As the dollar sinks to near-record lows against the euro and the British pound, the stock market has returned to record highs, but investors are being advised to anticipate a worldwide downturn and the U.S. economy may have already entered a recession.
An explanation may be found in a private investment letter published by the Carlyle Group to its “professional investors.”
WND has obtained a copy of a Jan. 31 letter by the Carlyle Group’s founding partner and managing director, William E. Conway, Jr., to the firm’s investment professionals worldwide.
In the letter, Conway attributes the continued rise of world stock markets to a glut of liquidity in the world financial system, which he describes as “the availability of enormous amounts of cheap debt.”
Conway writes, “This cheap debt has been available for almost all maturities, most industries, infrastructure, real estate and at all levels of the capital structure.”
He says there is so much liquidity in world financial systems that “lenders (even ‘our’ lenders) are making very risky credit decisions.”
WND previously reported concern that the decision of the Federal Reserve to quit publishing a traditional index, “M3,” a broad measure of the money supply, signaled a decision to pump the economy with excess liquidity.
Since the Fed quit publishing M3 data, economists who have attempted to re-create the index from other available data have estimated M3 data would today be reporting upwards of a 10-percent increase in the money supply, a high level by historical standards.
“Liquidity” is defined by economists as money available in all forms to be given out as debt, ranging from credit card debt to mortgage debt to large quantities of institutional debt typically used in complex financial transactions such as highly leveraged corporate acquisitions.
Excess liquidity, as reflected in the rise of highly leveraged hedge fund accounts, has been widely seen as a major factor in the rise of the stock market in the recovery since 9/11.
Conway cautions that “this liquidity environment cannot go on forever.” He warns that “the longer it lasts, the worse it will be when it ends.”
Looking on the bright side of what could be a major recession when the liquidity bubble bursts, Conway advises, “And of course when [the liquidity bubble] ends the buying opportunity will be once in a lifetime.”
He adds, “But I do not know when it will end.”
Bob Chapman, who publishes a bi-weekly Internet newsletter, The International Forecaster, has issued his reconstructed M3 estimate to100,000 subscribers.
“The world is awash in money and credit,” Chapman said. “My numbers show M3 increasing at about a 10-percent rate right now.”
Chapman has spent 45 years in the finance and investment business, including 28 years as a stockbroker specializing in gold and silver shares. He publishes his newsletter from an undisclosed address outside the U.S.
In his April 14 newsletter, Chapman wrote, “The effort to save the American economy, which began in 2001, has finally come full circle and the Ponzi scheme is coming unraveled. The overextension of credit, outrageously low interest rates and loans to the totally unqualified have finally come home to roost.”
For months, Chapman has been warning that the U.S. economy entered a downturn in February 2006. Chapman expects it will develop into a prolonged recession caused largely by the bursting of the housing bubble and the weakness in the dollar attributable to the United States’ large federal budget deficit and international trade imbalance.
At the same time, Chapman has been predicting for months that the dollar will challenge the technical support point of $USD 80 on the world currency markets.
On Thursday, the dollar index closed at $USD 81.64 in a steady decline that began at the end of February.
The euro late last week was trading as high as $1.3576, near its December 2004 record of $1.3539. At the same time, the pound rose to $1.9938, its highest point since September 1992. The pound last reached the $2 mark 14 years ago, when the UK was ousted from the European Exchange Rate Mechanism.
Chapman has argued the U.S. Treasury and Federal Reserve have been trying to manage a gradual devaluation of the U.S. dollar.
Chapman expects the dollar could lose as much as an additional 20 percent of its value this year alone. In the last five years, the dollar has lost 35 percent of its value against the euro.
Still, until debt defaults force a crisis in the world debt markets, Chapman agrees with the Carlyle Group that excess liquidity will continue to buoy the world stock markets, including the New York Stock Exchange, to new highs.
Chapman also agrees with Conway that when the liquidity bubble bursts, the decline in world stock markets could be sharp and severe, possibly even reaching crash magnitudes on the downside.
“Tens of billions of dollars have already been lost in the U.S. sub-prime lending market and the contagion is spreading as the media tries to cover-up what is really going on,” Chapmen wrote in his March 28 newsletter. “We are watching the disintegration to an extent of the entire mortgage market, which encompasses 25 percent of all outstanding credit.”
Chapman continued: “We predicted this three years ago and those who believe they are savvy discovered the problem a couple of months ago. This is a general meltdown and do not think it isn’t, and it has several years to go until the real estate sector is purged.”
The Carlyle Group, a large Washington, D.C., private equity firm headquartered founded in 1987, has close ties to the administration of President George H.W. Bush.
WND also reported the Carlyle Group has established a new team to invest in Mexico. The team includes Mark McLarty, president of Kissinger McLarty Associates and former chief of staff and special envoy to the Americas for President Bill Clinton.