Deadly Dollar Downtrend States All Inflation Adjusted Statistics Are Wrong, True Inflation is Double CPI!
Currencies / US Dollar Nov 08, 2007 - 05:16 PM GMTBy: Jim_Willie_CB
The public and investment community continues to be bombarded with denials as to the importance of the seemingly endless slide in the US Dollar, along with curiously shallow commentary that the US $ slide seems overdone. The US$ exchange rates could justify a 50% decline from here, out of sheer principle, not based upon the relative price of milk cartons or taxi rides. The comprehension of the gold breakout signal seems equally misunderstood and minimized. To be clear, the people have begun to sense with alarm the nature of the energy cost problem, but do not detect its weak currency roots.
The US Economy is soon to receive a series of cost shocks, starting with another 50 cents higher in gasoline per gallon. The US $ woes are hedged by crude oil positions, resulting in crude oil leading the US Dollar declines. The financial sector has a painfully clear vested interest to minimize the US $ threat, pointing out the small positive on export business growth. Wall Street needs a favorable light on the currency behind all of its financial asset investments, naturally. We are fast approaching, if not already smack dab in the middle, of a confluence of powerful negative factors exerting downward relentless pressure on the US $ exchange rates.
A powerful bearish momentum is driven by three extremely important factors: fundamentals, technical's, and psychology. The US $ fundamentals are miserable , resembling a Third World nation, marred by gigantic deficits and emphasis on war. The US $ technical's are miserable , whose DX index chart reveals a massive generational breakdown below critical support.
The US $ psychology is miserable , accompanied by broad international revolt, defection, and diversification away from its corrosive losses.
Just today, French President Sarkozy beat some war drums over the crippled, subprime currency called the US Dollar He stated a warning that the Untied States has engaged in an economic war to devalue the US Dollar in order to deal with its severe problems. The implication is that the US Govt and financial sector is attempting to renege on loans (due to devaluation), to export its monetary policy (freezing other central banks), to render cheaper its exports (while foreigners have their exports rendered most expensive), and to do so with its usual fare of fraudulent toxins scattered to foreign lands. Just yesterday, the Chinese unofficially announced a strategy to avoid weak currencies and embrace strong currencies. To me this is a bold slam against the US Govt and ugly offshoot of the trade friction.
It seems almost every day we find a significant story to paint yet another ugly face on the US Dollar ultra-slow motion collapse. It is gaining downward momentum. No bounce off 78, none off 77, none off 76. We are witnessing the middle stage shock waves, which in my view will result in the death of the US Dollar These are strong words. So are those coming from Asia out of anger. So are those coming from the Persian Gulf out of a sense of betrayal. So are those coming from Russia out of outright hostility. The Untied States has taken foreign credit supply for granted, then engaged in fraud on a grander scale than ever has been witnessed in all of modern history. The backlash is reaching a critical stage nowadays, with some expected and some unexpected reactions.
Look for a global boycott of some sort. The main engine upholding the US Dollar is the US $ printing press used by the US Govt henchmen. The outcome is the plunge of the US Dollar, and the utterly crystal clear COMPETING CURRENCY WARS fully warned and outlined by Ludwig von Mises. The following factors, concepts, and stories will be primary features to the November Hat Trick Letter report.
FUNDAMENTALS
The US Economy is clearly the weakest among the major industrial nations. It is amazing that the consensus among enlightened folks paints broad strokes of US weakness in retail, housing, car sales, manufacturing, home equity extraction, job growth, but with some glimmer of light by exporters. The banking distress is nowhere near ended, steadily denied as almost fixed, yet every passing week it seems yet another new remedy bailout rescue package feature, as my work forecasted in late summer. The ultimate rescue bailouts will total $2 trillion, a figure to place on your refrigerator. The recent Structured Investment Vehicle (SIV) superfund testifies to the breadth of rescues. This one smells to high heaven as an illicit balance sheet redemption, at inflated unrealistic prices to boot, for the specific benefit of connected insider Wall Street firms.
The Citigroup, Merrill Lynch, and Morgan Stanley forced admission of losses is not a mere accounting issue, without cash being involved. They are gigantic investment losses that the cute SIV device could not avoid in hitting the balance sheets. All eyes have turned to balance sheet accounting gimmicks, otherwise called fraud.
The truth might be that losses are twice what are admitted, maybe worse. Each revision from a so-called informed source seems to be larger than the previous. The total will inexorably march to $2 trillion, and that figure might be conservative. Do not expect foreigners to pick up that tab. It will be financed by the US $ printing press, weighing down the US Dollar
A year ago, my forecast was for the US primary banking system to go underwater, just like the Japanese banking system did in the 1990 decade, and for the same reason: housing bubble and excesses in real estate portfolios. The financial engineering nightmarish stupidity based on greed, fees, and leverage only compounded the problem in the Untied States. Oh yes, add fraud, with corrupt debt agency ratings, false prices, and a heavy motive to export subprime slime to foreign institutions. We now see the backfire. The end result is less credit available to a credit dependent national economy, which more accurately is an addiction founded in deep dependence. Here, the drug dealers are cutting down on supply to an increasingly desperate addict. The distrust has extended to US banks and suspicion of assets used as collateral by other US banks. This is the ultimate backfire in fraud.
THE US BANKING SYSTEM WILL EXPERIENCE REGULAR AND FREQUENT SEIZURES, HELPED BY FITFUL USFED RESCUE EFFORTS, BUT RETURNING TO CRISIS MODE PERIODICALLY. THE BAILOUTS AND REMEDIES WILL BE BROAD AND DIVERSE, IMAGINATIVE YET INEFFECTIVE, REQUIRING FRESH IDEAS, NEW DEVICES, DESPERATE ATTEMPTS, ALL OF WHICH WILL SUCCEED TO BUY ONLY A MONTH OR TWO OF TIME. THE ULTIMATE PROBLEM IS A BROKEN FINANCIAL FOUNDATION BASED UPON LETHAL, TEMPORARY, AND DOOMED LEVERAGED STRUCTURES THAT DO NOT STAND OVER TIME. THE ENTIRE RISK MODEL IS BEING UNWOUND, A PROCESS SURE TO TAKE A COUPLE MORE YEARS, NOT MONTHS. WITH EACH NEW QUARTER, A NEW LOG WILL BE PUT ON THE RAGING FIRE CONSUMING THE USDOLLAR. CHECK THE “BKX” BANKING STOCK INDEX FOR AN INDICATION. CAN YOU SAY PLUMMET ???
Despite what the US Federal Reserve claims, they will indeed cut interest rates again and again.
Their motive in a deceptive statement of balanced risks for growth and inflation was intended to prevent a financial market immediately pricing of that next cut.
Anyone who thinks the US housing market decline has ended is plainly compromised, operating without benefit of wisdom, or totally divorced from data. Anyone who thinks the US banking problems are merely a subprime slime issue, lacks any depth of understanding to the commercial paper problem, the unwinding of the entire risk structure with bonds and credit derivatives, or the disdain (if not early stages of boycott) harbored by foreigners to continue to hand savings over to criminals working closely with Wall Street and the US Govt They enjoy freedom from prosecution. Over 50% of all interbank collateral in commercial paper is based upon mortgage bonds. The upshot of the US Fed dilemma is that more interest rate cuts are guaranteed, sure to worsen the positive bond yield differential which was so important to lifting the US Dollar in 2005. The Euro Central Bank and the Bank of Japan each wants very much to raise interest rates. So the US leans toward lower rates while foreigners lean to higher rates. This situation will not be changing anytime soon.
The Current Account deficit remains deeply in the red, loud big deficits. The C/A deficit has crawled to under 6% of US Gross Domestic Product. That is good. However, it remains over 5%, long regarded as the key trigger for a 25% decline in the national currency, here the US Dollar A paradoxical twist comes with the slowly reducing US trade gap. Rising exports are a good thing. But the falling imports testify to a domestic slowdown, if not recession, in the US Economy Gradual resolution of the US trade deficit comes on the wagon known as recession since structural imbalance is deeply ingrained. The US Govt has become poor liars in economic statistics. To be sure, their task of lying has been rendered more difficult by a deterioration more widely recognized. The GDP numbers are aided by quarterly changes multiplied by four, called annualized. The GDP is aided by hedonic nonsense, a mythical set of kooky methods. The GDP assumes price inflation is running at 3% or so, from the Personal Consumption Index, another kooky series. The actual price inflation has been running at 10% or so for almost a full year, as anybody with a freaking pulse can testify, who lives, breathes, eats, transports, entertains, builds anything, and uses services in life from day to day. The liars have seen a gulf grow from their numbers versus reality, with the price inflation lie running above 6% now.
This means all inflation adjusted statistics are wrong by at least 6%, namely income, economic growth, retail sales, even the previous peak gold price and previous peak oil price.
The travesty of lies on price inflation deeply affects the Social Security recipients and federal pension holders and savers. They must accept measly fixed income lifts. Imagine a person investing in a certificate of deposit earning 5%, when price inflation runs at 10%. The person loses 5% to inflation, the hidden tax. Of course, if you do not benefit from a mental pulse, you will feel good to earn 5% yield against only a 3% officially stated CPI.
TECHNICALS
The charts simply do not lie. The US Dollar is seeing lows for an entire generation. To say the US $ is oversold and due for a rise is naive. The major global institutions are giving up on the current world reserve currency, even as they struggle to find a replacement. Technical's have given way to psychology, so not much can be cited on the chart. Sure, stochastic show profound weakness on cyclical's. Note the dive in the 20-week moving average. The difference is widening between the 20-wk MA and the 50-wk MA. The hardest part about reading the US DX chart is determining where technical support lies. IT IS NOWHERE !!!
My forecast is for the DX index to generate a bounce off the 75 level for no other reason that it ends with a five number. The bounce will be feeble, pathetic, only to expose the desperate situation. Some say the DX will react to 72 or 73 as support, but one must wonder if guesswork is the basis of such forecasts. My best guess is that a mammoth central bank effort in coordinated intervention will determine the next support level. But its support will fritter away in a month.
The US DX index, goony as it is, since it in no way reflects trade weighting whatsoever, is the lowest in three or four decades. The Asians are giving up. The Arabs at one time this autumn were giving up. The Europeans are beginning to give up. A global revolt has taken root, a movement, which is spreading each month to more corners, and extending deeper within each corner. From across the entire globe, key institutions are selling US$-based securities, hoping to limit their exposure to a collapse. The only loyal (but shaky) ally is the Arab tent of sheiks, who realize their military security depends upon the US Military. There are some benefits to the bizarre war on terrorism, and the huge troop and equipment presence in the Persian Gulf region. Can you say Protection Racket ???
The foreign currencies are running with alarming power. The euro hit 147. The Canadian Dollar actually hit 110 in a spurt but is settling at 107. The British pound sterling hit 211. The Aussie Dollar hit 94 and is settling at 92. It is safe to say the entire FOREX currency world has been turned upside down. The US Dollar is finding its true value. The US DX might settle around the 65 to 70 area by late 2008.
PSYCHOLOGY
Everybody hates the US Dollar except Secy Treasury Henry Paulson. But then again, he works for a corrupt organization, and used to head an equally sleazy organization at Goldman Sachs. Everybody sees the US Dollar as heading down hard. Everybody is attempting to protect from the downside risk, whether governments, institutions, companies, investors, or households. The fact that the majority finds the US $ trend as miserable and getting worse is no reason to be a contrarian.
The confidence level in the US Dollar is another key element. US Fed Chairman Bernanke said something truly stupid today, easily refuted by a good college student. He said that US export prices are rising (a good thing), but US import prices are not rising (a lie). If the US$ exchange rate affects export prices, it also affects import prices, that is unless a different exchange rate is used for the right hand than the left hand. Nonsense, deception, lies, the main devices of the US Govt and financial sector, where the quintessential institutional structural ingredient is DISHONESTY. Bernanke listed the key factors for US$ support. 1) strong US Economy, 2) strong US trade balance, 3) openness to US financial markets. The US Economy is teetering, despite the recent lie of strong Q3 GDP, a statistic which flies in the face of all component statistics. The trade gap continues as huge, despite a mild reduction. Openness of US financial markets is a benefit if what is sold is not laced with fraud.
Hey, let's be really clear, Ben Bernanke looked scared today before the Congressional Banking Committee. He claimed the “US Dollar is sound in the medium term” which sounds half as baseless and empty as the parroted Paulson claims that “A strong US Dollar is in our national interest.” Laughter would be warranted if the situation were not so desperately dire and dangerous.
When US-based pundits and talking heads continually spout nonsense with a bias, the confidence erodes further. Today, one could hear that the problems in the bank sector will eventually result in a big lift to stated earnings just like 1992 and 1993 after the Savings & Loan problems cleared up. They pointed to unclear values for asset-backed bonds (read mortgages), certain not to be as bad as current priced. With the ABX mortgage bond indexes showing big losses for the AAA and AA types, one should expect more, not less, write downs. Mortgage rate resets and home foreclosures are nowhere near ended. With the debt ratings agencies continue with debt downgrades, this trend will continue, not abate.
The fraud from subprime slime export has not resulted in clean accounting, but rather grotesque attempts to create SIV tools, to prevent losses to appear on balance sheets, to lie about insolvency, to create a new ‘Type 3' asset for worthless assets, to solicit US Govt assistance in over-priced asset redemptions, and for executives to sell stocks.
Nowhere is honest accounting and coming clean in sight. The Untied States cannot afford honesty. This erodes foreign perceptions of confidence. The fish rots from the head down. Look to the US Govt, with its phony federal deficit statements, its war costs off the balance sheet, its endless increases in the official legal national debt limit, and pervasive bankrupt characteristics. This is a Third World nation with a powerful military, used to offer support to the US Dollar As conditions turn more desperate and unsustainable, look for more war, not less. Look for presidential candidates who seek a new fresh path to be marginalized, smeared, even removed.
GOLD & CRUDE OIL
The gold price made mince meat of the 800 barrier, running over it like a HUMMER through a ranch front gate entrance complete with fat fence posts. The move to 900 will take your breath away. The move to 1000 will attract daily attention from all corners of the financial world.
No charts will be supplied, since technical's mean little anymore. Psychology has taken over.
Some humorous shallow commentary has come from pundits and charlatans alike. They say the gold up leg has been four times as strong as the US DX down leg. That ignores the entire concept of short covering in massive price cap futures contract positions. That also ignores the mammoth money supply inflation orchestrated by desperate central bankers across the globe. The gold price is rising in all three major continental currencies. My guess is that the cast of corrupt Wall Street criminals (in three piece suits, well coiffed, sporting perfect diction, nice tanned complexions, sporty Rolexes, and enviable Rolodexes) have so so so much trouble with proving to stock holders (like Saudi Prince Alwaleed Bin Tatal) that their icon Wall Street firms are not bankrupt, that they cannot prevent the gold price from seeking its true value. Another key factor is that even the Chinese are raising prices. Domestic manufacturers and vendors will raise prices in kind. The sixteenth big ugly secret on Wall Street is that the US Fed might have difficulty in cutting interest rates at their December FOMC meeting, since the CPI might be on the rise. Do not fear as a gold investor. An official US Fed rate cut will send the US Dollar down, good for gold. No official rate cut would be coincident with a higher price inflation statistic, good for gold.
The US Fed dilemma is great for gold. In fact, the US Dollar is not central to the gold bull anymore. THE DRIVING FORCE IS GLOBAL MONETARY INFLATION, PUSHED BY CENTRAL BANKERS. The money supply growth is over 14% and rising with each passing quarter. In a two-week period in August, the US $ money supply grew at an annual rate of over 50%. Call you say WEIMAR ???
Also, the crude oil price will not stop at the 100 price level. Some shallow commentary came this week that the oil price is overbought, and that a correction is coming when 100 is indeed hit. Probably true, but the correction might last a couple days and send the oil price down to 98. The forces behind the push to 100 are all gaining strength, not abating, and no remedy is in sight. Look for crude oil to head next to 110 before January is too far along. By then with gold and oil making headlines, the bandwagon for the bear trades on the US Dollar will become a national nightmare, urging a national solution. Unfortunately, the same corrupt banksters will be asked to design and formulate the remedy. So look for the Ruling Elite to take care of itself, just like in 1998 when the Long Term Capital Mgmt fiasco brought about the largest public bailout of aristocrats in modern history. This one will be one to two orders bigger. The LTCM bailout had a secondary motive to prevent a gold price explosion. This bailout will have a similar secondary motive, but it will fail!
A final note on the shortcoming even in the gold community to properly state what the previous 800 price peak means in today's price terms. They employ the fallacious Consumer Price Inflation index probably out of habit, or out of indoctrination, or out of intimidation. The CPI is wrong by a factor of three. The old 1980 gold peak price is equivalent in my book to about a 3000. Why? Because the exact sounding 1550 figure quoted, using the CPI, is clearly wrong in its lift by a factor of at least two, conservatively. That is correct, the gold peak 27 years ago is equal to at least $3000 now. We are heading to a 3000 gold price in conservative terms, since the problems in the Untied States are insurmountable, unfixable, without any remedy. The only real life solution will be a more visible totalitarian state complete with rationing. If you believe rationing will not happen, just look at the crack spread, the difference between the oil price and gasoline price. It is rising dangerously, crimping energy firm profits. Unless the gasoline price rises by 50 cents, we are certain to face shortages, lines to buy gasoline, and fights. Next come riots. In fact, job loss, home foreclosure, food prices, gasoline shortages, and bank runs will likely be the basis of social chaos in the next two years. One will not be capable of recognizing the US landscape in ten years, maybe five years. The whole world will be watching.
These factors will be primary features to the November Hat Trick Letter report.
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