Dow 14K: Miracle... or Mirage?

Dow 14K: Miracle... or Mirage?
A Swiss America Special Report
July 20, 2007

By David Bradshaw, Editor, RMP
By Ambrose Evans-Pritchard, Int. Bus. Editor, London Telegraph
By Craig R. Smith, Author/CEO, Swiss America
By Dr. Jerome Corsi, Author,
By David Bradshaw, Editor, RMP

By David Bradshaw, Editor, RMP Digest

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered." -THOMAS JEFFERSON

This Swiss America Special Report addresses some of the major risks and potential economic consequences facing investors today.

Predictions for the second half of 2007 and beyond range from rosy to ruinous, depending on which headlines you believe.

"Great Depression Dangers From Credit Spree," says The London Telegraph.
"Oil May Hit $95 This Year Says Goldman," MoneyNews informs us.
"Iran Asks Japan to Pay Yen for All Oil," declares Bloomberg.
"Gold higher as dollar languishes at record lows," says Forbes.
"Dow touches 14,000!," reports

The Dow just hit a new nominal high of 14,000, 17% above its March 2000 peak of 11,722. But after adjusting for inflation, the Dow would still need to rise another 4% to 14,200 to reach the same level it was seven years ago (using the official government rate of 3% inflation rate per year). Whoopee! Champagne anyone?

"Dow 14k is a kind of sleight of hand, brought about by inflation, and distracting the majority of people from the true condition of the economy," writes Michael Nystrom of

"The chart shows the DJIA (black line) compared to the DJIA multiplied by the US$ Index (red line). Despite the very nice surge in the unadjusted Dow, when adjusted for the falling dollar it is still well off its old highs made back in May 2000," reports Jack Crooks at Asia Times.

The S&P 500 stock index also hit a fresh nominal high of 1,550 for the first time ever. It last peaked at 1,527 in March of 2000, before falling to a low of 800 three years later. The inflation-adjusted S&P 500 index now stands at 1,224. To reach a new inflation-adjusted high the S&P 500 must top 1,850!

"This is looking more and more like the complete madness seen in 1999-2000, though playing out across a different stage, with different themes and for different reasons. One day, folks will look back on this period and marvel at what passed for wisdom," writes Bill Fleckenstein for MSN.

"32.6 percent of newsletter writers expect a 10 percent slide in U.S. stocks during the next 12 months according to New York-based Investors Intelligence. That's up from 25.8 percent a week earlier and the highest since August 1997, when the Asian financial crisis roiled stock markets worldwide," reports Bloomberg.

Meanwhile the U.S. dollar is "languishing" at all-time lows against the euro and the pound! Why are stock market "milestones" greeted with so much media fanfare, while the dollar's "millstone" status gains so little media attention?


Below is a sample from Part I...

By Ambrose Evans-Pritchard
International Business Editor, London Telegraph


The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fueled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.

"Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", said the bank.

The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.

"Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed," it said.

The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity.

"The Chinese economy seems to be demonstrating very similar, disquieting symptoms," it said, citing ballooning credit, an asset boom, and "massive investments" in heavy industry.

Some 40% of China's state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn.

It said China's growth was "unstable, unbalance, uncoordinated and unsustainable", borrowing a line from Chinese premier Wen Jiabao

In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.

It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment build up in the boom years had suffocating effects.

While cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and "sowing the seeds for more serious problems further ahead."

The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances, citing a current account deficit running at 6.5% of GDP, a rise in US external liabilities by over $4 trillion from 2001 to 2005, and an unprecedented drop in the savings rate. "The dollar clearly remains vulnerable to a sudden loss of private sector confidence," it said.

The BIS said last year's record issuance of $470bn in collateralised debt obligations (CDO), and a further $524bn in "synthetic" CDOs had effectively opened the lending taps even further. "Mortgage credit has become more available and on easier terms to borrowers almost everywhere. Only in recent months has the downside become more apparent," it said.

CDO's are bond-like packages of mortgages and other forms of debt. The BIS said banks transfer the exposure to buyers of the securities, giving them little incentive to assess risk or carry out due diligence.

Mergers and takeovers reached $4.1 trillion worldwide last year.

Leveraged buy-outs touched $753bn, with an average debt/cash flow ratio hitting a record 5.4.

"Sooner or later the credit cycle will turn and default rates will begin to rise," said the bank.

"The levels of leverage employed in private equity transactions have raised questions about their longer-term sustainability. The strategy depends on the availability of cheap funding," it said.

That may not last much longer.


DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.
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