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Good Morning Readers.
I
believe the greatest fear in the market today is the question of what will
happen if Dr. Bernanke makes good on his promise to end quantitative easing.
Here are the facts. One in four homeowners are still underwater. Despite that
we are being told unemployment is not improving, in a recent article in
Barron’ for every job that is created there are 4.6 applicants.
Moreover, in the 244,000 that were created, 56,000 of them were part time
jobs at McDonalds. Companies that are reporting record profits are doing so
by restructuring their workforce by laying off middle management positions
and filling them with part time employees. While this is a fundamentally
sound corporate decision, it leaves the middle class working man or woman in
a most precarious position. This “motus operandi” that big
corporations have employed saves theses corporations from paying for
healthcare; 401-K’s and puts 4 people to work for what it would cost to
have one full-time person employed. While this makes their quarterly balance
sheet look good it is the most despicable tax of all as the middle class
working man can no longer afford to pay for their mortgages, insurance and
the basic necessities to raise a family. Meanwhile, huge bonuses are handed
out to the executives who have implemented these strategies.
Soaring deficits and debts must be repaid and
I can’t see any way that is possible without the continued devaluation
of the dollar. This leads me to conclude that the Central Banks must continue
to print and devalue the dollar in order to prevent us returning to the same
scenario we saw in 2008 – 2009. The difference this time is
that now we are in an even deeper hole. On the other hand, we are seeing that
the world is preposterously short the U.S. Dollar. And that is a big problem
because recent developments overseas have been extremely dollar bullish.
Recent comments by Jean Claude Trichet caught investors off guard. Trichet
hinted that another ECB rate hike was unlikely at the June meeting. The
fiscal woes of Portugal, Italy, Ireland, Greece and Spain are going to drag
out for a long time. Until these nations break away from the European Union
there will be an overhang of discouragement. This leads me to believe that
there will be a trend toward a much weaker Euro and a much stronger dollar
over time.
This most certainly leaves our economy
between a rock and a hard place.
The world currency is being devalued. As
inflation spreads from Main St. America to the villages and cities of
countries around the world, commodities will rise much further than they
already have over the past two years. The only way commodities won't rise is
if the Federal Reserve stops printing money or significantly raises interest
rates. If the Fed did those two things, and let the chips fall where they may,
the United States would enter a recession far worse and much longer than
2008. The Federal Reserve cannot and will not do this. When
you hear QE2, think Treasury Market. The Fed is the biggest player in the US
Treasury Market and has been a net buyer for many months. If the Fed stops
printing money, or in other words, stops buying Treasury Bonds, interest
rates on US debt will rise and the US will quickly be facing default. If the
Fed voluntarily raises interest rates to slow inflation, it will choke out what
little economic recovery we have and the same result will occur. For these
reasons, we believe inflation will reign supreme for the next few years.
Just this past week the US sold $72 billion
of Treasury Notes at auctions! On Wednesday, May 11th 2011, $24 billion of US
debt was auctioned off by the US Treasury. As central banks and other foreign
buyers attempted to undercut prices, showing reduced demand or unwillingness
to buy Treasury Bonds at current rates, the Fed stepped in. The Fed did what
it has become accustomed to doing. It supported the market with falsified
demand - artificially holding interest rates low. The Fed bought $7.68
billion of Treasuries maturing November 2016 through April 2018. Almost 30%
of the buying that day came from the Fed. Who will buy these Treasury Bonds
and keep demand humming along for US debt when the Fed concludes its $600
billion monetary stimulus next month? Has Obama's policies changed? Has there
been news that this year's deficit will be cut in half? Will the US not have
to issue hundreds of billions and even trillions of debt to foreign central
banks just to sustain its own spending programs?
You know the answer to these questions. The
Fed will find a way to support the Treasury Market because if it doesn't,
these buyers will demand higher rates and the interest alone on the US
deficit will force it into default. The only reason the Fed can support this
manipulated market without countries turning their backs on the US is because
it controls the global reserve currency. If there were to be ongoing weakness
in the US Treasury Market it would only fuel China and Russia's ambitions for
a debasement of the US dollar as the world currency.
The threat that the US dollar could be
removed as the world currency is a serious issue that would fundamentally
change the entire international investing market; not to mention Americans'
standard of living. These are no longer distant grumblings. Real initiatives
and plans are being implemented to make this a reality not only in our lifetime,
but in the near future.
Many investors wonder how long the US can
keep printing dollars. The real question investors should be pondering is;
how long can the US dollar continue to be the world currency as failed
policies and out of control spending continue? In my opinion, the answer is
simple. We will steadfastly continue down that path until after the 2012
elections.
The US dollar is the global reserve currency.
In a nutshell, this means oil, gold, silver and all tradable commodities are
purchased in US dollars. So before purchasing crude oil, a country must
convert its own currency into USD to make that purchase. Naturally, there are
conversion costs that must be absorbed by the purchaser. It gives the US a
very clear and defining advantage. The US is the only country in the world
which can print unlimited dollars (the world's currency) and run up high
deficit. The United States has been taking blatant advantage of this and
abusing its control over the world currency for years. Many countries, but namely
China and Russia, have seen enough.
On March 24, 2009 the governor of China's
central bank, Zhou Xiao chuan wrote a paper calling for serious changes in
the global financial system and the possibility of creating a single currency
which would replace the dollar as the global standard. Zhou's
resolution was to reform the international monetary system by creating an
international currency reserve that is disconnected from individual nations
and is able to remain stable in the long run, thus removing the inherent
deficiencies caused by using credit-based national currencies. This forceful
statement was backed up by Russia. In late 2010, China and Russia
agreed to have their currencies trade against each other in spot inter-bank
markets. Chinese officials released a statement that said their motive is to
promote the bilateral trade between China and Russia. There is the clear
message here. China, nor its Yuan, will be confined to its borders.
China and Russia have been making gradual
moves away from trading in the US dollar for years. In the past, if China
wanted to buy oil from Russia it had to do so in US dollars. Not anymore.
Trade between these two countries stood at roughly $40 billion last year and
is expected to only increase as China becomes the largest consumer of oil in
the world. The International Energy Agency, has reported that China is
already the largest consumer of energy, however the U.S. is still the largest
consumer of oil. This is not to be overlooked, because as China becomes the
largest consumer of oil, the most widely traded commodity amongst developed
nations, a major bargaining chip of power will be permanently shifted into
their control. Russia has taken the first step. Will the rest of Asia follow
and begin trading in Yuan?
China is also promoting the use of the Yuan as
a trade settlement currency throughout Asia. Recently, it allowed its
currency to trade against the Malaysian Ringgit. Just like the deal with
Russia, the purpose of the agreement with Malaysia was to "promote
bilateral trade between China and Malaysia and facilitate using the Yuan to
settle cross-border trade."
I am always checking in on China as I believe
it will be the country which ultimately leads the global community away from
the US dollar. I must admit, they have been very intelligent in their efforts
to do so thus far. As a proud owner of more than $1.1 trillion US debt, China
has been eagerly reducing its exposure to the dollar. It has done this by
buying hard assets and stakes in natural resource deposits across the globe,
of course, using U.S. dollars. A prime example of this would be the $676
million dollar loan that the Hanlong bank has ready to distribute to General
Moly (GMO) once they receive their permits. When there was a glitch in the
permitting process at GMO, the Hanlong bank (in a show of unprecedented
compassion) quickly extended the deadline. You can bet that the
repayment of this loan will be in Molybdenum not in dollars.
The sad fact is that the international
community is beginning to lose faith in the dollar and the policies of the
Federal Reserve. Having said that, you better believe the Federal Reserve is
not going down without a fight. It will do everything in its power to
maintain the US dollar as the world's reserve currency. We are all witnessing
its desperation and tactics.
As the markets battle emotions leading up to
the conclusion of QE2. I continue to believe strongly that the
“X” factor that is being left out is that nothing will change
until after the 2012 elections.
Whatever name you want to give it, I believe
that the Fed cannot end the injection of money into the economy, nor can it
significantly raise interest rates. I admit that I may be engaging in
circular thinking because I also believe that this has been the factor
driving precious metals and Rare Earth mining stocks.
However, I continue to believe that great
value and opportunities in the sector are still strong. Shortly these stocks
will have their day. Be ready and don't be fooled into believing that this is
the end of this bull market.
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