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Jim Willie CB is the editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.

The last several months have provided a keen lesson in currency defense by a nation which has been written off in many circles as owning a dead and hopeless currency. Some key inter-related feedback loops have been on my radar, each vitally important and changing, which underscore in my viewpoint how major markets are inseparable, each inter-connected, and integrally important if the USDollar is to avoid a much deserved crash. A quip of mine at a conference one year ago centered on my claim that the USDollar was backed by the full force of the US Military. While true in some respect, the actual defense day to day entails a green triangle not to be confused by the iron triangle which fortifies the Pentagon funding, namely the US Congress, the defense contractors, and the lobbyists when grease the funding wheels. Complementing this death grip which has contributed over decades to do irreparable harm to the USDollar, the green triangle consists of holding down gold in a straight jacket, and holding down crude oil in a giant clamp. Never stated is its purpose to reinforce the USDollar from its implied inverse leverage device as hedge funds run for cover. The greenback and gold shine in opposite directions. The greenback and crude oil flow in opposite directions. Goldman Sachs has been at the controls on most of the master machinery.

From 2001 to 2006 much attention has been given to the gold cartel, as they conduct ambushes overnight, pull the rug out from the gold bid at 10 o’clock every morning, dump bullion on the market periodically, promise further central bank gold sales, corrupt their new exchange traded funds as a new hobby, and more sinister games. The sheer size of the outstanding short positions, never with any hope or intention of covering, testifies to the absence of a free market and the institution of a corrupt mangling of the regulatory oversight function. The purpose is to prevent gold from rising in price in any sustained uncontrollable fashion. Treasury Secy Paulson is on record as stating that their objective is to keep a lid on the gold price, which stands as the publicly readable meter on all matters pertaining to inflation and its expectations. The other motive is to screw up the entire perception of inflation and its conceptual understanding, a project which fully deserves the claim “Mission Accomplished” to the masses. An entire generation of indoctrinated economists fills the ranks of colleges and universities.

When the gold price falls, the public perception concerning price inflation relaxes. Better stated, their perception of monetary inflation as an alarm is toned down, thus fostering milder price inflation expectations. With lower inflation built-in gauges at work, comes less erosion to asset prices such as bonds, which are vital to most stock and currency markets. The end result from a subdued gold price is less diversification to other competing currencys such as the euro, and at the same time more USDollar support. Market reality dictates that shortages will persist since a coerced lower price will ensure inadequate supply.

The other side of the Strong Dollar policy has been the other oil cartel, also known as the current Administration of the USGovt. While gold is, or perhaps was, more within the direct control of central bankers via bullion dumping, crude oil has been more within the domain of hedge funds and other mainstream trading houses like big banks and brokerage houses. The funds have managed to bid up the oil price whenever the USDollar sagged in weakness. The Paulson team has gone where no minister has tread or traded before. The Energy Decline Initiative witnessed and engineered last autumn, for the benefit of the ruling party (oops, did not succeed) and economic participants (oil consumers) was something to behold. By cutting by 6% their Goldman Sachs Commodity Index weight for unleaded gasoline, they forced $6 billion in gasoline contract sales, enough to trigger a months long bear in the energy complex. Now that is impressive leverage! This newfound energy trend was sufficient to support the USDollar for another few months. The last year might convince a shrewd iconoclast and suspicious person that the USGovt has been run by a syndicate of sorts for many years. That is certainly my position. The business units of the shadowy group are for the intrepid investigator to discover, not the lazy reader or viewer who relaxes for further infusions doled out by the compromised rags and networks.

When the crude oil price falls, the public perception concerning systemic cost relaxes. Better stated, their perception of the entire cost structure as an alarm is toned down, thus fostering more optimistic growth expectations. With lower cost built-in gauges at work, comes more promising prospects to corporate profits and household spending patterns. The end result from a subdued crude oil price is less speculation in other competing asset groups, and at the same time more USDollar support. The gold price managed to shake off the coordinated siege on the energy complex, primarily delivered as salvos against crude oil. Market reality dictates that shortages will persist since a coerced lower price will ensure inadequate supply.

DEFENSIVE COUNTER-ATTACKS

The trouble with success is that it succeeds too well sometimes. The Paulson team must next relinquish the reins to the oil cartel in power in the executive branch and its friends wielding influence. The State of the Disunion message demonstrated with loud punctuation that the oil interests have seen enough decline in price, that they wish for at least a tepid rise, so as to restore their wealth and private interests. The doubling of the Strategic Petroleum Reserve is just the start. To me, that confirmed my stated forecast last month that 50 was the low in the oil price. One can be quite sure that Goldman Sachs covered their energy shorts before the Union message, even probably took large long positions which might have the short-term 60 price target for profit taking. 

Immunity from insider trading on a grand national scale is their privilege, reward, benefit, whatever, in true allegiance to the Mussolini Business Model with merged large corporations to the burgeoning state. Who do we suppose issued the research reports expecting a 40 oil price three or four weeks ago? Surely not Goldman or their minions! Surely not their mouthpieces in the press! A more pressing legal question is just what is to stop top Treasury allies from accepting printed money without any pretense of service or obligation for payment? A constant state of war and alert for terrorism certainly helps add to the confusion and to remove the need for vigilance against fraud. Big business is fighting the good fight. On the one end is Congress and its largesse. On the other end is the executive branch and its largesse. All that remains is the Supreme Court and some final largesse. But I digress on ethical violations, the guaranteed path once gold no longer backs the USDollar.

Together, holding back the gold price and the oil price has worked well in keeping firm support for the crippled USDollar. Help for gold suppression comes from European central banks and the Bank of Japan, the 51-st state by certain claims. Help for oil suppression comes from Saudi Arabia, the 52-nd state behind Japan by certain claims. All the while the US Military exerts its broad influence, holds the financial allies in check, forces them to toe the line, and conducts its own secretive business ventures which pay the bills. When a nation owns the world reserve currency, it has the opportunity (not the right) and the privilege (with attendant duty) to act responsibly. The United States has abused on both grounds in a manner which will go down into the history books, with the result being ushered through a transition from benefactor nation with a kind hand to a dominant bully with a crushing hand. 

The USDollar will be defended with gold levers, with oil levers, and with military levers as the American Empire fades anything but quietly. Natural forces oppose all three devices abused as tools. One should not regard it as unpatriotic to notice what occurs, since usage of the brain is an inalienable human right. The gold levers are opposed by Asian central banks, principally China and Russia, the outspoken rebel with nuclear capability, tremendous ambition, and willingness to use energy as a formidable weapon. The oil levers are opposed by Mother Nature, who is never to be denied for long. The latest public natural victim has been the Mexican Cantarell giant oil field in rapid 15% annual decline. The military (called in true Orwellian style “defense”) levers are opposed by those who wish not to be invaded on their own turf, a defense mechanism as old as the caveman. The USDollar depends therefore upon Eastern central bankers not to act too rebelliously, upon market mechanisms disobeying Mother Nature, and upon guerrilla fighters not prevailing. One can comfortably count on lost ground on all three fronts, over time. One should always remain aware that gold, oil, and the military are connected by zero degrees of separation.

CHINA INTERRUPTED

The so-called USEconomic recovery from 2002 to 2006 could not have occurred without the critical assistance of China. An estimated one third of the Chinese US$-based reserves investments are designated in corporate bonds and mortgage agency bonds. Perhaps Beijing leaders recently demanded the amplified monetization of mortgage bonds with printing press newly minted money, swapped in federal basements, conducted under cover of night, whose grease is the greater good??? Regardless, the Chinese support cooperation has turned ugly. The Strategic Dialog of December was an utter failure, press reports notwithstanding. Reform will occur on their ordered pace. Intellectual property will continue to be stolen at their whim. Subsidies of their industry will continue as they see fit. Tariffs on incoming US goods will persist as they justify them. Since July 2005, when they dropped their yuan currency peg to the broken USDollar, trade war was silently declared. Big Asian trade surpluses would no longer be routinely stuffed into US$-based securities. The US housing boom would no longer be subsidized across the Pacific Ocean. The great REFI abuse would be revealed as the carburetor for the US consumer. The US Treasury Bond would have to find another patsy to support it via trade surplus.

Three huge events have occurred in recent years to change the globe. The Iraqi War triggered a Russian and Chinese response in the oil world, where the global energy war escalated. The death of King Fahd and assumption of the throne by King Abdullah triggered a quiet defiance by the Saudis in the petro-dollar world. The removal of the Chinese yuan currency peg triggered a trade war, much like a Chinese water torture. Each event pressures the USDollar from its pinnacle position, and therefore gives gold wings.

Enter the 2006 crude oil price runup. As Asians pulled back on USTBond support, the Persian Gulf nations more than ably stepped up to the table to replace that support, Saudi defiance or not. The Iraqi War might act like a constant motivation force for Arab sheikdoms to continue USDollar support, like a fire next door. Wall Street has only begun to recognize that a lower crude oil price means smaller Persian Gulf and OPEC trade surpluses, which in turn mean less USTBond support. The biggest risk nowadays is for the US Federal Reserve to confuse a rising long-term bond yield and interest rate with newfound economic strength. Instead, it is from reduced petro-dollar recycling, plain and simple. This factor has been cited in the last few Hat Trick Letter reports, as of the last few months in 2006. Wall Street finally caught on, only after it became obvious.

The Chinese cooperative participation has turned to the early makings of a trade war. Just last week the US Trade Rep Susan Schwab filed a grievance to the World Trade Organization, citing many specifics against China. The trade war advances precisely on the course anticipated here, and mentioned in numerous articles. From partner to adversary goes China, which will cause great strain to the global financial system. Gold thrives on the conflict and regular shake-up to the system.

INTERRUPTED LOOP – EXPORTED INFLATION

Another important loop has been interrupted, that being the export of inflation to Asia, and the associated import of deflation from Asia. This has been an exceedingly clever, devious, and grand cheat in the scheme of things. The Asian Meltdown was the first casualty from the devious game entreated by USGovt leaders and accepted by ambitious Asians. Here we stand, with a new Asian financial leader in China, an old Asian industrial leader in Japan, an uneasy alliance between them, and a gargantuan kitty of USTBond toilet paper in the form of IOU’s (never to be honored) to show for their cooperative efforts with the United States. Asia managed to build its factories and industrial base, lift its standard of living, provide millions of new jobs (which the US lost but denies steadily), and finally stimulate domestic demand across the Asian continent. Sure, they face problems and challenges, but their prospects look much brighter for both prosperity and freedom than they do for the United States. The old guard economy is beset by dependence upon consumption and debt still, having forfeited its manufacturing base, a key legitimate income source.

The following feedback loop was presented as a slide to a Canadian conference almost two years ago. It is relevant today, not so much as to describe the present, but to highlight the past system which has been interrupted. Just as when an old piece of multiply connected machinery is phased out, new tentacles must be put in place. Such is the nature of the controlled energy price. The new force to keep prices down in the USEconomy is no longer Asian imports on a grand scale, but falling US housing prices and the destruction of wealth. Debt and asset deflation is a dangerous game played by the US Federal Reserve.

The interruption will force a grand continuation of monetary inflation which has taken the global financial system to dangerous levels of dependence upon loose money. We are told not to use the word “inflation” outside of price structures, but that is its origin, namely monetary growth. The global liquidity game is on in true Weimar fashion. Weimar money growth is here. Isn’t it curious that amidst huge money supply growth, the US housing sector is in decline, and the global energy complex is under siege? Do not confuse stock price advances with prosperity, since those higher Dow Jones averages and S&P500 indexes are mere adjustments for a constantly contaminated, continually corrupted USDollar. The purchase power of one S&P unit has not changed one iota. 

The gold price has marched upward and will continue to rise as money is ruined. The crude oil price will again reflect the global war to secure oil deposits. Crucially important inter-related feedback loops have been interrupted. An overly heavy reliance upon holding down the gold price and oil price cannot succeed for long in supporting the USDollar, whose fundamental balance sheet resembles a Third World Nation, and whose national leadership tactics and internal makeup resemble a Banana Republic. There are no degrees of separation when it comes to the USDollar, gold, and oil, which will be vivid in coming months.

© 2007 Jim Willie, CB
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