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positioned to rise like a cantilever during the ongoing panicky attempt to
sustain an unsustainable system burdened by numerous imbalances aggravated by
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In the last month a tectonic shift has taken place
among central bankers. To be sure, the USDollar is aided if foreign central
banks end their march to raise official interest rates. The USDollar has been
propped up for over two years in large part from powerful credit market carry
trades that used to exploit higher USTreasury bond yields, both the
short-term and long-term variety. The US Federal Reserve has been forced
kicking and screaming to reduce official Fed Funds rates, all the while
denying a grotesque contagion from the bond world to the bank world to the
economy on Main Street.
The USFed looks bound by the bond market to continue to cut interest rates,
much like a large dog is led by a spiked choker around its neck, urged to
obey its master’s orders via vicious tugs.
The gold price has stabilized. The flood of
additional open interest to short gold contracts kept the gold price in
check. It remains within the neighborhood of the critical 3/8-ths retracement
area after the September breakout and the November established peak. Absurd
pronouncements like that from Goldman Sachs of a gold decline in 2008 betray
how gold is eyeing the 1000 level. GSachs is not a non-profit organization,
so they attempt to deceive you into selling your gold, with the power of the
press behind them. Some additional time might be necessary for the moving
averages to catch up to the gold price, as unstable prices typically result
when it extends far above even rising 20-week and 50-week moving averages. The
stochastix cyclical gauge hints that gold is unwilling to remain near
intraweek low prices, preferring instead to resist downward pressure (real
and forced) and close strong each week. Gold remains very stubborn, with
friends in Asia and the Middle East who are
under siege from massive US$-based hoards of reserves at risk. They hedge
with gold bullion quietly. They prevent gold price from moving too far below
800.
Today in fact, the gold price might have responded
favorably to the USGovt Mortgage Bailout Plan, smelling more money flooding
the system. The benefits of higher gold prices to miners must exceed the
pain of their energy costs. Personally, a smile comes to my face when
gold is seen closing near 810 today while crude oil is back toward 90.
CENTRAL BANKS SHIFT EMPHASIS
The Euro Central Bank held rates steady today at
4.0%, still 50 basis points above the stodgy desperate US Federal Reserve. The
ECB continues to sound concern over the price inflation threat, while
economic growth remains steady. ECB Chief Trichet warned that some policy
makers supported a move to hike the official rate. The Bank of England cut
their official interest rate by 25 basis points to 5.5%, citing deteriorating
conditions in financial markets and downside risks to their economy and
consumer prices. The credit squeeze has intensified in England, a surefire consequence of adopting
the insane US
economic model of asset inflation dependence from an unsustainable housing
bubble. The Bank of Canada surprised markets with a 25 basis point cut to
4.25% on Tuesday. They cited silly lower projected price inflation as political
cloud cover, but very real threats to exports. So England
and Canada cut, while Europe kept a pause when it clearly prefers to hike. By
the way, the Reserve Bank of Australia
held firm at 6.75% after having hiked the official cash rate in November. These
maneuvers assist the hamstrung USFed, which operates in an ugly Catch-22, one
which my preference is to describe as Sophie’s Choice. She was demanded
by Nazis to choose her son or daughter to be executed in the death camps.
The dithering USFed Chairman Bernanke, dripping with
fear and oozing lack of confidence, has been aided for these foreign central
banks. The dreaded choices left with the USFed are to defend the USDollar
with an interruption in rate cuts, or to defend the stalled USEconomy and declining
housing market and cratering mortgage finance market and seized up banking
sector with continued rate cuts. ALL CENTRAL BANKS WILL SOON BE LOWERING
INTEREST RATES, TO AID THE SYSTEM, WHICH WILL ENCOURAGE MORE SPECULATION, OR
ELSE IMPLOSION IS ASSURED. The USFed will lead almost all central bankers to
the golden valley.
Gold will next rise from monetary inflation, price inflation, and
perceptions of broad rescues of a fractured system, much more than due to any
continued USDollar breakdown.
Forget the Bank of Japan, which will do what its
American masters instruct them to do. They will do their best to find
justification for insane chronic low official interest rates so as to
continue funding the gargantuan Yen Carry Trade. To be sure, the YCT is unwinding
to some degree, from a rising Japanese yen currency. The engineered rally in
USTreasurys removes some incentive for YCT traders to liquidate their carry
trades as USTBond principal values have produced a powerful rally. The
USTreasurys serve as object investments in the YCT speculation.
Then there is China, whose yuan currency
realized a substantial gain since yesterday overnight. The yuan moved from
7.3880 to 7.4095 per US$, a move of almost 3/10 of 1%. That is equivalent to
only a 42 basis point upmove for the euro. However, one should beware that
the Chinese yuan makes extremely slow small moves. Forward contracts in the
yuan currency indicate an expected 8.7% appreciation in the yun to 6.8150 in
the next twelve months. Premier Wen Jiabao maintains the stubborn position of
Gradualism in currency changes, ignoring pressure by the USGovt criticism
that the yuan gains are not fast enough.
THE CONCLUSION IS THAT CENTRAL BANKS HAVE BEGUN TO
FIRST ASSIST THE USFED WITH NO MORE RATE HIKES, NOW SOME ACTUALLY CUTTING
RATES. BY THIS TIME NEXT YEAR, ALL THREE CONTINENTS PLUS MAYBE THE MIDDLE
EAST WILL BE DESPERATELY ATTEMPTING TO INFLATE ENTIRE ECONOMIES. THEY MUST
BEGIN WITH PROPPING UP ENTIRE BANKING SYSTEMS, AS THEY ASSIST TROUBLED
HOMEOWNERS. THEY WILL NEXT FLOOD THE SYSTEM AS THEY REDEEM DAMAGED MORTGAGES.
IN TIME RIDICULOUSLY LOW INTEREST RATES WILL BE BACK, JUST LIKE 2002.
GOLD WILL SKYROCKET AS THE DUAL
FORCES ARE RECOGNIZED:
- SPILLOVER OF MONEY
FLOODING THE SYSTEM IN RESCUES & REMEDIES, AND EXPANSIVE GRAND
INITIATIVES, WHETHER SUCCESSFUL OR NOT
- BROAD PRICE
INFLATION WHICH CAN NO LONGER BE DISGUISED BY POINTY
HEADED BUREAUCRATS, SHOWING UP EVERYWHERE, EVEN WELCOMED BY LEADERS
FIRE TRUCKS
In past articles, my position has been clearly
stated that eventually a $2 trillion bailout package, complete with grandiose
resolution trust platform, augmented by numerous policy agendas, will be
executed in order to address the housing crisis and mortgage debacle. The
President’s pathetic Federal Housing Authority plan announced several
weeks ago now seems a drop in the bucket. The attempt to create a Structured
Investment Vehicle superfund fell on its face. The plan to increase Freddie
Mac loan limits might see more resistance after a giant $2 billion loss was announced,
when credit derivatives were finally marked to market. Talk continues to use
both Fannie Mae and Freddie Mac as the new & improved secondary mortgage
market centrifuge, but they must raise capital since they are both insolvent.
Ironically, raising Freddie Mac capital might result in a Fitch debt
downgrade! Forget the moral hazards. How about financial system health
hazards revived by taking a twin cesspool and directing it to be the
centerpiece in a national platform to resuscitate the secondary mortgage
market??? The phrase “A dog returns to its vomit” seems
appropriate!
All mortgage delinquency figures are worsening, from
2Q2007 to 3Q2007, the aggregate DQ rate, the prime mortgage DQ rate, the
subprime DQ rate at 16.3% incredibly. A national plan is in the works to
freeze mortgage rate resets, to call a moratorium on home foreclosures, and
to wave prepayment penalties and tax consequences. We have seen the usage of
the courts to interrupt people from being forcibly removed from homes. Social
unrest must be averted. Expect the free 800# telephone banks cited for USGovt
deployment to be inadequately staffed, by people who have inadequate
information. Meanwhile, Wall Street banks attempt to defend themselves
against the growing suspicion that they are insolvent, meaning assets do not
cover liabilities. Citigroup is bankrupt, Abu Dhabi welfare donations or not!
So far, to date almost all USFed injections have
been pathetically minimal. Lower interest rates are really just a measly 75
basis point reduction, not enough to matter. Banks continue to distrust each
other to a monumental degree, since the majority of commercial paper is
traded with mortgage bonds offered as collateral. Federal Deposit Insurance
Corp reports point to a rather large demand, implied from LIBOR sources in England. A
defiant mismatch inconsistency has been flashing for two months, ever since
the USFed began its woefully inadequate monetary ease, with flimsy rate cuts
which should include sizeable interim rate cuts. The big banks are
desperately trying to deal with insolvency, as they are forced to place
cratered mortgage bonds and their credit derivative CDO bond disasters. They
should be facing felony charges, but instead just fight for survival. A grand
failure is in progress. Former USFed Chairman Greenspan boasted that the
USEconomic dependence upon housing asset inflation was legitimate, since it
was true wealth. NO MORE! The USEconomy is at risk from severe stall, both
from housing decline approaching historically unseen proportions, and from a
banking system crippled by mortgage bonds.
THE PRESSURE BUILDS FOR A GRAND DIVERSE DEEP RESCUE
PLATFORM TO DEAL WITH THE HOUSING & MORTGAGE CATASTROPHE. AS IT TAKES
SHAPE, AS IT IS FUNDED, AS ITS INADEQUACY IS DEALT WITH GREATER REINFORCEMENT,
THE GOLD PRICE WILL ADVANCE TO $1000 PER OUNCE EASILY. So far, USGovt and
Dept of Treasury officials actually boast of no federal money to be used in
the current Mortgage Rescue Plan. This is an admission of inadequacy and
future rampups in the rescue, but it is a start. As the stimulus package,
rescue platform, and diverse desperation devices are put into motion, the
mining stocks will finally gain traction. So far, rising costs and
uncertain funding have combined to forestall the expected rise in mining
stocks. That will change as the government initiatives are empowered, funded,
and enabled.
FUEL FOR USTREASURY RALLY
Plenty of evidence is available to accuse the
USTreasury Bond rally as being engineered. A ‘Flight to Quality’
is phony when foreigners shun USTBonds, when FOMC auctions are duds. The
USDollar decline would grow into a rout if both the US$ fell and
the USTBond principal fell. So a USTreasury rally was ordered. Look to
JPMorgan and their credit derivative book for hints of the engineered rally,
larger than the entire market! In fairness, three other factors contribute to USTreasury
rallies.
- evidence of
a USEconomic recession is glaring, which motivates migration from
S&P500 stocks into USTreasury Bonds, despite high pricing inflation
(read: STAGFLATION)
- unwinding
the typical mortgage bond spread means to sell the mortgage bond and to
buy back to cover the USTBond, which results in rising credit spreads;
ditto on other spread trades like with junk bonds and emerging market
bonds, anchored by the USTBond
- as troubled
beleaguered institutions like Freddie Mac reduce their credit derivative
hedge book, they sell many leveraged contracts anchored by USTreasurys,
which means more short covers for the USTBond.
LATE SIGNALS
The 2-year USTreasuy Bill yield has fallen more
since my last article. It is just under 3.0% incredibly, down from 3.2% a
couple weeks ago. This short-term yield indicates the USFed is over 1.5%
behind the curve. Three 50 basis point rate cuts are dictated, yet the
goon squad at the USFed sits on its hands. At this point, a mere 25 basis
point rate cut on December 11 would not be met favorably. As the USFed
catches up, again kicking and screaming, they will ignite the gold price. The
priority for the USFed will continue to shift from concerns over price
inflation to concerns of risk for USEconomic deterioration amidst a
profoundly crippled bank structure. The dire bank situation is an order
of magnitude worse than what was seen in the 1989 Savings & Loan crisis. This
crisis is much worse, yet to be recognized. The 1991 Resolution Trust Corp
was designed to deal with liquidated failed banks. The 2008 Resolution Trust
platform will be an order of magnitude more grandiose in its design and
execution. As the USFed makes clear its only priority is to save the
USEconomy from a deadly lethal recession, gold will skyrocket. As the
monetary medicine is finally given, the precious metal mining stocks will
respond and rise in magnificent fashion. Mining stocks do not respond to
diagnosis, but rather to administered medicine. To date, that medicine is
late to arrive, after diagnosis is slow, too much talk and not enough action.
Herein lies the powerful rub! The 2-year TBill yield
has come down quickly, deeply, without interim USFed rate cuts urgently
needed. This means the USFed is behind the curve. But the 10-yr Treasury Note
yield has also come down, from 4.5% in mid-September at the start of USFed
rate cut cycle, to under 4.0% today. The two yields individually deliver the
same message, A RECESSION IS NEAR OR HERE. However, another message can be
dissected.
LOUDER PRICE INFLATION SIGNAL
Quietly, with little notice except for a few
intrepid market mavens, the spread for the USTreasurys between the 2-year and
10-year yield has finally reached 100 basis points. The 2-year TBill yield is
just under 3.0% and the 10-year TNote is just under 4.0%. In 2004 and 2005
and 2006, even early 2007, this yield curve was inverted. The message is
clear, that PRICE INFLATION IS HERE AND POWERFUL IN ITS ARRIVAL. This is yet
another signal for gold. The only crystal clear similarity to the 1970 decade
in my analysis is STAGFLATION. Gold loves stagflation, since monetary pumps are applied
endlessly.
The total picture is enormously complex. Strong
forces of deflation have hit housing, mortgage bonds, bank sector stocks, as
well as wages. Strong forces of inflation are evident with a nearly 15%
annual rate of increase in the US$ money supply, in energy
prices, and material prices, and the ultimate meter in the gold price. Neither
deflation nor inflation will win any battle. Both will ravage and destroy
almost everything in its path, except the gold price. By this time next year,
both deflation will wreck havoc worse and inflation will wreck havoc worse. The
storm differential of low pressure and high pressure will produce powerful
storms, with gold the beneficiary like a storm shelter. Watch both deflation
and inflation prevail, as both continue to gain power. The unspoken objective
for policy makers is to turn housing from the deflation side to the inflation
side of the ledger again. The Herculean task will take at least two years
more!!!
A mildly wet finger put to the wind can detect
absolute desperation setting in with the US Federal Reserve, the Dept of
Treasury Secy Paulson, Wall Street bankers, Debt Rating Agencies, National
Assn of Realtors, Mortgage Bankers Assn, and the President of the Untied
States. Like with the unheralded movie ‘Backdraft’ from 1991
starring Kurt Russell, immediately before a gigantic powerful explosion, a
reverse draft develops. The fire needs oxygen, which it sucks from its
surroundings. The explosion in economic slide, in bank system seizures, and
policy response is soon to come. A monetary gusher is being prepared, which
requires political acceptance foremost. The gusher has sucked money from
market surroundings in the preliminary phase. The explosion will be
historically unprecedented in its size and scope. We are witnessing
possibly the end of the US
banking and financial system as we know it, since the Greenspan Era killed
it. Dependence upon housing, abandonment of manufacturing, unchecked
leverage in bonds, and colossal fraud on Wall Street have broken the system. Gold
investors should hope that some semblance of solution can be accomplished. Otherwise,
martial law will be ushered in faster than you can say GERONIMO.
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Jim Willie CB is
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