Today's WrapUp by Jim Willie CB
*** ***
09.01.2005
THE US DOLLAR & HINDENBURG
On my mind lately has been the nature of the USDollar. It is not backed by any hard asset like gold, but rather by massive debt. It could thrive if backed by the commodity in greatest abundance in the United States, namely coal. Well, get serious. If the USA backed the USDollar by coal, Asians would own my Pennsylvania, along with Ohio, Kentucky, and West Virginia in a matter of a few quick months. Worker output from coal mines would be directed to Chinese power generating facilities. Talk about the United States being backed into a corner! We as a nation must choose what assets foreigners will take ownership of. So far they have been foolish enough to accept Treasury credit securities. Paper IOU’s are a pure con game.
The USDollar bears a strong resemblance to the old zeppelin flying fortress. It looks powerful and impressive to the eye, certain to cast a long wide shadow on the ground. Catch sight of it and a sure, “wow” is heard. However, its vulnerability is enormous as it floats without tether, without anchor, without any support. It acts like an experiment to mimic Ben Franklin’s own for attracting the bolt from the blue as a lightning rod, even as sudden downdrafts can potentially bring the craft down to earth much like wind shear does a jet aircraft.
TITANIC IN THE SKY
The USDollar bears many critical similarities to the old clumsy zeppelin. It is very difficult to turn the dirigible, just as economies are difficult to react to the havoc imposed by currency shifts and interest rate policy changes. Fiscal changes such as prohibitive taxes and stimulative spending are much like cross currents in winds aloft. The zeppelin is at constant risk from inclement weather, heavy winds, sudden downdrafts, lightning bolts, static electricity, and rolling thunder. Economic reaction to an overvalued currency has a direct impact, much like winds and the wind shear of downdrafts. The lightning might be from political arenas or sudden changes to tax & expenditure policy. The credit dependence from Asia to the US Economy is vast and acts like a powerful jetstream current. With interfered financial market mechanisms, a large “electrical potential” is building, positive in Asia, negative in the United States. The spark or discharge might come from politically driven protectionism, such as in trade tariffs.
It is untenable to argue in favor of US strength when dependence upon world savings is so great, when dependence upon world energy supply is so great, when Asia gathers strength from industrial investment & production, when the USA derives its sustenance from powerful bond speculation & housing gains, when the US Economy relies upon consumption at shopping mall shrines as its foundation. The USS Zeppelin is vulnerable from any of a dozen major risks. Its flight is a false symbol of strength. It is both a dinosaur and a floating bomb.
Helium once filled the expansive zeppelin, named for Count Zeppelin and developed further by Hugo Echener. As an inert gas, helium is stable. Once backed by gold, the USDollar was stable and the US Economy was strong, growing in a healthy, steady resolute fashion. All that changed in 1971, when the USDollar broke its earthly connection to the gold anchor. This is akin to the zeppelin abandoning helium in favor of hydrogen for supply of its expansive inner chambers. With no gold backing, the USDollar is subject to a vast array of risks. Each risk contributes to an increasingly hazardous and volatile condition for the zeppelin, whose hydrogen, although lighter in weight, is extremely combustible. Static charge release, spark ignition, and the friction from puncture can each lead to an explosion further fueled by the highly unstable hydrogen.
Governments and economies rely nowadays on funding from the printing press. Vast exports of money are evident in trade gaps. Asian Meltdown and Long Term Capital Management fiascos dot the historical landscape along with currency failures in smaller economies. We as people and managers do not learn from past mistakes. Instead, we repeat them on different vehicles against a backdrop of arrogance and false bravado. Bubbles are a regular feature in the financial news, almost fully accepted as normal. Inflation, extinct throughout the entirety of the 19-th century, is considered a normal and commonplace entity in today’s sickly landscape. Imagine cancer being a normal everyday malady in the household. Imagine sinkholes an everyday hazard in Florida. Imagine hurricanes an everyday scourge in the Gulf Coastline. Imagine earthquakes an everyday terror in California. Imagine volcanoes an everyday affliction in the Pacific Northwest. Imagine tsunamis an everyday horror in East Asia. No way.
THE EFFECTS OF THE ZEPPELIN
A zeppelin casts a large long shadow. Liken this to the currency wars, as foretold by Ludwig VonMises. As the USDollar came down in value since 2001, the victim of the long shadow was Europe. Well, so far. They might have relished the higher prestige from a currency pursued for value, following the euro’s uneasy infancy. They might have felt satisfaction from reduced interest rates as their EuroBonds were pursued by central banks in their portfolios. They might not have wanted to play the inflation game promoted by hapless US economists, whose skill in economic theory is woeful, inept, destructive, as well as politically and corporately compromised and motivated. Now the European economy has felt the pain of lost exports, as the currency war shows its most recent victim on the financial battlefield. In a sense the shadow of the USS Zeppelin inhibited European crop growth by denying it sunlight.
A zeppelin is difficult to dock, much like an airborne version of a ship at sea without gold ballast, sloshing in the deep water wave ebb & flow. Try to board or disembark a sailboat on a stormy day with 3-foot swells. Good luck. Such is a day in the life of the currency wars, and the rooting and docking of economies. Companies must make decisions, sign and execute on contracts, hire and invest in equipment, commit on land space leases. These are the procedures rendered difficult by the absent monetary anchor. We as a nation hardly ever contemplate the hardship inflicted upon us anymore by unstable monetary and financial systems. Currencies go up and down, and markets go up and down, bla bla bla.
One key market changed the world as its fluctuation disrupted the future path, namely crude oil. In 1998 the crude oil price descended to $10 per barrel. Inhibited by future prospects, investment in energy technology, the movement toward an educated energy labor force, R&D on alternative sources, and progress on large marginal energy projects all came to a virtual halt. It was akin to a huge negative wake wash from the zeppelin, whose low swinging waves rendered an entire industry as unappealing, unexciting, and unprofitable. We now pay the price for the neglect.
The zeppelin is weighed down by rising commodity and energy costs, inversely counter-balanced to the declining USDollar. On the international markets, all commodities are priced and settlements cleared in US$ denomination. Well, for now they are priced in US$ terms. This weighs down the airborne flying fortress, kept buoyant by dangerously volatile hydrogen gas. Long gone is the wonderful stable inert helium (gold). Heck, gold forbids the governmental practice of fraud through inflation. Add the drag from the rising cost of money (interest rates) which slows the propeller action on the lopsided airborne vessel. The swinging pendulum of exported recession (from overvalued currency) and imported asset bubbles (from easy credit supply) compounds risks toward stable flight for the airship fortress.
Foreign dependence is akin to overwhelming head wind current in the jetstream, sufficient to interfere massively with all navigation systems for the zeppelin. Look for the defining event to perhaps be a decline in the housing market, acting like a giant WIND SHEAR, the most severe of threats to flying objects in a powerful downdraft. If not downdrafts, then a burn of the outer skin might occur about the hapless fortress. The USDollar fashions a poor surface to the US Economy, akin to the dry burnable paper that is the US Treasury Bond. Widely held by Asians, USTBonds are put at risk by our trade friction, gaining momentum by the month. Dreaded sparks are likely to be generated all around our USS Zeppelin. Look for the defining event to perhaps be an unsustainable Fed rescue of USTBonds in the wake of Asian withdrawal, which has already begun, but which is absolutely positively not reported by the intrepid fully compromised US press & media.
As the unreliable zeppelin vessel suffers mounting challenges to negotiate unfriendly air currents, the risks grow for a crash and burn outcome scenario being realized. The unbacked USDollar, both the world banking reserve currency and the primary international transaction currency, acts like hydrogen, easily burned. Gather round the bonfire, kids, as we observe an event slowly building like a gathering storm.
THE HINDENBURG DISASTER
May 6, 1937 (Lakehurst, New Jersey): The “Hindenburg” has come all the way from Europe, a luxurious flying hotel, faster than any seafaring ship. The pride of the Third Reich prepares to land, and hundreds of onlookers have gathered to watch. Then, all of a sudden, a burst of flame is seen just forward of the upper fin. In a matter of seconds, the largest airship ever built goes down in a fiery blaze. In all 35 people died in the flames, and nobody knew why. Sabotage? A bolt of lightning? The mystery surrounding the disaster has never been resolved, until now. In many years of research, a NASA scientist at Cape Canaveral has found proof that neither the hydrogen in the hull nor a bomb was to blame, but rather the fabric of the Hindenburg’s outer skin and a new protective coating. Flight during the zeppelin’s voyage left the outer skin very dry. A single spark of static electricity was enough to make it burn like dry leaves. German engineers had designed a flying bomb just waiting to explode.
Careful investigation of the Hindenburg disaster verified the opinion of the engineers on the Hindenburg and proved that it was the flammable aluminum powder within paint varnish that coated the infamous airship, not the highly combustible hydrogen, which started the fateful fire. The Hindenburg repeated the famous experiment of Ben Franklin regarding collection of electric charge on an object in the sky. Ben Franklin flew a kite in a storm to learn about lightning. The captain of the Hindenburg provided the 800 foot long, 236 ton airship covered by aluminum powder varnish as a gigantic electric charge collector. As the Hindenburg was grounded with the drop of metal landing lines to moor the vessel, the experiment was complete. Electrical discharge in the Hindenburg’s skin started the fire. The Hindenburg would have burned and crashed if it had been filled with helium or simply held in the air by some other force. However, the hydrogen fed the flames, much like kerosene provides the giant assist to a camp bonfire.
What will deliver the spark to the USS Zeppelin? Will it become a weenie roast? Please pass the marshmallows. My guess is hedge fund disasters, banking distress from a flattened yield curve, energy price spikes, housing decline, likely triggered by the end to US Federal Reserve rate hikes. Take your pick, perhaps all in combination. The risk of sparks is everywhere around us. Imbalances create such conditions for sparks. And yes, watch for the lethal friction from trade war, protectionist measures, and tariffs!!!
NEWS TIDBITS
Some US oil refineries shut by Hurricane Katrina may be able to restart operations within one to two weeks, but others make take several months to resume making gasoline and other petroleum products, the Energy Information Administration claims. "Unlike the 2004 Hurricane Ivan, which affected oil production facilities and had a lasting impact on crude oil production in the Gulf of Mexico, it appears that Hurricane Katrina may have a more lasting impact on refinery production and the distribution system." Nine major oil refineries in Louisiana and Mississippi remained shut from the hurricane that account for about 11% of total US refining capacity. The Louisiana Offshore Oil Port (LOOP) is up to 50% capacity at 40 thousand barrels of oil per day in receiving oil from tankers 12 miles off the coast. The interior Colonial gasoline pipeline, which serves the NorthEast with 2.3 million barrels per day, is expected to be up to 50-60% capacity by this weekend. The interior Capline gasoline pipeline, which serves the Midwest, is currently running at about 25-30% capacity. In the natural gas national network, 80% of delivery pipelines are not functioning as normal from the Gulf port facilities. Their integrated nature, with several crossover points, permits it to overcome some disruptions. That natural gas network comprises 15% of the national delivery system. The USGovt has announced release of several million barrels of oil from the Strategic Petroleum Reserve, sure to alleviate the crude oil input price. The president and Fed Chairman Greenspan met today to discuss reaction to the national disaster which we are coping with.
Apache reports having 8 oil platforms lost or damaged in the Gulf of Mexico, part of the total of 20 impaired platforms floating like derelicts or wounded in the Gulf. A harrowing photo showed one such platform having crashed into a coastal bridge. It is estimated that 95% of the Gulf region oil processing capacity is shut in, and 82% of natural gas processing is shut in. An expert claims that it will take days before workers in for to assess the damage and order repairs. Also, it will take a month before equipment can enter for to begin those repairs. The Army Corps of Engineers are themselves dealing with underwater facilities. Less quantified at this point is the extent of spoiled foodstuffs, unable to reach the market, unable to reach shipment. Louisiana contributes $1.7 billion per year in sugar crop, fully 20% of the national output. It is all at risk. Almost all the coffee held in Louisiana storage is probably to be written off as spoiled.
Gazprom, the giant Russian energy supplier, is looking to make inroads into the US market. They produce 94% of Russian natural gas, and their supply meets 25% of European natural gas demand. The Russian giant is making greater commitments to LNG (liquefied natural gas) delivery systems, using their Murmansk facility in the Arctic circle. Discussions are underway to take advantage of LNG port facilities in Maryland for delivery.
The New Orleans regional economy accounts for approximately 1% to 2% of the national GDP. More difficult to estimate is the ripple effect on the US Economy from higher gasoline costs, absent supply at certain stations, interrupted energy supply generally, and altered consumer behavior. And then you have the back-up in grain delivery and other commodity deliveries through the largest port facility in the United States. A vast network of railways and pipelines connect to the Mississippi Delta. It is my personal opinion that New Orleans, now ordered to evacuate, will soon be declared an environmental toxic waste zone. If foreign terrorists were to target one particular zone in the USA for maximum damage, it would be New Orleans, not New York City, not Los Angeles. My eye has been on Texas & Louisiana refineries for several months as the extreme Achilles Heel for our nation. Even Andrew Jackson realized this fact during the Civil War in the 19-th century, when he ordered extra defense by confederate troops of the New Orleans port for its railroad facilities. The situation will worsen from human liquid and solid excrement, decomposing human dead bodies, rotten tainted food, overflowed sewage, spilled fuel from broken storage cells, and even emerging coffins from swamped cemeteries. Available drinking water and food supplies are desperately in need. The next health risk might come from both dehydration and mosquito infestation, or generally from the spread of disease by insects. New Orleans, below sea level as a city, had kept water out from Lake Pontchartrain by means of numerous levees, two of which have broken. Other levees, if not broken, will be circumvented by rushing waters. Summer heat will act to make the city a boiling cauldron of infestation. The bowl shape nature of the city will contain the toxic agents to render the city uninhabitable for months. Despite the president’s claim of rebuilding the city soon, my personal opinion is that insurance companies will hand out cash claims but will refuse to insure new structures. This will threaten the viability of the city’s future. We may be witnessing the death of a city, an American Sudan tragedy.
It should be noted that Entergy estimates that 837 thousand people have no electrical power in a region which covers the Mississippi coast. An analysis of homeowner insurance reveals that up to 50% of downtown properties are covered, but only 10-20% of neighboring communities (parishes) within New Orleans proper are covered. Most policies cover property damage from wind and stormy rain, but NOT from flood damage. Households are likely to suffer massive losses, far in excess of what claims will deliver in compensation. Total property damage from Hurricane Katrina is now estimated to be in the $20 billion range, much higher than Ivan in 2004, and perhaps higher than the devastating Hugo along the South Carolina coast in the early 1990 decade. Authorities disclosed that 360 thousand mortgages are at risk in the Gulf coastal region, with $48 billion in mortgage value involved.
Some trucker finance data is relevant. Fully 87% of American goods are shipped by truck. It costs about $63k per year to operate a truck, with 50% of the cost from labor and 25% from fuel. Fuel cost increases might add $20k annually to truckers, which must be passed along, or else run them out of business. A typical full tank of diesel fuel can send a truck 500 miles down the road. One newsworthy tidbit not mentioned lately is the upcoming dead stop in demand for SUV vehicles, those hogs, nay Urban Sherman tanks that parallel obese pedestrians, and often transport them. We do have Ford announcing August SUV sales down 33%, but curiously crossover sales up 50% (from large to small).
US manufacturing lost some momentum in August, with factory managers concerned about high energy prices. The Institute for Supply Management said its index of national factory activity eased to 53.6 in August from 56.6 in July. However, the index was still above 50, denoting expansion in the sector, which has been growing since early 2003. The prices paid component of the index was the highest since April, at 62.5 from 48.5 in July. Purchasing managers noted "great concern" over high energy prices, the ISM said. Couple this with the yesterday news from the Chicago Purchasing Manager Index, which fell from July 63.5 to August 49.2 to indicate a sharp slowdown. Whether the US Federal Reserve can respond with a halt to its mindless measured interest rate hikes, remains to be seen !!! The wise course might be to step back, to take a breather, and to reassess the economic damage. The sudden drop in 10-year Treasury Note yield to near 4.0% flat should hit Chairman up side of the head. The Fed Funds futures contract indicates a 70% chance of a 25 bpt hike in late September, and a 50% chance of a 25 bpt hike in November, but a 0% chance of any hike in December.
It is my personal professional opinion that Hurricane Katrina might be the rogue event to disrupt the delicate balance within the complicated network of financial derivatives, especially if coupled with an error by the US Federal Reserve. Their track record is truly horrendous despite the icon status they enjoy. The USFed has consistently reacted to coincident indicators, and not to forward indicators, a truly inept practice.
US consumer spending rose a hearty 1.0% for the second straight month in July, outstripping a weaker than expected 0.3% rise in income. The personal saving rate was thus sent into negative territory for only the second time on record. The saving rate, the percentage of disposable income socked away by consumers, was a negative 0.6%, the smallest rate since monthly records began in 1959, according to the Commerce Department. It was the first negative saving rate since October 2001 in the wake of the infamous September 11 attacks. The saving rate turns negative if consumers tap accumulated wealth in addition to current income to make purchases.
The number of out-of-work Americans seeking initial unemployment benefits rose unexpectedly by 3000 last week to the highest level in nearly two months. The Labor Department had to estimate jobless claims counts from Mississippi and Louisiana, since officials were unable to contact offices in the two hurricane stricken states. First time jobless claims climbed to 320,000 in the week ended August 27 from an upwardly revised 317,000 in the prior week.
The United States slapped extra curbs on Chinese imports on Thursday, hours after talks ended in failure on a formula to deal with China's surging textile shipments. The limits on Chinese made bras and synthetic filament fabric used to make high-end clothing underline the growing friction in Sino-American trade ties. Foiled agreements cast a shadow over the President Hu Jintao visit to the United States next week. US industry officials monitoring the negotiations said yesterday meetings had failed after the third day of talks between US and Chinese officials in Beijing aimed at crafting an agreement.
TODAY’S MARKET
Today the Dow Jones Industrials wrapped up at 10,460 (-22), S&P at 1222 (+1), Nasdaq at 2148 (-4), TENS yield 4.019% (-0.1 bpt). Currencies closed with Euro at 125.08 (+1.64), JYen at 91.21 (+0.67), Can$ at 84.55 (+0.24). Metals finished with spot gold at 442.0 (+7.2), spot silver at 696.0 (+13.1), copper at 172.70 (+3.20). Energy ended with crude oil at 69.45 (+0.51), natural gas at 11.87 (+0.40), unleaded at 242.50 (+16.87). Prices are at major futures contracts.
Jim Willie CB
Copyright © 2005 All rights reserved.
Jim Willie CB
Editor, Hat Trick Letter
Proprietor, GoldenJackass.com
financialsense.com |
