The Coming Economic Depression: April 05 Update

This month's update will look at several issues dealing with ways the financial system is preparing for big changes. I will not use the word 'crash' as that term tends to signify a sudden sharp negative event. That is not necessarily what I see. Presently the Federal Reserve is reviewing weak links in the system. Their concerns are as real as they come. Risks are evident in America's massive trade deficit, its over reliance on foreign financing of its trade and fiscal deficits; the rising cost of oil; growing fears of inflation; the effect rising interest rates will have in the housing market, trouble in the bond markets. The fact is while many of the nations financial publications tout headlines that support the idea of a robust economy, there are growing and more incessant signals of serious and possibly terminal problems in the US economy.

Let us consider the airline and auto industries. Both are in big trouble and there are some airlines who may find themselves back in bankruptcy court. Consider Northwest is attempting to save even more money on its labor costs. It plans on boosting these savings from $950 Million to 1.1 Billion. Pressures from rising oil prices and the competitive market environment are coming to bear on the company. However it is labor costs that are the perennial issue for the US economy overall. Globally, airlines plan to lose about five and half billion dollars this year mostly because of higher crude prices. These costs are also a major factor in GM's abysmal performance. Hourly wages, health care costs and pensions are eating into its ability to compete. These factors coupled with its lackluster line of new cars has caused many to wonder if GM's bonds won't descend to junk status. GM has $300 billion of debt. If GM is having problems in this business friendly GOP environment, how bad is their situation really? This is the question many investors are now beginning to ask.

Whatever solution GM chooses it will entail a great deal of pain. This is primarily because GM's problems are not based on transitory Market factors but on two basic structural problems

The cost issue is a very serious one and is being driven by another serious structural problem that exists in the US economy; that being exorbitant medical costs. GM has done a pretty god job at containing these costs but not enough. The stark unspoken and frightening reality is this; it may no longer be possible (profitable) to build cars in America if the workers are part of a union in this globalized economy. In other words that $400 a month a family of 5 will pay in health care costs will have to be shouldered by the worker in his after tax pay, which will be appreciably less than he takes home in his union job now. This is the inescapable conclusion to the globalization trend. Yes, the unions will fight it. But the next time contracts are negotiated GM will demand concessions from the unions if they are to keep the bulk of their US manufacturing capabilities. Already Bush is planning an frontal assault on labor unions. He is going to investigate them and knowing the rapacious nature of some of this backers, they will not stop until they find something, anything to break their power and influence. This is all about globalization. It is about NAFTA, the WTO and the coming CAFTA agreement. It is about Chinese labor, Indian labor, Malaysian labor verses US labor. It is about putting the Corporations in the drivers seat so they can shop around for the best labor market for their money. You know... like slave labor. No need to pay a slave. Just feed him a little gruel now and again shove a machine gun in his face periodically and he works extremely well. So why would you want to hire someone who is a member of a union and pay medical and retirement benefits? The only thing you have to do is find (or fund) a dictator or better yet bring him to power, move your production there and make certain that union organizers are tagged as 'communists', or 'marxists' or 'leftists' or better yet 'terrorists' and 'insurgents'. Don't laugh. It doesn't take much to get on a list like that in America, how easy would it be in undemocratic dictatorship? I mean lets look at China. It is difficult (though not impossible ) to find a worse example of dictatorial policies and human rights abuses. But China is the darling of many an American Corporation and that is where they are moving their production, slave labor and all.

Another major concession that will be on the table is pensions. The Unions will fight it but it will eventually be in vain. This is another huge structural problem in the US economy and one that will once again be eventually forced on the workers. Somehow promises (many legally binding) will be abrogated to keep companies in business. Anyone with two eyes could have seen this coming. It didn't take an MBA to predict this.

Ford as well is struggling. It's Jaguar division is in trouble producing a $700 Million shortfall. It's solution is to phase out one model and reduce incentives on another. This follows on the heels of layoffs in Britain. Ford also plans on giving its 500 sedan a face-lift to boost sales. Such a redesign is usually done every five years, rather than just three. Ford however, has seen the future and has acquired full ownership of its Indian subsidiary Ford India. There are pressing problems that need to be solved in America's automotive industry. Unfortunately these solutions, given the paradigm of globalization, mean only one thing; that is loss of jobs to markets with much lower wages and benefits. This is an irreversible trend. It is not going to get better, it is going to get much, much worse. There are no legislative solutions to this. Congress castrated itself when it passed the WTO and NAFTA agreements. They are stuck and American jobs will head east and south. These factors are all intricately and inextricably linked to our trade deficits, our federal and state fiscal deficits and the growing realization that something must be done to 'save' Social Security. This is, in essence, a planned and orchestrated transfer of wealth and capacity to produce it.

The clinch here is that the world is not ready to jettison the dollar as the primary currency in the world. This has given the US time to either do one of two things 1) consume more or 2) get its house in order. It has chosen to consume and to put off the other. We are running trade deficits of $666 Billion a year. This is not only unwise but fiscally, it is akin to a drug induced suicide. It is lunacy of the first order. This will mean that eventually one of two things will happen. 1) the US currency will be significantly devalued or 2) the two afore mentioned trade agreements will be re-negotiated. I do not think any Senator or Congressman will lead any call to do that, he would soon be removed from office not unlike Traficant was a couple of years ago. The powers that be that pick and choose in its self serving and highly selective fashion which Senator or Congressman to 'investigate' and prosecute would rake anyone who tried to bring such a resolution to the floor over the proverbial coals.

Even now it is Carla Hills, the US Trade Representative that negotiated NAFTA (in strict secrecy), that is working on ensuring that CAFTA goes through. She is playing a pivotal role. If you do not believe me then check out this document called Agenda for the America's. Yes, I am sorry to say that our leadership is working very hard not to roll back the trends in globalization but to move them forward. This means moving your job not just to Mexico, but to Central and South America. This way, not only Asia will get to have American factories and industries locate with its borders but also our southern neighbors will get the benefits of taking your job. This is why watching how the US reacts to Hugo Chavez is extremely important. Chavez is not going to go under the thumb of Washington. He has made that abundantly clear. He does not trust the Council on Foreign Relations (The CFR is the driving force behind North American Integration); not the oil, banking or industrial interests that are in full control of the US government. This is why Bush, Fox and Martin met in Waco on the 23^rd of March. It was to move this agenda forward so that by 2010 all the groundwork will be complete for North American integration. Trade, Borders, Security all will be integrated not at all unlike the EU. That is the goal of Bush's meeting with the leaders of our northern and southern neighbors. Trade and economic issues are playing the pivotal role and the view from the top (CFR) is to eventually integrate the entire Western Hemisphere into one giant trading block with the US at the titular head for the first few years.

However soon, if the CFR and like minded institutions around the world get their way, there will be no America nor nation-states as we know them. There will just be the slaves and the plantation owners. Those who think they have a little wealth now ($5 million and under) will see it expropriated one way or another either through outright taxation or the use of regulatory mechanisms¹ to make the vast majority of mankind poor, powerless and extremely busy producing for the massa' on his global plantation. I know that none of this is news to those of you who are savvy and know who has been running the show in the US the past 50 years. But it is probably news to some of you who have never heard of these things or only payed the most passing of attention to them. So I give each of you a word of advice. Don't bother trying to stop this glottalization bullet-train. It is already on its final approach to the station and there is nothing that can be done about it short of a violent uprising nationwide, which I neither advocate, encourage or desire.

So if the Global Trade and security juggernaut has announced its plans for the America's what about Africa? Well in response to a readers inquiry, I see many things happening in Africa. Both good and bad. If the world can avoid an economic catastrophe, then Africa will struggle in its efforts to get itself on firm economic footing as the western nations that have raped her of these resources and left poverty and disease in their wake will remain strong enough to continue to use Africa as a place from which natural resources can be expropriated without renumeration to the population as a whole. If however a global economic catastrophe ensues and reduces the United States and Western European economies to less that half of what they are now. Africa may stand a chance at competing in the global economy. Africa has what this world is in desperately short supply of and that is natural resources. If the people at large can rid themselves of corrupt dictators, vicious war-lords and ancient tribal rivalries then Africa's future is bright. If it cannot do this, Africa will continue to see poverty disease and war ravage the continent and watch its population be reduced to a fraction of its present size.

However Africa's best hope in this writers opinion lies not with the capitalistic west, which has seen fit to exploit Africa with a ravenous intensity but from portions of the world usually demonized by western interests. One of the nations that is spending an enormous amount of time money and diplomatic capital is China. China needs natural resources and knows that she cannot keep her economic miracle going without raw materials. Materials found abundant in Africa. Reliable trading partners who actually give something back to the African continent is what Africa needs right now. It is not another World Bank loan that leaves the continent impoverished, and in debt for decades to come often having to repay the same loan multiple times. It does not need more austerity measures forced upon them by international bankers after the commodity prices for goods produced in Africa are manipulated downwards in order to keep Africa from having the capital to repay. It needs a trading partner that will give a fair price for its goods in a stable currency and a partner that will not stage coups, assassinations or fund terrorist groups to overthrow governments if the political winds become less favorable to them.

Today, China may prove to be such a partner. It remains to be seen. In Ethiopia, China moved in when the US moved out. China brought in technicians, diplomats and business people to assist and positively engage the Ethiopians. It is China and perhaps Russia that stand to gain in the aftermath of a Global Economic Adjustment (GEADJ). China's ability to forge productive trade, economic, and security ties in Africa may be an important development in Africa's road to economic prosperity. In Nigeria, an oil rich nation, China is building a railway. The same was done between Zambia and Tanzania several years ago. China has also built two gas fired power plants in Nigeria that provide nearly 700 megawatts of electricity. China has set up scores of companies in Nigeria and is making great strides in fostering better relations with Nigeria. Indeed, China's total trade with Africa has grown significantly

During the first four months of 2004, it grew further by 17.6% to US$ 609 million, with Nigeria's export to China registering a growth of 330%. China's main exports to Nigeria are light industrial, mechanical and electrical products. China's mainly import from Nigeria are petroleum, timber and cotton. - Chinese Embassy In Nigeria

While China has constructively engaged Africa, the 'old school' in the west is still formulating coups and trying to assassinate leaders, as the recent debacle in Equatorial Guinea clearly showed. If a nation has oil and doesn't do what it is told by western interests, the murderers are sent in to 'adjust' the offending nations policy. China has its problems and to be sure probably has not shown its true face. Nevertheless, it is investing in Africa and building critical infrastructure in key regions that both assist their economic needs as well as those of Africans. If the US and the UK had shown such foresight and engaged African leadership, both political and business on terms that were ultimately beneficial to both parties, Africa would be a completely different place today. Why did this not happen? And why is Africa forced now to look elsewhere to get assistance and fair trade? It is because of an entrenched element in Washington and Britain that frankly looks down upon (and some even downright hate) black Africans. Not unlike the Native Americans who once roamed freely across the North American continent, many European-Americans saw it as their 'divine right' to Steal the land, Kill the people and Destroy their cultures. This is the same element that enslaved Africans in America for hundreds of years based solely on the color of the skin. There is still an entrenched and extremely powerful group of people in both the UK and the US who still feel, believe and act this manner. This is important in understanding why the West will not assist Africa in the ways it assists Asians when disasters strike, economic aid is needed or investment is requested. While the typical cries of 'lack of stability' is usually the tired excuse used, the real reason is often plain old racism, the kind of racism that decimated the American Indians, and is now doing its level best to kill Africa. To be sure this does not speak for all or even a majority of the holders of power in the West. To the contrary, these antediluvian views are more prevalent in the 'old money' families that still wield enormous power in the US the UK and Europe.

This is why I see light at the end of the tunnel For Africa if the present global economic System goes through the kinds of economic convulsions every chart and graph is pointing to. Africa may be in a better position to write-down the usurious debt that the west and foistered on her when she was desperate for help. Many of these loans have already been paid off several times over yet still somehow the high priests of usury demand more. Thus, African nations, from Angola to Zimbabwe may be able to renegotiate some of these loans a few years after GEADJ and begin a real economic renaissance when the terms of future trade are done on equal footing with its western trading partners. Peripherally, this is one of the reasons I feel that Bush's selection of Wolfowitz to head the world bank shows the true nature of the administration. Here is a man whose own grasp of reality was non-existant when we went to war in Iraq because the idea of petroleum-plunder got the better of him. Will this be how he views future loans to Africa; as a way to keep Africa indebted to the West so as to extract natural resources without payment? He has already stated that Africa is going to be his focus. Wolfowitz now is marketing himself as a 'multilateralist' after being the architect of Bush's repugnant militaristic unilateralism. One longstanding issue that has divided the World Bank in the past is the issue of grants versus loans. Wolfowitz claims to want to strike a balance. Frankly, I could not be more skeptical of Bush's choice to head the bank. It's akin to having David Duke deciding suddenly one day to put on black-face makeup and run for chairman the NAACP after apologizing profusely for his past racist views. The appointment is not without symbolism though, after all the World Bank is where McNamara went after he was fired by Johnson.

Sadly in the government policy papers, think-tank reports and news reporting on the future of the global economy that are done regularly, there are usually two glaring omissions, One is the possibility (actually inevitability) of a GEADJ the other is any in depth look at Africa's prospects². While some have looked at the issue most do in an a haphazard and incomplete fashion. The National Intelligence Council (NIC) did do a decent Study on Africa in early 2004 that does cover many issues, but never discusses even as the remotest of possibilities a GEADJ though many of our most venerated economic leaders are beginning to speak openly and frequently about it. The NIC's study uses its model of what they call the Seven global drivers which to formulate its prognosis. These drivers are.

This glaring omissions render the reporting in these studies incomplete and should a sharp and sudden GEADJ occur, they would become rather useless as another overriding driver would then be in the 'drivers seat'. The reasons for this omission may have little to do with any organized collusion, but rather a general fear by individual scholars of 'crying wolf' or sounding too alarmist. Scholars relish the opportunity to serve on the NIC's prestigious studies and should a persons views be perceived as being too far outside of the politically acceptable 'box', that member will not be invited back weather or not his viewpoint is correct.

Nevertheless even after a GEADJ many of Africa's problems will remain in areas that economics play a less substantial role. Two of these are demographics and a driver that is not on the NIC's list; global pandemics. Presently only in Africa has AIDS taken such a massive toll on the population. It has been devastating. Yet other nations are also feeling the sting of the AIDS pandemic, AIDS is clearly destroying the entire continents population and whatever can be said of the valiant efforts of health care professionals who are assisting Africa, AIDS is not a short term problem and its effects will be felt far into the future regardless of the other factors. Indeed, it is not even certain that if a cure is found it will be actually be distributed to Africans as pharmaceutical companies have not generally been known for making their drugs available for free or even cheaply to those that really need them. Thus Africa's demographic problems will tend to be extreme and somewhat unpredictable as it is unclear how a large portion of a generation of children will grow up without their parents guidance (having died of AIDS). At best they can and will become productive members of their communities and be taken in by locals and move into social safety nets created by leaders. The worst will be that they will be recruited at a very young age by local militia's, rebel groups and criminal gangs. Without the educational opportunities and technical training Africa's economic prospects look dim.

Another problem that Africa will face is an environmental one. Drought is still a serious problem in parts of Africa and as the earth undergoes changes in the environment, mostly brought about by over development and natural resource squandering. Fresh water is a growing concern world wide and it will have a serious effect on food production. Once again Africa will be closely watched because it's relatively untouched geography will be eyed greedily by the resource hungry West. Another factor not unrelated will be changes in weather patterns that shift rainfall to different parts of the Globe. Some scientists are concerned that the 9.3 quake on 26 December 2004 may have shifted the oceans currents thus precipitating some changes in global weather patterns, California's record rainfall over the past couple of months may be indicative of this. While this is simply conjecture on the part of some it must be noted here a recent study, the most comprehensive of its kind, the Millennium Ecosystem Assessment gives some of the most dire warnings yet on the future of the global environment. The environment and the changes it is currently undergoing will have an enormous impact on Africa. In fact, beyond the AIDS epidemic it may be the most important factor in determining its future and its ability to strengthen its economies, its institutions and brighten its future.

Unless you have been in cryogenic sleep the past few weeks you cannot have missed the scandal going on at AIG. AIG is a huge company and the scandal has already damaged the firms AAA credit rating. Questionable transactions are one of the key areas regulators are currently looking into. Indeed it appears that some kid of effort was made to remove documents from its offices in Bermuda. While AIG is attempting to blame local employees for the attempted removal, the facts remain unclear. Its relationship to offshore re-insurers is also under scrutiny. Inaccurate financial reporting has also come to light and it has already had to reduce its book value by $1.6 billion. The scandal has already cost the CEO his job. AIG is still a massive company. It has a market capitalization of $133 Billion.

The recent scandal has caused Starr International to oust several AIG executives that also sat on its Board of Directors. We will all have to see what else regulators find. I suspect they may come up with quite a bit and as long as Elliot Sptizer is assisting in the investigation, it is less likely that the Fed's will 'accidentally' miss anything crucial.

I cannot stress enough the peril of oil, its price and looming shortages will weigh on the economy; The Global economy that is. When it comes to oil one must think globally and not in the typical parochial American fashion. The International Energy Agency (IEA) has warned of the need for demand restraint and is calling for emergency (yes that is the word they used) measures to be taken in the event of a 1-2 million barrel decline in production. Oil is trading at over 60% higher that it was just a year ago. OPEC keeps claiming it will raise its production ceilings but the reality is that from the the oil wells, to the tankers to the refineries, everyone is operating at or close to capacity. “...I do worry about energy. We are not an economy geared to $60 a barrel oil”, said John Snow, US Treasury Secretary.

The IEA has urged importing nations to remove energy subsidies to assist in demand reduction in her respective economies. On the 4^th of April, prices surged past $58 causing Asian Stocks to decline. The measures that the IEA is proposing beyond the end the subsidies? A ban on Personally Owned Vehicles (that's what you and I drive), a reduction in the work week, the reduction of fees for public transportation, and encouraging employers to allow employees to work from home. Frankly as much as many of my conservative readers will have problems with this. It think the IEA is right on the money, even if they are a little late. If something is not done to drastically curtail consumption, especially here in the US, we will be looking at an energy crisis unlike anything we have seen before. The venerated financial firm Goldman Sachs is predicting a superspike of $105 a barrel coming soon to a commodity exchange near you. What does this mean? Gasoline prices at or near $5.00 a gallon. Got an SUV? You have my deepest sympathies. But never fear, with steel prices going the way they are you may be able to recoup a small portion of your investment by selling it as scrap metal in the not too distant future, because unless you don't mind putting in $100 in your tank every time you fill up, I would definitely start thinking about some alternatives,

Much has been made of the Inflation numbers released in March. Energy prices played a key role in the 'spike'. The fact is inflation is running at a much, much higher rate than the FED, the BLS or any of the alphabet soup agencies will reveal in their cooked up numbers. These numbers to not take into account rising housing prices, rising tax rates for homeowners or food prices. This is where people are getting hit. In the 'gotta have' items in the economy, yes big screen TV's computers and other 'want to have' items may be decreasing in price but when one looks at energy and housing and even food prices, any fantasy numbers that are put out by Uncle Sam that do not reflect fully these and other rising costs are little more that economic pipe-dreams conjured up in Uncle Sam's own private little opium den.

The chief economist at Morgan Stanley has criticized the Federal Reserve for moving too slowly in inflation. In his article called 'The Global Test', Roach states;

The US Federal Reserve is behind the curve and scrambling to catch up. Inflation risks seem to be mounting at precisely the moment when America’s current-account deficit is out of control. Higher real interest rates are the only answer for these twin macro problems. For an unbalanced world that has become a levered play on low real interest rates, the long-awaited test could finally be at hand. - Stephen Roach

The simple fact is as Jim Puplava clearly stated in his March 28^th market wrap-up is this;

The markets have been caught off guard and are now reacting to what was obvious all along. Inflation is on the rise and it should not surprise anyone, but it did. Certainly higher energy prices are a factor. Energy prices impact everything from the cost of factory output and the price of consumer goods, to the cost of food. Rising energy is only one factor. The costs of most raw materials have been rising for over three years. Since hitting a nadir in October of 2001 the CRB index went from 184 in October 2001 to 322 in March of this year. That represents a 75% increase in just three years. - The Confidence Game

Puplava's analysis is impeccable, as usual and in his article explains why a slowdown in China may not assist in a slow down in the global demand for commodities. It won't, at least not much. The need for raw materials is growing just as the Earth is beginning to show real signs of over extraction. Inflation pressures abound and are likely to intensify in the near to medium term. America's current account deficit widened again to 6.3% of GDP, way above any healthy number. Some economists believe that the Fed has acted too slowly to prevent the kinds of runaway inflation they see coming. With our prolific monetary expansion (see first chart) and the record indebtedness of Average Americans because of various types of credit creation, inflation was as inevitable as a champion swimmer has of getting wet when competing. The pressures are real and so will the prices consumers will pay for hard goods.

Building costs are rising significantly, 10.5% according to a story in the Wall Street Journal. This, in my opinion will not seriously drive up the price of housing if the Fed continues its monetary tightening, though it may begin to cut into the profits of the builders and may (this is big a may) be a disincentive to the boom we have seen in new housing construction. In short, the drivers are the interest rates (credit creation) rather than raw materials. As rates tighten (and they will), housing prices should come down, or at the very least rise much slower than they have. But rising rates are already causing some owners to worry as homes in some markets are already sitting on the market longer than expected. Fannie Mae's troubles are far from over and if compelled to reign in some of their lending, will make the banks much more careful about lending to individuals with less than stellar credit. Yet and still, the creativity of many lenders have shown with new types of mortgages does seem to show that there will remain more than a few risk takers that will lend to those with credit problems. However eventually the jobs potential homeowners have available to pay their mortgages will generally pay less than in the past. This will lead the booming mortgage business to slow considerably and prices should descend concurrently.

Doug Noland of the Prudent Bear Fund points our that it is just the problem of credit excess linked to the housing market that is fueling our current account deficit. This is caused by people puling money out of their homes (cash out refinancing) to fuel consumption. This excess of credit creation is a typical asset inflation scenario where housing prices have increased to levels only a few could afford using traditional mortgage loans. How does it all shake out? Who can say? But the Fed's tepid response to rising inflation is a sure sign of concern for the mortgage markets, the banks and GSE's that hold the notes and paper that back the loans. The Feds seems to be saying 'we don't know what is going to happen but we must raise rates to a level that will attract foreigners to our Treasury paper'.

"Without restrictions on the size of (their) balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for homeownership," Greenspan said.

No one knows exactly how this will all turn out. No one. But no one 'in the know' is predicting the days of wine and roses to last forever.

Anyone interested in purchasing a copy of Conquer The Crash At A very reasonable price can e-mail me at offer-crash@markswatson.com
Only While Supplies Last!!

Financial Sense Online An excellent web site dedicated to giving sound financial information as well as investment advice. This site also has one of the best internet radio shows around. Highly recommended!

Peak Oil - One factor that is already beginning to weigh on the US economy in is the fact that oil production world wide is set to permanently decline in the near term. This paper deals with this issue.

Disclaimer: The above article is commentary and is not investment advice. The author is in no way connected to the 'wall street' gang and its financial institutions, banks, brokerage houses, lawyers or investment advisers and therefore cannot dispense financial advise within the parameters set forth by Wall Street and the legal profession, nor will the author attempt to do so. This article is not investment advise nor is should it be construed as such. Please do not e-mail me asking for financial advise. I cannot and will not give it on any level.

1These mechanisms can take many forms but the most common is the drive people out of business by making to too expensive to stay in business. Exorbitant licensing fees, unattainable environmental regulations, impossible bureaucratic hurdles to gain approval to conduct business in certain industries. These regulations will only be able to be complied with by the insiders who will write the regulations with the specific intent of driving out smaller more efficient competition.

2Yes there are of course exceptions and as the world becomes more concerned with resources Africa will get more attention.

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The Coming Economic Depression – April 2005 Update

(pdf version)

This is the latest update to a series. Earlier sections appear here.