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The 7 Most Important Stories of 2007   (December 26, 2006)

Every other pundit/media outlet posts lists of 10, but here at oftwominds.com we're both parsimonious and sharply edited, so we've pared ours to seven. Here are the seven biggest, most important stories/trends to watch unwind/unravel/blow up in 2007:

1. Iraq is a quagmire. Former Secretary of Defense Rumsfield famously said shortly after the start of the Iraqi occupation, "We don't do quagmires." Nice quip, Don, but it turns out you and your political overlords do in fact do quagmires, and apparently not only do them but excel at every muddy step.

2. Iraq is a bottomless pit for taxpayers' money. I won't bore you with a full litany of the corruption, waste, fraud and incompetence which characterizes every contract and every dollar the U.S. has borrowed from the Chinese to spend in Iraq. Just grasp the details of one contract--that awarded to Parsons for 150 health clinics--and you'll understand the depth of the arrogance, cupidity, stupidity, avarice, greed and willful blindness of the Iraqi "rebuilding" process being funded by you, the U.S. taxpayer: Goals set by U.S. unworkable, says Iraq contractor; Audits found firm did fraction of the work. Parsons, by the way, once had a sterling reputation; so blaming the U.S. contractors is only part of the story--which has a long way yet to unravel.

3. The Housing Con Blows Up. The Big Con set by the political/financial/media powers that be--get your piece of the American Dream, which is endless wealth bubbling up from one's house--is about to blow up. The fuse was lit in October 2005--the housing bubble's peak--and it is now approaching the chained explosives. The charges will be going off for the next five or six years, so there's plenty of time to watch the pyrotechnics.

The media has started to cover the plight faced by the poor fools at the bottom of the debt mountain--those holding option ARM mortgages about to re-set to unaffordable--but the middle class will start feeling the heat in 2007 as well. For it is the middle-class which fell for the con of "investing" (i.e. speculating) in housing. It's the middle-class dummy who owns two, three or four properties, often in distant states; for the leveraging of equity into stunning piles of debt was held out as the key to wealth accumulation. Alas, it's actually the key to bankruptcy and debt-serfdom, and all that will begin an agonizing, tiresome, teeth-gnashing seemingly endless decline as 2007 hits the mid-point.

Even the wealthy won't be immune, once the stock and bond markets start their declines. In one of the greatest cheerleading, hubris-packed covers of all time, Barrons announced that a new age of unprecedented U.S. prosperity is underway:
Launching Platform The "platform economy" -- a business model focused on knowledge while outsourcing production -- heralds an age of unprecedented U.S. prosperity.

The story gloats about U.S. wealth growing by $3 trillion a year--the result of a 4-year long bull market in stocks, a soaring bond market cheering the end of interest rates upticks, and a real estate market in the fulsome bloom of a staggeringly inflated bubble. But did someone forget to mention to the cheerleaders that wealth can fall as quickly as it arose? The cheerleaders at Barrons apparently neglected the possibility that the stock, bond and real estate markets might actually decline in unison, deflating the very wealth they're lauding as a permanent feature of the American elite. Since the wealthy own some 70% of U.S. stock and bond assets, the decline in those markets will take down the wealthy, not Joe Schmoe (who's up to his neck in mortgages).

Analysts with a long view of financial history like Louise Yamada have been on record since 2000 warning that real estate bubbles take much longer to pop and cause far more widespread financial ruin than stock market bubbles because the losses are spread over a wider range of ownership. In other words, almost 70% of Americans own a home, which constitutes in most cases the vast majority of their assets. The stock market, largely owned by the wealthiest 10% of the citizenry, basically only impacts the wealthy when it blows up.

Ms. Yamada was fired by Solomon Smith Barney a few years ago for this kind of analysis, as it simply wasn't the 100% Bullish optimism the firm required to lull customers into complacency.

4. The meltdown of China begins. The cheerleaders in the financial press have flogged "the China miracle" to death for years. Why? Because China has fueled the gargantuan profits reaped by U.S. companies in the past five years. In order to provide employment to tens of millions of rural citizens desirous of the "good life" they see on TV, China has accepted the very worst, the most destructive and the least profitable parts of the global production machine: low-margin, capital-intensive, highly polluting, high-risk/cyclical industrial production. But let's let a cheerleader from the above Barrons article state the reality himself:
In return for their new (industrial) prominence, these countries are willingly importing much of the risk and cyclicality from platform economies like the U.S. Reliance on manufacturing is eminently preferable to that most risky of activities -- agriculture. Indeed, millions of unneeded farm workers are streaming into Asian cities, seeking better jobs. "In effect, China is trading job growth for the profits flowing to U.S. and other platform economies," Louis-Vincent Gave notes.

Nice bit about the risks of agriculture, but you can't eat a Bratz doll for dinner. China is busy building over its prime farmland along the eastern seaboard, ultimately paving the way to food shortages as more and more grain is imported and given over to meat production. In the meantime, they're sacrificing their environment, the health of their citizenry, and their profit margins to plump up U.S. corporate profits every quarter, for a record-breaking 18 straight quarters of double-digit profit growth.

Did it ever occur to the self-satisfied cheerleaders that the Chinese might tire of this lousy deal? Recall that they also have to fund our obscene deficit by plowing all their reserves into U.S. Treasuries and other debt. And all this largesse to U.S. companies and consumers is provided for 17 cents a doll: Labor group reports harsh conditions at Bratz dolls factory.

Oh, but it's really not a bad wage compared to nothing, blah blah blah. The Yangtse dolphin might beg to differ, only it went extinct in the past few boom years, erased by the usual ills of polluted waters and over-fishing. This rare creature is only a precursor of the environmental damage being absorbed by China as its leaders attempt to solidify their power on the distribution of wealth to the 900 million Chinese with little to their name.

Now that the West has off-loaded all the risk of cyclical downturns to China, well, what do you reckon will happen to China in the "downturn of 2007"? Apple lays off 100 people in its cushy Cupertino HQ, and 5,000 factory workers get axed in China. Repeat 10,000 times and you get the picture. Just how bad a deal this "boom" has been for China will only start becoming visible in 2007.

5. The Political Con blows up. The political leadership of this nation has done a masterful con job on the public for the past 6 years, dangling an emotional red-button issue in front of the masses time and again to distract them from reality. Forget Iraq! The real issue is... uh, lemme see, Karl? Whatcha got this time? Immigration! Yes, it's immigration. All those guys who pick your lettuce, oranges and veggies, and toil in the slaughterhouses? They're bad news, taking jobs away from "real" Americans...

Oh, and by the way, unemployment is 4%, which means anybody willing to work who isn't saddled with a felony arrest record longer than their arm has a job. Woo-hoo! Aren't we doing a peachy-keen job? So who's gonna show up to replace the 10 million workers we send home? I dunno. You want to bend over all day in the hot sun for seven bucks an hour? Well, who does? "Real" Americans? (giggle)

When the wheels really start falling off--in Iraq, in the housing and the stock and bond markets--then the citizens who have been so easily distracted by the red cape--abortion! Immigration! Flag burning! ad nauseum--will wake up when the sheriff comes to their door to evict them and repo their truck. "Sorry, folks, just doing my job"--that will be the great catch-phrase for 2007.

6. The Federal deficit explodes. Are you sick of hearing about how deficits don't matter? Maybe you're sick of hearing about deficits. Either way, the one thing we can safely predict about the economy imploding in 2007 is that tax receipts will drop even faster, because it's fat profits which have fueled the growing tax receipts of the past 5 years. Once profits--from house flippers, corporations, stock speculators (oops, I mean "investors")--dry up, so do tax revenues.

Then the spending and entitlement chickens come home to roost: GWOT (global war on terror), Iraq "reconstruction," Medicare drug benefits, retiring Baby Boomers hitting Social Security, etc. etc. Spending explodes even as revenues drop. The Big Con has been set here, too; billions of spending is routinely delayed a few weeks and shoved into the next Federal fiscal year. Cute, but all cons come to an end eventually. 2007 is the year of reckoning for the "budget deficits don't matter" crowd.

7. Crime expands beyond the inner city. I noted here last week the apparently Republican Party line which uses the horrific U.S. murder rate to trivialize the combat deaths in Iraq. The flip side of their "argument" is that they're also trivializing the victims of crime in urban America.

In just one city of 450,000--and there are many with the same urban ills--Oakland, California, 150 people were murdered, virtually all by guns or assault rifles (i.e. machine guns), and 674 were seriously wounded (i.e. "nonfatal shootings.") While this mayhem is of concern to big-city mayors and the African-American and Hispanic communities who bear the brunt of this senseless slaughter, the national politicos could care less. Inner-city citizens don't vote much, so they're marginalized. And since the crime--at least up to now--has stayed largely in the urban core, suburban dwellers don't care much, either.

But if times get tough, then crime may well move beyond the borders of the urban core. The old joke had it that a Republican is a Democrat who got mugged, but the Republicans have overseen a massive war on drugs even as they turned a blind eye to the assault rifles flooding urban America. "Tough on crime," indeed. The real "weapon of mass destruction" globally is the assault rifle, and it's not just people in Africa or Iraq who suffer the consequences of cheap ammo and readily available combat weaponry; look no further than urban America: Life is good after brush with death.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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