Alan's Finance Blog

The Light Bulb Moment for the Eurozone

EWI’s free EU debt report sheds some light on what’s in store

By Elliott Wave International

How many European bankers does it take to change a light bulb? That’s a joke in search of an answer, but EWI’s European analyst Brian Whitmer explained five months ago that the “light bulb moment” was coming — that’s the time when most people would clearly recognize the severity of the European debt crisis. He offered this spot-on analysis back in July 2011, before the larger world came to know recently how bad things really are in the eurozone.

This chart shows how markets in Greece, Ireland and Portugal have behaved over the past five years, including the bailouts. Whitmer says that the turmoil in Greece is due mostly to both social mood and Greek markets having plummeted for more than a year and a half, while the larger EU stock markets have levitated. Once they turn down, he forecasts that what you saw in Greece will be replayed in the eurozone.

To help his subscribers see the light and get the full picture, he compared EU member nations under financial scrutiny to those that are usually viewed as being safe — and showed that they weren’t as safe as most people thought.

Specifically, Whitmer warned that the debt per person in Greece looked eerily similar to the debt per person in highly regarded countries, such as Germany and France — and even to non-eurozone countries, such as the United Kingdom.

In 2010, Britain proposed a five-year, 25% budget reduction that affects nearly every area of the government. While it sounds like a drastic measure, it has played out differently during the past year. According to member of European Parliament Daniel Hannan, statistics show that not only is government spending and borrowing significantly higher than this time last year, but taxes, too, are way up. Whitmer notes that the budget cuts rely heavily on the future and lack near-term bite.

Why has the worst of Europe’s violence taken place on the streets of Athens rather than London? Athenians did not suddenly grow more violent in 2011. What has changed since 2007 is their stock market. Whitmer’s words of advice: “…should your country’s stock market begin to look like Greece’s, watch out. Trouble will be on the way.”

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European Financial Forecast Editor Brian Whitmer has covered Europe’s debt crisis since March 2010 — and his forecasts kept subscribers ahead of the downward spiral every step of the way. Read more of his analysis in our free report, “The European Debt Crisis and Your Investments.”

View your free report.

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Free Report The European Debt Crisis and Your Investments Continue reading more articles like this one by Brian Whitmer in our European Debt Crisis report. This free report offers commentary from February 2010 through November 2011 that will help you to better understand what could be in store in the coming months and years. Download your free report now.

Get Your Free Report: The European Debt Crisis and Your Investments

Dear Investor,

In 1999, 11 European countries surrendered their currencies for the euro and a shared monetary authority. But as the world applauded, Elliott Wave International (EWI) forecast that those countries had also sealed a shared fate: to eventually collapse together in a liquidity-driven deflationary spiral.

Barely a decade later, the once-celebrated EU and its currency are facing collapse. In November 2011, EWI observed that its “pageant of concession and agreement focuses (now) on rescue and preservation rather than expansion.”

EWI’s analysts have been anticipating and tracking the credit contagion across the European nations for the past two years. Back in December 2009, EWI analyst Brian Whitmer warned that a set of troubling events across Europe were signaling that the entire continent was on edge.

In April 2011, Whitmer wrote:

Back in February 2010, we stated, “Greece’s woes aren’t over and neither are its neighbors.” Four months later, as nearly every country in Europe said they would avoid a “Greek-like fate,” the June 2010 issue added, “The only thing separating these countries from Greece is the fragile confidence that they are, indeed, distinct.”

Will the Central Bank coordination bolster confidence enough to turn around the economies of the world? Or is this just another hopeful attempt that will provide nothing more than a short-term fix?

You owe it to yourself and your investments to find out. Remember, even if you believe you’re not directly invested in Europe, there’s a very good chance that some of the companies in your portfolio are — possibly even your money market funds.

Gain a valuable perspective on the European debt crisis and get ahead of what is yet to come in this free report from Elliott Wave International.

Read Your Free Report Now: The European Debt Crisis and Your Investments.

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

Free U.S. market analysis from the world’s largest market forecasting firm

Dear reader,

I just received a rare opportunity to offer you free U.S. market analysis from the world’s largest market forecasting firm. I strongly encourage you to consider this offer. Other than the fact that Elliott Wave International has fully-prepared their subscribers to take advantage of the recent free fall in US stocks, they never offer free trials to their services. Don’t miss this opportunity to find out what’s next for the US markets.

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Elliott Wave International – World’s Largest Market Forecasting Firm

From the Desk Of: Robert Folsom
Date: August 4th, 2011
Subject:

This brief message is all about you. To start with, however, I have to say something “about me.” I’ve been with Elliott Wave International since 1992: That’s a good long time, long enough to have seen lots of days when our staff did all it could to deliver forecasts that prepared subscribers for what’s next.

Yet today stands above virtually all those others. I can scarcely recall a day when we’ve been able to offer 1) So much, 2) So immediately, that is 3) So urgent.

Here is where it’s all about you. Earlier this year, The Elliott Wave Financial Forecast (EWFF) specifically forecast the juncture we’ve arrived at now — it said most people believe the markets and economy are recovered and growing. But there were TWO parts to that forecast; the time has come for the second part to unfold. You’re a few keystrokes away from what EWFF is saying now for free (new issue posts tomorrow, Aug. 5).

What’s more, you’re a few keystrokes from reading Robert Prechter’s current commentary in The Elliott Wave Theorist, again, for free. He provides you with a context to understand the events of the past week and month, which you simply cannot find elsewhere (you won’t need to wonder why the blue chips are now down on the year for 2011 — you’ll know why).

Finally there’s the forecast in The Short Term Update: Earlier this week we alerted subscribers to action in the S&P 500 and Dow Industrials which broke below critical price levels. Perhaps you’ve heard some of the chatter on news and financial websites in the past 48 hours about a “head and shoulders” pattern. Yet Short Term Update subscribers got THAT news two weeks ago, back on July 20 — along with a specific price level that would confirm the forecast.

This is a wealth of forecasting; you can have it immediately; and the moment is indeed urgent. I’ve never seen a day quite like it.

My colleagues here at EWI have put together a two-week free trial to all three of the services I mention above. Together, they we call them the Financial Forecast Service and they deliver the most comprehensive coverage of the US markets available anywhere. Now, if you are already familiar with EWI, you know that we NEVER offer free trials to these services. But you must act now as this offer ends Wednesday, August 10.

Find out what’s next for the US markets.

Thanks for reading,

Robert Folsom
Elliott Wave International

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

Mervyn King’s Spread Bet

By: Ben Traynor, BullionVault

The Bank of England won’t raise rates until it knows it won’t make a difference…

THE BANK OF ENGLAND is getting more dovish. It seems less inclined than ever to raise interest rates – despite inflation currently running at over twice the target rate.

This is bad news for anyone hoping to get a better return from their savings account. Even worse, the Bank will only start raising its main policy rate – the Bank Rate – when it is confident the rise won’t be passed on.

That’s what two members of the Bank’s Monetary Policy Committee implied last week, when they talked about unprecedentedly high spreads between Bank Rate and the interest rates borrowers actually pay.

To see what they mean, take a look at what’s happened in the UK mortgage market since the global financial crisis started:

As the Bank Rate fell in 2008 and 2009, mortgage rates didn’t fall anything like as far. The result was that spreads above Bank Rate shot up – and they’ve barely come down since.

MPC member Martin Weale – in a hawkishly-titled speech called ‘Why the Bank Rate should increase now‘ – explained last week that these high spreads are a key reason the Bank has kept its rate at an all-time low of 0.5%:

“The gap between bank lending rates and the Bank Rate is already much higher than it was before the crisis and our setting of Bank Rate takes that into account. If banks were, at present, lending at only small margins above Bank Rate we would need the latter to be higher than it actually is.” – Martin Weale, June 13 2011.

Two days later, Bank governor Mervyn King made a similar case in his Mansion House speech:

“Spreads between Bank Rate and the interest rates charged to many borrowers remain at unprecedentedly high levels…when conditions in the banking sector return to something closer to normal, those spreads will contract and the rate at which that takes place will have an important influence on the speed at which Bank Rate will rise.” – Mervyn King, June 15 2011.

The language is eerily similar, suggesting King and Weale are singing from a common Bank of England hymn sheet. The overall impression these comments give is of an MPC whose first priority is to avoid any effective monetary tightening, by only raising Bank Rate once lower spreads ensure the actual cost of credit remains unaltered.

This is understandable. The economy remains weak, and government spending cuts, however necessary, will most immediately be felt as lower demand for goods and services. The MPC clearly feels it must balance the government’s tighter fiscal policy with a looser monetary one. As Weale said in his speech, “no one is proposing that monetary policy should be set to anything except a very expansionary stance”.

It’s also understandable on a human level. Mervyn King will hardly want to go down in history as the man who crushed the economy. At least this way he can say he did everything he could…

There are early signs that spreads are falling, as the ultra-low Bank Rate slowly works its way through the system. Falling spreads, however, do not automatically mean that a hike is around the corner.

A major reason spreads are coming down, to the small extent that they are, is because more and more mortgage holders are coming off fixed deals that have higher, pre-crisis interest rates.

Back in 2007, more than half of all UK mortgages were fixed rate deals. That figure has fallen to less than a third. This means a greater proportion of mortgage holders are directly exposed to a rise in Bank Rate. Combine that with a central bank worried about hurting the economy, and we have a recipe for inaction.

This doesn’t bode well for savers, who have seen deposit rates fall along with the Bank Rate:

Yes, a positive spread has opened up. Banks are, after all, scrambling to recapitalize, so they need to offer some sort of carrot. But with annual consumer price inflation running at 4.5% in May, savers are still nursing losses in real terms.

The minutes from the MPC’s Junes meeting, published this week, show that the number of members voting to raise Bank Rate has gone from 3 out of 9 down to 2 out of 9, long-time hawk Andrew Sentance having left. And those who voted for a hike – Weale and Spencer Dale – only wanted a quarter of a percentage point.

The MPC has an entrenched inflationary bias. It has shown itself prepared to tolerate persistent above-target inflation rather than risk hurting growth. And even when it does eventually raise Bank Rate, it won’t necessarily follow that the rise will be passed on.

So Sterling savers will have a very long wait before they actually start seeing positive real returns on their money – which is probably why more and more of them are buying gold…

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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Greetings,

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Regards,
Alan

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

Deflation: How To Survive It

Important warnings about deflation from Robert Prechter.

By Elliott Wave International

Telegraph.go.uk, May 26: “US money supply plunges at 1930s pace… The M3 money supply in the U.S. is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.”

Deflation is suddenly in the news again. It’s a good moment to catch up on a few definitions, as well as strategies on how to beat this rare economic condition.

And who better to ask than EWI’s president Robert Prechter? He predicted the first wave of deflation in the 2007-2009 “credit crunch” and has written on this topic extensively.

We’ve put together a great free resource for our Club EWI members: a 63-page “Deflation Survival Guide eBook,” Prechter’s most important deflation essays. Enjoy this excerpt — and for details on how to read the eBook in full free, look below.

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What Makes Deflation Likely Today?
Bob Prechter, Deflation Survival Guide, free Club EWI eBook

Following the Great Depression, the Fed and the U.S. government embarked on a program…both of increasing the creation of new money and credit and of fostering the confidence of lenders and borrowers so as to facilitate the expansion of credit. These policies both accommodated and encouraged the expansionary trend of the ’Teens and 1920s, which ended in bust, and the far larger expansionary trend that began in 1932 and which has accelerated over the past half-century. Other governments and central banks have followed similar policies. The International Monetary Fund, the World Bank and similar institutions, funded mostly by the U.S. taxpayer, have extended immense credit around the globe.

Their policies have supported nearly continuous worldwide inflation, particularly over the past thirty years. As a result, the global financial system is gorged with non-self-liquidating credit. Conventional economists excuse and praise this system under the erroneous belief that expanding money and credit promotes economic growth, which is terribly false. It appears to do so for a while, but in the long run, the swollen mass of debt collapses of its own weight, which is deflation, and destroys the economy. A devastated economy, moreover, encourages radical politics, which is even worse.

The value of credit that has been extended worldwide is unprecedented. Worse, most of this debt is the non-self-liquidating type. Much of it comprises loans to governments, investment loans for buying stock and real estate, and loans for everyday consumer items and services, none of which has any production tied to it. Even a lot of corporate debt is non-self-liquidating, since so much of corporate activity these days is related to finance rather than production.

Figure 11-5 is a stunning picture of the credit expansion of wave V of the 1920s (beginning the year that Congress authorized the Fed), which ended in a bust, and of wave V in the 1980s-1990s, which is even bigger.

…it has been the biggest credit expansion in history by a huge margin. Coextensively, not only is there a threat of deflation, but there is also the threat of the biggest deflation in history by a huge margin. …

The Next Bust: The “Risk Trade”

A lot of focus was given to the central banks’ meetings this week.

That’s because a lot of people would really like to see target rates start moving up from their low levels.

Some argue for higher rates because they think the world is returning to normal and the emergency policy responses need to be removed sooner rather than later to avoid a date with inflation.

Others are concerned that all of the ultra-easy money will result in asset price inflation, another bubble and ultimately another bust.

But clearly, the central banks have different concerns. This week …

• The Federal Reserve kept rates unchanged and made no material change to its statement. The markets were looking for some language change that would open the opportunity for an earlier rate hike. But the Fed did not oblige. Result: Dovish.

• Next it was the Bank of England. The BOE kept its benchmark rate unchanged and went further in the easy money hole by expanding, for a second time, its asset purchase program. Result: Dovish.

• And finally the European Central Bank followed suit and left rates unchanged and its bank liquidity program intact. Result: Dovish.

This week, central banks, including the BOE, maintained their dovish positions.

To sum it up, the central banks continue to position themselves to accomdate the challenges in the real economy.

Now, for those who have been pleading for higher interest rates …

While I disagree with the first crowd, the one that thinks economies are returning to normal, I don’t completely disagree with the second crowd, those concerned about asset bubbles.

First, the U.S. economy and major global economies are nowhere near reaching a point of sustainable growth, much less normalcy. In fact the European Central Bank President, Jean-Claude Trichet, put it very plainly …

“I am a little a bit uneasy when I see [reports of a self-sustaining recovery occurring], because we have some green shoots here and there.”

The U.S. economy just printed its first positive GDP number in five quarters and most of it was attributed to government spending. Indeed, the purpose of government spending is to get the economy moving. But the idea is that in the process you create jobs … new industries … demand. And that just hasn’t happened.

So the people who think we’re back to business as usual have their heads in the clouds.

Now, for the second crowd …

Like I said, I don’t completely disagree with them. They fear another asset bubble. Some of my colleagues here at Weiss Research feel that way. And I think they’re dead right. It’s here. Stock markets, commodities, currencies … all 30 percent, 50 percent … even 100 percent higher in the past eight months!

I worry that another asset bubble is building in financial assets.

Financial assets have rocketed from their March lows and for no fundamental economic reason. Is it because of the mountains of capital that have been plowed into the system through stimulus programs has ended up in financial assets?

In some cases, clearly yes …

Take China for instance. Its economy couldn’t absorb the massive half-trillion dollar stimulus and uber-aggressive bank lending. So that money found its way into investments like the Chinese stock market. So easy money can find its way into financial markets, for sure.

But can the major economies of the world, namely the U.S., afford to tighten up the belt to keep this under control? In my opinion, absolutely not! And that’s where I disagree with the second crowd.

Financial asset bubbles are one thing, and they are a risk. But most of the risk, at this stage, is to investor and consumer confidence. A bust that would bring financial assets back in line with the fundamentals of the economy would be another major blow to sentiment. And that could be the trappings for another recession — even a depression.

But the guaranteed danger right now is the real economy, real asset deflation, and evaporated demand. The threat of a sharper deterioration in the real economy leads to a complete stand-still in economic activity … i.e. a date with depression. That’s the battle central banks are most worried about.

If you’ve concluded that this looks like a lose-lose scenario for the U.S. and the highly interconnected global economy — I’m afraid you’re right.

A likely best-case scenario is a very slow and painful rebuilding period, where weak demand and lower standards of living rule.

The worst-case scenario: A bout with global depression.

As for bubbles in the financial markets, better known as the “risk trade,” that day of reckoning is coming when prices revert back to fundamental sanity. And the time might be closer than many people think …

Regards,

Bryan

P.S. I’m now on Twitter. Follow me at http://www.twitter.com/realbryanrich for frequent updates, personal insights and observations from my travels around the world.

Economic Dark Matter

By: Adrian Ash, BullionVault

“A debt bubble, yes. But a consumption binge…?”

IT’S A COMMON-PLACE of political, investment and bar-room debate that the Anglo-Saxon economies enjoyed a debt-fuelled consumer boom over the last decade or so.

In fact, it’s a given…the one sure thing any analysis builds on, whether it’s begging for votes, fund-management fees or a shared cab-ride home. The US and UK piled more debt on household balance-sheets than any other nations in history, forgetting to add a balancing item beyond the apparent value of the roof over their heads.

Thing is, the data don’t support it. Worse yet, they don’t deny it either. Anglo-Saxony took on a record volume of household debt, simply to keep household spending growing on trend. Something ugly but hidden – economic dark matter – forced consumers deep into hock just to keep pace during the early 21st century.

The UK, for instance, added 30 pence of new private debt for every £1 of output at the very top of the bubble.

Not merely 30p for every extra pound. (New debt to growth averaged 4:1 from 2000 to mid-2008). No, private debt-growth peaked at equivalent to 30% of GDP full-stop, accelerating by more than one-sixth each year from the turn of the decade.

Yet household consumption failed to leap higher in tandem, remaining “on trend” from the previous four decades and growing in lock-step with total activity. The extra credit and debt must have gone on funding something else entirely.

Across the Atlantic, the same story, albeit with different data.

Personal consumption, as a proportion of GDP, broke sharply higher in the last years of last century. It stayed there too, equivalent to 70% of the annual economy, despite flagging in terms of year-on-year growth – and despite increasing in lock-step with GDP across the 10 years to end-2007.

Clearly something’s wrong with the maths, but where it’s broken the data won’t say. It didn’t add up five years ago either, back when then-Bank of England policy-maker Stephen Nickel spotted the puzzle…only to dismiss it. Nickel noted the huge leap in UK house prices in terms of income multiples (from the near-record four times salary then, they had another three multiples to go before peaking), but he guessed that “debt accumulation” by one family buying a home typically meant “financial asset accumulation” for the seller, using the proceeds to buy shares or bonds. Thus all was for the best in the best of all debt-driven worlds. Net-net, we were borrowing ourselves richer.

Fixing the worst slump since the Thirties thus comes down, or so everyone assumes, to either reversing a course that never took place…and forcing a reduction in consumption that enables households to reduce debt…or reviving a fresh (meaning first) surge in consumer spending with sub-zero interest rates and tax-funded cash incentives.

The likely outcome, we guess here at BullionVault, is both or neither. More urgent for investors and savers, let alone policy pooh-bahs, is identifying quite what the historic burden of debt that households now carry actually financed.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

New Deadly Dollar Carry Trade

By: Jim Willie CB

A powerful hidden engine existed for close to 20 years called the Yen Carry Trade. The engine produced tainted trillion$ for its priviliged participants, whose access to cheap money was assured and whose control of government policy was tight. The engine served two important purposes. It kept the Japanese Yen currency exchange rate low, sufficient for maintaining the export juggernaut that sent products around global supply routes with names like Toyota, Honda, Komatsu, Mitsubishi, Nikon, Toshiba, and Fuji for a string of years. It also supplied a torrent of funds to feed both the Japanese and Western (think US, UK, Europe) financial markets its most important channel in existence. The Yen Carry Trade was that important. The Bank of Japan and a host of Tokyo-based financial firms relied upon this carry trade for basically free money. This important money making machine required Japanese interest rates and currency to remain low, and USTreasury Bond yields and US$ currency to remain high. Those halcyon days are largely done, since the Yen is on a rising uptrend and the US$ is on the falling downtrend, even as US long-term rates are stuck below a defended steel bar. Nowadays, the insider firms are struggling to avoid a wrestling match with the Grim Reaper. They are falling like flies.

In the last two to three years, a significant portion of this carry trade has been unwound. In fact, when the US stock market went from Dow 14000 to Dow 7000, it was widely believed that the unwind of the Yen Carry Trade coincided with the decline, thus ending an era. Not to be denied, foreigners tapped into the easy money game during the longstanding era. Wall Street, London, and several European finance centers exploited the opportunity also. When the US$ exchange rate topped in year 2001, and when the US stock market topped in year 2007, the exits became crowded with Japanese and Westerners alike, as they dismantled their leveraged machinery designed to capture the easiest money in modern history. If these firms entered the mortgage bond torture chambers, they had to contend with floors that vanished, as well as swinging axes. Survival is a grand challenge when removing leveraged machinery.

YEN CARRY TRADE DYNAMICS

The Yen Carry Trade worked like this in rough terms. The large financial firms borrowed Japanese money at the near 0% rate, a lot of money, and managed a Yen currency risk. They could either borrow cash from Japanese banks or integrate short Yen positions into contracts with equivalent risk exposure. They had liberty to invest in whatever instrument they wished, but the favorite in the last two decades had been the USTreasury long bond. They earned 4% to 5% vig on the difference, but required a rising USDollar and falling Japanese Yen. The ruinous bursted bubble from Japan around 1990 and the seemingly endless years of 0% Japanese money enabled the Yen Carry Trade against a backdrop of a chronic insolvent Japanese bank system. A critical characteristic of that carry trade was that is applied leveraged enormous pressure in a way so as to maintain the low Yen currency and the high US$ currency. The typical leverage acted like a crowbar (jimmybar) to apply 10x to 20x more force, deploying futures contracts. The leveraged gains were thus between 50% and 100% per year, dotted with some currency risk. Be sure to know that other objects of this leveraged game involved the purchase of US stocks, like in an S&P bundle, and UKGilt Bonds and even German Bunds. Speaking of German, the entire Yen Carry Trade concept was totally unknown to the venerable Kurt Richebächer, admitted in our conversations in August 2003. May he rest in peace.

The objective asset had to meet requirements. They required only strong currencies and hefty bond yields, an easy task to identify object assets to invest in. Since 2001 when the Gold price hit bottom, another object for investment had been the Gold asset. The Gold price has risen in part from the Yen Carry Trade. In fact, the unwind of the Yen Carry Trade might be a key factor to explain the Gold price consolidation since January 2008, nearly a two-year period. My belief is that the long consolidation has created a very strong foundation for a rise to $2000, not a ceiling to limit the Gold price as the clownish pundits claim who litter the compromised landscape. Since year 2003, when the USFed hit the floor with low interest rates, funds to power Gold investment have largely been drawn from the USDollar fountain. Since mid-2007 when the USFed took the official rate even lower, matching the 0% from Japan, against all promises to do so, the Gold investment has been powered clearly by funds in US$ denomination. That movement will surely accelerate.

The Yen Carry Trade decline and wind-down has been reported for the last few years. It has been attributed to the US stock downdrafts. It would be impossible to wind it down in a year or two, even three years. It was that big. Its size is estimated to be perhaps $2 trillion in magnitude. The unwind has a nasty blowback effect to be felt by Japan. The Yen currency rebounded in the last couple years, thus creating a foundation for a strong recovery. In the process, the Japanese export trade is threatened by a rising Yen, rendering its exported products more expensive. Japan must therefore manage a transition to a new major trade partner in China, which has actually eclipsed the US in recent months. During this transition process, Japan will gradually loosen high level corporate ties and important political ties with the Untied States. If the Yen rises faster than the Chinese Yuan, then the transition can be managed to mutual benefits between Japan and China. The only problem is that Japan might find itself becoming a Chinese Lackey in much the same way it was an American Lackey for 50 years. The new Japanese prime minister elect Hatoyama has publicly stated his intention to strive for more balance.

PILLAGE FROM GOLD CARRY TRADE

Welcome a new carry trade to town! Before introducing it, let it be known that the carry trade concept was not a foreign tool to Robert Rubin, former Goldman Sachs currency superstar and former Treasury Secy in the Clinton Admin. He was the initial Wall Street fox invited to serve in the Dept Treasury henhouse, the beginning of the financial structure ruin for the nation. He served as Treasury Secretary in the same sense that a armored truck heist serves a bank. Rubin designed the Gold Carry Trade in the 1990 decade that took down the Gold price. He arranged for the USTreasury gold lease rate to be in the neighborhood of 1%, made available to Wall Street firms, but NOT YOU! They leased the gold bullion from Fort Knox, the national treasury, and sold it into the market. With proceeds they bought USTreasury Bonds, and ushered in a decade of prosperity, as they like to call it, more like a Stolen Decade of Prosperity in Jackass parlance. They set up this Decade of Despair. The end result was the depletion of the USGovt gold treasure by Wall Street for their private gain, but NOT YOURS! To think Wall Street exists in order to facilitate capital formation for the USEconomy is a gross error of judgment, that misses the entire criminal syndicate function they serve, best described as a vast parasite. The public has finally seen it with the climax death of Lehman Brothers, the nationalizations of the Black Holes in AIG and Fannie Mae, the extortion for the TARP funds, the secrecy upheld for its slush fund distribution, and the defiant posture from the USFed when confronted with audits. The syndicate is showing itself more clearly.

The Gold Carry Trade served its purpose, enriching Goldman Sachs beyond its wildest dreams. They even orchestrated an IPO stock event in order to cash in but retain control from their own deep bounty. Gold descended from $400-450 per ounce down below $300, hitting the depth a year after Rubin’s yeoman service. The USDollar peaked at the same time that gold bottomed. Now with insolvency of the US banks and US households, comes insolvency of the USGovt and the absence of its gold collateral for the USDollar itself, the consequence of Wall Street plunder and pillage.

Be sure to know that the natural order has unfolded the beginning of a quiet murder skein behind the scenes. It has been launched by the death of an ABN Amro banker in the Netherlands and the death of the Freddie Mac Chief Financial Officer, both last spring. Other deaths occurred just last week, four convenient ends for men who might have struck a plea bargain agreements with damning evidence, who might have been targeted by angry elite investment victims, and who might just have known too much about fraudulent money trails. Anyone who buys the suicide stories is dopey at best, a moron at worst. Recall that the businessman Al Capone attended church and gave money to ophanages.

THE USDOLLAR CARRY TRADE

Welcome a new carry trade to town! Here in the present, the new carry trade has begun to take root with the USDollar as its basis. Its requirements are simply stated. It needs a crippled bank system that offers a reliable 0% interest rate, a crippled currency that offers little risk of a rise in exchange rate, and plenty of targeted opportunities to invest in rising asset groups in competition. The gold asset is one such object asset. One is hard pressed to identify a sovereign bond security pitched by a government with any credibility. Their deficits, boatloads of bond issuance, and public statements in desire of weaker currencies tend to rule them out. So Govt Bonds are not a viable object. They are too busy ruining their currencies in the midst of the Competing Currency War. Why just two weeks ago, the Swiss Govt announced their frustration at a rising currency, despite all efforts to undermine their Franc currency. They will be forced to redouble their destructive efforts. The Europeans did NOT want to reduce interest rates a year ago, but they did, a correct Jackass forecast that went directly against some banker contacts. That shows the power of the Competing Currency War, since the Euro currency had risen to 160, sufficient to render considerable harm to the European Union Economy in its export trade. With numerous currencies ‘frozen’ from programmed destruction, the time is ripe for the USDollar Carry Trade to be launched. It has been launched. THIS CARRY TRADE WILL PUNISH THE USDOLLAR BADLY AS IT WEARS A BADGE OF SHAME!

The ruinous bursted bubble from Japan around 1990 and the seemingly endless years of 0% Japanese money enabled the Yen Carry Trade against a backdrop of a chronically insolvent Japanese bank system. A critical characteristic of that carry trade was that heavy leverage applied enormous pressure in a way so as to maintain the low Yen currency and the high US$ currency. In the summer 2008 when the USFed took the official interest down to 0.25% and stuck it there, the USDollar Carry Trade was assured of a vigorous run through the financial factories. Here is what is so important about its upcoming entrenchment. The US$ exchange rates will be heavily subdued, with any rebounds totally smothered, resulting in a relentless Gold rise with gusto. The shorting of the US$ is key for the supply of funds. It comes as borrowed US$ funds used outside the US Sphere, thus net bearish. It comes as leveraged instruments designed to capitalize on a continued US$ decline integrated into securities like with short DX contracts.

The coordinated and systematic ruin of major currencies, through monetizations, through vast federal deficits, through sustained near 0% official rates, and through chronically insolvent national bank systems, will assure that the Gold asset will be a favorite for the USDollar Carry Trade for at least a couple years, maybe more. Furthermore, installation of the USDollar Carry Trade will assure that No Exit Strategy will be available to the USFed also. Wall Street firms will participate in this free lunch carry trade, just like all others. Wall Street will not permit a USFed rate hike to firm the US$ exchange rate. Talk about a strong  perverse factor behind the USDollar. This is every bit as powerful as the ‘Beijing Gold Put’ analyzed in the Hat Trick Letter issued in September.

Continued forces will be at work in a variety of ways to continue the thrust and duration of this new USDollar Carry Trade, sure to keep it badly subdued. The risk is so great that a USTreasury Bond default could even become the last stop on its pathogenesis pathway. Just today, the compromised erudite spokesman Lawrence Meyers actually said the USFed will probably remain on hold for its near 0% interest rate until the end of 2011. That is NOT a misprint!!! The USFed will justify its decision not to hike rates, not to halt money creation, all the while discussing theoretically an Exit Strategy. Try not to laugh too hard! Also, the US$ Swap Facilities are scheduled to end in October 2009. Their extension should be very harmful for the USDollar, from the bad publicity and the understood urgent implicit desperate need. The next wave of US bank losses will arrive to coincide with the falling of the leaves in autumn, an apt parallel. The inability of the USFed to conduct and execute any Exit Strategy at all is powerful impetus behind the development of the USDollar Carry Trade, and the powerful lift it gives the Gold price. They cannot raise interest rates. The Stimulus Bill has run its measly course. The monetary stimulus must remain in place. The Uncle Sam patient is imprisoned in the Intensive Care Ward.

THE YEN, USDOLLAR & GOLD

The Japanese Yen bottom occurred in summer 2007, just about the time of the US stock peak. That is not a coincidence, since Yen Carry Trade funds propelled the US financial markets in a general sense. The continued breakout in the Yen beyond the January 112 highs will amplify the USDollar bear market, and push the US$ DX index to multi-decade lows. A panic comes, coordinated with a rise in the Euro, Yen, and other currencies.

The USDollar DX index will probably head below the critical support at 70 sometime early next year, or late this year. Its movements are increasingly volatile, in a bad way. A global revolt against the US$ is underway with full speed. The only US$ support comes from monetization and deception, as the Printing Pre$$ is active. The nation is insolvent in most every respect. No return to normalcy will come, despite the hopes and dreams of US leaders, unfortunately trapped inside the USDome, where perceptions are flawed. The US financial structure is permanently broken. In reaction to today’s FOMC decision to leave interest rates alone, the USDollar has resumed its decline. It will soon amplify its downward direction. While they spoke with optimistic words, the truth is that they are stuck without an Exit Strategy, which will become painfully clear over the passage of time.

Two weeks ago, a rather comprehensive list of reasons was provided for the Gold price breakout. Many factors were given to explain how and why the Gold price would march toward the $2000 level. THE ARRIVAL OF THE USDOLLAR CARRY TRADE IS A PRIMARY REASON FOR THE MARCH TO $2000 GOLD. Prepare for it, as the pundits will be made to squirm and eat crow! Almost all pronouncements, propaganda, and prattle must be ignored that come from the Pagan Paper Palaces that have wrought the current destruction and wreckage. The only factor they comprehend is the excessive printing of money and largesse from government budgets to aid the rescue and stimulate the moribund as well as to nationalize both the dead financial firms and their grotesque fraud laced with counterfeit.

CENTRAL BANKER DESTRUCTION OF CAPITAL

The phenomenon will be much like a flesh eating bacteria. What is eaten during unbridled USFed money creation and USGovt debt issuance is the USEconomic capital, both industial capital and household capital. The most misunderstood aspect of the profound accommodation with near 0% rate of interest (ZIRP) and enormous mountains of printed money (QE) is the destruction of USEconomic capital. Not only is new capital formation NOT possible, but capital is liquidated and banks are hesitant to lend even to good customers. Zero Interest Rate Policy and Quantitative Easing serve as the most severe and formidable Weapons of Mass Destruction to capital that the modern world has ever seen. See small business sector, see the car industry & supply lines, see construction sector, and much more. Both the ZIRP and QE are fuel and lubricant both to power gold to the $2000 level, serving as vivid battle cries!

The tragedy of modern day central banking, a franchise in total failure, has been the hidden destruction of capital with their full blessing. The central bankers cheered the dispatch of US factories to China so as to exploit cheaper labor, labeling ‘Low Cost Solutions’ as the myth chapter. Debt replaced income. They cheered the raid of equity from US homes after urging a housing bubble creation. Foreclosures resulted. They justified the absurd legitimacy of a USEconomy structured atop a housing bubble, calling home equity wealth, labeling ‘Asset Economy’ as the myth chapter. Bank system insolvency resulted.  They justified the horrendous US trade gaps and current account deficits, recycled back to the US from Asian and OPEC finance of the USTreasurys, labeling ‘Macro Economy’ as the myth chapter. Credit dependence and now monetization dependence resulted. They cheered the ultra-low rates to stimulate an economic rebound that has not occurred, to their frustration. They endorsed the US bank stock rally, aided and abetted by fraudulent bank balance sheet accounting. Lofty stock valuations (amidst a 97% profit decline) and heavy executive insider selling resulted. They cheered the stupid Clunker Car program that used $9 of USGovt funds for every $1 in fuel costs. A Detroit basket case resulted.

The latest shameful disgraces for the USFed are three. 1) The USFed monetizes USTreasurys during auctions by using the primary dealers as temporary holders before permanent open market operations, and by using foreign central bank sales of USAgency Mortgage Bonds in addition to the USDollar Swap Facility. 2) The USFed just admitted publicly that it had consistently been hiding its Gold Swap Agreements, thus rendering Greenspan a perjury perpetrator and the institution in violation of its contract. 3) New York Fed president Jan Hatzius (another GSax plant) expects the USFed balance sheet to expand by over $1 trillion more. The transgressions of the USFed ensure gold will hit $2000.

The idiots in the room are central bankers. They hold invisible wrecking balls and vats of acid. They busily help to coordinate the newest initiatives from the group of many new USGovt czars, each with semi-dictatorial powers, answerable to almost nobody. The clueless American leaders and awestruck US corporate chieftains and victimized American citizens watch in horror as the US Politburo is assembled toward creation of a communist state. Liberties were shredded following a certain event of grand deception and subterfuge in september 2001. Let’s just call it a Coup d’Etat, with the identities kept under wraps, since their hit squads are quite proficient and roam freely.

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 free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com

Is a Trade War with China Looming?

US stock markets have had a very wobbly opening this Monday as fear spreads that the Obama administration has fired the first salvo in a trade war with China. President Obama made a long-awaited decision on Friday about imposing sanctions on China over alleged “dumping” of low-cost tires on the American market. Obama sided with trade unions and imposed stiff duties on $1.8 billion worth of Chinese tire imports.

The United Steelworkers brought the case against China back in April claiming that more than 5,000 tire workers had lost their jobs since 2004 because of cheap Chinese tires flooding the U.S. market. Obama’s order raises tariffs for three years on Chinese tires — by 35 percent in the first year, 30 percent in the second and 25 percent in the third.

The Chinese government hit back fast and on many fronts. On Sunday, Beijing announced it would investigate complaints that American auto and chicken products are being dumped in China or benefit from subsidies. China says the U.S. imports have “dealt a blow to domestic industries.” You can be sure Beijing won’t have much trouble arguing that U.S. farmers and automakers are heavily subsidized.

On Monday Beijing escalated its action with a complaint to the World Trade Organization (WTO). The Chinese complaint to the WTO in Geneva triggers a 60-day process in which the two sides are to try to resolve the dispute through negotiations. If that fails, China can request a WTO panel to investigate and rule on the case

With unusually swift and coordinated action the official Xinhua new agency quoted the government as saying, “China believes that the action by the U.S., which runs counter to relevant WTO rules, is a wrong practice abusing trade remedies.” The government said the U.S. imports have “dealt a blow to domestic industries.”

So far it’s a trade spat, not a “war” but it is an irritant as Washington and Beijing prepare for a summit of the Group of 20 leading economies in Pittsburgh on Sept. 24-25. Obama is set to visit Beijing in November and his reception could be very frosty.

Amazingly, American tire companies had begged the President not to go ahead with sanctions against China. “By taking this unprecedented action, the Obama administration is now at odds with its own public statements about refraining from increasing tariffs,” said Vic DeIorio, executive vice president of GITI Tire in the U.S. “This decision will cost many more American jobs than it will create.”  GITI Tire is the largest Chinese tire maker, and a U.S. retailer of low-cost imports.

Although investors are not yet facing World War III between the two economic superpowers, it’s enough to make the markets very nervous. The Chinese ADR Index tumbled heavily at the markets’ opening but recovered swiftly as cooler heads prevailed.

Alarmists are worried that China, which holds about a trillion dollars worth of U.S. financial instruments could declare a real economic war. The tools Beijing could use are worrisome. China could:

1.   Sell dollars they hold faster than they already are

2.   Not buy at the treasury auctions in the near future

It’s a little too early for China to exercise the nuclear option in this trade dispute, but the events have spread fear in otherwise buoyant markets. Investors in U.S. stocks should exercise caution and consider diversification as worries about devaluation of the U.S. dollar, inflation and trade wars continue to loom.

Holders of Chinese ADRs should ride out this rough period if they are confident that the shares they hold are from companies which continue to grow profits by double-digits.

And, more importantly, they should not be invested in companies dependent on foreign exports.

Source:  Jim Trippon’s China Stock Digest