Investment

» Normxxx - Stock Trader's Almanac

From the Stock Trader's Almanac

by Yale Hirsh Note: This data is one month old.

Current Observations: Fed Funds Rate Policy

One glaring pattern is the extremely short time spans of the Neutral Bias Periods after Tightening Periods. All four are less than nine months long. The 1995 period is the only one that was not followed by a substantial decline. The three in 1974, 1981 and 2000 were followed by substantial declines that culminated in major midterm election year bear market bottoms in 1974, 1982 and 2002. Clearly the Fed tends to overshoot on the tightening side. Their mantra of inflation fighting contributes to this. Plus, they also seem to be fond of giving themselves some extra ammunition for the next downturn. Having a few quarter-point cuts in their quiver allows for immediate economic goosing when needed.

As we approach the end of this current Fed Tightening Period we are especially drawn to the similarity between the present Period and the 1977-1981 Tightening Period. Both are substantially longer than the other Tightening Periods and rate increases are also significantly greater. (More is expected from the current period.) The end of the Tightening Period on May 5, 1981 was near the April 27, 1981 bull market top. A bear market followed with a bottom in midterm year 1982 on August 12— then came the longest easing period of the study and the super bull of the 80s and 90s. We anticipate similar market action this time around and have already assumed a defensive stance for 2006 and anxiously await the next major buying opportunity later this year.

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The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

» SteveT - William Poole on Bloomberg

St. Louis FED bank President William Poole will be on Bloomberg TV at the market close. 4:00 PM Eastern.

Bill Gross of PIMCO will follow.

-- posted by SteveT

» Normxxx - This Time I'm Right!

The DJIA Report: This Time I'm Right!

By Enrico Orlandini | 11 April 2006

At least I think I am. As of late the stock market has been giving some very ominous signs, like storm clouds just off on a Michigan horizon. I'll have to admit that I've been looking for a top in this market for more than a year, and yet that's all I've done... look. In fact, I've even gone long on two occasions so as not to die of boredom in the interim. The latest was back in early February when I took my clients long looking for a top of 11,345. I blamed it on too much liquidity. Well every party has to come to an end, and this is no different. The Fed raised interest rates last week for the 15th straight time and made it understood that it wouldn't be the last. In a similar vain, the Bank of Japan announced an end to its easy money policy. Central Bankers around the world are turning off the liquidity spigot.¹ In short, the punch bowl has been taken away from the table; now, will the last one out please turn off the lights?

I would like to point out a few of the warning signs I see trampled in the dust of the "new Bull Market crowd" as they drool in anticipation of the next run-up in the Dow. I'll have to admit there are some very smart analysts in that crowd, some a lot smarter than me, but that doesn't mean they can't be wrong. Greed can turn the brightest mind into a useless tool. Let's take a quick look at a few things that are troubling me:

   The Dow is now selling at 21.5 times trailing earning while the yield is at +/- 2%. That is reminiscent of a Bull Market high, not a Bear Market low. No Bull Market has ever begun at these levels.

   Lowry's buying pressure has been decreasing for months while Lowry's selling pressure has been increasing for months. That smacks of distribution to me.

   In mid-January there were 458 new highs whereas now there are less than 150 new highs.

   While the DJIA is just 3% from its Bull Market (2000) high, the stocks that make up the Dow 30 are, on the average, 20% off their 2000 highs.

   The US is just awash in debt, all kinds of debt, and on every imaginable level. There has never been anything like it in all the history of mankind.

   There is substantial price inflation, if you don't believe me, just take a quick look at gold and the CRB; they just made new Bull Market highs.

   President Bush is not going to be satisfied with just two wars in Iraq and Afghanistan, he wants to attack Iran also.

[ Normxxx Here:   That way, he can have contiguous borders! ]

   The housing market, i.e., the economy, in the US is on the decline, and the decline seems to be gathering speed.

I could go on, but I think you get the picture. These are just some of the little nagging things that tug at the corners of your mind when you try to drift off to sleep at 3 am. Then there are other things, seeming less innocuous, but perhaps more important and I'd like to spend some time on each and every one.

At the top of my roll call is the Dow Jones Utilities Average. As you can see below in the Daily Chart of the Dow Jones Utility Index, it is not a pretty picture. After making an all-time high in January, the Index has turned down and has yet to look back. Normally, when a primary or big secondary move comes to an end, the utilities will turn down two or three months before the Dow. That happened in late 1999 and could be happening again at this very moment. Currently, not only has the Utility Index turned down, but it is trading below both the 50-day and 200-day moving averages. What's more, the 50-day moving average has turned down and looks like it is about to cross below the 200-day moving average. That is not a good signal.

<img src="http://www.321gold.com/editorials/orland...">

Next we have the housing market. Just about everybody and their brother knows that the housing boom has been the backbone of the "economic recovery" that began in 2002. The rising prices have allowed the average American to go to the financial trough time after time in search of the liquidity necessary to keep him afloat. He refinanced his house time and again, using variable interest rate loans (ARMS) in most cases, because Allen Greenspan said it was all right. Hell, he even said it was advisable. What more could you want? Meanwhile, Greenspan raised those rates fourteen times and his successor, Bernanke, just made it fifteen straight. To further complicate matters, the language in the papal-like Fed statement implied that more hikes were in the works.

<img src="http://www.321gold.com/editorials/orland...">

The credit cards, leased SUV's, and second and third homes are coming home to roost and will soon weigh heavily on the pocket books of Mr. and Mrs. Average America. Please focus attention on the Daily Chart of the Philadelphia Housing Index above. The Index topped just before the previously mentioned Utility Index, made a series of lower highs, rallied to an intermediate level, and appears to have rolled over. Pay close attention to the fact that the 50-day moving average has now crossed below the 200-day moving average. This is really quite a bearish scenario.

I personally believe the top is in for the housing market and reduced liquidity along with rising rates are the funeral dirges being heard in the background. Check out http://www.realtytrac.com and look at the U.S. Foreclosure Market Report for January 2006. The foreclosure rate is up 45% as compared to January 2005. Put that in your pipe and smoke it Mister Greenspan! Also, the inventories of both new and existing homes are making new highs as I type. Rising rates will only exacerbate this trend. Finally, in some markets as many as 20% of all homes financed were with no money down. Here's a little something I learned back in the interest rate purge of 1979, when my generation thought we had invented creative financing. If a person has nothing to lose, and times become difficult, how long do you think he will hesitate before he decides to give the key back? I'll give you a clue, you can measure it in hours rather than months. Just ask any Savings and Loan. Oops, I almost forgot, there aren't any left!

Before I tackle the really big issue of confirmation versus non-confirmation, I want to take a quick look at the Daily Chart of the Philadelphia Banking Index. The banks have been the primary beneficiaries of Mr. Greenspan's rather tainted policy, allowing the financial institutions to have access to very cheap money that they in turn loan out at higher rates. That cheap money isn't so cheap any more. The tipping point for the banks was probably at 4.0% and now that we've surpassed that point, and there is every indication that we will keep on going, we should see it in the above chart. We have a high on March 23rd, and we've now turned down. The first test will be the 50-day moving average. It is far too early to tell, but it bears watching.

<img src="http://www.321gold.com/editorials/orland...">

It's about now that you'll tell me that the Fed will begin to drop rates if the economy slows down too much. Wrong! That can't, and do you want to know why? It's all that debt floating around out there. We are becoming a bad risk. In a recent PIMCO posting, Bill Gross comments that FNMA debt is listed as a higher risk than Emerging Market debt. He then went on to say that that was a distortion. I disagree. This difference is an accurate reflection of the reality in the US. We are a country that requires damn near US $3 billion of 'other peoples money' in order to get through each and every day. As it stands, foreign Central Banks are only willing to anti up +/- 20% of that figure. Mr. Greenspan's dirty little secret is that almost all of the balance is coming from our own printing press. That's why the Fed decided not to publish the money supply figures anymore. If Central Banks don't want our debt, what makes you think anyone else will? Rising interest rates are just a reflection of our reality, and they are going higher than almost anyone expects.

Now let's get down to the nitty-gritty. I want to talk about the comparisons between the DJIA and the Transportation Index. Right about now my clients eyes are beginning to glaze over. Tough! Get over it, as my kids were fond of telling me. Below I have posted the Daily Charts for both the DJIA and the Dow Jones Transportation Average. As recently as yesterday, Thursday April 6th, the Transportation Average hit yet another all-time high closing at 4,680.00. Notice the emphasis on all-time. Neither the DJIA nor the S & P have been able to do so. In fact the S & P still has another 250 points to go and that's equivalent to 19%. The DJIA is much closer, needing only a 2% gain.

<img Align="Left" vspace="5" width="260" src="http://www.321gold.com/editorials/orland...">

<img Align="Right" vspace="5" width="300" src="http://www.321gold.com/editorials/orland...">

I'm sure you noticed that I did not include a chart of the S & P above, and there is a reason for that. Dow Theory considers the relationship between the Transports and the DJIA; there wasn't an S & P when Charles Dow roamed the earth. For the DJIA to confirm the new highs in the Transportation Index, we would have to top 11,750 and that would imply a new Bull Market in stocks is under way. A Bull Market that would begin at 23 times earning and sport a yield of less than 2%. That's never happened before, and I'm going to crawl way out on a limb here and say it won't happen now.

We have been in a Bear Market since 2000. The secondary reaction up, taking an unprecedented period of three years to run its course, is over, or very close to being over. It lived on liquidity and it will now choke on it, or rather its evil twin debt. If the truth be known, I really believe it came to an end with the top posted on March 21st. That was a 45-day calendar vibration. That's important because U.S. stocks and the indexes trade in 90-day blocks.

What's more, the Transports registered new intraday highs on three separate occasions this week and the Dow failed to even make so much as a secondary confirmation. Yes, I truly believe the top is in and things will become nastier sooner rather than later. Keep in mind that the second leg down in this Bear Market will destroy wealth in the U.S. like nothing you could ever imagine. Why? Simply because no one is prepared for it!

Ask for no mercy folks because none will be given.

In conclusion, Mr. Greenspan conspired with all the other major Central Banks to try and do something that has never been done before, i.e., change the primary trend of a major market from bearish to bullish. Trillions upon trillions of dollars, yen, euros, etc., were printed in an effort to bury the bear, and they failed. It was in the other countries interests to do this, so they went along with the scheme. After all, someone had to buy their goods. Now it's in their interest to stop, and that is precisely what they are doing. By raising rates, they are making their foreign currencies and bonds more appealing than the U.S. junk bonds. As a result, Bernanke will have to keep on raising rates and printing money to buy his own junk paper.

Countries like Japan, China, and India are awash in dollars, and will use those very dollars to buy infrastructure and commodities. Their end goal is to create sufficient internal demand to replace the fading demand from a U.S. consumer strung out on way too much debt. The savings rate in China exceeds 30% and, given the fact that there are almost two billion Chinese, it wouldn't take much spending to drive the economy. It is a race against time and I have the feeling that the clock is going to win. That helps to explain the relentless rise in commodities like copper, zinc oxide, and iron oxide as well as the surprising resurgence in oil. They are also using those useless dollars to buy gold and silver. China has long since recognized gold for what it really is, i.e., a true store of wealth.

Notes

¹The U.S. is the only exception: they are raising rates (tight monetary policy) while increasing the money supply (loose monetary policy). That combination can't work forever.

______________


The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

.

-- posted by Normxxx

» Normxxx - Complacency anyone?

Complacency anyone? (Wall of Worry vs. What, Me Worry?)

By The Big Picture, blog | 22 April 2006

We have discussed the general complacency of traders as evidenced by the market climbing higher despite a universe of potentially ugly issues.

In one camp, we have the Wall of Worry crowd (WOW!), that claims the market needs this negativity to create sellers and short interest, reluctant cash holders, all of whom eventually become buyers who drive the market higher. This group sees the market rallying despite Oil at $75 and Gold over $600 as proof of economic strength.

<img Align="right" hspace="10" vspace="5" src="">Standing inapposite to the W.o.W. crowd is the What, Me Worry? group (including your humble scribe). These folk have looked at the historical data, the cycles, view past as prologue to present. The commodtiy boom and inflation present specific dangers. We see longer term structural issues as a situation that can only end badly.

Those are the battle lines. Its not so much the Bulls versus the Bears; Rather, we see each group projecting onto the other the shortcomings they identify in each: The Bulls see the Bears as worrywarts missing all the fun; The Bears see the Bulls as Alfred E. Neuman, blithley ignoring the coming debacle.

Its not too hard to figure out where the Barron's Up and Down Wall Street Column comes out in the debate:

"DOLLAR LOSING ITS HEGEMONY? No worries, says the stock market. Neither about crude oil topping $75 a barrel Friday nor copper climbing past three bucks a pound, nor about President Bush's approval rating hitting 33% in a new Fox News poll, new highs and new lows, respectively. And higher-than-expected consumer-price increases or bigger-than-expected falls in housing starts? Fuhgeddaboutit...

"The reason for the bulls' devil-may-care attitude was the strongest hint yet that the Federal Reserve may be at the end of a tightening campaign that started back in June 2004, when it began to raise the federal-funds target from just 1% to 4¾% currently. 'One and done' has become the rallying cry, with the all-clear set to be sounded when the Federal Open Market Committee kicks the overnight rate up a quarter to 5% on May 10. Minutes of the March FOMC meeting, released Tuesday, suggested the panel was getting concerned about going too far in raising rates, which was good enough to tack a couple of hundred points on the Dow.

"As we noted earlier today, this is the 'Pause that Doesn't Refresh.' During the prior 9 interest-rate cycles, stocks have fallen an average of 7% between the time of the last Fed tightening and its first easing.

"Why would this hearten the Bulls? The two exceptions to the rule: 1989 and 1995:

"The bulls' euphoria no doubt is born of their memories of 1995, when it was off to the races when the Fed called a halt to its year-long series of rate hikes. But history suggests they may be getting ahead of themselves. According to a study from Birinyi Associates, since 1962, the Standard & Poor's 500 has suffered an average decline of 7% from the time of the Fed's last rate hike until its first rate cut. Only in two of these nine 'limbo periods' did the market rise.

"As we have repeatedly observed, these examples were aberrations, coming as they did in the middle of an 18 year secular bull market. I continue to see the most apt parallel as the secular Bear Market of 1966-82, with 2006-07 most similar to 1973-74 era.

"You may also recall our Pause/Resume scenario. It turns out to be the usual historic pattern:

"Moreover, the Fed may not be finished with its tightening cycle next month, but may only be entering a pause period before reaching the ultimate peak in rates. Indeed, that is the usual historic pattern, according to Livingston Douglas, president of Mountain View Advisors in Denver. That was true case in the late 1970s until the 1981 peak, during the 1987-89 up cycle, and during the 1990s until 2000. Notably, the pauses in the 'Eighties and 'Nineties were punctuated by financial crises— the October 1987 stock crash and the 1998 Long Term Capital Management collapse— after each of which the Greenspan Fed resumed tightening."

Barron's advises to "be careful what you wish for. An accelerating decline in real estate or some other financial accident certainly could bring about lower rates, though it's hard to see how that would be bullish for stocks."

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The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

» Normxxx - Testimony of Chairman BB

<img Align="Left" hspace="10" vspace="5" src="http://www.federalreserve.gov/gifjpg/sm_...">

Testimony of Chairman Ben S. Bernanke
Outlook for the U.S. economy
Before the Joint Economic Committee, U.S. Congress
April 27, 2006

Mr. Chairman and members of the Committee, I am pleased to appear before the Joint Economic Committee to offer my views on the outlook for the U.S. economy and on some of the major economic challenges that the nation faces.

Partly because of last year's devastating hurricanes, and partly because of some temporary or special factors, economic activity decelerated noticeably late last year. The growth of the real gross domestic product (GDP) slowed from an average annual rate of nearly 4 percent over the first three quarters of 2005 to less than 2 percent in the fourth quarter. Since then, however, with some rebound in activity under way in the Gulf Coast region and continuing expansion in most other parts of the country, the national economy appears to have grown briskly. Among the key economic indicators, growth in nonfarm payroll employment picked up in November and December, and job gains averaged about 200,000 per month between January and March. Consumer spending and business investment, as inferred from data on motor vehicle sales, retail sales, and shipments of capital goods, are also on track to post sizable first-quarter increases. In light of these signs of strength, most private-sector forecasters, such as those included in the latest Blue Chip survey, estimate that real GDP grew between 4 and 5 percent at an annual rate in the first quarter.

If we smooth through the recent quarter-to-quarter variations, we see that the pace of economic growth has been strong for the past three years, averaging nearly 4 percent at an annual rate since the middle of 2003. Much of this growth can be attributed to a substantial expansion in the productive capacity of the U.S. economy, which in turn is largely the result of impressive gains in productivity—

[ Normxxx Here:   Chiefly accomplished by outsourcing. ]

that is, in output per hour worked. However, a portion of the recent growth reflects the taking up of economic slack that had developed during the period of economic weakness earlier in the decade. Over the past year, for example, the unemployment rate has fallen nearly 1/2 percentage point, the number of people working part time for economic reasons has declined to its lowest level since August 2001, and the rate of capacity utilization in the industrial sector has moved up 1-1/2 percentage points. As the utilization rates of labor and capital approach their maximum sustainable levels, continued growth in output— if it is to be sustainable and non-inflationary— should be at a rate consistent with the growth in the productive capacity of the economy. Admittedly, determining the rates of capital and labor utilization consistent with stable long-term growth is fraught with difficulty, not least because they tend to vary with economic circumstances. Nevertheless, to allow the expansion to continue in a healthy fashion and to avoid the risk of higher inflation, policymakers must do their best to help to ensure that the aggregate demand for goods and services does not persistently exceed the economy's underlying productive capacity.

Based on the information in hand, it seems reasonable to expect that economic growth will moderate toward a more sustainable pace as the year progresses. In particular, one sector that is showing signs of softening is the residential housing market. Both new and existing home sales have dropped back, on net, from their peaks of last summer and early fall. And, while unusually mild weather gave a lift to new housing starts earlier this year, the reading for March points to a slowing in the pace of homebuilding as well.

[ Normxxx Here:   Construction of new homes dropped by 7.8 percent in March, marking the fourth decline in the past six months. The Commerce Department report provided further evidence that the nation's five-year housing boom is quieting down.

The decline pushed the construction of new homes down to a seasonally adjusted annual rate of 1.960 million units, the lowest rate in a year. Housing construction had surged by 16 percent in January, reflecting warm weather, but then fell by 7.8 percent in February.

The big decline in housing activity reflected weakness in single-family construction which dropped 12 percent to a seasonally adjusted annual rate of 1.591 million units. Construction of apartments and other multi-family housing rose by 15.7 percent to an annual rate of 369,000 units.

Construction was down in all parts of the country, led by a 15.5 percent drop in the West and an 8.2 percent decline in the Midwest. Construction activity fell 4.8 percent in the South and was down 0.5 percent in the Northeast.

Permits for future construction fell by 5.5 percent in March to an annual rate of 2.059 million units following a decline of 1.7 percent in February. ]

House prices, which have increased rapidly during the past several years, appear to be in the process of decelerating, which will imply slower additions to household wealth and, thereby, less impetus to consumer spending. At this point, the available data on the housing market, together with ongoing support for housing demand from factors such as strong job creation and still-low mortgage rates, suggest that this sector will most likely experience a gradual cooling rather than a sharp slowdown. However, significant uncertainty attends the outlook for housing, and the risk exists that a slowdown more pronounced than we currently expect could prove a drag on growth this year and next. The Federal Reserve will continue to monitor housing markets closely.

More broadly, the prospects for maintaining economic growth at a solid pace in the period ahead appear good, although growth rates may well vary quarter to quarter as the economy downshifts from the first-quarter spurt. Productivity growth, job creation, and capital spending are all strong, and continued expansion in the economies of our trading partners seems likely to boost our export sector. That said, energy prices remain a concern: The nominal price of crude oil has risen recently to new highs, and gasoline prices are also up sharply. Rising energy prices pose risks to both economic activity and inflation. If energy prices stabilize this year, even at a high level, their adverse effects on both growth and inflation should diminish somewhat over time. However, as the world has little spare oil production capacity, periodic spikes in oil prices remain a possibility.

The outlook for inflation is reasonably favorable but carries some risks. Increases in energy prices have pushed up overall consumer price inflation over the past year or so. However, inflation in core price indexes, which in the past has been a better indicator of longer-term inflation trends, has remained roughly stable over the past year. Among the factors restraining core inflation are ongoing gains in productivity, which have helped to hold unit labor costs in check,

[ Normxxx Here:   aka, international labor arbitrage ]

and strong domestic and international competition in product markets, which have restrained the ability of firms to pass cost increases on to consumers. The stability of core inflation is also enhanced by the fact that long-term inflation expectations— as measured by surveys and by comparing yields on nominal and indexed Treasury securities— appear to remain well-anchored. Of course, inflation expectations will remain low only so long as the Federal Reserve demonstrates its commitment to price stability. As to inflation risks, I have already noted that continuing growth in aggregate demand in excess of increases in the economy's underlying productive capacity would likely lead to increased inflationary pressures. In addition, although pass-through from energy and commodity price increases to core inflation has thus far been limited, the risk exists that strengthening demand for final products could allow firms to pass on a greater portion of their cost increases in the future.

With regard to monetary policy, the Federal Open Market Committee (FOMC) has raised the federal funds rate, in increments of 25 basis points, at each of its past fifteen meetings, bringing its current level to 4.75 percent. This sequence of rate increases was necessary to remove the unusual monetary accommodation put in place in response to the soft economic conditions earlier in this decade.

[ Normxxx Here:   From the Fed's perspective, there have been no 'rate increases' as yet— just removal of 'accommodation!' ]

Future policy actions will be increasingly dependent on the evolution of the economic outlook, as reflected in the incoming data. Specifically, policy will respond to arriving information that affects the Committee's assessment of the medium-term risks to its objectives of price stability and maximum sustainable employment. Focusing on the medium-term forecast horizon is necessary because of the lags with which monetary policy affects the economy.

In the statement issued after its March meeting, the FOMC noted that economic growth had rebounded strongly in the first quarter but appeared likely to moderate to a more sustainable pace. It further noted that a number of factors have contributed to the stability in core inflation. However, the Committee also viewed the possibility that core inflation might rise as a risk to the achievement of its mandated objectives, and it judged that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In my view, data arriving since the meeting have not materially changed that assessment of the risks. To support continued healthy growth of the economy, vigilance in regard to inflation is essential.

The FOMC will continue to monitor the incoming data closely to assess the prospects for both growth and inflation. In particular, even if in the Committee's judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook. Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, and the Committee will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve's mandated objectives.

Although recent economic developments have been positive, the nation still faces some significant longer-term economic challenges. One such challenge is putting the federal budget on a trajectory that will be sustainable as our society ages. Under current law, federal spending for retirement and health programs will grow substantially in coming decades— both as a share of overall federal spending and relative to the size of the economy— especially if health costs continue to climb rapidly. Slower growth of the workforce may also reduce growth in economic activity and thus in tax revenues.

The broad dimensions of the problem are well-known. In fiscal year 2005, federal outlays for Social Security, Medicare, and Medicaid totaled about 8 percent of GDP. According to the projections of the Congressional Budget Office (CBO), by the year 2020 that share will increase by more than three percentage points of GDP, an amount about equal in size to the current federal deficit. By 2040, according to the CBO, the share of GDP devoted to those three programs (excluding contributions by the states) will double from current levels, to about 16 percent of GDP. Were these projections to materialize, the Congress would find itself in the position of having to eliminate essentially all other non-interest spending, raising federal taxes to levels well above their long-term average of about 18 percent of GDP, or choosing some combination of the two. Absent such actions, we would see widening and eventually unsustainable budget deficits, which would impede capital accumulation, slow economic growth, threaten financial stability, and put a heavy burden of debt on our children and grandchildren.

The resolution of the nation's long-run fiscal challenge will require hard choices. Fundamentally, the decision confronting the Congress and the American people is how large a share of the nation's economic resources should be devoted to federal government programs, including transfer programs like Social Security, Medicare, and Medicaid. In making that decision, the full range of benefits and costs associated with each program should be taken into account. Crucially, however, whatever size of government is chosen, tax rates will ultimately have to be set at a level sufficient to achieve a reasonable balance of spending and revenues in the long run. Members of the Congress who want to extend tax cuts and keep tax rates low must accept that low rates will be sustainable over time only if outlays can be held down sufficiently to avoid large deficits. Likewise, members who favor a more expansive role of the government must balance the benefits of government programs with the burden imposed by the additional taxes needed to pay for them, a burden that includes not only the resources transferred from the private sector but also the reductions in the efficiency and growth potential of the economy associated with higher tax rates.

Another important challenge is the large and widening deficit in the U.S. current account. This deficit has increased from a little more than $100 billion in 1995 to roughly $800 billion last year, or 6-1/2 percent of nominal GDP. The causes of this deficit are complex and include both domestic and international factors. Fundamentally, the current account deficit reflects the fact that capital investment in the United States, including residential construction, substantially exceeds U.S. national saving. The opposite situation exists abroad, in that the saving of our trading partners exceeds their own capital investment. The excess of domestic investment over domestic saving in the United States, which by definition is the same as the current account deficit, must be financed by net inflows of funds from investors abroad. To date, the United States has had little difficulty in financing its current account deficit, as foreign savers have found U.S. investments attractive and foreign official institutions have added to their stocks of dollar-denominated international reserves. However, the cumulative effect of years of current account deficits have caused the United States to switch from being an international creditor to an international debtor, with a net foreign debt position of more than $3 trillion, roughly 25 percent of a year's GDP. This trend cannot continue forever, as it would imply an ever-growing interest burden owed to foreign creditors. Moreover, as foreign holdings of U.S. assets increase, at some point foreigners may become less willing to add these assets to their portfolios. While it is likely that current account imbalances will be resolved gradually over time, there is a small risk of a sudden shift in sentiment that could lead to disruptive changes in the value of the dollar and in other asset prices.

Actions both here and abroad would contribute to a gradual reduction in the U.S. current account deficit and in its mirror image, the current account surpluses of our trading partners. To reduce its dependence on foreign capital, the United States should take action to increase its national saving rate. The most direct way to accomplish this objective would be by putting federal government finances on a more sustainable path. Our trading partners can help to mitigate the global imbalance by relying less on exports as a source of growth, and instead boosting domestic spending relative to their production. In this regard, some policymakers in developing Asia, including China, appear to have recognized the importance of giving domestic demand a greater role in their development strategies and are seeking to increase domestic spending through fiscal measures, financial reforms, and other initiatives. Such actions should be encouraged. For these countries, allowing greater flexibility in exchange rates would be an important additional step toward helping to restore greater balance both in global capital flows and in their own economies. Structural reforms to enhance growth in our industrial trading partners could also be helpful. Each of these actions would be in the long-term interests of the countries involved, regardless of their effects on external imbalances. On the other hand, raising barriers to trade or flows of capital is not a constructive approach for addressing the current account deficit because such barriers would have significant deleterious effects on both the U.S. and global economies.

In conclusion, Mr. Chairman, the economy has been performing well and the near-term prospects look good, although as always there are risks to the outlook. Monetary policy will continue to pursue its objectives of helping the economy to grow at a strong, sustainable pace while seeking to keep inflation firmly under control. And, while many of the fundamental factors that determine longer-term economic growth appear favorable, actions to move the federal budget toward a more sustainable position would do a great deal to help ensure the future prosperity of our country.

______________


The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

» Normxxx - Testimony of Chairman BB

In response to Testimony of Chairman BB posted by Kirk:

Yes; I kept my pocket protector and at least 4 multicolored pens until the day I retired. (The pocket protector was definitely an 'heirloom' issue, as it was marked "Property of the U.S. Government!")

I think honey just doesn't like the colors because I introduced them!

As chief engineer, I reserved purple for myself. No one else seemed to be able to get them, and it was instantly recognizable as to source.

Thankfully, I can choose to ignore what Norm posts--ain't free speech great?

See, honey, never say I didn't do anything for you!

FWIW, the multiple colors are from the days when you only had one 'software printout' a day. It enabled you to go over your work several times and keep the corrections straight.

I am just getting the colors to mean something. Brown is used for quotes. Purple is reserved (pretty much) for my comments. Teal is for 'ordinary' emphasis; red is for extra emphasis. Bold, as necessary, for extra extra emphasis. Blue is now largely for blockquotes and/or contrast. Gold does not yet have a proper asignment— am using it mostly for gold related comments. Green is also unassigned. I don't have an orange (my favorite color in kindergarden), and I probably won't have, as I don't think I can get a sufficiant distinction from red and brown. But, I haven't really tried yet.

-- posted by Normxxx

» stocktiger - Commodities/Geopolitical turmoil

First off I like all the "off color" posts, hehe. I can almost tell who's writing what just by looking at your color/font/bold selections.
Engineers and their toys, gee whiz golly! Nothing against engineers mind you, some of my best friends include these rarified individuals. Now for the meat of the matter (and thanks for turning me on to safehaven.com) P.S. I don't know how to include the great graph that came in this article yet, but i can troubleshoot a malfunctioning plasma reactor blindfolded, hehe.

April 29, 2006

Gold: Much More to Go
by Mary Anne & Pamela Aden

Gold is soaring. Today it rose over $18 and reached yet another new 25 year high.

Silver has been in a league of its own. It's been soaring too and it's been even stronger than gold. The other metals and oil are surging as well, and so are gold shares, energy and natural resource shares.

So what's driving these markets? Essentially, it's a combination of financial and geopolitical factors. But many are now warning that these markets are overdone and they'll soon be headed lower. And while downward corrections are certainly normal in any bull market, we wouldn't bet against these bull markets.

Why? Because something much larger is currently happening for the first time in about 25 years. It's the mega upmove in commodities and tangible assets, which is poised to last for many more years (see chart). Aside from geopolitical and financial factors, this mega uptrend alone is going to be very bullish for the metals in the years ahead and we feel it's important to understand this very big picture.

The Mega Commodity Cycle

Marc Faber writes a great, always informative newsletter and he discusses these cycles in depth, which were studied by the Russian economist, Nikolai Kondratieff and are, therefore, referred to as the Kondratieff waves. These waves last between 45 to 60 years from peak to peak and the rising waves are characterized by rising commodity prices, new innovations, social upheaval, global economic power shifts and wars.

Briefly, new innovations, which tend to occur during the preceding cost cutting down wave, result in new countries competing on the world stage. This increases global tension because the new competitors (like China today) erode the old economic powerhouse's share of world markets. It also creates wealth imbalances at home, leading to possible social unrest, and wars abroad. This recurring pattern has happened throughout history. It's been documented going back to 1780 and it's now happening again.

Previous Kondratieff upmoves, for example, coincided with the following innovations: in the first one there was road, canal and bridge construction; in the second it was railroads; third was electricity, radio, telephone and autos; in the fourth it was electronics and aerospace and now in the fifth upswing it's telecommunications and internet.

These rising waves also coincided with the following wars and revolutions, to name but a few: the U.S. war of Independence, French Revolution, Napoleonic wars, Austro-Hungary Revolution, U.S. Civil war, Spanish-American war, Chinese Revolution, World War I, Russian Revolution, World War II and the Vietnam war.

Where are We Now?

These mega Kondratieff upmoves normally last around 22 years or more and since we're only six years into this mega upmove, it still has many years to go. This means commodity prices will likely be rising for the next 15 years or so. This tells us that you'll want to keep a large portion of your assets in tangible assets like gold, other metals and commodities, and not in paper assets like stocks and bonds.

Gold's mega uptrend since 2001 is reinforcing this. The booming rise in oil and the ongoing demand in the face of diminishing supplies in the years ahead is yet another reinforcement of this emerging mega uptrend.

Those who recognize this will profit handsomely. But those who follow the mainstream and keep a large portion of their savings in common stocks, especially those approaching retirement age, will be disappointed. And while we certainly don't have a crystal ball, the markets and history are also telling us we're going to be in for a period of wars and social unrest in the upcoming years.

In other words, what we've seen in recent years is going to continue and it'll probably intensify. This too will provide an underlying boost for gold because it tends to rise along with global tension. And considering that gold hit over $2000 an ounce in 1980 at the last Kondratieff peak, adjusted for inflation, it still has a long way to go in the years ahead before it even approaches that previous high.