What’s Coming
In my reading for the above, I came across the September 2007 edition of the International Speculator and its lead article, Preparing for Crisis .
I thought the following excerpt was worth sharing, not just because it shows how spot-on Bud Conrad, the chief economist of this operation, has been in forecasting the specifics of the unfolding crisis, but because it is still as useful today as then in understanding how things are likely to keep rolling out (the full article has much more detail, well worth reviewing). Here’s the excerpt.
The credit crisis will not end soon. Here’s what we think is coming.
More Defaults.
The bulk of the subprime loans are adjustable rate mortgages. The continuing reset of up to $50 billion per month of subprime ARMs will keep mortgage defaults growing, which will keep home prices falling, which means that more of the defaults will turn into unrecoverable losses for the investors holding the paper. The hedge funds that haven’t thrown in the towel on subprime mortgages will collapse one by one.
The economy will slow down. Lending to risky customers has dried up. Earnings of most corporations will slide because consumers, who can no longer turn to home equity loans and whose credit cards are already maxed out, will cut spending. The mounting losses in CDOs and the continuing defaults in the housing industry will precipitate a severe credit crunch. The capital of many banks is about to shrink, which will hamper their ability to lend.
Stocks will fall. The next phase down in the stock market will come from reduced earnings estimates for 2008. We could see an auto company or a big bank announce insolvency. Fear, and then the fear of fear itself, and the fear of being the last one out the door will take over. Big, 300 or 400 point moves – mostly down – will become regular events. People have forgotten, but they are going to be reminded, that stocks have, until fairly recently in history, normally yielded about twice as much as bonds, simply because they’re riskier.
Dollar down. While U.S. citizens are looking to build cash – another source of pressure on spending and investment – few foreigners now want U.S. dollars or dollar-denominated debt. After the failure of large U.S. institutions begins and the Fed turns the printing presses on full blast in an attempt to keep liquidity in the system, flight to safety will mean a flight from the dollar. How fast they will print is hard to guess. They’ve already started, but will probably panic as the economy slows, and then turn the presses to high. The dollar will fall in purchasing power. Interest rates will rise across the board, with low-quality paper hurt the worst.
If you are not yet receiving the International Speculator, now is a great time to sign up. With the 3-month risk-free guarantee, you can take a leisurely look at the publication to see if it’s right for you. Check it out.
Tuesday, March 25, 2008
Thursday, March 13, 2008
How to 'Invest' with $5,000 to $10,000
By Dudley P. Baker, Jr.
Mar 13 2008 11:46AM
www.preciousmetalswarrants.com
There are many ways to invest in the precious metals and natural resource sector. Many analysts would first suggest investors purchase gold and silver bullion or coins, then focus on some of the larger capitalized mining companies (most of which are selling for over $35 per share). You might consider the GLD or the SLV, the Exchange Traded Funds for gold and silver currently selling for $96 and $197, respectively. Not all investors have the financial resources necessary to purchase these alternatives.
So we ask, what about the individual with only $5,000 to $10,000 available to invest? Are they to be left out of this bull market? With limited investment funds, the above ideas are of little value due to the cost of each and the difficulty of diversifying your choices.
For individuals with limited resources, not only can we suggest some different vehicles for you to purchase, but how you can diversify with positions in several different companies.
Let’s explore the use of options, leaps and warrants allowing you to limit your investment exposure but still having the incredible power of leverage working for you. By selecting the right companies, options, leaps and warrants will provide you with the potential of increasing your $5,000 to $10,000 many times over.
Many call options, leaps and warrants are selling for pennies allowing your $5,000 to $10,000 to be spread/diversified over several different companies. Frankly, I would suggest purchasing call options, leaps or warrants on 4 or 5 different companies. You could pick a junior gold company, a silver company, a uranium company or an oil & gas company, thus diversifying your holdings and giving yourself more chances of being correct.
If you are unfamiliar with options, leaps and warrants, here is a brief overview:
Options and leaps trade on the Chicago Board Option Exchange (http://www.cboe.com/"). They are a contract giving you, the investor, the right, but not the obligation, to purchase the underlying security at a specific price and expiring on a specific date in the future. Call options may have a life of 30 days to 1 year, while leaps may have a life of up to 2 years. Your loss is limited to your investment for these contracts and no margin is used. The potential gains are great, if you are correct in your timing and company selection.
Warrants are slightly different in that warrants trade like a stock and are issued by a company usually in an initial public offering or in a financing arrangement. Many sophisticated investors are not aware that there are many warrants trading. While it is very common for warrants to be issued in private placements, particularly in the mining sector, these warrants do not trade and thus cannot be purchased. What is of particular interest, is there are numerous warrants trading which have a remaining life of 3 years or more.
Think about the possibility of a long-term warrant on one of your favorite resource companies with several years of time remaining.
Warrants will provide you with the opportunity to participate in this bull market with time on your side, a much lower cost than purchasing the common shares and the power of leverage working for you. As with options and leaps, your potential loss with warrants is limited to your cost and there is no margin.
In summary, investors with limited resources to invest can have a stake in this bull market and the opportunity for incredible gains by considering the use of options, leaps and warrants. Actually, I have recently purchased some call options on a large silver company which did not have warrants trading. I am investor first and seek out the best opportunities whether that is acquiring the common shares, options, leaps or warrants.
For subscribers to our service, we provide a table of all resource companies with options, leaps and warrants which are currently available to assist you with making your investment decisions.
We invite you to visit our website, view and listen to our new video tutorials, spend some time in learning center and sign up for our free Saturday email, The Warrant Report.
Dudley Pierce Baker
Guadalajara/Ajijic, Mexico
March 13, 2008
Mar 13 2008 11:46AM
www.preciousmetalswarrants.com
There are many ways to invest in the precious metals and natural resource sector. Many analysts would first suggest investors purchase gold and silver bullion or coins, then focus on some of the larger capitalized mining companies (most of which are selling for over $35 per share). You might consider the GLD or the SLV, the Exchange Traded Funds for gold and silver currently selling for $96 and $197, respectively. Not all investors have the financial resources necessary to purchase these alternatives.
So we ask, what about the individual with only $5,000 to $10,000 available to invest? Are they to be left out of this bull market? With limited investment funds, the above ideas are of little value due to the cost of each and the difficulty of diversifying your choices.
For individuals with limited resources, not only can we suggest some different vehicles for you to purchase, but how you can diversify with positions in several different companies.
Let’s explore the use of options, leaps and warrants allowing you to limit your investment exposure but still having the incredible power of leverage working for you. By selecting the right companies, options, leaps and warrants will provide you with the potential of increasing your $5,000 to $10,000 many times over.
Many call options, leaps and warrants are selling for pennies allowing your $5,000 to $10,000 to be spread/diversified over several different companies. Frankly, I would suggest purchasing call options, leaps or warrants on 4 or 5 different companies. You could pick a junior gold company, a silver company, a uranium company or an oil & gas company, thus diversifying your holdings and giving yourself more chances of being correct.
If you are unfamiliar with options, leaps and warrants, here is a brief overview:
Options and leaps trade on the Chicago Board Option Exchange (http://www.cboe.com/"). They are a contract giving you, the investor, the right, but not the obligation, to purchase the underlying security at a specific price and expiring on a specific date in the future. Call options may have a life of 30 days to 1 year, while leaps may have a life of up to 2 years. Your loss is limited to your investment for these contracts and no margin is used. The potential gains are great, if you are correct in your timing and company selection.
Warrants are slightly different in that warrants trade like a stock and are issued by a company usually in an initial public offering or in a financing arrangement. Many sophisticated investors are not aware that there are many warrants trading. While it is very common for warrants to be issued in private placements, particularly in the mining sector, these warrants do not trade and thus cannot be purchased. What is of particular interest, is there are numerous warrants trading which have a remaining life of 3 years or more.
Think about the possibility of a long-term warrant on one of your favorite resource companies with several years of time remaining.
Warrants will provide you with the opportunity to participate in this bull market with time on your side, a much lower cost than purchasing the common shares and the power of leverage working for you. As with options and leaps, your potential loss with warrants is limited to your cost and there is no margin.
In summary, investors with limited resources to invest can have a stake in this bull market and the opportunity for incredible gains by considering the use of options, leaps and warrants. Actually, I have recently purchased some call options on a large silver company which did not have warrants trading. I am investor first and seek out the best opportunities whether that is acquiring the common shares, options, leaps or warrants.
For subscribers to our service, we provide a table of all resource companies with options, leaps and warrants which are currently available to assist you with making your investment decisions.
We invite you to visit our website, view and listen to our new video tutorials, spend some time in learning center and sign up for our free Saturday email, The Warrant Report.
Dudley Pierce Baker
Guadalajara/Ajijic, Mexico
March 13, 2008
Wednesday, February 20, 2008
Gold & Whirlwind of Crisis
By Jim Willie CB
Feb 20 2008 3:49PM
www.GoldenJackass.com
Like a whirlwind, the crisis triggered by the housing crisis and mortgage debacle has extended to almost every phase of the landscape in US economic and financial life. And the rookies running the US Federal Reserve initially said the problem would be contained. My claim made in late June 2007 (see article, click here) was that it involved absolute contagion to the system, which is what we see vividly now. Let’s review some high level stresses in several arenas, examine the response potentials, and check on the gold and USDollar impact.
One should note, the gold & silver prices will soon demonstrate strong independence from the USDollar. Just like in 2005, gold can rise even with some bounce in the buck. Unlike 2005 though, the buck is likely not to make much in the way of advances.
The profound change this early part of 2008 will be the weakness in foreign currencies, thought to be impervious and invincible. The problems with banking, bonds, and now economies have gone global. In reaction to policy changes, primarily monetary and now fiscal, gold will react to an acceleration in monetary inflation after a long period of heavy money growth over 10% annually in many leading industrial nations.
USFed HIGH JINKS GAME
The USFed has been playing a dangerous secretive game. They denied the depth and power of the bond debacle in order to wait for Europe to feel the same problems. The USFed wanted to wait until Europe saw banking problems, economic slowdown, and bond losses. Some degree of arrogance might have crept into their thinking, that the US system was more resilient, more robust, and had stronger markets with greater safeguards installed. All were untrue.
The USFed figured they could cut interest rates faster later, only after Europe started to show signs of similar problems, joining them in the easing cycle. Well, Europe took a few months more time to detect damaging signals, and their problems on the continent are much less imposing in their degree of destruction than what is seen in the Untied States.
The European Central Bank (ECB) only lifted their official interest rate to 4.0% besides. So at a US peak of 5.25%, the USFed had to cut first alone. Now the USFed has come down to 3.0%, providing the euro currency with a full 1.0% vig to keep their currency rising versus the US$ from any carry trade. They do not want a higher euro! The USFed wants the ECB to begin to cut rates, which would and will take much of the pressure off the USDollar. Since much of the rise above 135 and 140 and 145 for the euro was predicated upon the ECB continuing to hike interest rates, a reversal of monetary policy by the ECB will bring the euro down and give decent temporary support for the USDollar.
The bigger reasons for the USFed to fiddle and diddle, delaying and postponing, are more profound to the problems faced.
They are two-fold. 1) The USFed is a private firm, not owned by Americans, with no desire to eat a trillion$ or more in losses. They do not wish to do the right thing for America when their primary loyalty is not to America.
They are a private firm whose owners reside in London and Old Europe. So their initial repurchase loans to member banks and other banks have been for high quality USTreasurys, not mortgage bonds, and certainly not Collateralized Debt Obligations (those nightmares that leverage mortgage bond losses).
Up to the time when the Term Auction Facility opened shop last month, the USFed only took USTBonds of various maturities. Since the TAF began to lend against broader assets, they began to accept Fannie Mae & Freddie Mac bonds.
Think their corporate bonds and mortgage backed (in)securities. Why would the USFed take F&F bonds? Because they eventually will be bailed out by the USGovt. They might not really be fully guaranteed, but they will be at crunch time.
2) The other reason the USFed delayed in prescribing and delivering the needed monetary medicine again points to their private firm status. They wanted to have the USGovt take the $1 trillion tab for bailouts, to put the kibosh on the USDollar, not the private USFed owners.
They are no more a public benefactor than Wall Street. Both the USFed and Wall Street firms are the quintessential parasites in the modern financial era. Finally, the USGovt has proposed a measly $150 billion bailout proposal, the first of several.
My forecast has been firm, that the rescue packages will be numerous, greater in scope in succession, and each inadequate until a master Resolution Trust Platform is instituted. The price tag on the full blown rescue will be at least $2 trillion and possibly as much as $4 trillion.
The USGovt fiscal packages will include tax cuts for households, permanent installation of lower taxes for the wealthy and corporations, greater tax incentives for business investments and job hiring, items directed to the poor, and more.
When the monetary stimulus takes root from lower interest rates and easier repurchases to assist the mortgage process, while at the same time the government fiscal stimulus packages spread out more broadly, we will see money overflowing everywhere.
We will see more money directed towards speculation again. We will see more price inflation. The only big question in my mind is whether higher wages will be tolerated. They call them ‘Secondary Inflation Effects’ which are halted, thus enforcing the destruction of the Middle Class. Lower wages permit the long-term interest rate to stay suppressed. Lower wages ensure the recession necessary to keep USGovt bonds more attractive than stocks, the ugliest of ugly conflicts of interest by the USFed.
The USDollar takes heavy blows when the USGovt stimulus package takes form as less an unknown. The gold price has risen since January, in part because of the foreseen combination of heavy USFed monetary medicine and heavy USGovt fiscal medicine working. It smells more inflation in all forms. When prescription moves to application, gold will vault past $1000 per ounce easily. Also, silver will vault past $20 easily.
THE MAJOR RUB WILL BE THE EFFECT ON LONG-TERM USTREASURY BOND YIELDS. The solution requires more price inflation, asset inflation, wage inflation, and spillover, all of which contribute to rising long-term interest rates. Already, we see the rub in higher mortgage fixed rates, higher jumbo mortgage rates, higher corporate bond yield spreads, higher junk bond yield spreads, higher fixed rate swaps. My gut feeling is that Rookie Chairman Bernanke harbors quietly his biggest fear, that enacting a full blown rescue of the banking & bond & economic system will trigger a bear market in USTreasury Bonds. That would ensure a credit derivative meltdown an order of magnitude worse than just from Credit Default Swaps off mortgage bonds, and an order of magnitude more swift.
The biggest losers in this game among leaders are Bernanke as USFed Chairman and Paulson at Secy Treasury. They fiddled and diddled for months, issued denials, made lousy forecasts, and sounded like utter idiots. Their emergency 125 basis points in January rate cuts, from interim cuts followed by FOMC ordinary cuts, emphasized their failure, and badly eroded confidence in the US bankers globally. Being the curve, and inept! The impact will be seen in the USDollar, since these are primary stewards of the US banking and currency system. The USDollar takes the brunt, with gold enjoying the lift.
My position is firm, that the US banking system has been irrevocably destroyed, unfixable. That will stop these hacks from trying a remedy, and in doing so, gold will rise tremendously. When it is clear that the fixes, the solutions, and vast platforms of rescues are not accomplishing much, the inflation spigot will be turned on with much more volume. That is how the gold price approaches $2000 per ounce, like within 3 years. Inflation will become an urgent national priority, not to stop it, to promote it. INFLATE OF DIE will be the motto in reality.
BAILOUT BENEFICIARY FELONS
The biggest obstacle to the initiation of the full bailout and rescue application has been and will continue to be the felons who command first positions in the rescue line. Since they are basically running the USGovt (thanks to Fascist Business Model), they dictate being first in line.
Not only are they the initial beneficiaries, but Wall Street firms are actively involved in designing the actual rescue stimulus packages themselves. Only in America can the thieves and criminals knee deep in colossal fraud be active in administration of remedy when they should be in defense against felony charges, face heavy billion$ fines, restitution orders, and prison sentences. Start with Goldman Sachs and JPMorgan, then move on to Citigroup, Bear Stearns, Morgan Stanley, and maybe UBS. At least most of these firms are big losers. Then again, nowhere but the Untied States has the state merged with large business so thoroughly. The Teaser Freezer stands as the most blatant interference by the state as an effort to block, prevent, forestall, and eliminate the potential for bond investor lawsuits against Wall Street.
Watch the class action suits though, since they are conducted and litigated in federal court, not in any rigged compulsory arbitration charade run by the same Wall Street conmen. The crisis had to grow too big, run unaddressed for too long, so that the USGovt felt as though the public wanted a bailout rescue stimulus, EVEN THOUGH the primary beneficiary might be the Wall Street felons occupying their executive suites and running board rooms. As the USFed delayed though, the big US banks suffered massive losses. That could be another motive to wait.
EURO & POUND STERLING
The Hat Trick Letter February Gold & Energy report is out. It focuses attention on both the euro and pound sterling currencies. The euro has begun to stall. This is not a popular concept for gold advocates. A USDollar bounce, especially one of intermediate variety (not short-term), is not embraced with warm & fuzzy feelings.
Usually such an event is accompanied by a decline in the gold price. NOT HERE!!! The euro selloff will trigger another phase of the gold bull market, one already well along in Europe.
The gold bull market requires all three major continents (North America, Europe, Asia) to participate. With its US$ woes firm, diverse crises, and declining interest rates, the North Americans are feeding the gold bull. With its industrial renaissance, strong regional growth, and near 0% Japanese fountain for funds, and Chinese treasure trove of savings, Asia is feeding the gold bull. The missing piece is the Europeans, who have been stubborn in maintaining the same 4.0% official interest rates, enforced by the Euro Central Bank since summer 2007.
THE GOLD BULL REQUIRES A DOWNTREND IN INTEREST RATES WORLDWIDE, AND FULL MONETARY ACCOMMODATION. That is coming, once the Europeans begin to cut rates. The topping pattern in the euro currency foretells of the ECB cutting rates soon, despite the German wishes. They are the ultimate inflation hawks. Not only will Europe be fighting financial problems across the Atlantic with cheap money and ample money, but the English will be also. London has already changed policies toward accommodation. Europe will soon feed the gold bull.
The British are also feeding the gold bull. The Bank of England has ordered two official rate cuts, not back to back though. My forecast is for the complete decline of the UK housing market, the complete decline of the UK economy built atop it, and the complete drubbing of the British pound sterling currency. When the pound sterling 20-week moving average crosses below the 50-wk MA (circled in green), technical traders will take the sterling currency down toward 187. My eventual forecast target is in the 175 neighborhood. A disaster comes to the UK, just like the Untied States. Think AngloSphere. The tough call is whether money exiting England will pursue the euro or USDollar. As problems crop up further in Europe, my bet is the money will chase the USTreasurys, crude oil, and gold.
HEDGE FUNDS ARE BACK
The hedge funds are actually being blamed for the crude oil price breaching the $100 mark. They are regarded as shunning the mortgage paper and bond arenas, in favor of hard assets like copper, gold, silver, crude oil, natural gas, grains, and more. Isn’t it interesting how the hedge funds have not been in the news much in the last year or so?
Their legion used to be mentioned as being 9000 in number, commanding $1.6 trillion in funds. No more! They are probably 7000 in number now (pure guess) and command only $1.2 trillion now (pure guess). These falsely labeled geniuses in propeller hats lost a huge sum of money in mortgage spreads, CDO bonds, credit default swaps, and other devices floating within the overall bond market. After licking their wounds, they have wised up to find commodities. Actually, they always were involved in commodities, from the start. They are reviving their interest, focus, curiosity, and attention for them. Commodities are the big winner asset group. They are untethered to debt generally, but vulnerable to a global slowdown in demand.
COMMODITY BULL STILL BREATHES
Given the frenetic Asian growth, and increase in intra-Asian trade, China and India along with Russia and Brazil will continue to grow, although slowly, even if the US and European Union and United Kingdom enter into a recession. Of course, the Untied States has been in a recession for at least two years, if you measure growth without nonsensical gimmicks in accounting, thus ignoring all USGovt official statistics. A great quote came this morning from one of the few consistently bright and accurate pundits on CNBC.
From the Chicago pits, Rick Santelli said, “Only a small amount of actual price inflation shows up in the government numbers.” That is a rare comment. He might be fined or relegated to Friday afternoon exposure if he is not more careful. By the way, word has it that the hedge funds place gold in a different elevated status among commodities. Even if Western nation economic recession takes root, and demand slows, hedge fund mentality is that the gold price will continue to rise. My belief is consistent with theirs, but also that the same is true of the crude oil price. China will stockpile it. Speculators will rely upon it against the weak USDollar.
The commodity boom continues. My favorite indicators are the Three Amigos: the copper price, and crude oil price, and the Baltic Dry Index shipping rates. These are monitored regularly in the Hat Trick Letter. They are each in decent shape.
After 25 years of under-investment, commodities are showing inadequate supply chain structures. They are also displaying grotesque vulnerability to tyrants being in charge, whether in Caracas Venezuela or Moscow Russia or Kazahkstan or WashingtonDC. The ugly impact of the relentless commodity bull market, is that it results in nasty cost inflation.
This leads to economic recession, as wages cannot keep pace, as corporate product prices cannot keep pace. Cost inflation without rising wages and product prices is a Western nation nightmare. All price inflations are not the same.
HOUSING HARD ASSET IMPOSTOR
Two years ago, when the housing market was experiencing what was called a boom, my position was clear. The boom would turn to bust in a couple years, the damage to the banking system would be profound (probably total), the losses would be two-fold from home equity and mortgage bonds, and a deep ongoing relentless (possibly endless) recession would unfold. So far that over-arching forecast seems right on track.
At the same time, my position was that the housing asset was a HARD ASSET IMPOSTOR. Many considered it incorrectly as another commodity, a hard asset, rising in price like copper, cement, lumber, gold, and energy. Not so! By now, my claim that it was an impostor seems evident.
My claim was that the home asset was dominated by the mortgage financial security, whether a loan in the bank portfolio or an asset inside the mortgage bond. My claim was that the home price would be determined by the financial assets behind it. All booms have a financial credit feeding component.
As the housing asset base continues to drain home equity, it kills the banking & bond system entirely. Housing stands as the two-ton weight lodged in the car, the millstone around the household neck. The stimulus being ordered by the USFed and USGovt must reverse the slow motion downward spiral for housing.
So far, housing has lost around 10% of value nationally in the last year plus. That amounts to over $2 trillion in home equity loss, rendered unavailable for home loans and consumer spending, if not education and training. Forget the boats! The entire focus of attention on stimulus and rescue packages must be on stopping the housing price decline. No exceptions.
The prime adjustable mortgages are next in line within the killing field of grand destruction. This is the USFed’s focus. They see it coming. The commodity boom continues, but the housing market is in its second straight year of painful decline. Do not expect the housing bear market to hit bottom until late 2009 at the earliest.
The USFed, the Dept of Treasury, the USGovt, the US Congress, they have all fiddled like Nero as Rome burns. The current president resembles Nero, with brandished military weapons substituted for a violin. Rome is the US financial system, with the USEconomy adjacent to the bonfire. Many references have been made recently by writers and analysts, citing that Rome is burning. When the officials at the USFed and leaders in the USGovt decided to unleash the heavy artillery so as to stop the housing hemorrhage, the impact on the USDollar and gold price will be profound. That is precisely my forecast, that when it comes, the gold price vaults past $1000 and does not look back. A rising gold price past $1200 and past $1500 will go hand in hand with a stabilizing housing market. Since they delayed so long, that bottom event will not come for at least another year. Goals finally have aligned.
MONOLINE BOND INSURERS – NEXUS OF COLLAPSE
The nexus of the current bank & bond debacle has been clearly concentrated lately in the Monoline Bond Insurers. Space does not permit full discussion, even a solid summary.
The last couple Hat Trick Letter reports have dealt with this unfixable topic. An argument has been put forth that the cost of the cure to address inadequate bond insurer corporate capital needs is much less than the impact on the system from the insurer firm failures.
What nonsense! Just like Wall Street firms wanted direct bailouts of their balance sheets, so do the Monoline insurers. The Wall Street impact from big debt downgrades is huge, since so many rafts of bonds would either be forced in sale or forced onto balance sheet for writedowns.
The current impact is seen with municipal bonds. The estimates for total bond losses are steadily rising. Big banks are raising their estimates. Financial firms are raising their estimates. Soon the estimates will be more realistic, like above $1 trillion.
Desperation has set in, as New York Insurance officials are attempting to hatch a rescue plan. It is doomed from the start. All they can hope for is to buy a few months.
If the housing market continues down, their work is futile. If the adjustable mortgage resets continue, their work is futile. If the foreclosures continue, their work is futile. If the debt downgrades by the rating agencies continue, their work is futile. If the corporate balance sheet adjustments continue, their work is futile. If faith erosion in the central banks (most notably the USFed) continues, their work is futile. If lenders hold ground and refuse to relax on lending flexibility, their work is futile. If foreigners continue to shun US$-based bond investments, their work is futile. If foreigners refuse to provide emergency cash infusions for capital positions, their work is futile. Gold smells a bond debacle worsening. When news progressively worsens, gold responds. Gold senses grandiose rescues.
However, the Monoline Bond Insurers must be prevented from declaring bankruptcy. The tragic sideshow has begun, of attempting to separate their healthy municipal bond business segment from their disastrous mortgage bond coverage business. A split cannot happen.
Corporate obligations dictate that insurer success is balanced against their failure, so profits from their gainful segment must subsidize its losing segment. The developments will make great theater for many more months. Games are being played. Eventually the USGovt must bail out the bond insurers, or else the US banking system collapses. That is a strong statement. The USFed will not take such a big step. The credit derivatives are a mountainous pyramid. The credit default swaps have counter-party risk entangled within.
If the insurers are not prevented from bankruptcy, then a gigantic beehive will be opened and infected bees allowed to spread to all corners. My intuition tells me that the clowns at the USFed and Dept Treasury misjudge the impact of the Monoline Bond Insurers and their collapse. So far, they have misjudged just about everything. When the bond insurer rescue comes, gold will respond, on the back of the renewed decline in the USDollar.
POLICY RESPONSE TO ADDRESS BUBBLE
Let’s walk down memory lane in conclusion.
In 1980, a nasty recession lingered longer in time than most so-called experts contemplated. The causes were many, but in my analysis it extended from the OPEC quadruple of oil prices, the failed Nixon Wage Price Freeze, the Volcker (USFed Chairman) harsh monetary medicine, the heavy hidden cost of the Cold War, and the Watergate Scandal.
So the ‘Policy Bubble’ was a defense buildup, complete with Star Wars technology, vast defense contracts, huge spending, and an economic recovery. The cost was about $2 trillion in added federal debt, the Reagan legacy few prefer to talk about publicly. The next bubble was well defined, but the costly impact was not. At the same time, the US manufacturing base was being dismantled and sent to the Pacific Rim of East Asia.
In 1992, a nasty recession lingered longer in time than most so-called experts contemplated. The causes were many, but in my analysis it extended from the end of the Reagan phony economic recovery, the dissipation end of the last coincident housing bubble, together with a painful shock of the Iraq-Kuwait Gulf War, when Saddam Hussein became more a household name. So the ‘Policy Bubble’ was a military buildup, huge wasteful weapons R&D and system deployment, and a housing bubble.
The actual war did receive some international funding. The icing on the policy bubble was the grand tech-telecom stock bubble. The next bubble was well defined, actually more broadly embodied in more diverse arenas, but the costly impact was not. At the same time, the US manufacturing base was still being dismantled and sent to the Pacific Rim of East Asia.
In 2001, a nasty recession happened suddenly but with swifter impact than most so-called experts contemplated. The causes were many, but in my analysis it extended from a busted stock market, together with a new factor. The new element was a newly engrained dependence upon financial bubbles serving as a foundation for the USEconomy itself.
The nation had lost most of its legitimate foundation. With the economy in decline, two avenues had to be pursued. First, a new enemy needed to be designed. A war was hatched on phony grounds by leaders of very duplicitous nature. Even the event triggering the war, the World Trade Center and Pentagon attacks, are heavily debated for suspicious origins. Second, a new financial bubble desperately needed to be spawned and puffed up. The ‘Policy Bubble’ was the War on Terrorism and the housing boom on the back on the mortgage frenzy. With war and security dominating USGovt spending, with the private sector pre-occupied not with valued added enterprise, the USEconomy rebounded in a phony recovery.
The next bubbles were well defined, in the two primary American icons of military and housing. However, the costly impact has only now been estimated. The cost is the destruction of the US bank and bond system, and an endless USEconomic recession. At the same time, the US service base was being dismantled and sent to the China and India, while the remainder of the US manufacturing was sent to China, as a vast industrial buildup has taken place there. The cost is the grotesque increase in US debt coupled with the grandiose growth in Chinese savings. The new age of the Sovereign Wealth Funds has begun. They now stand either as US corporate aid agents or enemies of the US financial state, many no longer friendly.
The next ‘Policy Bubble’ will be some form of grand US infrastructure buildup of a healthy nature, late to be sure.
It should have its foundation extending into alternative energy research and development, as in actual deployment and installation of systems. With no new ‘Policy Bubble’ to promote and feed, the USEconomy and financial sector will implode. At the same time, the housing sector must be revitalized. The two objectives must work in concert. If a national program to rebuild bridges, internet lines, communications systems, electrical lines, water mains, natural gas pipelines, and recycle centers, jobs will be produced, enough perhaps to help the public in its ability to service a heavy debt burden. Be sure that the same level of inefficiency and corruption will be rampant in them. See the Hurricane Katrina Relief program for instance, and on a much greater scale see the Iraq & Afghan Wars. Contractors are part of the merger of mafias that has captured the essence of the Fascist Business Model since year 2000.
GOLD & USDOLLAR CONCLUSION
As the many rescues planned and put in place, monetary inflation will be mammoth. The US$ will inevitably be sacrificed in the housing crisis and mortgage debacle, in addition to reviving the banks. The US$ will be weighed down further, in order to lead the USEconomy out of recession.
Cheap money is coming again, and globally. The USFed will not be able to escape the clutches of 1.0% interest rates again, coupled with the extreme shame. The USDollar will not be able to escape the plumbing of lower exchange rates, like down to the DX=70 level. The gold price will feed off lower interest rates, as speculative gains will be back in vogue, even called a good thing. There is nothing like a bout with deflation to change the mindset of speculation and its vagaries, turning it positive.
The gold & silver prices will rise from the cheap money, low interest rates, stimulus packages to ward off recession, rescues to banking, and lower USDollar.
But the USEconomy desperately needs the next ‘Policy Bubble’ in order to come back to life, to produce jobs, to change national psychology, to revive hope. Without a plan to puff a new bubble, which will buy some years of time, the nation will morph into chaos. A military dictatorship would be the only alternative. The urgent next step is leaders with some vision, rather than a plan for private profiteering, founded upon fear. Hope pays off more than fear, unless fascism is the end game.
Jim Willie CB
Editor of the “HAT TRICK LETTER”
Hat Trick Letter
****
Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com
Feb 20 2008 3:49PM
www.GoldenJackass.com
Like a whirlwind, the crisis triggered by the housing crisis and mortgage debacle has extended to almost every phase of the landscape in US economic and financial life. And the rookies running the US Federal Reserve initially said the problem would be contained. My claim made in late June 2007 (see article, click here) was that it involved absolute contagion to the system, which is what we see vividly now. Let’s review some high level stresses in several arenas, examine the response potentials, and check on the gold and USDollar impact.
One should note, the gold & silver prices will soon demonstrate strong independence from the USDollar. Just like in 2005, gold can rise even with some bounce in the buck. Unlike 2005 though, the buck is likely not to make much in the way of advances.
The profound change this early part of 2008 will be the weakness in foreign currencies, thought to be impervious and invincible. The problems with banking, bonds, and now economies have gone global. In reaction to policy changes, primarily monetary and now fiscal, gold will react to an acceleration in monetary inflation after a long period of heavy money growth over 10% annually in many leading industrial nations.
USFed HIGH JINKS GAME
The USFed has been playing a dangerous secretive game. They denied the depth and power of the bond debacle in order to wait for Europe to feel the same problems. The USFed wanted to wait until Europe saw banking problems, economic slowdown, and bond losses. Some degree of arrogance might have crept into their thinking, that the US system was more resilient, more robust, and had stronger markets with greater safeguards installed. All were untrue.
The USFed figured they could cut interest rates faster later, only after Europe started to show signs of similar problems, joining them in the easing cycle. Well, Europe took a few months more time to detect damaging signals, and their problems on the continent are much less imposing in their degree of destruction than what is seen in the Untied States.
The European Central Bank (ECB) only lifted their official interest rate to 4.0% besides. So at a US peak of 5.25%, the USFed had to cut first alone. Now the USFed has come down to 3.0%, providing the euro currency with a full 1.0% vig to keep their currency rising versus the US$ from any carry trade. They do not want a higher euro! The USFed wants the ECB to begin to cut rates, which would and will take much of the pressure off the USDollar. Since much of the rise above 135 and 140 and 145 for the euro was predicated upon the ECB continuing to hike interest rates, a reversal of monetary policy by the ECB will bring the euro down and give decent temporary support for the USDollar.
The bigger reasons for the USFed to fiddle and diddle, delaying and postponing, are more profound to the problems faced.
They are two-fold. 1) The USFed is a private firm, not owned by Americans, with no desire to eat a trillion$ or more in losses. They do not wish to do the right thing for America when their primary loyalty is not to America.
They are a private firm whose owners reside in London and Old Europe. So their initial repurchase loans to member banks and other banks have been for high quality USTreasurys, not mortgage bonds, and certainly not Collateralized Debt Obligations (those nightmares that leverage mortgage bond losses).
Up to the time when the Term Auction Facility opened shop last month, the USFed only took USTBonds of various maturities. Since the TAF began to lend against broader assets, they began to accept Fannie Mae & Freddie Mac bonds.
Think their corporate bonds and mortgage backed (in)securities. Why would the USFed take F&F bonds? Because they eventually will be bailed out by the USGovt. They might not really be fully guaranteed, but they will be at crunch time.
2) The other reason the USFed delayed in prescribing and delivering the needed monetary medicine again points to their private firm status. They wanted to have the USGovt take the $1 trillion tab for bailouts, to put the kibosh on the USDollar, not the private USFed owners.
They are no more a public benefactor than Wall Street. Both the USFed and Wall Street firms are the quintessential parasites in the modern financial era. Finally, the USGovt has proposed a measly $150 billion bailout proposal, the first of several.
My forecast has been firm, that the rescue packages will be numerous, greater in scope in succession, and each inadequate until a master Resolution Trust Platform is instituted. The price tag on the full blown rescue will be at least $2 trillion and possibly as much as $4 trillion.
The USGovt fiscal packages will include tax cuts for households, permanent installation of lower taxes for the wealthy and corporations, greater tax incentives for business investments and job hiring, items directed to the poor, and more.
When the monetary stimulus takes root from lower interest rates and easier repurchases to assist the mortgage process, while at the same time the government fiscal stimulus packages spread out more broadly, we will see money overflowing everywhere.
We will see more money directed towards speculation again. We will see more price inflation. The only big question in my mind is whether higher wages will be tolerated. They call them ‘Secondary Inflation Effects’ which are halted, thus enforcing the destruction of the Middle Class. Lower wages permit the long-term interest rate to stay suppressed. Lower wages ensure the recession necessary to keep USGovt bonds more attractive than stocks, the ugliest of ugly conflicts of interest by the USFed.
The USDollar takes heavy blows when the USGovt stimulus package takes form as less an unknown. The gold price has risen since January, in part because of the foreseen combination of heavy USFed monetary medicine and heavy USGovt fiscal medicine working. It smells more inflation in all forms. When prescription moves to application, gold will vault past $1000 per ounce easily. Also, silver will vault past $20 easily.
THE MAJOR RUB WILL BE THE EFFECT ON LONG-TERM USTREASURY BOND YIELDS. The solution requires more price inflation, asset inflation, wage inflation, and spillover, all of which contribute to rising long-term interest rates. Already, we see the rub in higher mortgage fixed rates, higher jumbo mortgage rates, higher corporate bond yield spreads, higher junk bond yield spreads, higher fixed rate swaps. My gut feeling is that Rookie Chairman Bernanke harbors quietly his biggest fear, that enacting a full blown rescue of the banking & bond & economic system will trigger a bear market in USTreasury Bonds. That would ensure a credit derivative meltdown an order of magnitude worse than just from Credit Default Swaps off mortgage bonds, and an order of magnitude more swift.
The biggest losers in this game among leaders are Bernanke as USFed Chairman and Paulson at Secy Treasury. They fiddled and diddled for months, issued denials, made lousy forecasts, and sounded like utter idiots. Their emergency 125 basis points in January rate cuts, from interim cuts followed by FOMC ordinary cuts, emphasized their failure, and badly eroded confidence in the US bankers globally. Being the curve, and inept! The impact will be seen in the USDollar, since these are primary stewards of the US banking and currency system. The USDollar takes the brunt, with gold enjoying the lift.
My position is firm, that the US banking system has been irrevocably destroyed, unfixable. That will stop these hacks from trying a remedy, and in doing so, gold will rise tremendously. When it is clear that the fixes, the solutions, and vast platforms of rescues are not accomplishing much, the inflation spigot will be turned on with much more volume. That is how the gold price approaches $2000 per ounce, like within 3 years. Inflation will become an urgent national priority, not to stop it, to promote it. INFLATE OF DIE will be the motto in reality.
BAILOUT BENEFICIARY FELONS
The biggest obstacle to the initiation of the full bailout and rescue application has been and will continue to be the felons who command first positions in the rescue line. Since they are basically running the USGovt (thanks to Fascist Business Model), they dictate being first in line.
Not only are they the initial beneficiaries, but Wall Street firms are actively involved in designing the actual rescue stimulus packages themselves. Only in America can the thieves and criminals knee deep in colossal fraud be active in administration of remedy when they should be in defense against felony charges, face heavy billion$ fines, restitution orders, and prison sentences. Start with Goldman Sachs and JPMorgan, then move on to Citigroup, Bear Stearns, Morgan Stanley, and maybe UBS. At least most of these firms are big losers. Then again, nowhere but the Untied States has the state merged with large business so thoroughly. The Teaser Freezer stands as the most blatant interference by the state as an effort to block, prevent, forestall, and eliminate the potential for bond investor lawsuits against Wall Street.
Watch the class action suits though, since they are conducted and litigated in federal court, not in any rigged compulsory arbitration charade run by the same Wall Street conmen. The crisis had to grow too big, run unaddressed for too long, so that the USGovt felt as though the public wanted a bailout rescue stimulus, EVEN THOUGH the primary beneficiary might be the Wall Street felons occupying their executive suites and running board rooms. As the USFed delayed though, the big US banks suffered massive losses. That could be another motive to wait.
EURO & POUND STERLING
The Hat Trick Letter February Gold & Energy report is out. It focuses attention on both the euro and pound sterling currencies. The euro has begun to stall. This is not a popular concept for gold advocates. A USDollar bounce, especially one of intermediate variety (not short-term), is not embraced with warm & fuzzy feelings.
Usually such an event is accompanied by a decline in the gold price. NOT HERE!!! The euro selloff will trigger another phase of the gold bull market, one already well along in Europe.
The gold bull market requires all three major continents (North America, Europe, Asia) to participate. With its US$ woes firm, diverse crises, and declining interest rates, the North Americans are feeding the gold bull. With its industrial renaissance, strong regional growth, and near 0% Japanese fountain for funds, and Chinese treasure trove of savings, Asia is feeding the gold bull. The missing piece is the Europeans, who have been stubborn in maintaining the same 4.0% official interest rates, enforced by the Euro Central Bank since summer 2007.
THE GOLD BULL REQUIRES A DOWNTREND IN INTEREST RATES WORLDWIDE, AND FULL MONETARY ACCOMMODATION. That is coming, once the Europeans begin to cut rates. The topping pattern in the euro currency foretells of the ECB cutting rates soon, despite the German wishes. They are the ultimate inflation hawks. Not only will Europe be fighting financial problems across the Atlantic with cheap money and ample money, but the English will be also. London has already changed policies toward accommodation. Europe will soon feed the gold bull.
The British are also feeding the gold bull. The Bank of England has ordered two official rate cuts, not back to back though. My forecast is for the complete decline of the UK housing market, the complete decline of the UK economy built atop it, and the complete drubbing of the British pound sterling currency. When the pound sterling 20-week moving average crosses below the 50-wk MA (circled in green), technical traders will take the sterling currency down toward 187. My eventual forecast target is in the 175 neighborhood. A disaster comes to the UK, just like the Untied States. Think AngloSphere. The tough call is whether money exiting England will pursue the euro or USDollar. As problems crop up further in Europe, my bet is the money will chase the USTreasurys, crude oil, and gold.
HEDGE FUNDS ARE BACK
The hedge funds are actually being blamed for the crude oil price breaching the $100 mark. They are regarded as shunning the mortgage paper and bond arenas, in favor of hard assets like copper, gold, silver, crude oil, natural gas, grains, and more. Isn’t it interesting how the hedge funds have not been in the news much in the last year or so?
Their legion used to be mentioned as being 9000 in number, commanding $1.6 trillion in funds. No more! They are probably 7000 in number now (pure guess) and command only $1.2 trillion now (pure guess). These falsely labeled geniuses in propeller hats lost a huge sum of money in mortgage spreads, CDO bonds, credit default swaps, and other devices floating within the overall bond market. After licking their wounds, they have wised up to find commodities. Actually, they always were involved in commodities, from the start. They are reviving their interest, focus, curiosity, and attention for them. Commodities are the big winner asset group. They are untethered to debt generally, but vulnerable to a global slowdown in demand.
COMMODITY BULL STILL BREATHES
Given the frenetic Asian growth, and increase in intra-Asian trade, China and India along with Russia and Brazil will continue to grow, although slowly, even if the US and European Union and United Kingdom enter into a recession. Of course, the Untied States has been in a recession for at least two years, if you measure growth without nonsensical gimmicks in accounting, thus ignoring all USGovt official statistics. A great quote came this morning from one of the few consistently bright and accurate pundits on CNBC.
From the Chicago pits, Rick Santelli said, “Only a small amount of actual price inflation shows up in the government numbers.” That is a rare comment. He might be fined or relegated to Friday afternoon exposure if he is not more careful. By the way, word has it that the hedge funds place gold in a different elevated status among commodities. Even if Western nation economic recession takes root, and demand slows, hedge fund mentality is that the gold price will continue to rise. My belief is consistent with theirs, but also that the same is true of the crude oil price. China will stockpile it. Speculators will rely upon it against the weak USDollar.
The commodity boom continues. My favorite indicators are the Three Amigos: the copper price, and crude oil price, and the Baltic Dry Index shipping rates. These are monitored regularly in the Hat Trick Letter. They are each in decent shape.
After 25 years of under-investment, commodities are showing inadequate supply chain structures. They are also displaying grotesque vulnerability to tyrants being in charge, whether in Caracas Venezuela or Moscow Russia or Kazahkstan or WashingtonDC. The ugly impact of the relentless commodity bull market, is that it results in nasty cost inflation.
This leads to economic recession, as wages cannot keep pace, as corporate product prices cannot keep pace. Cost inflation without rising wages and product prices is a Western nation nightmare. All price inflations are not the same.
HOUSING HARD ASSET IMPOSTOR
Two years ago, when the housing market was experiencing what was called a boom, my position was clear. The boom would turn to bust in a couple years, the damage to the banking system would be profound (probably total), the losses would be two-fold from home equity and mortgage bonds, and a deep ongoing relentless (possibly endless) recession would unfold. So far that over-arching forecast seems right on track.
At the same time, my position was that the housing asset was a HARD ASSET IMPOSTOR. Many considered it incorrectly as another commodity, a hard asset, rising in price like copper, cement, lumber, gold, and energy. Not so! By now, my claim that it was an impostor seems evident.
My claim was that the home asset was dominated by the mortgage financial security, whether a loan in the bank portfolio or an asset inside the mortgage bond. My claim was that the home price would be determined by the financial assets behind it. All booms have a financial credit feeding component.
As the housing asset base continues to drain home equity, it kills the banking & bond system entirely. Housing stands as the two-ton weight lodged in the car, the millstone around the household neck. The stimulus being ordered by the USFed and USGovt must reverse the slow motion downward spiral for housing.
So far, housing has lost around 10% of value nationally in the last year plus. That amounts to over $2 trillion in home equity loss, rendered unavailable for home loans and consumer spending, if not education and training. Forget the boats! The entire focus of attention on stimulus and rescue packages must be on stopping the housing price decline. No exceptions.
The prime adjustable mortgages are next in line within the killing field of grand destruction. This is the USFed’s focus. They see it coming. The commodity boom continues, but the housing market is in its second straight year of painful decline. Do not expect the housing bear market to hit bottom until late 2009 at the earliest.
The USFed, the Dept of Treasury, the USGovt, the US Congress, they have all fiddled like Nero as Rome burns. The current president resembles Nero, with brandished military weapons substituted for a violin. Rome is the US financial system, with the USEconomy adjacent to the bonfire. Many references have been made recently by writers and analysts, citing that Rome is burning. When the officials at the USFed and leaders in the USGovt decided to unleash the heavy artillery so as to stop the housing hemorrhage, the impact on the USDollar and gold price will be profound. That is precisely my forecast, that when it comes, the gold price vaults past $1000 and does not look back. A rising gold price past $1200 and past $1500 will go hand in hand with a stabilizing housing market. Since they delayed so long, that bottom event will not come for at least another year. Goals finally have aligned.
MONOLINE BOND INSURERS – NEXUS OF COLLAPSE
The nexus of the current bank & bond debacle has been clearly concentrated lately in the Monoline Bond Insurers. Space does not permit full discussion, even a solid summary.
The last couple Hat Trick Letter reports have dealt with this unfixable topic. An argument has been put forth that the cost of the cure to address inadequate bond insurer corporate capital needs is much less than the impact on the system from the insurer firm failures.
What nonsense! Just like Wall Street firms wanted direct bailouts of their balance sheets, so do the Monoline insurers. The Wall Street impact from big debt downgrades is huge, since so many rafts of bonds would either be forced in sale or forced onto balance sheet for writedowns.
The current impact is seen with municipal bonds. The estimates for total bond losses are steadily rising. Big banks are raising their estimates. Financial firms are raising their estimates. Soon the estimates will be more realistic, like above $1 trillion.
Desperation has set in, as New York Insurance officials are attempting to hatch a rescue plan. It is doomed from the start. All they can hope for is to buy a few months.
If the housing market continues down, their work is futile. If the adjustable mortgage resets continue, their work is futile. If the foreclosures continue, their work is futile. If the debt downgrades by the rating agencies continue, their work is futile. If the corporate balance sheet adjustments continue, their work is futile. If faith erosion in the central banks (most notably the USFed) continues, their work is futile. If lenders hold ground and refuse to relax on lending flexibility, their work is futile. If foreigners continue to shun US$-based bond investments, their work is futile. If foreigners refuse to provide emergency cash infusions for capital positions, their work is futile. Gold smells a bond debacle worsening. When news progressively worsens, gold responds. Gold senses grandiose rescues.
However, the Monoline Bond Insurers must be prevented from declaring bankruptcy. The tragic sideshow has begun, of attempting to separate their healthy municipal bond business segment from their disastrous mortgage bond coverage business. A split cannot happen.
Corporate obligations dictate that insurer success is balanced against their failure, so profits from their gainful segment must subsidize its losing segment. The developments will make great theater for many more months. Games are being played. Eventually the USGovt must bail out the bond insurers, or else the US banking system collapses. That is a strong statement. The USFed will not take such a big step. The credit derivatives are a mountainous pyramid. The credit default swaps have counter-party risk entangled within.
If the insurers are not prevented from bankruptcy, then a gigantic beehive will be opened and infected bees allowed to spread to all corners. My intuition tells me that the clowns at the USFed and Dept Treasury misjudge the impact of the Monoline Bond Insurers and their collapse. So far, they have misjudged just about everything. When the bond insurer rescue comes, gold will respond, on the back of the renewed decline in the USDollar.
POLICY RESPONSE TO ADDRESS BUBBLE
Let’s walk down memory lane in conclusion.
In 1980, a nasty recession lingered longer in time than most so-called experts contemplated. The causes were many, but in my analysis it extended from the OPEC quadruple of oil prices, the failed Nixon Wage Price Freeze, the Volcker (USFed Chairman) harsh monetary medicine, the heavy hidden cost of the Cold War, and the Watergate Scandal.
So the ‘Policy Bubble’ was a defense buildup, complete with Star Wars technology, vast defense contracts, huge spending, and an economic recovery. The cost was about $2 trillion in added federal debt, the Reagan legacy few prefer to talk about publicly. The next bubble was well defined, but the costly impact was not. At the same time, the US manufacturing base was being dismantled and sent to the Pacific Rim of East Asia.
In 1992, a nasty recession lingered longer in time than most so-called experts contemplated. The causes were many, but in my analysis it extended from the end of the Reagan phony economic recovery, the dissipation end of the last coincident housing bubble, together with a painful shock of the Iraq-Kuwait Gulf War, when Saddam Hussein became more a household name. So the ‘Policy Bubble’ was a military buildup, huge wasteful weapons R&D and system deployment, and a housing bubble.
The actual war did receive some international funding. The icing on the policy bubble was the grand tech-telecom stock bubble. The next bubble was well defined, actually more broadly embodied in more diverse arenas, but the costly impact was not. At the same time, the US manufacturing base was still being dismantled and sent to the Pacific Rim of East Asia.
In 2001, a nasty recession happened suddenly but with swifter impact than most so-called experts contemplated. The causes were many, but in my analysis it extended from a busted stock market, together with a new factor. The new element was a newly engrained dependence upon financial bubbles serving as a foundation for the USEconomy itself.
The nation had lost most of its legitimate foundation. With the economy in decline, two avenues had to be pursued. First, a new enemy needed to be designed. A war was hatched on phony grounds by leaders of very duplicitous nature. Even the event triggering the war, the World Trade Center and Pentagon attacks, are heavily debated for suspicious origins. Second, a new financial bubble desperately needed to be spawned and puffed up. The ‘Policy Bubble’ was the War on Terrorism and the housing boom on the back on the mortgage frenzy. With war and security dominating USGovt spending, with the private sector pre-occupied not with valued added enterprise, the USEconomy rebounded in a phony recovery.
The next bubbles were well defined, in the two primary American icons of military and housing. However, the costly impact has only now been estimated. The cost is the destruction of the US bank and bond system, and an endless USEconomic recession. At the same time, the US service base was being dismantled and sent to the China and India, while the remainder of the US manufacturing was sent to China, as a vast industrial buildup has taken place there. The cost is the grotesque increase in US debt coupled with the grandiose growth in Chinese savings. The new age of the Sovereign Wealth Funds has begun. They now stand either as US corporate aid agents or enemies of the US financial state, many no longer friendly.
The next ‘Policy Bubble’ will be some form of grand US infrastructure buildup of a healthy nature, late to be sure.
It should have its foundation extending into alternative energy research and development, as in actual deployment and installation of systems. With no new ‘Policy Bubble’ to promote and feed, the USEconomy and financial sector will implode. At the same time, the housing sector must be revitalized. The two objectives must work in concert. If a national program to rebuild bridges, internet lines, communications systems, electrical lines, water mains, natural gas pipelines, and recycle centers, jobs will be produced, enough perhaps to help the public in its ability to service a heavy debt burden. Be sure that the same level of inefficiency and corruption will be rampant in them. See the Hurricane Katrina Relief program for instance, and on a much greater scale see the Iraq & Afghan Wars. Contractors are part of the merger of mafias that has captured the essence of the Fascist Business Model since year 2000.
GOLD & USDOLLAR CONCLUSION
As the many rescues planned and put in place, monetary inflation will be mammoth. The US$ will inevitably be sacrificed in the housing crisis and mortgage debacle, in addition to reviving the banks. The US$ will be weighed down further, in order to lead the USEconomy out of recession.
Cheap money is coming again, and globally. The USFed will not be able to escape the clutches of 1.0% interest rates again, coupled with the extreme shame. The USDollar will not be able to escape the plumbing of lower exchange rates, like down to the DX=70 level. The gold price will feed off lower interest rates, as speculative gains will be back in vogue, even called a good thing. There is nothing like a bout with deflation to change the mindset of speculation and its vagaries, turning it positive.
The gold & silver prices will rise from the cheap money, low interest rates, stimulus packages to ward off recession, rescues to banking, and lower USDollar.
But the USEconomy desperately needs the next ‘Policy Bubble’ in order to come back to life, to produce jobs, to change national psychology, to revive hope. Without a plan to puff a new bubble, which will buy some years of time, the nation will morph into chaos. A military dictatorship would be the only alternative. The urgent next step is leaders with some vision, rather than a plan for private profiteering, founded upon fear. Hope pays off more than fear, unless fascism is the end game.
Jim Willie CB
Editor of the “HAT TRICK LETTER”
Hat Trick Letter
****
Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com
Friday, February 15, 2008
Central Bankers fueling Global Commodity Inflation
By Gary Dorsch
Feb 15 2008 11:54AM
www.sirchartsalot.com
Central bankers and finance ministers from the world’s top-10 economic powers, huddled behind closed doors in Tokyo last weekend, trying to work out a joint strategy to rescue the global stock markets from another possible meltdown. Roughly $6-trillion was lost on global stock markets in the month of January, triggered by the biggest financial crisis since the Great Depression, and a US housing slide, that could topple the giant US economy into recession.
Central bankers from the United States, Japan, Germany, France, Canada, Britain, Italy, China, South Korea, and Russia, collectively control the money spigots in three-quarters of the world’s $65 trillion economy. “We are not yet at the end of the market crisis,” warned Euro-group finance chief Jean-Claude Juncker. “The corrections will drag on for a few weeks, or months. We have agreed in Tokyo that if there are irrational price movements in the markets, we will collectively take suitable measures to calm the financial markets,” he said.
Asked what type of collective action the G-7 might take during another stock market meltdown, Juncker said, “Whoever has a strategy should not lay it out. Otherwise it will lose its effect, if it is explained.” Russian Finance Minister Alexei Kudrin hinted at a coordinated round of G-7 rate cuts. “Coordination of efforts between central banks on their refinancing rates may soften the consequences of the global credit crisis, because this is the key factor supporting financial systems,” he explained.
Other weapons in the G-7’s arsenal to counter a bear market for equities include brainwashing investors thru the media, fudging economic and inflation data, inflating the money supply, managing the “yen carry” trade, and outright intervention in stock index futures, championed by the US “Plunge Protection Team.”
After surveying the global landscape, the G-7 warned, “Downside risks still persist, including further deterioration of the US residential housing markets and tighter credit conditions.” Bank of Italy chief Mario Draghi added, “Risks are further shocks may lead to a prolonged recurrence of the acute liquidity pressures experienced last year. We face a prolonged adjustment, which could be difficult,” he warned.
Banks and brokerage firms around the world face $400 billion in write-offs of toxic sub-prime US mortgages, said German Finance Minister Peer Steinbrueck on Feb 11th. “The crisis that spread from the US property market to global financial markets may continue well into 2008,” he warned. The US credit crisis is no longer just a sub-prime mortgage problem. Many prime loans made in recent years also allowed borrowers to pay less initially, but with higher adjustable payments in later years.
With US home prices falling and lenders clamping down, homeowners with solid credit are also under the same financial stress as those with sub-prime credit. Over 40% of all mortgages issued from late 2005 to early 2007 are based on adjustable rates, so about $45 billion would reset each month this year. The expected tax rebates from Washington will cover less than two months of home payments.
Wall Street fueled the growth of sub-prime lending by packaging $1.8 trillion of risky home loans into bundled securities, and then marketing them as high-grade investments. But with US mortgage foreclosures set to top 1 million this year and home prices falling at the fastest pace since the Great Depression, the same Wall Street investment banks who profited by putting buyers into properties they couldn’t afford, are begging central banks and governments to manage the bust.
In Chicago, futures contracts for the Case-Shiller Home Price Index in the 20-biggest US cities are 9.4% lower from a year ago, and the slide might get worse as $550 billion of sub-prime adjustable rate mortgages adjust upwards this year. The Fed’s rate cutting spree since September, slashing the fed funds rate by 2.25%, might help by reducing the reset rate for many adjustable-rate loans.
But US consumers are hobbled by falling stock prices, tighter credit conditions, high gasoline prices, and a soft labor market. Sliding home values are also eroding the equity US households can tap for cash at the same time banks are tightening credit, threatening the consumer spending that the economy needs to dodge recession. “Going forward, we will continue to watch developments closely and take appropriate actions, individually and collectively, in order to secure stability and growth in our economies,” the G-7 said after their secret meeting.
The big threat to US household spending is primarily focused on the slumping housing market, but a double-barreled assault can be disastrous, so if the US stock markets keeps sliding, it would probably tip the economy into recession. And a US recession could undermine the global economy, like tumbling dominoes, since the US consumer buys about 20% of the world’s $14.5 trillion of exports.
The Federal Reserve has been the most hyper-active G-10 central bank in pumping liquidity into the global markets, slashing the fed funds rate to a negative 1%, in inflation adjusted terms. The Fed “will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Fed chief Ben “B-52” Bernanke told the Senate Banking Committee on Feb 14th.
Since the Fed began lowering rates in August, the Dow Jones AIG Commodity Index has jumped +22% to a record high of 200-points, while the MSCI All World Index, measuring the top-43 stock markets, has tumbled 7-percent. Commodities have historically been regarded as wildly volatile and risky, but since 2006, crude oil, gold, copper, silver, platinum, cocoa, and grains have soared, hitting record highs, and have trounced returns in the mis-managed G-7 stock markets.
G-10 central bankers are ignoring the deleterious side-effects of their super-easy money policies. The Fed and G-7 central bankers have injected hundreds of billions of dollars into the global money markets, fueling the “Commodity Super Cycle,” and intensifying global inflation. Central bankers in Canada and the UK have joined the Fed’s rate cutting spree. But the big surprise for G-7 central bankers might be how high commodities can fly, even in the face of a global economic slowdown.
The G-10 central banks are tolerating an upward creep in global inflation, because the pain required to kick the money printing habit is deemed too high. “Downside risks to the US economy are the most important factor for Federal Reserve interest rate policy for the time being,” said Chicago Fed chief Charles Evans on Feb 14th. “The Fed’s focus needs to be on those risks, even though inflation has been running a bit higher than we would like,” he admitted.
A remarkable run-up in prices of wheat, corn, oilseeds, rice, and dairy products, along with sharply higher energy prices, have been blamed on supply shortfalls, strong demand for bio-fuels, and an inflow of $150 billion from investment funds. From a year ago, Chicago wheat futures have soared +120%, corn +20%, and soybeans are +80% higher. Rough rice is up 55%, and platinum touched $2,000 /oz, up 80% from a year ago, while US cocoa futures hit a 24-year high.
In agricultural commodities, there are supply constraints in terms of the amount of arable land available. There are huge shifts in demand from the emerging economies, where populations are moving to cities, and incomes are rising, and changing dietary patterns. Entering energy into the food equation, the surging ethanol industry has put a squeeze on the corn market, causing prices to be demand driven. Bio-diesel traders are looking at soybean and vegetable oils.
Fund managers are pouring money into commodities across the board as a hedge against the explosive growth of the world’s money supply, and competitive currency devaluations engineered by central banks. Wheat had climbed nearly 10% since the beginning of the year, hitting an all-time high of $11.50 /bushel, as investment funds kept buying futures with US wheat supplies at the lowest level in 60-years.
Because most global commodities are traded in US dollars, the Federal Reserve has a special role to play in defending the value of the US dollar in the foreign exchange markets. On Dec 27th, Hu Xiaolian, director of China’s Foreign Exchange wrote, “If the US federal funds rate continues to fall, this will certainly have a harmful effect on the US dollar exchange rate and the international currency system,” Hu wrote.
Central banks are flooding the markets with paper, and nobody takes the dollar, the Euro, the yen, or the pound seriously. Investors are turning to gold because it is the only true store of value. The Arab oil kingdoms and Asian exporting nations are importing inflation through their currency pegs and dirty floats, but their patience with the US dollar is near the snapping point.
OPEC may abandon the US dollar for pricing oil and adopt the Euro, said OPEC Secretary-General Abdullah al-Badri on Feb 8th. “Maybe we can price the oil in the Euro. It can be done, but it will take time. It took two world wars and more than 50 years for the dollar to become the dominant currency. Now we are seeing another strong currency coming into the frame, which is the Euro,” said Badri.
The US Treasury and the Fed are risking a disastrous replay of the 1970’s, when high oil prices fueled double-digit inflation. Every time the Fed lowered rates to boost job growth, inflation took off, causing a vicious price spiral. The Fed let inflation rage for so long that it took a strict monetarist approach, adopted by Paul Volcker in 1979 to finally defeat inflation. However, the cost of subduing the inflation monster was a deep recession, with unemployment hitting 11% in 1982.
Excessive monetary accommodation just takes the economy from bubble to bubble to bubble. This time around, the Fed’s devaluation of the dollar, based upon Mr Greenspan’s 2001-02 blueprints, has unleashed the biggest wave of commodity inflation seen since the 1970’s.
Bank of England follows in Fed’s Footsteps
With 1.5 million adjustable rate mortgages due to reset in the UK this year, the Bank of England has joined the Fed’s money printing orgy. On Feb 7th, the BoE lowered its key lending rate by a quarter-point to 5.25%, following a similar cut in December. Pressure has increased on the BoE’s Monetary Policy Committee to slash borrowing costs, even as soaring energy and food bills are driving inflation higher.
Britain’s factories are facing the strongest input price pressures on record and are ramping up prices to compensate, but that didn’t stop the Bank of England from lowering its base rate to 5.25% last week, to shore up the Footsie-100 stock index. And there is little sign that UK price pressures are set to ease with the cost of raw materials surging 18.9% from a year earlier, the fastest rate in 22-years.
UK producer prices are surging at an annualized 5.7% rate in January, a 16-year high, not surprising, given the bullish trends in the global commodity markets. The price of imported food into the United Kingdom rose by nearly 15% in the past 12-months. But the bigger fear haunting the BoE is that weaker growth will undermine housing and stock prices, putting further pressure on bank balance sheets, and prompting a further tightening in credit conditions.
On Feb 13th, the BoE projected an economic slowdown to zero percent in the first two quarters of 2008, with a high probability that the UK economy will contract in at least one quarter. BoE chief Mervyn King’s message was blunt. “Tighter credit conditions will bear down on demand, while rising energy, food and import prices will push up on inflation. Both developments are now more acute than in November,” he warned.
Mr King says the BoE is powerless to counter surging commodity prices, which he believes “will result in a genuine reduction in our standard of living. However, there is no point in us going mad and pretending it is sensible to double interest rates in order to bring inflation back to target in the next six months,” he argued. Instead, King thinks that slower growth over the coming year will “reduce pressures on capacity” and bring inflation down to target towards the beginning of 2009.
“The Bank of England needs to stop worrying about inflation and cut interest rates to prevent a sharp slowdown in growth,” said BoE policymaker David Blanchflower on January 27th. “It’s essential that the BoE get ahead of the curve, as the current level of UK interest rates are restrictive. Evidence from the housing and the commercial property market is worrying. It is time for the MPC to lead not follow. Worrying about inflation at this time seems like fiddling when Rome burns,” he declared
Herein is the crux of the “Stagflation” trap. Lowering interest rates to bolster the local economy can backfire by igniting faster inflation, and erode the purchasing power of local citizens. But the BoE has been destroying the purchasing power of UK citizens for years, by inflating the British M4 money supply, up 12.4% from a year ago. Gold has risen by 110% against the British pound from four years ago, and is a proven vehicle for protecting asset wealth from abusive central bankers.
To ease the plight of its exporters, the BoE engineered a 10% devaluation of the British pound, from a 26-year high against the dollar in November. Britain’s goods trade deficit with the rest of the world ballooned to a record at 87.4 billion pounds ($170.4 billion) last year, up 10% from 2006. The UK’s current-account deficit widened to 5.7% of gross domestic product, the highest of G-7 nations. But a weaker pound also exacerbates Britain’s inflation problem, by lifting import prices.
“The BoE needs to balance the risk that a sharp slowing in activity pulls inflation below target against the risk expectations keep inflation above target,” the BoE said. Given the choice of defending the purchasing power of the British pound or rescuing the housing and stock market, the BoE will eventually show its weak hand, and lower its interest rates further, spinning its citizens on the treadmill of inflation.
To stay on top of volatile markets, subscribe to the Global Money Trends newsletter today, for insightful analysis and predictions of the future for the (1) top stock markets around the world, (2) Commodities such as crude oil, copper, gold, silver, and related gold mining and oil company indexes (3) Foreign currencies (4) Libor interest rates, global bond markets and central bank monetary policies, and (5) Central banker "Jawboning" and Intervention techniques that move markets.
GMT filters important news and information into (1) bullet-point, easy to understand analysis, (2) featuring "Inter-Market Technical Analysis" that visually displays the dynamic inter-relationships between foreign currencies, commodities, interest rates and the stock markets from a dozen key countries around the world. Also included are (3) charts of key economic statistics of foreign countries that move markets.
Subscribers can also listen to bi-weekly Audio Broadcasts, with the latest news on global markets, and view our updated model portfolio for Q’1, 2008. To order a subscription to Global Money Trends, click on the hyperlink below, http://www.sirchartsalot.com/newsletters.php
or call toll free to order, Sunday thru Thursday, 8 am to 9 pm EST, and on Friday 8 am to 5 pm, at 866-553-1007. Outside the US call 561-367-1007. This article may be re-printed on other internet sites for public viewing, with links required to, http://www.sirchartsalot.com/newsletters.php
Gary Dorsch
****
Disclaimer: SirChartsAlot.com’s analysis and insights are based upon data gathered by it from various sources believed to be reliable, complete and accurate. However, no guarantee is made by SirChartsAlot.com as to the reliability, completeness and accuracy of the data so analyzed. SirChartsAlot.com is in the business of gathering information, analyzing it and disseminating the analysis for informational and educational purposes only. SirChartsAlot.com attempts to analyze trends, not make recommendations. All statements and expressions are the opinion of SirChartsAlot.com and are not meant to be investment advice or solicitation or recommendation to establish market positions. Our opinions are subject to change without notice. SirChartsAlot.com strongly advises readers to conduct thorough research relevant to decisions and verify facts from various independent sources.
Copyright © 2005-2007 SirChartsAlot, Inc. All rights reserved.
Feb 15 2008 11:54AM
www.sirchartsalot.com
Central bankers and finance ministers from the world’s top-10 economic powers, huddled behind closed doors in Tokyo last weekend, trying to work out a joint strategy to rescue the global stock markets from another possible meltdown. Roughly $6-trillion was lost on global stock markets in the month of January, triggered by the biggest financial crisis since the Great Depression, and a US housing slide, that could topple the giant US economy into recession.
Central bankers from the United States, Japan, Germany, France, Canada, Britain, Italy, China, South Korea, and Russia, collectively control the money spigots in three-quarters of the world’s $65 trillion economy. “We are not yet at the end of the market crisis,” warned Euro-group finance chief Jean-Claude Juncker. “The corrections will drag on for a few weeks, or months. We have agreed in Tokyo that if there are irrational price movements in the markets, we will collectively take suitable measures to calm the financial markets,” he said.
Asked what type of collective action the G-7 might take during another stock market meltdown, Juncker said, “Whoever has a strategy should not lay it out. Otherwise it will lose its effect, if it is explained.” Russian Finance Minister Alexei Kudrin hinted at a coordinated round of G-7 rate cuts. “Coordination of efforts between central banks on their refinancing rates may soften the consequences of the global credit crisis, because this is the key factor supporting financial systems,” he explained.
Other weapons in the G-7’s arsenal to counter a bear market for equities include brainwashing investors thru the media, fudging economic and inflation data, inflating the money supply, managing the “yen carry” trade, and outright intervention in stock index futures, championed by the US “Plunge Protection Team.”
After surveying the global landscape, the G-7 warned, “Downside risks still persist, including further deterioration of the US residential housing markets and tighter credit conditions.” Bank of Italy chief Mario Draghi added, “Risks are further shocks may lead to a prolonged recurrence of the acute liquidity pressures experienced last year. We face a prolonged adjustment, which could be difficult,” he warned.
Banks and brokerage firms around the world face $400 billion in write-offs of toxic sub-prime US mortgages, said German Finance Minister Peer Steinbrueck on Feb 11th. “The crisis that spread from the US property market to global financial markets may continue well into 2008,” he warned. The US credit crisis is no longer just a sub-prime mortgage problem. Many prime loans made in recent years also allowed borrowers to pay less initially, but with higher adjustable payments in later years.
With US home prices falling and lenders clamping down, homeowners with solid credit are also under the same financial stress as those with sub-prime credit. Over 40% of all mortgages issued from late 2005 to early 2007 are based on adjustable rates, so about $45 billion would reset each month this year. The expected tax rebates from Washington will cover less than two months of home payments.
Wall Street fueled the growth of sub-prime lending by packaging $1.8 trillion of risky home loans into bundled securities, and then marketing them as high-grade investments. But with US mortgage foreclosures set to top 1 million this year and home prices falling at the fastest pace since the Great Depression, the same Wall Street investment banks who profited by putting buyers into properties they couldn’t afford, are begging central banks and governments to manage the bust.
In Chicago, futures contracts for the Case-Shiller Home Price Index in the 20-biggest US cities are 9.4% lower from a year ago, and the slide might get worse as $550 billion of sub-prime adjustable rate mortgages adjust upwards this year. The Fed’s rate cutting spree since September, slashing the fed funds rate by 2.25%, might help by reducing the reset rate for many adjustable-rate loans.
But US consumers are hobbled by falling stock prices, tighter credit conditions, high gasoline prices, and a soft labor market. Sliding home values are also eroding the equity US households can tap for cash at the same time banks are tightening credit, threatening the consumer spending that the economy needs to dodge recession. “Going forward, we will continue to watch developments closely and take appropriate actions, individually and collectively, in order to secure stability and growth in our economies,” the G-7 said after their secret meeting.
The big threat to US household spending is primarily focused on the slumping housing market, but a double-barreled assault can be disastrous, so if the US stock markets keeps sliding, it would probably tip the economy into recession. And a US recession could undermine the global economy, like tumbling dominoes, since the US consumer buys about 20% of the world’s $14.5 trillion of exports.
The Federal Reserve has been the most hyper-active G-10 central bank in pumping liquidity into the global markets, slashing the fed funds rate to a negative 1%, in inflation adjusted terms. The Fed “will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Fed chief Ben “B-52” Bernanke told the Senate Banking Committee on Feb 14th.
Since the Fed began lowering rates in August, the Dow Jones AIG Commodity Index has jumped +22% to a record high of 200-points, while the MSCI All World Index, measuring the top-43 stock markets, has tumbled 7-percent. Commodities have historically been regarded as wildly volatile and risky, but since 2006, crude oil, gold, copper, silver, platinum, cocoa, and grains have soared, hitting record highs, and have trounced returns in the mis-managed G-7 stock markets.
G-10 central bankers are ignoring the deleterious side-effects of their super-easy money policies. The Fed and G-7 central bankers have injected hundreds of billions of dollars into the global money markets, fueling the “Commodity Super Cycle,” and intensifying global inflation. Central bankers in Canada and the UK have joined the Fed’s rate cutting spree. But the big surprise for G-7 central bankers might be how high commodities can fly, even in the face of a global economic slowdown.
The G-10 central banks are tolerating an upward creep in global inflation, because the pain required to kick the money printing habit is deemed too high. “Downside risks to the US economy are the most important factor for Federal Reserve interest rate policy for the time being,” said Chicago Fed chief Charles Evans on Feb 14th. “The Fed’s focus needs to be on those risks, even though inflation has been running a bit higher than we would like,” he admitted.
A remarkable run-up in prices of wheat, corn, oilseeds, rice, and dairy products, along with sharply higher energy prices, have been blamed on supply shortfalls, strong demand for bio-fuels, and an inflow of $150 billion from investment funds. From a year ago, Chicago wheat futures have soared +120%, corn +20%, and soybeans are +80% higher. Rough rice is up 55%, and platinum touched $2,000 /oz, up 80% from a year ago, while US cocoa futures hit a 24-year high.
In agricultural commodities, there are supply constraints in terms of the amount of arable land available. There are huge shifts in demand from the emerging economies, where populations are moving to cities, and incomes are rising, and changing dietary patterns. Entering energy into the food equation, the surging ethanol industry has put a squeeze on the corn market, causing prices to be demand driven. Bio-diesel traders are looking at soybean and vegetable oils.
Fund managers are pouring money into commodities across the board as a hedge against the explosive growth of the world’s money supply, and competitive currency devaluations engineered by central banks. Wheat had climbed nearly 10% since the beginning of the year, hitting an all-time high of $11.50 /bushel, as investment funds kept buying futures with US wheat supplies at the lowest level in 60-years.
Because most global commodities are traded in US dollars, the Federal Reserve has a special role to play in defending the value of the US dollar in the foreign exchange markets. On Dec 27th, Hu Xiaolian, director of China’s Foreign Exchange wrote, “If the US federal funds rate continues to fall, this will certainly have a harmful effect on the US dollar exchange rate and the international currency system,” Hu wrote.
Central banks are flooding the markets with paper, and nobody takes the dollar, the Euro, the yen, or the pound seriously. Investors are turning to gold because it is the only true store of value. The Arab oil kingdoms and Asian exporting nations are importing inflation through their currency pegs and dirty floats, but their patience with the US dollar is near the snapping point.
OPEC may abandon the US dollar for pricing oil and adopt the Euro, said OPEC Secretary-General Abdullah al-Badri on Feb 8th. “Maybe we can price the oil in the Euro. It can be done, but it will take time. It took two world wars and more than 50 years for the dollar to become the dominant currency. Now we are seeing another strong currency coming into the frame, which is the Euro,” said Badri.
The US Treasury and the Fed are risking a disastrous replay of the 1970’s, when high oil prices fueled double-digit inflation. Every time the Fed lowered rates to boost job growth, inflation took off, causing a vicious price spiral. The Fed let inflation rage for so long that it took a strict monetarist approach, adopted by Paul Volcker in 1979 to finally defeat inflation. However, the cost of subduing the inflation monster was a deep recession, with unemployment hitting 11% in 1982.
Excessive monetary accommodation just takes the economy from bubble to bubble to bubble. This time around, the Fed’s devaluation of the dollar, based upon Mr Greenspan’s 2001-02 blueprints, has unleashed the biggest wave of commodity inflation seen since the 1970’s.
Bank of England follows in Fed’s Footsteps
With 1.5 million adjustable rate mortgages due to reset in the UK this year, the Bank of England has joined the Fed’s money printing orgy. On Feb 7th, the BoE lowered its key lending rate by a quarter-point to 5.25%, following a similar cut in December. Pressure has increased on the BoE’s Monetary Policy Committee to slash borrowing costs, even as soaring energy and food bills are driving inflation higher.
Britain’s factories are facing the strongest input price pressures on record and are ramping up prices to compensate, but that didn’t stop the Bank of England from lowering its base rate to 5.25% last week, to shore up the Footsie-100 stock index. And there is little sign that UK price pressures are set to ease with the cost of raw materials surging 18.9% from a year earlier, the fastest rate in 22-years.
UK producer prices are surging at an annualized 5.7% rate in January, a 16-year high, not surprising, given the bullish trends in the global commodity markets. The price of imported food into the United Kingdom rose by nearly 15% in the past 12-months. But the bigger fear haunting the BoE is that weaker growth will undermine housing and stock prices, putting further pressure on bank balance sheets, and prompting a further tightening in credit conditions.
On Feb 13th, the BoE projected an economic slowdown to zero percent in the first two quarters of 2008, with a high probability that the UK economy will contract in at least one quarter. BoE chief Mervyn King’s message was blunt. “Tighter credit conditions will bear down on demand, while rising energy, food and import prices will push up on inflation. Both developments are now more acute than in November,” he warned.
Mr King says the BoE is powerless to counter surging commodity prices, which he believes “will result in a genuine reduction in our standard of living. However, there is no point in us going mad and pretending it is sensible to double interest rates in order to bring inflation back to target in the next six months,” he argued. Instead, King thinks that slower growth over the coming year will “reduce pressures on capacity” and bring inflation down to target towards the beginning of 2009.
“The Bank of England needs to stop worrying about inflation and cut interest rates to prevent a sharp slowdown in growth,” said BoE policymaker David Blanchflower on January 27th. “It’s essential that the BoE get ahead of the curve, as the current level of UK interest rates are restrictive. Evidence from the housing and the commercial property market is worrying. It is time for the MPC to lead not follow. Worrying about inflation at this time seems like fiddling when Rome burns,” he declared
Herein is the crux of the “Stagflation” trap. Lowering interest rates to bolster the local economy can backfire by igniting faster inflation, and erode the purchasing power of local citizens. But the BoE has been destroying the purchasing power of UK citizens for years, by inflating the British M4 money supply, up 12.4% from a year ago. Gold has risen by 110% against the British pound from four years ago, and is a proven vehicle for protecting asset wealth from abusive central bankers.
To ease the plight of its exporters, the BoE engineered a 10% devaluation of the British pound, from a 26-year high against the dollar in November. Britain’s goods trade deficit with the rest of the world ballooned to a record at 87.4 billion pounds ($170.4 billion) last year, up 10% from 2006. The UK’s current-account deficit widened to 5.7% of gross domestic product, the highest of G-7 nations. But a weaker pound also exacerbates Britain’s inflation problem, by lifting import prices.
“The BoE needs to balance the risk that a sharp slowing in activity pulls inflation below target against the risk expectations keep inflation above target,” the BoE said. Given the choice of defending the purchasing power of the British pound or rescuing the housing and stock market, the BoE will eventually show its weak hand, and lower its interest rates further, spinning its citizens on the treadmill of inflation.
To stay on top of volatile markets, subscribe to the Global Money Trends newsletter today, for insightful analysis and predictions of the future for the (1) top stock markets around the world, (2) Commodities such as crude oil, copper, gold, silver, and related gold mining and oil company indexes (3) Foreign currencies (4) Libor interest rates, global bond markets and central bank monetary policies, and (5) Central banker "Jawboning" and Intervention techniques that move markets.
GMT filters important news and information into (1) bullet-point, easy to understand analysis, (2) featuring "Inter-Market Technical Analysis" that visually displays the dynamic inter-relationships between foreign currencies, commodities, interest rates and the stock markets from a dozen key countries around the world. Also included are (3) charts of key economic statistics of foreign countries that move markets.
Subscribers can also listen to bi-weekly Audio Broadcasts, with the latest news on global markets, and view our updated model portfolio for Q’1, 2008. To order a subscription to Global Money Trends, click on the hyperlink below, http://www.sirchartsalot.com/newsletters.php
or call toll free to order, Sunday thru Thursday, 8 am to 9 pm EST, and on Friday 8 am to 5 pm, at 866-553-1007. Outside the US call 561-367-1007. This article may be re-printed on other internet sites for public viewing, with links required to, http://www.sirchartsalot.com/newsletters.php
Gary Dorsch
****
Disclaimer: SirChartsAlot.com’s analysis and insights are based upon data gathered by it from various sources believed to be reliable, complete and accurate. However, no guarantee is made by SirChartsAlot.com as to the reliability, completeness and accuracy of the data so analyzed. SirChartsAlot.com is in the business of gathering information, analyzing it and disseminating the analysis for informational and educational purposes only. SirChartsAlot.com attempts to analyze trends, not make recommendations. All statements and expressions are the opinion of SirChartsAlot.com and are not meant to be investment advice or solicitation or recommendation to establish market positions. Our opinions are subject to change without notice. SirChartsAlot.com strongly advises readers to conduct thorough research relevant to decisions and verify facts from various independent sources.
Copyright © 2005-2007 SirChartsAlot, Inc. All rights reserved.
Friday, January 25, 2008
Gold Stocks -which direction it will go
Gold Stocks
The bull market in gold stocks can also be broken down into three phases. The first phase began in 2001 when gold stocks made a very large advance in a short period of time. These gains were made during a severe bear market in US equities. Gold stocks acted in a truly counter-cyclical manner.
The second phase was difficult for gold shares. It coincided with a cyclical bull market on US equities. Production costs rose steadily, driven by fast growing demand for energy and base metals caused by exceptional world economic growth. Gold stock performance was choppy, with indices being pulled up by a few diversified producers with significant exposure to base metals.
The third phase started in late 2007, concurrently with the beginning of a strong advance in gold as was the case during phase one. To date, all conditions are shaping up in a similar manner as in 2001-2003. Consequently, we expect phase three to be similar to phase one in both strength and length of the advance.
It is especially important that the gold / crude oil ratio ($GOLD / $WTIC) appears to have bottomed last summer. Oil is unlikely to move much higher and the ratio will continue to trend up, taking the pressure off of the gold exploration, development and production stocks. As a result, the $HUI / GOLD ratio will begin trending up in 2008 and gold stocks will regain their leverage to the yellow metal.
This is an excerpt from an RSG Newsletter posted on January 20, 2008.
Boris Sobolev
Resource Stock Guide
www.resourcestockguide.com
The bull market in gold stocks can also be broken down into three phases. The first phase began in 2001 when gold stocks made a very large advance in a short period of time. These gains were made during a severe bear market in US equities. Gold stocks acted in a truly counter-cyclical manner.
The second phase was difficult for gold shares. It coincided with a cyclical bull market on US equities. Production costs rose steadily, driven by fast growing demand for energy and base metals caused by exceptional world economic growth. Gold stock performance was choppy, with indices being pulled up by a few diversified producers with significant exposure to base metals.
The third phase started in late 2007, concurrently with the beginning of a strong advance in gold as was the case during phase one. To date, all conditions are shaping up in a similar manner as in 2001-2003. Consequently, we expect phase three to be similar to phase one in both strength and length of the advance.
It is especially important that the gold / crude oil ratio ($GOLD / $WTIC) appears to have bottomed last summer. Oil is unlikely to move much higher and the ratio will continue to trend up, taking the pressure off of the gold exploration, development and production stocks. As a result, the $HUI / GOLD ratio will begin trending up in 2008 and gold stocks will regain their leverage to the yellow metal.
This is an excerpt from an RSG Newsletter posted on January 20, 2008.
Boris Sobolev
Resource Stock Guide
www.resourcestockguide.com
Wednesday, January 16, 2008
Federal Reserve Plays Russian Roulette with US$
By Gary Dorsch
Jan 16 2008 3:47PM
http://www.sirchartsalot.com
In an age where governments of every political stripe distort data to promote their own self interests, it’s hardly surprising that they present inflation data in a manner that is best suited to their particular needs.
By the same token, it’s entirely natural for official inflation data to be wildly at odds with the reality that is faced by consumers and businesses, and to be regarded with utter disbelief.
So it wasn’t shocking to hear Federal Reserve officials insist last week, that inflation in the United States is under control, before telegraphing another tidal wave of liquidity injections into the US economy in the months ahead. “Stable inflation expectations give the Fed a lot of room for maneuver. If the evidence suggests that substantial policy easing is appropriate, I don’t think we’re going to face a risk of adverse inflation consequences,” said St Louis Fed chief William Poole on Jan 9th.
In an election year for the highest office in the land, American politicians from both sides of the isle, are quick to propose all kinds of fiscal stimulus and pork barrel projects to jump start the sputtering US economy.
But adding more monetary stimulus to the mix has the potential to ignite hyper-inflation in the US economy, and a speculative attack on the US dollar in the $3.2 trillion a day currency market.
“It’s difficult enough to make good policy in a complex economy and complex financial system,” said Fed chief Ben “B-52” Bernanke on January 11th. “Political considerations will play no role, and I assure you as strongly as I can, that we will be objective and analytical, and we’ll do what’s right for the economy,” he said.
It’s now becoming increasing clear, that the only prices the Fed is focusing on these days are home prices and those for toxic sub-prime mortgage debt. The Fed is pegging the federal funds rate in the direction of US home prices, mimicking the Bank of England as an asset targeter.
Last week, nearby futures contracts on the Standard & Poor’s/Case-Shiller, an index of home prices in the top-10 US cities, fell below the 206-level, or roughly 7% lower from a year ago.
Robert Shiller, a Yale University economist, and co-founder of the widely watched house-price index, predicted on Dec 31st, a possibility that the US economy would stumble into a Japanese-style recession, with house prices declining for years. “American real estate values have already lost around $1 trillion. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”
He noted that Chicago futures markets are pricing in further declines in US home prices, with farther dated contracts on the S&P Shiller Index pointing to losses of up to 14 percent. In the third quarter of 2007, US homeowners withdrew $20 billion less in equity from their homes than in the prior quarter, and since housing prices have continued to tumble, the outlook for cash-outs has continued to dim.
Lenders have also grown more cautious in handing out cash through home equity lines of credit since those loans were failing at their highest rate in ten years during the third quarter. If the housing market continues to sink this year, consumers will have less home equity to convert into cash, which could lead to a big pullback in spending. With consumers struggling with high energy costs and a softening jobs market, the drying up of home equity could usher in an economic recession.
Slumping home prices and a softer jobs market, could increase foreclosures on many sub-prime home borrowers, and blow huge craters in the balance sheets of banks and brokers worldwide. Credit Suisse projects 775,000 homes with $143 billion of mortgage debt will go into foreclosure in the next two years. Goldman Sachs estimated that losses in mortgage markets worldwide may reach $726 billion.
Some BBB rated sub-prime mortgage bonds have already tumbled to 16-cents on the dollar from 50-cents last July. AA rated paper isn’t faring much better, fetching only 40-cents in the $1.8 trillion sub-prime mortgage market. On January 15th, Citigroup C.n, the nation’s largest bank, took a fourth-quarter loss of nearly $10 billion, stemming largely from $18 billion of write-downs of sub-prime mortgages.
The deepening gloom in the US financial sector came as Bank of America BAC.n agreed to acquire battered mortgage lender Countrywide Financial CFC.n for $4 billion, to avert one of the biggest collapses due to the toxic sub-prime debt bomb. Merrill Lynch is expected to suffer $15 billion in losses stemming from soured mortgage investments, as the sub-prime debt bomb goes nuclear.
Bernanke Signals more Rate cuts in Q’1
With the US economy sinking deeper into the “Stagflation” trap, and credit worries clogging the arteries of the Libor market, Mr Bernanke shouted loud and clear for the whole world to hear on Jan 10th, that the Fed and the US Treasury (the “Plunge Protection Team” - PPT) have decided to exercise the “Greenspan Put” option, and will simply disregard elevated inflationary pressures in the rest of the economy.
“In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary,” Bernanke said on January 11th. “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks. Inflation expectations are reasonably well anchored,” and he pledged to monitor inflation expectations closely.
For the PPT, the devil of hyper-inflation is preferable to the specter of a bear market for the Dow Jones Industrials and weaker home prices. Exercising the “Greenspan Put,” means the Fed will slash the federal funds rate far below the US inflation rate in the months ahead. But that’s a frightening prospect for foreign holders of $2.3 trillion of US Treasury debt, who must contend with negative interest rates, which in turn, could severely weaken their US dollar denominated investments.
The Fed is signaling aggressive rate cuts at a dangerous time. Inflationary pressures in the US economy are elevated at multi-decade highs. US producer prices were up +6.3% last year, and US consumer prices up +4.1%, the highest in 17-years, compared with +2.5% for 2006. Gasoline costs were up 37%, and food prices were up 9.3% last year, embedding inflation fears into the American psyche.
Thanks to the Fed’s cheap dollar policy, US import prices rose +10.9% in 2007, the largest calendar-year increase since 1987. The Dow Jones AIG Commodity Index soared to an all-time high of 193.25, exerting upward pressure on raw material costs. Only one lone voice of reason from Foggy Bottom is advising caution. “I would be very careful, not to let inflation accelerate too long,” warned Kansas City Fed chief Thomas Hoenig on January 10th.
But Hoenig was rotated off the Fed’s interest rate setting committee, after he dissented against a rate cut in October, in favor of keeping Fed policy on hold. Instead, the politically correct thing to do in Washington these days is to cut rates and drop dollar bills across America from helicopters and B-52 bombers.
The Fed’s big Gamble
The Fed is betting that a sharp slowdown in the global economy will weaken commodity prices, and that Saudi Arabia will pump more oil, to keep inflationary pressures at bay. Until now, the Fed’s rate cutting campaign, its special $80 billion liquidity injection scheme and promises of another big tidal wave of liquidity, have severely weakened the value of the US dollar, which in turn, fueled parabolic rallies in crude oil and precious metals to all-time highs.
Fed rate cuts also fueled Agri-flation worldwide.
In Chicago, March wheat jumped the to $9.40 /bushel, after the USDA reported smaller than expected US plantings for hard red winter wheat. Corn surged to an 11-year high of $5.15 /bushel, on a big drawdown in US corn stocks. July soybeans soared to $13.76 a bushel, buoyed by fears that corn’s surge could cut into soybean plantings for 2008.
Rough rice futures in Chicago hit an all-time high of more than $15 per hundredweight, 37% higher from a year ago. Egypt is a major exporter of rice, but has suspended exports indefinitely, due to hoarding and speculation in its local economy. In Pakistan, armed guards escort trucks carrying high-prized wheat. India will become a net importer of rice this year, for the first time.
Jordan intends to double the stocks of wheat inside its country to 390,000 tons, equivalent to six months of supply, plus a further 130,000 tons purchased and being shipped, representing two months of supply. Doubling wheat stocks is an indication that some major importers see no end to the bull market in Chicago and want to protect themselves. Ocean shipping costs for dry goods have fallen 35% in recent weeks, which may encourage more purchasing of grains.
Bush Seeks Quick Fix to Tame Oil prices
On his arrival in Riyadh on January 15th, President Bush urged Saudi king Abdullah to put more crude oil on the world market, warning that soaring prices could cause an economic slowdown in the United States, and weaken the housing market. “High energy prices can damage consuming economies. When consumers have less purchasing power, it could cause the economy to slow down. I hope OPEC nations put more supply on the market. It would be helpful,” he said.
Saudi Arabia is the only member of OPEC with spare capacity - roughly 2.8 million barrels per day. Saudi Oil chief Ali al-Naimi said on Jan 15th, that Riyadh is ready to boost oil output if the market needed more oil to tame high prices.
“Nobody would look with pleasure on a recession in the United States. Concerns about US economic growth are valid. But the price of oil is more than just the US economy. Global economies are growing despite oil prices ranging between $90 and $100 a barrel,” Naimi said.
For instance, China’s oil imports rose 12% last year to a record 3.26 mil bpd.
But al-Naimi also blamed speculators in London and New York for inflating the price of crude oil by $20 to $30 per barrel. “Twenty to thirty dollars is the outside influence on the price of oil. If you look at who’s in the market, you’ll find a lot financial institutions are speculating, using the market as a hedge.” Still, Naimi wouldn’t say if Riyadh would agree to boost oil output at OPEC’s Feb 1 meeting.
King Abdullah must walk a along a tightrope, balancing his military patron’s request for more oil, against Iran’s opposition to further increases in output, which could hurt Tehran’s oil revenue. On Dec 5th, Iran’s President Mahmoud Ahmadinejad scored a big victory, when he convinced king Abdullah to join the hawks of OPEC – Iran, Libya, and Venezuela, and hold the cartel’s oil output steady at 27.25 million bpd.
“Our position is that demand and supply are balanced and there is no need to increase oil to the market,” said Iranian Oil Minister Gholamhossein Nozari. Still, the key question is which way will Saudi oil policy lean at the upcoming Feb 1st meeting in Vienna, in favor of US Prez Bush or Iran’s Ahmadinejad?
However, Riyadh is keen to keep oil prices elevated within a higher target zone, to sustain the enormous flow of petro-dollars to the Gulf, which has revived the speculative appetite for the local stock market. The Saudi All Share Index hit the psychological 12,000 barrier last week, enriching the brokerage accounts of 7,000 Saudi princes, who control 70% of the market.
Beijing warns US Treasury against further Fed rate cuts
Beijing also finds itself in a tough predicament, with $1.53 trillion of foreign exchange reserves over the past five years, mostly stockpiled in depreciating US dollars. However, Chinese leaders finally woke up to the folly of such a foolish investment policy. “The world’s currency structure has changed,” declared Xu Jian, vice director of the People’s Bank of China (PBoC) on Nov 7th.
“The US dollar is losing its status as the world reserve currency,” he warned. “We will favor stronger currencies over weaker ones, and will readjust accordingly,” added Cheng Siwei, vice chairman of China’s National People’s Congress. On Dec 27th, Hu Xiaolian, director of China’s Foreign Exchange department, wrote, “If the US federal funds rate continues to fall, this will certainly have a harmful effect on the US dollar exchange rate and the international currency system,” he said.
Traders closely watch any change in China’s strategy which could affect exchange rates. China’s central bank is tightening its monetary policy to combat inflation, which is raging ahead at a 6.5% annualized rate. At the same time, the Bernanke Fed is preparing to flood global money markets with another tidal wave of cheaper US$’s. China raised benchmark interest rate six times in 2007, but the benchmark one-year deposit rate of 4.14% is still far lower than the inflation rate.
“We must be sure about one thing, the central bank is moving towards the objective of positive real interest rate instead of moving away from it, “said Yu Yongding, a key advisor to the PBoC, on Janaury 3rd. The next day, the PBoC vowed to further tighten monetary policy in 2008, aiming in particular to prevent inflation from moving from certain sectors to the broader economy.
A year ago, the US Treasury’s 5-year T-note was yielding +2% more than China’s 5-year note. But today, the US T-note yields -1.2% less, putting enormous downward pressure on the US$ /Chinese yuan, and cementing big foreign currency losses in Beijing’s portfolio of US bonds. According to forward traders in Hong Kong, the dollar is expected to fall another 9% to 6.6-yuan over the next 12-months.
Since March 2006, China has been a net seller of US Treasury debt, reducing its exposure from $421 billion to $386.7 billion in November, and seeking to avoid further losses on the dollar’s exchange rate with the yuan. “The weakening dollar and rising global commodity prices is also creating inflationary pressures for China, but a quicker appreciation of the yuan would probably help offset some of those price increases,” said Yao Jingyuan, chief economist of the state statistics agency.
On Jan 16th, the PBOC hiked bank reserve requirements by 0.50% to a record 15%, a move that will drain 200 billion yuan ($28 billion) from the Shanghai money markets. The dollar fell to 7.23 yuan, or -3.2% lower since late October, a faster decline than the -1.2% slide in the US Dollar Index over same period, meaning the yuan is rising at an even faster pace against a basket of six major global currencies, including the Euro, British pound, and Canadian dollar.
Arab Oil kingdoms are Saviors of US$,
Japan is the largest holder of US Treasury debt, but has been a net seller of $46 billion, and South Korea has sold $19 billion over the past 12-months. To pick-up the slack, the Bush administration has relied heavily on the Arab Oil kingdoms, to recycle their bulging petro-dollar surpluses back into US Treasury debt. Since 9/11, America has assumed the financial costs of occupying Iraq, while the Arab oil kingdoms have experienced a staggering infusion of new wealth.
Saudi Arabia has taken in nearly $900 billion in oil revenues over the last six-years, and the emirate of Abu Dhabi has a sovereign wealth fund approximating $1 trillion. There had been a time, in the lean 1990’s, when Saudi Arabia’s debt had reached 120% of Saudi GDP, but today it has fallen to 5 percent. And from a year ago, it is estimated that the Arab oil kingdoms have recycled as much as $227 billion into US Treasuries, mostly through their brokers in London.
In order to keep the archaic dollar /riyal peg intact, the Saudi central bank has more doubled the growth rate of its M3 money supply to 21.6%, to stay ahead the of Bernanke Fed’s 16% expansion of the US M3 money supply. The Saudi central bank has cut its key repurchase rate, the benchmark for deposits, to 4% in tandem with the Fed. But the rapid growth of the money supply pushed Saudi inflation to 6% in October, it’s highest since 1995. Food price inflation hit 7.5 percent.
Inflation in four of the six Gulf Arab oil kingdoms has overtaken official lending rates, encouraging speculation in real estate, which is the main cost of living across the region. Saudis blame King Abdullah’s insistence on pegging the riyal to the US dollar for higher inflation at home. The central bank is handcuffed in the fight against inflation by the riyal’s peg to the dollar, which forces it to track US monetary policy at a time when the Federal Reserve is cutting interest rates.
Those who can afford to buy gold have protected their wealth from the Saudi central’s banks’ money spigots. But most of the Saudi population hasn’t been so fortunate. “We remind you of Prophet Mohammad’s words that you are shepherds who are responsible for your flock,” said 19 well-known clerics, including Nasser Al Omar, on Dec 16th. “The rulers should seek to try to remedy this crisis in a way that would ease people’s suffering. This crisis will have a negative impact on all levels, causing theft, cheating, armed robbery and resentment between rich and poor.”
Bush offers $20 billion arms deal for Saudi Oil
In a keynote speech in Abu Dhabi on January 13th, US President George Bush reminded the leaders of the oil kingdoms of what he called the threat to the world posed by Tehran. “Iran seeks to intimidate its neighbors with missiles and bellicose rhetoric, and its actions threaten the security of nations everywhere. So the United States is strengthening our longstanding security commitments with our friends in the Gulf to confront this danger before it is too late,” he warned.
The underlying message is simple, in return for American military protection against Iran, the Bush clan expects the Arab oil kingdoms to stick with their archaic dollar pegs, and recycle much of their oil surplus into US Treasuries. To keep the Saudi petro-dollars flowing into US Treasury debt, Bush offered Riyadh a $20 billion package of advanced weaponry, to shore up their defenses against Iran.
Still, Saudi Arabia and other Gulf Arab states are looking beyond the last 12-months of the Bush presidency, and are determined to maintain good relations with Iran, which might only be a few years away from acquiring nuclear weapons.
“We’ll listen to everything the president says. He can raise any issue he likes. We’re a neighbor to Iran in the Gulf, which is a small area, so we’re keen for harmony and peace among countries in the area,” said Foreign Minister Saud al-Faisal.
Saudi Arabia invited Iran’s Ahmadinejad to the Haj in Mecca in December and Qatar invited Ahmadinejad to a summit of the Gulf Cooperation Council (GCC) last month.
Bush spoke with the Saudi king in his opulent palace. Its marble floors and walls contain sheets of gold, colored with precious stones and embedded jewels. The king also invited Bush to his lavish horse farm where 150 Arabian stallions are stabled, as a payback to his visit to the Bush ranch in Crawford, Texas.
European Central Bank Rules out Rate cuts
The Bernanke Fed is playing Russian roulette with the US dollar, reckoning that other central banks will eventually join its money printing orgy, to prevent their currencies from rising sharply higher against the greenback. But while the Fed is trying to brainwash the media into believing that inflation is under control, ECB chief Jean “Tricky” Trichet has flatly ruled out any Euro rate cuts in the months ahead, arguing that inflation is a major threat faced by the Euro zone.
On Jan 10th, Trichet was asked whether it was correct to say the ECB had a bias to tighten rates, “We are certainly not neutral,” warning the ECB is not prepared to tolerate a wage-price spiral triggered by higher food and oil prices. Speaking on French television on January 14th, Trichet rebuffed suggestions by French government officials, that the ECB should pay more attention to stimulating growth, like the Federal Reserve, rather than focusing on keeping inflation under control.
“There is not one European to say that now is the moment to be particularly lax in the matter of fighting inflation,” Trichet declared. ECB member Michael Bonello backed his new boss, “The bank remains prepared to act to insure that the upside risks to price stability, which are clearly mounting at the moment, do not materialize,” he said. Austrian central bank chief Klaus Liebscher added, “We have clear upward risks from inflation, $95 per barrel of oil and dramatic food price increases. On top of this, we could see second round effects,” he said.
Compared to the reckless amateurs at the Federal Reserve, ECB officials are sounding more responsible and like stalwart guardians of the Euro’s purchasing power. But one must also keep in mind, that the ECB is inflating its M3 money supply at a record 12.3% annual rate. In doing so, the ECB has been a major accomplice to the historic rally in food and energy prices over the past few years.
The ECB is now warning Euro zone workers to avoid asking for higher wages, which they seek to compensate for the inflation that was created by the central bank itself. “Wages must not seek to catch up with prices to compensate for a weakening in purchasing power following this price rise,” warned Italy’s central bank chief Bini Smaghi on Jan 14th. “Otherwise inflation might not go down and at that point there won’t be any other solution than a monetary tightening,” he said.
On January 15th, Bundesbank chief Axel Weber said there were signs that wage pressure and inflation expectations were starting to drift up. “The currently noticeable higher rates of inflation in Germany and the Euro area overall should not be the yardstick for upcoming wage negotiations. We are observing current developments very carefully and, if needed, action will follow our words."
Around 2 million German public sector workers are seeking an 8% increase in wage talks which began last week, while German train drivers have already secured an 11% raise. German union bosses are calling the ECB’s bluff, figuring the central bank does not have the green light from government finance officials for a rate hike, given the severity of the credit crunch in the Euro Libor markets.
Bank of Japan is Silent on dollar’s Slide to 106-yen
Japan’s ministry of finance is the most notorious manipulator of inflation data, and for good reason. Japan’s outstanding public debt is 776 trillion yen ($7.25 trillion), or roughly 147% of gross domestic product, the highest among leading industrialized countries. In order to keep its interest rates and debt service costs low, Tokyo’s uses fuzzy math to calculate it inflation rate, to provide the Bank of Japan with the political cover to peg its overnight loan rate at an abnormally low 0.50 percent.
Japan imports almost all of its oil, or 4.2 mil bpd, and is the world’s third-largest oil consumer after the US and China. Japan runs an industrial economy and is only 40% self sufficient in agricultural commodities, so 60% of its domestic demands for food and agricultural products are imported. Yet Tokyo claims that Japan’s consumer price index is only +0.4% higher from a year ago, by far the lowest on the planet, despite a near doubling of food and energy prices from a year ago.
Japan has an enormous stash of cash, and can easily afford to pay for sharply higher prices for food and energy imports. Japan’s current-account surplus, the widest measure of a country’s financial performance on an international basis, expanded 46% to 2.2 trillion yen ($20.1 billion) in October from a year earlier. Japan’s foreign exchange reserves rose 9% to a record $973 billion last year, and are the world’s second largest behind China’s $1.53 trillion.
Currency traders are attracted to the yen because of Japan’s large external surpluses, but are also discouraged from buying the currency, because of abnormally low interest rates for Japanese bonds. On the flip side, global traders have borrowed $1.2 trillion in Japanese yen at 1% or less, to purchase stocks and commodities on worldwide exchanges, popularly known as the ”yen carry” trade.
Recently, the US$ has been tumbling against the yen, because the US Treasury’s 2-year note yield has plunged from +394 basis points above the Japanese 2-year yield to as low as +250 bp over the past two months. And in a chain reaction, Japan’s Nikkei-225 plunged to a 26-month low, as key exporters sank on fears of a possible recession in the US market and the surging yen. A weaker dollar will hurt exporter profits earned in the US, when converted back into yen.
Thus, unilateral Fed rate cuts have become a big headache for Tokyo’s financial warlords. Yet Japanese finance officials were surprisingly silent this week, as the dollar fell below 109-yen, previously regarded as the MoF’s red line in the sand, where intervention was expected to defend the dollar. The lack of intervention raises the possibility that Tokyo may have acquiesced to a stronger yen, in order to help dampen the high cost of imported food and energy.
Traders might probe the dollar’s downside, until subtle threats of intervention are sounded out by the MoF. There is also simmering speculation that the BoJ might lower its overnight loan rate to zero percent, after BoJ chief Toshihiko retires in March. The yield of two-year Japanese government bonds fell to 0.60%, just 10 basis points above the overnight call rate target.
A rate cut to zero percent could raise speculation of the BOJ returning to “quantitative easing”, a policy of force-feeding banks with excess cash to kick-start the economy. Annual growth in Japanese bank lending has slowed to +0.1% from a year ago, indicative of an anemic economy. Odds are rising that the world’s second largest economy is slipping into recession, led by weaker exports to the US.
Breakdown of Fiat (paper) Currency System
In a world of fiat (paper) currency, the full faith and trust in a nation’s currency often lies in the policy actions and honesty of its central bankers. Under the Bernanke Fed, global confidence in the US dollar has been badly shaken, and the Fed rookies hand picked by Mr Bush, are just learning about gold’s special role in the international monetary markets.
Trading in the foreign exchange market is akin to a reverse beauty contest, judging the least ugly (least inflated) currency as the winner. So far, only two central banks in Canada and England have shown a interest in joining the Fed’s money printing orgy.
Gold cannot be printed and mining output is 9% lower than a year ago. The Bernanke Fed is playing Russian roulette with the greenback, and a serious breakdown of the fiat (paper) currency system might only be a Fed rate cut or two away.
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Gary Dorsch
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Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.
As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch handled thousands of customer trades in 45 stock exchanges around the world, including Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's and Exchange Traded Funds.
He wrote a weekly newsletter from 2000 thru September 2005 called, "Foreign Currency Trends" for Charles Schwab's Global Investment department, featuring inter-market technical analysis, to understand the dynamic inter-relationships between the foreign exchange, global bond and stock markets, and key industrial commodities.
Copyright © 2005-2007 SirChartsAlot, Inc. All rights reserved.
Disclaimer: SirChartsAlot.com’s analysis and insights are based upon data gathered by it from various sources believed to be reliable, complete and accurate. However, no guarantee is made by SirChartsAlot.com as to the reliability, completeness and accuracy of the data so analyzed. SirChartsAlot.com is in the business of gathering information, analyzing it and disseminating the analysis for informational and educational purposes only. SirChartsAlot.com attempts to analyze trends, not make recommendations. All statements and expressions are the opinion of SirChartsAlot.com and are not meant to be investment advice or solicitation or recommendation to establish market positions. Our opinions are subject to change without notice. SirChartsAlot.com strongly advises readers to conduct thorough research relevant to decisions and verify facts from various independent sources.
Jan 16 2008 3:47PM
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In an age where governments of every political stripe distort data to promote their own self interests, it’s hardly surprising that they present inflation data in a manner that is best suited to their particular needs.
By the same token, it’s entirely natural for official inflation data to be wildly at odds with the reality that is faced by consumers and businesses, and to be regarded with utter disbelief.
So it wasn’t shocking to hear Federal Reserve officials insist last week, that inflation in the United States is under control, before telegraphing another tidal wave of liquidity injections into the US economy in the months ahead. “Stable inflation expectations give the Fed a lot of room for maneuver. If the evidence suggests that substantial policy easing is appropriate, I don’t think we’re going to face a risk of adverse inflation consequences,” said St Louis Fed chief William Poole on Jan 9th.
In an election year for the highest office in the land, American politicians from both sides of the isle, are quick to propose all kinds of fiscal stimulus and pork barrel projects to jump start the sputtering US economy.
But adding more monetary stimulus to the mix has the potential to ignite hyper-inflation in the US economy, and a speculative attack on the US dollar in the $3.2 trillion a day currency market.
“It’s difficult enough to make good policy in a complex economy and complex financial system,” said Fed chief Ben “B-52” Bernanke on January 11th. “Political considerations will play no role, and I assure you as strongly as I can, that we will be objective and analytical, and we’ll do what’s right for the economy,” he said.
It’s now becoming increasing clear, that the only prices the Fed is focusing on these days are home prices and those for toxic sub-prime mortgage debt. The Fed is pegging the federal funds rate in the direction of US home prices, mimicking the Bank of England as an asset targeter.
Last week, nearby futures contracts on the Standard & Poor’s/Case-Shiller, an index of home prices in the top-10 US cities, fell below the 206-level, or roughly 7% lower from a year ago.
Robert Shiller, a Yale University economist, and co-founder of the widely watched house-price index, predicted on Dec 31st, a possibility that the US economy would stumble into a Japanese-style recession, with house prices declining for years. “American real estate values have already lost around $1 trillion. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”
He noted that Chicago futures markets are pricing in further declines in US home prices, with farther dated contracts on the S&P Shiller Index pointing to losses of up to 14 percent. In the third quarter of 2007, US homeowners withdrew $20 billion less in equity from their homes than in the prior quarter, and since housing prices have continued to tumble, the outlook for cash-outs has continued to dim.
Lenders have also grown more cautious in handing out cash through home equity lines of credit since those loans were failing at their highest rate in ten years during the third quarter. If the housing market continues to sink this year, consumers will have less home equity to convert into cash, which could lead to a big pullback in spending. With consumers struggling with high energy costs and a softening jobs market, the drying up of home equity could usher in an economic recession.
Slumping home prices and a softer jobs market, could increase foreclosures on many sub-prime home borrowers, and blow huge craters in the balance sheets of banks and brokers worldwide. Credit Suisse projects 775,000 homes with $143 billion of mortgage debt will go into foreclosure in the next two years. Goldman Sachs estimated that losses in mortgage markets worldwide may reach $726 billion.
Some BBB rated sub-prime mortgage bonds have already tumbled to 16-cents on the dollar from 50-cents last July. AA rated paper isn’t faring much better, fetching only 40-cents in the $1.8 trillion sub-prime mortgage market. On January 15th, Citigroup C.n, the nation’s largest bank, took a fourth-quarter loss of nearly $10 billion, stemming largely from $18 billion of write-downs of sub-prime mortgages.
The deepening gloom in the US financial sector came as Bank of America BAC.n agreed to acquire battered mortgage lender Countrywide Financial CFC.n for $4 billion, to avert one of the biggest collapses due to the toxic sub-prime debt bomb. Merrill Lynch is expected to suffer $15 billion in losses stemming from soured mortgage investments, as the sub-prime debt bomb goes nuclear.
Bernanke Signals more Rate cuts in Q’1
With the US economy sinking deeper into the “Stagflation” trap, and credit worries clogging the arteries of the Libor market, Mr Bernanke shouted loud and clear for the whole world to hear on Jan 10th, that the Fed and the US Treasury (the “Plunge Protection Team” - PPT) have decided to exercise the “Greenspan Put” option, and will simply disregard elevated inflationary pressures in the rest of the economy.
“In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary,” Bernanke said on January 11th. “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks. Inflation expectations are reasonably well anchored,” and he pledged to monitor inflation expectations closely.
For the PPT, the devil of hyper-inflation is preferable to the specter of a bear market for the Dow Jones Industrials and weaker home prices. Exercising the “Greenspan Put,” means the Fed will slash the federal funds rate far below the US inflation rate in the months ahead. But that’s a frightening prospect for foreign holders of $2.3 trillion of US Treasury debt, who must contend with negative interest rates, which in turn, could severely weaken their US dollar denominated investments.
The Fed is signaling aggressive rate cuts at a dangerous time. Inflationary pressures in the US economy are elevated at multi-decade highs. US producer prices were up +6.3% last year, and US consumer prices up +4.1%, the highest in 17-years, compared with +2.5% for 2006. Gasoline costs were up 37%, and food prices were up 9.3% last year, embedding inflation fears into the American psyche.
Thanks to the Fed’s cheap dollar policy, US import prices rose +10.9% in 2007, the largest calendar-year increase since 1987. The Dow Jones AIG Commodity Index soared to an all-time high of 193.25, exerting upward pressure on raw material costs. Only one lone voice of reason from Foggy Bottom is advising caution. “I would be very careful, not to let inflation accelerate too long,” warned Kansas City Fed chief Thomas Hoenig on January 10th.
But Hoenig was rotated off the Fed’s interest rate setting committee, after he dissented against a rate cut in October, in favor of keeping Fed policy on hold. Instead, the politically correct thing to do in Washington these days is to cut rates and drop dollar bills across America from helicopters and B-52 bombers.
The Fed’s big Gamble
The Fed is betting that a sharp slowdown in the global economy will weaken commodity prices, and that Saudi Arabia will pump more oil, to keep inflationary pressures at bay. Until now, the Fed’s rate cutting campaign, its special $80 billion liquidity injection scheme and promises of another big tidal wave of liquidity, have severely weakened the value of the US dollar, which in turn, fueled parabolic rallies in crude oil and precious metals to all-time highs.
Fed rate cuts also fueled Agri-flation worldwide.
In Chicago, March wheat jumped the to $9.40 /bushel, after the USDA reported smaller than expected US plantings for hard red winter wheat. Corn surged to an 11-year high of $5.15 /bushel, on a big drawdown in US corn stocks. July soybeans soared to $13.76 a bushel, buoyed by fears that corn’s surge could cut into soybean plantings for 2008.
Rough rice futures in Chicago hit an all-time high of more than $15 per hundredweight, 37% higher from a year ago. Egypt is a major exporter of rice, but has suspended exports indefinitely, due to hoarding and speculation in its local economy. In Pakistan, armed guards escort trucks carrying high-prized wheat. India will become a net importer of rice this year, for the first time.
Jordan intends to double the stocks of wheat inside its country to 390,000 tons, equivalent to six months of supply, plus a further 130,000 tons purchased and being shipped, representing two months of supply. Doubling wheat stocks is an indication that some major importers see no end to the bull market in Chicago and want to protect themselves. Ocean shipping costs for dry goods have fallen 35% in recent weeks, which may encourage more purchasing of grains.
Bush Seeks Quick Fix to Tame Oil prices
On his arrival in Riyadh on January 15th, President Bush urged Saudi king Abdullah to put more crude oil on the world market, warning that soaring prices could cause an economic slowdown in the United States, and weaken the housing market. “High energy prices can damage consuming economies. When consumers have less purchasing power, it could cause the economy to slow down. I hope OPEC nations put more supply on the market. It would be helpful,” he said.
Saudi Arabia is the only member of OPEC with spare capacity - roughly 2.8 million barrels per day. Saudi Oil chief Ali al-Naimi said on Jan 15th, that Riyadh is ready to boost oil output if the market needed more oil to tame high prices.
“Nobody would look with pleasure on a recession in the United States. Concerns about US economic growth are valid. But the price of oil is more than just the US economy. Global economies are growing despite oil prices ranging between $90 and $100 a barrel,” Naimi said.
For instance, China’s oil imports rose 12% last year to a record 3.26 mil bpd.
But al-Naimi also blamed speculators in London and New York for inflating the price of crude oil by $20 to $30 per barrel. “Twenty to thirty dollars is the outside influence on the price of oil. If you look at who’s in the market, you’ll find a lot financial institutions are speculating, using the market as a hedge.” Still, Naimi wouldn’t say if Riyadh would agree to boost oil output at OPEC’s Feb 1 meeting.
King Abdullah must walk a along a tightrope, balancing his military patron’s request for more oil, against Iran’s opposition to further increases in output, which could hurt Tehran’s oil revenue. On Dec 5th, Iran’s President Mahmoud Ahmadinejad scored a big victory, when he convinced king Abdullah to join the hawks of OPEC – Iran, Libya, and Venezuela, and hold the cartel’s oil output steady at 27.25 million bpd.
“Our position is that demand and supply are balanced and there is no need to increase oil to the market,” said Iranian Oil Minister Gholamhossein Nozari. Still, the key question is which way will Saudi oil policy lean at the upcoming Feb 1st meeting in Vienna, in favor of US Prez Bush or Iran’s Ahmadinejad?
However, Riyadh is keen to keep oil prices elevated within a higher target zone, to sustain the enormous flow of petro-dollars to the Gulf, which has revived the speculative appetite for the local stock market. The Saudi All Share Index hit the psychological 12,000 barrier last week, enriching the brokerage accounts of 7,000 Saudi princes, who control 70% of the market.
Beijing warns US Treasury against further Fed rate cuts
Beijing also finds itself in a tough predicament, with $1.53 trillion of foreign exchange reserves over the past five years, mostly stockpiled in depreciating US dollars. However, Chinese leaders finally woke up to the folly of such a foolish investment policy. “The world’s currency structure has changed,” declared Xu Jian, vice director of the People’s Bank of China (PBoC) on Nov 7th.
“The US dollar is losing its status as the world reserve currency,” he warned. “We will favor stronger currencies over weaker ones, and will readjust accordingly,” added Cheng Siwei, vice chairman of China’s National People’s Congress. On Dec 27th, Hu Xiaolian, director of China’s Foreign Exchange department, wrote, “If the US federal funds rate continues to fall, this will certainly have a harmful effect on the US dollar exchange rate and the international currency system,” he said.
Traders closely watch any change in China’s strategy which could affect exchange rates. China’s central bank is tightening its monetary policy to combat inflation, which is raging ahead at a 6.5% annualized rate. At the same time, the Bernanke Fed is preparing to flood global money markets with another tidal wave of cheaper US$’s. China raised benchmark interest rate six times in 2007, but the benchmark one-year deposit rate of 4.14% is still far lower than the inflation rate.
“We must be sure about one thing, the central bank is moving towards the objective of positive real interest rate instead of moving away from it, “said Yu Yongding, a key advisor to the PBoC, on Janaury 3rd. The next day, the PBoC vowed to further tighten monetary policy in 2008, aiming in particular to prevent inflation from moving from certain sectors to the broader economy.
A year ago, the US Treasury’s 5-year T-note was yielding +2% more than China’s 5-year note. But today, the US T-note yields -1.2% less, putting enormous downward pressure on the US$ /Chinese yuan, and cementing big foreign currency losses in Beijing’s portfolio of US bonds. According to forward traders in Hong Kong, the dollar is expected to fall another 9% to 6.6-yuan over the next 12-months.
Since March 2006, China has been a net seller of US Treasury debt, reducing its exposure from $421 billion to $386.7 billion in November, and seeking to avoid further losses on the dollar’s exchange rate with the yuan. “The weakening dollar and rising global commodity prices is also creating inflationary pressures for China, but a quicker appreciation of the yuan would probably help offset some of those price increases,” said Yao Jingyuan, chief economist of the state statistics agency.
On Jan 16th, the PBOC hiked bank reserve requirements by 0.50% to a record 15%, a move that will drain 200 billion yuan ($28 billion) from the Shanghai money markets. The dollar fell to 7.23 yuan, or -3.2% lower since late October, a faster decline than the -1.2% slide in the US Dollar Index over same period, meaning the yuan is rising at an even faster pace against a basket of six major global currencies, including the Euro, British pound, and Canadian dollar.
Arab Oil kingdoms are Saviors of US$,
Japan is the largest holder of US Treasury debt, but has been a net seller of $46 billion, and South Korea has sold $19 billion over the past 12-months. To pick-up the slack, the Bush administration has relied heavily on the Arab Oil kingdoms, to recycle their bulging petro-dollar surpluses back into US Treasury debt. Since 9/11, America has assumed the financial costs of occupying Iraq, while the Arab oil kingdoms have experienced a staggering infusion of new wealth.
Saudi Arabia has taken in nearly $900 billion in oil revenues over the last six-years, and the emirate of Abu Dhabi has a sovereign wealth fund approximating $1 trillion. There had been a time, in the lean 1990’s, when Saudi Arabia’s debt had reached 120% of Saudi GDP, but today it has fallen to 5 percent. And from a year ago, it is estimated that the Arab oil kingdoms have recycled as much as $227 billion into US Treasuries, mostly through their brokers in London.
In order to keep the archaic dollar /riyal peg intact, the Saudi central bank has more doubled the growth rate of its M3 money supply to 21.6%, to stay ahead the of Bernanke Fed’s 16% expansion of the US M3 money supply. The Saudi central bank has cut its key repurchase rate, the benchmark for deposits, to 4% in tandem with the Fed. But the rapid growth of the money supply pushed Saudi inflation to 6% in October, it’s highest since 1995. Food price inflation hit 7.5 percent.
Inflation in four of the six Gulf Arab oil kingdoms has overtaken official lending rates, encouraging speculation in real estate, which is the main cost of living across the region. Saudis blame King Abdullah’s insistence on pegging the riyal to the US dollar for higher inflation at home. The central bank is handcuffed in the fight against inflation by the riyal’s peg to the dollar, which forces it to track US monetary policy at a time when the Federal Reserve is cutting interest rates.
Those who can afford to buy gold have protected their wealth from the Saudi central’s banks’ money spigots. But most of the Saudi population hasn’t been so fortunate. “We remind you of Prophet Mohammad’s words that you are shepherds who are responsible for your flock,” said 19 well-known clerics, including Nasser Al Omar, on Dec 16th. “The rulers should seek to try to remedy this crisis in a way that would ease people’s suffering. This crisis will have a negative impact on all levels, causing theft, cheating, armed robbery and resentment between rich and poor.”
Bush offers $20 billion arms deal for Saudi Oil
In a keynote speech in Abu Dhabi on January 13th, US President George Bush reminded the leaders of the oil kingdoms of what he called the threat to the world posed by Tehran. “Iran seeks to intimidate its neighbors with missiles and bellicose rhetoric, and its actions threaten the security of nations everywhere. So the United States is strengthening our longstanding security commitments with our friends in the Gulf to confront this danger before it is too late,” he warned.
The underlying message is simple, in return for American military protection against Iran, the Bush clan expects the Arab oil kingdoms to stick with their archaic dollar pegs, and recycle much of their oil surplus into US Treasuries. To keep the Saudi petro-dollars flowing into US Treasury debt, Bush offered Riyadh a $20 billion package of advanced weaponry, to shore up their defenses against Iran.
Still, Saudi Arabia and other Gulf Arab states are looking beyond the last 12-months of the Bush presidency, and are determined to maintain good relations with Iran, which might only be a few years away from acquiring nuclear weapons.
“We’ll listen to everything the president says. He can raise any issue he likes. We’re a neighbor to Iran in the Gulf, which is a small area, so we’re keen for harmony and peace among countries in the area,” said Foreign Minister Saud al-Faisal.
Saudi Arabia invited Iran’s Ahmadinejad to the Haj in Mecca in December and Qatar invited Ahmadinejad to a summit of the Gulf Cooperation Council (GCC) last month.
Bush spoke with the Saudi king in his opulent palace. Its marble floors and walls contain sheets of gold, colored with precious stones and embedded jewels. The king also invited Bush to his lavish horse farm where 150 Arabian stallions are stabled, as a payback to his visit to the Bush ranch in Crawford, Texas.
European Central Bank Rules out Rate cuts
The Bernanke Fed is playing Russian roulette with the US dollar, reckoning that other central banks will eventually join its money printing orgy, to prevent their currencies from rising sharply higher against the greenback. But while the Fed is trying to brainwash the media into believing that inflation is under control, ECB chief Jean “Tricky” Trichet has flatly ruled out any Euro rate cuts in the months ahead, arguing that inflation is a major threat faced by the Euro zone.
On Jan 10th, Trichet was asked whether it was correct to say the ECB had a bias to tighten rates, “We are certainly not neutral,” warning the ECB is not prepared to tolerate a wage-price spiral triggered by higher food and oil prices. Speaking on French television on January 14th, Trichet rebuffed suggestions by French government officials, that the ECB should pay more attention to stimulating growth, like the Federal Reserve, rather than focusing on keeping inflation under control.
“There is not one European to say that now is the moment to be particularly lax in the matter of fighting inflation,” Trichet declared. ECB member Michael Bonello backed his new boss, “The bank remains prepared to act to insure that the upside risks to price stability, which are clearly mounting at the moment, do not materialize,” he said. Austrian central bank chief Klaus Liebscher added, “We have clear upward risks from inflation, $95 per barrel of oil and dramatic food price increases. On top of this, we could see second round effects,” he said.
Compared to the reckless amateurs at the Federal Reserve, ECB officials are sounding more responsible and like stalwart guardians of the Euro’s purchasing power. But one must also keep in mind, that the ECB is inflating its M3 money supply at a record 12.3% annual rate. In doing so, the ECB has been a major accomplice to the historic rally in food and energy prices over the past few years.
The ECB is now warning Euro zone workers to avoid asking for higher wages, which they seek to compensate for the inflation that was created by the central bank itself. “Wages must not seek to catch up with prices to compensate for a weakening in purchasing power following this price rise,” warned Italy’s central bank chief Bini Smaghi on Jan 14th. “Otherwise inflation might not go down and at that point there won’t be any other solution than a monetary tightening,” he said.
On January 15th, Bundesbank chief Axel Weber said there were signs that wage pressure and inflation expectations were starting to drift up. “The currently noticeable higher rates of inflation in Germany and the Euro area overall should not be the yardstick for upcoming wage negotiations. We are observing current developments very carefully and, if needed, action will follow our words."
Around 2 million German public sector workers are seeking an 8% increase in wage talks which began last week, while German train drivers have already secured an 11% raise. German union bosses are calling the ECB’s bluff, figuring the central bank does not have the green light from government finance officials for a rate hike, given the severity of the credit crunch in the Euro Libor markets.
Bank of Japan is Silent on dollar’s Slide to 106-yen
Japan’s ministry of finance is the most notorious manipulator of inflation data, and for good reason. Japan’s outstanding public debt is 776 trillion yen ($7.25 trillion), or roughly 147% of gross domestic product, the highest among leading industrialized countries. In order to keep its interest rates and debt service costs low, Tokyo’s uses fuzzy math to calculate it inflation rate, to provide the Bank of Japan with the political cover to peg its overnight loan rate at an abnormally low 0.50 percent.
Japan imports almost all of its oil, or 4.2 mil bpd, and is the world’s third-largest oil consumer after the US and China. Japan runs an industrial economy and is only 40% self sufficient in agricultural commodities, so 60% of its domestic demands for food and agricultural products are imported. Yet Tokyo claims that Japan’s consumer price index is only +0.4% higher from a year ago, by far the lowest on the planet, despite a near doubling of food and energy prices from a year ago.
Japan has an enormous stash of cash, and can easily afford to pay for sharply higher prices for food and energy imports. Japan’s current-account surplus, the widest measure of a country’s financial performance on an international basis, expanded 46% to 2.2 trillion yen ($20.1 billion) in October from a year earlier. Japan’s foreign exchange reserves rose 9% to a record $973 billion last year, and are the world’s second largest behind China’s $1.53 trillion.
Currency traders are attracted to the yen because of Japan’s large external surpluses, but are also discouraged from buying the currency, because of abnormally low interest rates for Japanese bonds. On the flip side, global traders have borrowed $1.2 trillion in Japanese yen at 1% or less, to purchase stocks and commodities on worldwide exchanges, popularly known as the ”yen carry” trade.
Recently, the US$ has been tumbling against the yen, because the US Treasury’s 2-year note yield has plunged from +394 basis points above the Japanese 2-year yield to as low as +250 bp over the past two months. And in a chain reaction, Japan’s Nikkei-225 plunged to a 26-month low, as key exporters sank on fears of a possible recession in the US market and the surging yen. A weaker dollar will hurt exporter profits earned in the US, when converted back into yen.
Thus, unilateral Fed rate cuts have become a big headache for Tokyo’s financial warlords. Yet Japanese finance officials were surprisingly silent this week, as the dollar fell below 109-yen, previously regarded as the MoF’s red line in the sand, where intervention was expected to defend the dollar. The lack of intervention raises the possibility that Tokyo may have acquiesced to a stronger yen, in order to help dampen the high cost of imported food and energy.
Traders might probe the dollar’s downside, until subtle threats of intervention are sounded out by the MoF. There is also simmering speculation that the BoJ might lower its overnight loan rate to zero percent, after BoJ chief Toshihiko retires in March. The yield of two-year Japanese government bonds fell to 0.60%, just 10 basis points above the overnight call rate target.
A rate cut to zero percent could raise speculation of the BOJ returning to “quantitative easing”, a policy of force-feeding banks with excess cash to kick-start the economy. Annual growth in Japanese bank lending has slowed to +0.1% from a year ago, indicative of an anemic economy. Odds are rising that the world’s second largest economy is slipping into recession, led by weaker exports to the US.
Breakdown of Fiat (paper) Currency System
In a world of fiat (paper) currency, the full faith and trust in a nation’s currency often lies in the policy actions and honesty of its central bankers. Under the Bernanke Fed, global confidence in the US dollar has been badly shaken, and the Fed rookies hand picked by Mr Bush, are just learning about gold’s special role in the international monetary markets.
Trading in the foreign exchange market is akin to a reverse beauty contest, judging the least ugly (least inflated) currency as the winner. So far, only two central banks in Canada and England have shown a interest in joining the Fed’s money printing orgy.
Gold cannot be printed and mining output is 9% lower than a year ago. The Bernanke Fed is playing Russian roulette with the greenback, and a serious breakdown of the fiat (paper) currency system might only be a Fed rate cut or two away.
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Gary Dorsch
****
Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.
As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch handled thousands of customer trades in 45 stock exchanges around the world, including Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's and Exchange Traded Funds.
He wrote a weekly newsletter from 2000 thru September 2005 called, "Foreign Currency Trends" for Charles Schwab's Global Investment department, featuring inter-market technical analysis, to understand the dynamic inter-relationships between the foreign exchange, global bond and stock markets, and key industrial commodities.
Copyright © 2005-2007 SirChartsAlot, Inc. All rights reserved.
Disclaimer: SirChartsAlot.com’s analysis and insights are based upon data gathered by it from various sources believed to be reliable, complete and accurate. However, no guarantee is made by SirChartsAlot.com as to the reliability, completeness and accuracy of the data so analyzed. SirChartsAlot.com is in the business of gathering information, analyzing it and disseminating the analysis for informational and educational purposes only. SirChartsAlot.com attempts to analyze trends, not make recommendations. All statements and expressions are the opinion of SirChartsAlot.com and are not meant to be investment advice or solicitation or recommendation to establish market positions. Our opinions are subject to change without notice. SirChartsAlot.com strongly advises readers to conduct thorough research relevant to decisions and verify facts from various independent sources.
The Road to $200-a-Barrel Oil!
by Sean Brodrick
Dear Jack,
They say the highway to hell is paved with good intentions. I think the same can be said for the road to $200-a-barrel oil. And the car on that road will be the Nano, the new ultra-cheap vehicle from India's Tata Motors.
See, the Nano will be sold for less than $2,500, which suddenly puts car ownership within reach for a huge slice of India's population.
On the surface, that sounds like a good thing, right? But consider this ...
In the U.S. we have 1,000 cars for every 1,000 adults.
In Germany, it's 550 cars for every 1,000 adults.
While in India, there are just four cars for every 1,000 adults, and a population of 1.1 billion people!
In other words ...
Growing Car Ownership in India Means
Millions and Millions of New Gas Guzzlers!
The Indian government is actively promoting car ownership. It hopes to QUADRUPLE automotive sales by 2016.
Tata's Nano is going to make driving very affordable in India ...
But in light of the new, super-cheap Nano, India will likely hit and exceed those sales targets a lot faster!
Look, India's economy is growing at a staggering 9% for the third year in a row. At this rate, a lot more people will be catapulted into the middle class a lot sooner than planned.
Plus, India is one of the few countries in the world where a population boom means the population is getting younger. Young people tend to spend more and save less. Result — if current trends hold, consumer spending could quadruple by 2025 to $1.5 trillion.
India's middle class — those with annual disposable incomes between $4,380 and $21,890 in current dollars — will increase more than tenfold to 583 million by 2025, according to experts. Quite a lot of those people are going to have no problem affording cars like the new Nano!
In the process, India's demand for fuel should surge. The country already imports more than 70% of its oil, and its gasoline demand is already growing at 7% year over year.
Do you think gasoline prices are expensive now? Just wait until 583 million Indians start filling their roads with cheap cars! Of course ...
Chinese Drivers Aren't Exactly
Sitting on their Hands, Either!
India is the second-fastest growing auto market ... and China is the fastest! The country is already putting 14,000 new cars on the road EVERY DAY.
No wonder China's demand for oil rose from 5.6 million barrels per day in 2003 to a whopping 7.6 million in 2007! What's more, China's oil demand will increase another 5.7% this year, according to the International Energy Agency.
And just wait until they start flooding their own market with cheap cars!
China and India will cause a huge spike in oil consumption!
The cheapest car in China sells for twice the Nano's sticker price. But you can bet Beijing will either come up with its own ultra-cheap "people's car" or import them from India.
Bottom line: The Indians and Chinese are going to create huge demand for oil as they take up driving.
And their car-razy obsession is being repeated across all the emerging markets, turning pain at the pump into panic. Just last year, we saw fuel riots in Pakistan, China, and across parts of Africa ... while last week, Iran erupted in riots over fuel. Mobs attacked government buildings and called their leaders "thieves and murderers."
Clearly, the world is getting thirstier and thirstier for fuel, but ...
Where Is All the Oil
Going to Come from?
Unfortunately, the supply side of the oil chain is suffering a crisis of its own.
I've been pounding the table about the looming disaster in Mexico's Cantarell oil field, one of the biggest oil fields in the world. But the news there just gets worse and worse!
If current trends continue, Mexico, one of America's biggest suppliers of imported oil, will become an oil importer in just eight years.
Mexico's oil production fell 8.2% in November from the same period a year earlier. At the root of this is a three-year, 40% decline at Cantarell.
Mexico's state-owned oil company, Pemex, is trying to reverse the ugly trend by investing $2.4 billion into Cantarell this year alone. Pemex says this should slow the decline to half of last year's pace.
That's still bad news!
Instead of a decrease of 400,000 barrels a day, Pemex hopes Cantarell will lose just 200,000 barrels of daily output by year's end. Beyond that, Cantarell's production should continue to decline 10% a year.
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Pemex hoped to compensate for the decline by boosting production at its other oil fields. But the company admits that production at its next biggest field, Ku-Maloob-Zaap, also ranked in the world's top 20 fields, will start its own decline in 2011.
Another massive field, Chicontepec, will need more than 15,000 wells to develop properly. In its entire existence since 1938, Pemex has drilled only 23,000 wells.
WARNING: I can't over-emphasize the seriousness of this. There are only four oil fields in the world that produce more than one million barrels per day — Cantarell is one of them. It currently produces 1 of every 50 barrels of oil on the world market.
And it could suffer a "catastrophic" collapse — if sea water encroaches too far on the pillar of oil and gas in Cantarell, production could fall off a cliff.
That would have devastating repercussions at America's gas pumps and beyond. Worse yet ...
The Problems Don't Stop in Mexico ...
Or Anywhere Else, for that Matter!
On Monday, Qatar's Energy Minister Abdullah al-Attiyah said OPEC had no control over prices. "OPEC (members) are only oil producers, they are not fixing prices. They can't control the market forces," al-Attiyah told reporters.
He is only the latest OPEC oil minister to say that. If you had a product that sold for over $100 a barrel, wouldn't you pump as much of it as you could?
In fact, OPEC members cheat on their quotas when they can. I think they're going flat-out. I believe we have hit Peak Oil. In other words, I think the world is close to producing as much oil as it can. From here, production should go downhill, and prices should go way, way up.
U.S. crude oil stockpiles have been declining steadily since June and are at a three-year-low. At the same time, the price of oil is near an all-time high. It's the simple law of supply and demand — and that squeeze is getting worse ...
According to the EIA, global oil demand will average 87.8 million barrels per day (bpd) in 2008, which equals 1,016 barrels per second — a sonic boom of energy use!
I think oil prices could go higher — a lot higher — without seriously derailing our economy. Heck, we were told that $50 oil would cause the economy to collapse ... then $60 oil ... then $70 oil. Now we're near $100 for a barrel of oil, and the economy, while wobbling, keeps sputtering along.
Meanwhile, about 3.5% of U.S. household budgets now goes to gasoline and fuel costs, according to the U.S. Bureau of Economic Analysis. While that's up from 3% in the fourth quarter of 2006, it's down from 5.2% in 1981, when oil prices, adjusted for inflation, were about where they are today.
Translation: Americans can afford higher prices.
That's not to say prices can't zig and zag — but the general trend should be up. Way, way up.
In the Process, Smart Energy
Investors Stand to Make a Fortune!
While a lot of consumers are going to lose from higher energy prices, the oil companies are going to rake in money hand over fist. And so will their investors.
Look, the situation isn't pretty. But you can either sit around and let higher energy prices affect you, or you can protect yourself — and profit — before it's too late.
You can find plenty of these power-packed stocks in the Energy Select SPDR (XLE), or one of the other energy sector ETFs that are stuffed with larger-cap oil & gas companies.
Of course, I'd rather you target the very best individual companies, such as ...
Pick #1. An up-and-coming integrated oil company that is finding more oil than it pumps — growing reserves and pumping up profits!
Pick #2. A treasure-chest of a Canadian oil sands company — it has found a way to control costs and is bringing new projects online this year. The market hasn't uncovered this northern gem yet, but it will!
Pick #3. Sometimes the best money is made by selling equipment to the prospectors. That's why I like this oil fields equipment provider that's ringing up revenues as the global quest for oil kicks into high gear!
In all, I've hand-picked five stocks and two red-hot funds that are ready to zoom higher along with oil prices. And I've put them in a special report that I'm going to send out in less than 24 hours.
I'm selling this report — including three follow-ups — for $199. I think it would be cheap at triple the price, but if you contact us at 1-800-291-8545 by midnight tonight, and mention my name, you can reserve a copy for the low pre-publication price of just $99. You can also secure your copy online by clicking here.
Then, on January 17, we'll email you a PDF copy so you can jump on my red-hot recommendations as soon as they come off the press.
The best part is that we're seeing a short-term pullback in oil prices right now, which will give you an excellent buying opportunity.
Wall Street didn't see $100-a-barrel oil coming, and it's not prepared for $150 or $200 oil, either. But you can be prepared — to protect your portfolio and potentially reap a whirlwind of gains.
Good luck and good trades,
Sean
Dear Jack,
They say the highway to hell is paved with good intentions. I think the same can be said for the road to $200-a-barrel oil. And the car on that road will be the Nano, the new ultra-cheap vehicle from India's Tata Motors.
See, the Nano will be sold for less than $2,500, which suddenly puts car ownership within reach for a huge slice of India's population.
On the surface, that sounds like a good thing, right? But consider this ...
In the U.S. we have 1,000 cars for every 1,000 adults.
In Germany, it's 550 cars for every 1,000 adults.
While in India, there are just four cars for every 1,000 adults, and a population of 1.1 billion people!
In other words ...
Growing Car Ownership in India Means
Millions and Millions of New Gas Guzzlers!
The Indian government is actively promoting car ownership. It hopes to QUADRUPLE automotive sales by 2016.
Tata's Nano is going to make driving very affordable in India ...
But in light of the new, super-cheap Nano, India will likely hit and exceed those sales targets a lot faster!
Look, India's economy is growing at a staggering 9% for the third year in a row. At this rate, a lot more people will be catapulted into the middle class a lot sooner than planned.
Plus, India is one of the few countries in the world where a population boom means the population is getting younger. Young people tend to spend more and save less. Result — if current trends hold, consumer spending could quadruple by 2025 to $1.5 trillion.
India's middle class — those with annual disposable incomes between $4,380 and $21,890 in current dollars — will increase more than tenfold to 583 million by 2025, according to experts. Quite a lot of those people are going to have no problem affording cars like the new Nano!
In the process, India's demand for fuel should surge. The country already imports more than 70% of its oil, and its gasoline demand is already growing at 7% year over year.
Do you think gasoline prices are expensive now? Just wait until 583 million Indians start filling their roads with cheap cars! Of course ...
Chinese Drivers Aren't Exactly
Sitting on their Hands, Either!
India is the second-fastest growing auto market ... and China is the fastest! The country is already putting 14,000 new cars on the road EVERY DAY.
No wonder China's demand for oil rose from 5.6 million barrels per day in 2003 to a whopping 7.6 million in 2007! What's more, China's oil demand will increase another 5.7% this year, according to the International Energy Agency.
And just wait until they start flooding their own market with cheap cars!
China and India will cause a huge spike in oil consumption!
The cheapest car in China sells for twice the Nano's sticker price. But you can bet Beijing will either come up with its own ultra-cheap "people's car" or import them from India.
Bottom line: The Indians and Chinese are going to create huge demand for oil as they take up driving.
And their car-razy obsession is being repeated across all the emerging markets, turning pain at the pump into panic. Just last year, we saw fuel riots in Pakistan, China, and across parts of Africa ... while last week, Iran erupted in riots over fuel. Mobs attacked government buildings and called their leaders "thieves and murderers."
Clearly, the world is getting thirstier and thirstier for fuel, but ...
Where Is All the Oil
Going to Come from?
Unfortunately, the supply side of the oil chain is suffering a crisis of its own.
I've been pounding the table about the looming disaster in Mexico's Cantarell oil field, one of the biggest oil fields in the world. But the news there just gets worse and worse!
If current trends continue, Mexico, one of America's biggest suppliers of imported oil, will become an oil importer in just eight years.
Mexico's oil production fell 8.2% in November from the same period a year earlier. At the root of this is a three-year, 40% decline at Cantarell.
Mexico's state-owned oil company, Pemex, is trying to reverse the ugly trend by investing $2.4 billion into Cantarell this year alone. Pemex says this should slow the decline to half of last year's pace.
That's still bad news!
Instead of a decrease of 400,000 barrels a day, Pemex hopes Cantarell will lose just 200,000 barrels of daily output by year's end. Beyond that, Cantarell's production should continue to decline 10% a year.
Internal Sponsorship
$915 GOLD!
The rules have changed. Across Asia ... Europe ... and here in the Americas ... millions of uncertain investors are suddenly seeking safety above all else.
How will this new risk aversion impact your stocks, funds and other investments in the months to come? Which investments in your portfolio are most likely to crater? Where are the greatest profit opportunities ahead?
We're hosting an historic online event on Tuesday, January 22 to get you the answers you need to protect yourself and profit ... Registration is free — but you must reserve your place now!
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Pemex hoped to compensate for the decline by boosting production at its other oil fields. But the company admits that production at its next biggest field, Ku-Maloob-Zaap, also ranked in the world's top 20 fields, will start its own decline in 2011.
Another massive field, Chicontepec, will need more than 15,000 wells to develop properly. In its entire existence since 1938, Pemex has drilled only 23,000 wells.
WARNING: I can't over-emphasize the seriousness of this. There are only four oil fields in the world that produce more than one million barrels per day — Cantarell is one of them. It currently produces 1 of every 50 barrels of oil on the world market.
And it could suffer a "catastrophic" collapse — if sea water encroaches too far on the pillar of oil and gas in Cantarell, production could fall off a cliff.
That would have devastating repercussions at America's gas pumps and beyond. Worse yet ...
The Problems Don't Stop in Mexico ...
Or Anywhere Else, for that Matter!
On Monday, Qatar's Energy Minister Abdullah al-Attiyah said OPEC had no control over prices. "OPEC (members) are only oil producers, they are not fixing prices. They can't control the market forces," al-Attiyah told reporters.
He is only the latest OPEC oil minister to say that. If you had a product that sold for over $100 a barrel, wouldn't you pump as much of it as you could?
In fact, OPEC members cheat on their quotas when they can. I think they're going flat-out. I believe we have hit Peak Oil. In other words, I think the world is close to producing as much oil as it can. From here, production should go downhill, and prices should go way, way up.
U.S. crude oil stockpiles have been declining steadily since June and are at a three-year-low. At the same time, the price of oil is near an all-time high. It's the simple law of supply and demand — and that squeeze is getting worse ...
According to the EIA, global oil demand will average 87.8 million barrels per day (bpd) in 2008, which equals 1,016 barrels per second — a sonic boom of energy use!
I think oil prices could go higher — a lot higher — without seriously derailing our economy. Heck, we were told that $50 oil would cause the economy to collapse ... then $60 oil ... then $70 oil. Now we're near $100 for a barrel of oil, and the economy, while wobbling, keeps sputtering along.
Meanwhile, about 3.5% of U.S. household budgets now goes to gasoline and fuel costs, according to the U.S. Bureau of Economic Analysis. While that's up from 3% in the fourth quarter of 2006, it's down from 5.2% in 1981, when oil prices, adjusted for inflation, were about where they are today.
Translation: Americans can afford higher prices.
That's not to say prices can't zig and zag — but the general trend should be up. Way, way up.
In the Process, Smart Energy
Investors Stand to Make a Fortune!
While a lot of consumers are going to lose from higher energy prices, the oil companies are going to rake in money hand over fist. And so will their investors.
Look, the situation isn't pretty. But you can either sit around and let higher energy prices affect you, or you can protect yourself — and profit — before it's too late.
You can find plenty of these power-packed stocks in the Energy Select SPDR (XLE), or one of the other energy sector ETFs that are stuffed with larger-cap oil & gas companies.
Of course, I'd rather you target the very best individual companies, such as ...
Pick #1. An up-and-coming integrated oil company that is finding more oil than it pumps — growing reserves and pumping up profits!
Pick #2. A treasure-chest of a Canadian oil sands company — it has found a way to control costs and is bringing new projects online this year. The market hasn't uncovered this northern gem yet, but it will!
Pick #3. Sometimes the best money is made by selling equipment to the prospectors. That's why I like this oil fields equipment provider that's ringing up revenues as the global quest for oil kicks into high gear!
In all, I've hand-picked five stocks and two red-hot funds that are ready to zoom higher along with oil prices. And I've put them in a special report that I'm going to send out in less than 24 hours.
I'm selling this report — including three follow-ups — for $199. I think it would be cheap at triple the price, but if you contact us at 1-800-291-8545 by midnight tonight, and mention my name, you can reserve a copy for the low pre-publication price of just $99. You can also secure your copy online by clicking here.
Then, on January 17, we'll email you a PDF copy so you can jump on my red-hot recommendations as soon as they come off the press.
The best part is that we're seeing a short-term pullback in oil prices right now, which will give you an excellent buying opportunity.
Wall Street didn't see $100-a-barrel oil coming, and it's not prepared for $150 or $200 oil, either. But you can be prepared — to protect your portfolio and potentially reap a whirlwind of gains.
Good luck and good trades,
Sean
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