Sunday, October 17, 2010
By Ambrose Evans-Pritchard at the UK Telegraph:
Asian investment in plant has run ahead of Western ability to consume. The debt-strapped households of Middle America, or Britain and Spain, can no longer hold up the dysfunctional edifice. Asians must take over, or it will come down on their own heads.The countries actively intervening in exchange markets to suppress their currencies – China, Japan, Korea, Thailand, even Switzerland, to name a few – are all too often the same ones that have the biggest trade surpluses with the US.
They are taking active steps to prevent America extricating itself from the worst unemployment since the Great Depression, now 17.1pc on the latest U6 index and rising again.
Each country is doing so for understandable reasons: Japan to avoid a deflationary crisis, China to hold together a political order that is more fragile than it looks. In both these cases they are trapped because they clung too long to a mercantilist export strategy, failing to wean themselves off American demand when the going was good.
Yet this is an intolerable situation for the US. It should be no surprise that Washington has begun to retaliate in earnest, and not just by passing the Reform for Fair Trade Act in the House (not yet the Senate), clearing the way for punitive tariffs against currency manipulators.
The atomic bomb, of course, is quantitative easing by the Federal Reserve. America has in effect issued an ultimatum to China and G20: either you stop this predatory behaviour and agree to some formula for global rebalancing, or we will deploy QE2 `a l’outrance’ to flood your economies with excess liquidity. We will cause you to overheat and drive up your wage costs. We will impose a de facto currency revaluation by more brutal and disruptive means, and there is little you can do to stop it. Pick your poison.......read on
From the UK Telegraph:
The annual meetings of the International Monetary Fund in Washington are supposed to generate some kind of resolution. Instead, all we got was posturing and a slew of pious speeches saying that "co-operation is crucial".
What is now clear is that some of the world's leading economies are deliberately debasing their currencies in order to make their exports more competitive and lower the real value of the massive debts they owe the rest of the world.
Tempers are rising, as are protectionist sentiments. Across the globe, governments are talking about "aggressive tariff barriers" and "trade retaliation" - language that hasn't been used by mainstream peacetime politicians since the mid-1930s.
Yet instead of knuckling-down and addressing the urgent task of building some kind of an agreement to contain a fully-blown currency conflict, world leaders last Sunday urged the IMF only to "study the issues", and "play a stronger role in monitoring how the policies of each member state affects the others".
This was a pathetic response. The concluding statement of the fund's policy-setting committee meekly pledged to "work toward a more balanced pattern of global growth, recognising the responsibilities of surplus and deficit countries".
To his credit, even the IMF's own managing director, Dominique Strauss-Kahn, labelled such language "ineffective". The governments controlling the IMF simply kicked the tough conversations into the long grass – postponing them until the Seoul G20 summit in early November at the earliest.
While policy at the global level is non-existent, the US and several other "advanced" nations, including the UK, are in the midst of a radical policy experiment that is about to get even more extreme. For most of last week, the dollar fell further on speculation that the Federal Reserve, having already bought $1,700bn (£1,062bn) of dodgy mortgage-backed securities and government bonds with newly-created money, will soon indulge in further "quantitative easing".
As a result, the US currency hit record lows against the Chinese yuan, Swiss franc, Australian dollar and the Japanese yen. And, of course, that is just what America wants.
Ben Bernanke, the Federal Reserve chairman, continued to fuel speculation that the US is about to unleash hundreds of billions of dollars more QE money. "There would appear – all else being equal – to be a case for further action," he said in a speech on Friday. Yet America's now blatant policy of trying to print its way out of trouble, a ploy being copied by others, is far from proven and could actually make things worse: QE on the scale now being proposed has never been tried. It is beyond the realms even of economic theory........read on
October 16, 2010
To get a better idea of the actual decline of the dollar's purchasing power over the same period, let's look at the dollar price of gold:
June 3, 2010 spot gold on the NYBOT closed at $1205.80
October 14, 2010 spot gold on the NYBOT closed at $1379.50
Over that same period of time, gold has appreciated 14.4% measured in US dollars. Or more accurately, the dollar has depreciated 14.4% measured in gold. Hence the dollar has lost more than 14% of its purchasing power compared to gold in a little more than four months......read on
Jim Rickards is interviewed by Eric King on King World News. Jim discusses the gold price, the future of the US$ and the Fed trying to create inflation......listen here
For People Who Think
"A government that robs Peter to pay Paul can always count on Paul's support." -- G.B. Shaw
"All problems come from the fact that people don't understand money." -- John AdamsSO WHAT ELSE IS NEW?
All we have been hearing from Obama, Bernanke and Geitner lately is the steps that they will take to prevent deflation; the Government's current favorite "Straw Man." So it was interesting to note that the Producer Price Index for July was reported to have gained more than 4% year over year; which as we all know comes from a source that always, intentionally, understates inflation. We are also aware of some serious price drops as well, but most price decreases are the result of innovation and productivity improvements such as Computers, TVs and Cell phones etc. that have been declining in price for 20 years. On the other hand, sugar, grain and most commodity prices are soaring toward records highs as world demand expands due to the increasing living standards in the booming developing nations: Which has also pushed up the cost of a broader range of products, including rice, coffee, cocoa, as well as non-edible products, such as cotton, which also have been soaring in price. Doesn't this sound a lot more like INFLATION than Deflation? Lets not forget about the Hard Commodities like Copper, etc.
On the other hand, by sifting through all the misinformation coming out of Washington, it looks like we will most likely be using the latest vernacular; a Double Dip RECESSION before the end of the third quarter. After all, the revisions are in, (after the Elections) it will probably be determined that there never was any real recovery and that all we really had was a Dead Cat Bounce.
It seems more probable that we are headed for the worst of all possible situations, a period of Stagflation, which is an entirely different world from Deflation. My most logical expectation is an ever increasing QE2 and a rapid deleveraging of both the public and the bankrupt States. Even though nobody seems to know what, in words, is actually unfolding, business and the public see it coming; why else would they be "hoarding" so much cash. Investing in Treasuries given today's yields is a fool's game unless Capital Preservation is of the prime importance. That also makes sense in light of companies such as IBM who do not need any money, yet are nevertheless borrowing $ billion's at 3% for 10 years just because they can........read on
15 October 2010
The plight of the U.S.
Fed Chairman Ben Bernanke said he thought the current high unemployment and low inflation environment would linger into 2011 and as a result there is a "case for further action" on the monetary policy front. Mr. Bernanke said the Fed might expand its holdings of longer-term securities. He also said that the Fed has little experience in judging the economic effects of more asset purchases. This tells us that we are stepping off into new territory. The same will be true of the rest of the world. It signals that the dollar will fall lower and probably substantially lower. $1.50 to $1.70 to the euro is on the cards. The Yen, the Swiss Franc and the Pound Sterling and just about all other currencies will try to follow the dollar down. This isn't just a 'pebble in the pond", but a great big boulder. The 'ripples will start over this weekend if not today already. They will hit every market there is.
The U.S. dollar is the globe's sole reserve currency. It is responsible for pricing virtually everything that is traded internationally. It has been relied on to price and value every item we buy. Now that the Fed and the Treasury are indicating they will debauch the dollar in the interests of resuscitating the U.S. economy, what choice do other nations have with their currencies? Most nations including China are doing all they can reasonably do to diversify away from the dollar in their reserves. The pressure is on to change the pricing of internationally traded goods to other currencies. The only other alternative is to try to sell their own currencies on the markets to lower the exchange rate. This implies importing inflation, unless they follow China's path of 'sterilization' of such through draining liquidity from their own economies. As we can see with the Yen, this is not a good road to follow because of the likelihood of attracting not just speculators but nations dumping their own dollar reserves as they diversify.
Imagine international prices being made in a selection of currencies, including emerging nation's currencies. China is already following that road. Is it possible that we see oil priced in and producers accepting, a variety of currencies? Not only would that lead to a diving dollar, but a considerable reduction in the role of the U.S. dollar. Where would these surplus dollars go, except home.
More than a declining dollar such a policy emphasizes that it's every man for himself from now on, as the U.S. cares only for its own interests. China will ask how the U.S. can point a finger its way on its currency. Other nations fear direct intervention in exchange rates as that attracts the 'carry trade' speculators. The international anger will be palpable. As we have often said, governments will always choose internal interests over external ones. The U.S. is not alone on this, so a breakdown in cooperation in the foreign exchange world will be only a symptom of the underlying fragmentation.
Capital & Exchange Controls and split Currencies:
You can see nations imposing taxes on inflows of money from Brazil to Thailand already. Watch this spread to many, many more countries now. As markets become increasingly volatile, governments and central banks will become precipitous in their imposition of defense mechanisms. We may well see measures as draconian as the split currencies that we saw in Belgium and the U.K. in the 1970's, where there was a currency for commerce and one for capital with the two being separated by a discount or premium. The main pressure this time though will be from inflows of 'hot' money [easily withdrawn capital] which can be catastrophic for an economy both when money enters and when it leaves, en masse.
So what will markets do in the face of such actions? Every market will react to compensate for the falling value of the dollar in one way or another. Equity markets will rise too, but not for good reasons.
Reactions in the Gold, Silver and Oil markets:
- A look at the markets in the last week in these three markets has shown quick reactions to the falling dollar. All three went up, but both silver and gold went up the amount that the dollar fell. If that were to continue and the dollar to fall say to $1.70 against the euro, then without the gold price being pushed up by demand, the gold price would go up to $1,663.57 from the current $1,370. In the euro the gold price would not rise at all.
- Silver would follow a similar path too. Technically to discount the dollar's fall alone the price would go from $24.3 to $29.51.
- We know that O.P.E.C. members are calling for a $100 oil price to remove the impact of a falling dollar at current levels. With a $1.70: €1 dollar we should be looking much higher too.
By David Levenstein:
In 1980, the price of silver exploded upwards and traded above $50 an ounce. I recall this very clearly because I was trading silver through the London Metals Exchange (LME). In those days, the contract offered by the LME was 10,000 ounces, and the price was quoted in pounds, shillings and pence! While it takes more than a few words to explain why the prices went parabolic in 1980, suffice to mention that many investors had no idea what was going on or how they could participate in the silver explosion. I mention this, because the scenario we see with silver now reminds me of what we saw 30 years ago. I do not mean that the driving forces behind the prices now are the same as those in 1980. Absolutely not; but, once again many investors have no idea about silver, what is going on in the market and how they can participate.
Silver is an amazing metal as it is both a monetary as well as an industrial precious metal. And, the demand for silver in industrial applications is extremely price inelastic. Despite the fact that there is a large open short position which is held by the 4 or less large commercials trading via Comex, silver is benefiting from both general optimism on industrial production in emerging markets, and the investor interest in safe-haven assets like gold. Barclays Capital recently reported that the holdings of global silver exchange traded products it tracks has topped 14,000 metric tons for the first time. "Indeed, inflows in October have already hit 311 (metric tons), surpassing total inflows for the whole of August and almost half of September's 702 (metric tons)," Barclays says.
In 1980 individuals in South Africa were not allowed to hold offshore funds, and they were prohibited from owning any bullion. Now, even that these draconian laws have been amended, the number of investors in South Africa and probably worldwide who own any silver is minuscule. Yet, silver has been one of the best performing assets over the last few years, and I believe that it will continue to out-perform most other asset classes over the next 5 years.
Unlike gold, platinum and palladium, silver still remains well below its all-time high in spite of a developing shortage of supply. One of the reasons for this is been the alleged price manipulation by large traders such as the bullion banks that have sold massive amounts of silver on the futures markets to keep prices down. Currently, the open short position held by these banks is equivalent to approximately the annual global mining supply of silver.
Now US regulators have been urged to reveal the results of a two-year-long investigation into silver and gold price manipulation allegations. Recently, Bart Chilton, a commissioner at the US Commodities Futures Trading Commission (CFTC) which is investigating the claims, said: 'I think the public deserves some answers in the very near future.' He also added. "I expect the CFTC to say something on our silver investigation within weeks. I can't pre-judge what that will be. I can't even guarantee that the agency will speak. That said, if the agency remain silent for much longer, I intend to speak out on the matter in an appropriate fashion."
No matter the results of the investigation, the prices of silver still remain much undervalued and should be added to one's investment portfolio, especially as this time around there are many instruments available to investors unlike 1980. But, I would recommend that investors accumulate the physical metal in the form of silver bullion before investing in the other silver or silver related investment instruments.
The price of silver has moved from (A) $17.50/oz at the end of July to (B) $23.35/oz last week. This price move of more than 33% has put silver into a new into a new range of trading. While the 40 degree angle of ascent is not parabolic it is at an angle that suggests that it may run into some resistance. I suspect this to be between $23 and $25 an ounce.