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August 29, 2005

A Forked Tongue in Jackson Hole


John Mauldin, one of the more astute observers, may have been the first to dub this the "Muddle Through Decade". Mauldin accepts many of the negative points made by his Austrian-school oriented friends but somehow counterbalances their arguments with a fundamental appreciation for the enormous expansionist momentum (our words, not his) of an American-led world economy.

For many of those (highly bearish) Austrian-school fundamentalists, we have already been moving headlong into a precipitous imbalance for more than a decade. They see a perilous world economy buoyed by one more dangerous gimmick than the prior.

Their great villain is, of course, Fed Governor Greenspan, who through the manipulation of one market after another, has been the chief priest of this cult of irresponsibility. It was Greenspan, after all, who blew into the pipe of the great Tech Bubble of the late 90's thereby allowing stock valuations to reach unmaintainable levels. For the critics, a wiser steward would have held back after the crash and allowed those same corporate equity values to wind down to levels in line with profits thereby laying the groundwork for a soundly based re-expansion. Greenspan's second deadly sin, in their eyes, is the great asset/debt bubble that was unleashed by the Fed after the Tech Bubble burst as the central bank yanked down interest rates to negative levels in real terms in order to stimulate widespread debt while encouraging the Administration to pursue a course of reckless deficit spending.

As frustrated Cassandras, the sound-money bears have stood on the sidelines pointing to the flight of US manufacturing capacity and jobs, the increasingly massive trade and current account debt, the impending shortages of basic commodities like petroleum, the grievously poor quality of the growing number of loans being issued by US lenders, the suspicion that huge pools of funds are under the trigger-finger management of largely unregulated, potentially irresponsible hedge funds, and any number of other risk factors, not least of which, the eventual impact of a costly and extended, and ultimately unpopular war.

The bulls and Administration cheerleaders, not surprisingly have seen these last couple of years in a positive light even if the stock markets have somehow not quite got the message, something that never fails to baffle them. The bulls have focused on positive, slightly above average GDP growth over the period, strong corporate profits, positive job growth, low unemployment numbers, the positive effect of the bump up in housing values and associated business and job activity, and the great growth stimulus being provided to the world economy by the emergence of India and China as economic powers. They see only the demonstration of the real economy's resiliency in the face of rising petroleum prices, the negative impact of the War, the recovery from 911 and the Tech Bubble, etc.

Mauldin's muddle-through scenario gets played out over and over again in the financial pages of the world's press. On any given day we can see the announcement of fairly positive job numbers on one page and pictures of over 10,000 people waiting in line to get 400 minimum wage jobs at a newly opening Wal-Mart, as we did last week, in Oakland, just across the bay from Silicon Valley to the south and San Francisco city where house prices are so high that nearly 70% of the population rents.

The disconnect is so extreme that it can get surreal. It may also be reflected, quite ironically given the way it shakes out, in the Blue-state Red-state line-up of the present political equation. Real wages in the US have been stagnant since the 1980's (especially in the red state heartland) while CEO salaries have grown a thousand fold. Corporations and the wealthy (based mainly on the blue-state left and right coasts) also have benefited from greatly reduced tax rates. The War and rising oil prices have also fattened the portfolios and wallets of plugged-in segments of the population, located mainly along the coasts. At the same time, outside the public sector, the labor unions have never been weaker since the Second World War.

The bulls await the kick-in of a second wave that takes the relatively narrow stimulus of low taxes, deficit spending and the housing "boom" and turns it into a broad recovery that will last for years boosted further as oil prices finally recede along with the financial and psychological costs of the War. The bears await the impending collapse of the housing bubble --signaled, once again ironically, by their boogey-man Greenspan in a speech this week-- the swooshing sound of foreign capital as it pulls out of the US financial markets unleashing the full weight of the accumulated foreign and domestic debt of the last few years and the death by a thousand blows of a moribund economy they'd liken to Terry Schiavo.

The muddle-through argument relies, despite the raft of acknowledged problems, on a belief in the positive momentum of an ungainly but nonetheless growing world economy, the basic strength and ingenuity of the American workforce and the bet that in times of real stress, it's more likely that capital will flow into the relatively safe haven of US capital markets rather than in even more perilous opposite directions. The US, they argue, is the engine of the world economy, it's in everybody's interest to keep it on life support even if the Fed walks away. In a muddle-through world, there is more productive capacity than customers, prices for many items remain down --see GM's move to (permanently, our words extend its employee discount-- as do interest rates as capital seeks but cannot find high return investments thereby forcing governments to fight deflation by issuing even more cash.

For the time being, the muddle through equation seems to be holding: markets go sideways, up and down almost in random patterns, and foreigners continue to cover our excesses by recycling their dollars back into US securities. Just this week, the Wall Street Journal pointed out that even as US mortgage loans get issued to riskier and riskier borrowers (40% percent of all new mortgages are in this category), the market for REITs --the securities that back these loans and make it possible for the banks to issue them while shedding the risk-- remains strong, even growing in popularity with the Asian bankers who seem to hold the key to the low interest-rate economy we now live in.

The Fed will continue to push up rates until as Greenspan said in Jackson Hole somewhat forkedtonguedly: "If we maintain an adequate degree of flexibility, some of America's economic imbalances, most notably the large current-account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more wrenching changes in output, incomes and employment."

In other words, Greenspan, now zigging to cover his backside, will have higher prices, higher interest rates and a lower dollar while avoiding a bust that's sure to follow. That's what we call hyper-flexibility here in Dymaxia.

Posted by dymaxion at 12:40 PM

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August 15, 2005

The Silence of August


In the heat of the Potomac Summer, here at Dymaxia HQ, we sometimes show symptoms typical of the ague. Still, to our surprise, tiptoeing through the code orange ozone sky, a specter has appeared.

We know that in these quiet points, history can tip on single events like the defiance of a fatigued Rosa Parks on a long ago bus ride. This time the story is happening in Crawford TX outside the entrance to the Bush Ranch, where Cindy Sheehan, mother of a soldier killed in Iraq, has managed to draw attention to the mounting feeling of despair that has been stealthily creeping over the country as the toll of war deaths and injuries continues to mount relentlessly.

Why Ms. Sheehan's protest has gathered so much attention (as always, these days, first in the Blogosphere) says much about the way both the Administration and the mainstream Media have up to now danced somewhat macabrely around the entire Iraq narrative, best frozen by the daily presentation of war dead in silence on PBS's News Hour with Jim Lehrer. The must-be in silence metaphor holds not just for the Media but also for the Political Class and public. Most notably leading this silence is President Bush, who,  speech-challenged in the most ordinary sense, has also refused to provide the kind of rallying cry we expect from a leader who has put so much treasure and blood on the line for what can only be called a war of his own choice.

It is said by those who know his heart that the President is a deeply religious man who believes that he has been given his great position and the power inherent in it to serve the will of the Almighty. If this is true, and we have no reason to doubt it, we then can't help but to note that the President has never stood before the American people and shared this belief with the country. We can only imagine that this act of divine will is carried out in reflective silence.

Perhaps this is one reason for his relative quiet on the sacrifices his policy is requiring of a large number of us. On the other hand, and this can only be policy, we as a whole population are not being asked to make any direct sacrifices to ensure a successful outcome for this costly and Earth-moving venture. To date, the burden has fallen almost entirely on the shoulders of the professional military and their families; ... enter Ms. Sheehan.

To the contrary, as regards the rest of us,  it can be argued that the war is providing bounty --at least in the short run-- by fueling a flagging economy.  The 200 plus billions of dollars that is being spent is all off the budget and thus is not being accounted for, something that should be noted as the Administration announces budget deficit projections for the year.  It is a debt that is being run up in a military-industrial shopping spree, that only further speeds up the printing presses. As always, to keep things muddling along, we must rely on the favors of foreign governments to loan us the cash we need.

One of the lessons of the Vietnamese War for the postwar analysts was that a draft greatly exacerbates negative popular feeling during an unpopular war. Perhaps the greatest wall of silence today, in contrast to that turbulent period, emanates from the college campuses. Students, like their parents, run up debt as they go about their daily business unclouded by the thought that they might be called to serve and sacrifice for their country in Iraq and Afghanistan.

When Nightline's Ted Koppel last year at the milestone of  1,000 combat death in Iraq, chose to show the faces of those killed in action, (in silence, of course), he was roundly criticized by the Administration and its backers. ABC was deemed quot;political" for calling attention to this landmark.  In the same regard, one of the great under-told stories of the war has been the enormous number of serious casualties, estimated at some 25,000.

But non-silence can be dear. When Ambassador Joe Wilson spoke up calling the President's bluff on the atomic weapon scare (Niger yellow cake) that he had inserted into his State of the Union Address leading up to the war, "high ups" in \the Administration took the radical step of outing his wife, Valerie Plame, as an agent of the CIA. Factual speech, then, is squelched even as  speech that laid the false pretext of a case for Iraq's weapons of mass destruction (WMD) and links to Osama Bin Ladin (a major critic of Saddam) is left unscathed.

Ironically, silence from Iraq has been achieved through the generally negative situation .  Journalists, fearing for their lives, rely on the reports handed out by the military for their daily news feeds. This has resulted in a situation in which the deterioration has largely been gradual and utterly under reported.  For the most part, we do not know what is going on there on the ground and in the provisional government. We certainly don't know which areas are being controlled by which militias and what the constitutional process may or may not signify. Out of the silence we can surmise that there is a general breaking up of the country, that it is probably impossible to speak of standing up an Iraqi police and military given the mistrust among the Sunnis, Shiites and Kurds --we know this because the Pentagon is hinting that it will have to raise  the level of American troops during a scheduled election on the constitution that is supposed to take place around December and that coincides with the rotation in and out of American forces that allows for an overlap.  If there really was a reliable Iraqi military the extra troops shouldn't be needed. But once again we know this not by what is being spoken but by what is not being said.

The war has gone badly and thus empowered and emboldened neighboring Iran.  The Iraqi Sunnis who along with coreligionist cousins from Saudi Arabia, Syria and Jordan are fighting the Americans will come out with the short end of the stick if the oil fields to the north and south end up in quot;semi-autonomous" federal regions. This will be unacceptable to them and prove a potential danger for the bordering Saudi controlled oil fields of Arabia. It is whispered that Ahmed Chalabi, once the Pentagon's choice to replace Saddam and a leading pre-war player, has established himself near Basra in the South and with Iranian consent is leading a movement to create a semi-autonomous Shiite region that contains the major oil fields and Iraq's only port on the Persian Gulf.

It has become crystal clear there is no good outcome in Iraq.  The US' best hope is that the Shiites backed by the Iranians will somehow be able to box in the Sunnis without requiring too many permanent American troops and that we will be able to put the Iranians in the kind of box we once used against Saddam Hussein. A bad case but much more likely scenario will drive the price of oil to levels that will squeeze a shout of pain out of the silent American backbone. As for the American elites, smiling in silence all the way to the bank as their tax cuts and rising first, second and third home assets have hit the roof, we can expect the loudest calls for relief and subsidy should there be a squeeze. 

Cindy Sheehan has broken the silence, and unless the heat has made us delirious, she's but the first in a roar.

Posted by dymaxion at 04:56 PM

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