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USDOLLAR PROPS & PITFALLS
The USDollar has enjoyed a substantial and generous bounce since the new year began. Traders call it an “oversold” rally. As measured by the inadequate DXY index, the 80 level was indeed defended. (Its inadequacy as an index derives from the 1960 decade trade weighting, where the euro is given 4x the weight of the Japanese yen, and the Chinese yuan is given zero weight.) When the world had no further doubt that four more years of US debt, currency, and economic mismanagement was in store, complete with huge and unaddressed twin deficits, it sold off the USDollar with a running start before and after the presidential election. From early October to the end of December of 2004, the DXY fell below 87 support, then below critical 85 support. When the USDollar broke down below DXY 81 in the last week of the old year, gold was $12 below its recent high. Gold was $456 in the first week of December, when the DXY came off the 81 low. Three weeks later, gold was only at $444 when the DXY actually broke below 81.
Thus the signal of a US$ rebound, a long-term counter-trend rally in a strong bounce. From a technical perspective, a bounce to DXY 85 was a nobrainer. Whether it would rise to the congested zone of 87 to 90 is another question. A worthwhile review might be to list the many props holding up the USDollar, offering it an assist or push uphill. In contrast, list also the many pitfalls doubtless to prevent the rise from gaining too much momentum. The clownbuck is a crippled relic of an abused I.O.U. to be sure. It is the instrument of the grandest confidence game since the South Sea travesty. Alan Greenspan is the modern day John Law. Money is printed. Debt is issued. Foreigners buy it up with a certain degree of obligation. Then we downgrade it. We run quite the racket.
In the view of this analyst, the USDollar without question will falter, weaken, then stagger to the point coincident with a global war over natural resources in the coming few years. That asset grab is underway, much like the great homestead rush in the 19th century prairies, from which was born the nicknames Oklahoma Sooners and Kansas Jayhawks. The USA continues its pre-occupation with paper and war, evermore printed paper to sustain a gutted economy struggling through the charred remains of the great tech/telecom bust, and evermore war to secure the necessary resources which we as a nation must either import or seize, surely not denied. During these early skirmishes in the resource wars, the ebb & flow of the USDollar’s downward spiral make for fascinating clashes between paper & valid, between old & new, good & evil, between once powerful & nascent forceful. In the balance is the fate of the US Economy, long deprived of real wealth production despite the incessant propaganda spewed by both USGovt agencies and Federal Reserve pronouncements. It has sadly morphed into two chambers, first the distressed real economy where things are made (only remnants left) and serviced (under siege to India), second the financial sector where inflation is their coveted lifeblood if not addicted elixir.
Look for the USDollar, as measured in the DXY index, to find enormous and powerful resistance in the 85-87 zone. The long-term bear market downtrend channel which held firmly in the 2004 counter-move (May, August) is again at work NOW. The December trade gap news put a temporary end to the US$ rally. Jan2004 and Feb2004 support reversals at 85 provide a powerful resistance NOW. The 50-week moving average stands at 87 but continues to turn down, although with softened slope. We might see a brief move above 86, which will be accompanied by a euro move below 127 and a yen move below 94. Worst case scenario is for the DXY to reach 87 and test 90. Exhaustion soon will end this counter-trend rally.
THE USDOLLAR PROPS:
Few are the props which buoy the buck these days, but they are significant. The Fed is not finished with its tightening cycle. The short-term rate target in the USA sits 0.50% above that of Europe’s, an incentive to own US$-based bonds. The Fed Funds target is sure to go higher, uncertain to be matched by the Euro Central Bank. In an era where futures contracts are intertwined among USTBonds, EuroDollars, EuroBonds, Yield Spreads, the euro currency, and gold, interest rates at times can matter more than capital flows on the tail end of international trade. Rate spreads between the large bond markets at times dominate over chronically crippled fundamentals (rescued by intervention). Look for the Fed, led by Greenspan, to go too far. He always goes too far, hitting the upper guard rail in 2000 and the lower guard rail in 2004. His fame (or infamy) owes to his role as monetary drug dealer far more than to competent banking policymaker. The Fed loosened from 1996 to 2000 even after his warnings of irrational exuberance were ignored. The Fed tightened right through the stock bust five years ago. It is highly likely to tighten here and now to excess, since its myopia in reading the economy is well established. An accident on the upside for rates would help the USDollar in fleeting fashion.
USGovt budget austerity, or the pretense of it, even a suspicious whiff of it, has helped to give some lift under the USDollar’s wings. A fiscal deficit of only $420 billion might be an improvement over past records. The perplexing part: where exactly is the tax revenue from all the jobs created and reported with fanfare during the summer and autumn campaign, which if authentic would be reducing the deficit from the sheer force of economic growth? Out of character in recent weeks, the current Administration seems serious in its new religion to reduce the deficit, provided defense and security budgets are left intact. Perhaps some backroom pressure from Chairman Greenspan motivated our president to alter a course steeped in red ink for the first four-year term, burdened off the main balance sheet by military costs. He seeks an elusive legacy. Even minor reductions to the deficit are perceived as an improvement to the status quo. Lower budget deficits would mean less borrowing pressure, a move in the fiscally prudent direction. Perception of lower deficits would help the USDollar.
The Chinese yuan currency has become a bone of contention among world finance ministers. The reluctance by Beijing to adjust and revalue upward its yuan (renminbi) currency, despite the overwhelming need to do so, has granted the USDollar a reprieve, some time before a higher exchange rate is set. A gargantuan (and growing) bilateral trade deficit can be directed lower only if a higher exchange rate is made to work, either by market forces or an altered currency regime (aka peg). The trade gap with China had grown from $11.5 billion in Jan2004 to a high of $16.6 billion in Nov2004. Beijing has let it be known it will not be coerced or bedraggled. It will alter its currency regime when it sees fit, when the time is best suited in Chinese interests. The dreaded peg is not to be dismantled just yet, and in the meantime any delay helps to keep the USDollar aloft.
In a strange way, the successful Iraqi elections offer hope that US troops might someday head home. My personal view is that hope is misplaced, although noble. With a Shiite majority dominant in the new parliamentary government, the new challenge is the sharing of power in an equitable and just manner. Such unfolding of meted justice and evenhanded dispensation of power is hardly something to expect in Iraq, given its history and inbred distrust of both Great Britain and the United States. Critics maintain that elections only served to provide target identification in a civil war which began the day Baghdad fell two years ago. In addition, reliance upon newly trained and inexperience Iraqi security troops to prevent violence and to disrupt the pattern of bombings, suicide attacks, and assassinations is reminiscent of the absurd expectation that the Nguyen Van Thieu regime could do the same in Viet Nam 40 years ago. What most Americans fail to realize is that the entire democracy movement is perceived by a billion Moslems as a direct assault against Islam. Americans have come to separate government from religion in a peaceful coexistence. In the minds and hearts of Moslems, theocracy is of paramount importance and of high priority to preserve. To do otherwise would be an assault against Allah. Regardless, hope is raised and the glimmer of lower future military costs lies over the horizon. Lower costs mean reduced USGovt borrowing, and less pressure on the USDollar. In the best case scenario, an outbreak of peace in the Persian Gulf would be very positive for the USDollar.
The new diplomatic initiative led by Secy State Condaleezza Rice to smooth over relations with European leaders has all the earmarks of rapprochement. The spirit of the initiative is to patch up differences over the Iraqi War and its fleeting justifications. The guts of the initiative are to generate some assistance in training security forces in Iraq and to share their costs. The effort can use more help than Britain, Italy, and Poland. Somehow about 50 key nations have abstained to date. Room for improvement runs deep. The NATO alliance will be hard to shatter, even if damaged. Improved relations can only help the embattled USDollar, caught in the crossfire from this so-called war on terrorism. If it is actually a war to seize oil supplies or a war against Islam, then all hell will break loose in a matter of months.
THE USDOLLAR PITFALLS:
Many are the pitfalls that plague the USDollar, some massive with others noteworthy. The leading danger is for a US Economic slowdown to be revealed. It could happen from natural imbalanced forces like the absent manufacturing base, from minimal business investment, from inadequate job creation, from debt burden suffocation, and most deadly, from reversal of the many bond bubbles (Treasurys, mortgages, housing). An economic slowdown, even a clear stall, would interrupt Fed hikes and might bring an end at, say 3.0% or so. A slowdown would trash the attractiveness of the USDollar. The Federal Reserve is hardly invulnerable to a grand misread of inherent economic strength. The bureaucratic reports on the economy might have convinced the Fed of far more strength than exists. Could the Fed be a victim of its own statistical spew? A “neutral” Fed could be manifested at a much lower rate than typically seen in past cycles. It admittedly cannot recognize bubbles of its own making, cannot comprehend the nature of technology nor its effect on productivity and labor. The Fed has blessed asset inflation as wealth generation in the most queer of central bank assessments in modern history. An error by the Fed would result in a rapid cascade downward for the USDollar, as investment prospects would dim.
While budgetary discipline sounds good on the surface, actual budget cuts of 150 programs might contribute to stall the economy from lost stimulus. The US Economy has been behaving like a hedge fund for several quarters, far too dependent upon easy money for speculation and liberal finance terms for basic commerce. With lost legitimate income generation, it must resort to its vast inflationary machinery and direct government stimulus. A flatter yield curve shifts pressure on the direct stimulus to come through and save the day. Removed domestic support to deny agricultural subsidies, education funding, and health care spending could spawn a powerful headwind to the fragile economy. The specter of Social Security reform would expose $170B in additionally needed federal budget funding. For this reason, my expectation is for both political parties to back off on such reform in a display of prudence and cowardice.
Progress is reported on movement toward trading of Chinese yuan at the MERC. If a known date is announced, even if several months away, for relaxation of the Chinese currency peg, then a swift devaluation of the USDollar would likely be immediate. Given the $15 to $16 billion monthly bilateral deficit with China, the FOREX market might inflict deep wounds on the USDollar, or reward the Chinese yuan with deep value. Debate over its effect and considerable disagreement would ensue. Enormous political debate would be sure to come. My view is that all of the Asian currencys would jettison higher, to follow the Chinese lead. As that occurs, the worldwide perception would emerge that China is the new geopolitical powerhouse, to be followed. Failure to follow would be to face the perilous risk of lost competitiveness.
Launch of Senate trade sanction against China, first salvo in trade war, would have an unclear effect on the USDollar. If resisted by Beijing, then higher costs would be spread across the US Economy in the form of imposed tariffs. Higher prices from Wal-Mart to Best Buy to Staples to KMart to Home Depot would act like a giant wet blanket on the cornerstone retail sector. If consumer spending faltered as a result, then the world’s largest economy would be at risk of recession. On the other hand, if Beijing complied with upward currency revaluation under political pressure, then see the above paragraph. The USDollar would suffer. With trade war salvos, either way, the US$ exchange rates would decline.
Opening a new war front with Iran after an Iraqi “victory” would tarnish the USA image immeasurably. Additional adventures into Iran would ruin all the progress in Iraq, provided peace indeed breaks out between the Tigris and Euphrates. Bear in mind that Sunni elements largely refused to participate in the election, whereas the Kurds will hold roughly 25% of seats. Attacks on Iran would surely destabilize Iraq, since it would be ruled by the Shiite sect, even in a coalition. Defense budget costs would torpedo the federal budget process once again, as it has done since 2003. The USDollar would suffer, especially if Europe and Asia judged our actions as unwarranted. Credibility might be difficult to maintain with claims of nuclear armament in Iran’s capital of Teheran, after it was lost over weapons of mass destruction. If war breaks out on even a moderate scale, new larger expected costs would emerge as far as the eye can see.
If the tragedy of high-level Iraqi assassinations occurrs, the herald of civil war would be as clear as a bell even to Pentagon hardliners. Fully anticipated by the war’s critics, key deaths of Iraqi leaders could be absorbed if limited. If retaliatory sectarian murders are carried out, then we have the worst case scenario and utter chaos to deal with. The war on terrorism could degrade into a war against Islam with assassinations. The USA and the USDollar would be caught in the middle. In general, wider conflict in the Persian Gulf region could possibly accelerate the transformation from the Petro-Dollar system to the new Petro-Euro system, since the USDollar would be closely tied to a region suffering chaos and instability.
If talk builds on the succession of Chairman Greenspan following his retirement, anticipated in Feb2006, concern might escalate as to who might operate the greatest inflationary machinery in modern history. Confidence in the replacement of Secy of Inflation post of chief engineer could be more of a challenge than imagined. Nobody seems to be assessing the risk of lost inflation leadership. He never saw a situation that did not require and receive his inflationary blessing. His proclivity to inflate, surely the greatest in almost two centuries, would be difficult to replace. His succession would be uncertain. The actual successor might be bound by rationality, prudence, capability to observe bubbles, and restraint. The new Wizard (aka Minister of Propaganda) might errantly possess statistical skill beyond hedonic distortion as foundation for growth. The new Wizard might be all too aware of how productivity is imported from China and India, thus no rise in our standard of living and no wage growth. A new wizard might actually see the horrendous damage of forfeit to Asia of our factories, both clue collar and white collar. Yes, when the next Fed Chairman is interviewed, debated, proposed, the USDollar is in for highly uncertain times. Woe to the USDollar if the US inflationary machinery experiences a downshift, or worse, if it suffers engine trouble.
WHAT GOLD NEEDS:
Gold needs in the worst way a bond bear market. To my dismay, when comparing the current climate to the 1970 decade, the gold community has failed to emphasize the requirement for a bond bear to claw deep wounds. The gold camp also has given little printed ink to the enormous stultifying and dominating effect of China. The “cost push” so easy in past reflation cycles is impossible today. Industrial buildup is in China, not the USA. CHINA HAS BLOCKED THE GOLD RALLY. Consumer price inflation outside services, health care, energy, food, and within the import world so far has been non-existent. It is essential to see consumer price inflation, pricing power, and wage growth if the gold price is to accelerate. All are absent, due to heavy Chinese influence. To date, China has prevented the gold bull market to move into the next gear. Both Japan and China, through their central banks, have intervened so often in the currency markets as to cause a slipped clutch in the currency transmission necessary for shifting to the next gold bull gear. When and if the Asian currencys break out to join the euro bull market, then gold will celebrate and enjoy a considerably higher bid. At the same time, USTBonds will suffer, a certain requirement for gold’s advance.
So far, devotion of the majority of new money toward consumer household debt, mortgages for overpriced housing, commodity investment (consequent distressed profit margins), and central bank intervention (bond sale overhang) have given a giant assist to the secular deflation juggernaut. Greenspan always boasted of wanting to engage and overcome a Kondratiev Winter. He has had his chance. The K-Winter and China together have proved a formidable combination to overcome. The gold bull lies in the balance. This complex topic was treated in a January Special Report for subscribers to the Hat Trick Letter, a piece entitled “The Fed, Secular Deflation, and Gold.”
NEWS TIDBITS
Greg Mankiw, head of the White House Council of Economic Advisors, has decided to step down. His inept leadership has championed the widely accepted notions that outsourcing creates net new US job growth, that foreign-based low-cost solutions aid our economy in aggregate, and that the USA retains some comparative advantage when forfeiting jobs abroad. These are thoroughly bankrupt policies which he has embraced and promoted. He has exaggerated economic growth based upon hedonic adjustments. He has deceived on the jobless rate, ignoring discouraged workers. He has stood atop the distortion of job growth based upon the Birth-Death model. He has leaned on the distraction known as the Consumer Price Index, with claims of nil price inflation. He can return to Harvard University, where he can do less harm.
US interest rates are still “fairly low” after six straight increases, Federal Reserve Chairman Alan Greenspan said in Senate Banking Committee testimony, warning that despite the economy's good health, fiscal discipline is vital. Financial markets conclude that more interest rate hikes lie ahead in a cycle that began in June. Normally, long-term rates like those charged on home mortgage loans move in company with short rates but that has not been the case recently. The Fed chief then proceeded to make a rare admission of his confusion and inadequacy as a central banker. He admitted it was hard to explain why long-term interest rates have declined in the face of short-term rate increases. He looks forward to the opportunity to judge the forces at work, warning that the current state might be a short-term situation. That sounds like a prayer, more than an analysis. Greenspan said he was just as puzzled as everyone else about why long-term interest rates have remained low in spite of official rate increases by the central bank. (Exclude me, since your reflation initiative has failed, and the flattening yield curve is proof.) He noted, however, that yields and risk spreads have narrowed globally, not just in the United States. He might want to refer to the secular deflation juggernaut which he conceitedly boasted would be overcome by his rabid eager monetary inflation. He might want to open his eyes to how China exports deflation, founded in its microscopic labor costs. He might want to examine the carry trade activity, a central piece of financial center machinery. Perhaps he should focus more on where new money is devoted and malinvested, and less on aggregate statistics collected from an Ivory Tower. He is quoted to say “For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum… Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.” The flattened yield curve is evidence that cost inflation, non-existent pricing power, and absent wage growth are the sour fruit from the Fed’s premeditated attempt to generate price inflation. This is not your father’s business cycle !!! Art Hogan noted the similarity of his 1996 comment about stock market irrational exuberance. Today’s comment about the bond yield curve conundrum should be taken with the same milestone importance. Greenspan’s elite reputation is one of the most undeserved in economic history. Extreme ignorance of economics is pre-requisite for adulation. It is a fine line between pharmacist and drug dealer.
Greenspan sounded a comforting note on price pressures, without any seeming comprehension of upcoming dangers. “[The inflation outlook] will be influenced by the extent and persistence of any slowdown in productivity.” But so far, he explained that intense competition has limited the apparent ability to pass on higher production costs and higher labor costs in the form of rising prices. He did his usual expounding without showing concern about corporate profit margin squeeze and the reduced incentive by businesses to create new jobs at all. He did not discuss how the US Economy is importing productivity, from service outsourcing to Asia. This is a concept outside his scope. He is like a kid who runs around the house with a box, calls it magic, but knows not what lies inside. Lastly, Greenspan spoke openly about importing inflation from Asia, even implying that was a good thing, as though it would improve pricing power. He went on about how currency adjustments were absorbed by Asian export vendors in the recent past. In the next round, they are likely to raise prices inside the USA. The Chairman made a veiled warning that higher import prices here will narrow the trade gap. That will occur only if the US Economy experiences a sharp slowdown, if not a recession.
In response to lawmaker questions, Greenspan said he approved of the idea that contributors to Social Security should be able to have private accounts to help build up their savings, something the Bush administration has proposed. He urged a cautious approach, however, and said care should be taken about borrowing heavily to keep up benefit payments while funds were diverted into private accounts. Greenspan said he would consider a $1 trillion debt increase large, if not excessive. How about $2 trillion?
Overall manufacturing capacity utilization fell to 79.0% from 79.1% in December, reflecting weaker readings in both mining and utilities. An utterly laughable quote is worth mentioning. “There are some signs that slack in the economy is rapidly disappearing,” said Chris Rupkey, senior financial economist at the Bank of Tokyo/Mitsubishi in New York. The USA has a raft of unused and obsolete capacity, as in one mfg plant out of five being idle. The real story is irrelevance due to uncompetitive labor costs.
US housing starts unexpectedly rose 4.7% last month to a nearly 21-year high as single family housing starts shot up to a record, according to the Commerce Department. Housing starts increased to a seasonally adjusted annual rate of 2.159 million units in January from an upwardly revised 2.063 million unit pace a month earlier. The January total marked the highest pace of housing starts since February 1984 when they hit a 2.260 million unit pace. Single family housing starts rose 2.7% to a record 1.760 million unit pace from the December 1.713 million unit rate. Permits for future groundbreaking, an indicator of builder confidence, rose 1.7% to a 2.105 million unit pace in January from an upwardly revised 2.069 million unit pace the previous month. So the housing bubble is receiving a very strong dose of additional over-supply from artificially low rates, steady mortgage funding, and a continuous air of confidence typical inside bubbles. Never under-estimate builders to build to excess; it is their job.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity decreased 0.5% to 732.3 in the week ended Feb 11. The seasonally adjusted MBA index of refinancing applications climbed 4.1% to 2,530, adding to the 7.8% gain the prior week and marking the fourth gain in the past five weeks. That is also the highest level for refinancings since the week ended April 16, 2004 when the index reached 2,550.
Bankruptcy Judge Letitia Clark will hear arguments in the two-day hearing to determine if Yukos can proceed with the Chapter 11 bankruptcy case. It filed in December as part of its unsuccessful attempt to prevent the forced sale of its key oil producing arm. The Russian oil company, under siege by the Kremlin, faces a key test in its bid to stave off destruction when a US court begins hearings today on whether to proceed with its legal case.
Oil prices held steady as the Energy Information Administration (EIA) reported that crude oil stocks rose 2.1 million barrels last week, gasoline inventories rose 4.9 million barrels, but distillate stocks fell 3.1 million barrels. OPEC's acting Secretary General said that the group was leaning toward a plan to reduce oil production at its mid-March meeting in Iran. Oil prices surged more than a $1 as worries over a possible OPEC output cut this spring countered a rise in crude and gasoline stocks in the United States. OPEC has been contemplating a cut to its output limits to counter an expected decline in second quarter global demand.
The yen currency fell against the USDollar and euro after data showed that the Japanese economy slipped into recession for much of 2004. Their economy shrank 0.1% as measured by GDP from the preceding three months, which was worse than market expectations for growth of 0.1%. That marked a third straight quarter of contraction. Both the US$ and euro climbed in response.
The Kyoto Treaty, aiming to reduce greenhouse gases, went into effect today. With 50% of its electrical power generation coal-fired, the USA is not a signatory to the agreement, which calls for 5% reduction in fossil fuel burning over the next ten years. Merger & acquisition nonsense continues to capture the attention of those focused squarely on the meaningless. If not Google, then M&A. The National Hockey League made it official. They canceled the entire season as negotiations failed, and both owners and players union simply quit the effort after several fruitless rounds.
TODAY’S MARKET
Today the Dow Jones Industrials wrapped up at 10,835 (-2), S&P at 1210 (unch), Nasdaq at 2087 (-2), TENS yield 4.158% (+6.0 bpt). Currencies closed with Euro at 130.43 (+0.21), JYen at 95.14 (-0.78), Can$ at 80.89 (-0.32). Metals finished with gold at 425.50 (-0.4), silver at 724.8 (-10.5), copper at 147.60 (-1.10). Energy ended with crude oil at 48.33 (+1.07), natural gas at 611.0 (-6.5), unleaded gasoline at 128.20 (+2.56). Prices are at major futures contracts. Also, the VIX index of stock option volatility is at its lowest level since 1996, indicative of almost zero concern for risk and complacency almost fallen off the chart.
Jim Willie CB
Copyright © 2005 All rights reserved.
USDOLLAR PROPS & PITFALLS
The USDollar has enjoyed a substantial and generous bounce since the new year began. Traders call it an “oversold” rally. As measured by the inadequate DXY index, the 80 level was indeed defended. (Its inadequacy as an index derives from the 1960 decade trade weighting, where the euro is given 4x the weight of the Japanese yen, and the Chinese yuan is given zero weight.) When the world had no further doubt that four more years of US debt, currency, and economic mismanagement was in store, complete with huge and unaddressed twin deficits, it sold off the USDollar with a running start before and after the presidential election. From early October to the end of December of 2004, the DXY fell below 87 support, then below critical 85 support. When the USDollar broke down below DXY 81 in the last week of the old year, gold was $12 below its recent high. Gold was $456 in the first week of December, when the DXY came off the 81 low. Three weeks later, gold was only at $444 when the DXY actually broke below 81.
Thus the signal of a US$ rebound, a long-term counter-trend rally in a strong bounce. From a technical perspective, a bounce to DXY 85 was a nobrainer. Whether it would rise to the congested zone of 87 to 90 is another question. A worthwhile review might be to list the many props holding up the USDollar, offering it an assist or push uphill. In contrast, list also the many pitfalls doubtless to prevent the rise from gaining too much momentum. The clownbuck is a crippled relic of an abused I.O.U. to be sure. It is the instrument of the grandest confidence game since the South Sea travesty. Alan Greenspan is the modern day John Law. Money is printed. Debt is issued. Foreigners buy it up with a certain degree of obligation. Then we downgrade it. We run quite the racket.
In the view of this analyst, the USDollar without question will falter, weaken, then stagger to the point coincident with a global war over natural resources in the coming few years. That asset grab is underway, much like the great homestead rush in the 19th century prairies, from which was born the nicknames Oklahoma Sooners and Kansas Jayhawks. The USA continues its pre-occupation with paper and war, evermore printed paper to sustain a gutted economy struggling through the charred remains of the great tech/telecom bust, and evermore war to secure the necessary resources which we as a nation must either import or seize, surely not denied. During these early skirmishes in the resource wars, the ebb & flow of the USDollar’s downward spiral make for fascinating clashes between paper & valid, between old & new, good & evil, between once powerful & nascent forceful. In the balance is the fate of the US Economy, long deprived of real wealth production despite the incessant propaganda spewed by both USGovt agencies and Federal Reserve pronouncements. It has sadly morphed into two chambers, first the distressed real economy where things are made (only remnants left) and serviced (under siege to India), second the financial sector where inflation is their coveted lifeblood if not addicted elixir.
Look for the USDollar, as measured in the DXY index, to find enormous and powerful resistance in the 85-87 zone. The long-term bear market downtrend channel which held firmly in the 2004 counter-move (May, August) is again at work NOW. The December trade gap news put a temporary end to the US$ rally. Jan2004 and Feb2004 support reversals at 85 provide a powerful resistance NOW. The 50-week moving average stands at 87 but continues to turn down, although with softened slope. We might see a brief move above 86, which will be accompanied by a euro move below 127 and a yen move below 94. Worst case scenario is for the DXY to reach 87 and test 90. Exhaustion soon will end this counter-trend rally.
THE USDOLLAR PROPS:
Few are the props which buoy the buck these days, but they are significant. The Fed is not finished with its tightening cycle. The short-term rate target in the USA sits 0.50% above that of Europe’s, an incentive to own US$-based bonds. The Fed Funds target is sure to go higher, uncertain to be matched by the Euro Central Bank. In an era where futures contracts are intertwined among USTBonds, EuroDollars, EuroBonds, Yield Spreads, the euro currency, and gold, interest rates at times can matter more than capital flows on the tail end of international trade. Rate spreads between the large bond markets at times dominate over chronically crippled fundamentals (rescued by intervention). Look for the Fed, led by Greenspan, to go too far. He always goes too far, hitting the upper guard rail in 2000 and the lower guard rail in 2004. His fame (or infamy) owes to his role as monetary drug dealer far more than to competent banking policymaker. The Fed loosened from 1996 to 2000 even after his warnings of irrational exuberance were ignored. The Fed tightened right through the stock bust five years ago. It is highly likely to tighten here and now to excess, since its myopia in reading the economy is well established. An accident on the upside for rates would help the USDollar in fleeting fashion.
USGovt budget austerity, or the pretense of it, even a suspicious whiff of it, has helped to give some lift under the USDollar’s wings. A fiscal deficit of only $420 billion might be an improvement over past records. The perplexing part: where exactly is the tax revenue from all the jobs created and reported with fanfare during the summer and autumn campaign, which if authentic would be reducing the deficit from the sheer force of economic growth? Out of character in recent weeks, the current Administration seems serious in its new religion to reduce the deficit, provided defense and security budgets are left intact. Perhaps some backroom pressure from Chairman Greenspan motivated our president to alter a course steeped in red ink for the first four-year term, burdened off the main balance sheet by military costs. He seeks an elusive legacy. Even minor reductions to the deficit are perceived as an improvement to the status quo. Lower budget deficits would mean less borrowing pressure, a move in the fiscally prudent direction. Perception of lower deficits would help the USDollar.
The Chinese yuan currency has become a bone of contention among world finance ministers. The reluctance by Beijing to adjust and revalue upward its yuan (renminbi) currency, despite the overwhelming need to do so, has granted the USDollar a reprieve, some time before a higher exchange rate is set. A gargantuan (and growing) bilateral trade deficit can be directed lower only if a higher exchange rate is made to work, either by market forces or an altered currency regime (aka peg). The trade gap with China had grown from $11.5 billion in Jan2004 to a high of $16.6 billion in Nov2004. Beijing has let it be known it will not be coerced or bedraggled. It will alter its currency regime when it sees fit, when the time is best suited in Chinese interests. The dreaded peg is not to be dismantled just yet, and in the meantime any delay helps to keep the USDollar aloft.
In a strange way, the successful Iraqi elections offer hope that US troops might someday head home. My personal view is that hope is misplaced, although noble. With a Shiite majority dominant in the new parliamentary government, the new challenge is the sharing of power in an equitable and just manner. Such unfolding of meted justice and evenhanded dispensation of power is hardly something to expect in Iraq, given its history and inbred distrust of both Great Britain and the United States. Critics maintain that elections only served to provide target identification in a civil war which began the day Baghdad fell two years ago. In addition, reliance upon newly trained and inexperience Iraqi security troops to prevent violence and to disrupt the pattern of bombings, suicide attacks, and assassinations is reminiscent of the absurd expectation that the Nguyen Van Thieu regime could do the same in Viet Nam 40 years ago. What most Americans fail to realize is that the entire democracy movement is perceived by a billion Moslems as a direct assault against Islam. Americans have come to separate government from religion in a peaceful coexistence. In the minds and hearts of Moslems, theocracy is of paramount importance and of high priority to preserve. To do otherwise would be an assault against Allah. Regardless, hope is raised and the glimmer of lower future military costs lies over the horizon. Lower costs mean reduced USGovt borrowing, and less pressure on the USDollar. In the best case scenario, an outbreak of peace in the Persian Gulf would be very positive for the USDollar.
The new diplomatic initiative led by Secy State Condaleezza Rice to smooth over relations with European leaders has all the earmarks of rapprochement. The spirit of the initiative is to patch up differences over the Iraqi War and its fleeting justifications. The guts of the initiative are to generate some assistance in training security forces in Iraq and to share their costs. The effort can use more help than Britain, Italy, and Poland. Somehow about 50 key nations have abstained to date. Room for improvement runs deep. The NATO alliance will be hard to shatter, even if damaged. Improved relations can only help the embattled USDollar, caught in the crossfire from this so-called war on terrorism. If it is actually a war to seize oil supplies or a war against Islam, then all hell will break loose in a matter of months.
THE USDOLLAR PITFALLS:
Many are the pitfalls that plague the USDollar, some massive with others noteworthy. The leading danger is for a US Economic slowdown to be revealed. It could happen from natural imbalanced forces like the absent manufacturing base, from minimal business investment, from inadequate job creation, from debt burden suffocation, and most deadly, from reversal of the many bond bubbles (Treasurys, mortgages, housing). An economic slowdown, even a clear stall, would interrupt Fed hikes and might bring an end at, say 3.0% or so. A slowdown would trash the attractiveness of the USDollar. The Federal Reserve is hardly invulnerable to a grand misread of inherent economic strength. The bureaucratic reports on the economy might have convinced the Fed of far more strength than exists. Could the Fed be a victim of its own statistical spew? A “neutral” Fed could be manifested at a much lower rate than typically seen in past cycles. It admittedly cannot recognize bubbles of its own making, cannot comprehend the nature of technology nor its effect on productivity and labor. The Fed has blessed asset inflation as wealth generation in the most queer of central bank assessments in modern history. An error by the Fed would result in a rapid cascade downward for the USDollar, as investment prospects would dim.
While budgetary discipline sounds good on the surface, actual budget cuts of 150 programs might contribute to stall the economy from lost stimulus. The US Economy has been behaving like a hedge fund for several quarters, far too dependent upon easy money for speculation and liberal finance terms for basic commerce. With lost legitimate income generation, it must resort to its vast inflationary machinery and direct government stimulus. A flatter yield curve shifts pressure on the direct stimulus to come through and save the day. Removed domestic support to deny agricultural subsidies, education funding, and health care spending could spawn a powerful headwind to the fragile economy. The specter of Social Security reform would expose $170B in additionally needed federal budget funding. For this reason, my expectation is for both political parties to back off on such reform in a display of prudence and cowardice.
Progress is reported on movement toward trading of Chinese yuan at the MERC. If a known date is announced, even if several months away, for relaxation of the Chinese currency peg, then a swift devaluation of the USDollar would likely be immediate. Given the $15 to $16 billion monthly bilateral deficit with China, the FOREX market might inflict deep wounds on the USDollar, or reward the Chinese yuan with deep value. Debate over its effect and considerable disagreement would ensue. Enormous political debate would be sure to come. My view is that all of the Asian currencys would jettison higher, to follow the Chinese lead. As that occurs, the worldwide perception would emerge that China is the new geopolitical powerhouse, to be followed. Failure to follow would be to face the perilous risk of lost competitiveness.
Launch of Senate trade sanction against China, first salvo in trade war, would have an unclear effect on the USDollar. If resisted by Beijing, then higher costs would be spread across the US Economy in the form of imposed tariffs. Higher prices from Wal-Mart to Best Buy to Staples to KMart to Home Depot would act like a giant wet blanket on the cornerstone retail sector. If consumer spending faltered as a result, then the world’s largest economy would be at risk of recession. On the other hand, if Beijing complied with upward currency revaluation under political pressure, then see the above paragraph. The USDollar would suffer. With trade war salvos, either way, the US$ exchange rates would decline.
Opening a new war front with Iran after an Iraqi “victory” would tarnish the USA image immeasurably. Additional adventures into Iran would ruin all the progress in Iraq, provided peace indeed breaks out between the Tigris and Euphrates. Bear in mind that Sunni elements largely refused to participate in the election, whereas the Kurds will hold roughly 25% of seats. Attacks on Iran would surely destabilize Iraq, since it would be ruled by the Shiite sect, even in a coalition. Defense budget costs would torpedo the federal budget process once again, as it has done since 2003. The USDollar would suffer, especially if Europe and Asia judged our actions as unwarranted. Credibility might be difficult to maintain with claims of nuclear armament in Iran’s capital of Teheran, after it was lost over weapons of mass destruction. If war breaks out on even a moderate scale, new larger expected costs would emerge as far as the eye can see.
If the tragedy of high-level Iraqi assassinations occurrs, the herald of civil war would be as clear as a bell even to Pentagon hardliners. Fully anticipated by the war’s critics, key deaths of Iraqi leaders could be absorbed if limited. If retaliatory sectarian murders are carried out, then we have the worst case scenario and utter chaos to deal with. The war on terrorism could degrade into a war against Islam with assassinations. The USA and the USDollar would be caught in the middle. In general, wider conflict in the Persian Gulf region could possibly accelerate the transformation from the Petro-Dollar system to the new Petro-Euro system, since the USDollar would be closely tied to a region suffering chaos and instability.
If talk builds on the succession of Chairman Greenspan following his retirement, anticipated in Feb2006, concern might escalate as to who might operate the greatest inflationary machinery in modern history. Confidence in the replacement of Secy of Inflation post of chief engineer could be more of a challenge than imagined. Nobody seems to be assessing the risk of lost inflation leadership. He never saw a situation that did not require and receive his inflationary blessing. His proclivity to inflate, surely the greatest in almost two centuries, would be difficult to replace. His succession would be uncertain. The actual successor might be bound by rationality, prudence, capability to observe bubbles, and restraint. The new Wizard (aka Minister of Propaganda) might errantly possess statistical skill beyond hedonic distortion as foundation for growth. The new Wizard might be all too aware of how productivity is imported from China and India, thus no rise in our standard of living and no wage growth. A new wizard might actually see the horrendous damage of forfeit to Asia of our factories, both clue collar and white collar. Yes, when the next Fed Chairman is interviewed, debated, proposed, the USDollar is in for highly uncertain times. Woe to the USDollar if the US inflationary machinery experiences a downshift, or worse, if it suffers engine trouble.
WHAT GOLD NEEDS:
Gold needs in the worst way a bond bear market. To my dismay, when comparing the current climate to the 1970 decade, the gold community has failed to emphasize the requirement for a bond bear to claw deep wounds. The gold camp also has given little printed ink to the enormous stultifying and dominating effect of China. The “cost push” so easy in past reflation cycles is impossible today. Industrial buildup is in China, not the USA. CHINA HAS BLOCKED THE GOLD RALLY. Consumer price inflation outside services, health care, energy, food, and within the import world so far has been non-existent. It is essential to see consumer price inflation, pricing power, and wage growth if the gold price is to accelerate. All are absent, due to heavy Chinese influence. To date, China has prevented the gold bull market to move into the next gear. Both Japan and China, through their central banks, have intervened so often in the currency markets as to cause a slipped clutch in the currency transmission necessary for shifting to the next gold bull gear. When and if the Asian currencys break out to join the euro bull market, then gold will celebrate and enjoy a considerably higher bid. At the same time, USTBonds will suffer, a certain requirement for gold’s advance.
So far, devotion of the majority of new money toward consumer household debt, mortgages for overpriced housing, commodity investment (consequent distressed profit margins), and central bank intervention (bond sale overhang) have given a giant assist to the secular deflation juggernaut. Greenspan always boasted of wanting to engage and overcome a Kondratiev Winter. He has had his chance. The K-Winter and China together have proved a formidable combination to overcome. The gold bull lies in the balance. This complex topic was treated in a January Special Report for subscribers to the Hat Trick Letter, a piece entitled “The Fed, Secular Deflation, and Gold.”
NEWS TIDBITS
Greg Mankiw, head of the White House Council of Economic Advisors, has decided to step down. His inept leadership has championed the widely accepted notions that outsourcing creates net new US job growth, that foreign-based low-cost solutions aid our economy in aggregate, and that the USA retains some comparative advantage when forfeiting jobs abroad. These are thoroughly bankrupt policies which he has embraced and promoted. He has exaggerated economic growth based upon hedonic adjustments. He has deceived on the jobless rate, ignoring discouraged workers. He has stood atop the distortion of job growth based upon the Birth-Death model. He has leaned on the distraction known as the Consumer Price Index, with claims of nil price inflation. He can return to Harvard University, where he can do less harm.
US interest rates are still “fairly low” after six straight increases, Federal Reserve Chairman Alan Greenspan said in Senate Banking Committee testimony, warning that despite the economy's good health, fiscal discipline is vital. Financial markets conclude that more interest rate hikes lie ahead in a cycle that began in June. Normally, long-term rates like those charged on home mortgage loans move in company with short rates but that has not been the case recently. The Fed chief then proceeded to make a rare admission of his confusion and inadequacy as a central banker. He admitted it was hard to explain why long-term interest rates have declined in the face of short-term rate increases. He looks forward to the opportunity to judge the forces at work, warning that the current state might be a short-term situation. That sounds like a prayer, more than an analysis. Greenspan said he was just as puzzled as everyone else about why long-term interest rates have remained low in spite of official rate increases by the central bank. (Exclude me, since your reflation initiative has failed, and the flattening yield curve is proof.) He noted, however, that yields and risk spreads have narrowed globally, not just in the United States. He might want to refer to the secular deflation juggernaut which he conceitedly boasted would be overcome by his rabid eager monetary inflation. He might want to open his eyes to how China exports deflation, founded in its microscopic labor costs. He might want to examine the carry trade activity, a central piece of financial center machinery. Perhaps he should focus more on where new money is devoted and malinvested, and less on aggregate statistics collected from an Ivory Tower. He is quoted to say “For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum… Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.” The flattened yield curve is evidence that cost inflation, non-existent pricing power, and absent wage growth are the sour fruit from the Fed’s premeditated attempt to generate price inflation. This is not your father’s business cycle !!! Art Hogan noted the similarity of his 1996 comment about stock market irrational exuberance. Today’s comment about the bond yield curve conundrum should be taken with the same milestone importance. Greenspan’s elite reputation is one of the most undeserved in economic history. Extreme ignorance of economics is pre-requisite for adulation. It is a fine line between pharmacist and drug dealer.
Greenspan sounded a comforting note on price pressures, without any seeming comprehension of upcoming dangers. “[The inflation outlook] will be influenced by the extent and persistence of any slowdown in productivity.” But so far, he explained that intense competition has limited the apparent ability to pass on higher production costs and higher labor costs in the form of rising prices. He did his usual expounding without showing concern about corporate profit margin squeeze and the reduced incentive by businesses to create new jobs at all. He did not discuss how the US Economy is importing productivity, from service outsourcing to Asia. This is a concept outside his scope. He is like a kid who runs around the house with a box, calls it magic, but knows not what lies inside. Lastly, Greenspan spoke openly about importing inflation from Asia, even implying that was a good thing, as though it would improve pricing power. He went on about how currency adjustments were absorbed by Asian export vendors in the recent past. In the next round, they are likely to raise prices inside the USA. The Chairman made a veiled warning that higher import prices here will narrow the trade gap. That will occur only if the US Economy experiences a sharp slowdown, if not a recession.
In response to lawmaker questions, Greenspan said he approved of the idea that contributors to Social Security should be able to have private accounts to help build up their savings, something the Bush administration has proposed. He urged a cautious approach, however, and said care should be taken about borrowing heavily to keep up benefit payments while funds were diverted into private accounts. Greenspan said he would consider a $1 trillion debt increase large, if not excessive. How about $2 trillion?
Overall manufacturing capacity utilization fell to 79.0% from 79.1% in December, reflecting weaker readings in both mining and utilities. An utterly laughable quote is worth mentioning. “There are some signs that slack in the economy is rapidly disappearing,” said Chris Rupkey, senior financial economist at the Bank of Tokyo/Mitsubishi in New York. The USA has a raft of unused and obsolete capacity, as in one mfg plant out of five being idle. The real story is irrelevance due to uncompetitive labor costs.
US housing starts unexpectedly rose 4.7% last month to a nearly 21-year high as single family housing starts shot up to a record, according to the Commerce Department. Housing starts increased to a seasonally adjusted annual rate of 2.159 million units in January from an upwardly revised 2.063 million unit pace a month earlier. The January total marked the highest pace of housing starts since February 1984 when they hit a 2.260 million unit pace. Single family housing starts rose 2.7% to a record 1.760 million unit pace from the December 1.713 million unit rate. Permits for future groundbreaking, an indicator of builder confidence, rose 1.7% to a 2.105 million unit pace in January from an upwardly revised 2.069 million unit pace the previous month. So the housing bubble is receiving a very strong dose of additional over-supply from artificially low rates, steady mortgage funding, and a continuous air of confidence typical inside bubbles. Never under-estimate builders to build to excess; it is their job.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity decreased 0.5% to 732.3 in the week ended Feb 11. The seasonally adjusted MBA index of refinancing applications climbed 4.1% to 2,530, adding to the 7.8% gain the prior week and marking the fourth gain in the past five weeks. That is also the highest level for refinancings since the week ended April 16, 2004 when the index reached 2,550.
Bankruptcy Judge Letitia Clark will hear arguments in the two-day hearing to determine if Yukos can proceed with the Chapter 11 bankruptcy case. It filed in December as part of its unsuccessful attempt to prevent the forced sale of its key oil producing arm. The Russian oil company, under siege by the Kremlin, faces a key test in its bid to stave off destruction when a US court begins hearings today on whether to proceed with its legal case.
Oil prices held steady as the Energy Information Administration (EIA) reported that crude oil stocks rose 2.1 million barrels last week, gasoline inventories rose 4.9 million barrels, but distillate stocks fell 3.1 million barrels. OPEC's acting Secretary General said that the group was leaning toward a plan to reduce oil production at its mid-March meeting in Iran. Oil prices surged more than a $1 as worries over a possible OPEC output cut this spring countered a rise in crude and gasoline stocks in the United States. OPEC has been contemplating a cut to its output limits to counter an expected decline in second quarter global demand.
The yen currency fell against the USDollar and euro after data showed that the Japanese economy slipped into recession for much of 2004. Their economy shrank 0.1% as measured by GDP from the preceding three months, which was worse than market expectations for growth of 0.1%. That marked a third straight quarter of contraction. Both the US$ and euro climbed in response.
The Kyoto Treaty, aiming to reduce greenhouse gases, went into effect today. With 50% of its electrical power generation coal-fired, the USA is not a signatory to the agreement, which calls for 5% reduction in fossil fuel burning over the next ten years. Merger & acquisition nonsense continues to capture the attention of those focused squarely on the meaningless. If not Google, then M&A. The National Hockey League made it official. They canceled the entire season as negotiations failed, and both owners and players union simply quit the effort after several fruitless rounds.
TODAY’S MARKET
Today the Dow Jones Industrials wrapped up at 10,835 (-2), S&P at 1210 (unch), Nasdaq at 2087 (-2), TENS yield 4.158% (+6.0 bpt). Currencies closed with Euro at 130.43 (+0.21), JYen at 95.14 (-0.78), Can$ at 80.89 (-0.32). Metals finished with gold at 425.50 (-0.4), silver at 724.8 (-10.5), copper at 147.60 (-1.10). Energy ended with crude oil at 48.33 (+1.07), natural gas at 611.0 (-6.5), unleaded gasoline at 128.20 (+2.56). Prices are at major futures contracts. Also, the VIX index of stock option volatility is at its lowest level since 1996, indicative of almost zero concern for risk and complacency almost fallen off the chart.
Jim Willie CB
Copyright © 2005 All rights reserved.
Fleursdumal
फूल की बुराई
analisi OI ingarbugliata dai roll , su marzo ieri in aumento di 2200 su giugno di 15000 , dovrebbero essere nuovi short 
su nuova scadenza
su marzo un sacco di scambi sulla put 114 , quindi la difenderanno bene sino a finesettimana
su nuova scadenza su marzo un sacco di scambi sulla put 114 , quindi la difenderanno bene sino a finesettimana
Fleursdumal
फूल की बुराई
gastronomo ha scritto:
questa poi è incredibile, il nonnetto che dice che non sa bene cosa sta succedendo sui tassi a lunga, ma vadavialeciapett
possiamo chiamarlo qui per un brainstorming
Il Piadinaro
Forumer attivo
Il Piadinaro ha scritto:Il Piadinaro ha scritto:Salve amici,acquistate adesso 20 put aprile 2005 118 al prezzo di 0,13.....si vanno ad unire ai 5 short presi a 119,65 su Marzo,che Dio si ricordi anche di noi Bundaroli per una volta
Ad maiora
Buon giorno a tutti,mollate le prime 5 put a 0,30(prezzo di carico 0,13).
Ciao
Chiuso altre 5 a 0,31 ne conservo 10 più i 5 short,buon pranzo a tutti
gastronomo
Forumer storico
Chiuso altre 5 a 0,31 ne conservo 10 più i 5 short,buon pranzo a tutti [/quote]
Buon appetito
[/quote]Buon appetito
ditropan
Forumer storico
gastronomo ha scritto:ditropan ha scritto:gastronomo ha scritto:Ciao Alpino
Ciao Ric .... sarebbe pure ora.
Hai idee sul perchè l'eura sia così forte ? Mi prude la manina ...
... si e no ... si parla che è dovuto all'incertezza del momento, caso iran ieri .... per me ne aprofittano per fargli fare questo buon rimbalzo fino a 1,31 forse 1,32 ... stiamo a vedere.
Per ora io son corto di australiano, neo zelandese ... e mi sono accattato pure un franco svizzero.
Fleursdumal
फूल की बुराई
certo che qui a pranzo con sti nick , gastronomo , piadinaro , è dura se non c'è nessuno a cucinarti ve possino
la più buona piadina mangiata a Marina di Ravenna , giusto sulla statale, ritestata ogni volta che ci passo
ve possinola più buona piadina mangiata a Marina di Ravenna , giusto sulla statale, ritestata ogni volta che ci passo
Fleursdumal
फूल की बुराई
f4f ha scritto:
esaggerati
quando si dice la passione Similar threads
