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Posted On: 2006-12-12
Length: 18:30

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Well, this is Johannes Ernharth and we also have Stephan Ernharth on the show today, Vigilant Investor live, we're running a little bit behind schedule from our usual 4:15 start time, but sorry if you tuned in today and weren't able to listen to us live. But in any event, let's move on into the day's events. Kind of a flat day in the market generally, the Dow Jones Industrial down just a little bit 12 points, 13 points to 12,1315, or excuse me to 12, 315, S&P dropped just a shallow 1.48 down to 1,411, and the Nasdaq dropped 11.26, about a half percent there to a 2,431 close, all of them still down from their high earlier in the year, but it looks like things are still chugging ahead, I mean the Dow Jones is up 16 percent, the S&P up 15, and the Nasdaq Composite up 20 percent. Now, we take a look, we always like to look at the VIX, which is the CBOE volatility index, and today that's down another half percent trading at 10.65. Now, boy just a few, about a week ago it was up in the 12's and it seemed like everybody was finally wising up to the potential volatility out there, but alas, no 10.65 down a half percent and it is down 55 percent from its year high earlier and earlier in the year it was actually trading at, let's see, VIX was it down 13 points. So, 13 plus 10 is about 23, 24. So, it's come down a good bit, it's down 55 percent. So, obviously generally the markets are not expecting a ton of volatility out there, even in the face of a lot of not so attractive news on the economy front. Of course anything can be dressed up to looking better than it is. Now, we take a look at one other indicator that we like to monitor on a daily basis and that is the U.S. dollar. The USDX traded against other currencies, 5 major currencies and today it was down just about a quarter percent, three tenths of a percent, trading at 82.94, so it broke back below the 83 dollar, or excuse me the 83 threshold, which is considered to be one of those resistance points that when it gets below, people are monitoring what's happening with the dollar again, confirming our general belief that in the long run the dollar is going to continue to weaken. And for all those economic reasons that we talk about day in and day out at vigilantinvestor.com. So that's the quick market recap that we always like to do, and a reminder to everybody also Vigilant Investor regular listeners, this Wednesday evening is going to be our final open forum show that we do for an hour long 9 PM Wednesday evening coming up and we are then going to be converting, going forward to a Friday, 3, I think 3:15, 3:20 is when we're going to start, of course always check at talkshoe.com or vigilantinvestor.com for the exact start up time, but again December 13th, tomorrow evening, 9 PM Eastern Time if you want to participate, tune on in and then thereafter beginning not this week but starting next week, the week of the 18th, so our first hour long Friday show will be on the 22nd of December as we head on into the holidays. So, in any event hopefully you'll be able to tune in and call in and participate and all sorts of other things. So, moving onward and upward Stephan, any news today that you have spotted that you think is worth discussing with our listeners?

Stephan: Yeah, I think it's important the Fed kept the benchmark U.S. interest rate at five and a quarter percent, and suggesting a softer growth outlook while you know at the same time, noting inflation risks. Soft growth, inflation risks, stagflation, I thing those are code words, we need to set up our own BS analyzer here.

At least a Fed translator, maybe ...

Stephan: Yeah, Fed translator

You almost wonder if they even fully understand it themselves.

Stephan: Well, the Fed open market committee basically called the cooling housing industry, or the cooling in the housing industry substantial, okay? And you have to read between the lines here. You know one of the, basically, slight changes in the language from previous statements last month, and the prior month. But you know, and they basically called it economic indicators mixed etc.. But, I think right now what you have is a scenario, what you have right now is a scenario where you know, you've got this situation, you have inflation here, we thought we'd talk about it every day. You've got prices going up and you have an economic outlook that is soft. And that's not a pretty place to be.

True, true, true. And looking at the one other price that is worth monitoring and that is crude oil, and that was trading anywhere from about 61.50 to 62 today, with I think the last trade on the New York was 61.02. So, it looks like it was down just a little bit. So, there's talk of the crude is going to weaken a little bit with the head of the OPEC meeting. Any thoughts on what OPEC might be doing, or what they're thinking about in the midst of all these other things we discussed. Do you think they're going to increase the supply of oil, or do you think that it's in their best interest to tighten things up further, it's seems like they're getting other participants that won't even join up.

Stephan: I think they're going to tighten, and you've heard comments recently there is support, or let's call it leaks or selective leaks by OPEC that in effect they're going to try to cut production if they have to, to keep that price support.

Now, one thing that's happened is Bloomberg is reporting the U.S. October trade deficit narrowed to 58.9 billion and is that maybe a sign that the dollar is weakening abroad, people are spending less or is that just a sign that the consumer is just tightening and throwing in the towel?

Stephan: Well, you know what, it could be both. Again we've talked about Japan, from October to the prior October, their trade surplus dropped by 25 percent globally, but largely attributed to the U.S. consumer's declining demand.

Yes, it came down, but not as much as a lot of analysts and forecasters had expected. A lot of that can also be attributed, it's basically the largest shrinking in almost 5 years, this, and it was for October. And largely we can thank the price of oil having come down to help that to some degree as well. Less dollars we're spending on oil basically means the less we're spending on the deficit. But of course we've seen oil going back up price wise it was trading there in the high, the high, you know 50's there for a little bit, so that is probably something we're not going to see again through winter, especially now with some of the things that are happening in Russia, with, that was another bit of news that ended up hitting the wires yesterday, where the, or Putin basically told Shell that, no, we don't want you necessarily investing or owning over 50 percent of one of our best oil areas and developing there, and we're going to ask you to knock it down to 25 percent with the implied 'or else.' So, interesting things happening there on the energy front.

Stephan: Well, excuse me, yes and what you're also seeing out there, you know we always talk about inflation and the massive expansion of the money supply via government printing, lending, etc.. but you know, just released today, Britain's inflation rate rose to the highest in at least 9 years increasing speculation that the Bank of England will lift interest rates next year. And in a nutshell, consumers struggling to keep pace with inflation. Utility bills, transport, recreation, culture costs and this is what happens when, and retail prices accelerated in November, and this is what happens when you have more, too much money floating around. And this is a quote, "people are struggling to keep up with inflation," said Paul Sellers, economic policy advisor at the Trades Union Congress, which represents more than 7 million workers. "I don't see any inflation busting pay deals coming up, but pay has proved remarkably stable over the past year and that can't go on forever," i.e. they're looking for pay hikes and again, it's stagflation in England, okay? Costs going up, wages not going up and economic activity potentially going down and you also in England have rising joblessness. Unemployment is rising keeping a lid on wages. And, you've got a half a million immigrants from Eastern Europe joining in the workforce. So, in effect you're seeing, this is just on an American problem, okay? We're the focal point of this problem, we are via a lot of credit and borrowing, driving, the driving engine let's say of the global world economy, but this has a trickle down affect to many other countries.

Absolutely, looking also at some of the other headlines around today. U.S. employers are expected to tighten their hiring plans, and that's according to a survey by Manpower, which is the world's largest temporary employment group. Basically again, signaling a more of a recessionary type of thing moving forward. And it's interesting, I got an email from an author who often times gets his materials published in a national review on the economics front, and he's touting all the latest job gains as being a really good sign and so forth, and of course we have to take any job gains in this country with a little bit of a grain of salt when we consider the ultimate unemployment number because, you know, just the way that the unemployment number is calculated, it is not our grandfather's way of calculating unemployment. Most people would consider that unemployment would be anybody who is able bodied and capable of working, are they working or not? And, you know unemployment figures here seem to be really good here in the U.S. compared to other countries but, we fail to you know, take into account that you know, we have a huge anchor on there which is considered to be the people who are the discouraged workers. They're no longer considered to be unemployed because they've given up looking for work. So, it's a very nice little way to pad the stat there in terms of unemployment or not, and of course there's also the statistic sampling that goes on with the unemployment number where they remove some of the higher unemployment areas because they are considered to be too biased in one direction of another. So, you know heavy unemployment, you know slum areas, inter-city areas where there are more tendencies for people to be not working, they just don't sample them so that makes the unemployment number always look very good. But, again here's Manpower saying in the survey, you know, people are saying they're just not going to be hiring as many people going forward.

Stephan: Another interesting development today, you had treasury bond investors are extremely bullish right now and in effect the bond market is effectively driving the prices of treasury bonds up. And in effect the bond market is betting that the Fed is, the Fed is ultimately going to have to lower rates because there's a lot more on the downside relative to the economy coming up. So, again, the bond market in effect, the bond investors are realizing that you know, Greenspan can talk about reining in inflation, but what's he's got are economic problems that are far more severe on the downside than inflation. But listen, it's not the natural state of things, it defies economic gravity to have a declining economy and declining economic activities and rising prices unless you have central banks involved printing a lot of money out there, and be heading towards the inflationary hangover. And again, stagflation.

Absolutely, absolutely. Also looking at another headline out there, rent increases are apparently far exceeding workers' income growths. So, and that's according to the National Income Housing Coalition [...] that the affordability is basically getting you know, more and more out of reach with the, what do they have, the cost of affordable rental housing has risen 28 percent in the past 7 years, and that's clearly far outpacing wage growth. Inflation itself has only been up 17 percent since 2000, and we know that wages have been sinking relative to that, when you consider all forms of compensation, benefits, you know general actual cash wages and so forth.

Stephan: Yeah, so I mean, it's interesting. It's really interesting as to what's going on out there again, it's the holiday season, do we expect so much to be going on in December, no. But certain things that you have to keep your eye on, because in effect these, you know as we head into 2007 this type of information, these type of currencies start to rear their ugly head and they may not be so significant as they happen, but in effect they are tremendously important things that affects ultimately, could be extremely dramatic.

Right, right. The, otherwise a couple other headlines that I'm not going to get to deep into it, sub prime mortgages are creating more of a problem for borrowers, or excuse me, for lenders, people who have bought those sub prime mortgages as part of their investment opportunities, they're finding now that foreclosures are eating into their returns a little bit and causing, you know default issues. So, it will be interesting to see how these delinquencies and defaults end up affecting that overall mortgage pool as the economy gets tighter in the U.S. and of course, keep in mind when mortgages are issued in the U.S. they just don't stick with the bank in the old fashioned sense where the bank that had issued your mortgage, holds your mortgage those things are repackaged and shifted around the globe to investors all over the world and not only repackaged, they're sliced up and diced up in this modern world of finance. And a lot of people argue, well hey, that makes us less risky and less susceptible to a breakdown, but on the flip side if you remember we were looking at that VIX indicator earlier, it's almost as if people have grown overconfident and they're willingness to take risks at spreads over the risk free rate of return, which is traditionally your U.S. Treasury, where you're considered to basically to have not risk, at least historically on the, especially on the short term side of the equation. You're looking at just the spreads between formally what was considered to be a higher risk asset, you know your high risk bonds, your junk bonds and so forth. That spread is just so narrow these days that it defies, it's basically telling you that the market just doesn't perceive there to be all that much risk out there and of course that is for us being somewhat you know, I guess we'd be boxes contrarian, that's a contrarian signal.

Stephan: Absolutely. Absolutely. So, I think thing are quite interesting right now as they continue to be, and that the main thing we just want to stress to our listeners day in and day out you've got a scenario where there are signs of a softening economy, the bond market is saying so by driving up the price of bonds even though the Fed is keeping interest rates up or rising rates are bad for bonds, right? But the bottom line is bond market says to Bernanke, we're not buying it Ben, because you may try to prop up the dollar, or you may try to be saying that we need to control inflation or he may have to control inflation or, but it's utterly, I think he knows that he can't control it just by keeping interest rates up because he truly is aware that the Fed is aware of how much money is floated out there in the economy, okay? And they're complicit in the whole thing they've created this money out of thin air in [...] with our government. But in effect, the bond market is on to him Johannes as you always say, you've got your bond investors, bond vigilantes, the feeling the consensus by the bond investors out there is that the economy is going to be soft and it's going to be hurting and that really, he's going to have to drop interest rates to try to re-stimulate one more time.

Yeah, I think that in, the one thing that we always, the thing that should concern everybody is that the general philosophy among the prevailing wisdom among economists is, and Ben Bernanke being one of the prevailing wisdom type people, is that in order to stave off the problems with the bubble, the backside of the bubble has historically been a recession, a deep recession and ultimately in worst cases a depression. And when we go back to the last great depression in the United States the lesson that is echoed by Ben Bernanke et. al. I mean everybody who has talked about this is the big mistake that was made then was the central bank [...] step up in time to rescue the economy with enough liquidity. So that has been the panacea to the problem has been just to always increase the spigot, open the spigot, let the money flow and that bails out the problem. And as we always say as being of the Austrian school of economics persuasion is that can work for a while, but eventually that effectiveness declines each time you do it and eventually you just can't do it indefinitely and if we look at what happened in 2001, the foot was hit to the accelerator there, the money supply was increased, and instead of having a recession that cleaned out a lot of dislocation in the economy we have a housing bubble in its place and a balance sheet that is dramatically worse off than it was just 5 short years ago and here we are. Well, we've gone our 15 minutes and we've exceeded that and we probably ought to wrap up our show for today and anybody who is listening we will open up if you want to ask any questions and so forth after we stop our recording for our Podcast listeners, of course you can always subscribe to us to talkshoe.com or via vigilantinvestor.com and great. It's a great service to subscribe via something like iTunes, every time you log on it will automatically download our 15-minute daily, or 15 to 20 minute depending on how long we run daily. So if you miss it live you can catch it then, and also our hour long show, you can download that as well, it happens automatically every time you turn on iTunes and you're connected to the Internet it's gets beamed on into you. A very, very convenient way to listen to our show if you can't hear us live. But like I said, we're going to wrap up our show and anybody who is on board will be able to discuss and ask questions afterwards. This Johannes Ernharth and Stephan Ernharth, you're listening to Vigilant Investor, and of course what we always say, none of what we are saying should be construed as investment advice, please always consult with your own resources and professionals and so forth before you do anything based on what we're saying. We're purely here for informational purposes only.

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