LEX CORP NEWS LETTER

USDollar Death Dance

Jim Willie CB
Jim Willie CB is the editor of the "Hat Trick Letter"
Oct 24, 2008

[Quiklinks for readers in a hurry:
GOLD MARKET CLOSE TO BREAKING - click
NEW BRETTON WOODS II FARCE - click

The USDollar rally in the last several weeks has been remarkable. At closer examination, it highly resembles a spurt prior to death. Imagine an old man who just had a heart attack, lost feeling in certain body parts, his mind not working right, plenty of nonsense gibberish coming from his mouth, and now he is dancing hard on some last gasps. The vast liquidation movement is akin to the old man going through an embalming process while dancing atop the tables at the funeral parlor, as bidding proceeds for his cadaver. Are Americans last to realize the financial structure destruction means the USEconomy does not enter a recession, but rather a bizarre unprecedented disintegration? It seems so. The liquidation of speculative positions, the massive de-leveraging, the payouts of defaulted bonds, these events are the opposite of developments toward revival or resuscitation, like business investment!! Liquidation is the exact opposite of investment, and precedes job cuts, not job creation.

The following survey of important issues is covered in depth in the October Hat Trick Letter. This month, an additional Crisis Coverage report was included, since too much has been happening, most of it confusing. Plenty of stories are occurring behind the stories, many covered. Here is a quick survey touching the surface on issues discussed and analyzed more in depth for subscribers.

FACTORS BEHIND USDOLLAR RALLY

What is pushing the USDollar up cannot be construed as anything remotely resembling healthy factors. In no way whatsoever does it resemble investment. It is more like paid off death contracts, paid off death investments, paid off transfers from toxic US bonds into what are falsely regarded as safer US bonds with a guarantee from a crippled USGovt. Foreign financial entities are liquidating on massive scale. They need a tremendous amount of USDollars in order to complete transactions. Also, a tremendous amount of USDollars are needed for CDSwap payouts as defaulted bonds are resolved. Almost all CDSwap and other credit derivatives are paid out in USDollars. The Lehman Brothers payout was full of lies, again. The Lehman Brothers total volume of corporate bonds was $160 billion, but $400 billion existed in total CDS volume tied to them! It is no surprise that the Dow and S&P500 stock indexes fell hard (by almost 400 points on Dow) and on the Lehman resolution day. And market mavens boasted of no impact on the Lehman funeral date!

The DTCC (Depository Trust & Clearing Corp) reported only a net $5.2 billion payout on the Lehman Brothers failure CDSwap resolution. The 'Dis-Trust Clearing Corp' might want to check credit derivative experts who claim between $220 billion and $270 billion in that total after netting. By the way, the DTCC is the official banking entity that oversees all stock clearing overnight, including all the naked shorting. The de-leveraging process has left the central bankers empty handed, exposed as having empty financial cupboards. Thus the need for massive central bank swaps from the USFed, which has perversely farmed out its function to foreigners. In fact, the foreign central banks might be in possession of more US$ inventory items than the USFed. So the US central bank has asked foreign central banks to do its job, and to manage the world reserve currency? This amidst a US$ rally!?!

The Credit Default Swaps are capable of burning Hiroshima holes all over the US financial system, resulting in USEconomic implosion from eliminated bank and financial system structures almost entirely. The process has only begun, but in darkness. The other purpose for big bailouts was to prevent CDSwap explosions, risking a string of bombs to go off. The key aspect of CDSwap contracts is their hidden nature, with fuses intersecting in the dark.

When the market mavens talk about the de-leverage process, they refer to speculative investments being liquidated. Oftentimes, they do not include in the story how Wall Street firms, desperate to stave off bankruptcy, are targeting viciously their own clients. The big accounts lie in hedge funds, where the private wealthy are being decimated. Credit is being pulled. Margin calls are being delivered. Margin ratios are being raised. Those funds whose positions are aligned with the predators on Wall Street continue in their investment portfolios. Those funds in opposition are attacked with artillery, carpet bombs, and early morning raids. The USDollar is rallying amidst this type of sinister liquidation. The result has been numerous spread trades anchored by the USTreasury Bond are forced into sale. That means a USTBond buyback occurs from the short cover on the trade. Whether a spread on mortgage bonds, corporate bonds, emerging market bonds, or crude oil, or gold, the trade is liquidated, and a USTBond is bought back. NO TANGIBLE END DEMAND, ONLY USTREASRY BOND SHORT COVERS. This is the basis for a US$ rally?

WORSENING US$ FUNDAMENTALS

How many times have we seen the US stock market go down, non-government bond yields rise, the USDollar rise, and the USTBond yields fall? That has been the norm in the last few weeks. These are death signals, not investment signals. The USEconomy cannot afford liquidation and constricted credit, a well-known fact, seemingly forgotten today. These signals come amidst falling confidence, more bank distress measures, more job loss, more home foreclosures, and lately, trouble with letters of credit at port facilities.

Financial markets, including the USDollar, have yet to factor in the deep USEconomic recession. The USDollar rally flies in the face of deteriorating fundamentals. See job cut announcements at Caterpillar, Merrill Lynch, General Motors, Chrysler, several Wall Street firms including Goldman Sachs today. Weekly jobless claims at close to half a million per week, equal to peak during the unrecognized 2001 recession. See the UMichigan consumer sentiment, Philly Fed index, Empire Fed index, leading economic indicators, durable goods orders, on and on. Retail sales, the backbone of the backwards USEconomy, are plummeting. That is, the plummet is before inflation price adjustments. Car sales are plummeting also.

Exports are to be worse from the higher US$ exchange rate on the table, combined with slower foreign economies. The improved export trade has been a big boast from the lunatics running the asylum. The USEconomy is accelerating in its decline, certain to produce a recession and huge USGovt deficits. That deficit is likely to at least double and possible quadruple next year. USTreasury Bond issuance cannot conceivably finance all, or at least half, of the commitments. The printing press will do the rest, which will cut down the US$ valuation. The USDollar decline lies ahead, when the distortions slow or come to an end. Gold will soar on the other side of this liquidation.

An extreme backlash attack is coming against the USDollar. Rising import prices in foreign economies have already caused alarm. Foreigners will soon attack the US$ in a matter of time, using heavy US$-based reserves. Their banking sectors are in disarray, primarily because they are intimately tied to the US$ and USTBonds. The process has begun with Brazil and Mexico in Latin America, to use their strong reserves and sell into this queer US$ strength. That is what reserves are for. The process will spread to other nations.

GOLD MARKET CLOSE TO BREAKING

The gap between the physical gold market and paper gold market is widening. An example bears this out. In Toronto this week, a major off-market gold transaction took place. The price paid was $1075 per ounce on the physical transaction. Its volume was in the multi-million$. There was no US involvement in the transaction, and the settlement was in euros. Enormous repositioning is ongoing by the groups that will participate in the new, partially gold-backed currency. My take is this movement is from a large financial entity with global activity, and ties to central banks. It might be tied to the upcoming split in the euro, into a Nordic Euro and trashed Latin Euro. The Nordic version might contain a gold component. This and other transactions are taking place with European settlement. They are being satisfied in the alternative market, far from the distortions of COMEX. This was a physical transaction with the real metal being moved. Big shifts occur behind the scenes. A couple of months ago, 400 metric tonnes were moved into storage with the Royal Canadian Mint by a sovereign entity.

The more massive the paper manipulation, the more violent the coming correction. The asylum managers are losing control of their paper-physical arbitrage. Watch the gold lease rates, and silver lease rates, which have each more than tripled in the last two months. Lease rates precede price movement. Bullion bankers, including central banks, are reluctant to lease their physical supply. This time is no different, an event to come after the COMEX criminality is swept aside, or simply overwhelmed in return. One well-informed source, with over two decades of gold market experience, actually expects arrests to take place among COMEX officials before long.

John Embry of Sprott Asset Mgmt has raised the possibility of a December gold futures contract default. He is not predicting it, or claiming it as certain, but rather mentions how talk centers on the December gold contract as having extreme stress for actual delivery. Pressure is building. The December contract not only is end of quarter, but end of year. He suggests a possible default. He said, "there is probably going to be such an event to change perceptions." He cited a possible force majeure that could act as a "seminal event that defines the whole situation." He explained that the physical gold price would then dictate the paper gold price, a return to normalcy, and with a gigantic move up in the gold price. Right now the paper gold market is overwhelming the physical side, but the physical side is constricted on supply. He explained that hedge funds are being unwound on a massive scale, slaughtered by margin calls. The long side must call for delivery on many contracts. He also expects there will be many questions on the Exchange Traded Funds soon as well, although those are surely not as important as the COMEX contract defaults. Watch and listen to his interview on the Canadian Business News Network (CLICK HERE), and be sure to move to the 10 to 11 minute mark.

NEW BRETTON WOODS II FARCE

Last weekend in Brussels, G8 Finance Ministers met. Among other things, they discussed a reform to the global banking structures. For the many challenged on geography, that city is in Belgium, headquarters for many European Union functions, in Western Europe. Creditors were not present, which means the finance ministers were talking to themselves. Credit masters were not invited. The nations whose banking systems are in the process of implosion are essentially attempting to revise the global currency system. Those in attendance constitute the losers! However, the Arabs and Chinese were not present. This seems entirely backwards. The bankrupt nations do not dictate to the creditors terms of a revised agreement.

Imagine a large business saying the following. "We are bankrupt. We want a meeting. We are going to dictate to you bankers anyway. We are broke. Our economies are shattered. Our banking systems are in ruins. But we going to tell you how we are to restructure our debt and rework a new system. We realize our debts to you are bigger than we can ever repay. We realize we cannot continue in commerce without your continued extended credit. But we will force upon you a new system. It does not matter what your opinion is. You do not have a seat on this elite committee, sorry!" THIS FLOW IS NOT FROM THE WORLD OF REALITY!

No! Bankruptcy receivership is next, where creditors will be left with few options. They will be compelled to run management committees, and dissolve many functions of government. Creditors will probably await the G8 initiative, then summarily reject it. They will next propose their own new global financial structure. The teenager's credit card is about to be taken away, when the irresponsible kid proposes a new repayment system, new promises, new chores done even. The kid has burned down half the neighborhood, yet thinks he can call the shots! Sadly, the parents will probably ground him and force a tutor to direct his studies, and force a strict drill sergeant to direct his work activities. His friends will not be permitted to form new teams that include him. A 'Post-US World' is being planned, and Americans are the last to know. Entire new barter systems between a key pair of nations is about to be launched. Regional bond and commodity organizations are being formed, with exclusion of the US. The US press reports nothing on these important developments.

Foreign creditors will form new committees, which will be recognized in time as the Receivership Committee. Foreigners are watching in horror. Decisions have already been made, with Americans the last to know. In order to arrest the cancer they so clearly see, they are ready to force a complete upheaval. The USDollar will lose its global currency status, a thoroughly abused privilege. The above lack of disclosure only reinforces their motive to take action. They will move when they must, upon a system failure, or when they are challenged, or when flimsy attempts by debtors are made to dictate reform.

Without any changes forthcoming soon, the foreign banking systems and economies face huge threats to failure. To friends, family, and contacts, my approach has been to attempt to explain the underlying forces behind revolutionary financial change. Foreigners must cut off a cancerous body part, the one attached to the United States. Foreigners must cut off flow from a toxic systemic organ, the one attached to the United States. CUT IT OFF OR RISK DEATH. They must disconnect of USDollar from the global currency system attached intimately to their own financial and economic systems. They must to survive.

ARAB GOALS & MOTIVES

Arabs clearly lust to control and manage a global gold trading center. It will be in Dubai in the United Arab Emirates. The new Gulf dinar currency will pave the road to that center. The Gulf Coop Council is biding time, cutting time delay deals, warding off pressure by the USGovt, appeasing with weapons contracts from the USMilitary, and is working behind the scenes to create a new dinar currency. The new Gulf dinar is likely to be primarily gold in its backing. So, foreign nations will soon be forced to purchase the dinar for all or most of crude oil payments. This forces the purchase of gold in order to purchase crude oil. The demand for gold will thus fortify the global banking system, by means of commodity settlements. Many details are unknown, but the basic structure has been slowly come to light. A new motive flashes red in front of Arabs to institute some changes FAST. The crude oil price is down, cut in half from July. Their revenues are sharply reduced. Russia figures into the complex deal to launch the dinar. The Saudis and small sheikdoms need security protection. The next chapter will involve protection amidst a gold-backed currency, not a military-backed currency, in Saudi eyes.

ISOLATED USTREASURYS

The other side to the Arab dilemma is that the USTreasury Bond demand is quickly eroding from Petro-dollar recycle on trade surplus. The USGovt finds itself as relying far too much on foreign central banks for demand of USTBonds, relying far too much soon on the printing press. The USTBond demand is missing the oil surplus in recycle. Their reduced and unstable oil revenue motivates the Arabs to install a new payment system, based upon an end to the ugly defacto Petro-dollar standard. It shamefully is the basis of what my analysis has called a Protection Racket.

The incredible fact evident in the data is that until mid-September, the US Federal Reserve has drained liquidity from the US private banking system in order to offset its colossal bond swap bailouts for major Wall Street and New York money center banks. Their objective was to avoid undue US$ money supply growth. THEY WERE TARGETING GOLD. They essentially drained the lifeblood from the USEconomy on Main Street in order to subsidize fraud sanctioned and approved on Wall Street. Only since mid-September has the USFed been monetizing USTBond debt issuance. They are running scared, printing with abandon. The gold price is falling as the USDollar printing press is rapidly heating up, no longer offset by bank system drains. Details are in the Hat Trick Letter report.

DESERVED DISRESPECT TO GREENSPAN

Can you believe what is happening before a Congressional banking committee? Greenspan is being grilled, as his past errors are vividly pointed out. His past memos are being read back to him. His wrong premises are being questioned as having being totally discredited. His opposition to credit derivative disclosure is being challenged. His opposition to Fannie Mae reform is being challenged. He has been brought to task for his steadfast opposition for reform in the past during his tenure as USFed Chairman. He is being interrupted by lowly Congressional reps. His time to speak is being cut, in defense of others to be grilled. HE IS BEING SHOWN THE DISRESPECT DESERVED OF ANY FAILED PUBLIC OFFICIAL. Maybe they will demand to know who paid his second paycheck from Switzerland, and what his agenda was! Not likely! My view is that Greenspan was a primary key person used to take down the US banking system, to pave the way for a bigger agenda. These are intelligent people who knew what they were doing, who were the cheerleaders, even the Mythology High Priest.

Greenspan admitted a grand flaw in his free market ideology. He admitted being shocked that financial markets did not self-regulate. Hey Alan! They never self-regulate amidst a Fascist Business Model, since regulators and law enforcement is compromised as much as humanly or institutionally possible! He admitted a failure in the global financial market structure as he perceived it, a stunning admission. He acknowledged the USEconomy is faltering badly. He sees the rise in job layoffs and unemployment. He sees the retrenchment in consumer spending. He sees the price declines in housing without abatement. He forecasted a worsening recession.

His biggest admission is this. He admits to a flaw in the structural model perceived in the critically function for global banking. Wow! THAT IS A BIG ADMISSION, NOT PROPERLY PERCEIVING THE GLOBAL BANK STRUCTURE. He admits to how his risk pricing model did not take into account periods of financial stress. Hey Alan! Is that not what they are designed for? He used to boast for a full decade how offloaded risk via credit derivatives was a sign of sophistication, which enabled economic expansion. Instead, my view is that risk offload devices contributed toward an expansion atop a bubble, which when burst, killed the entire US banking system and then the USEconomy. He used to boast that credit derivatives shared the risk, but in fact it resulted in destruction on a widespread systemic basis. Recall the many claims made by Bernanke, that the subprime mortgage bond bust would be contained. The former Princeton Professor is not a good student of banking and economics! Unlike me, he is greatly encumbered by the limitations of economics credentials! Mathematics and statistics are pure science and its application as artistry.

NO SOLUTIONS FOR ECONOMY FROM BAILOUTS

Almost all US-based bailouts to date are to pay for dead financial firms. Their shareholders and bond holders and asset base have been repaired but not restored. To think this benefits the loan process is folly. It facilitates retirement to the Caribbean for corrupt bank executives. The flow of federal funds will not find its way to the people, or at least only pennies per dollar will. The 'Top-down Approach' is destined to fail because the corruption, bond fraud, accounting fraud, financial instrument shell game, and other assorted illicit procedures are the cause of the problem, and all lie at the top of the structure intended to trickle down! To expect benefits downstream is lunacy. In fact, the devices to assist and subsidize the criminal behavior at the top are vastly expanding with multiple branches. No less than five special purpose vehicles created by JPMorgan Chase were announced on Wednesday. The number of USFed lending facilities, all to big banks, none to people on Main Street, has exploded to such an extent that one needs a sportsbook guide to comprehend all the acronyms. David Rosenberg of Merrill Lynch even coined the YAP, yet another program. Proliferation might be what the architects of the Financial Coup d'Etat intended. Confusion is the best friend of coup architects, just like truth is the first victim of war.

The people receive $1 for every $500 given to Wall Street elite in fraud redemption. The rank & file population entered a 'Revolving Door' of loan repayments that often do not reduce the loan balance, assured to end in foreclosure within a year or so. The same nonsense of 'Trickle Down' was prevailed when it has no past precedent of succeeding.

The lack of disclosure is a tragedy. Congress demands no better disclosure, and receives none. The Lehman Brothers resolution has been conducted in total darkness. Evidence coming my way indicates that JPMorgan is using the dead Lehman carcass as a vast private arsenal to attack hedge funds. Some such funds have most of their assets frozen, while their positions are attacked. What is happening is criminal, a climax of this administration, which has been taken over by Wall Street. A complaint has been made that Treasury Dept documents look like redacted CIA documents, hardly what is needed to instill confidence. One official decree after another undermines investor confidence, the last being short rule restrictions on financial stocks, with an exemption given to Goldman Sachs. This is a selective bailout of Wall Street, a process run by Wall Street, permitting financial crimes worthy of 1000-page indictments.

DISTRIBUTION CHANNELS INTERRUPTED

Big disruptive events are occurring in the distribution system. Letters of credit are routinely being refused by export nations who distrust US sources. A fall of 10% to 20% in shipping traffic to western US ports has been reported. Ships are empty at Asian ports, some even loaded but interrupted on their voyage to US ports and European ports. Many details are given in the October Hat Trick Letter reports. Even manufacturers of shipping vessels are being severely affected, as credit has interrupted construction projects. Indian suppliers are often demanding 100% upfront on costs to east coast retailers, again showing the distrust. Almost total attention has been given to banks and credit markets and stock markets. The USEconomy is moving from recession toward something different from depression. The current interruption could actually be more like disintegration. Short-term credit is soon to interfere greatly with truckers and railways in distribution channels on the domestic side, much like letters of credit are wrecking havoc on the overseas shipper side.

The next big shoe to drop is credit cards. Bank of America has announced plans, not yet fully implemented, to cut back on credit cards to lower FICO scorers. The lower 60%-ile of credit score recipients will find themselves without credit cards at all. One friend told me that he used to own 10 credit cards. Recently, all but four were simply discontinued, but a few were not used. Other friends said most of their credit limits were slashed. Changes are coming. Then the next big shoe to drop will be commercial mortgage default. No reprieve, rest, or respite for US bankers. Changes are coming. It will force defaults in most every conceivable financial corner.

DISHONOR AMONG BANKERS

The system is breaking down. Just when the heart attack signals are actually improving, although only slightly, the USEconomy is falling off a cliff, as unprecedented decay is occurring. Some improvement has been seen with the short-term LIBOR rate, the money market funding, TED spreads, and mortgage bond spreads. But bankers and financial subsidiaries are in focus for dishonor.

The following message came yesterday to my desk. It pertains to General Electric. It involved dishonored Letters of Credit (L/C). The US banks not only distrust each other, they are engaging in criminal activity, like contract fraud. If big enough, or connected well enough to the power center, it is permitted. Again, no solutions, only proliferation of chaos.

"Try this one on. One of our clients did a bond early last year (underwritten by RBC/Dain Rauscher) backed up by a General Electric Letter of Credit. There is a tag end of $1 million. The deal was the sale and lease back of 13 bank branches. One remains. The tenant is a regional bank. RBC cannot remarket the bond now because the market is still frozen. So the client, per the documents, called on the L/C for performance (as allowed in the L/C, which extends to 2021). GE has reneged on the L/C and will not pay unless the two principals come up with $1M in cash. The client has said no way, the L/C has no such provision. GE has said, too bad, if you don't like it, talk to our attorney. We're not paying." Stories like this are probably surfacing all over the North American landscape. US banks are defending themselves by dishonoring contracts.

Jim Willie CB is the editor of the "HAT TRICK LETTER"
email: jimwilliecb@aol.com
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website: Golden Jackass
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Clive Maund
Oct 20, 2008

Gold

The reason why commodities and stocks have been collapsing is liquidity problems and the consequent threat of deflation, and the collapse has been made far worse as a result of the extreme leveraging that had earlier been employed in the markets, which has resulted in a destructive vicious circle as each downleg triggered a fresh wave of selling as stops and margin calls kicked in. The selling of commodities by commodity index funds has been broad-based and indiscriminate, due to client redemption requests, and this has resulted in heavy collateral damage across the board, with the "baby being thrown out with the bath water" as usual. At the heart of the problem is the banks' extreme reluctance to lend to one another, indicated by the high Libor rate which if it should continue would of course result in a credit freeze and a depression. The underlying reason for banks' reluctance to lend to one another is perfectly understandable - they don't know if the banks they are lending to are even going to exist in the future and the difficulty of calculating counterparty risk is exacerbated by the trembling derivatives mountain with its labyrinthine web of liabilities, which has been destabilized by the collapse of Lehman Brothers.

Everyone has been taken aback by the speed and ferocity of the implosion and the initial response of politicians and business leaders, which was shambolic and piecemeal, failed to allay fears and arrest the decline. Thus coordinated global action has become necessary, which is what we are now witnessing. Desperate situations call for desperate measures and thus what might have seemed unthinkable a short time ago - extension regulation of the financial industry and widespread nationalization of banks is now looking inevitable. Awareness that a global banking collapse will rapidly lead to a return to the dark ages is a powerful motivating factor and politicians and governments are quickly coming to the conclusion that the only way out of this mess is to shore up banks and guarantee systemic liquidity. Given the staggering losses accumulated in the banking system as a result of their reckless adventures, particularly in the realm of derivatives, it is clear that this will require massive infusions of capital. Where will this additional money come from? - it will be created out of nowhere electronically, in true Fiat tradition and the taxpayer will end up footing the bill, as usual, through greatly increased inflation. In the case of the United States, an attempt will be made to cover the debt by the increased sale of Treasuries, but it is likely that foreigners will be increasingly averse to taking them up.

The right course of action is not to intervene and to let the banks and Wall St pay the ultimate price for their greed and profligacy that have brought us to the current pass, and allow the system to implode which would cleanse it of the extreme distortions and excesses that have proliferated as the inevitable result of the unbridled expansion of Fiat. This, however, is understandably regarded as an unacceptably painful course of action, particularly as it would doubtless involve widespread privation and consequent social unrest and could result in many political leaders losing their positions and possibly their lives. Since politicians are renowned for taking the line of least resistance, at least as far as it concerns them personally, it is easy to deduce which course of action they will select when presented with the options of either a deflationary implosion or a hyperinflationary bailout at public expense. It is of course the latter, and that is what they are currently getting together to organize. The Paulson Plan was for the hapless citizenry of the United States the first installment that has "put the foot in the door" and will likely be the first of many such involuntary infusions.

So what will happen if the politicians' plans to bail out the banks and Wall St and stabilize the system at public expense succeeds? The amounts of money that will need to be created to achieve this are of course huge, and will be orders of magnitude greater if they attempt a solution to the derivatives mess, even assuming it is possible. Success of the plan therefore must lead inevitably to very high inflation or hyperinflation and probably an eventual bust anyway.

Assuming the Grand Rescue Plan goes ahead what will it mean for commodities and more particularly for gold? The massive infusions of newly created money that the plan calls for will feed through into huge inflation. In anticipation of this. the forced commodity liquidation currently underway can be expected to abruptly stop and then go into reverse, so that prices climb steeply. Gold will go through the roof. Silver, which is currently behaving as if it is not a Precious Metal at all, but an industrial metal, will take off as well in line with commodities as a whole, and as it typically performs best towards the end of gold uptrends, can be expected to accelerate as the gold uptrend becomes mature. A sign that the forced liquidation has about run its course will be the dollar breaking down from its current strong uptrend - funds from liquidation of both commodities and stocks are being parked in the dollar and have bidded it up.

Turning now to the charts we see that gold has actually held up remarkably well in the recent past considering the rout in commodities generally, as made clear by the gold chart and the commodity chart being stacked one above the other below for easy comparison . On its long-term chart we can see that gold is still above a zone of strong support that should limit downside over the short to medium-term term to about $730 - $750.

With regard to timing when the forced liquidation of commodities has run its course, we should be able to use the US dollar index chart for guidance, as funds from the liquidation are clearly being parked in dollars. On the 6-month dollar index chart we can see that although the it is rounding over and now looks set to react back across its parallel uptrend channel, a final 5th upwave is then likely which will probably mark the end of the uptrend. In any event, a breakdown from the channel will open up downside risk and thus will likely coincide with a reversal of fortune in commodities.

Silver

Silver may be classed as a "Precious Metal" but it has certainly not received any special treatment these past few months, during which it has been sold down heavily along with most other commodities, in marked contrast to gold, which has held up well.

We can see this at a glance by comparing the long-term charts for silver and the commodities index, which are stacked one above the other below for direct comparison. These charts make it abundantly clear that as far as the markets are concerned, silver is just another commodity. We had observed this weakness compared to gold a long time back hence our gravitating more towards gold. What useful conclusions can we draw from this for the future? In the first place we might want to reconsider whether silver should still be classified as a Precious Metal at all. In the old days, when wild-eyed guys with long matted hair used to hand over silver coins in the woods for hunks of salted meat, it certainly was, but its recent performance makes clear that its role as an industrial metal is, at least for now, its dominant one and it is being dumped along with base metals. The main conclusion of course, is that gold investments should be favored over silver at this time, although it should be kept in mind that silver comes alive and really performs well towards the end of gold uptrends, at which times it is often advantageous to rotate out of gold and into silver. It is because silver is often a by-product of base metal production that big silver stocks have been terrible investments for a long time and should continue to be avoided. The small silver stocks that are pure silver plays are much more interesting and some of the stocks of those companies which do not fail over the next year or so could end up being exciting and highly profitable investments. We will of course remain on the lookout for these and for signs of a reversal of fortune for the sector.

On the silver chart we can see that while it continues to weaken it is now approaching strong support in the $8 area, which is likely to generate, at the least, a sizeable bounce. If The Grand Rescue Plan, described in the Gold Market update, goes ahead then there is a good chance that we will soon see a major reversal in commodities as the bright prospect of rampant inflation and possibly hyperinflation lights another fire under commodity prices. On the silver chart we can see that the most likely point at which a major reversal is likely to occur is the $8 area. Again as described in the Gold Market update, a guide to the timing of such a reversal is likely to be provided by the dollar, which should then break down from its current strong uptrend.

Now compare the long-term gold chart to that for silver - as we can see it looks much healthier.

Oct 19, 2008
Clive Maund
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email: support@clivemaund.com
website: http://www.clivemaund.com/

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge, England. He lives in Chile.

Visit his subscription website at clivemaund.com. [You can subscribe here].

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Last Gasp of a Doomed Currency

Peter Schiff
Sep 15, 2008 

Here is a video of Peter Schiff- known as Doctor Doom.

In the latest example of financial market madness, the recent government "bailout" of Freddie Mac and Fannie Mae has perversely resulted in a sharp rise in the value of the U.S. dollar. If the markets were functioning rationally, the transference of staggering new liabilities to the U.S. Treasury would have been immediately seen as catastrophic for the dollar. Instead the markets have ignored the obviously negative long-term implications and have remained fixated on the more immediate effects. However, rather than solving the problems, the government's actions merely confirm my worst fears, and increase the chances for a hyper-inflationary outcome.

By transforming $5.5 trillion of suspect mortgage-backed securities into seemingly bullet-proof Treasury bonds, the move has sparked a relief rally in the dollar as foreign investors no longer have to worry about defaults or markdowns. In fact, to holders of Fannie and Freddie debt, it no longer matters what happens to the housing market. Home prices can drop another 50%, every single homeowner can default on their mortgage, and bond holders will not lose one dime. This has emboldened foreign investors, and temporarily increased demand for both dollars and Freddie and Fannie debt.

Had the government done the right thing and not guaranteed Freddie and Fannie debt, I believe we would now be experiencing an outright financial crisis. The dollar would be falling sharply along with real estate prices, gold would be soaring and the recession would be deepening. However, by nationalizing Freddie and Fannie, the government has merely delayed the crisis. The borrowed time will cost us dearly, as the day of reckoning will now likely involve much steeper losses for our currency.

The Freddie and Fannie takeover does nothing to address the underlying problems that forced the companies into bankruptcy in the first place. All of the bad mortgage debt still exists. In fact, based on this bailout, there will be trillions more in bad mortgages insured over the next few years. The only thing that has changed is how the losses will be distributed. Instead of falling solely on bond holders, who had chosen to invest in mortgage debt, they will now be dispersed among U.S. taxpayers and all holders of U.S. dollars, who made no such choices.

Over the next year or two, my prediction is that several trillion dollars of existing mortgages, not currently insured by Freddie or Fannie, will be transferred to the pile. Going forward the vast majority of new mortgages made to Americans will be bought by Fannie or Freddie. Therefore in a few short years the $5.5 trillion of initially transferred liabilities could grow to more than $10 trillion of new obligations for the U.S. Treasury.

The defenders of the bailout claim that Fannie and Freddie debt does not represent true obligations because they are fully collateralized by homes. But anyone with a casual interest in the current real estate market knows that homes are now only worth a fraction of outstanding mortgage debt. And that fraction gets smaller every day. My guess is that $10 trillion of federally insured mortgages could result in $2 trillion of losses, which amounts to more than $25,000 per American family.

Also, there is no reason to believe that the bailout merry-go-round will end with Fannie and Freddie. Faltering investment bank Lehman Bros. is now positioned to receive the kind of Federal backstop that smoothed the purchase of Bear Stearns back in March. Bailouts of automotive and airline companies can't be long in coming. Once the market perceives a Federal magic wand, it becomes politically impossible to stop waving it.

In addition to adding new sources of debt in the form of mortgage backed securities, the government is also piling on debt the old fashioned way... through budget deficits. Recent projections put the 2008 deficit at $410 billion, not counting the Iraq war or any costs related to financial bailouts. It is my guess that the annual Federal budget deficit will soon approach, and then exceed, $1 trillion, and that the national debt, including actual bonds and guaranteed mortgages, will soon exceed $20 trillion. When these untenable obligations force Treasury and agency investors to shift focus from default risk to inflation risk, a mass exodus from both Treasuries and mortgage-backed securities (now Treasuries in disguise) will ensue. The stampede will trample the dollar.

When the dust settles, the Federal government will be left with staggering liabilities that will be impossible to repay with legitimate means (taxation or borrowing). To make good, they must rely on the printing press to create money out of thin air. The rapid expansion in money supply will push the dollar down mercilessly.

Right now every asset on the planet is being sold except the U.S. dollar. To me this rally looks like the last gasp of a dying currency. Just like a toy rocket ship, once the dollar runs out of fuel it will crash back down to Earth.

###

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my book "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to buy a copy today.

More importantly, don't wait for reality to set in. Protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at http://www.goldyoucanfold.com/, download my free research report on the powerful case for investing in foreign equities available at http://www.researchreportone.com/, and subscribe to my free, on-line investment newsletter.

Sep 8, 2008
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives

I would like to thank Clive Maund for allowing me the use his articles on my website.  I highly recommend visiting his site. http://www.clivemaund.com/ 

Gold/Silver Market Updates

Clive Maund
Aug 26, 2008

Gold

Gold is believed to have bottomed. It crashed the support at $850 as predicted in the last update and plunged to hit a low $8 below our target range on a closing basis. Our target range for the drop was $800 - $825, and it bottomed at $792, with an intraday low at approximately $788. On the 1-year chart we can see how, although the drop took the price way below its 200-day moving average, and even below the 300-day, it now appears to be bottoming in the vicinity of the latter, and it is worth recalling that the most severe corrections during gold's bull market have ended near this average. It is interesting to observe how despite the decline taking the price somewhat below our target range, it ended exactly at a clear line of support that goes back to the November low at the bottom of a triangular consolidation pattern.

The time required for sentiment to recover after the recent battering is the reason why gold is not suddenly launching into a major advance, and instead appears to be marking out a small base pattern that at this point looks like it is evolving into a Head-and-Shoulders bottom, which we can clearly see on the 3-month gold chart. This pattern is forming beneath the line of resistance sandwiched between about $840 and $860 which was the former support level, and while this resistance will naturally impede this advance it could easily be swept aside if the dollar starts to accelerate to the downside again, which is hardly surprising as dollar strength has been a big factor behind the swoon in Precious Metals. If this is correct then gold is a buy on a minor reaction back to the $810 - $820 area to form a Right Shoulder to the pattern, which could occur in coming days.

The COT chart for gold is certainly looking encouraging at this time. While they would have to drop further to equal the level of August of last year, it is clear that the Commercials' short positions have dropped to their lowest level for a long time, which of course is normally a necessary precondition for a substantial rally.

The recent powerful rally in the dollar has comical overtones when one stops to consider that the intrinsic value of an individual dollar is approximately the same as a snowflake. This is easily the most debased and degraded currency in the developed world, and so the recent rally is inexplicable to many. Dollar bulls appear to have taken heart from the weakening of the Eurozone and there is a theory that heavy buying of dollars could be precipitated by a scramble to pay down debt ahead of massive rises in interest rates. Easy money has been around for so long that it is difficult for many now to imagine seriously high interest rates, so it would be interesting to see how the younger generation, for whom easy access to credit is viewed almost as a birthright, react if interest rates go through the roof.

On the 1-year dollar chart we can see that it has followed through after its strong breakout clear above its 200-day moving average to reach the target zone we delineated in the last update, where the advance is running into trouble. While its continuing overbought condition, as shown by its MACD indicator at the bottom of the chart, combined with its proximity with its falling 300-day moving average, call for it to react back soon, we should keep in mind that the recent surge was the first time that the dollar has broken out upside from a significant trading range and clear above its 200-day moving average since 2005, so there is a fair chance that after due consolidation or reaction it will continue higher in a mini bullmarket of the kind that occurred in 2005. This, however, will not necessarily stop gold going up. It conspicuously failed to do so in 2005. There is an old saying that "In the land of the blind the one-eyed man is king", but sadly we can't even compare the dollar to the one-eyed man, which makes its recent strength all the more remarkable.

Silver

Silver is believed to have bottomed. On the 1-year chart we can see how the failure of the clear line of support (now strong resistance) at and above the $16 level led to a savage plunge. It crashed the next line of strong support that we had expected to hold but stabilized not far below it, the decline doubtless being arrested by the unprecedented oversold extreme that it had by this time attained.

There are several factors suggesting that the bottom is in. One is that silver has dropped to long-term trendline support that we can see on the long-term chart. Another is that it is still extremely oversold with an unprecended low reading on its MACD indicator. Still another is that it has dropped way below its long-term moving averages, and although now still quite a long way below its 300-day moving average, which we would read as bearish in the case of gold, it is not much more so than at the August 2005 panic low, which was followed by a steep advance. The chief difference between now and 2005 is that the recent plunge has left a lot of players "hung up" at much higher levels - above the key support/resistance line at and above $16 who can be expected to generate heavy resistance once the price attempts to vault this level, and therefore a first attempt to run this resistance, especially if it happens rapidly, will be regarded as an opportunity for shorter-term traders to short silver. The plunge caused technical damage, greater in the case of silver than gold, and one consequence is this strong resistance level.

The large lower shadows on recent candlesticks, clearly visible on the 1-year chart, reveal underlying demand snapping at silver on down days and further suggest that the bottom is in. There is thought to be a fair chance that silver will react back early this week towards but not as far as the recent lows as it continues to base beneath the resistance in the $14 area, and any such reactions will be regarded as buying opportunities.

The latest silver COT shows continued improvement, although it is not as positive as the COT chart for gold.

Aug 25, 2008
Clive Maund
Archives
email: support@clivemaund.com
website: http://www.clivemaund.com/

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge, England. He lives in Chile.

Visit his subscription website at clivemaund.com. [You can subscribe here].

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Copyright ©2003-2008 CliveMaund. All Rights Reserved.

I would like to thank Jim Willie for giving me permission to post his article on my website. 

Q2 GDP: Gross Leveraged Lie

Jim Willie CB
Jim Willie CB is the editor of the "Hat Trick Letter"
Aug 15, 2008

Use this link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

It is hard to find much positive regarding the gold trade lately. The attacks have been multi-faceted during the weak late summer season. So resort to something of value: THE TRUTH. As Ralph Waldo Emerson once said, "The greatest homage one can pay to the truth is to tell it." When the US financial lattice work was showing clear signals of near total destruction, if not simple decimation, when USGovt bailouts seemed certain to cost in the trillion$ from mortgage agency rescues and FHA mortgage loan mulligans (second chance shot in golf), when US banks seemed caught in a race to raise more cash for equity from friendly foreign fools who fail to read the news, when the USEconomic recession has been turning broad and deep, when General Motors and Ford seem caught managing their death process toward a certain bankruptcy, THE USGOVT NEEDED A REALLY GOOD LIE FROM WHICH TO BUILD A DOLLAR BOUNCE. The Q2 report for the US Gross Domestic Product was a Gross Deception Perpetrated upon the world. The degree of its inherent lie was staggering to be sure, powerful in its impact. The acceleration of the economic recession is as grandiose as the official lie was grotesque. The importance of the accepted lie was momentous, enough to generate a significant USDollar bounce.

The story told at home in the Untied States was that the USEconomy would be the first to exit the troubled times since first to enter it with the explosion of the subprime mortgage crisis last August. The story told at home was that the Untied States is the only nation to eek out some positive growth, while Europe (including Germany), England, and Japan are officially showing negative GDP readings for the first time. The story told overseas was that the US has come clean on bank balance sheet damage, when the USGovt has finally installed powerful rescue plans to deal with the problem. Not a single theme is true. In fact, the lies have grown worse and the public scrutiny of the lies has grown almost totally absent.

THE SHAM GDP CALCULATION

The mechanism used to lie was the same trusty device relied upon in the past: LIE ABOUT INFLATION. Students of economics statistics seem to be asleep, all except the Shadow Govt Statistics folks, who never seem to be duped, as in EVER! The actual stat series involved in the official number crunching is called the Deflator. It is supposed to remove price inflation from the nominal growth. It seems to me that since the USGovt hack charlatan conmen dishing out numeric doctored statistics decided to call it a DEFLATOR so that sleepy people (including network anchors) do not realize that it is the exact same concept as the PRICE INFLATION INDEX in its ideal design. So the Deflator does not resemble the Price Inflation indexes at all, in practical numbers. That should raise questions, but this nation prefers headline news to detailed news. Let's just take the official doctored CPI data and demonstrate the lie for the Gross Domestic Product in 2Q2008. The exercise shows how silly obvious the lie is, even shows how grossly inconsistent the USGovt statistics are. IS ANYONE AWAKE OUT THERE IN THE FINANCIAL NETWORK MEDIA???

The CPI for the months of the second quarter 2008 showed April at +0.2%, May at +0.6%, and June at +1.1%, ending with the highest sequential increases in a long time. The Q2 period was precisely when everyone including network anchors was expressing alarm at the high cost of everything, from food to energy to utility bills to shipping charges, extending to industry feedstocks, even to import prices from China. The Dow Chemical pair of 25% price rises was in the news. All these seem forgotten when the kooky klutzy GDP was released. The July CPI was again high at +0.8% but that is not the second quarter. So for the heavily doctored CPI in Q2, a simple average is +0.6% on the sequential calculation comes out. By the way, the sequential method enables even more nonsense to be built in, since changes from month to month are notoriously unstable. Annualize the CPI for this simpleton 0.6% average, and one gets about a 7% recent growth rate. The changes in consumer prices compared to a year ago have been in the 4.5% to 5.5% range. Oh heck, let's just say the official doctored inflation for Q2 was a nice flat 5% for simplicity. And when it comes to USGovt statistics, simplicity is always a good idea. Their worker bees actively seek out methods to render the calculation complicated enough to confuse almost everybody. They like the geometric averages, the hedonic quality adjustments, the substitutions, all that crappola that the public does not comprehend, does not care about, and thus tends to trust the CPI more. The USGovt agencies must know what they are talking about, right?

The official US Gross Domestic Product report last week was an exercise in extreme corruption on the statistical front. It stated a +1.9% GDP growth rate for 2Q2008, in an exercise in pure unadulterated propaganda deception worthy of the annals of history. Even Nazi Germany's Josef Goebbels would be proud. Tell a lie often enough, loud enough, and the public will believe it. They tell inflation and growth lies repeatedly. The corollary is to tell the big lie precisely when the system is most vulnerable and needs some good news. The public and investment community will latch onto it with glee, and not bother to check to see how ridiculous and absurd the story is. Then defend the ramparts, sell the story, and move on. After all, the past is revised toward reality, but often ignored since a lagged story. The future is where to plant the big lie, since it moves the markets (stocks, bonds, currencys). In time, a revision of the big lie will be done, but nobody will care since its story will again be lodged in the past.

### THE USGOVT G.D.P. FOR 2Q2008 SHOULD HAVE BEEN MINUS 2% ###

Here are the highlighted basic facts from the official USGovt economic growth GDP lie:

• The USGovt agency used a 1.1% annualized Deflator for inflation adjustment, which is absurd given the skyrocketing costs that quarter in every conceivable corner.
• Even the falsified CPI was registered at close to 5% on successive months within the second quarter.
• So the Deflator was 4% wrong high, even versus internal USGovt calculations.
• To be consistent within its own corrupted statistics, the nearly 2% GDP growth should have been published as a minus 2% result, a loud recession reading.
• The last two official GDP readings would have been -0.9% in Q1, -2% in Q2, back-to-back negatives for quarterly GDPs.
• Accelerating economic recession with heavy price inflation is nasty STAGFLATION.

TIME OUT TO EXPLAIN AN EXAMPLE

Time out! Take a minute to explain what is going on at a higher level. Removal of inflation from economic statistics is simple, but to be honest, 95% of Americans have trouble with basic arithmetic. Conversion to another currency on a trip to Ontario's Niagara Falls is a major challenge. Dividing cost by quantity to find the best deal on large versus small cans of peaches or applesauce or packages of pens or pencils is a mindboggling challenge itself. If an entire economy has zero real growth, as in no growth at all, nothing, but that economy has a 5% price increase across the board, for every product and service in existence, then in the final wash, the economic growth should show 0% in the final figure. Simply, the 5% increase in the nominal amount of goods & services from business activity would have a minus 5% removal from price inflation, enough to render the final figure as 0%. It sounds simple, and is simple. However, if the officials do not recognize the price inflation, and call it 0%, then they would call the growth as 5% incorrectly. They essentially call any improper adjustment to price inflation as growth.

Any under-statement of price inflation is labeled as growth in a totally fraudulent fashion. The USGovt has recruited and trained expert accomplished teams of statistical liars in the Bureau of Labor Statistics. Better stat rats are employed in the Census Bureau, where years ago a friend of mine worked. The BLS is just plain conmen doctors of lies. They have been under-stating the Deflation series, the official measure of price inflation used for the Gross Domestic Product, for many years. The Deflator series typically runs lower than the CPI!!! In the above example, temper and moderate the lie. If they say that price inflation was only 1%, then the nominal 5% growth is adjusted toward a final 4% growth statement for the final published report. That is what the USGovt does. They under-state the price inflation, and whatever they deceive by, that amount is falsely called economic growth. That is one method how they have avoided reports for announcing negative growth in 25 to 27 out of the last 32 quarters.

NOW THE TRUTH ON G.D.P.

However, the truth is worse!!! The actual deflator, if reality were chosen, would have used something much higher. They supplied the graph above. The divergence between official story and truth is widening to an alarming level. The Clinton Administration is the original author to this great lie, with Rubin the co-conspirator, a fraud which costs recipients of Social Security, USGovt pensions, and US Military pensions every month. The lie is over 7% nowadays, between the true CPI and official CPI. The Shadow team actually measure 12.5% as the true honest CPI for people who must live in the United States, or is it the Untied States? Given the laws passed and erosion of liberty, it is more like Untied Snakes these days. The same Shadow Govt Stat folks measure the GDP for Q2 at minus 2.5%, after taking into consideration far more than simple deflator issues.

But the USDollar rallied, since even more powerful corruption was dictated before the US Presidential election, and while the USDollar was struggling in the face of both banking system devastation and failing economic prospects. A reality-based economic growth report would have sent the USDollar into a tailspin selloff, maybe even a rout. So they amplified the lies. The greatest production in any US industry is possibly the fraudulent statistics churned out in the dark chambers of the USGovt agencies. They do produce growth! Exceptions might be perhaps the computer, networking, tech telecomm, or biotech industries. To be sure, the US excels in military weapon technology, used to destroy things, and decreasingly on any defensive basis. The difference this time, in my book, is that the USGovt is lying in much more obvious blatant fashion, without bothering to use much to shield their gross lies. These are bold naked lies.

THE INCREDIBLE USDOLLAR BOUNCE

The USDollar has reacted powerfully from three important factors: 1) false USEconomic growth reports, 2) new weakness in Europe echoed by the EuroCentral Bank, and 3) a selloff from a frenzied crude oil price. The August Hat Trick Letter analyzes these items one at a time. An effective backroom force was also utilized by the central banker brethren, who find themselves desperately on the defensive to avoid systemic breakdown and bank system implosion. WHAT DID CENTRAL BANKERS DO??? The foreign central bankers actually doubled their pace of interventions to purchase USTreasury Bonds in US Federal Reserve custodial accounts, which broke the upside resistance. The last three weeks ending early August had twice the pace of USTBond purchases than the previous twelve months. Details are in the August report.

Is it unpatriotic to point out the grotesque economic growth lies and blatant intervention to corrupt free markets? Nowadays, yes, it seems. The newly defined patriot uses lies, covers lies, and criticizes those who expose lies. Such people wear brown shirts underneath their collared dress shirts, a joke that probably only 2% to 5% of Americans comprehend. Hint: see Nazi and nickname "brown shirt" movement in 1928 Germany. The USTBond is the vehicle for US$ support and movement. Clearly, the central banks are intervening to push the USDollar up, perhaps realizing with technical assistance from Treasury Secy Paulson that the DX index was vulnerable to a huge sudden rise.

The EuroCentral Bank was plain and clear. The ECB is not in a position to hike the official interest rate. They confirmed the economic slowdown that is spreading across the European Union. The euro fell right away, and powerfully so. My analysis a month ago was clear, that the ECB was not going to continue on rate hikes, and would probably reverse those rate cuts. Now my thinking is more akin to believing that the ECB wanted to engineer a top of the euro, so it could reverse from speculative gravity. Details of the disaster unfolding in Europe, centered in Spain perhaps, in the August report.

The last powerful factor was the selloff in the crude oil market. As the crude oil price falls, typically the USDollar strengthens. Demand for energy commodities generally are down in the Untied States. The Beijing Olympics seem to have caused a hiatus in energy imports to the Middle Kingdom. The result was a profound fall in the oil price, one fully warned and forecasted here, signaled by the XLE energy stock index. As the crude oil price fell from the 140s to the 110s, the USDollar was again bolstered. The problem zones like now Georgia in SouthWest Asia also create a global shock toward instability. My view is that a possible second front has opened in the Global Energy War, catching the depleted US Military and lame duck president off guard. Depletion of major oil fields continues. Mexico is now a net importer of crude oil? Gotta check that story which crossed my desk. Nigeria will surely continue as a national thug center, thugs in power, thugs armed at bandits, and thugs cutting deals with them. Crude oil output is not stable, regardless of the region globally. Even the Saudis are playing shell games, talking about output, not being clear as to sour crude versus sweet crude, even as their major Ghawar is in its 8-th inning out of nine.

The USDollar, via its DX index, has filled in a technical thin region between 73.5 and 76.5, and did so fast. Notice how in early June another milder but powerful surge was executed, again when the financial system seemed crippled. What has ensued actually makes possible the next serious decline in coming months. Notice the crystal clear symmetry in the chart, as the rise was as sudden as the fall. That spells instability for an easily occurring correction back down again. The US$ DX index has benefited not from inherent strength, but from relative weakness being realized in the euro. The British pound has also suffered steep declines, as forecasted here in the last several private reports. Even the Canadian Dollar has fallen. The Competing Currency Wars are at work, overtime. The USDollar is not gaining strength at all. It looks incredibly vulnerable. What has changed is that the US$ alternatives have vanished quickly.

The chart above is now encountering the 50-week moving average and the down trendline. It faces heavy resistance between 75 and 77 from the turn of year 2008. Look for a more gradual slide back to 73-74 range, as it fills from consolidation tied to much gyrations, debates, fluctuations, and competing scenarios. Like Wiley Coyote poised atop the chasm after a hearty chase, past the cliff ledge, he is in a bad spot. The clownbuck has no legs to stand upon here. The next round of bank failures and their inability to raise cash selling capital in balance sheet replenishment should be rather stark and a big wakeup call for foreigners who view the US$-USTBond tandem as safe haven. Mix some metaphors, why not? This all reminds me of great Tsunami that hit Thailand and Indonesia in late 2005, when a remarkable phenomenon occurred. The tide went out in a profound manner immediately before the floodwaters hit the shorelines. The financial markets are often well explained by water and weather analogies, as they explain market behavior from the ample liquidity flows, built-up pressures, and exposed differentials. The US$ rally is phony, technical, pushed by central banks, and owes more to the decline in euro, pound, aussie, kiwi, and loonie, than to any revival whatsoever in the US or its financial markets or its banks.

This is a bear bounce for the US$ DX index, one that rendered my forecasts as incorrect, to my dismay and surprise. The W-shape of the recovery does have the appearance of a clear reversal. One must wonder if a heavy long-term oversold condition was relieved, and nothing more. Time will tell. My radar is on the US banks, which will next contend with commercial mortgage losses and a surprising volume of prime mortgage losses, just when car loans, commercial loans, and credit card loans turn sour from the USEconomic recession fully denied. When bank losses extend from residential mortgages into the broad credit portfolios, the recession will finally be admitted, and central banks will be cutting rates in unison, coordinating their actions.

THE NEXT CHAPTER

Next comes central bank stimulus, monetary ease, and profound accommodation that launched the gold trade in 2002. The crude oil story seems the most paradoxical to the mainstream news anchors and guest. They applaud the demand destruction for oil sold, even for gasoline. That destruction comes from the USEconomic recession. The USFed is likely to cut rates next, not hike them. The crude oil speculation came unraveled partly from the gravity of heights, but also from the recession that is not recognized. The central banks will react soon to that recession. Furthermore, the lower crude oil price will give Arab nations less petro surpluses to invest in USTreasurys from recycle. Yet the 10-year USTreasury Note (TNX) yield stays under 4.0%. Important factors keep USTreasury yields down, starting with how price inflation is lodged within costs. Could we soon see lower Arab petro surpluses and lower energy costs result in higher long-term interest rates? Time will tell. A parallel paradoxical effect comes with the sharp reduction in US federal highway tax revenue from reduced miles driven and reduced gallons of gasoline purchased. A huge reduction of recycled funds is occurring back to states. Thousands of job cuts will result at the state level!

The Powerz are attempting to push down gold and dollar up as much as possible before the orchestrated autumn bank sector PULLED PLUG. Dozens of US banks are going to go bust. Also, the geopolitical chessboard seems badly tilted, adding to US financial vulnerability to the extreme. The Global War for Energy just witnessed a serious counter-attack by Putin. He must have looked into the US president's eyes last month at the summit and seen little to impress, along with a lame duck in office. The tsunami should come this autumn, one to inflict serious damage on the USDollar. The gold trade is still an anti-US$ trade. A difficult transition is in progress for gold to become the global monetary inflation trade. A new foundation on futures contracts must be built. The past gold trade built upon anti-US$ foundation has been largely eroded. The next one to be built upon monetary ease and huge accommodation by major and secondary central banks, in reaction to global recession. A tough transition must occur. Soon gold is to become the hedge against global monetary inflation, as central banks fight at least a Western world economic recession, that includes Japan, Australia, and New Zealand.

The USDollar fundamentals remain extraordinarily weak, and weaker than just a couple months ago. USGovt deficits have doubled in the last year. Tax revenues are way down, like 10% down annually, another confirmation of the recession. Foreclosures for US homes rose by 55% in July, a sign of continued nightmare. Housing prices are accelerating down, as lending institutions holding properties have begun to cave in on price to sell at a time when foreclosures continue in their other doors. The new reality in the housing industry is that two markets are apparent and at work, one influencing the other. There are houses demanded and supplied for the public. There are foreclosures entering and being disposed. In recent months, the foreclosed properties are increasingly dominant, not only making up 30% to 40% of final sales, but continuing relentlessly to supply more homes to be sold, upsetting the balance.

Durable goods purchases are also consecutively negative. Job losses are reaching huge levels. Retail sales have turned negative in a skein, not adjusted for inflation. All the component economic data supports the big recession of more than 5% economic decline argued above. The US is mired in the worst STAGFLATION in over 30 years. Until the November US Presidential election, the USGovt will not admit a recession at all, but rather LIE MUCH WORSE. And worst of all, the USGovt is spending staggering money in a futile foreign war to support private profiteering in military contract fraud, black market arms deals, and without any doubt continued prolific contraband trafficking out of Afghanistan. They might require more funding, since Afghan poppy production has tripled under US aegis (help?), incredibly. How about investing those $200 to $300 billion per year in US infrastructure, gasoline refineries, bridges, pipelines, port facilities, wind & solar power systems, ethanol from sugarcane, and generally projects that employ Americans in ways that do not leave them with missing limbs, need for prosthetics, suffering from traumatic stress symptoms. Let's launch a US investment program that does not enrich the private profiteers and security agencies in their syndicate operation.

The Competing Currency War has weakened foreign currencies to the point that the USDollar has few if any remaining viable alternatives on the paper fiat currency front. What remains is gold as that alternative. The transition is soon to take deep root. The gold trade will emerge in the next couple months as a response to central bank stimulus, to growing price inflation, to bank systemic risk, and to corrosive geopolitical risk (see Georgia, not as in Atlanta). Watch gold rise in price, perhaps even as the USDollar remains buoyant this autumn, as its competitor currencies continue to weaken.

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Aug 14, 2008
Jim Willie CB

Jim Willie CB is the editor of the "HAT TRICK LETTER"
email: jimwilliecb@aol.com
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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his website at http://www.goldenjackass.com/.