American Pronounced Bullishness

August 2, 2005

A recent email exchange took place between me and the venerable Kurt Richebächer. We keep in contact regularly but not too frequently. He has admitted over the past 20 months to being surprised at the accuracy of several currency forecasts made by me, someone he once said "has some skill but no currency training." My reply after laughter was that sometimes training can engrain incorrect thinking, and besides, advanced statistics is quite adequate for training together with some international economics reading. He dispenses compliments sparingly, be sure to know. My emailed queries to him regard questions on European matters, German exports, elder German economist quotations, and reliance degree upon credit extension from housing, a practice not at all popular nor widespread in Europe. My reading includes his Richebächer Letter each month, full of strong diverse wisdom based upon rational established prudent economic analysis. His view has not been positive toward the US Economy in recent years, as our system has been exposed to blatant inflation for sustenance. He has been somewhat frustrated to explain how the US Economy has not fallen on its face, and struggles to explain the function of the American Perpetual Motion Machinery whose operating manual in no way is taken from any known past economics paradigm.

Several weeks ago an email was sent from my desk to him, with a bold forecast that the euro currency would rebound. The euro was struggling to hold above 120 after the "thumb down" EU vote in France, and was sporting a 119 handle at the time. By the way, the euro is now showing a 122 handle as near-term short covering is well underway, as was anticipated on my part. In the late June email, my words were brief.

"Kurt, the euro is about done falling here
look in the next Q3, for EU exports to pick up
which will lead to a nice strong move in Q4 back toward 126
the Euro Monetary Union is not dead, only centralized power in Brussels"

It came with great pleasure that he has subscribed to my Hat Trick Letter. In his replies to me, he asked this past weekend for my take on the American perspective. He posed the question, "Can you explain to me the new pronounced bullishness about the U.S. economy?"He is surely more curious about the confidence and optimism on economic prospects and the future, than about what actually keeps the US juggernaut in motion and afloat. He surely has his own well-founded viewpoint. Here he asks for mine in a constructive exchange, like from a young upstart kid half his age who has nailed a few calls correctly and earned his respect. His words are usually fewer than mine, but that is ok. My fingers are younger and more nimble, and more of them participate avidly at the keyboard. These words are directed to my elder meister friend like a learning eager student speaking to a sitting chaired graying professor.

Here is my reply. It directs attention to the realities of our economic support, and the associated perceptions, point by point. The main body is included only, as some words were more of a personal nature. He has maintained a consistent viewpoint on the extremely aberrant, heretical, and destructive nature of US Economic policy, whose entire foundation is debt, not production. We share this viewpoint in almost every element. My focus has been more directed for the last two years on Asian developments, regarding trade, currencys, and bond intervention issues. He is well aware of my being significantly unimpressed with the consumption debt culture which prevails inside the United States. He lives in France. By not living inside the United States, he does not have the advantage of immersion within a highly steroid-driven debt environment, nor the benefit of feeling the familiar American pulse on a daily basis. He is not subjected to the daily barrage on television for zero-based finance deals offered on a host of products. You can be sure he knows few if any people who must float crippling credit card balances after running them beyond their maximum limits, who spend money (they don't have) on credit for the latest silly fashions, who are in college and have run a $500 or $1000 limit quickly on a newly granted credit card, who installed a jacuzzi on their new back deck porch paid by a home equity loan, who refinanced their home mortgage for the third time in three years and pulled out $20 thousand to take a wonderful vacation or to purchase an unneeded sports car or SUV which would tow a boat they do not own.

American practices of debt abuse are fully out of the ordinary, unique to our debt culture, yet fully embraced as normal on this side of the Atlantic. Zero percent financed deals are not available in most of Europe. Why should they be available? Our bizarre lending practices are accepted as normal, when we have strayed light years from normalcy. Complementary to debt abuse is bond speculation abuse, another common American practice. It too requires heavy borrowing, but for financial asset purchase. However, the United States does not own any monopoly on carry trade, yield trade, or bond arbitrage. London and Tokyo are large participants in carry trade. The US Economy vitally depends upon all kinds of credit for both commerce and investment. We are twenty years deep into this unnatural evolution. Or is it pathogenesis? Methinks the latter. The path back to normalcy has been washed away by financial storms and their deeper commitment of liquidity rescues. There can be no return. My Hat Trick Letter discusses most of these relevant topics and how investments can benefit from recognized trends.

Mein Herr Kurt,
I cannot speak with total certainty on American viewpoints, but I can try to share as a spokesman. My experience is broad here in the eastern states. My contacts are many. I talk to many people. I listen to a lot of people talking. Some patterns seem more than clear.

The US Economy has many extraordinary yet unimpressive underpinnings, most from the financial sector. Americans have accepted most props as normal and suitable, only because crises have so far been averted. A crisis not upon us represents an endorsement of normalcy in both policy and the pillars, strangely in their view. We have an amazing knack as a culture to dismiss neurosis as normal if crises fail to appear quickly, as though in some queer experiment. In my view, the entire US Economy is an experiment in the power of inflation and the glory of its leveraged machinery. We are also an experiment in prescription drug (ab)use and food (ab)use. Most prominent to the public is the zero percent financing available for so many items, like home furniture, large home electronics, some home appliances, even home repairs, and 2% financing for cars. This practice is supported by companies from both their balance sheet cash and bond issuance, which keeps employment going. A stress is usually given on cash flow to buy time for hoped future profit arrival. The public has come to regard easy financing as normal, in stark contrast to just four or five years ago. Recent national legislation cleared the path for more extended derivatives behind liberal financing of home equity loans and credit card cash transfers this spring. My mailbox is full of them in a sudden change. Before they are 0% account balance transfers. Now they are life-of-loan cash withdrawals for under 5%.

Let's face it, housing and its bubble supports our entire consumer economy, with the extra bonus of providing a speculative opportunity. Housing is the false economic foundation, upon which a sick demented consumer culture rests, fully infected by a powerful debt virus. You might be shocked to learn that 23% of all US college graduates declare bankruptcy before graduation. One could accurately call student bankruptcy part of the education to become a consumer. Students with no income are offered multiple credit cards. Savings has gone into reverse. We have a minus 1.0% to 1.5% savings rate in my book. People spend all they have and more, and often go shopping to counter boredom and depression, much like an addict, as well as to undertake a frivolous fashion initiative periodically. This supports the economy perversely, but at the same time surely dumbs down the labor force.

Retail, as we agree, sits on the lowest wrung on the economic food chain. Americans sense a profound change from dirty industry to clean financial and retail structures, with some recognition of the grand erosion of legitimate wealth creation. They feel they are getting away with it, wealth from inflation thin air. The latest erosion has been the transfer of R&D functions to Asia, well covered in the Business Week publications. However, Americans regard the massive job loss from manufacturing as a major thorn in our side, a festering problem which will not go away. At the same time, quite in contradiction, they regard the movement toward clean industries as evolutionarily advanced. This is clear cognitive dissonance. The reality gap shows up in added household debt. Again, housing enables this mental compromise, as the added household debt burden can be absorbed in yet more home equity loans and credit card consolidations. Inflation of the homestead makes it all go away, poof, all debt disappears. The untold story is how the credit card spending repeats, as it does with binge drinkers. High credit card balances reappear quickly. Housing is the great enabler of the American consumption and economic destruction.

The housing bubble is supported desperately by our banking leaders. We might even have seen an engineered bond rally this spring, feeding off the General Motors downgrade, to support housing, to ruin some hedge funds, and to cover up the absence of Chinese and Japanese official Treasury purchases. I suspect really nasty methods at work. The secular deflation natural process has greatly aided any and all bond bullish effects, joined in a powerful way by China and its triple quantum step cheaper labor. I believe you under-estimate the positive secular deflation effect on bonds, the Asian central bank collusion, and its ongoing fortuitous but temporary effect on US asset inflation. Our monetary inflation constitutes Asia's trade surplus, recycled directly into US Treasurys with no conundrum whatsoever. The core economic slowdown in the United States is so far undetected, due probably to extreme statistical deception through adjustments. That is the other answer to the so-called conundrum.

The US monetizes bonds via an Asian round trip. You expected great distress to the United States economy before now. Without Asian cooperation, we would be in total disarray and decline. They are not just our credit masters, as we know, but our hospital caretakers in full control of crucial intravenous drips of daily capital. We wither when they say so, but in the process, their economies lose their customer base. When Chinese middle class demand grows much more, when ex-Japan ex-China Asian demand grows much more, all of Asia can sacrifice some demand from the United States. When the Asian credit market is born, look out, as big changes will come here. Watch the United States obstruct the formation of this credit market, perhaps using the IMF or World Bank weapons.

The American public has long regarded the housing sector to be sacrosanct, and somewhat immune from downward pressures in a childlike manner. The entire bond speculation enterprise with all its leverage and financial engineering is designed not only to generate carry trade and yield trade profits, but also to support the housing industry. The Asians have been involved, and Americans believe naïvely that foreign mortgage finance support will always be there. They regard Asian support as an entitlement.

It is my contention that economic growth via the GDP will be corruptly engineered to report 2.5% to 3.5% growth for as far as the eye can see, almost regardless of reality, except during any unmistakable recession, even if growth is flat. My contention is that US GDP growth is around 1.0% to 1.5% and no more right now, as most growth is improperly adjusted price inflation, plain & simple. Most people I talk to look at my cross-eyed when I mention this, since they don't even know what the GDP is, but they do recognize higher prices across the board. It is amazing to me that even independent capital management executives fail to acknowledge how the GDP Deflator is below the corrupted CPI index, which means GDP growth claims are grossly amplified. Americans remain confident and optimistic (translated into the markets as bullish) because they are clueless ignoramuses on financial economics, and harbor misplaced trust that Chairman Greenspan can miraculously pull off the miracle of maintaining and juggling bubbles. He is perceived to be the "master of the universe" in controlling inflation. Americans never seem to bother to check Greenspan's horrendous track record and series of contradictions, nor acknowledge his long list of back tracking horrendous advice. They hold him in awe. We cheat nature, by accepting the asset inflation and exporting the monetary inflation. In the process we have forfeited our sovereignty with huge foreign debt holdings, even as Americans regard that too as a sign of strength. They believe foreigners see stronger growth prospects in the United States. Strangely, the American public believes, in my opinion, that the larger bubbles are easier to perpetuate, since tangible homes are involved, USGovt support has been enlisted, and Asian collusion has been steadily reliable. I personally believe a corrupt link has been created between Treasury bonds and Agency mortgage bonds in recent months. Fanny Mae has been in receivership for many months. Americans seem not to connect the dots, nor to care. It is hard for me to decide who the biggest idiots are, the USGovt officials or the American public. Their intelligence levels differ, but not stupidity.

On a world basis, the export of an overvalued currency from the United States to Europe, with the speculative rise in the euro currency, stands as the first salvo in the currency wars. The German export trade was the first victim, along with the Eurozone exports generally. This points out how the USA remains the superstar overachiever in the inflation business, and in the operation of inflationary machinery. We export problems quickly. The euro has rebounded over 120 to my pleasure, as I forecast a move to 126, not 115 as is the consensus. China will soon be forced to reckon with some fallout damage from industrial overcapacity and housing over-expansion, as their mighty bubbles struggle not to deflate. Neither Europe nor Asia has the expertise in managing inflation like the US in this practice. The USA exports not only overvalued currencys, but monetary inflation itself. That is what the US trade deficits represent in a clear sense. We import price deflation from Asian finished products. So paradoxically, we inflate monetarily but deflate on prices with imported products as the industrial expansion takes place in Asia. In a sense, our inflationary machinery has a reverse gear. Americans have no concept of inflation or deflation, and are extremely confused. I hate the question 'do we have inflation or deflation?' as my usual answer is 'yes, both in spades' to confused ears. Americans demand answers in aggregate terms, but clearly see different effects in various markets for housing, financial assets, commodities, labor, imported products, and costs generally. They ask questions, when answers are nowhere remotely understood. The inflation operators have succeeded in confusing the American public, perhaps beyond repair and redemption. Inflation is seen as the effect. My work has pointed out how monetary inflation can actually produce price deflation, when Asian labor is deployed.

The curious item on my screen is the year-over-year 10% rise in the income tax receipts for the USGovt internal revenue. My gut tells me it is based mostly upon capital gains tax receipts, as much as payroll taxes from employment centers. We will see if this is a repeat episode from 1999, when stock capital gains dominated and federal govt borrowing was reduced.In 2005, it is housing and bond capital gains which reduce federal govt borrowing. I suspect a long slow bond climax comes next, just like a stock climax came five years ago. History does not repeat itself, but if this bond-stock harmony is not a rhyme from 1999 to today, I don't know what is. Americans will look to place blame when they cannot find another bubble to blow for temporary financial refuge. We have no bubbles left, except for the continued bull market in commodities. Given the taxing nature of higher material costs, the bond bull will continue to compete with US Treasury bonds.

Major sea changes are underway, sure to disrupt the balance and introduce disorder. The changes will surely catch the majority of Americans off guard. We have the European Union voting NO on central power and a constitution. The biggest effect might be disillusionment toward EuroBonds and a Swiss-centric favor toward gold. We have China slowly walking away from a USDollar currency peg linkage, with huge ramifications. The biggest effect might be in both Treasury Bond weakened demand and relentless trade war legislation, sure to cause growing disorder, my major call. Growing winds of protectionism against China have not yet changed the American mindset. All they see so far is Chinese products at WalMart and many big retail chains. When told to hate the Chinese, Americans will begin to hate the Chinese, right on cue. Watch the trade tariff bill be resurrected this September in the US Senate, following the miniscule but significant 2.1% currency upward revaluation. Americans are totally ignorant of European politics. Everyone I spoke with about the NO vote in the EU made a derogatory shallow comment about France, pure emotion, nothing rational. One person even took satisfaction in renaming french fries. A few acquaintances of mine heard about the Chinese currency news, but not a single person I have talked to could cite a single detail or expected consequence. We are worse than oblivious, but rather disconnected like at an island carnival (see H.L. Mencken). I doubt most Wall Street professionals give much importance to EU votes or Chinese decisions either. It is easy to be positive when these things are not even on their radar or on their reading lists. They seem to concentrate exclusively on interest rates, incoming liquidity, earnings trends, and sector rotations. Even they seem childlike with little depth of comprehension for foreign effects. Anything positive overseas is a benefit to the USA. Anything negative overseas is a benefit to the USA.

The United States will not earn a pass on any recovery and sustained growth. Americans are likely to remain asleep until the crises, then to blame China for problems when they come like an avalanche, my expectation. I have come to call the Bretton Woods II agreement the "Plastic Accord" in mockery of the former Plaza Accord. We are damaging the rest of the world, both in Europe and Asia right now, Europe with damaged export trade, and China with overcapacity everywhere. We have lured China into going too far in all manner of construction. China is being stressed to handle outsourcing from both the USA and Japan. My big question is whether the Chinese & American umbilical cord can keep the blood flowing and music going until the 2008 Summer Olympic Games, their equivalent key event like our Y2K millennium event. My guess is the "dollar bloc" will begin teetering before then. The fates of the USA and China are inextricably linked. My expectation is for the great aging consumer engine (USA) to tumble with the great nascent industrial engine (China) into a guaranteed conflict. Few Americans I speak to, few whom I observe with eyes or on television, have any concept whatever that we step closer to serious conflict over energy with China. They notice the 50% rise in gasoline costs from a year ago, but a childlike perspective lingers. They believe Saudi Arabia and the Persian Gulf nations have all the oil ever needed. Only a handful of people I speak with are aware of the vast Canadian oil deposits and production underway. I fully expect the USA to merge into a sovereign regional trading state with Canada for resource wealth (energy & metals) and with Mexico for cheap labor. Our borders are intentionally made more porous with each passing month. The US Constitution might become a victim before long. Most Americans I speak to do not know much about this important document. Not much has changed in three centuries, as our nation is overrun by lower class laborers and marauding upper class pirates. My recent vacation to the North Carolina Outer Banks reinforced this point of view.

Back to American optimism. Its basis is housing and easy financing for commerce, which most people believe will continue, and most people expect our leaders to carry on. Weimar-like monetary growth is my forecast when Ben Bernanke (Head of White House Council of Economic Advisors) takes the helm at the USFed. Our string of central bankers is but a succession of more accomplished inflation engineers, whose past path contains vast wreckage. Greenspan wants to end his reign responsibly, but Bernanke might unleash the steroid driven inflation dogs, only to blame the Greenspan era for the ensuing problems. Most Americans hold a simple view, that Greenspan has presided over vast bubble growth which must be good since so much wealth was created. We are not a responsible culture in my view, a trait consistent with broad addictions.

The USA is following the Japanese path of destruction in the late 1980 decade unwittingly with blind arrogance. Asset inflation amidst secular deflation in a monstrous offset, when each opposing factor contains inherent risk. Our story is more grand, with more bluster, and strangely with far more world collusion. The end result will be gradual political change toward statism, widespread collaboration by nations against the United States (like with energy contracts) through alliances, steady denuding of the US industrial landscape, and gradual weakening of the USA on the geopolitical stage. We assume the catbird seat on the geopolitical stage as permanent. It is not. We will share limelight (or control) of the stage only grudgingly. Americans will not object to lost freedom, provided we are subjected to more terrorist events. We spoke of fascist trends two years ago. Most Americans I speak with are unaware what fascism even means. They point to Hitler with absolutely no awareness of fascist tactics. I have come to prefer the Mussolini definition, which calls for wide merger of state and corporate interests even as personal liberties are curtailed. Of course, the markets will become more controlled, and might be sacrificed for the benefit of freedom, which will be accepted but which is totally contradictory. Official confiscation might become far less subtle in future years, I suspect. Perhaps it is my fear.

If I had to pin one item of ultimate importance as the paramount indicator for US bullishness, it would be housing. If it goes into decline, the bullishness will evaporate within a few months. England is showing some housing decline right now, and could offer the United States a preview. Almost no television coverage whatsoever is given to England or Australia and their housing reversals. We remain unaware during the Anglo-Saxon phenomenon you and I discussed. The greatest enabling factors behind the "pronounced bullishness," as my writings have detailed, are poor academic and media education, powerful official indoctrination, acceptance of adjusted data by professionals, heavy lack of interest by the public, widespread ignorance of foreign currency and political matters, fortuitous impacts from competing currency effects when the USA owns the reserve currency, and the beneficial link from the secular deflation phenomenon to US bond-housing bubbles. That is a wide but flimsy foundation of factors.

What few seem to notice however, is that as the USDollar loses value, the US stock market rises to preserve value. Any S&P jump, whether over three years or three months, is not a bullish sign, but it is taken to be bullish. The recent upsurge in the S&P500 index might indicate upcoming declines in the USDollar versus the euro and Asian currencys. It is more a negative currency signal in my view, as most US leading economic indicators are negative. Watch the euro move to 125.5 as it fills the gap, surprises the crowd, and makes dummies out of those expecting a euro decline to 115. The EU trade surplus with the USA is still $10 billion monthly. You take deserved pride in German strength in export trade. My forecast is for those exports to revive soon, like before the year end. Most Americans would struggle to identify more than three German brand names. As you said on the veranda, "Americans have two blind spots, currencys and macro-economics." How true. Include foreign politics and foreign cultures as dim blind spots.

Massive sea changes are quietly underway. We are entering a new phase whereby politics are soon to collide with the concentric financial spheres. In the last few years, focus was on Europe over NATO, support for a US coalition in the Iraq War, the new EuroBond alternative to USTBonds, numerous trade conflicts, and broad calls for European reform. Now the focus has shifted to Asia. Watch the trade war with China. It is indescribably dangerous. Most Americans have no idea what is going on. They could not name more than three Chinese cities. I have not met a single person in my social conversations who is aware of the Senate tariff bill threatening overhead. Bear in mind that most of my conversations outside the office at not financial in nature. The conflict with China will be pervasive, as it covers trade, retail center shelves, job loss here, job growth overseas, lower wages here, lost fringe benefits here, intellectual property cheating, technology transfer, automobile industry destruction, competition for commodities, multi-national energy contracts, Russian military acquisitions, new Iranian alliance, and Treasury Bond support. What a lethally dangerous mix in the witch's cauldron!!! The last item points to implications to our housing industry and its gigantic bubble. I have talked to many many people who actually claim that the US housing sector has never suffered a bear market or decline, incredibly. Facts offered by me fall on deaf ears, from the reality of 1988 to 1992. Any talk about Bundestag or Krystalnacht goes right over their heads. Americans do not study history. We pull it off the shelf when needed and rewrite it to suit our needs, but not as egregiously as the Soviets did.

Most Americans believe the USA has survived all previous threats and will survive all future threats. We are the champion of capitalism and free enterprise, yet most people cannot define either term nor notice the erosion across the spectrum. The USA exploited cheap Persian Gulf oil for two decades until 1973. We built an interstate highway system with a quasi-tariff tax. The USA took advantage of the Asian Meltdown in 1997. We embraced a cheaper supply chain. We reacted quickly to the US stock bust in 2000 with lowered interest rates. We bounced back from the World Trade Center attack with repairs and increased security. The Lower Manhattan transportation system has been upgraded in the process. We took charge with a counter-attack to isolate the violent risk in the Middle East and to secure oil supply in the process. The USA reacts and prevails, that is the consensus view. In many respects, the USA is truly a mighty responder. We are innovative and versatile. Many Americans base their economic and financial bullishness on our military superiority, without connecting the defense budgets and federal deficits to Asian sources for credit supply. That is taken for granted. Few notice how the empire is suffering from "imperial overreach" and crippling indebtedness. Few notice that with growing national debt comes unavoidable loss of sovereign control. Arrogance still runs high, with its associated high level of confidence. If ten reasons backed that confidence, the top three reasons can be traced to housing, from its general rise in household wealth, its equity extraction, its speculative gains. Military supremacy ranks high also. Signs point both to a flatter housing market from numerous indicators, but also to continued gains in certain metropolitan areas. It is interesting to watch those in charge of the Private Mortgage Risk Index assess Boston, Long Island New York, and Washington DC as each having over a 50% risk of declines in the coming 12 months. The housing heart of the bullish optimism is soon to be tested. The last GDP revision included a housing price component decline in the calculations.

I don't have the answers, but I sure do keep my finger on the pulse, watch the key areas, and direct a keen eye on the horizon. I get a few forecasts right, but miss some also, especially when foreign central banks enter the mix. What free markets? My radar has little in common with those thrust upon the American public. The view just over the horizon carries a visible banner of TRADE WAR, escalating in every conceivable arena. I have forecasted trade war to explode on the scene ever since the summer of 2004, well documented, and it is unfolding almost exactly as I previewed it. With military conflict versus China looming in the next decade, the current battles will be more economic and financial as a long shattering prologue. We are frustrating China. They can accumulate USTBond paper, but they are not permitted to make asset purchases with them!!! They have withdrawn their offer for Unocal in the face of political opposition. The current events parallel in repeated form the Japan vs USA conflict in the late 1930 decade for industrial dominance. We have the appearance of cooperation with China, but behind the scenes friction festers and conflict brews. The Weapon of Mass Destruction is the US Treasury Bond accumulation in Asia.

I always look to your Letter for some guidance, for valuable data in evidence, and a steady stream of wisdom from established economic principles. My most recent article "The Fed Quest For Neutrality" cited your definition on balance between savings and industrial credit demand. The USA has none of the former and little of the latter, so balance is next to impossible in our imbalanced US-centric world. I am certain that my lengthy missive is more than you expected with a simple question. Sometimes briefly stated questions have long elaborate answers. Good luck to you in your work and health.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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