From the July 01, 2007 issue of Futures Magazine • Subscribe!

Consumption

Just a week before government bonds plunged causing 10-year U.S. Treasuries to hit their highest yields in five years, investment manager Jim Rogers told an audience that they should stay away from bonds unless they knew how to go short.

Rogers was speaking at the “Oasis 2007” conference in Santa Clara, Calif., to some 2000 plus individual options traders. He noted he was unhappy with the direction of the United States: its huge debt, its debtor nation status, its dollar policy, its banks. Rogers said his baby girl already had a savings account, but it’s located in Switzerland. In fact, he said, he and his family were looking to move to Asia. His daughter already is bilingual in Mandarin Chinese, and he noted that “China will be the next great country in the world whether you like it or not,” and that the Chinese are “the best capitalists in the world.”

On the heels of this speech the fall in bonds continued, with analysts stating the foreign appetite for U.S. government debt could be coming to an end. That’s a scary thought, especially when we have some $13 trillion in debt, and need so much for the world, especially China, to keep funding it.

In “Can the U.S. consumer beat the house?” by Associate Editor Chris McMahon (page 26), the outlook for both the U.S. economy and interest rates is unclear. The crux of the problem is the housing market, and anyone who can read has picked up on the problems that exist. Easy money in the mortgage market is coming to an end, and with it, taking out major subprime mortgage lenders, hurt by the spike in home-loan defaults. This racket is something akin to the old savings & loan deals in which loans were made at such levels that money was practically free. And then rates surged and savings & loans defaulted. A couple months ago at a conference in Florida, former Fed Chairman Alan Greenspan said he was “puzzled” that the subprime mortgage problems hadn’t had more of an effect throughout the economy, because he was sure that they would.

However, McMahon’s sources had conflicting views. For instance, although the subprime area was indeed a problem, and despite housing being a huge factor in the economy’s health, one analyst said the declines in housing permits and construction starts were mere “speed bumps” to the overall economy.

To the rescue so far has been consumer spending, which even Fed Chairman Ben Bernanke said was “the mainstay of the current economic expansion.” Consumer spending has been increasing on a quarterly basis, which makes sense as unemployment remains low and inflation stays manageable. But then, as one analyst noted, the spending increase could be rising due to higher prices, such as with oil, which is still hovering around $66 per barrel. The other hand’s view was especially key considering the aforementioned long term bull market in commodities, and the chance rising prices will continue.

A main theme throughout many analysts’ views is that inflation remains relatively benign, and the price of goods and services coming into play isn’t sounding an alarm. Yet Jim Rogers, who is even more bullish on commodities than he is on China, says that global supply and demand of commodities has gotten out of whack. The hunt for commodities, or refining them, has dropped dramatically causing prices to escalate. For example, he noted by the end of the decade Indonesia will be kicked out of the oil exporting cartel OPEC because it will need to import oil. The BP Statistical Review of World Energy reported recently that the world had enough proven oil reserves for only 40 years of consumption. It may be true then that a fall in building permits might be a speed bump to the economy, but surging commodity prices could be a pothole that swallows the engine.

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