Any comments or suggestions stated or writen on the HalSwanson.com website are presented solely for their educational value. This information not a solicitation to buy or sell any securities, currency, commodity futures or options. Trading involves substanial risk of loss and is not suitable for all investors.
Material from Hal’s recent seminars: “Currencies & Commodities”
Sell Dollars & Buy Gold
Since the late 1990′s, I’ve been concerned about the exceptional rise in consumer and government debt relative to our ability to service this debt with lagging incomes and a very low savings rate. The various ratios of debt to income have been reliable indicators in determining when our economy has become over-leveraged and susceptible to a reversal or recession. Today, these ratios are at record extremes and have put us as investors at risk as never before! I will show you in this presentation the facts, graphs, references, and expert opinions which all point toward a reduction in excessive consumption and a reduction in the total debt burden to more manageable levels. This process of debt reduction will take some time to play out and will likely drive the U.S. dollar substantially lower.
I am not alone in this pessimistic assessment of our economy, some of the best known and wealthiest investors on the planet are saying similar things in their own way. It’s a time for doing homework and strategic planning. ..I hope this information will be of help to you.
“In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce — that’s the trade deficit [now closer to 6%] — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.” – Warren E. Buffett (2004)
So, what do we invest in now?
Here’s what some of the legendary investors are thinking.
Some of the World’s most successful and prominent investors believe the US Dollar is poised for another significant decline. This dollar decline, if they are correct will have repercussions on the stock market, global trade, raise the threat of inflation, and ripple across all markets. The following interviews with Jimmy Rogers, Sir John Templeton, and Warren Buffet seem to reach the same conclusion:
- Here are two direct link interviews (one audio and one video) with the “legendary” Jimmy Rogers ..important and well worth the time!! Prudent Bear interview and Bloomberg interview. And, here’s his website: www.jimrogers.com. Also, a couple recent articles, “Rogers Says Gold to Reach $1,000 as Commodities Soar” – Bloomberg. “Commodities bull market has long way to go”: Jimmy Rogers – Business Times.
- The legendary investor Sir John Templeton has been optimistic towards US investments for over fifty years ..but not anymore, Templeton feeling bearish.
- Warren Buffet thinks the US trade deficits will sink the Dollar. More from Warren Buffet Short the Dollar, Berkshire Hathaway Inc…
- Also, I find insight and opinions of the following experts to be especially valuable:
Dr. Marc Faber current articles.
Dr. Kurt Richebacher current articles.
Richard Russell current articles.
Financial Sense Online current articles.
References: The eventual lunch bill may spell end to dollar’s dominance, ..moving out of dollars.
The US Deficit vs Dollar outcome is Ominous.
10/20/04 – A great summation of day’s economic imbalances, well worth reading, Borrowing traction – Kurt Richebacher
12/27/04 – Warren Buffett’s vote of no confidence in U.S. fiscal policies is up to $20 billion. . – Forbes.com
So, why are these great investors so pessimistic?
…THE U.S. HAS TOO MUCH DEBT!!
US TRADE/INVESTMENT IMBALANCE – According to Bloomberg, “Growing trade deficits contribute to a widening gap in the current account, the broadest measure of trade because it includes investments, and may put the dollar at risk because the U.S. needs to attract more and more foreign capital ($1.6 billion per day) to finance it”.
The following quotes are from a new study, The US as a Net Debtor.. (link is referenced below). “Since 2001, the current account deficit has reflected a widening government deficit, not strong private investment. The U.S. now borrows from abroad to allow the government to run a large fiscal deficit without crowding out private investment, even as growing consumption (and necessarily, very low private savings) reduce the United States’ ability to finance the fiscal deficit and private investment domestically”. , “the net internatonal investment position or NIIP (for the United States) – has gone from a negative $360 billion in 1997 to negative $2.65 trillion in 2003. At the end of 2004, we estimate the net international position will be negative $3.25 tillion. Relative to GDP, net debt rose from 5% of GDP in 1997 to 24% of GDP at the end of 2003 and to an expected 28% of GDP by the end of 2004″, and “The U.S. debt to export ratio at an estimated 280% of exports at the end of 2004, is in shooting range of troubled Latin economies like Brazil and Argentina”.
References:
U.S. Trade Deficit Widens to $54 Bln in August, The U.S. as a Net Debtor: The Sustainability of the US External Imbalances, U.S. Trade Gap Represents a Lost Opportunity, Current Account Deficit Poses Serious Risks, and here’s a major links page, Is the U.S. Current Account Deficit Sustainable?
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U.S. BUDGET DEFICIT PROJECTIONS – From a BBC article on the U.S. budget deficit, “And within the space of a few years, a projected surplus over ten years of $5.6 trillion has turned into a deficit for the same period of $1.4 trillion”. Also, “The budget deficit is now one quarter of total Federal spending, and 80% of the total receipts from Federal income taxes. It is equal to $1,600 per US citizen this year, and the accumulated deficit over ten years would be nearly $20,000 per person”. And finally, “This could lead to a run on the dollar (which is already suffering serious weakness), and a sharp rise in the interest rates demanded on Federal debt, which in turn could hurt the stock market, weaken banks and reduce private sector spending”.
References:
Does the US budget deficit matter?, Congress’s Analysts See Worsening Deficit, and Federal Deficit Reality – Could U.S. Treasuries Face A Rating Downgrade?
NATIONAL DEBT 1940 TO 2002 – The National debt graph below in stark terms displays a credit machine or a financial credit system out of control! It took 200 years to reach a debt of one trillion dollars in 1985, today less than 20 years later the debt level stands at over seven trillion dollars! As of 09/07/2004 the US Treasury debt stands at $7,368,363,360,008.57.
Reference:
US Treasury – The Debt To the Penny
WHO OWNS THE NATIONAL DEBT? – In recent years the national debt has become increasing owned by two groups. First, the US government through it’s various agencies, primarily Social Security has purchased for “us” over 40.6% of our own national debt. At some point in the future, this debt will likely offset much of the expected retirement benefits in the Social Security Trust Fund. ..Meaning, don’t give up your day job if you’ll be depending on the Trust Fund in ten to twenty years! The second large owner of our US national debt is foreigners. Our collective appetite for borrowing from the future for benefits today, has increasingly put us at risk of dependence on the desires of foreign lenders and their influence in our national policy-making processes. ..Meaning, our financical future is less and less in our own hands and more in the hands of foreigners!
Reference:
How Long Will Central Banks keep Financing Our Treasury Deficit?
A MOUNTAIN RANGE OF DEBT – The public took it’s cue from years of excessive government spending (poor leadership) and ramped up consumer spending (promoted by the Federal Reserve) to unrealistic and unsustainable heights. Now, after several years on a consumption binge the public is left exhausted, with very little in savings and deeply in debt. This situation is very slowly changing, savings rates are beginning to rise and consumer spending is slowing. Since about 70% of the GDP is based on the over-indebted consumer, it’s likely that economic growth will decline. The result of this growth slowdown will likely be a lengthy recession, including increased personal bankrupties, high banking and corporate failures, a sharp drop in the US dollar perhaps 40% to 70% from current levels, a tidal wave of imported inflation which will possibly coincide or follow a liquidity crunch and a drop in real estate prices. ..along with a gridlock in the global credit system. Now with every crisis there are opportunities arn’t there, and that’s what HalSwanson.com is all about.
NET SAVINGS AS PERCENTAGE OF GROSS NATIONAL INCOME – The record low savings rate is the counterpart to the U.S. trade deficit. During the last decade Americans have been on a consumption binge at the expense of their savings and potentially their financial future. The “comfort level” for savings appears to be in the area of 8% to 12% on a longer-term basis, not only in this country but throughout much of Europe. It seems quite likely that the savings rate will rise as the aging babyboomers seek greater financial security during their retirement years. And, with the huge Social Security and pension plan shortfalls many Americans are feeling their future “safety net” is now too close to the ground!
Reference:
Masking our Negative Personal Savings Rate
DEBT vs GDP 1915 TO 2003 – Our collective debt as a percentage of GDP has never been higher in our history. And, our lenders will be quick to tighten up loan requirements on any convincing evidence that the economy is seriously slowing down. This means that non-essential retail transactions will likely decline along with stock prices and interest rates will probably move significantly higher. Based on national income levels there is simply too much debt to pay off quickly!! ..so it will take time and changes in our lifestyles.
HOUSING PRICES vs PERSONAL INCOME – Cracks in the foundation of the housing boom!! Income growth has significantly lagged the dramatic growth in real estate prices. Residential prices in other “real estate bubbles” like in England and Australia appear to have topped out and have recently been declining. In the U.S., inventories of homes for sale has been rising, ..these increases in availability will probably lead to a weakening in home prices in the months ahead while municipalities are still pushing for higher taxes.
Latest update: Sales of New Homes Rebound, But Underlying Trend Is Soft.
References:
Housing Boom Threatens American Dream and Bubble Trouble.
To get additional perspectives on major consumer and government trends in debt and spending the following three essays are especially enlightening:
“Too Much Debt” (November 2002), “Everything (Un)Hinges On The US Consumer” (September 2004), and “Deep in Debt, Deep in Danger” (September 2004).
US DOLLAR INDEX (DAILY CONTINUATION) – The U.S. dollar has been in a clear and distinctive downtrend since the beginning of 2002. And, it appears poised for another sharp leg down perhaps to the 78.00 to 80.00 area. Over the next three to five years it is possible that the dollar could decline to the 40.00 to 50.00 area depending on how the fundamentals mentioned above unfold. The volitility will likely become much more intense than it’s been in many years. I will develop more of this commentary as time allows.
NY GOLD – (WEEKLY CONTINUATION) – Throughout history gold has had a reciprocal relationship to whatever fiat currency (backed by promises only) it was quoted in, so when the US dollar goes down, then gold goes up in dollar terms. Globally, almost every country’s currency is primarily fiat creating more potential demand for gold and world is full of debt. These are positives for gold and other commodities priced in U.S. dollars. ..more commentary to coming.
COMMODITY RESEARCH BUREAU INDEX (CRB) – (WEEKLY CONTINUATION) – As the downtrend in dollar continues, it makes our exportable commodities like grains, metals, chemicals, cheapier to foreign buyers, consequently, global demand for those commodities is drawn to the Uniterd States and prices are bid up. The CRB index is in a strong uptrend and is projected to continue strong for at least the next year. ..to be continued.
An economic slowdown with excessive debt could lead to a banking crisis.
BANK OF INTERNATIONAL SETTLEMENT (BIS) - In June, 2004 the BIS published a study on the history and causes of banking crisis around the world. Bank Failures in Mature Economies, it’s worth looking through. The diagram below also comes from the BIS and defines the interaction between inflation/deflation, economic growth, and debt leading up to previous banking crises in the United States. Here is the full BIS report, Back to the future? Assessing the deflation record.
See the graph below, we now have extreme “CREDIT/GDP” (also shown on the chart above), any significant slowdown in “REAL GDP” (guessing 0% to 2% real GDP) would likely trigger stress in the banking system perhaps tripping into a crisis situation. Currently, financial institutions around the world are watching these dynamics unfold and are quick to sell US dollars and securities on any sign of GDP weakness. If it were not for massive foreign Central Bank buying of US dollars, its value would be substantially lower than where it is today. ..Yes, a rather dicey macro financial situation.
VELOCITY OF MONEY – The US economy from 1993 to 2000 has been based on a record high level of business transactions which has been fueled by loose credit and a disregard for sound business judgement. The economy has been over-heated during the late 1990′s as rarely before with more debt piled on top since the 90′s. The stock market decline in 2000 through 2002 erased about five trillion dollars from the economy and triggering a decline in the number of business transactions which slowed the velocity of money markedly. Record high levels of debt must have a high rate of transactions to sustain itself or what will follow will be slowing economic activity. A slowdown in business transactions is not good for those with too much debt ..so they pay it or give it up! The current slowdown in velocity (see chart below) has been with us for a few years now and we all feel it. This what the Federal Reserve has been fighting to turn around ..if they can’t then the debt comes down around our ears.
RETAIL SALES vs MONEY SUPPLY – M2 money supply and retail sales have a close correlation (see the graph below), and recently both M2 money supply and retail sales have been showing a marked decline. This does not bode well for the economy, ..for there is not only a “bubble” in housing prices relative to income, but there is also a retail “bubble” with overbuilt retail trade based on high transaction activity, while the consumers appear to be retrenching (pay down bills and saving a little). Retailers could take a long and big hit if the economy continues to slow here.
The Cost of Living ..and those bogus government numbers, the CPI & PPI
Everyone’s cost of living is rising rapidly! ..despite what the bogus CPI & PPI numbers say!! According to the San Diego Union-Tribune, “over the past three years, energy costs have shot up more than 50 percent; haircuts, 40 percent; cheese, dishwasher detergent and soft drinks, 30 percent; gasoline, 28 percent; auto maintenance, 21 percent; dry-cleaning, 22 percent; and movie tickets, 11 percent”. What has fallen behind has been real wages! After taking the cost of living into account, the buying power for some of the largest occupations in the county (San Diego) – cashiers, retail sales clerks, security guards and janitors – has fallen between 3 percent and 17 percent over the past three years.
Reference:
Feeling the Bite of Inflation, The CPI – Certain Percentages Imagined, and A Federal Inflation Conspiracy?
CPI & PPI – While we are lead to believe that inflation is low or benign as measured by the CPI and PPI indices, the truth is these government reports are heavily manipulated to keep interest payments on the National debt and the “cost of living” increases for those retirees on social security as low as possible. Over a 35 year period the Consumer Price Index (CPI) has been altered 17 times to this end! I strongly recommend you read the following article by Richard Benson on the PrudentBear.com website. Using the Consumer Price Index to Rob Americans Blind.
PRICE LEVELS 1685 TO PROJECTED 2013 – There have been six other periods in world history dating back to 642BC where price levels have risen dramatically (superinflation) over a 90 to 110 year period. These century long periods of high inflation are then followed by about three centuries of price stability. As seen in the chart below, we are now living in the seventh period of decades long superinflation with no end in sight. ..A far cry from what we’ve been lead to believe.
In 1950, Mr. John Hay Whitney purchased Picasso’s “Boy With the Pipe” (painted in 1905) for about $30,000. That painting which is considered a Picasso masterpiece was auctioned off at Sotheby’s auction house on May 5, 2004. It fetched the highest price ever for a painting, ..$104,168,000. Here is an example of extreme monetary excess, the unproductive application of wealth, and a parabolic rise in prices. Personally, I think building a new factory or hospital would have been a better monument to one’s success.
YEARLY INFLATION RATE 1665 TO 1914 – commentary coming.
Source: Robert C. Sahr – Historical charts and data on inflation, dollar, etc..
Ref: Annual Confederate Inflation Rates .
YEARLY INFLATION RATE 1915 TO 2002 – commentary coming.
Source: Robert C. Sahr – Historical charts and data on inflation, dollar, etc..
GOLD PRICES 1786 TO 2002 – commentary coming.
Source: Robert C. Sahr – Historical charts and data on inflation, dollar, etc..
“The system of banking [is] a blot left in all our Constitutions, which, if not covered, will end in their destruction… I sincerely believe that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity… is but swindling futurity on a large scale.” - Thomas Jefferson
A Generational Social/Economic Pattern called: The Kondratieff Cycle
Throughout history people have lived based on their expectations. Those expectations drive their actions, when the future seems perilous we (collectively) are very conservative and risk adverse, and to the other extreme, when we are overly confident we take on unrealistically high risks that are driven by greed and emotions. The world economies and the United States in particular, in the 1990′s and to date, used credit (future payments) to sustain their current lifestyle. ..or in other words, borrowing from our children or grandchildren for our present benefit. This has been tried many times before and never worked. The debt becomes overwhelming and it ends up collapsing around the lifestyle of the borrowers and the lenders !! ..So, here we are today as a country ..overspent again!!
The following links include articles and an interview with Ian Gordon, the best expert I know of regarding the Kondratieff Cycle. I suggest you listen to his interview with Jim Puplava of Financial Sense Online (also a great website for info!). taped interview and also, read the interview transcript for further study. Also, Ian Gordon’s extensive analysis is available on his website at The LongWave Analyst in the form of several lengthy newsletters.
Next, is some background information about Nikolai D. Kondratieff (1892 – 1938) and a brief description of the different phases of the 50 to 60 year cycle.
IAN GORDON’S KONDRATIEFF WAVE GRAPH – This is a pattern of credit and asset price booms and busts!
BIG BANKRUPTCIES -
RECORD PERSONAL BANKRUPTCY FILINGS -
“Bulls of 1929 – like their 1990s counterparts – had their eyes glued on improving profits and stock valuations. Not a thought was given to the fact that the rising tide of money deluging the stock market came from financial leverage and not from savings.” -Dr. Kurt Richebacher
“The only perfect hedge is in a Japanese garden.”
GENERATIONAL CYCLES HAVE SIGNALED A TURN!!
The 30 year cycle in the CRB Index (commodities) and silver have put in major lows right on schedule. Look back 30 years ago! ..The US dollar came under intense selling pressure as foreign investors and Central Banks sold US Treasury securities. The results of this dollar decline was an inflationary explosion, ..and a move from financial assets into tangiblies. The stage is now set for a repeat performance.
LOWER INTEREST RATES AND TAX CUTS CAN NOT CREATE ECONOMIC GROWTH …WITHOUT A DECLINE IN THE EXTREMELY HEAVY DEBT LEVELS.
At the end of every extended economic expansion ..there is too much debt relative to income. The only difference this time, is the debt to income ratios are at all time record highs, ..and with little or no personal savings growth,
..IT WILL TAKE TIME TO STRAIGHTEN THIS OUT!!
See the link Too Much Debt To Pay.
Here is a good historical 50 year reference chart.
…You can comment below if you have questions.
Your comments and opinions on this presentation and my technical charting in general would be helpful. Also I’m looking for (truthful) testimonials that I can use in future promotional materials ..that would be appreciated too. Thank you.
PLEASE READ THE RISK DISCLOSURE STATEMENT LINKED AT THE BOTTOM OF THIS PAGE BEFORE ACTING ON ANY OF THESE RECOMMENDATIONS. TRADING COMMODITY FUTURES IS A VERY RISKY VENTURE. ..especially with the current volitility!!
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