His conclusion was clear as a bell: a "great bear market is inevitable." Just two months later, the major indexes peaked and didn't stop falling until 2003. In June 2002 he alerted his readers that, "while the consensus expects a strong dollar again next year, we see it falling over time to new all-time lows against the major currencies." The next year the dollar fell 21 percent against the euro. Suspicious mind Back in December 1996, Dr Richebächer became suspicious of Alan Greenspan's ability to control the economy. That was when Greenspan asked the American Enterprise Institute for Public Policy Research: "How do we know when irrational exuberance has unduly escalated asset values?" In other words, Greenspan was saying he wouldn't know if stocks were overvalued until it was too late. "Rubbish," said Dr Richebächer. "The bubble was as apparent to everybody as the emperor without clothes. The only thing needed to see and say the obvious was integrity and honesty among policymakers and economists." Then he warned his readers that the Fed had already caused "severe dislocations in America's liquid resources-forcing a shift from safety to speculation." He's known for speaking the truth regardless of the consequences and his comment on the current situation is also very succinct: "The numbers haven't been like this since the Great Depression. The US economy is much weaker and much more vulnerable than various official statistics make it seem." Price of Easy Street In the past, easy credit and low rates of interest resulted in consumer-price inflation. The price of goods and services went up and a rise in wages soon followed. But this pattern began to change drastically in the course of the 1980s. For the first time, exceptionally sharp increases in stock and property prices occurred in various countries, while price increases for goods and services remained moderate. In the late 1990s, the US stock-market bubble went global. From the turn of the century the property-price bubble has gone global due to loose monetary policy and ultra-low interest rates. Bursting the bubble As Dr Richebächer points out, the pivotal hallmark of a 'bubble' is that the ballooning asset prices are widely used as collateral for consumer borrowing and a spending binge. In the US, mortgage borrowing by households during the first half of the 1990s increased by an annual average of $168 billion. This accelerated in the decade's second half to $296.9 billion. But after 2000, it virtually exploded to an average of $615 billion per annum. It is undisputed that the greater part of the escalating mortgage borrowing in the US and other Anglo-Saxon countries has been for purposes other than house purchases. This has radically changed the economy's pattern of growth. Yet, a recently published survey article by the St Louis Federal Reserve concluded that: "We find little indication that booms were caused by excessive growth of money and credit. The view that monetary authorities can cause asset market speculation by failing to control the use of credit has been largely discarded." The complacency of the central banking fraternity and their academic lap dogs is a wonder to behold. Wages waylaid Recently, Reuters reported that nominal wages in the US rose 2.5 percent last year whereas inflation rose 3.3 percent. This resulted in a loss of purchasing power of 0.8 percent. At the low-end of the income scale the damage was severe. People earning less than $21,000 (z?.65,000) saw their income drop by 1.7 percent-and this is not taking inflation into account. With household debt at 115 percent of earnings, how are these people going to pay back their loans? When the increases in US house prices stop, more than 10 million house owners will become insolvent. A week ago the number-one mortgage lender in the US, Countrywide Financial, posted a 39 percent decline in its fourth-quarter profit. In 1987, the median price for property in New York peaked at $375,000 (z?.1.2 million) before plunging 45 percent to a low of $205,000 (z?.640,000) in 1995. Prices did not climb back up to their 1980s' levels again until 2000. Which uniform? In our canary, the British Isles, consumer debt has broken the L1 trillion mark, more than the whole external debt of Africa and South America combined and the number of people unable to pay off their debts last year reached 46,651-the highest level since records began. Personal bankruptcies increased by 67 percent in Northern Ireland and 52 percent in London with an average of 126 people declaring bankruptcy every day compared to 97 per day in 2003. With unemployment in Germany and Poland reaching levels that existed just before the arrival of Hitler, it would appear that in order to survive, working-class boys throughout the advanced socialist-capitalist economies will soon have to choose between the uniforms of McDonald's or Wal-Mart or the Protestant Crusaders Army. Cycles repeat.