Full Market Update
April 4, 2004
Welcome Free & FullMktUpdate subscribers via e-mail
YOUR EYES ONLY*
UNAUTHORIZED DISCLOSURE NOTICE
NOTE: The information contained in this communication is private,
legally privileged and confidential information intended only for the
use of registered HSL or Gold Charts R Us or FMU
subscribers. If the reader of this communication is not the intended
recipient, you are hereby notified that the reading, dissemination,
distribution, forwarding or copying of this communication is strictly
prohibited and grounds for the immediate termination of the subscription,
without the right of refund, of any registered HSL subscriber
who participates in such distribution, dissemination, forwarding or
copying. HSL reserves the right to monitor the use of this communication,
by whichever electronic means it deems appropriate. If you have received
this communication in error, please immediately notify us by e-mail
to arrange for return of the message to us. It is the intention of the
sender of this communication to preserve all protections and privileges
attendant to the enclosed e-mail. Thank you.
WARNING: Reproduction of any of the material contained in HSL, forwarding of HSL, or any portion thereof, by e-mail, fax, photocopying or any other means, substantial quotation of any portion of HSL, or any other use of HSL by any person other than the registered subscriber, without the written permission of HSL, may violate copyright laws and subject the violator to legal prosecution. All rights reserved.
Welcome back to FMU :-))
Please note: as requested by several FMU members we have changed the format of FMU reports. We will now start with the market section at the top & follow with quality quotes on the economy, money & markets. Thanks for your feedback, encouragement & support.
Dow Industrial vs. Dow Transportation Index
Industrials topped to confirm lead signal of weakness in transports. Upside breakout from (shorterm) bullish downwedge in transports offers theoretical 3080 target (ie, reflex rally back towards Feb peak). Next major bull cue: industrials above 10,750 & transports above 3080. Next major bear cue: industrials below 10,000 & transports below 2750.
S&P500 June futures closed Friday April 2 at 1142.10 ie, up 36.00 pts on the week.
The Commitment of Traders report shows S&P500 commercial hedgers added 6,531 longs, bringing total longs to 407,987, whilst shorts added 1,892 contracts, bringing total shorts to 420,624. Large speculators are holding 43,956 longs against 79,494 shorts. And, small traders are holding 130,112 longs against 81,937 shorts.
S&P 500 (continuation Cx) weekly chart - line on close:
Reverse head & shoulder base development possible. Consolidation likely to hold on/above 1000 closing support IF higher highs to follow medium term. Spinner (blue) confirming line deep in positive territory (ie, no major weakness on horizon); downside pressure easing in (red) timing line but deeper dip possible before recent oversold extremes reached. MACD in first major negative cross since March 2003. Chart bullish to shorterm neutral.
S&P 500 June futures daily chart - line on close:
Poss triple top corroborated by break below March 2003 uptrend. Upside break from mini down wedge offers 1158 theoretical target. Spinner's (blue) confirming line in positive hook below zero, whilst volatile rise in (red) timing line points at shorterm strength rather than sustained upside. MACD in positive cross below zero. Chart neutral to bearish.
FMU Traders Guidelines:
Note: toppy action in global equity mkts likely to create a period of volatile/directionless trading as uncertainty increases. New trades should be limited to foothold positions, & increased only if/when new trends develop in your favor.
Per HSL639, traders who sold short weakness at mkt exited via stoploss :-((
Gamblers sell short (small size) after bounce that fails below 1158; stop 2-dc over 1158. Take ½ profits at 1100. Sell again on break below 1090 for 1060 downside profit target, or use TPS to follow weakness.
Buy 3-dc over 1160; stop 1-dc below 1130 (or 30 pts max below your entry level). Take ½ profits at 1195 & use TPS on rest.
Traders are advised to use mini S&P's to enter/exit trades incrementally. 1 mini Cx = $50/point, compared with $250 for full size Cx (5 minis = 1 full size).
Nasdaq (mini) June futures closed Friday April 3 at 1495.00 ie, up 75.50 pts on the week.
Composite weekly breadth figures show new highs crushed new lows (438-42),
while advances more than tripled declines (2670-760) & advancing
volume outweighed declining volume by a ratio of 2.34 to 1.
Nasdaq Composite (continuation Cx) weekly chart - line on close:
Price consolidating below key 1555-1675 resistance. Inverted head & shoulder base formation possible. Needs quick rise above Jan peak if Spinner's (blue) confirming line to remain in positive territory; (red) timing line easing to neutral below zero. MACD in crosscurrent bull mode (ie, negative cross above zero). Price finding shorterm support on Oct 2002 uptrend line. Chart bullish to neutral.
HSLP-Nasdaq chart (HSLP = our in-house mkt predictor) line on close:
HSLP-Nasdaq shows tentative (lead?) rise above 3-month 2310-2530 trading range. Lethargic move above zero in Spinner's (blue) confirming line offers hesitant bull signal. Stochastics, best applied to markets locked in a sideways price patterns or trading ranges, pushing into overbought extremes (but can stay locked at such levels for days or even weeks). Chart neutral to bullish.
Nasdaq (mini) June futures daily chart - line on close:
Mini bull cue on rise above Jan 26 downtrend & over left shoulder, but must hold sustained closing strength over 1465 to avoid poss head & shoulder top (we remain cautious of poss H&S top because Edwards & Magee say rise beyond head needed to conclusively void risk).
Spinner & Stochastics hint at shorterm strength rather than sustained upside. Chart shorterm bullish to neutral.
FMU Traders Guidelines:
Per HSL639, traders who sold short weakness at mkt exited via stoploss :-((
Sell short (small size) after strength that fails to break over 1515; stop: 2-dc over 1515. And/or sell short on 2-dc below 1450; stop 2-dc over 1480. Take partial profits at 1380. Re-sell break below 1370 for 1200 downside profit target. Use TPS to lock in shorterm gains.
Buy (small size) on 3-dc over 1515; stop 2-dc below 1465. Buy again on 3-dc over 1560. Use TPS to follow strength.
Market Vane bulls at 66% vs. 61% for the prior week. AAII Index rising sharply to 55.2% bulls vs. 31.5% for 1-week ago.
& Worst Dow Jones US industries over 3-months:
Manufacturers Index -14.53%
10-Year T-Note June futures closed Friday April 2 at 112^30, ie down 2^09 on the week.
The Commitment of Traders Report shows T-Bond commercial hedgers reduced 26,400 longs, bringing total longs to 314,115, whilst shorts reduced 63,031 contracts, bringing total shorts to 319,469. Large speculators are holding 90,262 longs against 83,306 shorts. Small traders are holding 95,646 longs against 97,248 shorts. Data shows huge confusion.
10-Year T-Note June futures daily chart - line on close:
Textbook break down & pullback to neckline of mini head & shoulders top gave astute chartists a clear early warning signal on ensuing weakness. Several trading days may be necessary for dust to settle after last Fridays sharp intraday plunge. Nov 2003 uptrend holds key to shorterm direction, ie: bullish above, bearish below. Spinner (red) timing line at oversold extremes, but lag action of sharp price dip has yet to play out. Chart neutral.
FMU Traders Guidelines:
Gamblers buy bit at mkt; stop: 2-dc below 112^10. Buy again on 2-dc over March 25 downtrend. Take ½ profits at 114^26 & use TPS on rest.
Sell short (small size) on 2-dc below 112^10; stop 2-dc over 113^10. Sell again on break below 111^08 for 109^20 downside target.
Economically sensitive commodities
CRB Futures Price Index closed April 2 at 281.49, ie up 2.63 pts on the week.
CRB Futures Price Index weekly chart - line on close:
Top boundary of Feb 2002 uptrend channel may offer shorterm resistance. Poss consolidation action expected to be temporary halt in powerful uptrend & offer excellent buying opportunities as/when new breakouts occur. Spinner & MACD indicators in full bull mode but both at recent overbought extremes, which raises odds for shorterm dip action of some sort. Chart bullish to shorterm neutral.
DJ World Index
DJ World Index closed Friday April 2 at 196.20, ie up 6.39 on the week.
DJ World Index weekly chart - basis line on close:
Price vacillating at make-or-break levels basis the 50% retracement rule from Mar 2000 peak. Spinner's (blue) confirming line deep in positive territory, which theoretically reduces odds for major technical weakness (normally signaled by a dip below the zero line). Key intermediate support: 178, 164 & 152. Longterm reverse head & shoulders base development possible. Chart bullish to neutral.
Gold June futures closed Friday April 2 at 422.50 ie, down 0.70 on the week.
***NEW YORK, April 2 (Reuters) - "COMEX June gold fell $12 from its overnight high at $430.50 an ounce, accelerating through preplaced stop-loss sell orders, after the government said March nonfarm payrolls rose 308,000. That was triple the consensus forecast for a 103,000 rise, and gave U.S. markets a confidence boost after recent reports fell far short of expected labor market growth.
"The dollar did quite well; the euro took a beating following the employment report," said analyst Tom Boustead, at Refco Inc. "What we saw was some trade selling, which set off some stops in the gold, which drove out some of the funds."
"Benchmark gold settled down $6.30, nearly 1.5 percent, at $422.50, after steadying at $418.50. Spot gold fell to $419.55/0.05 from the previous close at $427.25/8.00. London's last fix was at $419.00.
"The unemployment rate actually rose to 5.7 percent from February's 5.6 percent, as the pool of workers expanded.
Thursday, June gold reached $433, its highest level since July 1988,
edging past the January highs as investors traded out of the dollar.
Gold started the year tracking the euro's climb to lifetime highs amid
dollar disinvestment. Before stumbling Friday, the precious metal was
up $44 -- over 10 percent -- from its bottom near $388 five weeks ago."
Gold (continuation Cx) monthly chart - line on close:
Price at 15-years high after slicing through pivotal resistance dating back to 1990-1996. Corrective dip possible to consolidate gains of sharp run-up. Nov 2001 uptrend holds key to medium term direction, ie: bullish above, bearish below. Positive pressure waning in Spinner, but MACD holding firm bull mode. Chart bullish to shorterm neutral.
double top vs. bullish inverted head & shoulders base.
FMU Trader's gold Guidelines:
HSL639, short traders exited for limited loss on 2-dc over 406.00 :-((
Gamblers buy at mkt &/or buy after dip that holds on/above 417.40; stop: 2-dc below 417.40 (sell at mkt if sharp sell-off develops below 417.40). Take ½ profits at 445 &/or use TPS to follow upside.
Or, buy after dip that holds on/above 408.75-405.00 closing support; stop: 1-dc below 405.00. If buy low, take ½ profits at 420 & re-buy 2-dc over 423.00.
*** To increase profits in gold shares, bullion & gold, we recommend trading them, not just holding. Our weekly 'Gold Charts R Us' service (GCRU) is available via Net, fax or mail. Via Internet at rate of: 3-mos $300, 6-mos $585, 9-mos $855 & 12-mos $1,110. By fax add $120 per 3-months. By mail only $250 per 3-mos. GCRU offers many gold mine charts with specific buy&sell & stops levels for each pick. U can sign up online at: www.hsletter.com (click on 'Gold Charts R Us').
Special GCRU '2-Week Taster' offer available at $45 via:
Euro vs. US$
Euro June futures closed Friday April 2 at 1.2110 ie, up 0.0020 on the week.
Euro futures (continuation Cx) weekly chart - line on close:
Price falling (in bull flag?) towards possible support of lower boundary of April 2002 uptrend channel & June/Oct 2003 peaks. Spinner hints downside pressure easing, but further action needs to offer conclusive signal. MACD in crosscurrent bull mode. Chart shorterm bearish to neutral.
Euro June futures daily chart - basis line on close:
Double top confirmed via break below 1.2330 (low of valley betwn Jan & Feb peaks) & Sept 2003 uptrend. Spinner & MACD in positive crosses below zero, but slackness in lines hints at continuing weakness rather than sustained trend reversal. Chart neutral to bearish.
FMU Trader's Guidelines:
Per HSL639, traders sold short on weakness at mkt &/or on 1-dc below 1.2160 (ie, 1.2100). Stop: 1-dc over 1.2460. Take ½ profits at 1.1800 & use TPS on rest. If U R out, sell short bit on 1-dc below 1.2090; stop: 1-dc over 1.2360.
Buy 1-dc over 1.2460; stop: 1-dc below 1.2200. Buy again on 2-dc over 1.2800. Take profits at 1.3260 or use TPS to follow upside.
US dollar index
Dollar Index June futures closed Friday April 2 at 88.85 ie, down 0.43 pts on the week.
Dollar Index futures (continuation Cx) weekly chart - basis line on close:
Retracement from Jan 2004 low nearing resistance of top boundary of March 2003 downtrend channel. Spinner lines not positioned to confirm sustained upside strength, as (blue) confirming line is firmly below zero line & (red) timing line has negative hook. Chart neutral to bearish.
Dollar Index June futures daily chart - basis line on close:
Yo-yo trading since Jan 2004 low reduced odds for consistent gains. Limit exposure until new trend develops. Next indication of shorterm direction expected to come on rise above 89.60 or break below 87.50. Spinner in tentative bear mode (quick rise above 89.60 needed to pull (blue) confirming line back above zero line). Chart neutral; has 3 fan lines.
FMU Trader's Guidelines:
HSL639, traders went long at 89.00 or better; stop: 1-dc below 87.50.
Sell short (small size) on 1-dc below 87.50; stop: 2-dc over 88.60. Sell again below 86.60 & 85.50. Take profits at 82.70 or use TPS to follow downside.
Note: do NOT trade dollar index & euro simultaneously.
Yen vs. US$
Yen June futures closed Friday April 2 at .9591 ie, up .0132 on the week.
Yen futures (continuation Cx) weekly chart - line on close:
Sharp pullback (classic) towards neckline of 2½ year reverse head & shoulder base; theoretical .9940 upside measured target. Spinner & MACD playing catch-up with fast price action (meaning bullish bias is likely to improve shorterm). Chart bullish.
Yen June futures daily chart - line on close:
Explosive rally-leg sparked by news that BOJ will stop (or at least severely limit) its intervention in the Yen pushed price sharply above Feb 2004 resistance. Corrective action likely to hold on/above .9475 closing support if higher highs to follow shorterm. Spinner at overbought extremes, but position of (blue) confirming line points towards shorterm corrective action rather than a sustained trend reversal.
FMU Trader's Guidelines:
Per HSL629, traders went long at .9320 or better. Take full profits at mkt :-))
Hard to buy into run-away moves, but ease with which price rose above Feb peaks/resistance (after extended upside run from March low) hints more strength to follow.
Buy (small size) on strength at mkt &/or buy after dip that holds on/above .9475 basis close; stop: 1-dc below .9375. Take ½ profits at .9750 or use TPS to follow strength.
Next major bear cue: 2-dc below .8900.
New Stock Recommendations
Glamis Gold (TSX: GLG) buy bit at 22.60; stop: 19.90. Gamblers buy at 23.00.
Glamis Gold (NYSE: GLG) buy bit at 17.20; stop: 14.90.
NBTY Inc (NYSE: NTY) (manufactures & markets nutritional supplements) buy bit on strength at mkt &/or buy after dip that holds on/above 34.00 basis close; stop: 31.40.
Northern Sts Finl (Nasdaq) gamblers sell short bit at mkt; stop: 30.70.
Urban Outfitters (Nasdaq: URBN) buy bit on strength &/or buy after dip that holds on/above 45.30; stop: 40.48.
1)Traders are strongly advised to limit total equity exposure in their portfolios to percentages outlined in the HSL Investment Box (see HSL639).
2)Traders must adapt recommendations to shorterm mkt direction. If strength/weakness kicks in before pullbacks to buy/sell levels are reached, enter small foothold positions at mkt. Likewise if general mkt direction moves against open positions, exit at mkt rather than waiting for stoploss levels to be hit. Your interpretation & modification based on conditions of our recommendations often makes the difference betwn profits or losses.
Stop & Sell Recommendations
partial profits on:
following stks were recommended on dates indicated, but omitted from
2)If bought Shuffle Master on upside breakout, raise stop to 39.95.
***Here is small extract from a MUST read essay posted at www.goldismoney.com
The mandrake mechanism: an overview
"The entire function of this machine is to convert debt into money. It's just that simple. First, the Fed takes all the government bonds which the public does not buy and writes a check to Congress in exchange for them. (It acquires other debt obligations as well, but government bonds comprise most of its inventory.) There is no money to back up this check. These fiat dollars are created on the spot for that purpose. By calling those bonds "reserves," the Fed then uses them as the base for creating 9 additional dollars for every dollar created for the bonds themselves. The money created for the bonds is spent by the government, whereas the money created on top of those bonds is the source of all the bank loans made to the nation's businesses and individuals. The result of this process is the same as creating money on a printing press, but the illusion is based on an accounting trick rather than a printing trick. The bottom line is that Congress and the banking cartel have entered into a partnership in which the cartel has the privilege of collecting interest on money which it creates out of nothing, a perpetual override on every American dollar that exists in the world. Congress, on the other hand, has access to unlimited funding without having to tell the voters their taxes are being raised through the process of monetary inflation. If you understand this paragraph, you understand the Federal Reserve System. [Read it again to be sure says Uncle Harry :-)). And read on. The best is yet to come].
"Now for a more detailed view. There are three general ways in which the Federal Reserve creates fiat money out of debt. One is by making loans to the member banks through what is called the Discount Window. The second is by purchasing Treasury bonds and other certificates of debt through what is called the Open Market Committee. The third is by changing the so-called reserve ratio that member banks are required to hold. Each method is merely a different path to the same objective: taking IOUs and converting them into spendable money.
THE DISCOUNT WINDOW
"The Discount Window is merely bankers' language for the loan window. When banks run short of money, the Federal Reserve stands ready as the "bankers' bank" to lend it. There are many reasons for them to need loans. Since they hold "reserves" of only about one or two per cent of their deposits in vault cash and eight or nine per cent in securities, their operating margin is extremely thin. It is common for them to experience temporary negative balances caused by unusual customer demand for cash or unusually large clusters of checks all clearing through other banks at the same time. Sometimes they make bad loans and, when these former "assets" are removed from their books, their "reserves" are also decreased and may, in fact, become negative. Finally, there is the profit motive. When banks borrow from the Federal Reserve at one interest rate and lend it out at a higher rate, there is an obvious advantage. But that is merely the beginning. When a bank borrows a dollar from the Fed, it becomes a one-dollar reserve. Since the banks are required to keep reserves of only about ten per cent, they actually can loan up to nine dollars for each dollar borrowed.
"Let's take a look at the math. Assume the bank receives $1 million from the Fed at a rate of 8%. The total annual cost, therefore, is $80,000 (.08 X $1,000,000). The bank treats the loan as a cash deposit, which means it becomes the basis for manufacturing an additional $9 million to be lent to its customers. If we assume that it lends that money at 11% interest, its gross return would be $990,000 (.11 X $9,000,000). Subtract from this the bank's cost of $80,000 plus an appropriate share of its overhead, and we have a net return of about $900,000. In other words, the bank borrows a million and can almost double it in one year. That's leverage! But don't forget the source of that leverage: the manufacture of another $9 million which is added to the nation's money supply.
THE OPEN MARKET OPERATION
"The most important method used by the Federal Reserve for the creation of fiat money is the purchase and sale of securities on the open market. But, before jumping into this, a word of warning. Don't expect what follows to make any sense. Just be prepared to know that this is how they do it.
"The trick lies in the use of words and phrases which have technical meanings quite different from what they imply to the average citizen. So keep your eye on the words. They are not meant to explain but to deceive. In spite of first appearances, the process is not complicated. It is just absurd.
THE MANDRAKE MECHANISM: A DETAILED VIEW
"The federal government adds ink to a piece of paper, creates impressive designs around the edges, and calls it a bond or Treasury note. It is merely a promise to pay a specified sum at a specified interest on a specified date. As we shall see in the following steps, this debt eventually becomes the foundation for almost the entire nation's money supply. In reality, the government has created cash, but it doesn't yet look like cash. To convert these IOUs into paper bills and checkbook money is the function of the Federal Reserve System. To bring about that transformation, the bond is given to the Fed where it is then classified as a...
"An instrument of government debt is considered an asset because it is assumed the government will keep its promise to pay. This is based upon its ability to obtain whatever money it needs through taxation. Thus, the strength of this asset is the power to take back that which it gives. So the Federal Reserve now has an "asset" which can be used to offset a liability. It then creates this liability by adding ink to yet another piece of paper and exchanging that with the government in return for the asset. That second piece of paper is a...
FEDERAL RESERVE CHECK
"There is no money in any account to cover this check. Anyone else doing that would be sent to prison. It is legal for the Fed, however, because Congress wants the money, and this is the easiest way to get it. (To raise taxes would be political suicide; to depend on the public to buy all the bonds would not be realistic, especially if interest rates are set artificially low; and to print very large quantities of currency would be obvious and controversial.) This way, the process is mysteriously wrapped up in the banking system. The end result, however, is the same as turning on government printing presses and simply manufacturing fiat money (money created by the order of government with nothing of tangible value backing it) to pay government expenses. Yet, in accounting terms, the books are said to be "balanced" because the liability of the money is offset by the "asset" of the IOU. The Federal Reserve check received by the government then is endorsed and sent back to one of the Federal Reserve banks where it now becomes a...
"Once the Federal Reserve check has been deposited into the government's account, it is used to pay government expenses and, thus, is transformed into many...
"These checks become the means by which the first wave of fiat money floods into the economy. Recipients now deposit them into their own bank accounts where they become...
COMMERCIAL BANK DEPOSITS
"Commercial bank deposits immediately take on a split personality. On the one hand, they are liabilities to the bank because they are owed back to the depositors. But, as long as they remain in the bank, they also are considered as assets because they are on hand. Once again, the books are balanced: the assets offset the liabilities. But the process does not stop there. Through the magic of fractional-reserve banking, the deposits are made to serve an additional and more lucrative purpose. To accomplish this, the on-hand deposits now become reclassified in the books and called...
"Reserves for what? Are these for paying off depositors should they want to close out of their accounts? No. That's the lowly function they served when they were classified as mere assets. Now that they have been given the name of "reserves," they become the magic wand to materialize even larger amounts of fiat money. This is where the real action is: at the level of the commercial banks. Here's how it works. The banks are permitted by the Fed to hold as little as 10% of their deposits in "reserve." That means, if they receive deposits of $1 million from the first wave of fiat money created by the Fed, they have $900,000 more than they are required to keep on hand ($1 million less 10% reserve). In bankers' language, that $900,000 is called...
"The word "excess" is a tipoff that these so-called reserves have a special destiny. Now that they have been transmuted into an excess, they are considered as available for lending. And so in due course these excess reserves are converted into...
"But wait a minute. How can this money be loaned out when it is owned by the original depositors who are still free to write checks and spend it any time they wish? The answer is that, when the new loans are made, they are not made with the same money at all. They are made with brand new money created out of thin air for that purpose. The nation's money supply simply increases by ninety per cent of the bank's deposits. Furthermore, this new money is far more interesting to the banks than the old. The old money, which they received from depositors, requires them to pay out interest or perform services for the privilege of using it. But, with the new money, the banks collect interest, instead, which is not too bad considering it cost them nothing to make. Nor is that the end of the process. When this second wave of fiat money moves into the economy, it comes right back into the banking system, just as the first wave did, in the form of...
MORE COMMERCIAL BANK DEPOSITS
"The process now repeats but with slightly smaller numbers each time around. What was a "loan" on Friday comes back into the bank as a "deposit" on Monday. The deposit then is reclassified as a "reserve" and ninety per cent of that becomes an "excess" reserve which, once again, is available for a new "loan." Thus, the $1 million of first wave fiat money gives birth to $900,000 in the second wave, and that gives birth to $810,000 in the third wave ($900,000 less 10% reserve). It takes about twenty-eight times through the revolving door of deposits becoming loans becoming deposits becoming more loans until the process plays itself out to the maximum effect, which is...
BANK FIAT MONEY = UP TO 9 TIMES GOVERNMENT
"The amount of fiat money created by the banking cartel is approximately nine times the amount of the original government debt which made the entire process possible. When the original debt itself is added to that figure, we finally have...
TOTAL FIAT MONEY = UP TO 10 TIMES GOVERNMENT
"The total amount of fiat money created by the Federal Reserve and the commercial banks together is approximately ten times the amount of the underlying government debt. To the degree that this newly created money floods into the economy in excess of goods and services, it causes the purchasing power of all money, both old and new, to decline. Prices go up because the relative value of the money has gone down. The result is the same as if that purchasing power had been taken from us in taxes. The reality of this process, therefore, is that it is a...
HIDDEN TAX = UP TO 10 TIMES THE NATIONAL DEBT
"Without realizing it, Americans have paid over the years, in addition to their federal income taxes and excise taxes, a completely hidden tax equal to many times the national debt! And that still is not the end of the process. Since our money supply is purely an arbitrary entity with nothing behind it except debt, its quantity can go down as well as up. When people are going deeper into debt, the nation's money supply expands and prices go up, but when they pay off their debts and refuse to renew, the money supply contracts and prices tumble. That is exactly what happens in times of economic or political uncertainty. This alternation between period of expansion and contraction of the money supply is the underlying cause of...
BOOMS, BUSTS, AND DEPRESSIONS
"Who benefits from all of this? Certainly not the average citizen. The only beneficiaries are the political scientists in Congress who enjoy the effect of unlimited revenue to perpetuate their power, and the monetary scientists within the banking cartel called the Federal Reserve System who have been able to harness the American people, without their knowing it, to the yoke of modern feudalism." End quote.
Perspective, by Marshall Auerback
Full link: http://www.prudentbear.com/internationalperspective.asp?content_idx=
"Lee Cooperman's strategist, Steve Einhorn, explicitly points to Greenspan's deliberate re-ignition of a series of new asset bubbles to deal with the fall-out of the collapse of the high tech bubble of the late 1990s. This approach to monetary policy has been a hallmark of the Greenspan Fed. Its consequences have long occasioned critical comment from abroad, notably the Bank of England's chief economist Charles Goodhart, Japan's former Vice Minister for International Affairs, Eisuke Sakakibara, and former German Chancellor, Helmut Schmidt. Most recently, Philip Lowe, the Australian Reserve Bank's head of economic analysis, made explicit his concerns that the Fed was in the process of engendering a global moral hazard melt-up:
"The Fed's been very good at lowering interest rates quickly whenever it saw risks, downside risk to the macro economy. But it has not been willing to increase interest rates to reduce the probability of what it sees as very bad outcomes. It was not willing to increase interest rates to try and take some of the heat out of the stock market Investors come to believe that the Fed will bail them out. The Fed will be very happy to cut interest rates whenever any problems come along, and that somehow reduces the or increases peoples' appetite for risk-taking, and I think we're seeing some evidence of that currently in global capital markets."
"Steve Einhorn himself is more direct about the Fed's intentional generation of mini-bubbles. He notes:
"What [Greenspan has] done by keeping rates low is inflate asset prices - that's how he encouraged the economy to grow, knowing he didn't have the traditional underpinnings of employment growth and wage growth. Keeping rates low inflates stock prices, home prices, commodity prices, bond prices, - Greenspan has basically had them substituting for employment and income growth to keep the economy growing until the traditional drivers take over. Now, clearly, the risk is that they don't take over. Greenspan keeps rate this low indefinitely, and he creates a series of mini-bubbles in all the various asset classes. That, I think, is a policy risk that the market is getting more sensitive to than it was six months ago."
"The market's troubling action over the past few weeks, however, implicitly suggests an underlying unease that the Fed's gambit will ultimately fail. Einhorn's concerns are echoed by Northern Trust chief economist Paul Kasriel, in a recent interview with the Australian Broadcasting Corporation. Kasriel holds Greenspan responsible as the figure who "aided and abetted the stock market bubble. You don't have asset price bubbles unless you have cheap central bank credit."
"That professional investors are recognizing the peak in leading indicators is occurring prior to the peak in policy stimulus is making them even more nervous about second half '04 prospects, never mind '05 possibilities. The correction in equity market indexes since late January, the equity sector rotation away from reflation plays (until the past week), and the damage done in several reflation bets (gold price, yen long/dollar short trades) has sent professional investors scrambling to come up with explanations for these unexpected developments. [As Uncle Harry mentioned in last week's Gold Charts R Us].
"As they do so, they inevitably find themselves facing the same worries expressed by Kasriel, Lowe, and various members of the Fed's own Open Market Committee. The minutes of a recent meeting, released days ago, make these concerns clear. They express a fear that the lowest interest rates in 46 years have "contributed to valuations in financial markets that leave little room for downside risks". End quote.
More Truth to Earnings
"The Financial Accounting Standards Board (FASB) just recommended that companies start expensing employee stock options on their income statements as early as next year. Should the proposal draft become law, estimates call for a 7% decline in net earnings for the S&P 500.
"The truth of the matter is that options are an expense of doing business and should be accounted for to accurately reflect their cost. By expensing options as a cost, companies would give up the free ride that they currently enjoy. So, there is little doubt that earnings would be stymied if this is implemented -- and a 7% drop is likely a conservative prediction.
"For example, look at the tech sector where earnings could easily fall at several companies by more than 50% -- especially those technology businesses that liberally use the dangling carrot of options to attract top talent. Critics say that this major accounting adjustment would cause options to disappear completely for rank-and-file employees. If so, the net affect will likely come in the form of higher salaries for highly-skilled employees, who will want to be compensated for the loss of their precious options. So, whether companies continue to offer stock options or not, they can expect to see lower profits across the board, as the fixed cost of salaries and benefits for core talent rises dramatically.
"Should the FASB's recommendation become law, investors better watch out! This kind of rule, while a more honest way to account for these expenses, has the potential to send the stock market into a severe tailspin." End quote.
and Freddie Need a Tougher Cop Watching Them
"When Federal Reserve Chairman and free-market savant Alan Greenspan mentions ``systemic risk'' and the need for more regulation in one breath, millions of investors and legislators should be paying rapt attention. Greenspan called for tougher regulation of the leviathans Fannie Mae and Freddie Mac, two shareholder-owned, government- sponsored enterprises (GSEs), that guarantee and package mortgage- based vehicles. Together, the two entities have at least $1.6 trillion in assets, which makes them collectively larger than Citigroup, Inc., the biggest U.S. financial services company, with $1.2 trillion in assets. Freddie and Fannie are the latest poster children for more regulation because few know the threat their mammoth portfolios pose to investors, especially in light of ambiguous government oversight and backing of those two enterprises.
"If they defaulted on their debt in 2005, each taxpayer's burden in a bailout would be $16,434 according to an estimate posted on the Web site of FM Policy Focus, a Washington, D.C.- based group of financial associations that has called for stiffer regulation of the enterprises. ``Their trading in derivatives is a concern because they may not be properly hedged,'' said Michael House, executive director of the organization. ``It's a problem for the entire market.''
Independent Regulator Needed
no one is predicting that the government-sponsored enterprises are in
imminent financial danger, there are solid reasons for appointing a
strong, independent regulator of the enterprises. Speaking before the
U.S. Senate Banking Committee Feb. 24, Greenspan said regulators ``must
assess whether these institutions hold appropriate amounts of capital
relative to the risks that they assume and the costs they might impose
on others, including taxpayers, in the event of financial-market meltdown.''
Although investors generally believe that Fannie and Freddie are too
big to fail -- and the federal government would back them with cash
infusions -- there's no explicit guarantee akin to federal deposit insurance
supporting the enterprises. ``All of these entities and their securities
are exempt from the registration and disclosure provisions of the federal
securities laws,'' said Alan Beller, the Security and Exchange Commission's
director of corporate finance, before the Senate Banking committee on
Feb. 10. ``None of the debt securities issued by any of these GSEs is
backed by the full faith and credit of the U.S.''
government may not even know if there is a threat looming within Fannie
or Freddie's portfolios because the entities are not subject to the
same degree of disclosure and examination that public companies must
provide their investors. ``They (the enterprises) haven't been regulated
in the last 10 years,'' says Sean Egan, managing director of Egan Jones
Ratings, Inc., of Haverford, Pennsylvania, an independent ratings service.
``Investors don't know the quality of their assets and their hedging.
Their huge growth in assets and low growth in capital can't continue.''
***Here's a scary snippet from www.comstockfunds.com March 23 update:
Believe it or not!!
"Believe it or not, it looks to us as if the public is being set-up for another investing disaster. We have talked many times about the trap that investors got into when they plowed a record $140 billion into equity mutual funds (EMFs) just as the market peaked in the first quarter of 2000. It is hard for us to believe, but by mid March of this year, we were on track to exceed that unprecedented inflow into EMFs in 2000. According to most estimates we actually had inflows of $134 billion into EMFs for the year to date as of March 17.
would have to think that after the terrible beating the public took
after getting trapped into the market mania only four years earlier,
that it would take a couple of decades before the same "irrational
exuberance" would show up again. The only rationale for this type
of financial mania so soon after the bear market of 2000, 2001, and
2002 is that these same investors believe the only mistake they made
in the late 1990s is not unloading near the top. They are convinced
that as long as they sell before the rest of the public sells they will
do just fine. The problem with this type of thinking is that with so
many investors having the same agenda, once this market starts down
the rush for the exits could produce a major liquidation or even a crash.
China - Determined to Slow
Full link: http://www.morganstanley.com/GEFdata/digests/20040324-wed.html#anchor0
"After five days in Beijing, I am convinced that a slowdown in the Chinese economy is at hand. China's leadership is clearly worried about the risks of overheating. And those worries will likely translate into actions that should result in a meaningful deceleration of Chinese GDP growth over the course of 2004. For world financial markets and global commodity markets that are expecting the China boom to continue, a likely soft landing could come as quite a surprise. For China's trading partners who are counting on open-ended support from the Chinese demand dynamic, a slowdown could comes as a rude awakening.
"Despite its dramatic transition over the past 20 years, China remains very much a command economy - a system that ultimately takes its orders from the senior leadership of the country. That's not to say the old Soviet-style central-planning mechanism remains intact. But the transition to a market-based system is still very much a work in progress. Rough estimates by China's leading official think tank put assets of the state-owned economy still at approximately 60% of the nation's total assets. China still pays enormous attention to five-year development plans that set broad guidelines for reforms and shifts in the mix of economic activity. China does not have an independent central bank, nor an autonomous fiscal policy. All directives on the policy front flow from the top. As such, getting China right basically means listening very carefully to what the senior leadership has to say about the economy and policy adjustments.
"I was in Beijing these past several days to participate in the annual China Development Forum - a remarkable conference that brings together senior Chinese officials and "outside experts" from around the world for three days of intense discussions. The Forum is set up under the auspices of the State Council, China's highest executive organ of state power headed up by the Premier. The sessions are structured and at times formal, but they offer an extraordinary opportunity for an exchange of views that you can rarely find in any nation - socialist or otherwise. The Forum is five years old and I have attended the last four. It has become the highlight of my year as a China watcher.
"I listened carefully to what China's leaders had to say over the past several days, and, in my view, the key message was unmistakable: Official China is dead serious about coming to grips with the possible overheating of the Chinese economy. In the words of Premier Wen Jiabao, "Overheating is my biggest concern. We are preparing further measures to slow growth and they will be more forceful." To me, that says it all: The Chinese economy has become too hot to handle, and the leadership of this command economy is very focused on slowing the growth rate from the 9.1% pace recorded in 2003.
"This is not exactly breaking news. Premier Wen used the occasion of the China Development Forum to reiterate a message he had conveyed earlier this month during the National People's Congress. At this official gathering of the Chinese legislature, the Premier used the occasion of his annual "Government Work Report" both to legitimize the debate on overheating as well as to lower the GDP growth target to 7% GDP for 2004. At the China Development Forum, he drove the point home to the outside audience and added a note of emphasis that was certainly not lost on me.
"Nor was Wen Jiabao's message lost on the other Chinese officials and academics who participated in this just-completed Forum. Minister after minister, academic after academic, and researcher after researcher all joined the debate on overheating with great gusto. The most striking assessment of the risks came from a speech given by Ma Kai, Chairman of the National Development and Reform Commission. Chairman Ma worried that China was close to a critical point when bottlenecks in materials consumption could begin to constrain economic growth. According to his calculations, in 2003 China accounted for 7% of the world's total consumption of crude oil, 31% of global coal, 30% of iron ore, 27% of steel products, 25% of aluminum, and 40% of the world's total cement consumption. Ma Kai was unequivocal over his concerns about the risks such trends posed to the sustainability of Chinese economic growth. In his words, "If such an illogical mode of economic growth is maintained, it will be difficult to keep economic growth at 7%." In China, that's as direct a message as you'll ever see.
"Premier Wen left little doubt on the line of attack in the government's efforts to slow the economy. It will come from reining in the excesses of the bank lending cycle. Bank lending had surged by 21% on the 12 months ending November 2003 - nearly double the average gains of about 12% over the previous five years, 1997-2002. Reflecting concerns over the impacts of SARS and a weak global climate in early 2003, Chinese authorities were willing to err on the side of injecting excess liquidity into the domestic economy. They now know they went too far. Property bubbles in Shanghai and elsewhere in the Coastal region, along with excess growth in fixed investment, are telltale signs of excess credit creation. The Chinese leadership seems determined to slow bank-lending growth in 2004, and there were hints of administrative measures to come in achieving this important objective.
"The early read on a turn in the credit cycle is actually encouraging. In the five months ending February 2004, gains in total bank lending averaged Rmb 151 billion - 45% slower than the Rmb 275 billion average pace that prevailed over the first three quarters of 2003. In my view, that sounds like a pretty sharp slowdown in the pace of credit creation. But when I pushed senior Chinese officials as to whether they were satisfied with these results, they all said "no." This underscores the strong sense of determination that exists in China to be even more forceful in coping with the overheating issue. The operative presumption in Beijing is that the sooner the efforts bear fruit, the greater the chances of a soft landing. Conversely, the longer it takes to contain the economy's excesses, the greater the risks of a hard landing - and the unacceptable implications such an outcome would have for job creation. In China, the massive job losses associated with the ongoing restructuring of state-owned enterprises - with annual headcount reductions estimated at 7-9 million workers - makes the consequences of a hard landing almost intolerable.
"At the same time, official China has another important motive to bring the bank lending cycle back under control. It is a critical building block to the financial sector reform initiative planned for 2004 - namely the "pilot" public offerings of two of the four state policy banks. Excess bank lending is a recipe for increased nonperforming loans, precisely what China wishes to avoid as it cleans up its banking system for international investor scrutiny later this year. Tempering the excesses of the credit cycle is key in achieving this important objective on the road to reform.
"So far, there are only straws in the wind that the medicine is working. While lending growth has decelerated markedly since China's central bank went public late last August with its tightening efforts, the real economy has barely flinched. Industrial output growth has moved down a tick, slowing to 16.6% y-o-y in the first two months of 2004 versus an 18.1% pace evident in December 2003. Courtesy of recent tax-law changes, the export slowing has been more pronounced - 28.8% average gains in January and February 2004 versus a 40.5% annualized surge in the fourth quarter of 2003. However, the senior Chinese officials I spoke with were not encouraged over these results. They want and need to see a much more decisive slowdown. Hence, the unequivocal message from the nation's leadership that more actions are likely in order to assure such an outcome.
"My fascination with China began about six years ago in the depths of the Asian financial crisis. It quickly became infectious. I continue to believe that getting China right is one of the most important tasks of global macro. Andy Xie and I have both maintained the out-of-consensus view since last fall that China was about to surprise on the downside. As I spread this message to investors around the world, the believers are few and far between. After all, the consensus in financial markets has only just accepted the legitimacy of the China growth miracle. But now that investors have discovered the China boom and all that it means for commodity markets, the Japanese recovery, and the global economy, they don't want to let go. The Chinese leadership is sending a very different message. My experience tells me that they will have the final say - and in this case, sooner rather than later. They are utterly determined to slow an overheated Chinese economy." End quote.
Alan Greenspan is Worried About Social Security
"March 11, 2004 -- THIS is how bad the Social Security situation really is. If you look at a new document on the Treasury Department Web site called the "2003 Financial Report of the U.S. Government," you'll see that this country's indebtedness grew by $3.7 trillion over just the past year.
"Nearly $2 trillion of that amount of new indebtedness is because of money we will owe in the future when today's taxpayers start collecting Social Security and Medicare. In all, the country is $34.8 trillion in debt.
"But stay with me and you'll understand why Federal Reserve Chairman Alan Greenspan - seemingly out of the blue - suddenly started talking about cutting government Social Security benefits.
"Washington has already admitted to a troubling deficit of $374.8 billion in its fiscal year that ended last September.
"But the government says that if it kept its books like a company does - called the accrual method of accounting - the 2003 deficit would have been a staggering $665 billion (Page 6 of report).
"The 2004 deficit is expected to be around $500 billion because of the Iraq war and tax cuts.
"But that means that if the government didn't have its own accounting method and had to record costs like businesses do, the deficit would probably be more than $750 billion. For one year.
"These sort of numbers will be a big problem for the financial markets when they start paying attention." End quote.
braced for a bust as bubbles look set to burst
"Credit has to be given to Alan Greenspan, the Federal Reserve chairman.
"He is the first head of a monetary authority who has not only managed to create a series of bubbles in the domestic economy but has also managed to create bubbles elsewhere - in the New Zealand and Australian dollars, emerging market debts, government bonds, commodities, emerging market equities and capital spending in China.
"In fact, over the last 18 months, US monetary policies have boosted all asset classes. This is most unusual since it ought to be obvious that in the long run commodities and real estate inflation is incompatible with a bond bull market.
"Mr Greenspan's monetary tribulations mark an achievement no one else in the history of capitalism has accomplished. It is also one investors will never forget once this credit-driven, universal bubble bursts and it will fill entire chapters of financial history books with economic and financial horror stories.
"We simply don't know how the end game of the current speculative wave will be played out and when the bust will occur but a painful resolution of the current asset inflation and global imbalances is as certain as night follows day.
"I used to believe that sometime in 2004 we would see the beginning of diverging trends in the performance of different asset classes, since bonds, commodities and real estate cannot continuously rally in concert.
"After all, one characteristic of a strong secular bull market in one asset class is the simultaneous occurrence of a bear market in another. The commodities bull market of the 1970s was accompanied by a vicious bond bear market. The equities and bond bull markets of the early 1980s were accompanied by a persistent bear market in commodities and, in the 1990s, stocks of developed Western markets soared while Japan and emerging stock markets collapsed.
"So, I was leaning towards the view that some assets would continue to increase in value in 2004 while others, such as bonds, would begin to fall by the wayside and enter longer-term bear markets. After further consideration, I am now increasingly concerned that sometime soon "everything" could begin to unravel. When interest rates rise, it is conceivable that bonds, stocks, commodities and real estate will all decline in value at the same time.
"In the past I have had the tendency to dismiss the deflationist views of some reputed economists and strategists as unlikely. I now feel the current universal asset inflation and overheated Chinese economy will be followed by a serious bust and asset deflation, which will kill consumption in the US. The only question is when.
"I'm at a loss as to when this bust will occur. But given the overbought condition of the US stock market, the extremely high bullish consensus (indicative of market tops in the past), the rising commodity markets and the tendency of markets to defeat central bankers who entertain the same erroneous beliefs that central planners under the socialist ideology had when they thought they could plan the best possible economic outcomes, the bust could come sooner rather than later.
"Moreover, we know from the experience of Japan in the late 1980s and Hong Kong in the mid-1990s that consumption booms, driven by asset inflation, end with a colossal bust. That can result from rising interest rates, or because stagnating household incomes no longer support the asset bubble as affordability diminishes, or additional supplies coming to the market and exceeding demand.
"So, given that consumption driven by asset inflation is unsustainable in the long run and always ends badly, what should the contrarian investor do?
"The least desirable asset in the world is US dollar cash. The investment community can take everything in stride - even a 70 per cent decline in Nasdaq stocks. But interest rates, as low as they are now, compel people to speculate on everything from commodities, homes and bonds to equities.
"Therefore, investors in the current speculative environment should be extremely defensive and not be tempted by short-term gains, which could be swiftly erased. Daily moves of 5 per cent in investment markets will become common. Nickel recently fell 8 per cent in a day, copper by 5 per cent, and the euro by 5 per cent within a week. Gold and, especially, silver may offer some protection but, once the current asset inflation bubble ends, they could also be in for a rough time.
Obviously, as I experienced in Asia in the 1990s, it wasn't important to be "asset-rich" before the crisis of 1997 but to be "cash-rich" after the crisis when financial asset values had tumbled by 90 per cent and when incredible bargains across all asset classes were available." End quote.
The author is editor and publisher of 'The Gloom, Boom & Doom Report' and author of Tomorrow's Gold."
Extract from a brilliant article posted on www.mises.org
Power to Destroy
Full link: http://www.mises.org/fullstory.asp?control=1477
"The Chodorov call for repeal of the Sixteenth Amendment was seconded by J. Bracken Lee, governor of Utah, who introduced the book and noted how the states were losing "more and more of their autonomy," how the federal income tax empowered Washington "to bribe the state governments, as well as its citizens, into submission to its will." Submission then and now, if now much more so.
"For here in fiscal 2004, which began last October 1st, that bribery comes to a pretty penny. Commerce Department data show that transfer payments to citizens (in such forms as Social Security and Medicare) in the 3rd quarter of calendar 2003 came to $1000.4 billion, annualized, while transfers via "grants-in-aid" to states and localities amounted to $341.6 billion. Add to those totals, $51.9 billion for subsidies to farmers and others and you find that Uncle Sam is spending more than three-fifths of the federal budget, then at $2.2 trillion, in welfare "transfers"-or in "legal plunder," as Frederic Bastiat more honestly put it in his book, The Law, in 1848.
"So does this Everest of taxpayer money talk, if not shout, to 200 million adult Americans, many of them bunched into special interests, as Uncle Sam cleverly seizes their money with one hand and then bribes them with it in the other, as he saps further and further the incentives to work and produce, save and invest, while politically sapping further and further the very republic that Founding Father Benjamin Franklin cited when asked outside Independence Hall in 1787 what kind of government the Founders were providing. His famous hedged answer: "A republic, if you can keep it."
"How presient was Franklin with his iffy hedge. As Chodorov wrote: "Thus, the immunities of property, body, and mind have been undermined by the Sixteenth Amendment. The freedoms won by Americans in 1776 were lost in the revolution of 1913." For originally, as Chodorov reminds us, the Founders, smelling a rat, had wisely foreclosed an income tax in the Constitution where they stipulated in Article 1, Section 9:
"No capitation, or other Direct Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be undertaken."
"To be sure, the Lincoln regime most arbitrarily declared its Civil War income tax to be but an "excise" tax. But that pretense is no longer necessary in view of the sweeping language of the Sixteenth Amendment in force today:
"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."
"Sweeping indeed. Chodorov held that the absolute right of property, the very heart of a free society, was violated, that income and inheritance taxes imply loss of the integrity if not the very denial of private property, and so they differ radically in impact from all other taxes. The ability-to-pay doctrine, for example, breaks with the equality-before-the-law principle; it spells class warfare between the so-called "rich" and "poor." Yet, as Ludwig Mises notes in Human Action, the rich capitalist or entrepreneur is broadly the poor's best friend as he boosts capital formation." End quote.
out the rug
"Apparently, the consensus economists are still convinced that the growth acceleration in the second half of 2003, and above all a sharp rise in profits, have laid the foundation for sustainable growth. In particular, sustainable growth with sufficient creation of employment.
"But we must admit that our own assessment is prejudiced by the postulate of the Austrian school, that "the thing which is needed to secure healthy economic growth is the most speedy and complete return both of demand and production to its sustainable long-term pattern, as determined by voluntary consumer saving and spending."
"Friedrich Hayek said in 1931: "If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into the wrong direction and a definite and lasting adjustment is again postponed. And even if the absorption of the unemployed resources were to be quickened in this way, it would only mean that the seed would already be sown for new disturbances and new crises."
"We think this precisely describes what has been happening and continues to happen in the United States. The Greenspan Fed has discovered a new, amazingly easy and quick way to create higher consumer spending virtually from thin air - by way of so-called wealth creation through asset bubbles. It began with the stock market bubble, to be followed by bubbles in bonds, house prices and mortgage refinancing.
"Measured by real GDP growth, it seems a successful policy. But measured by employment and income growth, it is an outright disaster. The so-called "wealth effects" are not for real, neither for the economy as a whole nor for the individual asset owners. The reality in the long run is only the horrendous mountain of debts that consumers, corporations and financial institutions have piled up.
"Given the general euphoria about the U.S. economy and its recovery, there appears to be a general apprehension in the markets that the Federal Reserve will be forced to raise interest rates in the foreseeable future. The Fed is clearly anxious to dispel any such fears - and this, in our view, is for a compelling reason. U.S. economic and financial stability have become inexorably dependent on the existence of a steep yield curve allowing and fostering unlimited carry trade in long-term bonds. Any major rise at its short or long end would shatter this artificial stability and send the economy and financial system crashing.
"Considering all the imbalances impairing U.S. economic growth, we are unable to see the sustained, strong recovery. A closer look at the recent economic data confirms this skepticism. Possibly, if not probably, economic growth has already peaked. For us, the question rather is when general disappointment will gain the upper hand.
"That, of course, is sure to soothe the bond market, allowing moreover the Fed to maintain low interest rates. But it will conjure up another, even greater risk at the currency front. It will pull the rug out from under the dollar.
"In our view, the U.S. trade deficit is big enough to cause a true tailspin of the dollar against all currencies. So far, two things have prevented this threatening dollar collapse: the gargantuan dollar purchases by Asian central banks and the still rather positive perception around the world of the U.S. economy. In our view, few people realize its true weakness and vulnerability.
"There is widespread hope that the falling dollar will go a long way to lower the U.S. trade deficit. It takes a lot of wishful thinking to believe that. Its persistent growth has various reasons. One of them is that the gap between exports and imports has simply become too big to be reversible. Last year, exports amounted to $1,018.6 billion and imports to $1,507.9 billion. Just to prevent a further rise of the deficit, exports would have to rise 50% faster than imports.
"Principally, the trade flows of a country are exposed to three major influences: first, relative prices and the exchange rate; second, relative demand conditions; and third, relative supply conditions.
"Empirical experience suggests that exchange rate changes by themselves have very little effect on trade flows. One obvious reason is that Asian as well as European exporters readily adjust their prices to maintain their market shares.
"For years, the United States has been top in the world with its domestic demand growth propelled by the loosest monetary policy in the world. For sure, lacking demand growth in the rest of the world has played a role in boosting the U.S. trade deficit. Yet what matters most for the trade balance is not U.S. growth in relation to other countries, but U.S. demand growth in relation to U.S. capacity and capital-stock growth. In essence, such a deficit indicates an equivalent excess of domestic spending over domestic output.
"More precisely, the U.S. trade deficit reflects gross overspending on consumption on the demand side and a grossly unbalanced investment structure on the supply side. There was gross underinvestment in manufacturing versus gross overinvestment in retail, finance and high-tech.
"Our assumption is that there is no intention or will on the American side to correct any of these maladjustments. Given their enormous size, it is a Herculean task, too Herculean, in fact, to be seriously addressed.
"Principally, American policymakers and economists take only two economic problems seriously: high rates of inflation; and, in particular, slow growth and rising unemployment. They could not care less about the dollar. The low inflation rate is the excuse for more of the same extreme monetary looseness.
"There is quite a variety of accidents waiting to happen in the markets, but the most predictable and biggest risk is a dollar crisis. In addition to the gargantuan trade deficit, looming in the background are existing foreign holdings of dollar assets in the amount of $9 trillion.
"As explained, the tremendous vulnerability of the U.S. bond market due to its underlying heavy leveraging prohibits any defense of the dollar through tightening.
"Instead, the plunging dollar will pull the rug out from under the bond and the stock markets." End quote.
elderly woman walked into the Bank of Canada one morning with a purse
full of money. She said she wanted to open a savings account and
The president was curious and asked her how she had been able to save so much money. The elderly woman replied that she made bets. The president was surprised and asked, "What kind of bets?" The woman replied, "Well, I'll bet you $25,000 that your testicles are square."
The president started to laugh and told the woman that it was impossible to win a bet like that. The woman never batted an eye. She just looked at the president and said," Would you like to take my bet?"
replied the president. "I bet you $25,000 that my Testicles are
not square." "Done", the woman answered. "But given
night, the president became very nervous about the bet and spent a long
time in front of the mirror examining his testicles, turning them this
way and that, checking them over again and again until he was positive
that no one could consider his testicles as square and reassuring himself
that there was no way he could lose the bet.
Then the woman asked him to drop his pants so that she and her lawyer could see clearly. The president was happy to oblige. The woman came closer so she could see better and asked the president if she could touch them. "Of course", said the president. "Given the amount of money involved, you should be 100% sure."
woman did so with a little smile. Suddenly the president noticed that
***Attorney General Ashcroft was visiting an elementary school.
A little boy named Bobby raised his hand and said, "Mr. Ashcroft, I have three questions. First, how did Bush win the election with fewer votes than Gore? Second, why are you using the USA Patriot Act to limit Americans' civil liberties? And third, why hasn't the U.S. caught Osama Bin Laden yet?"
then the bell sounded and all the kids ran out to the playground.
girl raised her hand and said, "Mr. Ashcroft, I have five
HSL will be mailed on May 10.
Subscriber input is WELCOME on FMU service, trading recom's, jokes, or any other ideas/info that may be of interest to FMU family members.
Note: unfortunately, we simply don't have the staff to be able to layout FMU in HSL or GCRU format. If you wish to print a small section or single item from FMU, simply highlight the section in question (click & drag mouse on your browser page) & paste into Word. Word will automatically format pages so that charts & images are not cut in half, etc.
HSL contact details
For info: fax, phone or E-mail our fulfilment office in Costa Rica:
Free phone for US: (1) 866.725.3724
Free phone for Cad: (1) 877.659.9004
The HSL Team