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Like
a whirlwind, the crisis triggered by the housing crisis and mortgage debacle
has extended to almost every phase of the landscape in US economic and
financial life. And the rookies running the US Federal Reserve initially said
the problem would be contained. My claim made in late June 2007 (see article,
click here) was that it involved absolute contagion to the system, which is
what we see vividly now. Let’s review some high level stresses in
several arenas, examine the response potentials, and check on the gold and USDollar impact. One should note,
the gold & silver prices will soon demonstrate strong independence from
the USDollar. Just like in 2005, gold can rise even
with some bounce in the buck. Unlike 2005 though, the buck is likely not to
make much in the way of advances. The profound change this early part of 2008
will be the weakness in foreign currencies, thought to be impervious and
invincible. The problems with banking, bonds, and now economies have gone
global. In reaction to policy changes, primarily monetary and now fiscal,
gold will react to an acceleration in monetary inflation after a long
period of heavy money growth over 10% annually in many leading industrial
nations.
USFed HIGH JINKS GAME
The
USFed has been playing a dangerous secretive game. They
denied the depth and power of the bond debacle in order to wait for Europe to feel the same problems. The USFed wanted to wait until Europe saw banking problems, economic
slowdown, and bond losses. Some degree of arrogance might have crept into
their thinking, that the US
system was more resilient, more robust, and had stronger markets with greater
safeguards installed. All were untrue. The USFed
figured they could cut interest rates faster later, only after Europe started to show signs of similar
problems, joining them in the easing cycle. Well, Europe took a few months more time to
detect damaging signals, and their problems on the continent are much less
imposing in their degree of destruction than what is seen in the Untied
States. The European Central Bank (ECB) only lifted their official interest
rate to 4.0% besides. So at a US
peak of 5.25%, the USFed had to cut first alone. Now
the USFed has come down to 3.0%, providing the euro currency with a full 1.0% vig
to keep their currency rising versus the US$
from any carry trade. They do not want a higher euro!
The USFed wants the ECB to begin to cut rates,
which would and will take much of the pressure off the USDollar.
Since much of the rise above 135 and 140 and 145 for the euro
was predicated upon the ECB continuing to hike interest rates, a reversal of
monetary policy by the ECB will bring the euro down
and give decent temporary support for the USDollar.
The
bigger reasons for the USFed to fiddle and diddle,
delaying and postponing, are more profound to the problems faced. They are
two-fold. 1) The USFed is a private firm, not
owned by Americans, with no desire to eat a trillion$ or more in losses. They
do not wish to do the right thing for America when their
primary loyalty is not to America.
They are a private firm whose owners reside in London
and Old Europe. So their initial repurchase loans to member banks and other
banks have been for high quality USTreasurys, not
mortgage bonds, and certainly not Collateralized Debt Obligations (those
nightmares that leverage mortgage bond losses). Up to the time when the Term
Auction Facility opened shop last month, the USFed
only took USTBonds of various maturities. Since the
TAF began to lend against broader assets, they began to accept Fannie Mae
& Freddie Mac bonds. Think their corporate bonds and mortgage backed (in)securities. Why would the USFed
take F&F bonds? Because they
eventually will be bailed out by the USGovt. They
might not really be fully guaranteed, but they will be at crunch time.
2)
The other reason the USFed delayed in prescribing
and delivering the needed monetary medicine again points to their private
firm status. They wanted to have the USGovt take
the $1 trillion tab for bailouts, to put the kibosh on the USDollar, not the private USFed
owners. They are no more a public benefactor than Wall Street. Both the USFed and Wall Street firms are the quintessential
parasites in the modern financial era. Finally, the USGovt
has proposed a measly $150 billion bailout proposal, the first of several. My
forecast has been firm, that the rescue packages will be numerous, greater in
scope in succession, and each inadequate until a master Resolution Trust
Platform is instituted. The price tag on the full blown rescue will be at
least $2 trillion and possibly as much as $4 trillion. The USGovt fiscal packages will include tax cuts for
households, permanent installation of lower taxes for the wealthy and
corporations, greater tax incentives for business investments and job hiring,
items directed to the poor, and more.
When
the monetary stimulus takes root from lower interest rates and easier
repurchases to assist the mortgage process, while at the same time the
government fiscal stimulus packages spread out more broadly, we will see
money overflowing everywhere. We will see more money directed towards
speculation again. We will see more price inflation. The only big question in
my mind is whether higher wages will be tolerated. They call them
‘Secondary Inflation Effects’ which are halted, thus enforcing
the destruction of the Middle Class. Lower wages permit the long-term
interest rate to stay suppressed. Lower wages ensure the recession necessary
to keep USGovt bonds more attractive than stocks,
the ugliest of ugly conflicts of interest by the USFed.
The USDollar takes heavy blows when the USGovt stimulus package takes form as less an unknown. The
gold price has risen since January, in part because
of the foreseen combination of heavy USFed monetary
medicine and heavy USGovt fiscal medicine working. It
smells more inflation in all forms. When prescription moves to
application, gold will vault past
$1000 per ounce easily. Also, silver will vault
past $20 easily.
THE
MAJOR RUB WILL BE THE EFFECT ON LONG-TERM USTREASURY
BOND YIELDS. The solution requires more price inflation, asset inflation,
wage inflation, and spillover, all of which
contribute to rising long-term interest rates. Already, we see the rub in
higher mortgage fixed rates, higher jumbo mortgage rates, higher corporate
bond yield spreads, higher junk bond yield spreads, higher fixed rate swaps.
My gut feeling is that Rookie Chairman Bernanke harbors quietly his biggest fear, that enacting a full
blown rescue of the banking & bond & economic system will trigger a
bear market in USTreasury Bonds. That would ensure
a credit derivative meltdown an order of magnitude worse than just from
Credit Default Swaps off mortgage
bonds, and an order of magnitude more swift.
The
biggest losers in this game among leaders are Bernanke
as USFed Chairman and Paulson
at Secy Treasury. They fiddled and diddled for
months, issued denials, made lousy forecasts, and sounded like utter idiots. Their
emergency 125 basis points in January rate cuts, from interim cuts followed
by FOMC ordinary cuts, emphasized their failure, and badly eroded confidence
in the US
bankers globally. Being the curve, and inept! The impact will be seen in the USDollar, since these are primary stewards of the US
banking and currency system. The USDollar takes the
brunt, with gold enjoying the lift. My position is firm, that the US
banking system has been irrevocably destroyed, unfixable. That will stop
these hacks from trying a remedy, and in doing so, gold will rise
tremendously. When it is clear that the fixes, the solutions, and vast
platforms of rescues are not accomplishing much, the inflation spigot will be
turned on with much more volume. That is how the gold price approaches $2000
per ounce, like within 3 years. Inflation will become an urgent national
priority, not to stop it, to promote it. INFLATE OF DIE will be the motto in
reality.
BAILOUT
BENEFICIARY FELONS
The
biggest obstacle to the initiation of the full bailout and rescue application
has been and will continue to be the felons who command first positions in
the rescue line. Since they are basically running the USGovt
(thanks to Fascist Business Model), they dictate being first in line. Not
only are they the initial beneficiaries, but Wall Street firms are actively
involved in designing the actual rescue stimulus packages themselves. Only in
America can the thieves and criminals knee deep in colossal fraud be active in administration of remedy when
they should be in defense against felony charges,
face heavy billion$ fines, restitution orders, and prison sentences. Start
with Goldman Sachs and JPMorgan, then move on to
Citigroup, Bear Stearns, Morgan Stanley, and maybe UBS. At least most of
these firms are big losers. Then again, nowhere but the Untied States has the
state merged with large business so thoroughly. The Teaser Freezer stands as
the most blatant interference by the state as an effort to block, prevent,
forestall, and eliminate the potential for bond investor lawsuits against
Wall Street. Watch the class action suits though, since they are conducted
and litigated in federal court, not in any rigged compulsory arbitration
charade run by the same Wall Street conmen. The crisis had to grow too big,
run unaddressed for too long, so that the USGovt
felt as though the public wanted a bailout rescue stimulus, EVEN THOUGH the
primary beneficiary might be the Wall Street felons occupying their executive
suites and running board rooms. As the USFed
delayed though, the big US
banks suffered massive losses. That could be another motive to wait.
EURO & POUND
STERLING
The
Hat Trick Letter February Gold & Energy report is out. It focuses
attention on both the euro and pound sterling
currencies. The euro has begun to stall. This is
not a popular concept for gold advocates. A USDollar bounce, especially one of intermediate variety
(not short-term), is not embraced with warm & fuzzy feelings. Usually
such an event is accompanied by a decline in the gold price. NOT HERE!!! The euro selloff will trigger
another phase of the gold bull market, one already well along in Europe. The gold bull market requires all three major
continents (North America, Europe, Asia)
to participate. With its US$
woes firm, diverse crises, and declining interest rates, the North Americans
are feeding the gold bull. With its industrial renaissance, strong regional
growth, and near 0% Japanese fountain for funds, and Chinese treasure trove
of savings, Asia is feeding the gold bull. The
missing piece is the Europeans, who have been stubborn in maintaining the
same 4.0% official interest rates, enforced by the Euro Central Bank since
summer 2007. THE GOLD BULL REQUIRES A DOWNTREND IN INTEREST RATES WORLDWIDE,
AND FULL MONETARY ACCOMMODATION. That is coming, once the Europeans begin
to cut rates. The topping pattern in the euro
currency foretells of the ECB cutting rates soon, despite the German wishes. They
are the ultimate inflation hawks. Not only will Europe be fighting financial
problems across the Atlantic with cheap
money and ample money, but the English will be also. London has already changed policies toward
accommodation. Europe will soon feed the
gold bull.
The
British are also feeding the gold bull. The Bank of England has ordered two
official rate cuts, not back to back though. My forecast is for the complete
decline of the UK housing
market, the complete decline of the UK economy built atop it, and the
complete drubbing of the British pound sterling currency. When the pound
sterling 20-week moving average crosses below the 50-wk MA (circled in
green), technical traders will take the sterling currency down toward 187.
My eventual forecast target is in the 175 neighborhood. A disaster comes to
the UK,
just like the Untied States. Think AngloSphere. The
tough call is whether money exiting England will pursue the euro or USDollar. As problems
crop up further in Europe, my bet is the
money will chase the USTreasurys, crude oil, and
gold.
HEDGE FUNDS ARE
BACK
The
hedge funds are actually being blamed for the crude oil price breaching the
$100 mark. They are regarded as shunning the mortgage paper and bond arenas,
in favor of hard assets like copper, gold, silver, crude oil, natural gas,
grains, and more. Isn’t it interesting how the hedge funds have not
been in the news much in the last year or so? Their legion used to be
mentioned as being 9000 in
number, commanding $1.6 trillion in funds. No more! They are probably 7000 in number now (pure
guess) and command only $1.2 trillion now (pure guess). These falsely labeled
geniuses in propeller hats lost a huge sum of money in mortgage spreads, CDO
bonds, credit default swaps, and
other devices floating within the overall bond market. After licking their
wounds, they have wised up to find commodities. Actually, they always were
involved in commodities, from the start. They are reviving their interest,
focus, curiosity, and attention for them. Commodities are the big winner
asset group. They are untethered to debt generally,
but vulnerable to a global slowdown in demand.
COMMODITY BULL
STILL BREATHES
Given
the frenetic Asian growth, and increase in intra-Asian trade, China and India
along with Russia and Brazil will continue to grow, although slowly,
even if the US and European Union and United Kingdom enter into a
recession. Of course, the Untied States has been in a recession for at least
two years, if you measure growth without nonsensical gimmicks in accounting,
thus ignoring all USGovt official statistics. A
great quote came this morning from one of the few consistently bright and
accurate pundits on CNBC. From the Chicago
pits, Rick Santelli said, “Only a small amount of actual price inflation
shows up in the government numbers.”
That is a rare comment. He might be fined or relegated to Friday afternoon
exposure if he is not more careful. By the way, word has it that the hedge
funds place gold in a different elevated status among commodities. Even if
Western nation economic recession takes root, and demand slows, hedge fund
mentality is that the gold price will continue to rise. My belief is
consistent with theirs, but also that the same is true of the crude oil
price. China
will stockpile it. Speculators will rely upon it against the weak USDollar.
The
commodity boom continues. My favorite indicators
are the Three Amigos: the copper price, and crude oil price, and the Baltic
Dry Index shipping rates. These are monitored regularly in the Hat Trick
Letter. They are each in decent shape. After 25 years of under-investment,
commodities are showing inadequate supply chain structures. They are also
displaying grotesque vulnerability to tyrants being in charge, whether in Caracas Venezuela
or Moscow Russia or Kazahkstan
or WashingtonDC. The ugly impact of the relentless
commodity bull market, is that it results in nasty
cost inflation. This leads to economic recession, as wages cannot keep pace,
as corporate product prices cannot keep pace. Cost inflation without rising
wages and product prices is a Western nation nightmare. All price inflations
are not the same.
HOUSING HARD
ASSET IMPOSTOR
Two
years ago, when the housing market was experiencing what was called a boom,
my position was clear. The boom would turn to bust in a couple years, the
damage to the banking system would be profound (probably total), the losses
would be two-fold from home equity and mortgage bonds, and a deep ongoing
relentless (possibly endless) recession would unfold. So far that
over-arching forecast seems right on track. At the same time, my position was
that the housing asset was a HARD ASSET IMPOSTOR. Many considered it
incorrectly as another commodity, a hard asset, rising in price like copper,
cement, lumber, gold, and energy. Not so! By now, my claim that it was an
impostor seems evident. My claim was that the home asset was dominated by the
mortgage financial security, whether a loan in the bank portfolio or an asset
inside the mortgage bond. My claim was that the home price would be
determined by the financial assets behind it. All booms have a financial
credit feeding component.
As
the housing asset base continues to drain home equity, it kills the banking
& bond system entirely. Housing stands as the two-ton weight lodged in
the car, the millstone around the household neck. The stimulus being ordered
by the USFed and USGovt
must reverse the slow motion downward spiral for housing. So far, housing has
lost around 10% of value nationally in the last year plus. That amounts to
over $2 trillion in home equity loss, rendered unavailable for home loans and
consumer spending, if not education and training. Forget the boats! The
entire focus of attention on stimulus and rescue packages must be on stopping
the housing price decline. No exceptions. The prime adjustable mortgages
are next in line within the killing field of grand destruction. This is the USFed’s focus. They see it coming. The commodity
boom continues, but the housing market is in its second straight year of
painful decline. Do not expect the housing bear market to hit bottom until
late 2009 at the earliest. The USFed, the Dept of
Treasury, the USGovt, the US Congress, they have
all fiddled like Nero as Rome
burns. The current president resembles Nero, with brandished military weapons
substituted for a violin. Rome is the US financial system, with the USEconomy adjacent to the bonfire. Many references
have been made recently by writers and analysts, citing that Rome is burning. When the officials at the USFed and leaders in the USGovt
decided to unleash the heavy artillery so as to stop the housing hemorrhage, the impact on the USDollar
and gold price will be profound. That is precisely my forecast, that when it
comes, the gold price vaults past
$1000 and does not look back. A rising gold price past $1200 and past $1500
will go hand in hand with a stabilizing housing market. Since they delayed so
long, that bottom event will not come for at least another year. Goals
finally have aligned.
MONOLINE BOND
INSURERS – NEXUS OF COLLAPSE
The
nexus of the current bank & bond debacle has been clearly concentrated
lately in the Monoline Bond Insurers. Space does
not permit full discussion, even a solid summary. The last couple
Hat Trick Letter reports have dealt with this unfixable topic. An
argument has been put forth that the cost of the cure to address inadequate
bond insurer corporate capital needs is much less than the impact on the
system from the insurer firm failures. What nonsense! Just like Wall Street
firms wanted direct bailouts of their balance sheets, so do the Monoline insurers. The Wall Street impact from big debt
downgrades is huge, since so many rafts of bonds would either be forced in
sale or forced onto balance sheet for writedowns. The
current impact is seen with municipal bonds. The estimates for total bond
losses are steadily rising. Big banks are raising their estimates. Financial
firms are raising their estimates. Soon the estimates will be more realistic,
like above $1 trillion. Desperation has set in, as New York Insurance
officials are attempting to hatch a rescue plan. It is doomed from the start.
All they can hope for is to buy a few months. If the housing market continues
down, their work is futile. If the adjustable mortgage resets continue, their
work is futile. If the foreclosures continue, their work is futile. If the
debt downgrades by the rating agencies continue, their work is futile. If the
corporate balance sheet adjustments continue, their work is futile. If faith
erosion in the central banks (most notably the USFed)
continues, their work is futile. If lenders hold ground and refuse to relax
on lending flexibility, their work is futile. If foreigners continue to shun
US$-based bond investments, their work is futile. If foreigners refuse to
provide emergency cash infusions for capital positions, their work is futile.
Gold smells a bond debacle worsening. When news progressively worsens, gold
responds. Gold senses grandiose rescues.
However,
the Monoline Bond Insurers must be prevented from
declaring bankruptcy. The tragic sideshow has begun, of attempting to
separate their healthy municipal bond business segment from their disastrous
mortgage bond coverage business. A split cannot happen. Corporate obligations
dictate that insurer success is balanced against their failure, so profits
from their gainful segment must subsidize its losing segment. The
developments will make great theater for many more
months. Games are being played. Eventually the USGovt
must bail out the bond insurers, or else the US banking system collapses.
That is a strong statement. The USFed will not take
such a big step. The credit derivatives are a mountainous pyramid. The credit
default swaps have counter-party
risk entangled within. If the insurers are not prevented from bankruptcy,
then a gigantic beehive will be opened and infected bees allowed to spread to all corners. My intuition tells me that the
clowns at the USFed and Dept Treasury misjudge the
impact of the Monoline Bond Insurers and their
collapse. So far, they have misjudged just about everything. When the bond
insurer rescue comes, gold will respond, on the back of the renewed decline
in the USDollar.
POLICY RESPONSE
TO ADDRESS BUBBLE
Let’s
walk down memory lane in conclusion. In 1980, a nasty recession
lingered longer in time than most so-called experts contemplated. The causes were many, but in my analysis it extended
from the OPEC quadruple of oil prices, the failed Nixon Wage Price Freeze,
the Volcker (USFed
Chairman) harsh monetary medicine, the heavy hidden cost of the Cold War, and
the Watergate Scandal. So the ‘Policy Bubble’ was a defense buildup, complete with
Star Wars technology, vast defense contracts, huge
spending, and an economic recovery. The cost was about $2 trillion in added
federal debt, the Reagan legacy few prefer to talk about publicly. The next
bubble was well defined, but the costly impact was not. At the same time, the
US
manufacturing base was being dismantled and sent to the Pacific Rim of East
Asia.
In
1992, a
nasty recession lingered longer in time than most so-called experts
contemplated. The causes were
many, but in my analysis it extended from the end of the Reagan phony economic recovery, the dissipation end of the last
coincident housing bubble, together with a painful shock of the Iraq-Kuwait
Gulf War, when Saddam Hussein became more a household name. So the
‘Policy Bubble’ was a military buildup,
huge wasteful weapons R&D and system deployment, and a housing bubble. The
actual war did receive some international funding. The icing on the policy
bubble was the grand tech-telecom stock bubble. The next bubble was well
defined, actually more broadly embodied in more diverse arenas, but the
costly impact was not. At the same time, the US manufacturing base was still
being dismantled and sent to the Pacific Rim of East Asia.
In
2001, a
nasty recession happened suddenly but with swifter impact than most so-called
experts contemplated. The causes
were many, but in my analysis it extended from a busted stock market,
together with a new factor. The new element was a newly engrained dependence
upon financial bubbles serving as a foundation for the USEconomy
itself. The nation had lost most of its legitimate foundation. With the
economy in decline, two avenues had to be pursued. First, a new enemy needed
to be designed. A war was hatched on phony grounds
by leaders of very duplicitous nature. Even the event triggering the war, the
World Trade Center
and Pentagon attacks, are heavily debated for suspicious origins. Second, a
new financial bubble desperately needed to be spawned and puffed up. The
‘Policy Bubble’ was the War on Terrorism and the housing boom on
the back on the mortgage frenzy. With war and security dominating USGovt spending, with the private sector pre-occupied not
with valued added enterprise, the USEconomy rebounded
in a phony recovery. The next bubbles were well
defined, in the two primary American icons of military and housing. However,
the costly impact has only now been estimated. The cost is the destruction of
the US
bank and bond system, and an endless USEconomic
recession. At the same time, the US
service base was being dismantled and sent to the China
and India, while the
remainder of the US
manufacturing was sent to China,
as a vast industrial buildup has taken place there.
The cost is the grotesque increase in US debt coupled with the
grandiose growth in Chinese savings. The new age of the Sovereign Wealth
Funds has begun. They now stand either as US corporate aid agents or enemies
of the US
financial state, many no longer friendly.
The
next ‘Policy Bubble’ will be some form of grand US
infrastructure buildup of a healthy nature, late to
be sure. It should have its foundation extending into alternative energy
research and development, as in actual deployment and installation of
systems. With no new ‘Policy Bubble’ to promote and feed, the USEconomy and financial sector will implode. At the
same time, the housing sector must be revitalized. The two objectives must
work in concert. If a national program to rebuild bridges, internet lines,
communications systems, electrical lines, water mains, natural gas pipelines,
and recycle centers, jobs will be produced, enough
perhaps to help the public in its ability to service a heavy debt burden. Be
sure that the same level of inefficiency and corruption will be rampant in
them. See the Hurricane Katrina Relief program for instance, and on a much
greater scale see the Iraq & Afghan Wars. Contractors are part of the
merger of mafias that has captured the essence of the Fascist Business Model
since year 2000.
GOLD & USDOLLAR
CONCLUSION
As
the many rescues planned and put in place, monetary inflation will be mammoth. The US$ will inevitably be sacrificed
in the housing crisis and mortgage debacle, in addition to reviving the
banks. The US$
will be weighed down further, in order to lead the USEconomy
out of recession. Cheap money is coming again, and globally. The USFed will not be able to escape the clutches of 1.0%
interest rates again, coupled with the extreme shame. The USDollar
will not be able to escape the plumbing of lower exchange rates, like down to
the DX=70 level. The gold price will feed off lower interest rates, as
speculative gains will be back in vogue, even called a good thing. There is
nothing like a bout with deflation to change the mindset of speculation and
its vagaries, turning it positive. The gold & silver prices will rise
from the cheap money, low interest rates, stimulus
packages to ward off recession, rescues to banking, and lower USDollar. But the USEconomy
desperately needs the next ‘Policy Bubble’ in order to come back
to life, to produce jobs, to change national psychology, to revive hope. Without
a plan to puff a new bubble, which will buy some years of time, the nation
will morph into chaos. A military dictatorship would be the only alternative.
The urgent next step is leaders with some vision, rather than a plan for
private profiteering, founded upon fear. Hope pays off more than fear, unless
fascism is the end game.
By : Jim
Willie CB
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Jim Willie CB is the
editor of the “HAT TRICK LETTER”
Jim
Willie CB is a statistical analyst in marketing research
and retail forecasting. He
holds a PhD in Statistics. His career has stretched over 24 years. He aspires
to thrive in the financial editor world, unencumbered by the limitations of
economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal
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