Friday, March 11, 2005

Let Fly

You, dear reader, may be forming the impression that I am a broken record, preacher of doom and gloom, and predictor of impending global financial disaster. It’s true, I am. But only because I feel obligated to alert those around me that it is time to take precautions now. I am taking precautions as if the scenario painted in “As the World Burns”, which I consider to be a realistic worst-case scenario, were going to happen. If you haven’t read this document, PLEASE DO SO NOW. And if you do read it and think it is totally loony, please comment and let us know what parts you think are incorrect.

Also, for your own edification, please visit The Daily Reckoning and sign up for their free daily newsletter. The writing is entertaining, diverse, and with interesting guest essays. A quote from today's:

"We pause, pull out our sextant and take a sighting. For many months now we have been at sea. We wonder where we've come to. The sun, the moon, the stars are all we have to steer by. But we see nothing. Overhead, the clouds of news are so vast that they obscure our view.

So, the best we can do is dead reckoning.

We reckon today that we are near the end - finally - of the great rally. We have reckoned this before; we don't deny it. But it has to come someday. Stocks have been in a bear market rally since October of 2002. They are destined to go down. Like death, we don't know when exactly it will come. But it is the sort of thing you want to be prepared for all the time. You do not want to go to your grave after saying an unkind word to your mother. Neither do you want to wake up to a market crash with a portfolio of junk bonds and tech stocks. So, we avoid unkind words and unsound investments - and wait.

Americans are getting poorer. They don't realize it. No newspaper tells them. No politician dares even to whisper the truth. No Fed economist proposes a remedy. Still, real wages are less today than they were a year ago...and no higher than they were at the bottom of the recession in November 2001. Worse, unmentioned in the "real" calculation is the cost of housing. Depending on where you live a house today could cost twice as much as it did in November of 2001. This, of course, is taken as good news to most people. But it is only good news if you are ready to leave the country or die. Otherwise, you are going to need some place to live. And it will cost you a lot more than it did a few years ago.

GDP figures are not bad. Inflation is under control. Consumers keep spending. Unemployment is low. And stocks are high. But beyond the fog of numbers, the stars put the U.S. economy at a completely different latitude. Each day, Americans spend 5% more than they make. That is the implication of a $600 billion current account deficit in a $12 trillion economy. And every day that passes, workers in India, China, Indonesia and many other countries become more skilled - readier to compete with Americans for the world's resources. Oil goes up. Copper soars. Soon it will be meat.

Jobs are created in America...but they are poor-paying jobs, most of them merely helping to pave the road to ruin, as almost all of them are on the consumption side of the ledger. We build houses. We work in health care. We finance houses and business mergers. We lend. We sell. If ever you want to go into debt, dear reader, there are plenty of people to help you do it."

P.S. The markets did not react as violently to the "arrow to the heart" of the dollar from Japan mentioned in yesterday's blog as I thought they would. Although the DOW is down only 75 today, the slide has begun. Often these foreign verbal arrows take a few days to reach their target. The market often seems myopically focused on the ground in front of it, but the arrow is already in the air. I can hear it whistling.

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