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US Shifts and Alterations After 911
Lehman Brothers has just been the first investment bank in the United States to go under as part of the whole financial quagmire brought on by the sub-prime mortgage mess. The U.S. has so far escaped recession through a surge in exports, but expectations are that a slowing world economy will cause growth to moderate in second-half 2008 and on into 2009. Since the beginning of this year, the U.S. economy has dropped some 600,000 jobs.
In the two years that followed the last U.S. economic contraction in 2001, nearly 3 million jobs were lost. Growth picked up in 2002 and 2003 despite outsourcing of work to other parts of the world, but dramatic structural change internationally was already underway. Four-and-a-half years of month-to-month employment increases through the end of last year have helped to distract attention from some major shifts and alterations that have come about with respect to the United States verses the rest of the world following 911.
(1) The BRIC nations (China, India, Brazil and Russia) are all much bigger players on the world stage now, as are Hong Kong, Singapore, South Korea, Taiwan and Thailand, to name just a few. Demand from these nations is what has been driving commodity prices and is the explanation for why supply is on such a “knife edge”. The emerging-nation effect is why the outlook, long term, for international oil prices must be upward. Firms in the building industry need only look to commodity prices to understand what is happening to so many construction costs. With the world in economic slowdown, there will be a brief respite, but availability can be stretched thin “at a moment’s notice”.
With respect to commodity prices, the key question is how dependent these emerging and industrializing nations are on sales to the U.S. versus other customers (e.g., the European Union) and their own domestic economies. Each degree to which they uncouple from the U.S. means an extra likelihood of being able to drive commodity prices on their own, as opposed to being reined in by weakening U.S. demand. Growing middle classes in these nations provide a source of expectations separate from any external forces. By the way, a thriving middle class will eventually draw up its own agenda when it comes to the system of government that it wants to see in place. With respect to liberalizing social change within some of these totalitarian regimes, this will undoubtedly be a good thing.
(2) Much of the U.S. financial sector is now beholden to foreign sovereign wealth funds. Governments in a number of countries have managed to amass vast sums of money in two ways – by selling goods to the industrialized West or through oil and gas revenues. Countries with such government-controlled dollar stockpiles include China, Singapore, Norway, Saudi Arabia, Kuwait and Dubai and Abu Dhabi in the United Arab Emirates.
The drawn-out nature of the U.S. credit crisis has at least provided breathing room for some of the major players to shore up their finances. Capital-to-liability ratios have been brought back into line at some shaky institutions through cash infusions by the sovereign wealth funds. It used to be said that the U.S. was in “hock” to China and Japan. But this was based on the preponderance of debt instruments, such as treasury bills, held by those nations. Now other countries have taken substantial equity positions in the U.S. financial system, which may turn out to be a different kind of “symbiotic” relationship altogether.
(3) A goodly portion of the U.S. financial sector that doesn’t have a foreign presence now has federal government backing. In addition to the Federal Reserve and Treasury Department accepting less-than-secure notes as collateral (e.g., Bear Stearns), there are the bailouts of Fannie Mae and Freddie Mac. The U.S. federal government budget deficit ($500 billion) this year was already substantial and the accumulated debt load was staggering (many trillions of dollars). Now the problem has been cranked up by a whole extra factor.
This leads into a consideration of the so-called “twin deficits”. Add to the federal deficit the fact that the foreign trade deficit in goods is approaching $1 trillion. It now stands at -$900 billion, but is somewhat obscured by the fact that the net trade in services is +$150 billion. Furthermore, it is hard to see how the twin deficits can easily be reduced. In the case of foreign trade, reliance on foreign oil is a big part of the problem. As for the government revenue shortfall, somebody is going to have to start paying more taxes.
(4) The U.S. dollar has fallen by one-third to one-half versus most other major currencies since 2001, with the prospect of further declines to come. In addition to the twin-deficit problems, there are a couple of other important considerations. First, other cities and regions (e.g., London, Frankfurt, Hong Kong, Singapore and Dubai) are already striving to sub-plant New York as financial centres. This process will be speeded up when the new and apparently necessary regulations are enacted as part of the clean-up procedure.
Second, there is a serious danger of monetary authorities “relaxing discipline” when it comes to the money supply as a means to reduce government debt. This is a genteel way of saying that cranking up the printing presses has often been used in the past as a means to finance public endeavors - and/or to increase inflation, which reduces outstanding nominal obligations. The first step down this path will be taken when the Federal Reserve lowers interest rates from their already stimulative 2.00% level.
The October issue of The Ruben James Report holds some very interesting economic news for Britain, Canada, the US and 11 other counties spread across the Eurozone and Asia. The Insider Information section will give you a few ideas to work from now that a temporary ban of short-selling stocks of financial institutions was placed into effect by the UK on September 18, 2008 and followed shortly thereafter by the US on Septermber 19, 2008 and of course there are stock tips on Markets across the globe as well as selected buy and sell recommendations in every issue. This issue's You Asked section deals with a question concerning investing in the DOW 30 and a twelve part feature begins called Killer Penny Stock Profits - The Wheres and Hows.