Greenspan was
able to pursue his high-octane policy of slashing interest rates to 1% to
rescue the stock market, because
global inflationary pressures were largely subdued. The gold market was dead
in the water, languishing under $300 /oz. The Bank of England was dumping
half of its gold reserves at an average price of $276 /oz, and central banks
from Switzerland,
Argentina,
and Australia
were selling their gold reserves and buying foreign government bonds.
Six years ago, crude oil
prices had sunk to as low as $18 /barrel, on fears the stock market crash in
Sept 2001 would usher in a major slowdown in the global economy. But
conditions in the crude oil market have changed dramatically from six years
ago, hitting $100 /barrel earlier this month. China
is now importing half its crude oil consumption, and should log a 12%
increase, or 400,000 bpd, in imports for 2008.
Today, gold is trading at
$925 /oz, and US consumer prices were 4.1% higher last year, the largest
annual rise since 1990, and producer prices were 6.3% higher, just below a
34-year high. The Fed has gone insane, slashing interest rates at a time when
inflationary pressures are dangerously high, playing Russian roulette with
the greenback, and guiding the US
economy into the “Stagflation” trap.
On Oct 2, 2007,
“Easy” Al Greenspan, the godfather of the $1.8 trillion sub-prime
debt bubble, warned, “We’re beginning to see the extraordinary
period of disinflation and economic growth coming to a halt. We now have to
be very sensitive to the fact that inflationary pressures could well get out
of hand,” he said. But in trying to clean up the mess that Greenspan
left behind, the Fed is exercising the “Bernanke
Put.”
On Jan 15th, Saudi oil chief Ali al-Naimi
said the Fed’s cheap dollar policy is adding $20-$30 to the price of
oil. “$20-30 is the outside influence on the price of oil. If you look
at who is in the market, you’ll find a lot of financial institutions,
players who are speculating, using the market as a hedge,” Naimi said. Soybean prices have tripled from six years
ago, largely due to the bio-diesel connection and weak US dollar.
Gold is a reliable
harbinger of inflation and is setting all-time highs, as the Fed pushes
interest rates far below the inflation rate. The dollar is hovering at a
record low against the Euro and a basket of foreign currencies. Flooding the
market with more dollars will drive up the price of foreign imports. The Fed
wants to inflate the stock market, but the money injections drive up food and
energy costs.
Last week, Stephen
Roach, the head of Morgan Stanley Asia observed, “Policy-makers are
reaching back to the same play book that created this mess in the first
place. They’re saying we are there to clean up after bubbles burst,
rather than to prevent them. It’s a dangerous, reckless and
irresponsible way to run the world’s largest economy. We have a
market-friendly Fed injecting a lot of liquidity in the system which will set
us up for another bubble economy. Excessive monetary accommodation just takes
us from bubble to bubble to bubble,” he explained.
ECB Shifts from Policy of “Asset Targeting”
Hopes that the Fed’s emergency rate cut to 3.50% would be followed
by a easier European Central Bank policy, were dashed last week, when ECB
chief Jean “Tricky” Trichet said he
would not cut Euro zone interest rates in line with the meltdown in European
stock markets. For many years, the ECB had been targeting its repo rate in line with the direction of European stock
markets, while allowing the Euro to climb higher against the US dollar to
help contain the cost of raw materials.
After the benchmark German DAX Index plunged by roughly 15% last week, in
reaction to meltdowns in Asia
and Wall Street, European stock market speculators were hoping for the
instant exercise of the “Trichet Put”,
to bail them out of a tough situation. Instead, “Tricky” Trichet signaled a hard-line
stance, in sharp contrast to the rookies at the Bernanke
Fed, saying he is focused on fighting inflation, even in the face of a big
stock market meltdown.
“In demanding times of significant market correction and
turbulences, it is the responsibility of the ECB to solidly anchor inflation
expectations to avoid additional volatility in already highly volatile
markets. At this stage I think we have to look at what’s happening in
the real economy, we have a base scenario and at this stage I’m not
going to modify this base scenario,” Trichet
said.
“There is one needle in our compass and it is price stability. There
is no contradiction between price stability and financial stability. The
market correction, which the ECB and other central banks had warned over a
year go, was now taking place and it is significant. But under the capital
market system it was natural for risks to emerge and central banks”
main job was to solidly anchor inflation expectations.”
“What is extremely
important is to offer a steady hand as possible. First, price stability and
then solidly anchor inflation expectations. If risks did not materialize you
would not be living in a market economy, you would be living in the Soviet Union,” Trichet
explained on Jan 24th. He was backed up by the Bundesbank’s
Juergen Stark on Jan 22nd, “Our
main worry is the high inflation rate of 3.1% in the Euro zone. Volatility on
global stock markets is not helpful, but recent developments are an
overreaction and their importance should not be exaggerated,” he said.
On Jan 28th,
Austrian Chancellor Alfred Gusenbauer
said what was right for the US was not necessarily
right for Europe.
“You can’t just go and say, we’ll do the same thing as the
Fed. Despite the pressure, we shouldn’t cut interest rates and we ought
to get towards an inflation rate of around 2% in the Euro zone," he
said.
We’re witnessing the reincarnation of the old “Tricky” Trichet, harkening back to a speech he gave on April 23,
2002 to the Federal Reserve Bank of Chicago and the World Bank. Then, Bank of
France chief Trichet warned that central bankers
must be cautious in considering
volatile asset prices such as the stock market and housing prices when
setting monetary policy.
“My feeling is that we should remain extremely cautious about it, because
it would be like opening Pandora’s Box if we started setting our key
policy rates according to asset price changes. Not only could the large
swings, misalignments or even bubbles of assets prices endanger price
stability, which is the main objective of most central banks, but also they
could impinge upon financial stability,” he warned.
Bank of England takes Middle of the Road Approach,
The Bank of England is a disciple of “Asset Targeting,” and
nowadays, British interest rates are largely moved by the direction of UK
home prices. On Nov 23rd, the BoE’s Rachel Lomax
indicated the central bank faces a tricky balancing act. “While
current stock market woes could hit British property prices, there are always
risks in easing policy at a time of rising energy prices.”
“This is all the more
so after a year when inflation measures remains uncomfortably high. On the
other hand, we need to be very alert to the risk that the economy may be
slowing too abruptly. At current interest rate levels monetary policy may be
on the restrictive side,” Lomax said. Two weeks later, the BOE lowered
its base rate a quarter-point, to 5.50%, the first rate cut in over 2-years
to shore-up the UK
housing market in the face of a global credit crunch.
On Jan 23rd,
the BOE hinted at another quarter-point rate cut to 5.25% in February to safeguard home prices, but aggressive cuts of the
kind initiated by the rookies at the Bernanke
Fed are not on the cards. BoE
chief Mervyn King said Britain’s
economy faced its most challenging year in a decade, but suggested that
rapid-fire interest rate cuts were not the answer to financial market woes.
Most BoE members are worried that rapid-fire rate cuts would send the
wrong message and fuel expectations of higher inflation in the future. Sterling’s
recent slide below $2.00 is also exacerbating price pressures.
“Movements in the yield curve and the depreciation of sterling had
already provided some further monetary easing,” the 8-1 majority of the
committee argued.
Interestingly
enough, BoE chief King issued two warnings of an impending global stock
market crash in November and in December, mostly ignored by over zealous
stock market operators, until a panic sell-off hit in January. “The
re-pricing of risk we have talked about for some considerable time
hasn’t really fed through to markets such as equity markets, and if
there were to be an adjustment of risk premiums in equity markets, with a
fall in asset prices, then that could have a bigger impact on the world
economy,” King warned on Nov 14th.
“It’s
very striking that despite developments we’ve seen in the last three
months, equity prices are on average higher now than they were in August. This
is true around the world and in emerging markets, they’re 20% higher. There
must be some downside risks there,” King told reporters at a news
conference.
On Dec 18, Mr King warned
of more bad news to come for the financial sector, “The problems in the
financial sector remain with us. A painful adjustment faces the global
banking sector over the next few months as losses are revealed and new
capital is raised to repair bank balance sheets. Banks’ reluctance to
lend will lead to a sharper slowdown in the United States.
That concern is a serious one because
it does hold out the prospect that there will be a self-reinforcing downturn
in credit and activity,” King told the UK’s
parliament’s Treasury Select Committee.
Ironically, BoE rate cuts
weakened the British pound against the Japanese yen, and triggered the
unwinding of “yen carry” trades. The BoE’s
massive injections of monetary steroids into the UK
banking system also destroyed the purchasing power of the British pound by
35%, when measured in gold terms. It’s a signal that BoE rate cuts will
lead to faster money supply growth and higher inflation.
Yet on Jan 28th,
the BoE’s radical inflationist, David Blanchflower said in an interview with the Guardian
newspaper, that the current level of UK
interest rates at 5.50% was too restrictive. “Worrying about inflation
at this time seems like fiddling when Rome
burns. There are risks to the upside to inflation, but the greater risks are
to activity on the downside. Evidence from the housing market and especially
the commercial property market is worrying,” he said.
However, BoE hawk Andrew Sentance warned that market expectations of several more
rate cuts were ignoring rising price pressures. BoE chief Mervyn
King pointed to a balanced approach between slowing growth and rising
inflation. “Although central banks can and will respond to the
consequences of strains in the banking system, the solution to the underlying
problem does not rest with them, but with the banks and financial markets
themselves,” King said on Jan 23rd.
Bursting of Shanghai
Red-chip Bubble?
While the Bernanke Fed is slashing interest rates at a frantic
pace, and the ECB holds a steady hand, the Chinese central bank is moving in
the opposite direction, and tightening liquidity in the Shanghai
money markets. On Monday, the mighty Shanghai
red-chip index plunged 7.2% to 4,435, its fourth biggest drop this decade, that left it 28% below its record intra-day high,
hit in October.
China’s central bank has poured cold water on the idea that the
country’s juggernaut economy
can decouple from the United States.
“China’s
exports will be badly hit if US
consumption weakens,” said Zhang Tao, of the People’s Bank of China.
“If US
consumption really comes down, that’s bad news for us. That will have a
pretty severe impact on our exports,” Zhang warned.
On Jan 4th, China’s central
bank vowed to further tighten monetary policy in 2008, aiming to prevent
inflation from spreading across the broader economy. With
food accounting for a third of China’s
consumer price basket, the 18% surge in Chinese food prices last year is a
ticking time bomb, where fuel price increases touch off violent protests. If
the inflation problem gets out of hand, it could have devastating
implications for the economy, and China’s
political stability.
The Bernanke Fed’s embrace of
“Asset Targeting,” and its complete disregard for the
inflationary consequences of its actions, has caught
the attention of major players overseas. On Dec 27th, Hu Xiaolian, director of
China’s Foreign Exchange warned, “If the US federal funds rate
continues to fall, this will certainly have a harmful effect on the US dollar
exchange rate and the international currency system,” Hu wrote.
Bernanke is
risking a disastrous replay of the 1970’s, when high oil prices fueled double-digit inflation. Every time the Fed lowered
rates to boost job growth, inflation took off, causing
a vicious price spiral. The Fed let the disease rage for so long that it took
a strict monetarist approach by Paul
Volcker in the early 1980’s to finally defeat
inflation. The price was a deep recession, with unemployment hitting 11% in
1982.
To stay on top of volatile
markets, subscribe to the Global
Money Trends newsletter today, for insightful analysis
and predictions of the future for the (1) top stock markets around the world,
(2) Commodities such as crude oil, copper, gold, silver, and related gold
mining and oil company indexes (3) Foreign currencies (4) Libor interest
rates, global bond markets and central bank monetary policies, and (5) Central
banker "Jawboning" and Intervention techniques that move markets.
GMT filters important news
and information into (1) bullet-point, easy to understand analysis, (2)
featuring "Inter-Market Technical Analysis" that visually displays
the dynamic inter-relationships between foreign currencies, commodities,
interest rates and the stock markets from a dozen key countries around the
world. Also included are (3) charts of key economic statistics of foreign
countries that move markets.
Subscribers can also listen
to bi-weekly Audio Broadcasts, with the latest news on global markets,
and view our updated model portfolio for Q’1, 2008. To order a
subscription to Global Money Trends,
click on the hyperlink below,
http://www.sirchartsalot.com/newsletters.php
or call toll free to order, Sunday thru Thursday, 8 am to 9 pm EST, and on
Friday 8 am to 5 pm, at 866-553-1007. Outside the US
call 561-367-1007. This article may be re-printed on other internet sites for
public viewing, with links required to,
http://www.sirchartsalot.com/newsletters.php
By : Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
The Global Money Trends newsletter is
happy to announce a special bonus for new and existing subscribers, - "Audio Broadcasts", posted
on Monday and Wednesday evenings, during Asian trading hours, to the Log-In
section of our website, with our latest analysis of gold, crude oil, base
metals, foreign currencies, interest rates and the top stock markets from
around the world.
To make life easier, Global Money Trends also presents a
model portfolio of our top-20 picks in the global stock markets, to take
advantage of historic price movements in the global commodity markets and
foreign currencies. That's in addition to our regular newsletter, published
on Friday, for 44 weekly editions.
This article was just
the Tip of the Iceberg, of
what's inside the Global Money Trends
newsletter! Here's what you will receive with a subscription, Insightful analysis and predictions
of the (1) top dozen stock markets
around the world, Exchange Traded Funds, and US home-builder indexes (2) Commodities such as crude oil,
copper, gold, silver, the DJ Commodity Index, and gold mining and oil company
indexes (3) Foreign currencies
such as, the Australian dollar, British pound, Euro, Japanese yen, and
Canadian dollar (4) Libor interest
rates, global bond markets and central bank monetary policies, (5)
Central banker "Jawboning" and Intervention techniques that move
markets.
GMT filters important
news and information into (1) bullet-point, easy to understand analysis, (2)
featuring "Inter-Market Technical Analysis" that visually displays
the dynamic inter-relationships between foreign currencies, commodities,
interest rates and the stock markets from a dozen key countries around the
world. Also included are (3) charts of key economic statistics of foreign
countries that move markets.
To order a
subscription to Global Money Trends,
click on the hyperlink below,
http://www.sirchartsalot.com/newsletters.php or call toll free to order, Sunday thru Thursday, 8 am to 10 pm EST,
and Friday 8 am to 5 pm, at 866-553-1007.
Information
contained herein is obtained from sources believed to be reliable, but its
accuracy cannot be guaranteed. It is not intended to constitute individual
investment advice and is not designed to meet your personal financial
situation. The opinions expressed herein are those of the author and are subject to change without notice.
The information herein may become outdated and there is no obligation to
update any such information. The author,
24hGold, entities in which they have an interest, family and associates may
from time to time have positions in the securities or commodities discussed.
No part of this publication can be reproduced without the written consent of
the author.
