the most informed, intelligent and savvy subscribers one could ask for. One
of them, Lorimer Wilson, previously wrote me with his insights on "Our Worst Nightmare - the Puncture of the
Current US Housing Bubble." It was
very well received when published by me recently and he has just sent me
another one I think you will find timely and of particular interest. He has
compiled a remarkable summary of the ominous warnings, dire predictions and
perceived devastating consequences that the vast majority of economists,
financial analysts, economic research firms and financial commentators are
saying about our current economic situation and what is most likely to unfold
in the months and years ahead. It is a must read to more clearly understand
and appreciate the financial state of the union, the impact it will likely
have on various investments, and how better to allocate ones assets. Nobody
has a crystal ball, but to just ignore the following warning signs and hope
that everything will turn out okay would simply be foolish. Below is Part
1 of Wilson's 6-part article.
Warnings and Dire Predictions of World's Financial Experts - Part 1
Greenspan, an 'original gold bug' and former Chairman of the Federal Reserve,
is going to say "I told you so!" as soon as he feels at
liberty to comment further on what he already warned us might/will happen to
the economy. He will no doubt expand on what he saw as the:
for a derivative crisis - "I would suspect there are potential
disasters running into ... the hundreds."
drop in asset prices - "This vast increase in the market value of
asset claims [stocks, bonds, houses] is in part the indirect result of
investors accepting lower compensation for risk. Such an increase in market
value is too often viewed by market participants as structural and permanent.
But what they perceive as newly abundant liquidity can readily disappear ...
history has not dealt kindly with the aftermath of protracted periods of low
bubble - "Nearer term, the housing boom will inevitably simmer down.
As part of that process, house turnover will decline from currently historic
levels, while home price increases will slow and prices could even
decrease. As a consequence, home equity extraction will ease and with it
some of the strength in personal consumption expenditures."
crisis in Social Security - "The imbalance in the federal budgetary
situation, unless addressed soon, will pose serious long-term fiscal
difficulties. Our demographics - especially the retirement of the
baby-boom generation beginning in just a few years - mean that the ratio of
workers to retirees will fall substantially. Without corrective action,
this development will put substantial pressure on our ability in coming years
to provide even minimal government services while maintaining entitlement
benefits at their current level, without debilitating increases in tax rates.
The longer we wait before addressing these imbalances, the more wrenching the
fiscal adjustment ultimately will be." "When you do the
arithmetic of what the rising debt level implied by the deficits tells you
and add interest costs to that ever-rising debt at ever-higher interest
rates, the system becomes fiscally destabilizing. What you will end up with is
a stagnant economic system."
supply risk - "The current situation reflects an increasing fear
that existing reserves and productive crude oil capacity have become subject
to potential geopolitical adversity. These anxieties are not frivolous
given the stark realities evident in many areas of the world."
budget deficit - "Large deficits result in rising interest rates and
ever-growing interest payments that augment deficits in future years. Unless
that trend is reversed, at some point these deficits would cause the economy
to stagnate or worse." "Monetary policy, for example, cannot
ignore the potential inflationary pressures inherent in our current fiscal
outlook, especially those that could rise in meeting commitments to future
retirees. However, I assume that these imbalances will be resolved before
stark choices again confront us and that, if they are not, the Fed would
resist any temptation to monetize future fiscal deficits. We had too much
experience with the dangers of inflation in the 1970s to tolerate going
through another bout of dispiriting stagflation. The consequences for both
future workers and retirees could be daunting."
long-term interest rates - "The fiscal issues that we face pose
long-term challenges, but federal budget deficits could cause difficulties
even in the near term. Rising interest rates have been advertised for so long
and in so many places that anyone who hasn't appropriately hedged his
position by now is desirous of losing money."
current account deficit - "Given the already substantial
accumulation of dollar-dominated debt, foreign investors, both private and
official, may become less willing to absorb ever-growing claims on US
residents....Net claims against residents of the United States cannot
continue to increase forever in international portfolios at their recent
pace...Given the size of the US current account deficit, a diminished
appetite for adding to dollar balances must occur at some point. The trade
deficit cannot continue to increase forever at the recent pace.
household debt - Debt in modest quantities does enhance the rate of
growth of an economy and does create higher standards of living, but in
excess, creates very serious problems.
U.S. dollar - Although I doubt that the U.S. dollar will lose its status
as the world's reserve currency any time soon, there are in my judgment
lessons to be learned from the experience of sterling as it faded as the
world's dominant currency."
interesting to note that at one time Greenspan was an ardent gold bug and a
true believer in the gold standard as his following words attest: "In
the absence of the gold standard, there is no way to protect savings from
confiscation through inflation. There is no safe store of value. Deficit
spending is simply a scheme for the 'hidden' confiscation of wealth. Gold
stands in the way of the insidious process."
Fisher, President of the Dallas Federal Reserve, noted on Feb.6, 2006 that
"U.S. consumer spending could suffer if the property market cools too
fast but that is unlikely because of the high number of home owners with
fixed rate mortgages acting as a buffer against the small fraction of those
with variable rate mortgages. It is not unreasonable to think the situation
is manageable, albeit worth watching closely."
the record U.S. current account deficit he said "those urging the United
States to rein in its spending should be equally full-throated in prodding
countries with excess savings and trade surpluses to create conditions for
growing their domestic demand. If they fail to do so, and the U.S. suddenly
becomes more virtuous on its own, the global economy could sink into a
Volker, a former Federal Reserve Board Chairman, is on record as saying
"I think we are skating on increasingly thin ice. On the present
trajectory, the deficits and imbalances will increase. At some point, the
sense of confidence in capital markets that today so benignly supports the
flow of funds to the United States and the growing economy could fade. Then
some event, or combination of events, could come along to disturb markets,
with damaging volatility in both exchange markets and interest rates. Indeed,
there is a 75% chance of a major financial disaster within the next few
Dodge, Governor of the Bank of Canada, earlier this month said "global
imbalances, such as the record U.S. current account deficit and the ballooning
surpluses in some Asian countries, are persisting and if not resolved in an
orderly way, we face the threat of great disruption with periods of
Roach, Managing Director, Chief Economist, and Director of Global Economic
Analysis of Morgan Stanley, has stated that "America's record trade
deficit means the dollar will keep falling, interest rates will rise further
and U.S. consumers, in debt up to their eyeballs, will get pounded with no
better than a 10% chance of avoiding economic Armageddon."
Richebacher, former Chief Economist of the Dresdner Bank, has stated that
"the bubble-driven consumer-spending boom we are currently in represents
artificial, unsustainable demand and further rate hikes by the Fed will
prick both the carry trade bubble in bonds and the bubble in housing. A
financial Apocalypse will follow. The U.S. economy will lose its chief
liquidity source with disastrous effects on a wide range of asset prices.
U.S. has such serious structural problems they preclude any possibility of a
sustained economic recovery. These structural problems include a corporate
profits decline, a record savings shortfall, a capital spending collapse, an
unprecedented consumer borrowing and spending binge, a massive current
account deficit, ravaged balance sheets and record high debt levels. Tops
among them are the depression of profits and capital spending which will
propel each other downward in a vicious spiral.
addition, U.S. stocks are still overvalued. The worst part of the bear
markets is still to come and it will result in the wholesale destruction of
the financial wealth derived from the bubble economy.
U.S. financial system today is a house of cards built on nothing
but financial leverage, credit excess, speculation and derivatives. A
recession is coming and it will prove unusually severe and long. The
length and severity of recessions or depressions depend critically on the
magnitude of the dislocations and imbalances that have accumulated in the
economy during the preceding boom and, as such, the U.S. economy is in for a
very hard landing. The excessive monetary looseness has only postponed and
magnified the coming inevitable crisis.
disillusionment with the U.S. economy is the trigger. The huge capital
inflows have become the U.S. financial markets' single most important pillar.
Take this pillar away, and those markets will instantly collapse with
devastating effects for the U.S. economy, turning quickly into a savage
credit crunch. The exposure of the U.S. financial markets to foreign
investors and lenders has grown to such preposterous magnitude during recent
years that a controlled gradual dollar devaluation no longer appears
feasible. The dangers that loom on the currency front are immense. The
grossly over-leveraged U.S. financial system is hostage to a strong dollar
and permanent, huge capital inflows. The U.S. trade deficit and the
accumulated foreign indebtedness have reached a scale that defies any
possible action by central banks. The fate of the dollar is beyond any
Roubini is Professor of Economics and International Business at New York
University's Stern School of Business; Chairman of Roubini Global Economics; Research
Fellow at the National Bureau of Economic Research; Research Fellow of the
Centre for Economic Policy Research; Member of the Bretton Woods Committee,
the Council on Foreign Relation's Roundtable on the International Economy and
the Academic Advisory Committee, Fiscal Affairs Department of the
International Monetary Fund; former Senior Economist for International
Affairs on the Staff of the United States President's Council of Economic
Advisors; and co-author of several books on the economy.
has stated that "if the US does not take policy steps to reduce its need
for external financing, before it exhausts the world's central banks
willingness to keep adding to their dollar reserves then the large,
growing and unsustainable fiscal deficit and U.S. current account deficit
will become twin financial train wrecks for the U.S. economy and will lead to
a sharp hard landing of the dollar, a sharp increase in long term interest
rates, a significant increase in the inflation rate and a sharp slowdown of
the U.S. and global economy.
dollar crash/hard landing would be associated with a bond market rout and
would have serious consequences on all other risky and overvalued assets
(equities, housing, high-yield debt, emerging market debt).
effects in the US of higher short and long rates on the housing market, both
flows of new housing and new home demand on the value of existing housing,
would likely be severe.
prices will skyrocket above $100 per barrel. Then we will get a U.S. and
global recession that will pale compared to the one in 1980-82.
not being alarmist or unrealistic when you consider our reckless fiscal and
public debt policies, the absence of adult policy supervision in Washington
and the mediocre or nonexistent US economic leadership."
Walker, Director of the U.S. General Accounting Office and Comptroller
general of the United States, has stated that "our projected budget
deficits are not manageable without significant changes in status quo
programs, policies, processes and operations and were such action implemented
it would most likely adversely affect the quality of life of every American
now and in the foreseeable future. The U.S. faces a demographic tsunami
that will never recede."
Mr. Wilson for this Part 1 summary of what some of the best minds have said
about our current financial situation and what is in store for us in the
years ahead. As we understand it you are strategically positioned in a wide
variety of assets including precious metals, mining shares and long-term
warrants. Nothing like taking what the experts say to heart and investing
by Dudley Baker
Dudley Baker is
the owner/editor of Precious Metals Warrants, a market data service which
provides you with the details on all mining & energy companies with
warrants trading on the U. S. and Canadian Exchanges.