EURO
KEY TO US$ DECLINE
by Jim Willie CB
January 5, 2007
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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 decline remains in progress, the one which began when the United States citizenry and its Wall Street aristocrats observed the great eating orgy known as Thanksgiving. Nothing can stop a holiday where Americans make eating the order of the day. All else sits still, even markets. The USDollar began its breakdown then, and it continues. The past week only served to provide a correction to the breakout. Technicians call it a revisit to the point of breakout. Some offer that it is akin to a man emerging from a bathroom window. He sticks his head out first, then pulls back in. Next is emergence of the entire upper torso to be followed by the entire body afterwards. In this setting, the euro head moved back inside the bathroom. Next is the continuation of the foreign currency uptrend, with more uplegs, led by the euro and sterling. The yen is the wild card. A starkly plain fact of economic life is that a USDollar correction contradicts all claims of a USEconomic recovery. Instead, it screams “RECESSION” and confirms the inverted Treasury Yield Curve. The slump in the energy and copper market also testifies to the recession underway. Don’t look to the Banking Stock Index BKX for guidance, since those guys are way too competent to miss speculative opportunities to make big money. The spread trades (to profit off yield differentials) and the carry trades (to do the same within different currencys) offer the big banks plenty of opportunity to pick low fruit for profit. They are most likely tipped off by Goldman Suchs after they have their positions in place, with an “all clear” on absent risk. The magnets for investment in the last twelve months have been outside the United States all year long, another signal of USDollar unattractiveness. FIRST STAGE OF USDOLLAR BREAKDOWN Much talk has floated like verbal vomit about the benefit to US exporters from a lower USDollar. If so, then the net benefit to the USEconomy would show up in a remedied trade gap. This is mere material suitable for promotional literature at Wall Street firms, surely not fit in our world. One needs a manufacturing base to pull off that stunt. Not happening. We still import much more than export, as any recovery is founded upon imported goods purchased in both retail consumption and foreign made equipment. Import growth has superceded export growth since 2003. Also, multi-national firms will enjoy favorable currency translation of operations, but that encourages more jobs shipped overseas. To be sure, Caterpillar and Boeing will benefit from currency translation. Talk of benefits is pure political pablum and Wall Street deceptive spin. Any market correction to the obscenity whereby the United States demands 80% of world capital will NOT come with any benefits, only pain, crisis, financial loss, and disruption. Probably war too. When the buck broke down in thin holiday trading during the week of Thanksgiving, the real story was with the major international currencies. The euro, swissy, aussie, and sterling all jumped markedly, enough to grab headline news. The USDollar breakdown, plunge, steep decline, severe adjustment shook the global financial world and captured its attention in loud manner. The intractable imbalances are not resolvable, and will present a clear & present danger for years to come. What happened in late November was the first of a great many earthquakes in a long sequence whose trade and debt imbalances serve as tectonic plate gaps rubbed raw by destructive foreign policy discourse amidst power games. The earthquake event six weeks ago made all the more urgent the economic summit meeting in China. The summit might buy more time, but will not in any way fix anything. The main outcome will be for more Wall Street profiteering. More IPO’s are in the pipeline, ensuring heavy profit for Chinese leaders on the inside track, and for Wall Street firms who are also on the inside track. The line between government and big private firms has been blurred, if not eradicated, all in the Mussolini tradition without a peep objection by the clueless public. Inside word has it that the Beijing Summit was a colossal failure. Chinese leaders will permit the yuan currency to rise at a slow pace to their liking. They will open their bank system at their own pace and pleasure. They will collude with Wall Street firms to conceal the damaged financial books on banks to undergo initial public offering. They will dribble income for US intellectual property in a slow laughable trickle, as dictated for software, movies, books, music, and patents. They will diversify to EuroBonds and gold as they damned well please. They will continue with extraordinary energy projects with Iran, much to the displeasure of the USGovt, whose embassy delivered a warning to Beijing just last week. Games will continue until it is clear who is in charge, the credit master! Such signal might put an exclamation point on the nice warm fuzzies from the summit itself. In my view Beijing wants four things. First, they want their own regional Asian currency which would stand as the foundation for an Asian credit market. Second, they want a seat at the G8 Finance minister meetings, deserved from good trade behavior or not (see the World Trade Org complaints). Third, they want to expand their military, to be bought with USTBonds sitting around and perhaps assisted by giant Korean shipbuilders (provided technology is donated). Fourth, they want unfettered unobstructed access to the US markets for selling products. Be sure that the USGovt will comply on all counts, all in time. In the next few months, the USEconomic recession will be more detectible. The US housing decline will stubbornly continue. The negative effect on the USDollar will be relentless, round after round. What has happened in the last week or more is mere technical posturing within the FOREX market. However, as outlined in the upcoming January Hat Trick Letter report, the requisite USDollar adjustment process contains numerous powerful countervailing forces. Import dependence renders the USEconomy as vulnerable to necessary US$ corrections. The entire cost structure will rise again and again, to obscene levels actually from US$ declines as all costs rise. Expect to see $3 per gallon gasoline again in 2007, most likely during the second half. Foreigners will come to realize they face massive losses in the tens of billion$ within their FOREX reserves. They must diversify. When they do, more shock waves will come. Gold and silver will respond very favorably. Foreign exporters, primarily Europeans, will suffer from erosion to their export trade. An exported higher currency is lethal and usually resisted. Asians are more willing to provide a nearly total sterilization to the influx of US$ in balance of payments. The buck has nine lives, and perhaps only five or six have been used, fewer than most realize. The wild card is the utter contempt and disgust for the USGovt Administration from global corners. When incompetence, arrogance, recklessness, and aggression are meted out with poor communication skills, the world’s key players react eventually in ways at their disposal. My view, expressed on numerous occasions, has been that the trade protection issue will undermine relations between the United States and China. Trade protection will be seen as the least undesirable of solutions, and at the same time the most politically expedient for the nouveau ambitious candidates. As US workers lose jobs in droves, US corporations will continue to chug along and earn profits. Next year should deliver more job loss pink slips, as the USDollar declines and business costs rise. Job outsourcing is a direct consequence of rising cost pressures domestically. Voter angst leads them to urge their Congressional reps to impose tariffs, declare quotas, and protect jobs. The effects are to be two-fold. First, anger and resentment will grow in Beijing, probably enough for them to sell large tracts of US$-based securities. That will push the USDollar down hard, even against other Asian currencies, and serve to lift long-term interest rates. Second, prices will rise inside the USEconomy, from reduced supply and from higher import prices. So voter pressure and demands are certain to create a markedly worse situation. It is coming as sure as night follows day, since Congressional leaders appeal to voters and their emotions, with little respect for the right course of action. Some emotions are destructive. In a Wall Street Journal poll conducted in early Dec2006, a majority 61% of Americans believe the USGovt is “not tough enough” when dealing with China. EURO LEADS AMONG FOREIGN CURRENCIES In late November, the euro currency broke above the critical 129 level toward my extended 133 target. The euro went past it to 133.5, and then settled back below 132. The next euro move depends upon data from the USEconomy and housing market in particular. More confirmation of a serious slowdown will send the euro up, since Europe continues to be firm in growth, and the ECB has not finished with rate hikes. A US rate cut and continued ECB rate hikes will cause havoc in ongoing USDollar declines, in time to push the euro over the 135 mark. In the immediate, beware of a pullback in the euro slightly below 130, in order to fill a gap. Both key moving averages are rising nicely. In the December issue, coordinated activity was described of a collusive nature by central banks, as they felt the FOREX pressures squarely. Paulson led the defense with mere words, hardly realistic, but perhaps more feared than believed. All summer long the euro traded between 125 and 129, considered ironclad. No more! Now we see the euro as filling the dreaded gap to the dollar longs. This too shall pass, all in the course of TA101 (technical analysis basics).
The short-term correction after the breakout has come on cue. The technical pattern of retreat to the point of breakout is commonly seen. Also, expect stories of threats to German exporters soon. We have already heard them from Airbus officials, intent on holding market share. They might soon find themselves with both an inferior product to Boeing and a strong currency forcing a higher price. However, it should be noted that most of German exports are within the European Union, insulated from currency shifts, according to the euro design. In my view the euro currency is the most important currency to observe for the USDollar breakdown. It is not under complete control like the yen. Sure, the Bank of Japan might unleash some illiquidity anti-tidal waves. But the Euro Central Bank still has a spine. The euro is likely to reach 140 during this calendar year, with the next stop being 135, the old December 2004 and March 2005 high. The Aussie and British sterling have been the strongest major foreign currencies in these past few weeks. The Aussie presses for multi-year highs. Mineral exports and sky-high 6.25% bond yields make the difference, despite unstable fiscals and fundamentals. Both key moving averages are rising nicely, which suggests a breakout beyond the key 80 mark before the spring. The Aussie rise is testimony to the importance of bond yields, eclipsing economic fundamentals and budget deficits. The British pound sterling is a mystery. It has been the weak pressure point to the nearly unprecedented irresponsible monetary management policy by the Bank of England. My suspicion is they are aiding the USDollar, being a principal contract master embodied within the US Federal Reserve itself. In fact, the BOE policy has been so irresponsible as to be dubbed “hands off policy” by expert observers. Sterling will continue its breakout, perhaps soon to reach the psychologically important 200 mark, as long as the lenses used to see inflation are safely stored in the cupboards. Heck, most supposed experts and pundits could not even define inflation. Is that price inflation or monetary inflation or debt inflation or asset inflation? And what about exported inflation and wage deflation, let alone energy inflation and cost inflation? Be sure to know that confusion on all matters of inflation is a prime directive among central bankers. CONCLUSION The biggest risk detectible on my radar is for the US Federal Reserve to remain stubborn. As long as they extol the mythical strength of the USEconomy, as long as they cry wolf at the ravage of price inflation threats, the risks rise for investors of gold, silver, and crude oil. The longer the buffoons at the USFed hold back on interest rate cuts, the more damage will be born by the housing market, and by the upside down consumption-based economy, and by investors of commodities (whether physical or stocks). In a reckless policy execution, the USFed is playing a grand game of chicken. They want demand destruction, but risk economic downward momentum led by housing. They truly believe they are controlling price inflation, but they are actually risking a situation which might not respond and take to the next low rate medicine. Their next move is to cut rates. Blather from the USFed to cite an inflation threat and their vigilance to fight it speaks not to rising wages and rising prices from cost push. It addresses, nay screams, to their fear of a falling USDollar and the associated systemic rise in prices. Why? Because the United States has become fatally dependent on foreign finished products, foreign energy supply, and foreign credit, reminiscent of a Third World nation. All that is missing is the goose step among marching military columns. The gold price and silver price and oil price all will rise with a falling USDollar. And let’s not forget the mind numbing destructive failed policy in the entire Middle East, from each and every corner. Iraq is the quicksand. Iran is the powderkeg. Israel is the friction. Europe stands in the crossfire. Russia lies in wait, in far more control than the sleepy lapdog US press & media choose to report. For that would be to proclaim a return to the Cold War. That icy belligerence of conflict is surely here, but on the energy front, which has earned the title the Global Energy War by me since 2003, ignited by the Shock & Awe of the Iraqi War. The only thing shocking is the degree of failure. The only thing of awe is the stubbornness to continue the course. The words mind numbing fit more and more with each passing day. Ironically, the decisions not to bomb Iran have kept the USDollar up, and the crude oil price down. The decisions not to resume bombardment of Beirut have kept the USDollar up, and the crude oil price down. In the meantime, the USDollar remains fatally wounded, yet Uncle Sam, who leaks bills from his wallet, continues to walk upright. He is a hollow replica of his former robust self. Numerous friends and foes alike prop him up. One must actually check his pulse to see if he is alive. It might just be a skull & crossbones under the royal robes worn thin by the years. The price of gold, silver, and oil will benefit from the inevitable repeated USDollar declines, which will occur less often than expected for practical reasons.
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.