Interesting read by Ruben James at
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US Shifts and Alterations After 911
LehmanBrothers has just been the first investment bank in the United Statesto go under as part of the whole financial quagmire brought on by thesub-prime mortgage mess. The U.S. has so far escaped recession througha surge in exports, but expectations are that a slowing world economywill cause growth to moderate in second-half 2008 and on into 2009.Since the beginning of this year, the U.S. economy has dropped some600,000 jobs.
In the two years that followed the last U.S. economiccontraction in 2001, nearly 3 million jobs were lost. Growth picked upin 2002 and 2003 despite outsourcing of work to other parts of theworld, but dramatic structural change internationally was alreadyunderway. Four-and-a-half years of month-to-month employment increasesthrough the end of last year have helped to distract attention fromsome major shifts and alterations that have come about with respect tothe United States verses the rest of the world following 911.
(1)The BRIC nations (China, India, Brazil and Russia) are all much biggerplayers on the world stage now, as are Hong Kong, Singapore, SouthKorea, Taiwan and Thailand, to name just a few. Demand from thesenations is what has been driving commodity prices and is theexplanation for why supply is on such a “knife edge”. Theemerging-nation effect is why the outlook, long term, for internationaloil prices must be upward. Firms in the building industry need onlylook to commodity prices to understand what is happening to so manyconstruction costs. With the world in economic slowdown, there will bea brief respite, but availability can be stretched thin “at a moment’snotice”.
With respect to commodity prices, the key question ishow dependent these emerging and industrializing nations are on salesto the U.S. versus other customers (e.g., the European Union) and theirown domestic economies. Each degree to which they uncouple from theU.S. means an extra likelihood of being able to drive commodity priceson their own, as opposed to being reined in by weakening U.S. demand.Growing middle classes in these nations provide a source ofexpectations separate from any external forces. By the way, a thrivingmiddle class will eventually draw up its own agenda when it comes tothe
systemof government that it wants to see in place. With respect toliberalizing 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 ofmoney in two ways – by selling goods to the industrialized West orthrough oil and gas revenues. Countries with such government-controlleddollar stockpiles include China, Singapore, Norway, Saudi Arabia,Kuwait and Dubai and Abu Dhabi in the United Arab Emirates.
Thedrawn-out nature of the U.S. credit crisis has at least providedbreathing room for some of the major players to shore up theirfinances. Capital-to-liability ratios have been brought back into lineat some shaky institutions through cash infusions by the sovereignwealth funds. It used to be said that the U.S. was in “hock” to Chinaand Japan. But this was based on the preponderance of debt instruments,such as treasury bills, held by those nations. Now other countries havetaken substantial equity positions in the U.S. financial system, whichmay turn out to be a different kind of “symbiotic” relationshipaltogether.
(3) A goodly portion of the U.S. financial sectorthat doesn’t have a foreign presence now has federal governmentbacking. In addition to the Federal Reserve and Treasury Departmentaccepting less-than-secure notes as collateral (e.g., Bear Stearns),there are the bailouts of Fannie Mae and Freddie Mac. The U.S. federalgovernment budget deficit ($500 billion) this year was alreadysubstantial and the accumulated debt load was staggering (manytrillions of dollars). Now the problem has been cranked up by a wholeextra factor.
This leads into a consideration of the so-called“twin deficits”. Add to the federal deficit the fact that the foreigntrade deficit in goods is approaching $1 trillion. It now stands at-$900 billion, but is somewhat obscured by the fact that the net tradein services is +$150 billion. Furthermore, it is hard to see how thetwin deficits can easily be reduced. In the case of foreign trade,reliance on foreign oil is a big part of the problem. As for thegovernment revenue shortfall, somebody is going to have to start payingmore taxes.
(4) The U.S. dollar has fallen by one-third toone-half versus most other major currencies since 2001, with theprospect of further declines to come. In addition to the twin-deficitproblems, there are a couple of other important considerations. First,other cities and regions (e.g., London, Frankfurt, Hong Kong, Singaporeand Dubai) are already striving to sub-plant New York as financialcentres. This process will be speeded up when the new and apparentlynecessary 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 presseshas often been used in the past as a means to finance public endeavors- and/or to increase inflation, which reduces outstanding nominalobligations. The first step down this path will be taken when theFederal 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. TheInsider Information section will give you a few ideas to work from nowthat a temporary ban of short-selling stocks of financial institutionswas placed into effect by the UK on September 18, 2008 and followedshortly thereafter by the US on Septermber 19, 2008 and of course thereare stock tips on Markets across the globe as well as selected buy andsell recommendations in every issue. This issue's You Asked sectiondeals with a question concerning investing in the DOW 30 and a twelvepart feature begins called Killer Penny Stock Profits - The Wheres andHows.