PARALLEL EVENTS FROM THE 70'S AND 90'S 1970's
1. End of Bretton Woods - Nixon severed any ties our currency has to gold
2. Dollar supremacy ended and our position as world reserve currency (weakening)
3. Dollar and other world currencies had to float to find value against one another
4. Today, dollar is in process of finding its new value it could be devalued as a result
5. Of companies and investors shifting to Europe - BIS meeting in June
6. U.S. went from surplus to deficit in balance of trade in 1973
7. Our trade deficit is at historic highs after 27 years - it could trigger a fall anytime
8. Interest rates rose and Inflation came
Base on what happens to the euro and dollar, it could happen very quickly
9. Then: U.S. decided to support Israel and suffered Oil embargo of 1973' and when Shah fell in 1979
higher oil prices and gas lines
Have fight over Jerusalem with Palestinians - Idea is to make Jerusalem an international
City under UN rule. Fight over who owns the Temple Mount
10. U.S. had shortage of oil refineries - part of problem
Still have shortage of oil refineries - Centralia McLendon - Because environmentalists have not
Allowed a new oil refinery to be built in U.S. in 12 years, if the US starts to import refined oil,
It will devistate our plastics, oil refinery and fertilizer business in the U.S. It will also have a great affect on our dollar and standard of living. Foreign oil companies threatening to shut down U.S. operations Strategic Oil is non-refined. Senators are now asking that existing refineries
Work 110% which can't be done.
Also - much oil/gas has been locked up in expanding National Forests and Parks which
Are off limits.
11. Stock market dropped 35-45%; defense stocks, gold, silver/copper rose
Defense stocks up since April, oil at 10 year high; gold appears to be rising
Stock market has been sideways and volatile
12. The U.S. was a major industrial power - since then our steel mills have been transferred to Japan and China
See Gill's Bk The United States is a service based industry as the bulk of our manufacturing has been transferred to countries which have cheaper labor. At this point, we don't even manufacturer shoes for military purposes.
Euro dollar market
7/7/71 $60b in euro-dollar. Eurodollars are American dollars deposited and relent outside U.S.
Deficits
8/14/71 - The dollar weakened further yesterday in chaotic trading on world currency exchanges. Central banks in Europe and Japan were forced to buy substantial amounts of dollars to hold the U.S. currency at its official minimum. The great uncertainty in the exchange markets at present is how stability and calm are to be restored. With the deficit in the U.S. international balance of payments now running at an annual rate of $15-20B, there is widespread belief
2/11/73 - The dollar is under attack in world financial markets as a huge deficit in the U.S. balance of trade and Nixon's liberalization of price and wage controls have combined to raise new doubts about the dollars future value.
Defense Stocks
1/5/80 Defense issues registered the biggest gains on the Dow while gold dropped $50 to $595.50 ounce, the biggest gainers were General Dynamics at 68; Boeing at 54 «; Lockheed at 38 1/98; Northrop at 45 1/4; McDonnell douglas at 38 7/8 and Litton at 44 1/2.
Dollar
8/14/71 - The dollar weakened further yesterday in chaotic trading on world currency exchanges. Central banks in Europe and Japan were forced to buy substantial amounts of dollars to hold the U.S. currency at its official minimum. The great uncertainty in the exchange markets at present is how stability and calm are to be restored. With the deficit in the U.S. international balance of payments now running at an annual rate of $15-20B, there is widespread belief
2/11/73 - Monetary authorities are meeting in Basel to find ways to settle a currency crisis that is causing strains in Western relationships. Central bank governors from the U.S., Canada and Western Europeans nations and Japan were dealing with problem that have arisen as a result of the weakened dollar which has resulted in a flood of $6b into Germany over the last 9 days.
1973 - The dollar is allowed to float by the central bank governors meeting in Basel Switzerland
9/22/85 Group of Five finance minister met at the Plaza Hotel, NY to launch an orderly appreciation for other currencies against the dollar
8/31/00 - FT, 10 - For nearly seven years the sterling was stable against the U.S. dollar. This year volatility between them has been greater than that between the sterling and euro. On 8/30, it hit a 7 year low against the dollar and has fallen 10% since the start of the year. The main reason for the pound being decoupled from the dollar is that it is caught between two great currency blocs and may be swinging out of the dollar into the euro's.
8/31/ FT 1- The appetite of European companies for US acquisitions remains unsated as underlined by Credit Suisse's agreement to buy DLJSC for $13.7B. Of the $95B of large cross-border mergers and acquisitions, $78B consisted of European companies buying U.S. companies. To many economists the only way out of this vicious circle of a falling euro, raising inflation, and faltering growth is structural reform in Europe.
9/21/00 - FT, 14, The dollar's strength partly reflects the fact that the US is sucking in vast amounts of European capital to fund its current account deficit which is now 4% of GDP. The IMF suggests that the euro is 20-25% undervalued against the dollar. The US does not want to drive the dollar down because this could force up both US inflation and interest rates
10/9/00 - FT 39, Summers has a tricky balance act: prop up the euro at a cost of a weaker dollar but also assure foreign investors that the U.S. remains committed to a strong greenback. The two goals are at cross-purposes economically and politically. A brawny dollar is important right now because the US requires an unprecedented flow of foreign capital to finance growth. The dollar has been a key anti-inflation force. A sudden weakening in the dollar would have sharp negative consequences for U.S. Growth and inflation.
Economic Slowdown
9/8/00, 1 Fears bout the impact of the soaring price of oil and the plunging euro spread yesterday as companies warned investors to expect lower profits. Dupont blamed substantially higher oil prices for increasing its costs and said a weak euro was hitting its revenues as it issued a profits warning. Investors forced the company's shares down $11% to $41.81. Dow Chemical fell 6l38% to close at $25.69. Analysts are expecting that the oil price will rise and will cause a much sharper-than -expected economic slowdown.
Euro
9/1/00 - FT The euro feel on a new low as markets shrugged aside a .25% point rise in interest rates by the ECB.
9/8/00 Ft - E1 - The euro's fall continued despite the ECB's announcement Thursday that it would use some of its dollars and yen to buy up $2B worth of euros. As much as $1B a day in foreign investment capital has been flowing into the U.S. in recent months in search of higher returns. Much of the European investment in the U.S. is coming in the form of corporate takeovers of U.S. firms. The weak euro helps hold down US inflation by keeping the prices of European imports low, but hurts U.S. exports to Europe by making them more expensive. The Euro's slide also reduces the value of U.S. corporate revenues from European operations. The appreciation of the dollar helped keep disinflation down in the U.S. Economy. Similarly the weakness of the euro has raised real activity in the euro-zone. The euro's weakness is a symptom. It reflects the outward flood of capital to pastures green abroad. In 1999, U.S. corporate purchases of European companies fell 29% while deals in the other direction rose 32% to $193.2 B.
9/20/00 - FT - , 1 Pressure mounted yesterday for coordinated intervention to halt the euro's slide after the currency hit new lows against the dollar, yen, and Swiss franc. Gillette and Dupont have complained that the euro's weakness was denting earnings. If the euro was not reversed soon, it risked a sharp and destabilizing correction higher against the dollar in the future.
9/22/00 - FT - 2 - The real reason for the euro's decline analysts say has been the inexorable outflow of long-term capital from the euro-zone. Driven by the promise of superior returns, European companies and equity investors have been drawn to the U.S. While some speculative attacks can be fought through central bank intervention, capital flows are more difficult to turn the tide. "How do you make the chairman of a conglomerate quake in his boots? You can't If he likes the brands in the US and he wants to buy them, it doesn't matter if you intervene."
9/23/24/00 0 FT - Until yesterday the euro had fallen by more than 30% against the yen and more than 25% against the dollar since its launch in January 1999. Estimates by foreign exchange dealers of the amount of euros purchased by central banks ranged upward from $1.5B
9/23-24/00 - FT 2, The critical element in yesterday's action was the participation of the US. U.S. Treasury Secretary Summers said it had acted in response to European concerns about the potential effect on the global economy of a weak euro. It emphasized that the move was a European initiative, not a US one, that the US was assisting in the operation not leading it. In other words, said Hans-Jurgen Meltzer of Deutsche Bank, "The euro's dive was becoming a potential problem not just for the euro-zone but for the world as a whole, including the U.S.
9/25/00 - FT - The decline of the euro has become worrisome: (1) it threatens higher inflation in the euro-zone 92) imposes pressures on internationally exposed segments of the UK economy; and (3) could generate further huge increases in the U.S. current account deficit. They can succeed if they wish: the Federal Reserve is able to create an infinite number of dollars. But it is unlikely in practice to undertake an intervention that affects U.S. monetary policy.
9/30/00 - Ft - FT - 26, Sony is planning to shift production of high-technology consumer electronics products from Japan to Europe to offset the recent sharp decline in the euro against the yen. Euro weakness has eroded the company's profits in its vital European market. They will look to seek an alliance with a European semi-conductor. The euro has tumbled against the yen 30% since its launching.
European Integration
8/1/71 - Communist China expressed approval over it: "Economic and financial power of Western European bloc grows relentlessly, and this tends to weaken the power of the U.S."
9/7/00 - FT, 15 - The enlargement is a doubling from 15 member states to 28 or 30. Current members include: Ireland, UK, Finland, Sweden, Denmark, Netherlands, Belgium, Germany, Luxembourg, France, Austria, Italy, Spain, and Portugal. Front Runners: Cyprus, Estonia, Poland, Czech Repl, Slovenia
Europeans Investing in the U.S.
9/22/00 - FT - 2 - The real reason for the euro's decline analysts say has been the inexorable outflow of long-term capital from the euro-zone the euro-zone. Driven by the promise of superior returns, European companies and equity investors have been drawn to the U.S. While some speculative attacks can be fought through central bank intervention, capital flows are more difficult to turn the tide. "How do you make the chairman of a conglomerate quake in his boots? You can't If he likes the brands in the US and he wants to buy them, it doesn't matter if you intervene."
Group of Seven/Group of 10
12/1/71 - NYT - Treasury Secretary Connally announced that the US and 9 other major non-communist countries had started negotiating a realignment of currencies for the first time since the world monetary crisis broke out in late August 1970.
2/11/73 Money authorities of the major non-communist industrial countries meeting here today are trying to find ways to settle a currency crisis which is causing new strains in Western relationships. The central bank governors meet here routinely and secretly as "guests of the BIS on the second weekend of every month to discuss mutual problems of money management."
9/22/85 Group of Five finance minister met at the Plaza Hotel, NY to launch an orderly appreciation for other currencies against the dollar
9/23/00 - FT - G7 Finance Ministers and Central Bank Governors Communique - "We disucssed developments in OUR exchange and financial markets. WE have a SHARED interest in a strong and more stable international monetary system. Money authorities from the eCB, US, Japan, UK, and Canada joined in concerted intervention in exchange markets because of the shared concern.
Inflation
Interest Rates
7/2/71 - Interest rates rose from 5.5% (prime) to 6%.
International currency markets - floating currencies - see EURO
7/3/71 - German mark was cut lose from its peg and is floating. Dutch guilder, Belgian franc and Canadian dollar are floating. Other nations are committed to pegged rates. IMF allows currencies to float within1% above/below parity.
8/10/71 - The Swiss National Bank moved to stem a speculative flow of dollars into Switzerland that bankers attributed to the call by a U.S. congressional Subcommittee for a devaluation of the dollar
8/12/71 - US has formally proposed to the IMF that the band width which currencies are allowed to fluctuate be widened to 3% above/below their define par values.
12/1/71 - Treasury Secretary Connally announced that the US and 9 other major non-communist countries (G10) had started negotiating a realignment of currencies for the first time since the world monetary crisis broke out last August. Other countries have demanded the dollar's devaluation which Connally indicated would happen. The U.S. can devalue the dollar by raising the price of gold.
Lockheed
7/6/71 - Congress authorizes guarantees of up to $250 million in bank loans to help Lockheed. Said, Wright Patman, "I want to do something for Lockheed. We don't want to be charged with being a springboard for a depressing."
NIXON SEVERS DOLLAR FROM GOLD
8/16/71 President Nixon announced tonight that henceforth the U.S. would cease to convert foreign-held dollars into goldunilaterally changing the 25 year old international monetary system. For 25 years non-Communist nations have maintained the international exchange value of their currencies by 'pegging' them to the dollar. Their central banks would buy or sell their own currencies in daily trading in the foreign-exchange market to keep the value within 1% either side of "par". The Bretton Woods system established in 1944 was ended. See currency markets
Oil/OPEC
1973 - OPEC formed - first time oil used as political/economic weapon
10/16/73 - The Saudi Arabian oil minister told Western executives that if the U.S. undertook to resupply Israel's fighting forces, they would cut crude-oil production by 10% at once and by 5% a month thereafter. The U.S. consumes about 17 million barrels of crude oil and refinery produces a day of which 6.4 million is imported.
1979 - Second oil shock as a result of widespread disruption of the Iranian oil industry after the fall of the Shah of Iran
FT 8/26/27/00, 6 - In the past 18 months, oil prices have TRIPLED - Brnt crude the benchmark has risen from $10 in 2/99 to more than $30 yesterday. Germany is set to slow down. "It is really becoming serious. We are in a situation maybe not so different from the oil shocks of the 1970s" said Eric Chaney of Morgan Stanley Dean Witter. "Energy is still a key input: the new economy runs on gasoline and aviation fuel. The US home is to the gas guzzler car and the walk-in refrigerator, and the consumption of oil is regarded as close to an inalienable right." The US economy is indeed much more energy-hungry than Europe. The US needs 330 tonnes of oil to generate $1 million of gross domestic product, compared with 190 tonnes in France and Germany and 140 tonnes in Europe. Analysts are predicting a new all-time record of $50 a barrel for Brent crude. Even if prices merely stick to $30, pessimists expect that both inflation and unemployment will rise in the US and Europe.
9/29/00 Internet - "Intervention Will Foster Higher Oil Prices" - Azteca de Oro
By Gore releasing strategic oil reserves is in direct conflict with normal supply/demand dynamics. It will delay the recovery of the oil market to its normal level which will put off the real correction and solution to the problem. If the govermnt subsidizes oil like a totalitarian state, since subsidies come from tax receipts of the citizen, we pay. Oil companies will face uncertainty in their decisions. By using SPR, government paved the way for higher oil prices. Next year, with our vulnerability unchanged, oil will continue to be used as a weapon to force price of oil down. This will leave the U.S. vulnerable in the event of any disruption in future production. Why would oil producers want to pump more oil if it is going to fall in praice. ? The international oil industry is trying to recover from the recent state of ruin it was in. Clinton is firing the last shot before winter arrives.
The gold market is intervened and manipulated like the silver market. The stock market is intervened and manipulated.
The currency market is intervened to rescue the heretofore plunging euro. the inflation data, trade deficit and many other variables appear to be manipulated. Something is very wrong. Everything now is being controlled for political expediency. The author believes that the GOLD WEAPON might be used now by some oil producers. There is no incentive to stick with the dollar. First they control the gold price, then the oil prices. Do not be surprised if some producer starts to ask for payment in GOLD.
10/1/00 Internet, Straford Weekly - Oil
Will this rise in oil prices trigger a depression? Will it be 1973 all over again? The answer lies in looking at the structural and cyclical parts of the world's economies. They - not oilwere at the heart of the 1970s economic downturn and will determine vents in this decade. ANALYSIS: Since petroleum is the key industrial mineral, without which nothing works, there has been an economic consequence to the recent rise in prices. The most immediately perceptible consequences, have been political. Oil prices, which caused civil disobedience in Europe, are now a centerpiece in the American presidential campaign. The 1973 Arab oil embargo created a massive price rise and economic dislocation, from Tokyo to Paris to Chicago. The explosion in oil prices ushered in a decade of "stagflation" in which inflation soared while economies stagnated. By the end of the decade, the U.S. experienced double-digit unemployment, double-digit inflation and double-digit interest rates.
Q: When will the bull market end? By most definitions the bull market ended many months ago.
1. United States - The S&P 500 hits 1553 in April and has moved sideways since then, closing at 1436.51 on Friday, six months later a 7.5% decline. The Dow topped out in January, showing a similar pattern and decline.
2. Japan - The Nikkei topped out at 20833 in April, closing Friday at 15747, a decline of 25% for the year.
3. Hong Kong - The Hang Seng reached its high for the year in April at 18398. It feel below 14000, rallied to below its high and then plunged again, closing at 15648 on Friday, a decline of 15%.
4. Singapore: The Straits Times Index peaked at 2583 in January and closed Friday at 1997, a decline about 23%.
5. Germany - The DAX fell from 8136 in March to 6798, near the yearly low. This is a decline of about 8.4%.
6. France - The CAC index went from an all-time high of 6367 in September to 5945 on Friday or decline of 6.6T
7. UK - The FTSE index peaked in late December 6930, moving sideways, closing at 6294 or a decline of 9.2%
Three observations:
a. We are moving into a cyclical downturn on a synchronized basis. Everyone is going in the same direction at the same time.
b. The structural de-synchronization remains in place. Asia's cyclical downturn is a resumption of a long-term downtrend.
c. Increased oil prices will therefore have disproportionate effects. More vulnerable Asia will be hurt more than the U.S.
The world's cyclical and structural shifts are not coinciding. We expect that oil prices will not affect the world as they did in 1973, nor will they be sustainable for the decade. Oil prices will affect the depth and length of a downturn, but are not the cause. A weakening will occur across the globe.
9/29/00 - Dollar Reserve Currency on the Wane: Can Iraq's Policy affect the US$ and Euro - - By Steve Hickel from gold each editorials.
"Iraq decided to no longer accept dollars for oil. In my opinion, we will see the dollar having to bid for Euro's instead of oil directly. That will reverse the current Euro-Dollar relationship. It will create a high demand for Euro's causing a higher euro valuation; the dollar will significantly devalue against the euro by 30% or more. Since the Euro is market-aligned with gold which represents 15% of its current value, the price of gold will also rise in dollars and euros. As gold changes in value, so too will the euro change. Gold will become a proportionately higher percentage of backing for the euro as gold rises (lowers).
Commentary on oil from book:
In 1973, oil supplies were tight and the U.S. experienced some shortages of home heating oil because of a lack of refining capacity. The oil-exporting countries were pressing the international oil companies for a price increase, about the companies were resisting. Then came a new Arab-Israeli war. The Arab oil producers quietly threatened to stop selling oil to the U.S. if it re-supplied arms to Israel and when it did, they carried out the threat. Oil prices headed up. Soon gasoline lines appeared. For the rest of the decade, energy became a national obsession. Oil prices shot up again in 1979 after the fall of the Shah of Iran, sparking new shortages and gas station closing. Energy companies became the darlings of the stock market for their increasing profits. Throughout the decade the Government tried to hold down inflation through controls on the prices of oil produced from domestic wells. That led to an extensive bureaucracy. In 1979 Carter ended prices controls but asked for a "windfall profits" tax on oil companies.
History
1960 - Opec formed by Iran, Iraq, Kuwait, S. A. and Venezuela to counter the 7 sistersbig western oil companies that dominated the global petroleum sector
1973 OPEC storms to prominence as oil prices surge to unprecedented levels in the wake of the Arab oil embargo of industralized countries following the October War between Israel and its Arab neighbors
1979 - Second oil shock of the decade hits theworld as a result of the Islamic revoltuion and fall of Shah
1985-86 - Oil prices collapse after widespread cheating of S. A.
1990-91 - Panic buying send soil prices soaring after Iraq invasion of Kuwait
1998-99 - Oil prices collapse as a result of open quota cheating and the economic collapse in Asia
1999-2000 - OPEC responds with a series of deep production cuts that eventually reverse bearish sentiment and trigger the long bull run in oil prices.
2000 - fear that there will not be enough heating oil
Printing Money
12/27/71 - A new pattern of currency values has emerged form the Washington meeting of finance ministers, but the gnomes of Zurich and London and Frankfurt are convinced there will be some changes made before too long. Franz Pick, the New York currency expert once said all money is made to be devalued because of the inflationary bias in the world and the penchant of governments to print money when they can't finance their debts.
Profits (Corporate)
9/8/00, 1 Fears bout the impact of the soaring price of oil and the plunging euro spread yesterday as companies warned investors to expect lower profits. Dupont blamed substantially higher oil prices for increasing its costs and said a weak euro was hitting its revenues as it issued a profits warning. Investors forced the company's shares down $11% to $41.81. Dow Chemical fell 6l38% to close at $25.69. Analysts are expecting that the oil price will rise and will cause a much sharper-than -expected economic slowdown.
Stock market
7/1/71, - Dow up 8.84 points to 891; volume was 15.41 million shares
8/7/71 - markets were highly keyed up over the continuing weakness of the U.S. dollar form the balance-of-payment deficit and the drop in the official gold supply. The Bank of France started to move funds out of dollars into francs
1/3/80 - Dow drops 14 points to 824.57 in its heaviest loss since last October. Precious metals stocks staged a dazzling display in Wall Street as their prices reflected soaring quotations for bullion to record levels. God, silver, and copper futures surged to daily price ceilings. Big money flowed out of the Middle East into precious metals. Copper futures moved up. "Copper is a war metal, first and foremost. If there's a war, its always bullish for copper."
Commentary from book on NYT
The 1970's were the years that America came to doubt itself. Inflation rose relentlessly and the country seemed to be at the mercy of oil sheiks and oil company executives. The dollar, for long a symbol of American supremacy in the world, was devalued as the Bretton Woods system of fixed currency rates was ended by President Richard Nixon. By the end of the decade, a dollar was worth far less than it had been by any measurewhether in purchasing power or in the number of marks or yen that it could buy. The stock market which had risen reliably for most of the time since WWII, went into reverse. The worst bear market since the Great Depression sent the Dow down 45% And when the decade ended the average was below where it had been 14 years earlier. Investors had concluded that stocks and bonds were dubious investments but that commodities, particularly precious metals, could only rise in price. 207
The Dow, from its high water mark of 1051.70 on Janiuary 11, 1973 through last Tuesday August 26, plummeted 36.15% and rubbed out more than $200 billion in the market. This compares with a decline of slightly under 36% during the 1969-70 break.
Trade Deficit
The U.S. trade deficit is likely to reach $1B to $1.5B by the end of the year. With the shift of the nations deficit from a surplus to a deficit in the second quarter of 1971.