Friday, May 26, 2006

Understanding the State of the Real Global Economy


Recently I've been spending a lot of time looking into macroeconomics issues and investments. It seems pretty clear to me that the world economy has major economic 'imbalances' that are probably only going to be corrected after the US dollar decreases dramatically and the debt fuelled US economy has a substantial 'correction'. In the short term this would almost certainly mean an economic downturn for most other countries in the world, since the US accounts for so much of the world's economic consumption at present . However, the long term trend of rapid development in Asian countries like China and India is likely to continue.

In term of investments, all this means that US stocks and bonds are a very poor investment. Given the massive structural problems with the US economy (the ENORMOUS government, consumer, and trade debts; military overextension and worldwide hostility; MASSIVE amounts of excess liquidity in markets and real estate; rising oil prices and other commodities; continuing loss of manufacturing base), the dollar is likely to decline relative to other currencies quite dramatically in the near future. Since the dollar is the world's reserve currency and many other major economies suffer from similar economic problems, the classic safe haven of gold will continue to be an excellent investment for some time to come.

In the short term, foreign stock markets, particularly the less established markets, are probably highly vulnerable as well. However, looking at things from a longer time frame, investing in promising areas of the developing market are probably excellent investments. The best approach might be to wait for much of the economic instability to pass, and invest in these markets when most of their companies are bleeding. The rapid development of Asia also means that we are in a long term bull market in commodities such as metals, agricultural goods and oil and etc. Hundreds of millions of newly arrived 'middle-class' Asians will undoubtedly dramatically increase their consumption of basic commodities such as base metals, grains, meat, cotton, oil and etc. There's a huge leap in consumption of most of these commodities when a population moves from a traditional 'peasant' economy to an industrial one. This is also coming in a time where most commodities have been hammered for two decades by extremely low prices, which has meant that countless mines and farms have been closed down making for very low levels of supply. In my opinion, this means we're in the midst the biggest bull market in commodities the world has every seen.

But that's enough of my babbling for now. I'll throw out a few links that I think will give people an accurate sense of the state of the global economy at the moment.

To start off, if one really wants to comprehend what's going with the economy and in the capital markets today, one has to have a basic grasp of the world's current monetary system. If you have no clue what a central bank or reserve currency is than check out this audio series entitled the Wizards of Money. The first few episodes do a pretty good job of explaining some basic ideas about the present monetary system and it's importance for the novice.

To get some sense of how big of a problem the current US government deficits are at the moment check out this interview with the USA's Auditor-in-Chief David Walker on the BBC program HardTalk.

My favorite financial internet radio show to listen to at the moment is the Financial Sense Newshour hosted by Jim Puplava. The second hour where he interviews an expert guest is particularly worth listening too. Puplava's mission is to expose the structural problems with the US economy and to counteract the government spin which attempts to cover-up this situation.

For those interested in investing in gold and precious metals I recommend Jim Sinclair's Mineset blog. Also check out Kitco.com and TheBullionDesk.com for breaking news and charts.

One of my favorite market analysts is Marc Faber, a Swiss economist that has been living in East Asia for decades now. He has his own website and newsletter. You can also find his commentary on various websites. To read a detailed summary of his thoughts on the global economy you can check out one of my previous posts. If you're really looking for some insight on the global economy I highly recommend you check out his work.

Here's a couple of websites that do an excellent job of exposing the massaged and inaccurate economic statistics produced by the US government. These websites are crucial for understanding the real state of the US economy, which is at present the driving force behind much of the world's economic growth as well. The first is called Shadow Statistics and the second is Now and Futures. You will need a bit of economic savvy to navigate those websites, but they're worth effort. You can also check out this interview with John Williams of Gillespie Research on how the US government has been continually fudging economic stats on inflation, employment and other variables, painting a far rosier economic outlook than is warranted.

Another couple of very interesting websites that attempt to cut through distortions of mainstream US economists are ITulip and RGE Monitor. Some very good info to be found on both sites.

Here's a very interesting article on financial derivatives by the famed self-made billionaire investor and guru Warren Buffett. It's not an easy read but it's worth the effort. According to Buffett the MASSIVE derivatives industry is creating enormous risk throughout the world's capital markets. This is creating so much potential risk to the derivative holder that he's actually labeled derivatives as 'financial weapons of mass destruction'. He has first hand experience on just how risky and financially painful these derivative positions are from his experience of buying Gen Re and trying to get the company out of it's enormous derivatives tangle. It has been estimated by some that there are hundreds of TRILLIONS worth of derivative bets infesting the capital markets of the world. Needless to say, the unraveling of a portion of these positions could be disastrous. In short, complicated financing of vast amounts of easy money has created tremendous risks which can affect the entire world economy.


My favorite forum for discussion economic and investment issues is the Daily Reckoning Forum. A very free-wheeling and zany place- definitely plenty of 'characters' on that board. But there's also quite a few very knowledgeable and helpful people who post there regularly too. Just be prepared for the occasional extreme political thread, not much censoring of political views there ;-)

If anyone has some good financial websites/resources they'd like to share please post them in the comments. There's tones of good financial info out there, I'm always looking for more good info.

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