|
FOUR
SLIPPERY REASONS
What are those elements?
As has now been kicked about all over the press, Greenspan out in Wyoming has now come out and in a sort of ass backwards mea culpa stated that asset prices will slow down and may decrease and that personal consumption will slow. I’m not a particularly religious writer but even that had me asking for damnation of the man that dropped the liquidity bomb on the world and then years later states the obvious as to the consequences thereof, as though he is some sort of soothsayer and wise man beyond his 80 years. Whether he’s looking to shore up his legacy or simply trying to state the obvious for the record, it will now be up to his successor to try and sort out the potentially ugly aftermath. With this background and testimony, we may now be sure that the Fed will try and alleviate the asset bubble with increased rates – tightening - possibly even a 50 bp hike by the end of the year to show all “hey, we’re here to play ball”. Even as I write this, the USD index is showing renewed vigor – strange as that may sound on the back of Katrina – and gold was down $7 and has now confirmed my slanted bearish position. Hence, the Fed looks to continue an “aggressive” / tighter policy and thus rate hikes to ensure assets cooling down, but of course with the possibility of inversion in short / long term yields. Again, the Fed is in a “be damned if you do and damned if you don’t” position. In the interest of worldwide perception of the USD and the US economy they are likely to place their bets on the side of prudence and let the US consumer deal with the housing and consumption outcomes. Although many have talked of a “housing bust”, I have my reservations - discontiguous events are impossible to predict and not the norm so I say we might see some tough and ugly repossessions and price drops but it is more likely the majority of house owner pain might simply be a slow unwinding of the housing prices in a slowing but not bursting. Again, as I stated long ago, the rates need to be raised in order that they can be cut at some distant future and hence seen in the light of doing what’s best for the economy. Unfortunately the interim damage to the US consumer and the stock markets remain the wildcards – and very big ones at that. As to oil, the main thought components were more or less summed up in the Oil Alert I placed in the cafeDINL (see Espresso entry). Right now, not only may oil prices do a post-event surge on the back of hurricane Katrina, but also the ongoing political rumblings out of Venezuela should have us concerned, with the US being their number one importing client. A while back I had estimated a $65 to $70 oil price and was pooh-poohed by some as being overly pessimistic. That may be – it was my reading of the tea leaves – maybe I was lucky. The fact is not so much an outlier of a spike price but rather where the prices settles at longer term – that will be a key macro component for further economic outlook. My crystal ball remains at >$50 / barrel which is a considerable drag on world GDP, especially US and Asia as to compared just over a few years ago (see chart – more than doubled in 2 years). As I said, with the winter season approaching, we may see heightened prices, maybe not so much from increased demand but rather from supply shortages, especially in the refining capacity.
At this point we have now two strikes against the world economy:
Let us continue. Asia has been a “creation” of the West for the past decade or so. Of course their economies would at some point have risen, but they were accelerated by the West wanting cheaper consumer goods. The well-known swap “US Treasuries for cheap goods” is, hopefully by now, well understood by readers of this Letter. In essence, mainly the US has subsidized the growth of the East / Asia and been given a life of cheap luxury to compensate them for it. Of course not only the US is at fault, most major western countries could not resist the labor cost arbitrage and low social / environmental costs, the temptation to gain a foothold in the world’s largest budding economy and the geopolitical policy of trying to imbed the Communist Party into a more western style democracy. Meanwhile the snowball of China’s production has sucked in poor farmers from the land looking for better pay and better jobs. The commodity price rises have been phenomenal yet is the economy stable enough to survive an oil shock and slowed export production? Although this is hard to know based on wishy-washy empirical data, the straight logical answer is that they cannot survive a protracted world recession. Internal consumption is growing slowly but negligent by Western standards just as external imports may need to slow as the western economies throttle back consumption. The most interesting aspect is of course what shall they do with their foreign currency reserves, mostly US dollars ? The most obvious thing to do would be to buy real assets with them while the USD remains relatively strong. In the case of the inevitable USD weakening the judgment call becomes more interesting – ride out the recession, i.e. low export demand and keep the USD from weakening further or to exchange them for something of more value and risk geopolitical / trade consequences with Washington DC ? Right now, I continue to take the straight logical route of a harder than preferred landing in China if the US should fall into protracted recession on the back of higher rates and higher oil. Likewise, China would be extremely hurt on higher oil prices and might trigger a spiraling demand for known oil supplies – hence one can derive that higher oil prices may first be a precursor to a foggy macro outlook but then may slump if the recession continues to drag on as both production (and consumption) are reduced to align with lowered worldwide demand. Strike three: China or Asia cannot be expected to fill the consumption shoes in a protracted intra-global recession. Germany’s election is now scheduled for September 18th. The Constitutional Court has now given the go-ahead. With only a few weeks to go, the winds of reform and change are heavy in the air. Not a day goes by without television talk shows, interviews and whatever with respect to party plans, revised manifestos and What-If scenarios. The current polls indicate a victory for the Christian Democrats (CDU) over the ruling Social Democrats (SPD) thus signaling a fresh agenda for the nation. The interesting part of course is, with a strong reform mentality already having gripped the nation, a change of power in Berlin may enhance the chances of the CDU to make bolder reforms than even they imagined possible. Nevertheless, many people are expected to register their protest votes as the “social net” is rolled back even further and people are forced to get by with much less than ever before. Some are even calling this the most important election since 1949, after World War II. It may very well be. So even while the former “motor of Europe,” Germany, struggles to get back its position in Europe, I continue to remain very subdued as to the effect that might have on Euroland as a whole. Germany continues to break the 3% deficit rule laid out by the Finance Ministers and business climate surveys, e.g. ZEW and Ifo, continue to flip-flop up and down just as quickly as the opinions of voters. What has not been talked about so much is the extent to which the money supply has continued to grow in Euroland, along with many other nations. M3 growth has now accelerated to near 8% thus placing increased pressure on price stability and the pressure on Mr. Trichet at the ECB to do something about it. By keeping rates at 2% Trichet risks the “Greenspan syndrome” of artificially low rates for stimulation but of course risking inflationary tendencies. Despite this, the shadow advisors to the ECB are calling for continued holding at the 2% level even though opinions are mixed as to possible rate increases. Although not privy to the plethora of ECB data, I suspect the ECB will continue holding rates as the consumer here simply swallows the higher oil prices and cuts back dramatically on consumption. This I do not see as immediately inflationary in any way As well, personal credit does not nearly play such a large part in continental Europe as it does in the US or UK. With the continued question marks hanging over many consumers here in Germany due to the election outcome, many people are nervous and simply hunkering down as to expenditures and trying to increase their savings. Hence a protracted oil price increase combined with a very tough job market here combine to offset the inflationary bias of continuing at 2% rates – that is my thinking right now. Strike four: Euroland is coming to terms and starting to grasp the concept that “things will not be the same as they were” . The social state is under attack. Consumption and consumer confidence remain dampened regardless of the oil price. Higher oil simply adds another load to the consumer which will likely be combated with lower consumption. No help can be expected from Euroland to offset other global recessionary tendencies or imbalances. Screaming to consumers to consume more is simply not a viable tactic. Job creation is, but that has been promised by the SPD and never happened. Will the CDU deliver on that ? Again, I remain cautious to party propaganda and slogans – facts speak louder. Gold As for the immediate, I see the near-given Fed tightening policy as bearish for gold as I continue to keep my model of inverse relationship to the USD as valid. Hence we may see further pullbacks in gold as being opportunistic events in gold purchases. With the HUI now showing its recent strength as only temporary and dropping below the 0.47 level on the chart, ( see previous Letter ) we may now expect a lower consolidation especially if the stock market is hit lower on upcoming Fed tightening – this may very well pull the gold and silver stocks considerably down, depending on the overall market atmosphere. That would be a more prudent time to consider purchases. Although we seem to be in a VERY long term stealth gold market, the winner will remain to be those patient and aware of the macro global outlook for that is where the seeds of change should tip us off as to when best to place our money into this sector. Right now, as the yield curves converge it shows us that the monetary outlook remains overall bearish and that risk remains low as seen by the markets – both of which are gold negative.
More on this in upcoming issues - if you would like to know more and be included in future portfolio recommendations, please sign up for a free subscription to Der Invest Informant here. As well, please visit the site for updates. Ror more on this article and more charts please visit the homepage www.dinl.net in the Latest Letter box.
Contact
Information
|
