The article is a long read, but I don’t think you’ll be disappointed… Please read on.
Preface: Welcome, Chairman Bernanke. May you ward off price inflation from reaching the core CPI. May you enact policies that continue to export inflation to Asia. Embrace those faulty statistics. You make me laugh with your explanation of the inverted Treasury yield curve. Your reason #1 of reduced inflation expectations and stable economy is self-serving, but it ignores the monstrous influence of outsourcing on job creation and cancerous transformation to a consumption economy centered on malls and retail chains, filled by omnipresent cheap imported products. Your reason #2 of a prevalent global savings glut ignores identification of the $700 billion trade deficit imbalance as a problem. You tell us as clearly as you can that the USFed will continue rate hikes. Your solution for the massive trade gap and current account deficit is to improve savings in the United States, lift spending in foreign economies, and make more flexible the currency exchange rates. How incredibly shallow for a central banker!!! A college student with an introductory economics course under his or her belt could recite such a trivial solution. How about another shallow solution: import less and export more, which the public will understand better???
The US Federal Reserve has several motives to continue in its interest rate tightening cycle. However, we have entered the hidden agenda realm. The Greenspan Fed might have delivered on more transparency, but the institution surely holds dear its hidden motives, secret objectives, replete with clandestine activity. Someday their convenient partnerships will be better known. The best way to be safe is not to discuss them, but rather to be aware of their existence, and to anticipate the effect of their activity. Generally, one can confidently claim that the USFed is no better, no worse, than the lying thieves who deceive and line their own pockets on Wall Street. The umbilical cord connecting Wall Street to the USFed is the giant banks, who have large brokerage arms under their corporate umbrellas, permitted since the repeal of the Glass Steagall Act. Since 1999, big banks, brokerage houses, and insurance firms have been permitted to work together, sleep together, share agendas together, deceive together, profit together, and perhaps someday go down together. Such is the pathogenesis of the cancerous encroachment which contradicts the supposed independence of the central bank. Enough, the USFed will hike rates more. They don’t need to offer a reason to justify their actions. However, if the financial markets (stocks, bonds, currencys) are to retain confidence in the US$-based systems, our central bank must give reasons, even if those reasons are pure fiction and full of the same lard tossed onto the masses during these heyday chapters written on economic mythology.
STATED OFFICIAL REASONS
The USFed actually states they can afford the luxury of additional interest rate hikes because the USEconomy is robust and strong. It is amazingly resilient, provided a convenient bubble can be inflated in a major sector within that economy. An exaggerated growth rate and rising inflation pressures (housing, CPI, employment costs) are the spoken motives for further 25 basis point increases. They speak of a tight labor market, one where the jobless rate ignores all those who cannot find work or collect unemployment insurance. They talk about “full employment” of 4.9% jobless amidst rampant unemployment. Include the jobless and we see a 7.4% jobless rate.
The USFed cannot be honest, since its credibility would be shattered. Go figure. They must defend their position of strength, and continue to describe the USEconomy as strong. They must maintain the notion that their monetary policy has managed to keep the economy robust, healthy, balanced, flexible, and full of vitality. And yes, expert monetary policy under the near perfect aegis of Alan Greenspan has enabled the USEconomy to avert a recession since 1990. What is the best device to avoid a recession in the world of public reality? Basically, FRAUD & LIES.
The puny Q4 GDP came in officially at 1.1% growth. Subtract the 4% to 5% from fraud, lies, deception, as price inflation (removed from sleight of hand from the formulas) is put back into the indexes, and we see a minus 3% Gross Domestic Product, maybe worse. The negative growth confirms the US Treasury yield curve, which has become inverted or at least very flat indeed. Recession always confirms the reliable inverted yield curve signal. Another confirmation is the growing crude oil inventories, and its flagging price, which yesterday fell below $60 per barrel. Another confirmation is the growing list of home builders who warn. Another confirmation is the long list of big name companies who have warned on future performance.
There is reality behind the rising Consumer Price Index, the rising Employment Cost Index, and the extended housing bubble. Over 2005, the CPI rose 3.4%, the ECI rose 3.0%, and housing rose and rose and rose. Not to be left out, energy rose 17.1% in very visible fashion. It is a strange directive whose drumbeat the USFed seems to march to. They desire a halt to the rising consumer prices and employment costs. To heck with the workers of America and their need for higher wages! Let them eat cake! Wages have struggled mightily from Asian competition. Let wages rise, for God’s sake! Adjusted for inflation, real wages fell by 3.1% last year, and that means they fell much farther since adjustment for inflation is a total joke. My view is that the USFed hacks want to halt the rise in energy costs and housing prices on the domestic front. The crude oil price is cantilevered in opposition to the USDollar. Keep down the oil price, and therein support the USDollar.
The housing upcoming pullback comes with warnings from the high-end with Toll Brothers, and from the affordable low-end KB Homes. Now that the housing market has slowed and entered a decline in several markets, the USFed has seen fit to push it downward more severely with rising adjustable mortgage rates. Chairman Greenspan had the unmitigated gall last summer to criticize homeowners who over-leveraged themselves, with harsh words something like “those who did not heed the signs of rising rates were desirous of losses.” How cold, especially in view of the fact that Greenspan himself urged the long bond yield down in 2002 in order to rescue the USEconomy with his housing bubble weapon. He needed a new bubble to fight the effects of the last bubble. They in effect created a monster with housing, that monster is in dire fatigue, and the zookeeper has seen fit to deny it food as it staggers on its four feet. In tow, the monster has dragged along the retail consumption insanity. Heck, let’s cut that off at the knees also. It is painfully clear that there is no solution to the USEconomic woes.
THE UNSPOKEN REASONS
The US Federal Reserve cannot discuss the real problem, since that would alert the world to our gaping shortcomings, our giant warts, our horrid financial odor. The stench of spinning credit gears and rotting debt on the vines is acrid and shocking. They cannot expose or highlight the crippled dependence upon inflated asset bubbles (or their reversal), nor the revolt underway by those foreign central banks who feel betrayed, nay drowning in a sea of USDollar liquidity.
The unspoken motives for continued USFed rate hikes are several:
to counter and defend against a rising gold price
to counter and defend against a rising crude oil price
to encourage Asian exporters and Persian Gulf oil producers to recycle surpluses
to deter Asians and Persian Gulfers from diversification in their reserves
Continued USFed rate hikes to excess come with ulterior motives, without any doubt in my mind. Their effect will be to prevent a serious decline in the USDollar with mixed competing reactions to gold, sure to add to its volatility. Their unspoken motive is USDollar defense.
What can be stated publicly amidst political circles and before the financial community must be acceptable and harmless, even promising and constructive. Nevertheless, reality comes with a harsher face, with flaws, blemishes, weaknesses, and vulnerabilities exposed. The four above reasons cannot be stressed or discussed with too much detailed depth or conviction. Such is the province of professional analysts and independent newsletter writers, us independent blokes!
GOLDEN & OILY LINKS
Gold still competes with the USDollar. Another leap in the gold price might undercut the US$ noticeably and thereby threaten US Treasury bonds generally. The Petro-Dollar system in place contains mammoth cantilevered derivative positions with the US$ and crude oil in opposition. Another leap in the oil price would undercut the US$ more noticeably. Only a stable US$ can encourage incremental investment of surplus reserves in US Treasurys, US Mortgage Bonds, and S&P baskets. Only a stable US$ can encourage continued holding by foreigners in astronomical bond securities with steady diversification out of them. Behind the scenes, foreign central banks urge the USFed to continue to tighten as much as possible without harming US consumers, who are critical to those foreign economies so dependent upon export markets.
The interplay of various effects is difficult to gauge and predict. At this point, each official rate hike by the Fed will support the USDollar. More important is the perceived motive for the hike. If from a validly strong USEconomy in a non-inflationary climate, then the impact will be to cool the gold price. If from an intention to calm the housing boom, then the impact will be to cool off housing, but also to suppress the USEconomy and do great harm down the road when housing serves as a huge drag on it. If a housing bear market enters the living room, the effect on the USDollar will be enormous and negative, somewhat helpful for gold, less beneficial for crude oil. If from rising price inflation and employment costs, then the impact will be to light a fire under the gold price and fuel its rise. If from a defensive posture against gold, then attention is turned to gold, which only poses more questions. If to defend against crude oil, then it will not only keep the oil price down but also suppress and do harm to the USEconomy. If to keep our foreign credit suppliers to hold open the spigot flowing to feed our vast credit appetite and finance our debts, then it will succeed as long as the impact is effective in supporting the USDollar. Two undeniable factors are at work. The markets sense rising price inflation in many sectors, from housing to commodities to worker costs, and yes, to almost everything to run a business or a household. Foreign central banks are highly motivated to shed their US$-based holdings, at first at the margin of new purchases and later at the core of reserves.
FOREIGN RESERVES HELD OVERSEAS
See strange locations for purchases of Treasury Bonds to offset the near total stoppage of Asian USTBond support since July 2005, from the official USGovt TIC Report on foreign holdings data. Financial news media channels have dropped the ball. Japanese holdings have actually fallen since Aug2005. Chinese holdings have risen only slightly up to Dec2005, but with only minor increases in certain months.
Note the giant drop from the Caribbean last summer, offset by the giant rise from England. Big changes surfaced in the wake of the General Motors debt downgrade last summer, actually June2005. The unwind of credit default swaps brought about sales of those swaps and repurchases of US Treasury Bonds held as the spread anchor. The GM debt imploded, which lifted in value the debt insurance contracts linked to the swaps. As profit was taken in the swaps, investors gathered profits, but in doing so, they bought back their “shorted” TBond basis as anchor on the leveraged trades. Do the detective work and find roots of the swaps in hedge funds. Observe Aug2005 and the severe decline in USTBonds accounted for (end of swap trades, closed out) in the Caribbean. Observe Aug2005 and the severe decline in USTBonds account for in England. Did hedge fund money return home to London, only to be invested once more before Jan2005 ended? Methinks YES. Also, most experts believe illicit USFed shell agencies operate as tools out of the Caribbean banks. Heck, if it is good for the goose (mafia), it must be good for the gander also (USFed). Let’s just hope that (unlike the M3 money supply), these data sources remain publicly available, so that detectives among us can track these rogue devils with far less requisite skill than that possessed by Sherlock Holmes.
We might need more GM or Ford debt disasters in the near future. Unwind of additional profitable leveraged swap trades could come to the aid of the USTBonds once more. Any move above 4.6% in the 10-yr TNote yield (TNX) could, on a technical chart basis, motivate a giant move toward the 5.5% level. My conjecture is that the GM and Ford “events” have ended for some time, perhaps another several months. Besides, the USFed might desire higher long-term rates in the TNX. A higher TNX would relieve the troublesome signal emitted by an inverted Treasury yield curve. This enigmatic topic is discussed in the February Hat Trick Letter issue. Furthermore, a signal has been identified for subscribers to foretell whether the Treasury yield curve will steepen or invert further. One should be very clear about the so-called conundrum. The recession evidence seen in the Q4 quarter confirms the inverted yield curve. There is no conundrum. Instead off admitting their lie in the GDP, they label it a conundrum, as Greenspan rides into the sunset (mounted backwards on his bull). What a charlatan, a pied piper!
Leave address of the thorny topic, USFed monetization of USTBonds for another day. Its evidence is not so easy to track, without clear footprints and fingerprints. Or is it grease stains from the overworked printing presses?
COMMENT ON ETF FUNDS
While busy with the pen, a comment is in order about Exchange Traded Funds. The gold ETF is being proved to be a sham, not convincingly so, but enough to anyone harboring a suspicious mind. Stories abound within ETF’s regarding shorting gold via futures, buying 10 cents worth of gold per dollar held, lack of transparency, unaccountability under the false guise of security concerns, and avoidance of SEC requirements enough to earn a formal investigation. Eventually, we will learn that on a good day, a fractionally managed gold ETF is right on target with their reality. My uglier view is that ETF’s will morph into non-producing hedge firms, simple queer adjunct skeletal illicitly controlled shams linked to the hedged mining firms themselves, whose certificates are fully mixed, those valid vaulted very real with those leased vanished never to be seen again. For smart people to trust the ETF offerings is evidence of utter complete stupidity in my book. Jim Turk’s original suspicions might have been met with calls of competitive bias, but no more. His concerns have all been borne out as authentic. He is a true gold patriot. For the precious metal community to embrace the upcoming silver ETF is beyond my comprehension.
Such trust reminds me of the Iraq War and calls of weapons of mass destruction. Now Iran is a nuclear threat. Have we learned anything about disinformation? How intelligent is the gold community? Don’t confuse zeal and stubbornness for intelligence and craft. If Fanny Mae launched an ETF for housing investors, would we trust it? A credible argument can be made that the hedged gold institutions (within the establishment of the goomba World Gold Council to manage the gold ETF) is akin to the mafia managing the lending operations for the Teamster’s Union retirement fund. How is that working out? The streetTRACKS gold ETF (GLD) will have a similar fate someday, in managed receivership by some official steward.
LEADERSHIP & COMPETITIVENESS
The Bernanke baton handoff makes me ponder on leadership. Personally, I fear for America’s future. Our investment & brokerage system successfully integrated an umbilical cord to the US Federal Reserve and banking system. Was that the last fateful act and deed by Bill Clinton and Robert Rubin??? Our nation is unprepared either to lead itself or to detect the most basic deception by leaders. My disappointment and lost respect is turning to anger and ridicule. Here is my perception of future leaders of America.
American science and math skills are in a woeful state. Basic arithmetic with percentages might be a major challenge, let alone geometry. If anyone wants an outline of the proof to the Pythagorean Theorem (hypotenuse sum of squares rule), just email me. Got some down time after posting my February Hat Trick Letter issue this past weekend. Few analysts realize that the US is suffering the bitter fruit of 30 years of monetary inflation, which has lifted the US wage scale an order of magnitude higher than Asia to an uncompetitive pay scale. Concurrently, our population of skilled workers declines annually. The output of engineers from US institutions of higher learning in 2005 was 70 thousand, versus 200k in India and 500k in China. As Jimmy Rogers suggests, when your kid must choose a language in school, urge Chinese as the choice. Trouble is, US schools begin with foreign languages at age 15 typically, another failed policy. Try half that age in Europe and Asia. Not one in ten people of my acquaintance can recall any foreign language learned long ago. Lack of language skills goes hand in hand with ignorance at a cultural level, key to international diplomacy. Diplomatic stumbles leave the USEconomy as seriously vulnerable and at a disadvantage. We seem to have replaced diplomatic skill with arrogance and displays of power. Our media explosion has been squandered by reality TV shows, worthless sitcoms, movie reruns, vitriolic polarized debate between the right & left, coverage of endless murder trials and reports of missing children or euthanasia. News is sorely missing in the media despite countless US cable channels. This nation is in bigtime trouble. Lastly, here is my quintessential image of American math skills. This person surely found it, a solution indeed.
THE HAT TRICK LETTER COMBINES MACRO ANALYSIS WITH INVESTMENTS.
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