Barron's (Nov. 27, 2006) has an interesting article on "Goldilocks" as a barometer of the U.S. economy.
It shows a graph of the four-week moving average of the number of times the word "Goldilocks" appeared in the financial press as a description of the investment climate, since 1966, when the term first became part of the Wall Street lexicon.
Barron's submits that the frequency of the media use of the word "Goldilocks" is a, "pretty accurate barometer of the speculative atmosphere." They point out that, "in one important sense, the "Goldilocks" rational — that the economy is not too hot, nor too cold, but just right — serves quite handily less as an explanation of the favorable action of the stock market than as an excuse for being bullish in the face of some obstructive negative like excessive exuberance in the street."
Barron's then goes on to point to the recent spike in the "Goldilocks" count coincides not with "some magical equilibrium between overheated and frosty," but with signs that the economy is "clearly beginning to cool and gets more vulnerable by the day to recession, as the housing collapse inexorably worsens."
Story Continues Below
Financial Intelligence Report has long warned our readers that a collapse in residential house prices can lead to a drop in stock prices and that they should be cautious.
[Editor's Note: Sir John Templeton first warned housing prices could crash 50 percent. Discover how to protect yourself and even profit from the housing crash. Go here now.]
We agree with Barron's when they recommend you flinch when next you "read or hear the word "Goldilocks" — As it's a sharp reminder that it's not too early to be wary."
Yet more worrying is the Barron's comment that the "angry Grizzly" of a dollar collapse did not accompany previous stock market declines foreshadowed by the ‘Goldilocks' hypothesis.
We have constantly alerted our readers to the importance of the dollar collapse. A weak dollar increases inflationary pressures over the long term as U.S. imports rise in price.
Furthermore, the outlook of a weakening dollar discourages investment in U.S. financial markets and encourages investment overseas.
We have heard much of late about the collapse of the dollar against other major international currencies. What we do not hear much about is how much these other major currencies themselves have collapsed against "real" money, or gold!
In the chart below, we have listed, in column A, the price of gold measured in U.S. dollars, euro, sterling, Swiss francs, yen, Australian dollars, and in Chinese yuan as of a year ago. Column B shows the price today. Column D shows the percentage increase in the price of gold, as measured in each currency. Finally, column E shows the fall in the value of the U.S. dollar, relative to each currency, the commonly used, but somewhat deceptive measure.
One has to remember that the major nations, wishing to isolate themselves from the reality of gold, have made concerted efforts, over recent years to demonetize gold, by engendering massive sales of their citizens' gold reserves, via the International Monetary Fund.
Central bankers and governments like their currencies to be measured against depreciating fellow currencies, but definitely not gold.
In column E you can see the commonly used relative currency measures of U.S. dollar decline.
To see the "true," or absolute decline of the U.S. dollar, we must add the percentage "relative" currency decline of the dollar (column E) to the "Actual" decline of that foreign currency versus gold (Column D). Thus, we see that the U.S. dollar has declined 11.5% in the past year against sterling. But, from column D we see that Sterling itself has declined by 9.3% against gold. The total decline, over the past year, of the U.S. dollar against gold, measured in sterling terms is (11.5 + 9.3) is 20.8%. Similar declines are 20.8% v euro; 21.55 v Swiss franc; 21.4% v yen; 22.5% v Australian dollar; and 22.8% v Chinese yuan.
[Differences between individual currency depreciations are probably due to a combination of rounding and to the variable trading volumes and dealing spreads in the prices of gold and currencies, around the world.]
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The Real Value of the Dollar
|
|
A
|
B
|
C
|
D
|
E
|
| |
12/6/2005
|
12/6/2005
|
Gold price/ oz
|
Change in
$1 v currencies
|
| USD |
511.4 |
631.45 |
23.5% |
|
| EUR |
434.16 |
475.29 |
9.5% |
-11.3% |
| GBP |
293.79 |
321.21 |
9.3% |
-11.5% |
| CHF |
668.40 |
755.50 |
13.0% |
-8.5% |
| JPY |
61823.15 |
72768.30 |
17.7% |
-4.7% |
| AUD |
679.15 |
803.37 |
18.3% |
-4.2% |
| CNY |
4131.09 |
4940.09 |
19.6% |
-3.2% |
| Source: Bloomberg screen.
|
|
[Editor's Note: Warren Buffett is betting billions the dollar will crash in 2007. Go Here Now.]
All this adds up to the fact that U.S. dollar depreciation is far worse than it appears when measured merely against other major currencies that are themselves depreciating. It all adds up to the fact that the currency-induced inflationary pressures of a weak dollar are higher than we are usually led to believe.
To this one must add the massive latent inflationary pressures caused by the wild "borrow and spend" policies followed by Congress over recent years.
In view of the above, it may surprise our readers as to why the U.S. bond market is booming on the expectation of a cut in Fed rates while the U.S. stock markets are climbing back to the levels (discounted for inflation) equal to those they previously attained in 2000 — so-called new records!
At the same time, overseas markets are also "booming." Where is all the money coming from?
Well, in order to avert a depression in 2001, the U.S. government created massive liquidity. The Fed also made credit historically cheap.
Today, as Barron's says, "The world, everyone agrees is awash in liquidity." In short, as we have long said, an excess of cash, much of it borrowed against personal housing, is chasing investments of ever-increasing risk. This is the so-called "Goldilocks" economy.
[Editor's Note: Can Ben Bernanke avoid the coming currency crisis? Go here now.]
As Stephen Roach of Morgan Stanley said recently, "There is one word that permeates virtually every discussion I have with investors around the world — liquidity. It's really the only thing they want to talk about." He then adds. "In the view of most fund managers, liquidity remains more than ample to support ever-frothy markets — irrespective of the outcome for the global economy."
Finally, Roach said, "For my money, the risks of the ‘global fizzle' are being taken too lightly." Our loyal readers would most probably agree.
If you see "Goldilocks" beware that when it rains the gold tint may wash out, exposing white hair! If you are in these speculative markets, stay close to the door. On another subject … <
The Mortgage Racket
Perhaps you, like me, are harassed by offers of credit at what appear to be miraculously low rates, especially from mortgage companies.
Some of these offers look too good to be true. As they say, if a thing looks too good to be true, it probably is.
The Dec. 11 issue of BusinessWeek had a most interesting and informative article on unsolicited credit offers, in particular Option Arm Mortgages. Apparently, they reported, "the Office of the Comptroller of the Currency has issued new underwriting and disclosure rules designed to protect consumers from risky loans they don't understand."
[Editor's Note: Discover 5 ways to profit — and protect yourself — from the real estate crisis. Go Here Now.]
In the past we have commented in Financial Intelligence Report on the sub-prime lending that has exacerbated the residential housing boom, leading to some of the wild speculation that now threatens to discourage the U.S. consumer. Credit has been almost thrust upon people, often by means of tempting and misleading marketing.
One example of what could be seen as misleading is the marketing of mortgages with a payment schedule, over the initial years, that does not even cover the "real" interest charged. The shortfall between the "real" and the "actual" rate charged is somewhat surreptitiously tacked onto the outstanding principle balance. This encourages borrowing well above the ability of the borrower to finance and often results in crippling debt loads and even in foreclosure.
Things have now got so bad in the sub-prime mortgage market that according to CNBC, sub-prime mortgage company "Ownit," of California (20% owned by Merrill Lynch) has closed its doors.
Added to aggressive mortgage marketing, we are often besieged by ‘pre-screened credit card offers.
A recent issue of Newsweek published a most useful number for people to contact to avoid unsolicited pre-screened credit card offers. It is 1-888-567-8688. I have called it myself. It is user-friendly and fast.
Editor's Notes:
