When Giants Fall

Featured Guest on Follow the Money

I am the featured guest on this week's Follow the Money Radio Show with host Jerry Robinson. For a downloadable webcast of our wide-ranging discussion, please click here.

Panzner, Kunstler, Rawles

I was recently a guest, along with Jim Kunstler and Jim Rawles, two individuals who I respect, on Phoenix radio station 550 KFYI. Host Kevin Gossett has just posted two one-hour podcasts of the show, entitled "End of the World Night," on his station-affiliated blog.

For those who are interested, here are the links to the mp3 files:

Part one.
Part two.

Media Appearance: Russia Today

I was recently interviewed by U.S. international correspondent Anastassia Churkina for the Russian TV channel, Russia Today. For those who are interested, here is the video (via YouTube):

Excerpt from AMCF Presentation

I was one of the speakers at the Association of Management Consulting Firms (AMCF) Horizon Series Strategy Event, "Smart Minds, New Ideas, Future Strategies," which took place back in June at the Harvard Club of New York. AMCF has just posted an excerpt from the conference, featuring yours truly, on YouTube, which I thought some of you might find interesting.

Interview at Your Contrarian

Chris Wilson, publisher of Your Contrarian, has just posted an interview with me, recorded this past week, for his Roundtable audio series. For a downloadable podcast of our wide-ranging discussion, click here.

Featured Guest on Holistic Survival Show

Back in March, I was the featured guest on the "Holistic Survival Show" with host Jason Hartman. The interview, entitled "How to Weather the Financial Armageddon," has just been posted on the HSS website. For a downloadable podcast of our wide-ranging (and still relevant) discussion, click here.

Now Posted at Financial Armageddon

For those who are interested, my latest column for the Huffington Post, "Wall Street's Gains Equal Main Street's Loss?" is now posted at Financial Armageddon.

Featured Guest on Contrary Investors Cafe Network Radio

I was a featured guest on the Contrary Investors Cafe Network internet radio show, "Spin Cycle," with host Andy Sutton. For a downloadable podcast of our wide-ranging discussion on markets, the economy, and the outlook for the future, click here.

Now Posted at Financial Armageddon

For those who are interested, my latest column for the Huffington Post, "Holes in the China Recovery Story," is now posted at Financial Armageddon.

My Latest Huffington Post Column: 'The Trouble with Markets'

Below is my latest column for the Huffington Post, entitled "The Trouble with Markets":

In recent months, the spread between short and long-term bond yields has increased significantly, hitting record extremes. Many market-watchers believe the widening differential reflects two concerns.

The first centers on whether the market can absorb the tsunami of government bond sales needed to fund the various bailouts and stimulus measures Washington has agreed to, as well as the budget gaps that have opened up as the economy has weakened.

There is also a growing fear that the recent jump in government borrowing and the Federal Reserve's efforts to boost liquidity through "quantitative easing" -- that is, by cranking up the monetary printing presses -- will trigger a bout of inflation that slashes the future value of the money that will be used to pay off these obligations.

But not everybody agrees with this assessment. According to a recent Reuters report, Federal Reserve officials are "puzzled" by the steepening yield curve. While they accept that investor worries over inflation could be behind the recent moves, they also allow for other explanations.

One possibility, Reuters writes, is that the steepening yield curve -- along with an overall increase in bond yields -- suggest "an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit."

Alternatively, some central bankers believe it could be a technical development, reflecting a decision by China, "the largest foreign holder of U.S. Treasury debt,... to refocus its portfolio by leaning more heavily on shorter-term maturities."

With all of that in mind, it's probably fair to say that the message of this particular market is somewhat muddled, and that the moves seen so far could point to any number of outcomes, leaving observers in the dark as to just what the future holds.

But this is not the only example of markets sending a mixed -- or even a misleading -- signal. Recent trading in the shares of General Motors represents another case in point.

Last Thursday, the Wall Street Journal reported that GM's bondholders "soundly rejected a debt-swap offer critical to the auto maker's survival, pushing the company closer to a bankruptcy filing that could come in the next few days." The shares fell on the news, though, oddly, not by much. They closed at $1.12, down three cents.

A story in Friday's Journal, "GM in Last Lap to Chapter 11," was even more specific about the company's ominous near-term prospects, noting that a bankruptcy filing was planned for Monday and that current GM shareholders would end up with nothing. Not suprisingly, the shares came under further pressure, dropping by a third to $0.75. Not quite zero, but bolstered, perhaps, by hopes of a weekend miracle.

Today's action, however, was something else, reflecting what appears to be a major disconnect between markets and reality. Before trading even began, news reports and remarks by lawyers, policymakers, and bankers made it clear that the 100-year-old car manufacturer was heading to bankruptcy court.

Given that the company's liabilities are far in excess of its assets, that meant shareholders would almost certainly end up with nothing, nada, zilch once it was all over. And yet...by the time trading ended at 4 o'clock, the shares were unchanged on the day. Strange, indeed.P>

The point, of course, is that what takes place in markets doesn't always make a whole lot of sense, nor does it necessarily serve as a guidepost to what may (or may not) happen in future.

In fact, that notion was no more evident than when share prices were powering to all-time highs in October 2007 -- amid all sorts of evidence that the financial world was in serious trouble, and just two months before the start of one of the worst downturns this century.

With that in mind, some might wonder what the recent near-40 percent rally in the S&P 500 index -- which the bulls blindly cheer as a leading indicator of good times to come -- is really telling us.

My Latest Huffington Post Column: 'A Bad Connection in the Markets'

Below is my latest column for the Huffington Post, entitled "A Bad Connection in the Markets":

t first glance, news that Standard & Poor's has placed the AAA rating of the United Kingdom under review for a possible downgrade would seem to have no real connection to the fact that U.S. bond yields jumped to six-month highs.

But that would be a mistake.

In fact, these and other recent developments likely reflect an increasingly widespread fear among analysts, creditors, and fixed-income investors that a growing number of governments no longer view sound finances as a key policy goal.

Since the turn of the year, five countries -- Japan, Ireland, Spain, Portugal, and Greece -- have had their formerly top-notch credit ratings cut by S&P, Moody's, or Fitch amid expectations that faltering economic growth, burgeoning public spending, and an increasing reliance on borrowed money has undermined these countries' financial prospects.

In general, deteriorating credit ratings translate into higher borrowing costs. That is not a welcome development when government budgets are already under pressure and public sector demand for credit is expanding rapidly around the globe.

And while some might argue -- with good reason -- that rating agencies' opinions shouldn't matter all that much considering how badly they did when it came to evaluating the creditworthiness of institutions and an array of financial instruments during the recent credit boom, global credit markets are also telling an alarming story.

Around the world, despite -- or, perhaps, because of -- the efforts of central bankers and legislators, long-term bond yields in many countries are at or near six-month highs and yield curves -- essentially, the gap between long and short-term rates -- have been widening, in some cases dramatically.

Taken together, this combination can be seen as a clear sign that investors are starting to worry about the prospect of sovereign delinquencies or defaults, or the threat of serious inflation -- or both.

If history is any guide, it would not take much for such fears to begin feeding on themselves, eventually translating into a widespread vote of no confidence that will leave many governments -- and their citizens -- exposed to myriad risks, not least of which is an inability to fund essential spending on infrastructure and defense.

Yet despite these warning signs, many mainstream economists and policymakers here and elsewhere continue to push for more and more spending, bailouts, rescues, and borrowing than the already substantial amount we've seen so far -- without a coherent plan, accountability for how the money is being spent, or a clear sense of what the endgame is.

In their view, the need to address near-term economic woes far outweighs the longer-run implications of what might be described as an imprudent course of action. Even among those who are alert to the risks posed by the orgy of government spending, there is a belief that the strategy can be easily reversed once the time is "right."

Unfortunately, the track records of policymakers and politicians, in the United States and in other countries, have proven they are wholly inadequate when it comes to making such assessments, even if one only takes more recent events into account.

Moreover, assuming that those in charge somehow figure out when they've "solved" whatever problem it is they are worrying about -- that is, if they actually know themselves -- the markets are likely to be anything but accommodating.

At that point, in fact, there's a very good chance that we will see the loss of confidence that is already gaining pace in a host of countries evolve into a full-fledged run on the banks -- or, in this case -- the currencies and the bond markets of those governments that decided deficits and debts don't matter in the short run.

By then, everyone will understand why today's seemingly unrelated events are so deeply connected.

Fundsupermart.com Interview

Singapore-based Fundsupermart.com just posted a Q&A with yours truly on the subject of my new book and my outlook for the future, entitled "The End Of The American Era":

Michael Panzner, author of When Giants Fall (published by John Wiley and Sons), argues that the US empire is in decline. In his provocative book, he states the signs of an empire in decline and what to do in order to survive – and prosper from – the end of the American era.

For the last 25 years, Michael J. Panzner has been involved in the global stock, bond and currency markets, working for a host of corporations, including HSBC, Soros Funds, ABN AMRO, Dresdner Bank, and JP Morgan Chase.

In his preface to When Giants Fall (published by John Wiley and Sons), he writes, “For many Americans, the years ahead will be nothing short of a modern Dark Ages, where each day brings forth fresh anxieties, unfamiliar risks, and a deep sense of foreboding.”

In short, the worst is yet to come.

If the tone of the book is somewhat overly apocalyptic, perhaps it is the better to catch the reader’s attention with. Panzner’s no-holds-barred approach to the book underlies the urgency of what he believes to be “a clear and present danger to the economic well-being of every American”.

We caught up with Panzner for a quick interview on his book.

Nick Tay (NT): What factors led you to the conclusion that the world is headed for ‘the end of the American era’? 
Michael Panzner (MP): My outlook is based on a number of things. Historically, great powers like the US have always come and gone; I felt this time would be no different. The only real question, then, was timing: Would it be now or many years hence? My belief that the moment of truth has arrived stems in part from the realization that the financial crisis I predicted in my March 2007 book, Financial Armageddon, would not only devastate the US economy, but would also do substantial damage to the public purse. Why did that matter? Because research by historians reveals that there has always been a strong link between a nation’s financial condition and its ability to project power. In addition, we are seeing numerous warning signs, identified by historians, of impending "imperial demise," including our extraordinarily costly military commitments around the globe. Other nations have also been gaining ground on the US, both economically and militarily, narrowing the gap that has kept America on top.

NT: From an investing point of view, what does this mean for investors who are looking for the US to lead a broader and more sustained recovery?
MP: Those who are counting on America to turn things around are making a mistake. In fact, it is one of many base assumptions that investors will have to rethink in the years ahead.  In my view, the damage that has been done to the US and world economy by the "Great Unraveling" (the current economic upheaval) is not just a cyclical interruption, but the starting point for a secular transformation of the overall pattern of economic activity. Among other things, investors and others will have to adjust to a world where: overall growth is less than it was during past decades; credit is costlier and harder to come by; there is a growing loss of faith in institutions, governments, and currencies; and, social unrest, conflict, and geopolitical instability are the order of the day.

NT: Following the stimulus plans announced by the Obama administration, are there signs of a return to the country’s former glory?
MP: On the contrary, although our president has many talents, I think he and his administration are making a number of serious mistakes. For one thing, policymakers appear unwilling to make the kinds of hard-nosed decisions that are called for during a full-fledged insolvency crisis. That is, getting rid of managers and others who caused the problems to begin with; wiping out the shareholders ­and − in many cases, the bondholders − of failed institutions; salvaging the healthier firms and shutting down the basket cases; and, perhaps most importantly, protecting the interests of taxpayers and ordinary Americans. Instead, they are relying on methods, including cranking up the printing presses, which helped get us to this point to begin with. In the end, we’ll still have to deal with the painful consequences of hubris and excess, but we won't have much to show for it except an unfillable hole in our finances.

NT: Let’s say the giant does indeed fall. Who is likely to fill up the economic vacuum (in terms of demand and supply for/of goods and services) left behind?
MP: There’s no easy answer to that question. Unlike those who believe there will be an orderly transition to: either a multi-polar world, where America shares power with other up-and-comers, or a new global order, where China, for instance, assumes the mantle of power much like the US did when the sun set on the British Empire, I expect the foreseeable future to be marked by instability, confrontation, and conflict, where no one country is in charge. Exacerbating matters will be the strains associated with resource-related constraints. When various interests are competing for a shrinking pool of vital resources − energy, food, water, and even air − economic activity will likely be volatile and disjointed, with no one region garnering an advantage for long.

NT: In your opinion, is there any way to avert the fall of the US empire?
MP: As someone who has spent more than two decades in the financial markets, I’ve learned never to say never and that, no matter how improbable it might seem, anything can happen. That said, there are no real historical examples of a country that has managed to remain the dominant power for too long without having the economic resources and military advantages necessary to support those ambitions. While it is possible that geopolitical rivals and adversaries, including China, Russia,  India, Brazil, Iran, and Venezuela could be equally hard hit by the fallout from the “Great Unraveling”, potentially leaving the US better off  in relative terms, that seems unlikely, especially given how dependent the long-time superpower has become on the support of other nations. Moreover, it is sad to say, the arrogance and sense of exceptionalism that the US has demonstrated during the past decade, in particular, has undermined the support needed to maintain our global standing.

My Latest Huffington Post Column: 'Intended Consequences?'

Below is my latest column for the Huffington Post, entitled "Intended Consequences?":

To the cynical observer, the history of government policymaking might also be called a chronicle of unintended consequences.

Take one classic example, detailed in The Concise Encyclopedia of Economics. In an effort to protect its pastoral vistas, Vermont in 1968 enacted a statewide ban on roadside billboards and large signs. Not long after, big and bizarre "sculptures" started appearing adjacent to businesses, including a "twelve-foot, sixteen-ton gorilla, clutching a real Volkswagen Beetle," commissioned by a car dealer, and "a nineteen-foot genie holding aloft a rolled carpet as he emerges from a smoking teapot" on the grounds of a carpet store.

Recent reports highlight other instances of good intentions gone bad. In this month's The Nation, for example, DC editor Christopher Hayes reveals how an obscure tax provision, intended to reduce America's dependence on fossil fuels, has spurred paper makers to add diesel fuel to a process that requires none so that they can qualify for a government subsidy -- worth up to $8 billion this year to the 10 largest companies in the sector.

Likewise, a story published earlier this week by the Associated Press notes that "as drought forces families in the West to shorten their showers and let their lawns turn brown, two Depression-era government programs have been paying some of the nation's biggest farms hundreds of millions of dollars to grow water-thirsty crops in what was once desert."

To some, the fact that credit conditions have hardly improved after myriad "bailouts" and "rescues" also reflects the law of unintended consequences. Even though lenders have received more than $211 billion in federal funding to help open up the credit spigots, writes the Washington Post, Treasury Department data indicates that "lending by the nation's largest banks fell six percent in February from the previous month, continuing a downward trend that began in October with the financial crisis."

Then again, some might point to other developments this past week and wonder what lawmakers really meant to accomplish by their efforts to return things to "normal."

Last Thursday, for example, Wells Fargo, the nation's second-biggest home lender, reported a record profit for the first quarter that beat the most optimistic Wall Street estimates, according to Bloomberg (albeit with the aid of "cookie jar reserves" and other accounting maneuvers, notes Jonathan Weil, a columnist for the news service, in a later commentary).

Then on Monday, Goldman Sachs announced better-than-expected results for its latest quarter (again, not without a measure of assistance from a change in its fiscal calendar, detailed in a blog post by The New York Times' Floyd Norris.) As it happens, the results were good enough to allow the investment-turned-commercial bank to bring a $5 billion stock offering to market.

Finally, this morning J.P. Morgan also delivered surprisingly strong profits for the three-month period just ended, with earnings-per-share that handily topped analysts' estimates. As the Wall Street Journal wrote in a follow-up report, the nation's largest bank was the third big financial institution "to surprise Wall Street with solid results despite the recession."

Naturally, some might wonder whether all the good news coming from the banking sector lately is merely an unintended consequence of efforts to get liquidity flowing through the economy again.

On the other hand, more jaded types might draw attention to the incestuous and longstanding relationship that the moneyed interests have had with those who are making and implementing policy -- and doling out taxpayer funds like candy to the firms that helped get us here.

Intended consequences, anyone?

My Latest Huffington Post Column: 'Lipstick Won't Make Pigs Fly'

Below is my latest column for the Huffington Post, entitled "Lipstick Won't Make Pigs Fly":

In discussions about misguided notions, the name of a particular animal often comes up.

If, for example, the facts suggest an outcome is next to impossible, the conversation can quickly turn to the subject of flying pigs. Alternatively, when a proposition makes little sense on its face, there may suddenly be talk of putting lipstick on that very same creature.

But when it comes to recent government-sponsored efforts to convince Americans that things are better than they appear, both expressions would seem to apply -- mixed-metaphor conventions be damned.

Take today's move by the Financial Accounting Standards Board to relax the rules on mark-to-market accounting. According to Bloomberg, FASB was "pressured by U.S. lawmakers and financial companies" to make the change, which allows managers more leeway in pricing the financial assets on their balance sheets, including the toxic variety that many firms are now stuck with. Experts say that shift could boost banks' first quarter net income by 20 percent or more.

But will the newfound profitability mean the system is in better shape than before? Not really. In fact, the lack of transparency will likely add to the uncertainty that has undermined lending and other markets since the credit bubble first burst two years ago.

After a brief respite, the financial world will again come unglued over fears about the economic wellbeing of banks and other counterparties. Liquidity will dry up, Main Street will grow more worried about the future, and the economy will suffer the consequences of steadily deteriorating demand.

That is not the only area where proactive policymaking will likely bring about unintended consequences. For example, if you dig into the recent spate of "better-than-expected" economic reports, which many permabulls and TV pundits have siezed on as evidence of a turnaround, there appears to be something other than rigorous analysis involved.

According to Barron's columnist Alan Abelson, citing work by Merrill Lynch economist David Rosenberg, some of the assumptions that government number-crunchers have been making as they transform raw data into headline statistics are more than a little optimistic, especially in light of broader economic developments.

Among other things, Abelson wrote in this week's Up and Down Wall Street column, "the seasonal adjustment for [February] new-home sales was the strongest since 1982," while the corresponding adjustment for durable-goods orders was the strongest since the series was first released in 1992.

Hmmm, interesting.

Unfortunately, while that might be taken as good news for now, an inevitable reconciliation of the reported data with what is actually happening on the ground sets the stage for a crushing disappointment later on.

The Public-Private Investment Program, or PPIP, is another effort that seems designed to make the bad look good -- at taxpayer's expense, that is. Quite simply, the plan put forth by Treasury Secretary Timothy Geithner uses the same kind of smoke-and-mirror chicanery that helped create the mess we are in to begin with.

In the end, nothing will really be solved, and the very costly mistakes of the private sector will end up on the books of the taxpayer, with little to show for it except a crushing load of debt for our children and granchildren. (For a helpful overview of how the scam works, check out the chalkboard commentary by the Khan Academy over at YouTube.)

Finally, while it's not clear whether the "assistance" was officially (or even unofficially) sanctioned, the allegedly good results that several banks reported they were having in January and February, which signaled to some wishful thinkers that a turnaround was at hand, may well have come at the expense of the financial black hole known as American International Group, now under U.S. government ownership.

As Zero Hedge argues in a recent post, "AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the Treasury Secretary...disclose the real extent of this, for lack of a better word, fraudulent scam."

Of course, all of these developments may be totally unrelated, or perhaps they reflect an extraordinary change in circumstances (not being felt by average Americans, it seems) that also help explain the recent rebound in share prices.

Then again, if only I had enough lipstick, I could make pigs fly.

My Latest Huffington Post Column: 'Anti-Dollar Contagion Gains Pace'

Below is my latest column for the Huffington Post, entitled "Anti-Dollar Contagion Gains Pace":

Yesterday, China's central bank posted an essay on its website calling for the creation of a new international reserve currency. Given that the Asian power now holds most of its $2 trillion of foreign currency assets in U.S. dollars, the news caused quite a stir on Wall Street and in Washington.

Yet the real story for those who've been paying attention during the past few months is not that the Chinese are suddenly getting worried about their dollar holdings. Rather, it is that so many other nations are also having doubts about the U.S. currency -- and are expressing their concerns publicly.

Last week, for example, Russia issued a statement urging the International Monetary Fund to consider creating a "supranational reserve currency to be issued by international institutions as part of a reform of the global financial system," according to The Moscow Times.

Reuters also reported remarks by Chalongphob Sussangkarn, a former Thai finance minister and now president of the Thailand Development Research Institute, where he raised concerns about a possible large sell-off in the dollar.

"The U.S. deficit is so huge," Sussangkarn said. "This is why all countries, particularly East Asia, are concerned because we hold a lot of these assets. What happens if the U.S. dollar falls 40 percent? Many central bankers will be losing huge amounts of money."

But that's not the end of it. During a speech two weeks ago at a one-day summit of the Economic Cooperation Organization, which includes Iran, Turkey, and other nations nearby, Iranian President Mahmoud Ahmadinejad said that the "capitalist system was close to collapse," according to Reuters, and he suggested that a single currency -- other than the dollar -- should be used in cross-border trade between members.

A day earlier, The Japan Times detailed a report by the Institute for International Policy Studies, a semigovernmental think tank, which asserted that "in order for the entire Asian region to keep growing, [Japan] must create the third-polar regime in Asia by introducing the Asian common currency, which stands on par with the U.S. dollar and the euro."

And finally, while the Gulf Cooperation Council today announced that it was postponing a 2010 deadline for the launch of a common currency for the region, which includes Arab states whose domestic units of account have long been linked to the dollar, the group indicated that it remained committed to a strategy that would eventually loosen those ties.

As was the case with the now hobbled U.S. banking system, the dollar's fortunes have long depended on the confidence of others.

If that weren't true, nations such as China, Japan, and Russia, which own $740 billion, $635 billion, and $120 billion, respectively, of U.S. Treasurys, would have few economic incentives to be so heavily invested in a market where returns are low and the currency has steadily depreciated over the course of many decades.

Others' faith in our future also helps explain why nearly two-thirds of all dollars that are currently in circulation are in the hands of foreigners -- that is, "unnatural" holders who usually don't spend their money here.

Under the circumstances, what now seems to be a contagious quest for alternatives to the dollar -- a budding run on the bank, if you will -- by policymakers in China as well as in many other countries around the world should not be taken lightly.