U.S. Economic/Financial News
Housing Bubble Could Burst in a 'Few Short Months'
We might be "only a few short months" from the bursting of the housing bubble, warned Bill Gross, head of PIMCO, the largest bond-trading fund in the world. In his September "Investment Outlook," Gross notes: "I have a strong sense that most of our risk asset markets (and therefore our domestic and global economies as well since they are so asset-appreciation dependent) are substantially past high noon." He points to Fed Chairman Alan Greenspan's warning at Jackson Hole, saying in his opaque way, that present asset prices are unsustainable and, once falling, would cause a wave of "debt liquidation."
Following Britain and Australia, now the U.S. housing market is showing the first signs of stagnation. "If the home asset bubble stops expanding, deflates, or pops anytime soon (and I suspect we are only a few short months from at least the first of these three) then the potential for Greenspan's 'debt liquidation' follow-on is something that investors must begin to prepare for." He calls on investors to get out of all financial titles that are now enjoying low-risk premiums. This includes "real estate, equities, high yield, corporate, and some areas of emerging market debt."
'Policy Leadership' Needed To Handle Financial Crisis
The world needs "policy leadership" for the financial crisis it faces, especially the asset-price bubbles in industrial countries, wrote Mohamed El-Erian, managing director of the world's largest bond trader, Pimco, in the Financial Times Sept. 8. Pimco is based in California.
El-Erian warns about the dangers posed by the asset price bubbles, especially that of U.S. real estate, to economic stability. "It appears that the world currently lacks a comprehensive approach to challenges that have just been rendered more difficult by Katrina.... There is thus a need for policy leadership that recognizes the interconnected nature of international structural changes, the regulatory dimensions to deflating certain bubbles, and the need to respond flexibly to the evolving challenges of the Katrina tragedy. The longer such leadership is absent, the greater the risk of a pronounced economic slowdown and financial market disruptions."
Wall Street Journal Praises Oil-Price 'Gouging'
"In Praise of 'Gouging'" was the headline on a Wall Street Journal editorial Sept. 7, in a strange parody of Jeremy Bentham's "In Defense of Pederasty." After complaining that 20 statesmost in the Southhave energy anti-gouging laws on the books, the Journal complains that people don't understand that price gouging is just the way the market doles out limited supplies. It claims that since Katrina has knocked out 2 million barrels a day of oil production (which is actually 1 million barrels now), consumption will have to be reduced. The Benthamite solution, herein proposed, is to avoid the indignity of gasoline lines by giving access to supposed limited supplies to the upper crust, as sky-high prices make gasoline inaccessible to the poor. Limiting the profits the oil companies can make, they claim, will discourage them from investing in more capacity.
In fact, as Lyndon LaRouche has emphasized, only a re-regulated industry will bring adequate and necessary investment back into the energy sector.
Senators Move Against Price Gouging by Oil Cartels
Senator Carl Levin (D-Mich) introduced the Hurricane Katrina Emergency Temporary Energy Price Freeze Act of 2005 Sept. 7, to give the President the power to freeze the price of gasoline and other petroleum products to pre-hurricane levels. The freeze would end when production is fully restored. "The massive and unjustified gasoline price increase of the last week will not bring on more supplyonly more profits for oil companies," Reid stated. He says the recent precedent for this action was the imposition of price caps in 2001, under the Bush Administration (and under tremendous political pressure), by the Federal Energy Regulatory Commission during the California energy crisis.
Similarly, Sen. Byron Dorgan (D-ND) has introduced a "windfall profits rebate act" that would penalize oil companies unless they use their "above-normal profits" for new investments in oil and gas production or refining capacity.
Bankers Fear FDR Reflex from Congress Over Katrina
An op-ed in the Sept. 6 Wall Street Journal begins with a strong attack against President George Bush for his miserable performance after Hurricane Katrina, but reveals that the real fear in those corridors is that The Street's entire economic agenda might be at risk. Katrina "poses a threat to [Bush's] entire second term," they say, partly because Americans won't accept lame excuses (blaming local officials, etc.) such as the Bush Administration has been offering. Then, after telling Bush that it's okay to finally drop his "admirable" efforts to impose Social Security reform, they admit that, "What's really at stake in the coming months is the Republican claim to be the governing party."
Bush now needs to make sure Americans understand the "link between tax cutting and the economic vitality needed to fund both Katrina relief and the war on terror." He has to quickly choose a point man for relief efforts, in order to avoid "the liberal/GOP Congressional impulse to throw money at everything." Instead, the entire area should be declared an "enterprise zone" to offer tax incentives and regulatory relief to entrepreneurs, in spite of the danger that the "floating casinos" might benefit from this as well. This is still better than the possibility of "spending $20 billion or more solely on the priorities of local politicians."
Or, unmentioned, but clearly an unspoken fear of the Wall Street crowd: someone might raise the "General Welfare" clause of the U.S. Constitution as a guiding principle.
Service Sector Expands as Manufacturing Collapses
The Institute for Supply Management, surveying 370 businesses across the United States, reported Sept. 6 that its non-manufacturing (i.e., service sector) index rose from 60.5% to 65%, July to August.
However, the Institute's index for the manufacturing sectors went down during the same time, from 56.6% to 53.6%. A reading above 50% is supposed to indicate that the sector is expanding.