Backsliding Currencies & Gold
by Jim Willie, CB. Editor, Hat Trick Letter | January 31, 2008Print
EDITOR NOTE: My math was done last week on a dirty napkin. The �AAA� index on credit default swaps for mortgage bonds perhaps is not indicative of prime mortgages, my error in pasted title for the graphic. Mea culpa! The index contains a mix of subprime slime slices in tranches, for some odd reason. Also, those high quality indexes are actually time stamped, with the most recent being the hardest hit. They contain the immediate decline in recent housing prices, the most recent defaults, without benefit of some home collateral appreciation. My attitude is firm though, that the swap contracts of age one year will lose a similar amount, like 30%. Give them time. Ditto for the swap indexes of age two years. The recent mortgage indexes are excellent forward indicators for the older ones. My math was on a napkin, dirty and stepped on when it lay on the floor. In time, look for 30% losses on prime mortgages. No apologies! Get ready for a veritable avalanche of prime adjustable mortgages entering a killing field this year. The US-style innovation is in full swing for backfire. The utter insanity of US-style lending was epidemic, as will be the death count for both lenders and borrowers.
Three very important points need to be kept in mind on the currency front, all of which have a bearing on the gold and silver price. They pertain to the euro currency, the Arabs and their US$ peg, and the technically strong look for the USDollar DX index chart. The euro factor is positive for the buck. The Persian Gulf peg factor is potentially devastating to the buck. The technical chart appears positive for the buck. Expect volatility among currencies in the next few weeks. The inexperienced rookies running the US Federal Reserve bla bla bla.
EURO CURRENCY TO COME DOWN
The Europeans are gradually giving ground, with Germans talking about price inflation, on the inevitable next move. The Euro Central Bank grudgingly is making noises about their next move eventually being an interest rate cut. THIS WOULD SUPPORT THE USDOLLAR. Their economies are slowing, as leading indicators are down. Remember that the Germans are the world's foremost successful adept currency hedgers, enabling German exports to grow right through the euro rise. They do not have the advantage of extraordinary market interference like the American meddlers. See the corrupt Plunge Protection Team, working in the full light as the Working Group for Financial Markets, with no more hidden stance. The Spanish banks are appealing for direct bailouts, horrendous victims from their housing bust. Note that the European Monetary Union do not possess a treasury, so the Spanish bailouts are of suspicious origin. Other banks like UBS announce endless huge bond losses. PNB Paribas (a merger of Paris National Bank and Spanish Paribas) announced a 40% reduction in earnings. Although the European continent in no way suffers from insane US-style mortgage loans, they do have a housing bubble. Their banks imported insane deadly leverage amounting to more than a $trillion in asset backed bonds backed by shoddy assets. The lack of extreme US-style leverage in EU banks assures they will be standing when the dust clears. The US banks will not be standing, as recognition has already begun that they are vampires, walking dead.
From my little corner of the world, the colossus Citigroup (dead as doornail) has acquired little Cuzcatlan Bank out of Panama, Costa Rica, and El Salvador. Just what did Citi use for money? Citi is probably using their own stock for the transactions, surely valued by the stock market at ten times more than true value. Vampires seeks blood (assets) from which to feed upon. Think of US banks as being black holes that consume much around them. How about a different analogy? Citi (and other dead banks) seek valid alkaloids with which to mix their acidic balance sheets in order to produce operating water (liquidity). Enough!
The next Euro Central Bank move is going to be a rate cut. They might talk more about an official rate cut than actually order such a rate cut. The ECB is guaranteed to join forces with the increasingly desperate USFed and increasingly compromised Bank of Japan in coordinated official monetary actions, so as to defend the USDollar. That ensures a decline in the euro currency. My target is 143, whereas now it sports a 148 handle. An expected cut in the European interest rates guides lower the bond yields. Look for a more managed differential between the ECB rate and the US Federal Reserve rate. In their view, the euro cannot, absolutely cannot go over 150. If conditions in Europe deteriorate more quickly than many expect, a move down to 140-141 could happen, with support at the 50-week moving average.
ARAB STRAIN ON PETRO-DOLLAR
Most people who evaluate the plight of the Persian Gulf nations think in isolated terms on price inflation, property speculation, local economic effect, and the like. They tend not to take the argument to the next step. If the oil producing Arabs defend themselves from a USFed moving headlong reluctantly to cut rates, the Arabs will be forced to separate themselves from the US monetary policy. They must protect their burgeoning economies in the Persian Gulf region from rampant money growth and lower borrowing rates, since their economies are the opposite of the American disaster story unfolding. The next shoe for Arabs after breaking the US$ peg to their domestic currencies is to accept euros, yen, and sterling for oil shipments. Far reaching consequences come in its wake.
If they accept non-US$ payments for crude oil, then they will cut the foundation from under the defacto Petro-Dollar standard. If they depart from this longstanding standard, held in place since the 1970 decade, then they will undercut the world banking system designed with USTreasury debt securities as their broad and deep foundation. Numerous pockets of big bankers are already in revolt against the USDollar. The Arabs will deliver a very painful blow to the USGovt and USFed and US financial community, rejecting the USDollar, in a plain exercise of self-preservation. They must do so. When (not if) the Arabs break their US$ peg, the USDollar will suffer at least a 3% decline, perhaps a 5%, but it will more importantly release a mudslide likely to result in a 10% decline. Their decision might be a coordinated upward revaluation of their domestic currencies, talk now heard in the open. Keep in mind that if Arabs remain stubborn, or cave in to US pressure, they invite bond arbitrage in a new arena. They are very unlikely to reduce interest rates by 125 basis points, as the USFed has done in the last two weeks. So they would invite wealthy investor speculators to borrow US money and invest in Arab financial securities, enjoying the positive differential in whatever specific market is dabbled with. D-Day might come on February 10, when the Shura Council meets in Saudi Arabia. Their 120 members will review draft legislation and make recommendations, which are not binding. However, pressure mounts.
The Arabs are feeling the pinch of price inflation, never like this in recent decades. The Saudi consumer price inflation (without benefit of US-style distortions) is running at 6.5%, a 16-year high. The United Arab Emirates are suffering from a 9.8% consumer price inflation for the full 2007 year. A US$ devaluation would give their national economies more flexibility by reducing import costs, where so much is imported. They do not have industries to make shoes, vitamins & aspirin, bed sheets, light bulbs, toothpaste, lumber & nails, car tires, and the like.
Regard the $20 billion arms deal pushed by the outgoing weakened US president with the Saudis as the queer graffiti on the Riyadh walls. What should you expect from the war machine spokesman and figure head? The Fascist Business Model lobbyists in power speak in defense of their businesses, namely banking, military weapons, and energy firms.
USDOLLAR WITHSTANDS, MAKES BASE
The DX dollar index is in no way a trade weighted index. It is a relic from the 1960 decade, from a time before Asian industries propelled their nations into prominence. The euro has three times the weight of the Japanese yen for some odd reason, owing to continuity. The DX dollar index is regarded as the �Anti-Euro� index. A euro turn from a top, down even a little will be seen in the US$ DX index as a lift. The USFed 1.25% in official rate cuts might be seen as a climax of good monetary news, sparking a counter-trend USDollar rally. More importantly, one should be extremely watchful of the Competing Currency Wars and their profound effects. Individual nations and collections like in Europe are forced at the point of an economic gun to enable their currencies to go lower. A high currency acts like an economic tax. The principle is often called �Competitive Devaluation� in a race to the bottom. Floating currencies hurt all economies that participate in the deadly experiment. Any bounce in the USDollar might be brief in duration, like a month or six weeks. The bounce might only reach the 77 to 78 level.
Like with the euro currency chart, notice the two divergences. Here they indicate a growing chance of a bounce. The upper cyclical index is the weekly slow stochastix. Weekly closes have tended to be relatively strong. The lower MACD (moving average convergence divergence) is trending up. Technicians give much weight to these cyclicals. However, a word of wisdom. After a telephone conversation with the very bright, insightful, ever diligent Rob Kirby of Toronto, a fellow who is not only a tremendous financial fraud forensic analyst but also suave & debonair, we concluded that someday in the not too distant future, technicians are going to be ramrodded, screwed, and lose billion$. They will read the charts and place their bets, only to be wrong as growing powerful forces overrun them and their positions, rendering them paupers. That day is coming! Who knows when?
WHIRLWIND ENOUGH TO MAKE YOU DIZZY
The news accelerates in breadth, depth, and severity. It has become mindboggling, even to make an even keeled person dizzy. Countrywide announced exactly one in three mortgage subprime loans is delinquent. Monoline bond insurers like MBIA and Ambac have announced $22 billion in losses, as they fight off debt downgrades. Fitch cut the debt rating to monoline insurer Financial Guarantee Insurance from �AAA� in a move that puts at risk more than 100 thousand municipal bonds. MGIC expects paid losses of at least $2 billion. Oppenheimer estimates at least $70 billion in monoline bond insurer losses for year 2008. The monoliners wanted to expand business outside the sluggish municipal bond arena, so embraced mortgage bond insurers as the latest growth sector. The USFed slashed interest rates, showing new desperation, as they finally are with the program of reality perhaps. The USGovt announced a $150 billion stimulus package, one that looks woefully inadequate. An unintended consequence to the lift in the mortgage loan limit under the Fannie Mae & Freddie Mac sewage sprayed umbrella is possibly higher mortgage rates in order to match the higher risk. The FBI is engaged in a broad subprime loan investigation involving at least 14 corporations in a broad crackdown of white collar crime. The Q42007 Gross Domestic Product crawled at 0.6% growth, but benefited from at least a 4% lie. So the actual GDP growth rate is closer to minus 4%, a deep recession not properly recognized. Business capital investment surprised to the upside with a 4.4% non-defense growth rate. CEO and CFO optimism has plummeted at major corporations, as business leaders appeal for crisis leadership. UBS announces another giant $ billion in bond losses. Japanese Mizuho Financial Group announced US subprime losses of up to $2.8 billion. Even MidEast banks have begun to report US subprime losses, according to the Middle East Economic Digest. We had been led to believe that Arabs had no taste for US subprime slime. Morgan Stanley and Citigroup announced big job cuts, while London braces for potentially 20 thousand job cuts in all. Soci�t� G�n�rale defends itself from a $7 billion rogue trader incident, when the real story could be that Jerome Kerviel might have been a scapegoat to focus attention away from a systemic risk management problem. The third largest US homebuilder, Pulte Homes announced a huge $875 million loss, leading to an industry shakeout certain to include several bankruptcies. Standard & Poor is close to cutting debt ratings on $270 billion in US mortgage backed securities, while putting another $264 billion of Collateralized Debt Obligations on credit watch for future downgrade. New York State Attorney General Andrew Cuomo plans to use the 1921 Martin Act in prosecution of mortgage bond fraud, the law NOT requiring the proof of intent to defraud (important distinction). The US Supreme Court rejects an appeal by Enron investors to seek $40 billion in damages from a class action lawsuit, as Wall Street power prevails. JPMorgan was the Enron mentor, but escaped all damage from lawsuits. US existing home sales fell 2.2% more in December. House prices in the US continue to decline, as prices in the top ten metropolitan areas have fallen for 11 consecutive months. The total decline is 8.4% through November for the annual drop, a record since the Great Depression. The home foreclosure rate rose by 75% in 2007 to reach 2.2 million households, interrupting the American Dream. The top banker from the Bank for Intl Settlements, in a rare quote during the Davos Meeting, saw no quick end to the credit and banking problems, as he directly cited risk of contagion from the United States (core of fraud & corruption, exported) to the other regions of the globe, as the damage from deleverage banking assets continues.
And lastly, Halliburton profits rose by 5%, as war is good business. If you do not have a headache, you aint been reading carefully and paying close attention.
Amidst the growing hurricane, centered upon the housing crisis and mortgage debacle, gold will rise far past $1000. By summertime, the new base will be at one thousand bucks. The silver price will surpass the $20 mark before the leaves fall from trees in autumn. The price of gold at the last 1980 peak corresponds to around $3000 after adjusting for price inflation in a realistic manner, apart from corrupt USGovt statistics. Get ready for a very long ride, but not without some surprises for the USDollar in a possible upward bounce. However, if and when the Europeans cut their official rate, leading to a brief selloff in the euro currency, gold will rally in Europe even as gold softens in its US$ price. Volatility this way comes. The powerful factor pushing gold up will be much more global monetary inflation, broad easy money from fighting against both economic recession and broken banking systems, on a global basis. The days when the gold price is tethered to the USDollar are soon to disappear. The gold price rise is all about monetary inflation, a factor slowly being properly recognized.
Copyright © 2008 Jim Willie, CB
Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials.
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