An interesting aspect of the dollar's swift reversal is the seeming nonchalance shown by the Bush Administration, analysts say. As a result, traders pay little heed whenever U.S. officials swear fealty to the strong dollar policy.
'The strong-dollar policy seems like a strong-dollar policy, 'nudge-nudge, wink-wink," quipped David Mozina, director of global foreign exchange research at Bank of America in New York. However, 'from a policy perspective and looking at the imbalances in the U.S., it's welcomed.'
In the market's view, the policy created by former Treasury Secretary Robert Rubin and ostensibly continued by his successors ceased to exist the moment George W. Bush moved into the Oval Office.
'I think it is dead. If it's not dead, it's crippled,' said Lara Rhame, U.S. economist at Brown Brothers Harriman in New York. 'Ever since the Bush Administration came into office, they've been giving their tacit acceptance of a weaker dollar.'
She noted a CNBC interview with Treasury Secretary John Snow earlier this week in which he advocated a strong dollar in principle but added the caveat that its value was 'best determined in an open, competitive currency market.'
Within 24 hours, the White House echoed Snow's comments.
-END-
My take on all of this is very simple. The stock and bond markets are going up. Thus, Wall Street is happy. Why are they going up? Because they are being forced up by the Fed and US Treasury. This is not wild-eyed fantasy on my part. They are only doing what they said they would do and even telegraphed what was coming these past many months:
*Mike Bolser’s wonderful work has alerted us to the repo operations to bolster the stock market.
*The Fed has told us all stops would be pulled out to stave off deflation. Clearly, they are buying Treasuries to drive down long-term rates. How else could Treasuries advance with such relentless dollar selling?
Why should that be a surprise to anyone?
From the Asian press, but not reported in the US:
"There was an agreement between Japan and the US to take action co-operatively in foreign exchange, stocks and other markets if the markets face a crisis."
Bill Buckler of the Privateer had it nailed:
"With that official statement, Japan’s Chief Cabinet Secretary, Yasuo Fukuda, let the biggest global financial cat out of the bag of modern times. Mr Fukuda has officially stated that the world’s two largest financial and economic powers have agreed to "manipulate" the currency markets, their stock markets and all "other" markets - IF any of these markets face "a crisis".
The recent US/Iraq war certainly qualifies as a "crisis" of sorts.
The Japanese are living up to their word by buying their own stocks:
TOKYO, April 7 (Reuters) - The Bank of Japan (BOJ) said on Monday it had bought a cumulative 1.16 trillion yen ($9.64 billion) of shares held by banks by March 31 under a programme aimed at reducing banks' exposure to stock market volatility.
The Japanese are living up to their word by selling their currency and buying dollars:
Japan reveals $20bn of currency interventions
By David Pilling in Tokyo
Published: May 8 2003
Financial Times
Japan said on Thursday that it had sold yen to the tune of $20bn (€18bn) in the first three months of the year, raising the prospect that it would continue to intervene to prevent the Japanese currency becoming too strong.
The detailed breakdown of what had been secret intervention show that Japan sold yen, largely for the dollar but also for the euro, on 17 days in the first three months of the year. The first intervention was on January 15 when the dollar fell below ¥118.
The revelation comes a day after the yen rose to a two-month high against the dollar at ¥116.5, triggered largely by a US Federal Reserve report suggesting it would keep interest rates low to head off deflation. Traders said the recent strengthening of the yen reflected a weakening dollar rather than optimism about the Japanese economy.
-END-
The United States is in the markets like the Japanese (as per their agreement), but refuses to acknowledge these operations. As former Treasury Secretary O’Neill said to the AP: they would rather "delude."
The fact that the US does not announce their operations does not mean they are going unnoticed. UBS PaineWebber’s Art Cashin is subtle, but it is easy to catch his drift:
CASHIN'S COMMENTS
FRIDAY, MAY 9, 2003
[AN ENCORE PRESENTATION] Hey, Did You Hear What They Said? Yeah, I Heard What They Said - But What Did They Mean? - Markets looked like they grappled for a second day with the import and impact of the Fed's latest pronouncement. Granted, our assessment of Thursday's action was from a less immediate observation post, but the collective results hinted a thesis. And....as we've previously postulated, we think perception (spelled "logic") is more important than proximity.
Anyway, stocks were soft and bonds were strong. More correctly, bonds were strong but long bonds were stronger than short bonds (bills, etc.). Additionally, the dollar was soft (re-awakening gold bugs). That overall landscape might be very puzzling were it not for the FOMC statement.
In Wednesday's Comments we reproduced the FOMC statement and noted the presumed deflation/Bernanke link. (In his "printing press" speech Bernanke had hinted one way to fight deflation was to lower "long rates.")
We then went on to recount traders' opinions about what the Fed intended to accomplish with the statement. First, might be to get the market to do the heavy lifting by lowering long rates in anticipation of the future Fed move. (So far it looks like this worked.) Secondly, they may have hoped to reassure bond guys that there is no "hair trigger" on the rate gun. In essence, an economic recovery won't spike a quick jump in rates - so long bonds are not extra-vulnerable. (As above, long bond bounce hints this may be gaining acceptance.)
That brings us to stocks and the dollar. Stocks did not rally on the presumed future helping hand (rate cut) if the economy still lags. On the other hand, they did not panic that the Fed might think we're edging toward Japanization. Confused mulling is the reaction....so far.
So, we are back to the dollar. If the Fed's gamble on the statement is to have an unintended consequence, it may be in the greenback. Foreign currency holders might take two views. A deflation could mean you get paid back in dollars that buy more than those you lent. Or, you could worry that a re-inflate Fed would return you a less valuable (bang for the buck) currency. Maybe, watching the BOJ currency related responses to deflation, the dollar holders seem unimpressed by the Fed - at least in the first two days (a nano-second in currency moves.)
To Know Where You're Going Should You Know Where You've Been - Everyone, especially the Fed, is dying to see the "post Iraq economy". As we have noted, economists and the media have opted to see the Iraq war as a key point of economic demarcation. In late 2001, most good data was dismissed as tainted ("that's pre-9/11"). Now most weak data is dismissed as "pre-Iraq victory".
Nevertheless, we thought we'd take a look at the March FOMC minutes - not so much for the data - but to see what was on the FOMC's collective mind.
It will be the same FOMC that assesses the new upcoming data.
Overall the FOMC saw the general data suggesting "that growth of economic activity remained sub par". They then went through their usual checklist of data. Of note, to me at least, was a longer than normal discussion of the dollar, world trade and the global economy. The FOMC's keen interest in these areas had hints of two recurring themes (concerns). First was deflation (which they refuse to speak aloud) and the other was a global stagnation. Intertwined in all of this was repeated commentary on lack of clarity and outright uncertainty. Little wonder that they opted not to opt at the end of the meeting.
If you can pull yourself away from the fast food version of finance - media interpreted and pre-digested - take a look at real life. I think it's at "www.federalreserve.gov/fomc/minutes/20030318.htm." I think it is revealing. The Next 30 to 60 Days May Be Critical To The Economy And The Stock Market - The Fed remains confused and concerned (as we read things). The data they have (so far) has not been very good. In their statement Tuesday, they seemed to place much of their faith and hope in psychological indicators (consumer confidence, capital markets). As the days and weeks go by the Iraq factor will become less of a factor. There will be clarity on whether the economy is rebounding or receding. Stay tuned.
–END-
Last, and maybe most important in the end, The Gold Cartel continues their manipulation and price-capping of gold. They are continuing to do what they agreed to do. The Japanese are selling yen, the US is orchestrating the leasing (swapping) of gold. Quid Pro Quo! The Japanese are propping up the dollar versus the yen, the US and Gold Cartel are doing what they can to keep the gold price from soaring as the dollar falls. The bottom line of all of this is that there will be CONSEQUENCES. The manipulation of the gold price was the lynchpin of the US' strong dollar policy for many years, one that has now been cast aside – cast aside ONLY after it was instrumental in causing so many market bubbles in the US. The dollar was kept artificially high for far too long to placate the Wall Street crowd. For every action, there is an equal and opposite reaction. The dollar is tanking as a result. Especially in light of the recent geo-political situation, holding up the dollar became hopeless. What to do with gold? Why not let it go now that the "strong dollar policy" is history?: Because they are afraid a sharply rising gold price will set off a financial market derivatives nightmare. Perhaps that is what Greenspan was referring to the other day? JP Morgan Chase has around 25 trillion of derivatives on its books. The GDP of the US is only 10 trillion. Many of them were put on when they knew the gold price would be controlled. Remember what the former Treasury Secretary wrote in Gibson’s Paradox and The Gold Standard: "gold prices in a free market should move inversely to real interest rates."
By keeping gold subdued, the US could keep interest rates subdued.
It’s conceivable that a fair (perhaps inordinate) amount of Morgan’s massive derivatives are the positions of the US Treasury or Fed and not those of Morgan itself. Regardless, a sharply rising gold price could set interest rates up and induce the rigger’s worst nightmare: VOLATILITY. That’s when the volatility option values explode and tend to blow out the Black Box models that are supposed to be the glue for the massive derivatives positions. Someone will have to deal with that nightmare if it becomes reality. At what cost???
The nightmare for the US and the rest of The Gold Cartel is that, unlike what they can do with the stock and bond markets, they are running out of ammo (physical gold) to continue their ploys in the gold market. They can’t print gold. As is, the central banks have lent/swapped out 15/16,000 tonnes they cannot get back without driving the price of gold up MANY hundreds of dollars per ounce. Only the jewelry-wearing people and gold-saving peasants of the world can bail the beleaguered bankers out. That will only happen when the gold price rises those many hundreds of dollars. In essence, the central/bullion banks are prisoners of their own gold shorts.
This brings me to the CONSEQUENCES from all of these non-free market shenanigans It’s called: ending badly. I think Greenspan knows it and is the reason he is expressing concern about the concentration of derivatives. Unfortunately, he is saying too little, too late. The damage is done. The powers that be are scrambling to patch up their ill-conceived market manipulations.
My guess is we are headed for a Gold Derivatives Banking Crisis. That is just what a GATA delegation explained to the Speaker of the House, Dennis Hastert, three years ago to the day tomorrow. GATA presented a two hundred page GDBC document to the Speaker on that subject, as well to the staff of every House and Senate Banking Committee member. That crisis is liable to spread like the SARS virus to the interest rate arena. Concern over the US financial markets is likely to send our stock market into new multi-year low ground. The investing public will be stunned. The price of gold will SOAR in panic market conditions.
That’s the way I see it. Time will tell.
The gold chart has looked good for sometime. It keeps getting better. Note how gold often closed near its lows on the way down from its early Feb highs. Note how it is often closing near its daily trading session highs at the end of its basing period and on its way back up:
http://futures.tradingcharts.com/chart/GD/63 The John Brimelow Report Friday May 9 2003 Indian ex-duty premiums: AM $5.81, PM $6.19, with world gold at $346.70 and $348.10. Still above legal import point, although of course sharply lower than yesterday. This is impressive given the abruptness of yesterday’s move, and the fact that it was in the $350s that Indian buyers faltered earlier this year. Very bad news for Bears.
TOCOM more than recovered yesterday’s heavy losses on heavy volume: the active contract leapt 34 yen with overall volume equaling 49,485 Comex lots, 34% above Thursday. Trade houses apparently scrambled to buy back their Tokyo shorts as the arbitrage was attractive: open interest fell the equivalent of 2,063 Comex contracts, and now stands at 123,360 Comex equivalent. (NY yesterday traded 62,095 lots, with open interest rising a steep 6,093.)
Gold’s move in the past 24 hours deserves the more respect because it was far from unopposed. Estimated Comex volume soared 50% on the day in the final half hour on Thursday as gold was forced $1.50 off the high:
"Investment Bank selling capped the advance at the highs" as Standard London politely puts it, and trade was apparently heavy in Asia generally today, with gold stalled around $347 most of the day. Volume in NY today looks like being quite heavy too – it was estimated at 36,000 by Noon.
MarketVane’s Bullish Consensus for gold last night jumped 5 points to 66%. Arguably this was appropriate for the conquest of as heavily-defended a chart point as the 100 day moving average (referred to by UBS Warburg as the "famous resistance of $344") actually was. Of more importance, the Bullish Consensus for the dollar only fell 1 point to 14%. In January it bottomed at 8%, and spent three weeks below 15%. Both series could easily accommodate a significant continuation of the recent trends.
JB
CARTEL CAPITULATION WATCH
The DOW moved up 113 without a care in the world to 8604. The DOG soared to 1520, up 30.
Back to the real world, some good insight from UBS PaineWebber.
Executive Summary
Owing to recent developments at the FASB, we are now assigning a 90% chance that there will be mandatory fair value expensing of employee stock option grants in the United States as early as mid-2004, but most likely by January 2005. Unless politicians interfere this is a done deal. Using the 2002 footnote disclosures, these new rules would reduce S&P 500 operating earnings per share by $5.10 or 10.9%. The S&P 500 P/E would rise from 18x to 20x.
By sector, fair value expensing of employee stock option grants would have reduced 2002 operating earnings per share (First Call EPS) the most for Technology (68%), Consumer Discretionary (10.4%), Telecom (9.7%), Materials (8.8%), Health Care (8.2%), Industrials (5.4%), Financials (5.4%), Consumer Staples (4.5%), Utilities (3.5%) and then Energy (2.9%). We estimate that on a more normalized earnings basis the reduction to technology sector earnings may be more like 20% to 30%. We believe that employee stock options are indeed an expense. This employee compensation has a real economic cost to companies/shareholders that must be recognized in the income statement. The UBS Warburg Global Valuation Group advocates mandatory expensing of stock options using a fair value method. We do not believe the difficulties in quantifying the cost of options justifies ignoring the cost altogether, which is the current situation when only using diluted EPS. Diluted EPS not only fails to capture the ongoing cost of employee stock options, but also fails to capture the employee claim on the firm from the remaining time value of existing options granted in past years. Based on our calculations, this uncaptured time value is worth slightly over 1% on average of diluted market cap for the 30 Dow Jones companies but nearly 3% on average for the big technology companies. Since 1996, option costs for the S&P 500 have increased every year. Adjusting for option costs lowers the S&P 500’s historical operating EPS growth rate by 120, 190, 210 basis points for the periods 1996-2002, 1998-2002, 1999-2002, respectively. Excluding option costs, 2002 S&P 500 operating EPS was 17% higher than 1996. Including option expense, 2002 was 8.5% higher than 1996. Our advice to companies looking to mitigate the adverse affect to earnings from these new rules would be to reevaluate their employee compensation packages. We think companies could save economic costs by using more cash, restricted stock, employee benefits, etc. There must be more creativity in compensation. We encourage members of the investment community to voice their views on this issue as it culminates over the coming year. Compensation committees must know investors’ views and valuation multiples should reflect the responsiveness of managers to handle this change in the best longterm interest of investors. -END-
Excellent point from The King Report:
In Thursday’s WSJ, reporters Jeff Opdyke and Michelle Higgins ask why the Fed fears deflation when so many prices (cable TV, tuition, insurance, healthcare, housing, entertainment, property taxes) are rising. The Fed does not fear failing prices per se; they fear debt contraction spiraling out of control into a debt deflation. The Fed fears debt deflation, not price deflation…For the week ended 4/28, M2 surged $44.5B and M3 mushroomed $55.4B. The Fed holds a record $647.6B of US govies as of Wed.; foreign central banks hold $893.9B of US govies and agencies. Party on, Garth! Party on, Al!
-END-
To give you some idea of what’s ahead in terms of a learning curve for the coming herd of gold investors, it would be helpful to read the following article. It will be new investors that are reading commentary such as this that are going to drive up your share prices. They will be the ones to cause the gold share buying panic:
The Daily Reckoning PRESENTS: Gold’s resurgence has brought a lot of newcomers to the table. If you are one, a few tips on playing the game are in order, compliments of True Wealth’s Steve Sjuggerud.
WHEN GOLD’S DAY COMES
By Dr. Steve Sjuggerud
http://www.dailyreckoning.com ).
Chuck checks back in:
Bill:
I started to write you yesterday regarding this fantastic market. We are now in reversal mode after some of the most breathless shifts in bullish sentiment that the stock market has ever witnessed. Investor's Intelligence at 55%, AAIA 30% bears, TICKS relentlessly popping over plus 1000, 5% mutual fund cash and many other unbelievably negative technicals. Plus the grand finale, Barron's cover Sunday of "The Bull Is Back." What timing!
It is obvious that the Fed is attempting to pump this thing into life with no effect. We should be ready for some dynamic changes here such as a move up in interest rates if the dollar continues to free fall or even if it begins to reverse. And when have you seen so much public print of "deflation." The key group is the financial stocks which have had a giddy non-stop ride. There should be a bombshell ready for this market. I am curious where it will come from. Enjoy this event. Your friend, Chuck
Bob makes a lot of sense, commenting last evening on a part of yesterday’s MIDAS commentary:
"aggravating"????
That's too mild a word for what they have been doing to us. For example:
Yesterday Gold down 50 cents--my diversified Canadian and US gold portfolio down $8,500
Today Gold UP $ 6.60 -- " " up $4,100 (not $15-20,000??)
And yesterday, as you pointed out, the shorts couldn't attract any more short sellers and were FORCED to cover. How much more bullish for gold shares can one get? If the above scenario were an isolated couplet I would dismiss it, but it is the DOMINANT PATTERN. My explanation: The ESF, IMF, FED, JPM etc. cabal saying: " We can no longer keep the dollar from going down, we are running out of ammo to keep the price of gold down, BUT, we can keep the whole gold shares market down with pocket change. Perhaps selected members can, on an outfit that has 3 times the number of outstanding shares shorted and is therefore selling at a low price, just buy it out on the cheap and nobody will be the wiser, pocketing both the company and the shorted money. Maybe we are missing the obvious. How else can you explain anyone being crazy enough to short such high percentages of the outstanding stock of numerous gold mining shares? No, I don't think the gold mining share crowd are clueless; I think we are being overwhelmed by the same cabal that seems to be trying to control every market.
Bob Wansbrough ScD, PE A fellow Café member on Greenspan and derivatives:
Derivatives are a logical extension of banker's greed and deception on the world-wide public.
Way back when, lending started as paper backed by 100% gold (silver, etc.), and some time later banker greed lowered the 100% number into 'fractional reserve' banking. The ubiquitous (within banking circles) greed pushed that 100% number relentlessly down until it hit zero back in the mid part of the last century when all currencies went 100% fiat. Well, that wasn't enough to satisfy the bankers' greed - they wanted still more. The answer: leverage.
Derivatives enable bankers to take that fractional reserve number south of zero, into negative territory. Instead of 'fractional reserve', we now have 'negative reserve' (you heard it here first) banking. It's the unparalleled (ever in history of the human race) greed of pushing a corrupt and incorrigible system to the maximum limit. We don't know the absolute limit yet because we haven't gotten there; but, we will. We're damn close already.
If Greenspan's claims are true that the benefits of derivatives to the financial industry have been that much greater than the disadvantages, why is he against OTC derivative transparency? Is it that transparency somehow shifts the balance more to the side of disadvantages than benefits? Or, is it that transparency lifts the veil that masks just how dangerous this negative fractional banking really is to the world-wide economy?
It only takes common sense to discern that massive, massive greed on an unprecedented level cannot continue to expand forever. And, the way the system is constructed, there's no continuous means of returning to a society based on virtue without the corrupt influences of bankers. That means that sooner or later, as dictated by the laws of nature, we will experience a discontinuity in our societal existence. A derivative Armaggedon; there is zero doubt about it.
"G"
Getting to the Greenspan nitty-gritty:
Bill,
I have been thinking of Greenspan's comment of a "unwelcome substantial fall in inflation." These are my thoughts and it is quite sobering!
Greenspan is usually very subtle. He would not use the "substantial fall in inflation" as a euphemism for deflation. I believe he is signaling something much more significant. What he is eluding to is that there is no such animal as "deflation". We can not talk of deflation in the monetary sense because we don't have a monetary system. What we have is a credit
system. When you have a true money system (eg gold standard) the money is valuable so there is always demand for it. Just like for any commodity if you increase the money supply its value decreases and if you decrease the money supply its value increases. This is not the case with the credit system of the Federal Reserve. The only way that Federal Reserve notes (aka US Dollars) can get into the system is for someone to take credit or a loan. The "money supply" is not controlled by the FED, it is the "demand for money" (actually it is demand for credit) which they control through the control of interest rates. If the interest rate is low the demand for credit (money) is high if the interest rates are high the demand for credit decreases. Although Bernanke spoke of the electronic equivalent of the printing press it is not possible to inject new, freshly created dollars into the system unless there is demand. You can make a good analogy with the IPO's of the dot.com's. While the public was punch-drunk in the 1990's the start-up tech companies could print as many shares as they liked and the public would buy them because there was such huge demand. Since the tech-wreck there is no demand for these shares and the IPO's have stopped completely. You can print share certificates but you can not get them into the system unless some one wants them. Has the reduction in the "share supply" made the other tech shares that were already issued more valuable? Heck no! The fact that there are no IPO's is not due to a reduction in supply but a huge reduction in demand. That means that the demand for what has already been issued also falls and so the dot.com shares have all become worthless.
This is the problem the FED faces. Even with rock bottom rates the demand for loans and credit is falling. This means the demand for new dollars is falling but this means that the demand for previously issued dollars drops also and so its value starts to drop. This leads to a huge dis-hoarding of dollars because it is the reserve currency and so the value falls even further. So just like in the IPO example it is not the supply that is dramatically reduced but the demand which as a result reduces the supply. But this is NOT deflation...the dollar does not become more valuable. Instead the drop of demand leading to a drop in value leads to a flood of dis-hoarding which will collapse the currency value just as the dot.com share values collapsed.
So what Greenspan fears like the plague is an "unwelcome substantial drop in inflation". Which means a substantial drop in demand for dollars (which is a substantial drop in the inflation of the "money" supply) which will lead to a rapid collapse of the dollar to practically zero. He has correctly avoided using the term "deflation" because there can be no such thing. There are only two options
1) Inflation
or
2) collapse
You can see why the FED is so hell bent to achieve the former.
At one time the dot.com IPO's were all the rage, in a space of weeks they were toilet paper. A short time ago we had the "strong dollar" at 120 on the USDX and now it is 95 on the USDX...a further "substantial fall in inflation" could unleash an avalanche of unwanted dollars on the market. Holders will buy the Euro, the Yen, Sterling, the Swiss Franc but most of all they will buy hard assets like gold and silver.
The stakes are very high...these people are rolling the dice for the future of the world's financial system.
Cheers
Adrian
The gold shares sold off early, but came right back with the XAU closing up .21 to 20.69 and the HUI ending at 134, down .26 and well off its lows.
Gold and the gold shares remain in explosive mode!
GOT TO BE IN IT TO WIN IT!
MIDAS
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