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

To: CalculatedRisk who wrote (24121)	2/22/2005 4:54:44 PM
From: Chispas	Respond to of 116555

Instant Economic Depression February 23, 2005 by Magnus Ekervik Prosperous times as well as depressions are natural phenomenon that has been around since man started to trade goods. It is a natural part of economic evolution and the sequence of 5 steps forward and 3 steps back. Economic booms are the effect of an increase in the money supply and economic bust are the effect of a decrease in the money supply. An economic cycle starts when prices are depressed. A boom is created from an expansion of the money supply. The boom ends when society is saturated with debt and either starts paying down the debt or defaulting on the debt. Either way results in a decrease of the money supply and the beginning of the bust. The cycle ends when weak debtors have been cleansed from the system and prices once again are depressed. The cycle length is between 50-60 years with an average length of 54 years. Earlier economic cycles usually topped out and began their busts 10-20 years before the economic cycle were about to bottom. Natural consequences of excessive debt started to take their toll on the economy with bankruptcies and other debt defaults. This started the inevitable bust. The last economic cycle the one we are in right now have been different from earlier cycles. What separates it from earlier cycles is that this cycle was not allowed to have its natural bust. I believe that the only industrial country that had a natural bust was Japan. Japan started its bust 1990 and has since then erased about 75% of its stock market value and has been in almost constant deflation despite extreme fiscal and monetary stimulus. Because of the interconnected global economy it is my belief that the entire industrial world "should"; have entered their natural busts about the same time as Japan did. What actions did United States and Europe take to escape the beginning of the natural bust? The answer is that they put the pedal to floor and started increasing the money supply and re-inflated their economies and postponed the bust. Nature has tried several times since 1990 to send different shocks against the world economy to start the bust. 1990 The start of Japans bust and deflation. 1994 Mexican financial crisis. 1997 Asia and Brazil crises. 1998 Debt default in Russia and LTCM failure. 2000 IT and Telecom crisis. 2002 Corporate scandals such as Enron and WorldCom. 2003 The SARS epidemic. Despite all these shocks the world economy as a whole has continued to prosper. How? The US Federal Reserve Bank has met every shock with an increase in the money supply to bail out the affected country or institution to avoid a bust of the world economy. The result is that the excess debt of the boom has never been corrected. On the contrary the money supply has kept increasing and total debt has mounted as a result. Has the US Federal Reserve Bank found The Holy Grail of economics and a way to make economic busts and depressions obsolete? Has mankind found a way to conquer natural economic cycles? Yes, this is fantastic! By the way I must also inform you that the Earth is actually flat, gravity has been lifted and Santa Claus really exists!!! No! There is no economic Holy Grail and the economic cycle still exists and bust will follow boom! The only thing the economic policymakers have been able to do this time is to postpone every negative impact to the bitter end. The system is now rotten to the core. Instead of slowly descending into the economic abyss policymakers has assured the world economy a freefall into the abyss with instant economic death as result. What will start the freefall into the economic abyss? Some horrible exogenous event will rock the economic system so badly that it will set off the economic avalanche that has been sitting on the cliff for so long. The destruction will be instant and total. You will go to bed at night in a prosperous and wonderful world and wake up the next day in outright economic depression and a new horrible world! The point I am trying to make is that if you have not prepared before it hits there will be no escape. You will not be able to liquidate your financial assets at fair prices because liquidity will dry up in a matter of hours. Prices will come crashing down. We will have an Instant Economic Depression! What kind of exogenous shock will it be? It can be anything. An assassination of some influential person, a pandemic (avian flu?), a failure of some important company (Fannie Mae or Freddie Mac?), a natural disaster or a major terrorist attack. The important thing is that it rocks the economic system enough to trigger the economic avalanche. Unfortunately, I believe the most likely shock would be a terrorist attack on US soil with weapons of mass destruction. Don’t believe that? Well both CIA chief Porter Goss and defense minister Donald Rumsfeld recently said it is only a matter of time! Conclusion: The bust of the economic cycle has been postponed to the bitter end. The economic system is now rotten to the core. The trigger that sets off the economic avalanche will be some exogenous event, most likely a terror attack on US soil with the use of WMD. Will the world economy escape Instant Economic Depression in 2005? Not very likely! Magnus Ekervik safehaven.com

To: CalculatedRisk who wrote (24121)	2/22/2005 5:12:10 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Snow going on the road to promote Social Security plan Tuesday, February 22, 2005 9:37:58 PM afxpress.com WASHINGTON (AFX) -- Treasury Secretary John Snow will visit Florida this week to promote President Bush's plan to shore up the Social Security system. Snow will speak on Thursday and Friday about Bush's plans to allow workers to divert some of their wages into private accounts, which has drawn opposition from Democratic lawmakers. Snow will emphasize that Americans currently 55 and older will see no change in their Social Security benefits, Treasury spokesman Rob Nichols said Tuesday. The Treasury secretary will speak to local chambers of commerce in Tampa and Jacksonville, Florida. Under the plan outlined by White House officials earlier this month, the plan would be phased in between 2009 and 2011 for workers currently 55 and younger. Eligible workers would be able to divert up to 4 percent of wages, or nearly two-thirds of their share of Social Security payroll taxes, up to a maximum of $1,000, into private accounts. The cap would move higher each year Democrats charge that Bush's approach will erode the safety net provided by Social Security while providing a potential bonanza to investment firms. This story was supplied by MarketWatch.

To: CalculatedRisk who wrote (24121)	2/22/2005 11:57:44 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Bank of Korea denies plan to reduce dollar role in reserves - Wednesday, February 23, 2005 1:57:09 AM afxpress.com (Updating with won/dollar rate and South Korea's forex reserve) SEOUL (AFX) - The Bank of Korea denied market speculation that the central bank plans to sell its dollar-denominated assets to invest in other international currencies. "The reported rumour of our selling the US unit is untrue," the bank said in a statement "We just plan to diversify the investment of foreign exchange reserves into non-state bonds, and this does not mean we will sell the dollar holdings to convert into other international currencies," it said It added that the bank will not change the currency composition of its foreign exchange reserves in line with short-term market factors. The Wall Street Journal, the International Herald Tribune and other international media carried reports linking the dollar's fall on foreign exchange markets to plans by the Bank of Korea to step up its purchases of securities denominated in other currencies The won strengthened against the dollar again today after hitting an eight-year high yesterday at the close of 1,006. At 10:18 am today, the won traded at 1,003. As of Feb 15, South Korea held foreign exchange reserves of 200.25 bln usd, making it the world's fourth largest after Japan, China and Taiwan. A considerable portion of the reserves has been invested in US treasuries.

To: CalculatedRisk who wrote (24121)	2/23/2005 12:28:22 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Detroit housing from slapdasher on the FOOL I just got a call from my brother in Howell, MI. In conversation, he mentioned about how much debt he has, now $15k on credit cards. He said he's increasing it, actually. I asked him why, and he said that part of it is improvements on the house to increase its value. Specifically, hardwood floors to the kitchen and dining room and hallway. The next project is tiling for the bathroom, which will cost more. He wants it all done by the end of April. He said that he has two loans. The main loan is fixed for 5 years at 4.75%, then it goes ARM. The other second loan is based on the prime rate, and that "second mortgage" is the equivalent of PMI. The second mortgage is for $30k charging 9% interest. (He said it was 7% when he locked it in last April, but rates have gone up.) At the end of April, he will get the house reappraised and get a fixed rate mortgage. He paid $216k for the house, and believes it should have appreciated by 15% to around $250k because "it's been a year and 15% is what houses are going up in this area." At $250k, that should give him about 20% equity. If the house hasn't appreciated quite enough - let's say it's $5k short - he can either throw in $5k cash or he can have a second mortgage for the difference. (His current second mortage is $30k, so even if it were down to $5k it wouldn't be a big deal.) If all goes as he plans, he will end up with just one mortage: a 30 year fixed paying just $100 more per month than his current two mortgages. Earlier today, I verified with a real estate agent that the condex house on his street (and looks identical, with identical specs) sold in January 2005 for $194,900. The agent also told me that there is a large amount of construction going on in Howell, increasing supply. My brother also mentioned how Michigan's employment picture is bleak and getting worse, with the autos doing horribly. I would think, in that kind of environment, you would want to have no credit card debt and a nice cash cushion. But I guess if your house goes up 15% every year "just because," there isn't a need for a cushion - or even a job. You can just pull out $40k every year from your house's appreciation in value. BTW, I also spoke with my mother who lives just outside Novi, MI. She got an appraisal from the county the other day, and was angry that her tax bill went up by over $1,180 despite the property value going down. The appraised value used by the county for tax purposes - supposedly 50% of the real fair market value - is now $71,540, down from $94,490 last year. So, if the county is right, the home price has dropped nearly 25% in one year.