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ECONOMIC ANALYSIS:

THINKING MARKETS

by Fred Cederholm
What made the events of this past week so noteworthy was the complete absence of a “noteworthy triggering event.”
I’ve been thinking about markets. Actually I’ve been thinking about the week that was, volatility, performance, stocks, currencies, our debt/deficits, the “big four,” and just who owns America - or who is buying it. Once again as I tracked the unfolding financial and economic developments, I was left with a feeling of uneasiness in attempting to figure out what is going on in the bigger picture. Basically there were two unanswered questions; who was doing all the buying? And... with what?

You see last week the US equity markets experienced a buying frenzy. Last Friday, the Dow Industrials closed at 12,961.98 (up 158.35 for the day), the NASDAQ closed at 2,526.39 (up 21.04 for the day), and the Standard and Poor’s 500 closed at 1,484.35 (up 13.62 for the day). Crude oil closed at $63.38 and gold closed at $695.80. This was the other side of the coin from what I described in my earlier column – TH*NK*NG (VOLATILITY) – from eight weeks ago when everything was headed south. The common thread was that in both cases there were no clear cut underlying threads (or triggers) as to why what happened in the markets happened.

What made the events of this past week so noteworthy again was literally the complete absence of a “noteworthy triggering event.” In fact, overall things (and market motivating factors) were pretty much as they have been for some time now – not any worse, but certainly no better. The reported earnings for those companies who had reported on their first quarter earning were pretty much on target, but... the forecasts for 2007 had been reduced – foretelling the weakest earning season in three years. The same was true for what was being reported on jobs created (and jobs lost).

The US National Debt topped $ 8.882 TRILLION on Friday. The National Debt has continued to increase an average of $1.56 billion per day since September 29, 2006!
While the American equities markets had really a pretty remarkable week (BULLISH, if you will), the currency markets experienced the opposite. The US dollar was really taking it hard after yet another week of losing ground against other major currencies of the planet. As of April 22nd, the British pound cost $ 2.00345, the EURO cost $1.35934, and the Yen cost $ ..0084126. This downward activity by the US buck was fully understandable. The US government and the American public continue to live well beyond their means – underwriting their profligate spending on the largesse of foreigners. The US National Debt topped $ 8.882 TRILLION on Friday. The National Debt has continued to increase an average of $1.56 billion per day since September 29, 2006!

You should also consider how the M-2 money supply - courtesy of the Fed’s printing presses –has escalated to another $ 7+ TRILLION on top of that. There are a “whole lot” of dollars out there, unfortunately the lion’s share of these “full faith and credit greenbacks” are not in the hands/ coffers of America’s own citizenry. The US dollar has become our outstanding liability (and pending nightmare), while it is only the foreign holders of the bucks who “might” be able to perceive it as some kind of asset.

When you are talking about fiat money, let’s face it... money is only worth what you can barter for it. It is interesting to note that the recent jump in the dollar price for a barrel of crude is almost completely explainable by the erosion in value of the dollar relative to the POUND or the EURO. It may be claimed that the Dollar is still the “official” currency of the energy markets, the facts show otherwise.

The "Noteworthy Event"? The Chinese, the Japanese, the EURO (currency) zone, and the Arab OPEC’s have accumulated dollar holding in excess of a $TRILLION, EACH! Would you sit on that huge a block of Dollars, or would you try to convert them to something else?
In calendar 2007 US/us is right on target for buying some $ 800 BILLION more of foreign made “stuff” than we are selling of our own products to the rest of the world. That breaks down to a “net” outflow of newly printed bucks to the tune of almost $ 2.2 BILLION per day! This has been going on for quite a while, so it should come as no shock that there are at least four geo-political entities which have accumulated dollar holding in excess of a TRILLION, EACH! These are the Chinese, the Japanese, the EURO (currency) zone, and the Arab OPEC’s. When you sit on that huge a block of Dollars, do you continue to hold them – watching them erode in value, or do you try to convert them to something else?

When “We the people...” watch and attempt to track the unfolding developments in the equity markets (unless there is an announced take over), we only know the volumes of the stocks traded and at what price. So... just who was doing all the buying this past week - pushing up prices/ markets to record levels - or almost record levels? Just where was all that money coming from? I’ve got a pretty good idea, and I TH*NK you do, too. I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

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This story was published on April 23, 2007.