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Best Quotes of April 2007
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Jeremy Grantham,
Grantham Mayo Van
Otterloo
Everything is in bubble territory.
Everything. From Indian antiquities to modern
Chinese art; from land in Panama to Mayfair; from
forestry, infrastructure and the junkiest bonds to
mundane blue chips; it's bubble time! The bursting
of this bubble will be across all countries and
all assets.
Bernard Ber,
CIBC
Let us return to the sequence
of events that led to the stock market crash of
1929 and the Great Depression in the 1930s. Back
in 1966, the most esteemed Alan Greenspan himself
wrote the following in an essay entitled “Gold and
Economic Freedom”:
When business in the United
States underwent a mild contraction in 1927, the
Federal Reserve created more paper reserves in
the hope of forestalling any possible bank
reserve shortage. More disastrous, however, was
the Federal Reserve's attempt to assist Great
Britain who had been losing gold to us because
the Bank of England refused to allow interest
rates to rise when market forces dictated (it
was politically unpalatable). The reasoning of
the authorities involved was as follows: if the
Federal Reserve pumped excessive paper reserves
into American banks, interest rates in the
United States would fall to a level comparable
with those in Great Britain; this would act to
stop Britain's gold loss and avoid the political
embarrassment of having to raise interest
rates.
The "Fed" succeeded; it stopped
the gold loss, but it nearly destroyed the
economies of the world, in the process. The
excess credit which the Fed pumped into the
economy spilled over into the stock
market-triggering a fantastic speculative
boom. Belatedly, Federal Reserve officials
attempted to sop up the excess reserves and
finally succeeded in braking the boom. But it
was too late: by 1929 the speculative imbalances
had become so overwhelming that the attempt
precipitated a sharp retrenching and a
consequent demoralizing of business confidence.
As a result, the American economy collapsed.
Great Britain fared even worse, and rather than
absorb the full consequences of her previous
folly, she abandoned the gold standard
completely in 1931, tearing asunder what
remained of the fabric of confidence and
inducing a world-wide series of bank failures.
The world economies plunged into the Great
Depression of the
1930's.
Do we see any parallels
here?
The two major players in the world
financial system at that time were the United
States and Great Britain. The United States was
the emerging industrial power, whereas Great
Britain was the mature and stagnating industrial
power. The central bank of the emerging industrial
power (the US) printed money in an effort to prop
up the economy of the mature industrial power
(Great Britain). The inflation of the money supply
resulted in the overheating of the economy and the
stock market of the emerging industrial power. It
was the crash in the stock market of the emerging
industrial power (the US) that brought about the
crash in all the world’s stock markets and the
Great Depression followed later.
Now fast
forward to today, and what you see is China as the
emerging industrial power and the United States as
the mature and stagnating industrial power. China
is printing money in an effort to prop up the
economy of the mature industrial power (the US).
The inflation of the money supply is resulting in
the overheating of the Chinese economy and stock
market. Very interestingly, on February 27, 2007,
it was the sharp 9% one-day drop in the Chinese
stock market that led to the sharp drop in stock
markets worldwide, including the US.
People may be conditioned to think that
economic events in developing countries pale in
significance to economic events in the US, and may
fail to see how what happens “way over there” in
China would have any significant impact on their
economic well-being. But how different the truth
really is. I think most people even now after the
February 27th turn of events, fail to grasp why
the US stock market sold off so sharply after the
Chinese stock market sell off occurred first. The
idea that a foreign stock market could dictate
what happens in the US stock market almost offends
the American sense of national pride (so the event
is casually dismissed as “market irrationality”).
A word of advice: you better get used to it, as
there is much more of that to come. The crash is
coming.
Richard Daughty, The Mogambo
Guru
I'll say
it again, as if I haven't said it enough already:
The dollar is going down because we acted like
idiots, and so load up on gold, silver and the
shares of oil companies to save yourself. This
Mindless Mogambo Strategy (MMS) has worked like a
charm for quite awhile now, and so it IS "the
trend." And as everyone knows, "the trend is your
friend!"
Bill Fleckenstein, Fleckenstein
Capital
Wall
Street continues to view stocks as one-way bets,
with positive outcomes. Every day, I am more and
more astounded by the bravado/denial that I see.
If you told this crowd that the world was going to
end on Friday, they'd be buying stocks in
anticipation of the rebound they would expect to
occur after its demise. How anyone can be sanguine
about how this movie ends is beyond me.
On
a side note, operators in
the LBO world seem keen to IPO themselves because
they can see that valuations are so stupid. Thus,
they're in the process of trying to have it both
ways: getting paid huge fees to take companies
private, while preparing to take themselves public
based on their huge fee income.
Mark Kiesel,
PIMCO
One
question my friends and colleagues have asked me
repeatedly over the past six months is: Are you
still renting? Yes! I sold my house over a year
ago and continue to rent. Based on the current
outlook for housing, I will likely be renting for
one to two more years.
Housing is today’s
leading indicator of economic growth and risk
appetite. An extended downturn in housing will
likely lead to slower job creation, softer
corporate profit growth, tighter lending standards
and weaker consumer and business confidence. The
Fed should lower the Fed Funds rate as soon as we
have confirmation that the employment situation is
deteriorating. By that time, credit spreads will
have already anticipated the fact that risk
appetite is set to turn for the worse.
Paul Lamont, Lamont Trading
Advisors
When
the effects of inflation have been extracted, the
DJIA is much more cyclical than Wall Street
promoters would care to admit. After optimistic
peaks of 1834, 1906, 1929, and 1966 the DJIA
subsequently moved to the bottom of the long term
trend channel. These bear markets were either
inflationary, such as the 1966-1982 bear market or
deflationary such as in 1929-1932. We have also
noticed that inflationary/deflationary crashes
tend to alternate. We suppose this is because Mr.
Market likes to fool even the bears. Today we are
again at the top of the trend channel. How will we
fall? Most bears remember and fear the stagflation
of the 1970s. However with debt levels currently
high, inflation cannot be maintained for an
extended length of time. Debtors would merely file
for bankruptcy or foreclosure (as they have begun
recently). Instead a deflationary spiral similar
to 1929-1933 or 1834-1842 is likely. It appears
the rule of alternation will continue.
John Mauldin, Millennium Wave
Advisors
Rising prices create their own kind of
self-fulfilling momentum. As more and more people
throw caution to the wind and jump into the
market, hoping to capture some of the profits they
see their friends making so effortlessly, you
finally get down to the last bear standing. Mr.
Market will do whatever it takes to prove the most
people wrong. And one of his favorite things to do
is to create momentum markets which defy the logic
of the underlying fundamentals. It then ends in
tears.
Hyman Minsky, as quoted by Prudent
Bear’s Doug Noland
An understanding of the American economy
requires an understanding of how the financial
structure is affected by and affects the behavior
of the economy over time.
It should be noted that the stabilizing
effect of big government has destabilizing
implications in that once borrowers and lenders
recognize that the downside instability of profits
has decreased there will be an increase in the
willingness and ability of business and bankers to
debt-finance. If the cash flows to validate
debt are virtually guaranteed by the profit
implications of big government then debt-financing
of positions in capital assets is
encouraged. An inflationary consequence
follows from the way the downside variability of
aggregate profits is constrained by deficits.
Mike Maloney,
GoldSilver.com
Why does everyone think the Dow is going
up, when it is actually going down in
value?
According to the Minneapolis Federal
Reserve, total inflation from 2000 to 2007, using
the Consumer Price Index, is just about 20%. This
means the Dow would have to be at 14,100 just to
break even. And that's if the CPI wasn't a
made-up, hocus-pocus, voodoo fabrication (which it
is). Here's why.
In calculating inflation,
the Bureau of Labor Statistics (BLS) takes a
basket of goods and services and tracks their
prices throughout the years. This worked just fine
when they would track the actual price of the same
items year after year. The problem is they no
longer use the actual price, and they no longer
track the same items year to year. If the price of
an item has gone up so much that it might make
whichever administration that is in power look
bad, they simply drop that item from the basket of
goods (deletion), switch to another item
(substitution), or make up their own price
(hedonic adjustment). Yes, the BLS has become just
another division of the governments "Ministry of
Propaganda". Its job is to manipulate the numbers,
so as to paint smiley faces all over the
economy.
…[This kind of] “invisible crash”
is a product of a fiat currency system and/or
rampant credit creation. It requires a rapidly
expanding money supply to obscure the fact that an
overvalued asset class is correcting and reverting
back to fair value or less. It cannot happen on a
gold standard with conservative fractional reserve
banking practices. Therefore, it didn't happen in
the United States until the 1970s and today. But
it has happened numerous times throughout history
once a country leaves an asset backed currency
standard. The stock of the Mississippi Company of
John Law's France, and the German stock market
during the Weimar hyperinflation come to
mind.
Doug Noland,
PrudentBear
The “2006 Vintage” of residential mortgage
loans is now recognized as being in a class by
itself (recalling the 1999/2000 Vintage of telecom
debt). This predicament supports a central
tenet of Macro Credit Theory: Credit losses (and
maladjustment) expand in an exponential manner in
the late stages of a Credit boom. Invariably, the
benefits of prolonging frenetic “Ponzi” financial
schemes will appear much more appealing than the
alternative. The fundamental backdrop in 2005 (and
earlier) beckoned for a major tightening in
mortgage lending standards, one that rampant
marketplace liquidity ensured was delayed for a
number of perilous quarters. The upshot was a year
of absolutely atrocious lending that is now coming
home to roost, along with ongoing excesses
ensuring that the roosting process has years to
run.
Michael Nystrom,
BullNotBull
When I was about 9 years old, my father
took my elder sister and me to see a performance
by a famous magician called Blackstone. What I
remember most about the show is when Blackstone,
with a flourish of his cape, made an elephant
appear onstage out of thin air. It was an
astonishing feat, and the crowd - including me -
went wild with applause. I had no idea
how he did it. After the show however, as we
were exiting the theater, my elder sister said, “I
didn’t see what was so great about that elephant.
It just walked onto the stage and everyone started
clapping.”
My sister’s revelation
was just as amazing as the trick itself, which
suddenly made perfect sense. Blackstone had used
some kind of sleight of hand, distracting the
audience over here while he got the elephant to
walk on stage over there. With this simple,
well-known magician’s tactic, he managed to fool
just about everyone.
Yesterday, as the Dow
“smashed its all time high,” closing above 13,000
for the first time in history, I was strangely
reminded of Blackstone’s performance that day some
thirty years ago. The Dow’s current levitating act
is the result of another well-known sleight of
hand trick used by central bankers. It's called
inflation. Even so, most everyone is mesmerized by
the performance. Everyone seems transfixed,
clapping in amazement at this spectacular
feat.
Enrico Orlandini, Dow Theory
Analysis
So
what else bothers me? Bush along with US domestic
and foreign policy just scare the hell out of me.
Did you ever know an accident was about to occur
before it did? That's the way I view US policy. My
fear is aggravated by the extremely high level of
complacency that exists in absolutely every fiber
of American society. How do you measure
complacency? The market has its barometer and it's
called the VIX which is short for Volatility
Index. I've been in the investment business for a
while now and I don't recall such a prolonged
period of high P/Es, low dividend yields, and low
VIX readings. Either everyone has ice water
running through their veins or everyone is piled
over on the wrong side of the boat. Any bets on
how that will end?
Rob Peebles,
PrudentBear
After four years of rising stock prices a
person might wonder how private equity investors
can keep finding companies cheap enough to deliver
decent returns on their investment. According to
Thomson Financial, private equity firms bought 654
U.S. companies last year. But were they bargains?
Were they bought cheap enough to produce a decent
return on their $375 billion cumulative price tag?
Here’s the answer: It doesn’t
matter.
That’s the great thing about
being a private equity investor. It doesn’t have
to be about the Return on Investment or the ROI.
There’s always the RFP, or Return From Pillage. So
far, RFP has come in the form of “management” fees
and “dividends” paid by recently-privatized
companies to the privateers who privatized
them.
Wall Street Journal reporters
Greg Ip and Henny Sender described these
innovative forms of compensation in a July 25,
2006 article using Burger King as an example.
Here’s how private equity investors got it their
way with Burger King: First, Burger King paid the
private equity folks $22.4 million in
“professional fees,” apparently for shepherding
the company from the public wilderness into the
loving arms of private equity owners. Then, after
three years of restructuring and other voodoo, and
three months before releasing Burger King back to
the public, Burger King paid the investors a $367
million dividend.
After reviewing
such a transaction, a person might exclaim,
“Zowie, what a turn around to be able to afford to
pay yourself almost a gazillion dollars!” But that
person would be exclaiming in the wrong direction.
That person should be exclaiming, “Zowie, you
loaned money to Burger King to pay almost a
gazillion dollars to their own owners!” That’s
because Burger King borrowed the money for the
dividend, the sort of thing that apparently is
possible at the late stage of a credit bubble.
Ron Paul, Texas
Congressman
The fiscal year 2008 budget, passed in the
House of Representatives last week, is a monument
to irresponsibility and profligacy. It shows that
Congress remains oblivious to the economic
troubles facing the nation, and that political
expediency trumps all common sense in Washington.
To the extent that proponents and supporters of
these unsustainable budget increases continue to
win reelection, it also shows that many Americans
unfortunately continue to believe government can
provide them with a free lunch.
Peter Schiff, EuroPacific
Capital
As the
Dow burst through the 13,000 milestone this week,
few understood the hollowness of the achievement.
Measured against the rising dollar-denominated
prices of just about everything else on the
planet, the Dow has actually lost value over the
past seven years. Measured against the truest
benchmark, the price of gold, the record high for
the Dow was set back in January of 2000 when its
price equaled approximately 43 ounces of gold.
Today it is only worth about 19 ounces.
To better appreciate just how much
of stock gains can be attributed to inflation,
consider that the record high for the Dow in 1929
of approximately 380 also equated to 19 ounces of
gold. So despite all of the hoopla and a
thirty-fold increase in stock prices, the Dow has
actually gained no real value during the past
eighty years. The entire rise from 360 to 13,000
has been an illusion made possible by the magic of
inflation. So much for the concept of stocks being
a “can’t lose” long term investment -- unless you
feel that eighty years is not quite a long enough
time horizon!
Jay Taylor, J Taylor's
Energy & Energy Tech
Stocks
We
Americans have come to think it our natural-born
right to be able to drive huge SUVs while most of
the world lives in relative poverty. But our
materialistic view of the world is on a collision
course with a new reality that will be forced on
us and will reduce our standard of living. The new
reality I speak of is derived from a combination
of declining production of oil, especially cheap
oil, and rising competition from huge numbers of
middle-class people from places like China and
India as well as other lesser-developed countries.
We are going to continue to pay much more for oil,
as various geopolitical interests compete for
dwindling supplies of oil, and as central bankers
print more and more money in a self-deceptive move
to try to pretend to society that we can afford
expensive oil.
Steve Saville, Speculative
Investor
Now,
it is certainly possible that the knock-on effects
of weakness in the US residential property market
will postpone the start of a major decline in the
bond market until the first half of next year, but
there's little chance of it being postponed any
longer than that. This is because central banks
and governments can be relied upon to respond to
every economic problem by promoting more inflation
as long as they have the freedom to do so. And
they will have the freedom to do so until bonds
break below major support and begin to accelerate
downward. In other words, if things get bad enough
on the economic front to underpin the bond market
during the second half of this year then the
monetary authorities will undoubtedly take actions
that set the stage for an even bigger inflation
problem thereafter.
Jim Willie, Hat Trick
Letter
A
powerful gold and crude oil rally is soon to be
unleashed. The gold push will be unwanted, but
demanded by a weak USDollar. The oil push will be
secretly ordered.
Three sources have
supported the gargantuan US credit appetite in the
last several years. The Asian trade surplus
recycle has essentially disappeared, without
publicity or fanfare. The Persian Gulf petro
surplus recycle is going in full bore, under the
shroud of accounting diversions, with little
attention paid. The USGovt printing press has been
turned loose in unprecedented fashion, without the
harsh light of tracked M3 Money Supply statistics.
Look for a higher crude oil price, like one to hit
$80 per barrel, and a higher gold price, like one
to hit $750 per ounce, in the coming months. Look
for mindboggling creation of new money to come
also, under the cover of darkness, to paper over
the mortgage bond black hole, to avert associated
credit derivative accidents underway. We are in
the Weimar Age of modern money. Good prefers
light; evil embraces darkness. In full light, the
gold rally would be afforded greater tailwind.
Even in darkness, gold will thrive since
confidence erodes in darkness. Darkness is the
constant theme to both the current financial
system which manages the USDollar, and to a lot
more of the national drumbeats.
Naomi Wolf, The
Guardian
Last
autumn, there was a military coup in Thailand. The
leaders of the coup took a number of steps, rather
systematically, as if they had a shopping list. In
a sense, they did. Within a matter of days,
democracy had been closed down: the coup leaders
declared martial law, sent armed soldiers into
residential areas, took over radio and TV
stations, issued restrictions on the press,
tightened some limits on travel, and took certain
activists into custody.
They were not
figuring these things out as they went along. If
you look at history, you can see that there is
essentially a blueprint for turning an open
society into a dictatorship. That blueprint has
been used again and again in more and less bloody,
more and less terrifying ways. But it is always
effective. It is very difficult and arduous to
create and sustain a democracy - but history shows
that closing one down is much simpler. You simply
have to be willing to take the 10 steps.
As
difficult as this is to contemplate, it is clear,
if you are willing to look, that each of these 10
steps has already been initiated today in the
United States by the Bush
administration.
Because Americans like me
were born in freedom, we have a hard time even
considering that it is possible for us to become
as unfree - domestically - as many other nations.
Because we no longer learn much about our rights
or our system of government - the task of being
aware of the constitution has been outsourced from
citizens' ownership to being the domain of
professionals such as lawyers and professors - we
scarcely recognize the checks and balances that
the founders put in place, even as they are being
systematically dismantled. Because we don't learn
much about European history, the setting up of a
department of "homeland" security - remember who
else was keen on the word "homeland" - didn't
raise the alarm bells it might have.
It is
my argument that, beneath our very noses, George
Bush and his administration are using time-tested
tactics to close down an open society. It is time
for us to be willing to think the unthinkable - as
the author and political journalist Joe Conason,
has put it, that it can happen here. And that we
are further along than we
realize.
Martin Weiss, Safe Money
Report
Forgive
me if my message to you is both brief and
blunt:
The U.S. dollar is sinking into the
toilet.
No one is able or willing to come
to its rescue.
Investors who fail to take
protective action could get hurt badly.
And
those that act promptly stand to make some of the
greatest fortunes in recent memory.
****
Copyright © 2007 www.dollarcollapse.com
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