DILEMMAS
& REDUX
by Jim Willie CB
June 21, 2006
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Jim Willie CB is the editor of the “HAT TRICK LETTER” For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market. Don’t look now, but a dilemma faces almost every single policy maker on the planet, and some tyrants roaming the planet. A few tyrants have no dilemmas like Putin in Russia, Chavez in Venezuela, and the faceless Sudanese dictator; they continue to rampage and pillage. Morales in Bolivia already made his decision; his die is cast. A fork is presented in the road in at least five power centers globally. As anyone with a sense of odds, chance, gambling, or probability knows, each fork has two choices. That makes for a great many combinations of directions, 32 actually (two to the power five). No analysts worth their salt can competently put forth a forecast without contingencies and various scenarios. No one power center make can be deemed more important than another. They are all critical. As one center takes action, other centers respond or join in a similar action. The entire globe is stretching and heaving. Financial tectonic plates shift. US Federal Reserve The US Federal Reserve must make a choice. Continue to hike rates in order to support the USDollar with maintain the advantageous bond yield? Continue to hike rates in order to attract foreign USTreasury Bond purchasers in incremental credit supply? Doing so places considerable stress on the housing market. Is their true motive to appeal to bond and currency traders in foreign locations? Or is their attention more on domestic price inflation and fighting expectations? Does the USFed plan to destroy the world economy in order to be regarded as credible in their fight of inflation? This sounds like a strange question to begin with, since their reason for being (raison d’ętre) is to provide, create, and manage monetary inflation. It is like asking a farmer to limit the effects of food production. Should the USFed permit Weimar inflation rather than suffer the shameful outcome of a gathering global recession instead? Are the financial leaders and central bankers aware that the USEconomy is nothing but a gigantic bubble, vulnerable to higher rates? To tighten this economy on its inflation sustenance is to restrict its primary blood supply. It is wholly dependent upon inflation, and little else. Given that the Gross Domestic Product contains a 5% exaggeration, USGovt official statistics are full of propaganda about growth. Almost all, perhaps all, of US GDP is improperly adjusted price inflation. How can we stand by and nod our heads that the CPI contains a 3% fudge, yet accept the GDP as an accurate number? This is not possible. The GDP contains the further exaggeration owing to a 1% fudge from the GDP Deflator being lower than the absurd CPI. Not a single analyst who writes on the planet ever talks about the obscure GDP Deflator. The other 1% is from the foolish hedonic adjustments for greater speeds in information technology (which permit more daydreaming at the desk, and idle time for commercial applications of equipment). Does any computer operate around the clock? Do workers ply their trade without pause? So therefore, a theme of my scribbles for three years, the USEconomy has been in a stall for five years. Check the 4Q2005 for evidence. Gasoline, diesel, crude oil, and natural gas prices zoomed up in the wake of the hurricanes. Complaints were lodged for inadequate response by USGovt relief operations. Sales and economies in the entire Gulf Coast region were shut down, stopped cold. Initial economist estimates called for a 1% decline in GDP from the storm damage. Yet the GDP rose??? NOT A CHANCE, pure b.s. One must conclude that the USFed is hiking rates in the middle of a stall. Claims of 5% GDP growth are pure poppycock and fantasy. But in any mythology, fantasies prevail. What this writer analyst finds astonishing is that even the gold community accepts the nonsensical GDP numbers. At the Vancouver gold conference in mid-June, my ears heard at least five speakers cite strong US growth, the world’s strongest growth. It is pure deception, distortion, delusion, built upon lies. They comprehend most lies in statistics, but not in the GDP, which is an inconsistent observation. Crises occur when policy is ineffective, as accidents wreck havoc. Gold will benefit when the crises happen more often and with shorter time intervals between them. One can safely say that US banking leaders are like a bunch of captains with a poor past job history controlling the bridge of a once great ship USS America. They stand as arrogant blind lunatics at the helm reading faulty control instruments on the bridge. Their instruments are designed to placate, not guide. They urge on business, much like the sale of ship passage tickets, rather than to warn properly. Icebergs lie ahead. As recently as year 2000, icebergs were hit. It is worse than described. Credible arguments can be made that some icebergs are intended to be hit. Accidents are planned. You see, the USGovt sells the lifeboats. They are called US Treasury Bonds. A perverse desire persists, that the lifeboats not become too expensive. There must be sufficient accidents so that the price of lifeboats do not fall too low. By killing off stock investors aboard the USS America, they are directed into the lifeboats. Worse still, they might find it preferable to return to rationing and allow some “economic dead zones” (like an array of icebergs) so long as prices remain low, inflation not rage, and lifeboats remain in demand. Isn’t that right out of the wartime playbook too? The Bank of Japan Since February and March of 2006, the BOJ has threatened to end their Zero Interest Rate Policy (ZIRP) which has kept rates very low for five years. They threaten also to end their Quantitative Easing (QE), which is not the same thing. We can have both higher rates and full flow of money in liquidity ponds. Emerging markets got butchered. Iceland and New Zealand found themselves victims among the smaller economies worldwide. Should the BOJ tighten, end ZIRP and QE, sharply reduce easy money employed by speculators, spread traders, carry traders, even if it knocks down global stock markets by 20%? The major developed economies have also been hit, see London, Paris, Frankfurt, Tokyo, and New York. Instead, should the BOJ keep the monetary spigot of easy money wide open, and permit domestic consumer prices in Japan to rise? Should they permit their Nikkei stock market to zoom out of control again, and Tokyo property prices? Tough decisions. At least Japanese officials do not use faulty statistics like US officials do. Instead, they are timid and reluctant to act forcefully. They are all too aware of 12 to 14 years of deflation, after they wrecked their financial markets in 1989. The fact that 0% is their official interest rate (or thereabout) signifies extreme failure and embarrassment. More than any other culture on earth, the Japanese react to shame. It is painful. They want to end ZIRP but are skittish. Is the BOJ a lackey to US bankers? Do they act independently? Are they on an increasing basis marching to the beat of the Beijing drums? If the BOJ does not hike rates, they essentially issue a green light to the potential rampage of consumer price inflation, a runaway bull market in stocks, and a property bubble? To complicate the matter, nobody has an accurate gauge on the size of the Yen Carry Trade. It is estimated to be greater than $2 trillion ($2000 billion). Amazingly, in 2005 the total money supply of yen worldwide surpassed the total USDollars sloshing around worldwide. That is no mean feat, since the USDollar has been horrendously abused with over-supply for years. Well, simply stated, both the yen and US$ have been abused in similar fashion. If the Germans (or really Europeans?) fail to join the parade of destroying their currency, will the European Union economy crumble? Watch their export trade if the euro currency jumps toward 135 again, or jumps past that level. Such is the nature of the currency race to the bottom. Does the BOJ talk of hikes more than actually hike rates? To do so would employ FedSpeak in a high jinks game. We will see. The USFed might threaten to fight inflation with words more than actual continued hikes, and err on the side of excessive tightening. Japanese bankers might err on the side of excessive accommodation. Just today, BOJ chief Fukui again guided world financial markets to expect rate hikes soon if dictated by economic conditions, but gradually implemented. They seem painfully aware they might exacerbate swings in the economic cycles. Perhaps they should hike by only 10 basis points, or even 5 bpts, so as to check the market reaction. An ongoing battle is underway between the Ministry of Finance and the Bank of Japan. Their power center is more in the Administration ministries than the central banker, unlike the United States. This is discussed more at length in the June issue of the Hat Trick Letter. Chinese Yuan Currency Last July 2005, Beijing leaders relented. They removed the direct link from their yuan currency to the USDollar. They have been diversifying their mountainous reserves for a year now. A few months passed with no USTBonds purchased at all. A paltry $30 billion have been increased since the early months of 2006, offset by a similar sale of USTBonds by Japan. Few seem to talk about it, but on a net basis Asia is no longer buying US Treasurys. The yuan was upgraded by order last July by 2.1%, a mere adjustment. Since then the yuan has lifted another 1%, not enough to matter. The Chinese foreign reserves have amassed to a total of $885 billion, finally overcoming the Japanese stockpile of US debt paper. Shrill calls emanate from the US Congress and USGovt for China to raise their yuan currency significantly higher. The threats of a 27.5% trade tariff are on again, off again, a constant looming threat. It seems WashDC talks of tariff, only to motivate response. Beijing talks of wider diversification away from US$-based securities, only to motivate response. Usually, the credit master calls the shots. Congressional and political leaders (ministers also) seem to think those in control of the marketplace (shopping malls) and extend debts are in control. Perhaps they believe owners of the military weapons call the shots. Lately, a hazardous change has taken place. USGovt leaders have openly complained that the Chinese government has spent too much money on military weapons and systems. The USGovt spends 4.0% of its GDP on military, versus 1.5% of GDP spent by China. In volume, dollar terms, the US spends 15 times as much on defense (or is it offense?). A double standard of hypocrisy cries out. The rub is that China is building a military on the backs of outsourced jobs from the USEconomy. The magnitude of the deficits are astounding. China, with its $15 to $18 billion monthly bilateral trade surplus with the United States, could afford an entire naval fleet each year, every year. They could keep the Japanese and Korean shipyards bustling to emerge as the fastest growing employer on the planet. Chinese leaders face a difficult decision. If they do nothing on yuan currency upgrades, they create internal strains within their economy, their banking system, and their Asian neighbors. They have to date relied upon managing the Chinese bank reserve ratios. That has created two types of stress, depending upon low ratios enforced, or high ratios. This is discussed in the June Hat Trick Letter issue in more depth. US Military No need to go into a wide discussion. Too much politically charged stuff. If the United States attacks or invades Iran, for whatever reason, whatever motive, whatever weapon, whether threats are real or imagined, whether legitimate or contrived, consequences occur. The biggest problem nation is not Iran, but Russia. They sell Iran nuclear technology. They sell Iran defensive missile systems. They sell Iran uranium refinement equipment, and supply Iran refined uranium. They cooperate with Iran in connecting oil supply to the Iran pipelines. In the background are two threats never mentioned in the US press & media. Iran won the great oil pipeline war. This is not a “winner take all” game, but without doubt, most of the Central Asian oil output can flow through ports controlled by Iran. The Iran Oil Bourse is set to sell crude sooner rather than later, but in euro currency transactions. Nowhere will the topic of the Petro-Dollar and its vast banking superstructure appear in the US press. It is taken for granted. It is a self-designed purposeful blind spot. It might be motive for war when directly challenged. Just today, the Saudi finance minister Faisal warned that military attacks on Iran could easily result in at least a doubled crude oil price. This is a standoff, a “lose-lose” situation requiring cool heads, mature leaders, constructive engagement. Curiously, USGovt leaders might be forced to demonstrate they are indeed toilet trained. Stranger still, the United Nations might act as the baby sitter parent, making sure the kids act nice and play fair. Ayatollah Khomeini in Iran indirectly threatened the West with an oil cutoff, as he flicked the nose of the United States. “If the United States makes a wrong move regarding Iran, definitely the energy flow in this region will be seriously endangered. We are committed to our national interests and whoever threatens it will experience the sharpness of this nation’s anger… Today our nation has taken a step forward and has bravely resisted. There is no international consensus against Iran’s nuclear program except by some monopolist countries and this consensus has no value… You [United States] are not capable of securing energy flows in this region.” Although Iran holds the world’s second largest oil reserves, and is the fourth largest oil exporter, it lacks refinery capacity. Iran imports a sizeable 40% of its 15 million gallons (50 million liters) in daily gasoline consumption. It seems every nation has a protruding vulnerability, even feisty Iran. Iran has at its disposal state-of-the-art Russian Sunburn missiles. The US naval fleet is sure to be attacked if the US attacks Iran. In fact, Iran has been conducting drone reconnaissance over US warships, to test our response. Worse, Russian President Putin has promised to come to Iran’s defense if Teheran is attacked by an external aggressor. Such games, never to mention the aggressor. Lying in the background are the Israelis. Their participation in the intelligence, planning, black bag operations, and more, receives little attention, but is very real. In 2001, Russia, China, and four former Soviet republics formed the Shanghai Coop Organization (SCO) for the chartered purpose of security, as well as mutually collaborative economic development. Recently, the SCO activities seem to be more focused upon energy project development and large long-term contracts for crude oil and natural gas. China operates with much less disdain for dictators and tyrants. They break bread easily with leaders who make no pretense of civilized behavior. Hence they have succeeded to make more alliances with rogue nations led by genocide practitioners such as Sudan. Oil pipelines are the prizes, even in West Africa. The US is being outflanked on the geopolitical chess board, not just by China, but by Russia. These thorny topics are treated in the June Hat Trick Letter issue. Russia Pushes Aggressively Let’s face it. The Soviet Union might have ended the communist system. But the KGB continues, with its former head Vladimir Putin now sitting as elected president. The only presidential election more contested than in the United States, with fraud and rigging among major nations in the last decade, is the Putin election inside Russia. Their government is often described as an autocracy, meaning a single strong man dictates the policy. The rule of law is far gone, displaced by convenient legal treachery and violations of legal contracts so widespread, that most Western nations have criticized Putin sharply. The Yukos confiscation was a criminal act. The auction of Yukos property was a rigged event. The jailing of Khordorkovsky reads like a comic book. The auction was a blatant grab by Putin and his cronies handled in secrecy, under the guise of rectifying the blatant grab by Yeltsin and his cronies after Gorbachev unloosed a measure of capitalism. Putin is a master chess player in real life. He is proving to be an excellent poker player, whose hand is much stronger than we like to admit. He is also a competent syndicate head, delivering on midwinter natural gas shutoffs to Ukraine, affecting Europe. He has issued threats to redirect natural gas supply away from Europe amidst obstacles put in place by London govt officials. Gazprom wanted (and succeeded) to acquire the British natural gas firm Centrica. Other battles have been waged with London stock exchange officials, amidst dispute over the initial public offering (IPO) of Rosneft. Their properties are in dispute from the controversial Yukos auctions. Watch the pricing Rosneft shares. Should Putin push aggressively for more complete monopoly into Europe of energy supply? Should he push on the financial front with sale of crude oil in euros and rubles? How will the new Russian exchange for oil and gold play out? Are these maneuvers evidence that the US Empire is fading, or is weakening? The United States leaders rarely criticize Putin or Russian policy, until lately. These incredibly dangerous issues are discussed in the June Hat Trick Letter issue. The price of crude oil and gold will be affected. NOT LIKE 1980 Oftentimes one hears how the current commodity boom resembles the 1970 decade, when gold peaked at $850 per oz in 1980. My analysis finds little in common except a rising crude oil and gold price. Sure, oil and gold zoomed in price to gather world attention. But that is about as far as the parallel extends. Here are differences, which paint a profoundly different picture in 2006 from what we lived through in the 1970 decade. China was asleep three decades ago. Well, economically anyway, since Mao Tse Tung and Chou En Lai were hardly conducive to slumber. Now China serves as the world’s factory to build things, from electronic products to fiberoptic equipment to housewares. They have put in place a firm wage ceiling in the entire industrialized developed world. Wage gains are pathetic in the US and Europe. Outsourcing of jobs is a trend which is highly likely to continue as long as Chinese professional wages are 10% of those in US & Europe. India was a quiescent subcontinent three decades ago. Exploiting their language skills has enabled a grand economic development which extends far beyond simple call centers. Software development in Bangalore is a high priority project for numerous major US firms such as IBM, Microsoft, and Oracle. In fact, software jobs in the US are hard to come by, unless you take a 30% pay cut upon layoff. Computer and connectivity speeds used to stumble along at 10k and 25k baud early in the 1980 decade. In the previous decade, connection was not even done. Cable TV was in its infancy. Modems were just hitting the market. Computer networks were in their infancy, with niche leaders Cisco and Wellfleet kicking butt and taking names. Nowadays computer networks connect with international subsidiaries for file sharing worldwide in a blink of an eye. Internet access is broadband for those willing to pay for it. South Korea and Ireland are the world’s most widely connected in high speed flow. The United States lags Asia and much of Europe. Information flow is rapid, available, and easy, unlike the 1970 decade. Price structures have adjusted accordingly. Although Maestro Greenspan regarded this fast info flow as a justification for higher stock prices, it was the opposite. It has leveled the playing field, and has brought down prices and corporate profitability. Competition in this environment is fierce, the opposite of three decades ago. The concept of “cost push” was easy back then, impossible today. Hedge funds did not exist in the 1970 decade. Sure, private equity funds existed, but not to the tune of $1.2 trillion collectively on a global scale. Nor did central banks deploy intervention counter-measures so routinely. The financial practices of today bear no resemblance to the past. In the 1980 decade, the Plaza Accord was informally ratified in order to bring down the USDollar, to enable a return of US mfg to our shores, to restore balance of trade. Paul Volcker, the last competent USFed Chairman, raised interest rates in order to attract foreign capital and quell the fires of price inflation. Arabs took the sucker bet, as they recycled their petro surpluses into USTBonds. Arab bond investors took a 20% to 30% loss as US monetary inflation was permitted to pay for the higher energy bills, when all was said and done. Arabs served as bagholders. Today, both Arabs and Asians have begun to resist this shameful role, but they still hold far too much USTBond paper. They are turning to gold as a diversified asset. Their USTBonds held in reserves are an order of magnitude greater in size than they were three decades ago. In the 1970 decade, the Soviet Union counter-balanced the United States. The USSR was seen as belligerent, while the USA was seen as more the peace maker. My oh my, how we live in different times. The Soviet Union is gonzo. The United States is largely unchallenged. Nowadays, when the US takes military action, both crude oil and gold shoot up in price. The TBond might not work so well as a safe haven anymore. Gold works better, maybe not in the last five weeks. When the gloves come off, and the stakes are great, and the opposing forces are monumental, gold works better. The Wars The Vietnam War ended in 1971. We declared victory and went home, which sounds better than the reality. Leave the details for historians. An oil embargo slapped against the United States by Arab nations spawned the birth of OPEC itself. US support for Israel riled Arab nations. A certain strain existed, but without direct military conflict between the US and Arab nations. The Shah of Iran was firmly rooted in Teheran, a puppet friendly to the West. Saudis were new in their rule, busy collecting billion$ at the expense of an impoverished nation. The US cut a deal without formal treaty. The US Military was to provide security protection for the Saudi royals, in return for their support for US financial markets (stocks & bonds & property). The current situation involves much wider conflict, occupation of an oil producing nation, and direct armed conflict between the US Military and Islamic fighters. A war over the “domino theory” of spread communism has given way to a war of “Islamic terrorists” whereby the intractable politics of religion has been ignited. To me it remains unclear who lit the fuse. ©
2006 Jim Willie, CB
The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
Jim
Willie CB is a statistical analyst in marketing research and retail
forecasting.