SPENT
DOLLAR MOMENTUM
by Jim Willie CB
November 7,
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. The USDollar has been a certain beneficiary of the engineered energy decline, whereby crude oil has declined over 20%, unleaded gasoline has been pushed down by 80 cents, and natural gas was hammered but bounced strongly. That enormous lift at the hands of Jason of the ArGo(ldma)n-auts might be coming to an end. The inverse relationship between crude oil and the United States currency is well known. As energy costs subside, prospects for sustainable growth improve within the USEconomy. Well, until you factor in housing and its momentous multi-tiered crash. Let’s call a spade a spade. The list of risks to the USDollar reads like a laundry list, so long, so broad, that is should be frightening. It covers every single pillar from the last decade, each now eroding. For the last four years, the USDollar has been supported for some rather perverse reasons, among them the Asian desire both to retain its customer base and to bleed the US-based capital until the body American withers. From a manufacturing perspective, a withered corpse is precisely what the USEconomy resembles, decked by (asset) bubbles and flesh eating (consumer) microbes scattered across the body. The Asian project still is at work, as a truly tragic transformation continues like from a Sun Tzu playbook. My joke told in many circles in the last year has been that the USDollar is backed by a powerful military, and not much else. One should not find comfort in such a thought, unless your aggression greatly exceeds your mental process. The late summer USDollar momentum seems to have dissipated. The long-term downtrend might be ready to resume, once past the highly charged US elections. The currency market might be factoring in the election resolution, as much as anticipating a changed position by the dynamic duo. Goldman Sachs could easily see the merit in a flip flop, free from politico accusations. They are highly likely to start talking and pushing up crude oil, matched by talking and pushing down the USDollar. JPMorgan simply works silently in the background. Their only unwanted emergence from the shadows came collapse five years ago during the Enron, whom they mentored. The duo are in the business of making money, in any and all manner, free from the distraction and annoyance of law. Who is to stop them from market manipulation? Surely not the USGovt or any of its servile agencies. Many of them are embroiled in their own corruption. Most economic forecasts are so far off that they are funny. Only a small fraction are based in reality. Most optimistic forecasts are for business promotion purposes, couched as unbiased and founded in analysis. They are instead founded in business profit and support of entrenched positions and cheer leading to keep the public invested. Of course, most forecasts incorporate the housing decline as a factor, or they claim to do so. The common themes missing in most economic forecasts are MOMENTUM, FEEDBACK LOOPS, and RIPPLE EFFECTS from the housing bear market downturn. These effects and dynamics are covered in my Hat Trick Letter reports. Other powerful feedback effects are to be seen from the falling USDollar on rising costs. The housing decline is in its early stages, nowhere near its end due to powerful momentum. The ugliest aspect of the crisis will be the resolution of homeowners struggling underwater in their mortgages, who owe more than their house is worth. They will bail out, and make national headlines. My expectation is for the brutal bear to rip into the housing market for at least another two years as ripples hit like earthquake after shocks. Lending available funds is the issue now, not interest rate. Lending has gone from corrupted lax to somewhat restricted. Soon it will turn to strictly measured and then desperately restricted. FROM THE MUNICH GOLD SHOW As William Engdahl pointed out to me in a personal conversation in Munich last weekend at a gold conference, the USDollar world currency standard is one of two primary pillars for US global supremacy, along with an unrivaled US Military. We discussed how the most important battles to unseat the USDollar in its standard for international payments clearly involve the sale of oil in dollars. Engdahl stressed in strong terms the growing hidden confrontation between the United States and Russia, as outlined in his recent works. Behind the scenes, he describes how a grand battle on the global chessboard has extended the establishment of military bases surrounding the Russian state. President Putin has responded in what can best be described as a backlash or backfire in policy, after recognition that Khordorkovsky was a “chosen son” of US Oil Giants working with the USGovt. That fact has eluded the intrepid lapdog sleepy US press reports. The real problem that US leaders have with Iran can be traced to Russia. We have a renewed cold war ignited. At the Munich show, Marc Faber had them riveted. Bill Murphy had me laughing privately as we traded stories and marveled at his sponsored successful Yukon Roundup in 2005. Jim Turk had me worried sick about closed borders for money migration. THE CRUDE OIL NEW SPIN Has anyone noticed the sudden shift in spin? The financial media has seen fit to remind us of a Nigerian threat to reliable oil supply, and a risk of Saudi continued oil output. Two weeks ago, my regular reminder to friends was to expect this shift, a bold maneuver from the evil twins Goldman Sachs and JPMorgan to signal their changed stance. These powerful twins can be expected, like night follows day, to move their money into long energy positions in a revision which might have begun. An intermediate rally in energy be coming very soon, one to weaken the USDollar. The next news story on energy might involve Russia with their utterly blatant confiscation in Sakhalin Island aimed against both Royal Dutch Shell and Exxon Mobil. It is not new news, but it is news to repeat a few times to push energy upward, now that the “boys” have their positions in place at the bottom. The next story after that might pertain to renewed warfare in the intractable Lebanon tinderbox. As crude oil rises in price, the USDollar falls. THE DOLLAR CHART The 2005 year featured a powerful long-term counter-trend rally up in the USDollar which brought relief to a universally accepted bearish sentiment against the world reserve currency. Since mid-2006, a powerful intermediate rally in the USDollar overcame a badly oversold decline. The recent rally has been incredibly weak in my view, given what has occurred with the energy market. A 20% to 25% decline in crude oil should have lifted the buck considerably higher, a testament to its pervasive weakness. See the firm rigid 20-week moving average in its chart. It acted much like a brick wall in the last few weeks. The pennant pattern heralds a painful decline very soon, confirmed by the upward gold move. The important weekly moving averages do not preview a promising forecasted resolution.
CENTRAL BANK REVOLT Yes, the word “revolt” applies. The list grows for central bankers who have strayed from loyalty to the Almighty Dollar. The most vocal with harsh criticism, Russian bankers wish to devote 10% of their reserves toward gold. Furthermore, they intend to gobble up the entire Russian gold miner output. Once more, here in reserves management, we find Russia to be our adversary. The United Arab Emirates also plans to diversify more toward gold, away from the USTBond. On November 4, a group of Arabs will meet to decide on pan-Arab policy for reserves management. China has a cool $988 billion tucked away, with diminished and long faded interest in accumulating more. CURRENT ACCOUNT DEFICIT The trade gap continues to set new high records. No longer do we have the benefit of seeing investment in financials offset the trade gap. In the last three quarters, the average deficit in the balance of investment income has averaged almost $3 billion. The latest recorded such deficit was in 2Q2006 at minus $4.15 billion, almost double the Q1 amount. Bear in mind that it averaged a surplus of over $5 billion per quarter for the past few years. This is a huge momentous shift. The current account is composed of the trade gap (for goods & services) plus the investment gap. Such investments cover stock dividends, bond yields, property rents, and intellectual property royalties. The balance of investment income gives a signal for the direction of investments generally. HOUSING The great housing bear market has begun, minimized in its damage and longevity. The louder the denials, the most assured the painful downturn. This will turn out to become the worst housing bear market since World War II. The $1200 billion in total construction spending in the 12 months ending August 2005 will not be repeated. Expect calls for a “Soft Landing” in spring 2007. Then, when it fails to arrive, expect calls for it to be realized in autumn 2007. Then, when it fails to arrive, expect calls for it to arrive in spring 2008. You know the drill. Successive forecasts will contain less credibility than the last. Some stories have begun to circulate concerning diverse material suppliers to the housing industry, the dreaded ripple effect. The lenders have weighed in with their pain, as have the builders. Harken back to 2002 when economists would regale us with stories about the positive impact, most of which they choose to delete from memory nowadays on the down side. CONSUMER ECONOMY In the 12 months ending March 2006, a mindboggling $825 billion was extracted from home equity by Americans. An entire economy has been underpinned by spending money which appears in the home, evidence of insanity. Nobody seemed to ponder what happens when the direction changes, especially the greatest financial charlatan in US modern history, former US Federal Reserve Chairman Alan Greenspan. His departure in 1996 from prudent monetary management, to embrace the irrational exuberance which he warned about, led to the abandonment of the US manufacturing base, the export of jobs, and the heavy reliance upon inflating and inflated assets for economic vitality. Early this month, Greenspan made another shallow self-serving (to his personal legacy) statement, as he claimed “early signs of stabilization” in the housing industry. The Gross Domestic Product for 2Q2006 was a flimsy 1.6% officially, lifted substantially and fraudulently by a bonus from the shrinking car industry from falling prices amidst horrendous industry distress and job cuts. Anyone who does not believe in the tooth fairy needs to subtract 5% from the official GDP so as to earn entry into the world or reality. Exaggerations are constant, pervasive, and obvious. We have been in an unrecognized recession for two consecutive quarters. It is really convenient to have a GDP which contains a positive bias (lie) of 5%, since that means our economy is thus recession proof. BUSINESS INVESTMENT & PROFIT Business investment by corporations a year ago should reverse, as consumers reel in spending. The captains of industry will react when the housing and spending downturn are better recognized expenditures. They will instead most likely devote more money into stock buybacks, and ensure their stock option packages of profitability. When consumers follow through on their retreat, retail chains will suffer, hiring will suffer, profits will suffer, and momentum will gather. The construction industry composes 10% of the entire USEconomy. It is in fast retreat. Profits will follow in that direction. Foreign investors are more aware that housing led the USEconomy up and will lead it down in a symmetric fashion. UPCOMING USFED DESPERATION They are not sounding desperate yet, but they will. Count on it. The experience back in late 2000 and early 2001 should be a vivid reminder that the USFed policy can turn on a dime suddenly. All through late 1999 and up to June 2000, the knuckleheads at the USFed under the Pied Piper Greenspan himself led the nation of investors off a cliff. This time is no different, except that the housing market is the culprit, not the tech & telecom sectors. By early next year, the nonsensical (but highly useful) Soft Landing will be clearly more like a continued “free fall” in the housing market. Expect the USFed to surprise the markets sometime between January and March with a desperate rate cut. Watch the USDollar then descend rapidly, then approach the DX=80 mark. Gold will react positively in anticipation. EMPTY ASIAN SUPPORT Since the summer of 2005, Asians have largely been a “no show” on USTreasury Bond support. The gains from China are offset by reductions from Japan. An Asian boycott has been in place for almost 18 months, with little publicity, notice, or fanfare. A major pillar of USDollar support has been removed. China succeeded in warding off the US Congressional trade tariff, probably more from paving the way for bank IPO’s to Wall Street firms. Paulson did well in smoothing relations last month when in Beijing, but most likely for Wall Street benefit, not economic benefit. Forget his words, follow the money. Big investment banking fees are due to Wall Street firms. Perhaps phony bank balance sheets accompany the IPO issuance. PERSIAN GULF SUPPORT The ugly rub from lower crude oil prices is that Persian Gulf oil producers cannot support the USTreasury Bond as much as before. With Asian absent in USTB support, the heavy lifting was done out in the open by Arab sheikdoms. Behind the scenes are the many illicit London-based firms busily buying USTBonds with freshly printed money from the Dept of Treasury. Their tracks are covered by the blackout on the money supply statistic. An isolated USGovt with a well oiled printing press as the primary support device makes for a dangerous currency situation. BOND YIELD DIFFERENTIAL For the last two years, the greater yield offered on USTBonds has kept the USDollar aloft. Heck, who needs it when the engineered energy decline has fortified the clown buck? But woe is that buck when the energy rally ends on the downside. Like now. The European Central Bank hiked rates by 25 basis points in early October, and nobody cared! Even the Swiss National Bank hiked by 25 bpts, and nobody noticed. They do now that the energy group has revived to show signs of life. Trichet mentioned the hike was “not the last” but no big deal. Notice has returned to the yield differential once again. The useful gap between ECB and USFed rates shrinks, to be made even narrower in time. Another hike by the ECB will be coupled with a USFed kicking & screaming into a coerced cut. That will ensure the USDollar as the victim in bond speculation. Money will come flying out of USTBonds in that spread trade. Gold will rejoice. CONCLUSION The scorecard is turning quite negative for the USDollar. The onliest factor to be put forth might be the weaker crude oil price, which seems to push the clownbuck upward but only minimally and only temporarily. However, breakdown of Iraq into civil war, resumption of war in Lebanon, or new attacks pointing to Iran, these will lift the crude oil price. The increasing aggression displayed internationally by the United States has left foreign investors traumatized. They are pressured into USDollar support, yet they feel encroached upon in a war shrouded in both dubious success and suspicious motives in their eyes. The hidden threat of frozen assets held in US banks is the discouraging kick in the shins which invites walking away by investors in the opposite direction. Continued support of US financial assets is known by foreigners to sustain the very imperialism which they find objectionable. The confrontation with Russia nears with each passing month and each successive hostile maneuver by Putin’s energy machinations. Geopolitical reasons only add weight to the deteriorated fundamental reasons to shun the USDollar. The USGovt will conjure up a rally for USTreasury Bonds every several weeks somehow, by the hands of their financial agents on Wall Street. Do they act in the interest of the nation or their own incumbent group in power? The liquidation of hedge funds under attack actually resulted in USTBond buybacks from the short anchor in broadly placed spread trades, their favorite device for leverage with stability. The attack on their exposed energy long positions was absolutely brilliant. In fact, too brilliant to boast about publicly. Well, at least not until after the elections. The weakening USEconomy hurts the USDollar, even if lower energy demand reduces the oil price. The world reserve currency is backed into a corner. Beware a wounded bear though, as acts of desperation cannot be dismissed, and might be anticipated, especially if majority control of the Congress is doled out by voters. Do voting machines represent the corporate interests, in repudiation of people interests? It is hard to think otherwise. Perhaps Ukraine or Spain or Argentina could reveal the path for the wayward United States toward crucial reform in the democratic voting process. The stated objective to spread democracy rings hollow when that same democracy faces erosion at home. The whole world is watching, and it don’t look good. Foreigners from more than a few nations demonstrated their utter dismay, alarm, disgust, consternation, sadness, disappointment, and shock at recent developments to me at the conference last week. The common thread they see is pervasive corruption, ineptitude, and market interference. We maintain our superiority complex somehow, which is the ultimate satire on the world stage. THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS From subscribers and readers: “I find your work incredibly wide-ranging and thorough, with insight that cuts through the haze and all the confusion surrounding the markets and the global financial system. You take so many complex elements and manage to combine them into a unified and comprehensible whole, and do it in such a readable style, with strong fundamental and technical analysis.” (Dan W in Missouri) “I think the last two public articles woke me up to the fact that I am doing myself a disservice by not subscribing. So here I am lamenting not having done this sooner. I've enjoyed only two other authors well enough to subscribe to their newsletter. I felt that something was still missing. 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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.