Use access key #2 to skip to page content.

An Historic Challenge for New Leadership



December 04, 2008 – Comments (1)

[From Euro Pacific Capital]

At long last it is official. Even the government’s own statisticians now admit that we are in a recession. They have even concluded that it began in late 2007. How wonderfully candid of them!

To fight the downturn that it can no longer deny, the government has budgeted some $3 trillion to spend the economy out of recession. However, there is increasing evidence that the recession is deepening, just as we have forecast over the past year or so. It is now rumored that a further $8 trillion (some $25,000 dollars for every American man, woman and child) is being considered. Many people are worried and are beginning to wonder where it will all end.

But, as the saying goes, even the darkest cloud has a silver lining. Provided the incoming Obama Administration makes the right decisions, great opportunities lie ahead. The situation we face is terrible. Indeed, we that a full-blown depression in looming. Some may ask for the source of this pessimism given the relatively benign forecasts favored by most economists.

The answer lies in the range of our economic perspective. Perhaps arrogantly believing that the sophisticated modern economy lacks historical precedent, most economists and analysts look back only as far as World War II. Somehow it is assumed that 99% of recorded history offers no lessons for the modern world. This is naïve.

If we adopt a far longer-term perspective, we can find some parallels to the Bush-Greenspan bubble that we now see unwinding: the bursting of the South Seas bubble in 1720, and the Stock Market Crash of 1929. Both events led to unprecedented losses and took years to recover from. We believe that history will record 2008 as the year in which a decade long boom, which began with the tech boom of the late 1990’s and continued with the real estate boom of the middle years of this decade, was finally pricked.

All three crashes were based, essentially, on massive, irrational, speculation. But the potential depression that will follow the most recent crash will face two problems not seen by the first two: massive leverage and institutional corruption.

Today, vast numbers of consumers are highly leveraged with credit card debt, auto loans, student loans, overdrafts and mortgage debt. In normal times, such levels would have been considered grossly imprudent. But the past 10 years have been anything but normal. Given that many of these consumers have scant ability to service the loans they have taken, the debt has been characterized as the “toxic waste” of the financial industry.

The banking system carefully hid most of this “toxic waste” within derivative structures and an abuse of off-balance sheet accounting to a degree that amounts to the greatest financial fraud in history.

The fraud was directly caused and tolerated by policy makers. In an effort to avoid healthy recessions and to perpetuate the good times, the Administration, under Bush and Greenspan, pumped trillions of unearned dollars into the world economy, laying the foundation for the unprecedented real estate and consumption booms of the 2000’s.

In order to postpone and disguise the inevitable pain of America earning less than it was spending, Bush and Greenspan quietly depreciated the currency and borrowed massively.

Although the risks were systematically dismissed for years by the Government, banks and corporations, the horrors that result from the ‘deleveraging’ from such massive speculation, debt, leverage and fraud, are now dawning with ferocious intensity.

On the bright side, things may be so bad by January 20, 2009, and people so scared, that they will be prepared to accept policies, delivered by an outstanding level of oratory by President Obama, that they would have been totally unaccepted only months before.

We know that he has the skill. But if he also has the vision and the nerve, Obama may even be able to convince America to accept the excruciating pain necessary to restructure our economy and restore our national wealth. This must involve boosting production at the expense of excessive consumption.

It is a long shot, but at least it is a possibility that could end in a resurgence of American prosperity and power. Should Obama fail to seize this painful but historic chance, the markets will be left to deliver the inevitable pain. The credit rating on American debt will be cut and the U.S. dollar and markets will plummet, delivering a blow to the standard of living of most Americans that will threaten insurrection.

1 Comments – Post Your Own

#1) On December 04, 2008 at 7:17 PM, kdakota630 (28.87) wrote:

Financial doomsayer Schiff still grim on future

Wednesday December 3, 3:39 pm ET
By Dave Carpenter, AP Business Writer

Bearish market pundit Peter Schiff foresees much worse economic times ahead, even a depression

CHICAGO (AP) -- People aren't laughing any more at the way-out-there predictions of Peter Schiff, whose long-standing pessimism about the economy and stock market has been largely borne out.

Schiff heads Euro Pacific Capital, a brokerage in Darien, Conn. with more than $1 billion in assets under management. He has silenced critics because he predicted the collapse of the housing market, the subprime crisis and the soaring of oil prices in his market commentaries before they came to pass.

A YouTube video called "Peter Schiff Was Right" shows him being repeatedly mocked when he went on TV stock shows to make those ultimately correct calls in 2006 and 2007, including forecasting a recession 2 1/2 years ago.

Now, in the midst of what's already the biggest financial crisis in decades, the prominent purveyor of gloom and doom still sees far tougher times ahead -- including a depression and a bear market he thinks will last another five years or more.

In a telephone interview with The Associated Press, Schiff outlined views that remain on the far side of gloomy compared with virtually all other pundits but still envision some buying opportunities for investors. He foresees grimmer prospects in the U.S. than elsewhere, perhaps a reflection of the fact his firm focuses more on international investments than domestic ones:

Q: What sectors of the economy do you expect to do well in 2009?

A: I don't know if any sector will do well. But ultimately, whether it's going to be 2009 or whenever the turnaround is going to be, I think the only sectors of the U.S. economy that are going to improve are going to be those that are related to exports -- manufacturing, mining, energy, agriculture, commodities-related businesses. I think the slowdown in the global economy will be short-lived. But I think the U.S. depression is going to be with us for a long time.

Q: How bad do you think things will get?

A: Tens of millions of people unemployed, inflation spiraling out of control, the government instituting price controls that result in shortages and blackouts and long lines for things. I think things are going to get very bad.

From an investment point of view, investors need to stay clear, because they need to realize that it's not just U.S. stocks and real estate that are going to lose value, but U.S. bonds. This is the last bubble yet to burst. I think we're going to see a collapse of the bond market sometime during Obama's first term, and interest rates are going to spiral out of control, and the dollar is going to just be destroyed.

Q: Why do you oppose bailouts of troubled companies?

A: Nobody should be bailed out. Failure is supposed to be punished and success is supposed to be rewarded, not the opposite. When companies fail, their resources, their assets, get redistributed. What happens is people who are incompetent lose their assets and people who are competent buy them, and they reorganize them. The government is propping up and rewarding bad behavior.

Q: But wouldn't letting the auto industry fail have huge negative consequences for the economy, just as Lehman Brothers' bankruptcy had major ripple effects?

A: Look, the only thing that the U.S. government did right was to let Lehman Brothers fail. Everything else they did wrong.

If Ford and General Motors are allowed to go bankrupt, there will be adverse consequences, no doubt. But there's going to be more adverse consequences by bailing them out. So the lesser of the evils is to let them fail.

Ultimately, I don't think it's going to be the end of the automobile industry in this country, I think it's going to be the beginning of a better automobile industry. I think the new people who buy up the General Motors plants and can find a way to employ all those skilled workers in Detroit to make cars profitably. Obviously the management of GM is incapable of doing it. Look at these guys. These guys are paying themselves $20 million, $25 million salaries to run these companies into the ground.

Q: Where should investors have their money in 2009?

A: In international. You need to be in stocks that are going to benefit from this change in global leadership as the American economy collapses and the American consumer no longer reigns supreme. ... So the key is to buy value around the world. Buy these viable companies that still have good businesses, good balance sheets, good income potentials. A lot of U.S. stocks are down a lot, but they're going to keep falling. A lot of foreign stocks are down a lot but they represent good buying opportunities because they're not going to keep falling, they're going to snap back. And especially once the dollar turns around, then these foreign investments are really going to look good.

Q: What do you see happening with oil prices now that they've fallen $100 a barrel from their peak last July to under $50?

A: This pullback is an incredible buying opportunity for oil company stocks. Oil prices are going to be much, much higher as a result of this huge plunge, because this big drop is going to put on the back burner for years any alternative plans, any big exploration plans. Because when oil is back above $100 a barrel next year, nobody is going to want to spend any money on oil exploration because they're all going to be afraid of another major collapse. That'll give OPEC another three or four years of $150, $200-a-barrel oil where no one is doing anything about it. OPEC is probably loving this price decline, because they know it's laying the foundation for a bigger price increase down the line.

Report this comment

Featured Broker Partners