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An
important reversal of focus, expectation, and direction has taken place in
Europe. Put aside the sovereign debt mess that will not go away. It will not
be fixed, despite all the effort and talk and deal making. They must prepare
for a string of bank failures and a Greek default. Every solution executed or
proposed or pending involves the same lunatic device of creating more debt or
more money to solve a problem caused by too much credit creation and
unchecked monetary creation. For 18 months the Euro had traded on the back of
the European Central Bank monetary policy, on interest rate judgments and
expectations. To be sure, the PIIGS sovereign debt situation has dominated
the news. However, that disaster has played out in the member nation bond
yields, like Greek yields shooting toward 100%, like the bigger southern
periphery nations jumping over the critical 5% level. During all the
maelstrom of the wrecked bonds, arguments over bank bailouts, haggling over
funding the stability facility, and political footdragging,
the Euro had maintained a 140 exchange rate for a long time. The impetus for
the rise from 130 to 147 in the Euro currency from the beginning of year 2011
had been the clear move by Trichet of the Euro
Central Bank to break ranks with the US Federal Reserve. Outgoing chief Trichet hiked the official rate by 25 basis points
several months ago, attempting to make distance from the USFed.
He made defiant comments implying a reckless pattern at the USFed. He cited rising price inflation threats and the
lack of desire to continue to stimulate on the monetary side. The rate hike
was criticized widely for its direct impact on PIGS nations. Their mortgage
rates and other related internal bank mechanisms caused damage to the
southern banks. They were already teetering.
All
changed at the end of August. The Trichet EuroCB responded to the Western plunge in stock markets
accompanied by vivid economic slowdowns. Suddenly,
Trichet indicated a greater emphasis on paying
attention to growth issues. The profound bank distress grew into a contagion,
as the big French banks came under the spotlight, also capturing his
attention if not causing shock. Then suddenly Dexia
had a near death experience, aided en route to the morgue. The EuroCB seems now trapped by two equally unsavory and
undesirable policy directions. It had been giving all the signals of an
official rate cut. But the European
Central Bank did not cut rates last week, an event of extreme importance.
Trichet cited intensified downside economic risks, that matched the Bernanke language of extreme
economic weakness. The clumsy Euro Central Bank instead decided to announce
another round of bank loans and massive bond purchases. While the bond plan
is more of the same expansion of money, much bank backstop activity has
curiously been US$-based, as the big European banks have a boatload of US$
obligations to meet. The ugly little fact in the last month has centered on how
Wall Street banks have filled the void and extended bailout-like loans in the
interbank market to big Euro banks. The
harsh reality is that when Greece inevitably defaults, a string of bank
failures will occur that hit Europe, London, and the US simultaneously.
The great posturing is underway prior to the big event. Clear the smoke and
dust, and the fact remains that the official EuroCB
interest rate was not cut by 25 basis points. They did not even remove their
hike from several months ago.
EURO CURRENCY REVERSAL NEXT
The
FOREX market is tremendously leveraged and active. It trades off arbitrage of
interest rates and their expected direction. The Euro has begun to rise. Just
this week, it registered a 140 basis point rise on a single day. Today yet
another big upward move has been recorded, as the Euro has risen
160 basis points more, touching the 138 level. Observe the reversal of the Euro currency decline. It has a thinly
defended gap between 136 and 140 which will be filled. The reversal in
underway. Momentum is building. Talk of the absent rate cut is loud and
reverberating. The MACD momentum swing indicator shows a reversal in
progress. The potential for FX trader profit is suddenly on the upside. The
fundamental defense in the form of narrowing interest rate differential
versus the USDollar did not materialize. The FX
currency market is dominated by leveraged bond speculators who prey and trade
off the differential.
Bankers
across the Atlantic are actively printing money, buying bonds, and otherwise
debasing their currencies. A big announcement by the Bank of England about
their GBP 75 billion (=US$115 billion) infusion into the financial markets
came in rapid fire after the Euro Central Bank left their benchmark rate at 1.5%. The ECB announced
it will resume covered bond purchases and reintroduce important loans for
banks. Massive futures contract bets had been placed that the Euro would
fall versus the USDollar. Short covering has begun in earnest. But the
justification from a pending expected rate cut did not happen. The reversal
is in progresss, with some momentum. A shift is vividly clear in risk
sentiment for the USDollar to weaken from here. It has made a run on Euro
weakness, not US mainland strength. The American problems remain enormous and
intractible.
EURO GOLD LOST SHINE
My gut told me the EuroCB would
not cut rates. They cringe at the thought of following the American lead.
They reluctantly cut rates back in 2009, knowing it would cause speculative
problems and a rising Euro to damage German export trade. They defiantly
hikes rates in very early 2011, angering the Americans by putting distance
between them. They bristled at the Geithner appearance at the G-7 in Poland
last month, for his hypcrisy and arrogance on urging an approach. The expected
rate cut (that never happened) has been an important short-term crowbar to
knock the Euro down 1000 bpts, from 142 to 132. My thought was that the Trichet ECB would avoid an official rate cut in a rising
price inflation environment within Europe. We have seen a 500-bpt rise in the
Euro so far, the process half done, fully expected and mentioned in private
email exchanges last week. Curiously,
very few economists expected a rate cut, but the 1000-point Euro decline was
predicated on exactly such a rate cut. The EuroGold
price pre-saged no rate cut. The pause is clear.
The EuroGold price could easily fall back toward
the 1100 Euro mark, where it was before the big Euro currency decline. Its
foundation has vanished. But a Euro rise and a big Gold rise could keep the EuroGold price steady near the 1200 level.
The
US$-based Gold price will benefit in opposite manner to the EuroGold price. The Gold price is prepared to rise in US$
terms, perhaps powerfully so. It will fall in Euro terms. Notice the EuroGold price fights below the 50-day moving average.
Watch to see if it crosses below the 100-day MA soon. The MACD is close but
has not crossed over. Look for it to dance and kiss but not cross above in
bullish terms. Notice the Gold price in US$ has bounced off the 1600 impulse
bottom.
ENGINEERED GOLD DECLINE HALTED
This
article would be remiss not to point out that history is being made. The
COMEX has decided to raise margin requirements when a falling price is
occurring, for both gold & silver. Normally, the opposite is the case.
Notice no USTBond margin hikes, even though an
asset bubble. If truth be known, the damage done to the Paulson Fund had a
big hand in knocking down gold. Motive is painted on the walls. Policy is to tarnish the precious metals
as the global monetary system continues to crumble, as the USGovt deficits head toward $2 trillion annually, and the
USEconomy enters a recognized recession along with
Western Europe, before renewed stimulus is attempted. With all the
destinations staring the bankers and politicians in the face, they wanted the
Gold & Silver prices to be pushed down. The next upsurge will be one for
the history books. With new money heading to fill holes in the bank bond
bailouts, the recapitalization of numerous banks, the economic stimulus, and
the government debt monetization (led by the US), the debasement of major
currencies will be astounding. The Gold & Silver prices will make strong
new highs repeatedly.
The
Silver price is ready to bust north too, but in a more emphatic display. Its
decline was led by the Gold decline, but was also pushed by the industrial
demand card from a slower economy. The extreme silver supply deficit has not
gone away. Neither has the huge silver coin demand from various mints around
the world shown any sign of relenting. The Silver price has a MACD reversal
in progress. The 30 breakout level from the final months of 2010 has been
defended. The potential for a powerful reversal to fill the obvious gap from
32 to 40 is painted loudly for all technical traders to see. No resistance is
presented. A pit stop at 36 will come, enough for a cup of coffee.
By the way, Operation Twist is a massive
deception to enable foreign creditors to dump USTreasury
Bonds.
The hallmark of Quantitative Easing has turned toward deception, lack of
transparency, and devious cunning scheming defense of the USDollar
by whatever means. The past QE, QE-Lite, and QE2 kicked the USDollar in the teeth, knocked it down in value, and
caused an extremely disruptive rise in the cost structure for the entire
world. It was hardest felt in food prices. The USFed
has been given direct blame across the world, complete with harsh criticism. So the monetary easing programs instead
turned more secretive, as Global QE became the policy. Check out the
Japanese and Swiss central banks, even the British, as they are all involved
in active monetary growth. A queer fact never received much attention late
last year. The Irish increased their Euro money supply over a four month
period by a staggering amount. They defied the Euro Central Bank since
unapproved. Annualize by a 3x factor, then compare to the US by a 50x factor
(accounting for population) and the Irish increased the money supply by a
ripe $3 trillion annual equivalent.
Conclude
that Global QE is here in earnest, uniformly and powerfully so. If all
central bank outpost nodes participate, the USDollar
will not fall much, if at all. The
central bankers are willing to wreck the global economy in order to contain
the cost structure from demand destruction, a truly dangerous ploy since they
risk toppling their own subservient collusive big banks. The October Hat
Trick Letter provides details on the sneaky reality behind the Operation
Twist. Foreigners bailed out, and might have purchased some US stocks. Doing
so would keep the flows from re-entering their home currencies and lifting
their exchange rates, a step that would lower the US DX dollar index in the
process. The secondary motive behind USFed action
is to avoid another strong USDollar decline, even
though the United States is the biggest PIIGS nation of all on debt ratios of
any measure.
THE HAT
TRICK LETTER PROFITS IN THE CURRENT CRISIS.
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Jim Willie CB, editor of the “HAT TRICK LETTER”
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