Market Observations with Rob Kirby

rob kirby

Predatory Lending and Outsourcing of Jobs

A Deadly Combination

by Rob Kirby, Kirby Analytics. November 16, 2009

Catherine Austin Fitts has been sounding the alarm about the pillage of America for more than a decade,

“Overwhelming American communities with mortgage, auto and credit card debt as we shift manufacturing and research capacity, jobs and approximately $10 trillion of capital offshore—much of it by illegal means— has been the US economic strategy since 1996.”

Ms. Fitts has worked tirelessly to expose the extent of the “looting of America” as per revelations of conversations she has had with such highly placed individuals as Bill Christ – [then] President of CalPERS,

“In April 1997, we had an advisory board meeting at Safeguard Scientifics where the board chair led a venture capital effort. I gave a presentation on the extraordinary waste in the federal budget. As an example, we demonstrated why we estimated that the prior year’s federal investment in the Philadelphia, Pennsylvania area had a negative return on investment. It was, however, possible to finance places with private equity and then reengineer the government investment to a positive return and, as a result, generate significant capital gains. Hence, it was possible to use U.S. pension funds to increase retirees’ retirement security significantly by investing in American communities, small business and farms — all in a manner that would reduce debt and improve skills and job creation. This was important as one of the chief financial concerns in America at that time was ensuring that our retirement plans performed financially to a standard that would meet the needs of beneficiaries and retirees. It was also critical to reduce debt and create new jobs as we continued to move manufacturing and other employment abroad. If not, we would be using our workforce’s retirement savings to finance moving their jobs and their children’s jobs abroad.

The response from the pension fund investors was quite positive until the President of the CalPers pension fund — the largest in the country — said, “You don’t understand. It’s too late. They have given up on the country. They are moving all the money out in the fall (of 1997). They are moving it to Asia.” He did not say who “they” were but did indicate that it was urgent that I see Nick Brady — as if our data that indicated that there was hope for the country might make a difference. I thought at the time that he meant that the pension funds and other institutional investors would be shifting a much higher portion of their investment portfolios to emerging markets. I was naive. He was referring to something much more significant.”

American Capital, By-and-Large, Did Seed “The Chinese Economic Miracle”

The passage above outlines and gives credence to how capital, technology and jobs were purposely and systematically “outsourced” from America to lower wage jurisdictions like China and India. While this practice of “labor arbitrage” was being instituted, at the behest of the money-changers, so too was the practice of Predatory Lending by the same crowd. As explained by the Wharton School,

"What we take it [Predatory Lending] to mean is [a situation where] I make a loan to you that reduces your expected welfare," Musto says. "That is an example of me being a predatory lender.... I, the lender, know something extra about how this loan is going to play out."

In layman’s terms, the point that Ms. Fitts is making is this,

“If you are going to create all sorts of inducements to encourage people to ‘leverage-up’ and take on lots of new loans – you might want to also inform them that you are also planning to ‘off-shore’ their jobs at the same time – seeing as how the income from those jobs is how everyone is planning on servicing the new debt.”

Should it really come as a surprise to any informed individual just how far China has come in a relatively short period of time?

All the caveats about Chinese statistics aside, Q3 was a monster, with GDP growing 8.9%.

China’s export sector has been hard-hit but domestic growth is soaring. China is fostering their own internal growth,

Sales on domestic markets continued to steadily accelerate with higher growth rate at or below county level than that in cities. In the first three quarters, the total retail sales of consumer goods reached 8,967.6 billion yuan, a year-on-year rise of 15.1 percent; the real growth was 17.0 percent after deducting the price factors, which was 2.8 percentage points higher than that in the same period last year. The retail sales in cities reached 6,101.3 billion yuan, up by 14.8 percent, and the retail sales at and below county level stood at 2,866.3 billion yuan, up by 16.0 percent. Grouped by different sectors, the sale by wholesale and retail businesses was up by 15.0 percent and that by lodging and catering industry was up by 17.4 percent. Among the sales by wholesale and retail businesses above designated size, apart from the telecommunication devices, the sales of all the other 20 categories of commodities realized positive growth. Of these, the sale of furniture increased by 32.3 percent, and that of the automobile up by 24.5 percent.

China’s emerging middle class, with their higher propensity to save, ALONG with huge Government stimulus [compliments of their huge trade surplus] - have created the domestic capital pools to re-invest in their own economies,

Investment in fixed assets enjoyed fast growth with acceleration of growth in investment in real estate. In the first three quarters of this year, the investment in fixed assets of the country was 15,505.7 billion yuan, a year-on-year growth of 33.4 percent, or a rise of 6.4 percentage points as compared with the growth in the same period last year.

How China’s Stimulus Has Become a Double-Edged Sword for America

For years, America has been exporting inflation to China. The monetary inflation that America has been exporting has [at least, up till now] been ‘sterilized’ – quietly accumulating in China’s foreign reserve accounts. The economic downturn has resulted in 1] – a growing reluctance of China to increase their pro-rata share of new U.S. Debt and 2] – the mobilization of China’s reserves to simulate domestic Chinese demand. We can see this statistically in stalling Chinese TIC accumulations as well as Chinese monetary aggregate data,

The [Chinese] money supply grew rapidly with continued increase in loans of financial institutions. By the end of September, the supply of broad money (M2) was 58.5 trillion yuan, a year-on-year growth of 29.3 percent, which was 11.5 percentage points higher than that at the end of last year; that of the narrow money (M1) was 20.2 trillion yuan, a rise of 29.5 percent, or 20.5 percentage points higher; the cash in circulation (M0) was 3,678.8 billion yuan, up by 16.0 percent, or 3.3 percentage points higher.

Remember folks, inflation is a monetary event – and China is now growing their money supply at a much faster rate than America,

With America now dependant on China for so much of what it consumes, this inflationary feedback-loop now begins to work in reverse.

Gold, commodities and all tangibles are now ONLY beginning to react.

Today’s Market

Overseas equity markets enjoyed modest gains with Japan’s Nikkei Index adding 20 points to 9,791. North American markets fared even better with the DOW ahead 136.60 to 10,407.10, the NASDAQ up 29.97 to 2,197.85 and the S & P gaining 15.80 to 1,109.30. NYMEX crude oil futures gained 2.50 to finish the day at 78.85 per barrel.

Interest Rates: The benchmark 5 yr. government bond ended the day at 2.19% while the 10 yr. bond ended the day at 3.34%.

On foreign exchange markets the U.S. Dollar Index dropped .33 to 74.95.

Precious metals were up across the board with COMEX gold futures adding 19.90 to 1,139.40 per ounce while COMEX silver futures added .92 to end the day at 18.36 per ounce. The XAU Index added 4.97 to 185.96 and the HUI Index gained 14.34 to 474.84.

On tap for tomorrow, at 8:30 a.m. Oct. PPI data is due, headline number expected +.7% vs. prior -.6%. Core Oct. PPI expected +.2% vs. prior -.1%. At 9:00 a.m. Sept TIC data is due, expected 30.0B vs. prior 28.6B. At 9:15 a.m. Oct. Capacity Utilization data is due, expected unchanged at 70.5% and also at 9:15 a.m. Oct. Industrial Production data is due, expected +.2% vs. prior +.7%.

Wishing you all a pleasant evening and successful investing!

Rob Kirby

© 2009 Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail

Contact Us | Copyright | Terms of Use | Privacy Policy | Site Map | Financial Sense Site

© 1997-2012 Financial Sense® All Rights Reserved.

The opinions of the contributors to Financial Sense® do not necessarily reflect those of Financial Sense, its staff, or its parent company.