Global Update — Preparing For A Weaker U.S. Dollar

The global economy is in a state of stabilization rather than normalization and despite the various negative events in the first quarter (earthquakes, Japan, Middle East) the global economy is still set to grow at a rate of about 4.5 percent this year, only marginally lower compared to 2010

However, global economic growth is very unevenly distributed these days and emerging markets are growing much faster than developed markets like the United States and Europe. Emerging markets are expected to grow about 6.5 percent versus only 2.5 percent for developed markets.

In its recent update “World Economic Outlook”, the International Monetary Fund (IMF) writes that global growth has been gathering momentum in the past few months and that the economic recovery has broadened. Also, the IMF thinks that the risks for a renewed global recession have diminished. It also thinks that the sharp increase in commodity prices is not a real problem for the global recovery. In their view, even an increase of oil up to US$150/barrel would only lower global growth by about 0.75 percent.

The IMF, on the other hand, is concerned about the increasing debt levels of the U.S. and the fact that there has not been enough done to address the problem of rapidly rising debt levels. While we share some of the views in this latest IMF report, our own outlook is more negative and we think that the state of the global economy is still more fragile.

We continue to see higher growth rates in emerging markets that will offset at least some of the lower growth in the Western world, but in our view the outlook for emerging markets is a lot more uncertain. There are a number of factors that could impact growth in emerging economies very negatively.

We also can’t share the IMF’s view on commodity prices. In our view, rising commodity prices are a much bigger problem. While the fundamental supply/demand relationship is clearly supporting higher prices, the increasing share of speculative investment money that has come into the sector is creating new problems. The rapid increases among all sort of commodities has led to a very broad increase in global food prices.

An increase in food prices has a very direct impact on disposable income. Today we are seeing a growing number of people getting pushed to the limits because of higher food prices and that is, among a few other factors, contributing to political changes like we are seeing in the Middle East right now. These changes can have far-reaching implications in coming years, not only to the Middle East, but to all major economies in the world.

We think that the global economy can grow about 4.5 percent in 2011 and 2012. That is a very realistic assumption, but the fact that today we are dealing with many economic imbalances today and a much higher degree of interdependence among major economies is increasing the risks for the global economy.

The main risk factors are obvious. With the Western world experiencing sluggish growth and growing levels of debt, painful adjustments have to be made eventually. We think that it is highly questionable that the ongoing loose monetary policies among most major markets can bring these economies back to the growth levels seen historically.

Higher economic growth in developing economies is in sharp contrast to the very moderate growth in developed markets and there are also growing imbalances between them, mainly due to the fact that developed markets have been increasing government debt very significantly in recent years while emerging economies have been able to reduce their debt in the last decade.

The following two charts illustrate the current trends of debt levels and deficits in developed economies and in emerging markets:

Developed Economies

Developing Economies
Source IMF

 

Emerging Economies

Emerging Economies
Source IMF

The charts show that the situation in the U.S. and in Japan is bad and about to get worse. While most countries in the European Union have finally started to address the debt problem and the trend for them is improving, it might take many years to turn things around. The big difference between the U.S. and Japan is that the U.S. has a much higher percentage of the debt financed by foreign investors, as the following chart shows

Net Percentage Of Debt Held By Non-Residents

Net Percentage Of Debt Held By Non-Residents
Source: IMF

While the U.S. continues to increase the debt burden, emerging nations like China are accumulating foreign currency reserves and are reinvesting them in developed markets, a large part of it in government debt securities such as U.S. Treasury bonds. This can’t go on forever and it is clear that emerging markets are increasingly concerned about reinvesting their reserves in U.S. Treasury bonds. Actually, these investments are already declining.

While the attempt to provide the domestic economy with ample liquidity is certainly understandable, it is giving the wrong signal to foreign investors. And it comes at a time when the need for foreign investment is bigger than ever.

The Federal Reserve in the U.S. is currently trying to stimulate the domestic economy and to create jobs by providing the market with a lot of liquidity. We don’t think that liquidity alone will create jobs. In our view, the fact that job creation has been so disappointing has to do with a number of structural factors that are much harder to correct.

Politicians and central banks will most often do whatever serves them best, and when you have so many people looking for jobs and being unemployed, it’s natural that this is a top priority. However, by creating excess liquidity and therefore forcing a devaluation of the currency, the ultimate consequence is inflation. I think we are currently in the first phase of this development. This is going to get worse in coming months, and probably years, and we will hear and read about it much more in the future. Inflation will eventually become a much higher priority item and therefore policymakers will gain much more by fighting inflation.

Here history repeats itself. In the early 1980s, inflation was by far the biggest problem, peaking at more than 13 percent in 1981. The fight against inflation began in the late 70s with the appointment of Paul Volcker as the chairman of the Federal Reserve. He raised the Fed Funds Rate to 20 percent against widespread protests.

But inflation eventually began to slow and it fell back to about 3 percent in 1983. It was a matter of setting the right priorities at that time. Yes it was painful, but it was a much-needed measure. The economy began to recover and returned to healthy growth for much of the 80s.

In light of the lessons from the past, it is obvious that the current Fed strategy is not sustainable in the long run. However, even if rates eventually start to go up, we think it is highly doubtful that the value of the U.S. dollar will go up significantly. I think it might only devalue at a slower rate.

Remember, even in the last few weeks with all the negative events in Japan and the Middle East, the U.S. dollar has not benefitted. Historically in times like this there was always a flight to security, and that was usually positive for the U.S. dollar. But now not even all the bad news helped the greenback.

This should have been big headlines in financial news, but it wasn’t. However, it is a further sign that the U.S. dollar is about to lose its status as the world’s main reserve currency which will cause a large rebalancing of currency reserves in coming years.

The world has become increasingly aware of the declining status of the U.S. dollar in the last couple of years and it seems like the world is now accepting a weaker U.S. dollar going forward. This is a real game changer with far-reaching consequences for investing.

Government Regulations Send Tech Companies Overseas, Issa Says

Government regulations send tech companies overseas, Issa saysRepresentative Darrell Issa (R-Calif.) has accused the Federal government of stifling job growth in the technology sector with compliance regulations.

Issa is the former chairman of the Consumer Electronics Association and the current head of the House Oversight and Government Reform Committee. On April 18, he delivered a speech in San Jose, Calif., presenting concerns from some of the nation's top technology representatives, The Hill reported.

He said that many start-up companies are avoiding the United States because of the high corporate tax rate and a lack of a permanent research-and-development tax credit. Issa cited Intel chief executive Paul Otellini, who says that it costs an extra $1 billion per factory to build in the U.S., compared to overseas.

A total of 90 percent of those additional expenses go to tax and regulatory compliance, Otellini told Issa.

According to The Wall Street Journal, the Commerce Department reports that U.S. companies added 2.9 million jobs domestically and 2.4 million positions overseas during the 2000s. That is a dramatic ratio differential compared to the 1990s, when 4.4 million jobs were created in America, while 2.7 million were added abroad.  

15 More Minutes

Truth be told, there are worse choices for the White House; some of whom aren’t even Democrats. It’s not as if the guy has committed murder; as long as you don’t count the intellectual tenor of primetime television—which was on life support anyway. I just think there are some candidates who are a great deal less… cartoonish. So, someone please pull the plug on the Donald Trump experiment.

I don’t have a real problem with The Donald, but I don’t have a real problem with Trump’s fellow reality TV star Bret Michaels. They’re both marginally entertaining, both surrounded by weird people and hot women and both were bigger in the 1980s. That doesn’t mean I think moderate-to-severe financial issues, tabloid-fodder living and pitiful attempts to hide profound baldness are any higher on the list of Presidential qualifications than—say—being a “community organizer.”

Of late, Trump has been polling in the 30s against a low-to-mid 40s showing for President Barack Obama. Now, before those of you who have climbed aboard the Trump express begin shouting “It’s EARLY, Ben! Give the guy a chance!”—jump back to the 1990s with me for a moment.

About 15 years ago, NBC (which airs Trump’s program “The Apprentice”) aired a sitcom called “NewsRadio.” One of the players on “NewsRadio”—a billionaire named Jimmy James—ran for president. While his prodigious wealth makes his campaign newsworthy, it soon becomes abundantly clear that James is running for President because he “wants to meet girls.”

I doubt Trump joined this fray in order to meet girls. The guy seems to be catnip to women with Winter Olympics-type accents. Plus, Trump may be a player, but he’s not grossly stupid. He surely remembers Bill Clinton’s eight years treating the Oval Office like Craigslist, and all Bubba got was a perjury record and lifetime status as a punch line.

But I cannot shake this nagging feeling that Trump, who has essentially played himself in every modern venue from the gossip pages of the lower-rung tabloids to the upper echelon of primetime television, is playing himself onto the greatest stage of the modern age: The campaign for Leader of the Free World.

Trump self-promotes the way politicians lie. Given his visceral desire for media attention, I suspect that even if he is serious about running and even if he managed to win—a mighty big if—he’d spend more time posing for Presidential photographs than he would actually BEING President. Looking at the sanctimonious buffoon who has the job now, we certainly don’t need another empty chair behind the Resolute Desk.

Many of you have offered an ear to Trump because of his “investigation” of Obama’s citizenship. (Obama’s ham-fisted mishandling of this one has kept it in play. However, barring a miracle, it’s never going to happen for the “birthers.” Knowing what I know about liberal logic, even IF someone were to irrefutably prove Obama was born on Pluto, the Democrats would probably ignore the Constitution… again.)

Trump may be a lot of things, but stupid is not among them. By provoking the “birthers,” he is likely hoping to gain their trust, and galvanize their Presidential blessing. But there are three flaws in his logic:

  1. The “birthers” don’t represent a large enough subset of voters to swing even a primary.
  2. He’s making the same mistake as the Democrat Party; he’s underestimating the “birthers'” intelligence.
  3. The birth-certificate (or lack thereof) issue isn’t going to be enough to hold together a long-run campaign. Obama’s unrivaled incompetence has left the economy idling at the stoplight, the military stretched even thinner than it was when he took office and the nation more divided than it has been since U.S. Grant made Robert E. Lee say “uncle.” Obama’s 2012 successor will need a lot more than just an affidavit from a stateside hospital to grab the political brass ring.

Throw in Trump’s rather checkered past vis-à-vis monetary donations to some seriously shady Democrat characters, and the recipe for a Presidential soufflé falls very flat. Lest you require further assurance, Charles Krauthammer and our own John Myers—two of the smarter cats on the planet—aren’t necessarily buying what Trump’s selling, either.

Closer to November 2012, I’ll share my thoughts on my choice for President. For now, someone call Trump and tell him his latest 15 minutes are up.

Governor Brewer Vetoes ‘Birther Bill’ And Legislation To Allow Guns On College Campuses

Governor Brewer vetoes 'birther bill' and legislation to allow guns on college campusesArizona Governor Jan Brewer has rejected two pieces of legislation that received ample support from GOP lawmakers.

On April 18, the Republican governor vetoed a bill that would have allowed guns on public college campuses, as well as a proposal that would have required Presidential candidates to prove they were born in the United States before being placed on the State ballot.

In an interview with FOX News, Brewer admitted that while she supports the expansion of gun owners' rights, she said the bill passed by the Arizona Legislature was "sloppily written" and would likely face legal challenges. She claimed that the law could be misconstrued to include K-12 schools, where Federal law prohibits firearms.

In regards to the "birther bill," Brewer said that the new law could open the door to "arbitrary or politically-motivated decisions," quoted by CNN. The legislation, which would grant power to the Arizona Secretary of State to confirm a candidate's birth status and subsequent ballot eligibility, was approved by Arizona legislators last week.

Lawmakers in Arizona can override Brewer's veto with a two-thirds majority vote. 

The Medical Police State

We live in a state of medical tyranny, where parents no longer have a say in their children’s care and where State legislators are considering laws that would make criminals out of people who practice natural and holistic medicine.

In Detroit, Maryanne Godboldo recently learned first-hand what happens under the medical police state: Refuse to follow orders and you lose your children and face multiple felony charges.

Last year, Godboldo took her 13-year-old daughter to the Detroit Children’s Center, a group that works with troubled children. She sought advice on a treatment plan for the girl, who began experiencing behavioral problems following a series of immunizations. Godboldo says her child—who has a physical disability—had never had behavior problems before being subjected to the State-mandated immunizations.

A doctor at the center prescribed an anti-psychotic medication. But when Godboldo realized the medication only worsened the child’s symptoms, she sought another opinion from a doctor not affiliated with the center. The new doctor recommended the girl be taken off the drug, and Godboldo agreed.

But the medical dictators of the state Child Protective Services thugocracy wanted to continue its doping regimen and CPS workers gave Godboldo two choices: Drug her child or give her up.

Godboldo refused both choices. That’s a perfectly reasonable choice. After all, she had gone to the center voluntarily, had tried their treatment plan and not only had not seen results, but had actually seen the condition worsen, and had sought another physician’s opinion.

In a sane world, where people are free to make their own decisions about the medical choices for their families, that would have been the end of the story. But that was not good enough for CPS, which showed up at her door March 24 with armed storm troopers from the police SWAT team demanding Godboldo surrender her daughter. According to press reports, police claimed to have a warrant but refused to show it to Godboldo. So Godboldo closed the door and told CPS and police to leave.

A standoff ensued, a shot was fired from inside the house—though Godboldo’s attorney said it was not fired at officers—and long hours of negotiations commenced. Finally, Wayne County Circuit Judge Deborah Thomas convinced Godboldo to surrender.

Godboldo was jailed under multiple felony charges and her daughter was whisked away to a psychiatric hospital. And then, in an act that would be comedic were it not so tragic, a judge ruled that the child didn’t need the medication after all.

Godboldo, 56,  and described in Detroit press accounts as a teacher, dancer and respected member of the city’s arts circle, remains separated from her child—has not even seen her since CPS stole her away. The child remains in the psychiatric hospital and has contracted a sexually transmitted disease, which Godboldo’s lawyer says is the result of a sexual assault in the hospital.

A hearing in the case is set for April 22. Perhaps a moment of clarity will reign and a judge with common sense will rule against the medical tyranny.

Pray for it, but don’t expect it. Big Pharma, the medical mafia and government-loving elites who feel they know better than you have become securely entrenched in places of power. Loosening their grip on our lives and regaining our medical freedom is going to be a long and arduous process.

Appeals Court Affirms Government’s Right To Observe National Day Of Prayer

Appeals court affirms government's right to observe National Day of PrayerA Federal appeals court has dismissed a lawsuit that challenges the government's observance of National Day of Prayer, which is set for May 5 this year.

The complaint was filed by the Freedom From Religion Foundation (FFRF), which claimed that the Federal government's participation in religious practices compromises the individual rights of Americans. Last year, United States District Judge Barbara Crabb ruled that the government's observation of prayer was unConstitutional.

Last week, the U.S. Court of Appeals for the Seventh Circuit overruled Crabb's decision, saying that the FFRF had no legal standing to bring the suit. The court concluded that "hurt feelings differ from legal injury."

The decision was praised by several groups, including the Liberty Institute, CitizenLink, Family Research Council, American Civil Rights Union and Liberty Counsel. They argued that observances of prayer were modeled by America's forefathers.

"Even Americans with a decidedly agnostic view of religion cannot refute the important role religious tradition has played throughout the history of this great nation," said Brad Miller, director of family policy council for CitizenLink. "The President's proclamation is simply a continuation of a long and deep tradition of urging and acknowledging prayer as a fundamental part of a healthy society."

Several past rulings by the U.S. Supreme Court have protected the traditions of religious invocations. In 1952, Congress passed a statute that called on the President to issue a proclamation on the National Day of Prayer, which is observed on the first Thursday of May. 

A Week For The Bad Guys

Sadly, the bad guys made more headlines in history this week than the good ones. Let’s start with April 20, 1889, when a particularly heinous character named Alois Schicklgruber came into the world. You’ll know him better by the pen name he adopted later, Adolf Hitler. As the world knows to its sorrow, he went on to become one of the most murderous tyrants in history.

Strangely enough, although Hitler was a left-wing extremist (the very name of his movement, Nazi, is a contraction for “national socialism”) somehow the Left has managed to turn the word into a pejorative against the right. It sure is easier to sell a lie when you dominate the mass media, isn’t it? (Not to mention most seats of higher leaning… er, learning.) If I had a buck for every time my colleagues and I have been called Nazis or fascists, why… I’d buy a lot more gold.

More than 100 years after Hitler’s birth, two demented high school students in Littleton, Colo., chose the anniversary of their hero’s birth to conduct the Columbine High School massacre.

Finally, on April 25, 1945, 45 countries convened in San Francisco for the founding conference of that international plot against individual liberty, the United Nations. The general secretary of the meeting was none other than the notorious Soviet espionage agent, Alger Hiss.

Hiss was not the only American involved in the formation of the United Nations who was later revealed to be a communist. In fact, of the 18 Americans cited by the State Department in 1950 as “the important men who shaped the UN,” all but one were later identified as communists. No wonder the U.N. is so inimical to traditional American values.

–Chip Wood

Obama’s Approval Ratings Continue To Wane

Obama's approval ratings continue to waneIn the wake of a Congressional budget standoff and military action in Libya, President Barack Obama's approval ratings have fallen to near-record lows.

According to The Washington Post/ABC News poll, a total of 47 percent of Americans approve of Obama's job performance, which is four percentage points lower than last month and only one point higher than the lowest ratings of his Presidency. In regards to Obama's handling of the economy, approximately 57 percent of respondents disapprove.

However, surveyed Americans still preferred Obama over the field of rumored GOP Presidential candidates. Against former Alaska Governor Sarah Palin, former House Speaker Newt Gingrich and real estate mogul Donald Trump, Obama held double-digit percentage point advantages.

Former Massachusetts Governor Mitt Romney is Obama's top challenger, according to the poll. About 45 percent of respondents favored Romney, compared to 49 percent who backed the President.

In an effort to gain support among conservative voters, Obama recently conducted an interview with a reporter from a Dallas-Fort Worth TV station, named Brad Watson. According to The Chicago Tribune, Obama became a little chippy with Watson, saying "Let me finish my answers the next time we do an interview, all right?" 

The Color Of Green

“You walk in to a shoe store with $150, you walk out with one shoe." —Paul Newman speaking to Tom Cruise in the film “The Color of Money.”

Earlier this month another terrible blizzard struck in what has been one of the worst winters in memory. As snow packs finally begin to melt I can’t help but think that the environmentalists are not telling us the truth. Of course, having two terrible winters in Western Canada over the past three years can’t yield a scientific conclusion. Yet my observations may carry as much evidence as the Green’s theory that the earth is melting beneath our mukluks.

In his 2009 book Heaven and Earth: Global Warming—The Missing Science, Australian geologist Ian Plimer makes the following points:

  • There is little to no geological, archaeological or historic analysis on what is causing climate change.
  • Greenland was once a green land because of natural occurring global warming. During medieval times Earth was several degrees warmer than it is now.
  • Climate has always changed but it is not because of industrialization.
  • Atmospheric CO2 has been far higher than it is now.
  • The hockey stick graph that charts global warming as the result of manmade CO2 emissions is fraudulent.

The book concludes that the slogan, “Stop climate change”, is a public phenomenon based on widespread ignorance rather than real science. The sheer number of TV programs that go out of their way to hammer home the dangers of global warming is evidence that Plimer is on to something.

You can order this book from Amazon.com by clicking here.

President Barack Obama is staking America’s future on clean energy while ignoring these truths. A few weeks ago in a major policy address, Obama announced that America would continue to pursue green energy solutions from wind, solar, biofuels and nuclear power.

According to the President, “We cannot keep going from shock when gas prices go up to trance when gas prices go back down.”

This prompted The New York Times toconclude: “The path to energy independence—or at least an end to dependence on the Mideast—could well be dirty, expensive and politically explosive.”

What the Greens seem blind to is the fact that a shift away from fossil fuels will have huge opportunity costs for the United States at a time when the country can least afford it. The technology for clean energy does not yet exist. To embrace it when competitors like India and China do not would be economic suicide.

What the President either cannot or will not grasp is that these solutions involve huge subsidies and are cost ineffective.

Why Adam Smith Would Hate The Environmentalists
Over the past couple of years I have written to you about all the problems inherent with renewable energy. On that list is the vast amount of cropland needed to create ethanol, the inefficiency of solar energy and the lack of an infrastructure for hydrogen vehicles. In time, all of these problems can be worked out, but the best way to achieve a seamless switch is to take government out of the equation.

And while Adam Smith died more than 200 years ago, the father of economic thought would object to Obama’s energy agenda because it does not allow free markets to operate.

The invisible hand that Smith spoke of when describing how free markets create wealth was at work when oil was trading above $120 per barrel. The record purchases of hybrid cars three years ago were evidence that free markets work.

The chart below shows hybrid car sales statistics along with the price of gasoline over the past seven years. As gasoline prices have declined so too have sales of hybrid cars. That is how the free market works.

Hybrid car sales statistics, January 2004 to March 2009

As petroleum becomes less and less affordable, consumers will switch towards other types of transportation, including electric cars. This will encourage outside investment and, over time, crude oil will be displaced. This won’t happen because the Federal government mandates a changeover which is neither practical nor affordable.

Despite this fundamental truth, Obama is hell-bent on the Federal government fixing a problem (global warming) that doesn’t even exist. It seems hard to understand why, but the Las Vegas Review Journal suggested an answer. A headline in the April 4 issue read, “Green goal: End capitalism, destroy our quality of life.”

According to that newspaper:

“Those who claim to be trying to save the planet from the scourge of greenhouse gases and catastrophic global warming have a few other goals: social engineering, assaulting capitalism and assailing the American lifestyle.

“United Nations Environment Programme (UNEP) defines a green economy as one that results ‘in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities.’ In its simplest expression, a green economy can be thought of as one which is low carbon, resource efficient and socially inclusive.

“By socially inclusive they appear to mean a leveling [SIC] of the capitalist system under a global government, with less wealth spread equally among a population of green-collar workers without social or employment mobility.”

I don’t know if Obama and his Green coalition are nefarious. But there remains one simple fact—fossil fuels still make economic sense. To claim otherwise and keep subsidies for renewable energy or pass carbon tax legislation would only serve to sell the American people a useless bill of goods.

Yours in good times and bad,

John Myers
Myers’ Energy & Gold Report