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Posted On: 2006-12-11Length: 20:15

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Hi, this is Johannes Ernharth, you are listening to Vigilant Investor and we're also here with Stephan Ernharth, how are you doing Stephan?

Stephan: Doing well Johannes, how about yourself?

Not too bad, just wrapping up another exciting day out there in the world of high finance in the economy and so forth. But, we may as well just dip on into some of the events going on in the marketplace today. The Dow Jones Industrial up just a touch 20 points for a close of about two tenths of a percent up at 12,328.48, getting closer and closer just 80 points below its record high, so we'll have to see if it breaks over that nominal high of course, not a real high as we always remind people. The S&P 500 up just a little bit 3.2 points to 1,413 and the Nasdaq up 5.50 to 2,442, Nasdaq still down a full percent from its high and that's about 25 points away, but the S&P is looking at just being 5.23 points below its record high. Meanwhile, we look at the CBOE volatility index which we like to monitor, that thing is getting down again into super low territory, broken down below 11, down 11.18 percent today, the volatility index we remind everybody is an indicator, one of many indicators that can be looked at as an indicator of complacency by a lot of people. And typically when people are worried about things getting volatile in the equity markets or anywhere, they can turn to the CBOE volatility index to use that as a way to offset some of the risk. And it's still up 9 percent from it's low which was 9.81, and that just happened a few weeks back after the big dollar drop after thanksgiving and then the subsequent big Dow and S&P drop that happened after the following Monday. But, it looks like people are getting back into complacency territories. Stephan what do you think?

Stephan: You know it's yet to be seen, there have been some interesting commentary made by people not out of the main stream let's say that are forecasting gold actually over the next year or two to go anywhere between 675 and 2 to 3 thousand dollars, we can get into that in a little bit. But I think what's really interesting were Greenspan's comments today regarding the dollar, in effect stating, "I expect that the dollar will continue to drift downward until there is a change in the U.S. current account balance, it's imprudent to hold everything in one currency." And those are pretty, those are pretty strong words for Greenspan, yes he's not the treasury or the Fed Chairman anymore, but you typically see this sort of Fed speak out there, which is very much understated and that is very, that's very intriguing.

Well, it's interesting to see also, I mean the dollar, what is going on there? You know there's a tendency for people who are worried about these sorts of things in contrarian to start watching out when all of the sudden too many people start talking about something that's liable to happen, the Fed, you know Alan Greenspan talking about the dollar and of course U.S. Treasury Secretary Henry Paulson is off in China and there are some interesting developments today relative to the conversations he's having with the Chinese. He's of course trying to encourage the Chinese to allow their currency to float a little more freely in the market, and what they tend to do is they tend to adjust their currency to peg it to the dollar. And what that basically prohibits the U.S. from doing is [...] the U.S. is always weakening its currency day in and day out and by not allowing their currency to fluctuate with the market effectually what they're doing is they're increasing the money supply to keep pace with the dollar. And a lot of people argue that's why we have this huge trade deficit with China but it's a distraction. But the bottom line is dollar interestingly has picked up form its low last week, it dropped down about 82 in mid week and it was kind of flat there little bit but then Friday it zoomed up to, we're talking about the dollar, the U.S. dollar index, USDX, which is a trade weighted, excuse me not trade weighted but it's a weighted currency in index against 5 major currencies out there and it bounce up to about 83.5 on Friday and that's come down again to 83.2 today, so the dollar closed I guess about 83.18 with it's close on the USDX, which is an indicator of currency verses currency, but then again Stephan that's only part of the big equation. And granted the dollar has been getting abused for decades by our very own Federal Reserve, the steward of the dollar, the protector of all of our wealth who has caused 95 percent of the dollar to vanish in terms of it's wealth, it's deleted [...] wealth since its existence.

Stephan: What I think is interesting right now you're hearing other sentiment or more conventional sentiment that says you know, don't bet against the dollar, Bernanke is hawkish against inflation and he's not going to lower rates, so that you know, i.e. he's going to try to fight inflation by keeping rates up and those rates, which are no higher than they are today, okay are supposedly going to save the dollar. But at the current rate right now, the Fed's fund rate et cetera, the dollar has been getting hammered by the euro and this is the catch 22 of all central banks right now -

What about the euro verses -

Stephan: Everything else, everything else including gold. The point is if Bernanke really wants to fight inflation he would raise rates right now, but he can't afford to do it because the economy is a credit based economy and you choke everything off. So this is the stage that you get into and this is the dangerous game you play when you inflate or make money easier you create money through lending and low interest rates and a market becomes dependent upon a new supply of that, then you have the tail end, as you always say, Johannes, of the inflation hangover is higher prices. And to continue the party going -

One of many I should say -

Stephan: you need to continue to stimulate borrowing. And if they lower rates again, the dollar is going to go to the floor, number one, there's no guarantee that people will continue to borrow, but if rates go up, if rates are raised, yeah it might strengthen the dollar a little bit but you're just going to choke off the economy because there are no savings.

Well, I would also add to you know, clearly there is the hangover which is you know, you need to keep that, things start to slow down without the continuation. But the bottom line is bigger problem and a longer term problem, which is something that develops dramatically more glacially if the dislocation of capital and the important thing to remember is that a dollar is, the dollar of any currency is supposed to be a stored wealth and the pricing mechanism that's out there in the economy, not to get overly technical, but we all view prices as just basically something that should be reliable, the price of something in exchange for something else, then we translate that always through dollars as the common denominator in the U.S. economy at least, well actually in the global economy too the currency of choice for oil and all sorts of transactions globally. But what happens is when you begin to inflate as much as we have year after year after year and decade after decade, it slowly begins to happen that the pricing mechanism loses its validity and knowing how to price things gets more difficult. Now, an interesting thing that's appeared on the Vigilant Investor blog has been some comments from people around the world. Now we sat in on Casey Serin of iamfacingforeclosure.com, last show I sat in on that and some commentary was flying around on there it seems like a few people who were very interested in the real estate side of things decided to stop on by and the general questions that we're getting on the blog has been you know what should I be doing with my property, should I be expecting this or that to happen? And the general response I've been giving is that well, you know it's really difficult to say what's exactly going to happen in any market, but don't forget that the bottom line is that prices have been driven up to a point where they no longer really match a reality, and knowing what reality is, is impossible to determine because it's just so dislocated. And a great example of that is just the L.A. Times today, we're going to post up an article in just a few minutes, has an article called, it's titled, A Loan That Will Get Ugly Fast and it's written by David Streitfled at the L.A. Times again and what we'll do is we'll provide a link for everybody to click on through. But it talks about a mortgage type out there that basically gives the borrower the ability to choose how much they're going to pay. They can pay well below, they can pay the full amount, which is interest in principle like a conventional 30 year or they can just do an interest only approach or they can even pay below that, and what that basically does is when you start doing interest only or below interest only you start deferring your requirements into your loan, so it starts building upon itself. And it's an alarming situation that's happening out there, because when you take a look at how many loans were required in 2003, the article notes, only eight out of every thousand people buying a home are refinancing a mortgage in California used a pay option loan. And last year it was one in five loan applicants, okay? In the first eight months of 2006, now this is even as the real estate market is beginning to weaken and all these fears are happening and everything, nearly one in three Californian loan applicants are choosing them. And we're talking about a situation where you know, they interview this gentleman in the article and he's basically in a position where [...] get to a home and maybe he got a little bit aggressive in the size of his home but for a lot of people the only way they can get into a home is by using these types of mortgages because that's the only way they can get a home. And what that's telling you is that there's a you know, number one, there's a bubble that's driving these prices way out of whack from reality because ordinarily people wouldn't be able to afford it but because of the money supply system, the credit is so liquid, it's just so open [...] open that it's enabled the prices to get out of reach from [...] market and the loan requirements have gone through the tubes where they don't you know, can Casey Serin that we're talking about I Am Facing Foreclosure, now this is the kid who you know could well go to jail for fudging on his application a little bit, but you know shame on the mortgage brokers who were so quick to get that money turned around to get their commissions that they never bother, now this is an industry standard, they never bothered to check his income or his residency. I mean, what kind of system do we have there, that's all a byproduct of cheap credit, expanding money supply constantly and you compound that year over year, you know if people are emailing me, you know how do I determine the price in Portland, Oregon or how do I determine the proper price in Houston for real estate, should I be worried because we have a lot of [...] you know the prices are that out of whack from reality. Just think about every entrepreneurial decision being made across this country day in and day out, and how many entrepreneurs are basing their decisions based on you know the byproduct of that and whether its related to the housing industry or not. It's crazy but that's the dislocation effect that I just can't stress enough. It's going to cause a real huge problem as this all begins to unwind because people are doing things that never would have sustained themselves absent of cheap credit and the expanding money supply, and it's taken money from the real income producers, the real builders of the economy and shifted it into the hands of people like the Casey Serins of the world so they can get eight loans across four states for 2.4 million dollars without disclosing their income or residency. It's crazy.

Stephan: I think we talked about that, we almost talk about that every show and I think it's important stuff but what's really intriguing is, are the forecasts that you see out there and along with the spin. And what's interesting today The National Association of Realtors, they're saying that the worst of the housing slump is over. Sales of previously owned U.S. homes will grow at an annual rate of 6.29 million in the first quarter, snapping five consecutive quarterly declines, that's what they forecast. New home sales, about 15 percent of the market wont recover until 2007 fourth quarter. And this is, remember, this study is by people that, whose business is to sell homes. And to put the best possible spin on it you start to hear other analysts say things like, there's a consensus emerging that the beginning of the recovery is probably going to be 2007, the spring selling season is going to be crucial in determining exactly where it begins, or when it begins. And that's intriguing, and that may in fact happen, I think what's really important though is to remember you know so much of this economy we talk about this one every day is due to home equity being extracted. And when that's done, a huge source of quote "spending in our economy" is going to go away. And then you hear other people like John Lonsky from Moodies Investor Service say, three to five years may pass before housing starts and home sales return to their peak. So there is definitely not a general consensus out there, and what's really going to be interesting is, you know for starters here you have to take it day by day, week by week, month by month, but you also have to be able to sort of peak through the roses and it's going to be really interesting to see what happens with the whole Christmas buying season and consumer spending. I mean the holidays are the holidays and people spend money by it's going to be really interesting to see how that pans out, because that could be a key indicator as a beginning indicator.

We're already getting signs from you know, the retail industry, trade groups and so forth and we posted up some details today on Vigilant Investor. One analyst who is fairly prominent has revised his retail estimations downward from where he was, and he's finding that a lot of consumers are just not racing out there and in fact the surveys are showing that most consumers, well there is spending going on out there and you know it's picking up, it's not at the growth rate that is comparable to last years, which in other words is showing momentum decline, things are settling on in. But beyond that he's also finding that a lot of people are surveying [...] but they're just going to simply wait more so, more than ever are waiting until after until after the holiday to do some of their shopping and it doesn't look like they're going crazy out there as a lot of folks expected and a lot of folks had hoped. So, initial signs are not great and of course, Wal Mart, which is the nation's retailer has been revising it's earnings downwards for a little while and saying that things are going to come in well below expectation which tells you that middle America is not you know out there going gangbusters for this holiday season.

Stephan: Right, well it's interesting because you know, you're starting to see the economic you know, this is from Bloomberg, economic growth in the U.S. weakened the quarter, this is today and the slowdown will carry into the first half of 2007 and the pullback in manufacturing adds to the effect to the slump in housing. The economy will grow at an annual rate of 2 percent this quarter, will expand at 2.4 percent pace in the first 3months of next year. Both estimates are down from the previous month's survey. So you know a report this month basically has shown us that manufacturing has contracted for the first time in more than Three years in November, and a lot of that is due to auto makers trimming production et cetera, but you know, supposedly job and income growth will be strong enough to keep consumers spending et cetera. So you know, we shall see, I mean we are, what's really disconcerting is the fact that you're losing all these manufacturing jobs. I think last month we lost 15 thousand manufacturing jobs. And you're putting on jobs in other sectors but they're pretty much service oriented. And that is still a concern a bit of a concern.

[...] Chrysler announcing about 4 thousand layoffs in the North American truck operation and that includes some in Canada as well. But again it's, you know here's our manufacturing base slowly deteriorating and everybody is saying, yeah we don't have to worry about manufacturing, we can do all the thinking and let everybody else do all the heavy lifting and all the difficult work and, you know as if that's not derogatory in some ways I mean really to think that other people can't thing or can't catch on and of course you know all these proponents of the you know we'll do all the service industry sort of stuff are now realizing that the service industry is weakening and you seeing that you know service jobs are getting exported and a lot of the technology jobs can be done online, you're ever seeing legal work getting exported and so forth and education work starting to get exported. So you know the real question ought to be on a lot of people's minds is you know, what do we have here relative to our infrastructure in the United States that can continue to sustain 70 percent consumption driven GDP, economic growth?

Stephan: Well, and this is interesting too. You have the you know, going back to the National Association of Realtors, with their upbeat forecast going into this year, you have economic reports this month showing that the slide in housing may be deepening. Construction spending in the U.S. fell by the most in 5 years in October led by a plunge in homebuilding the commerce department said on December 1st. Sales of new homes fell more than economists expected that month. Slowing demand has left some companies with excess inventories causing many to throttle back on production as they sell from existing stockpiles. So, you know inventory is in October, piled up at a faster pace, and that's interesting, that's interesting Johannes and I think that's something important for our listeners and for people that are just investors out there to pay attention to. And I think it's going to get more and more interesting as we go from month to month, let alone week to week.

Right, well just wrapping up one other note that made the rounds today, the thefinancialtimes.com put out a post there, one of their articles was Oil Producers Are Beginning to Shun the Dollar More So and that's from the bank of International Settlements is showing that basically the oil producers, mind you as the price of oil lurks above 60 dollars, I think it closed at around 62 dollars and some cents today. They have al these dollars they don't know what to do with and what's happening is they're beginning to shun the U.S. Treasuries and so forth. And again the auctions for U.S. Treasuries have slowed down a little bit, so the big question is, in an economy that's as addicted to debt as of the U.S. right now and needs debt in order to keep the GDP going as it has been given that again 70 percent of our economic growth is dependent on personal consumption, and well, how are we going to keep those rates down and not totally choke off the U.S. consumer? And that is an inflationary question, but we don't have time to get into it much deeper because we're already at 19 minutes for our show today, we probably ought to be wrapping up. Everybody just don't forget we're on every day at 4:15, barring technical difficulties or some other smaller thing like a meeting or something that might prevent Stephan or I from getting to the show at the time but if we do have that we'll try to do the show earlier in the day. But in any event, we are having our last final, this is important, our final Wednesday evening Vigilant Investor hour long show 9 PM this Wednesday coming up here and we are going to be moving our hour long show to Fridays at 3 PM, that is our live hour long show. And you can get more details on that, we'll actually be starting closer to 3:15 PM and it will be a full hour and we're going to try to touch on some of the things we talk about on the day to day basis as we always do but then open it up to more conversation with listeners, to ask questions and so forth. So, until then this is Johannes and Stephan Ernharth at Vigilant Investor live, tune in tomorrow 4:15, we'll see you then.

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