Euro Speaks
Stratfor has been accused by some readers of being an Intelligence organization front and tends to ignore certain key elements that might otherwise be obvious to other analysts, including ignoring Y2K and the Euro.
For example, the Euro is directly competing with the dollar for market share as a world reserve currency. At first glance that doesn't seem frightful because Europe and the US both have about the same amount of gold (which everyone says is dead, except all the people who have bought the 10 thousand tonnes of metal that has been sold short into the market) with the EU at 11,000 tons and the US at 8,000 tons. The US has burned its gold bridges twice: first was with the US citizen back in 1932 when Roosevelt made all US citizens turn in their gold. Next, President Nixon defaulted on the dollar's gold backing in 1971. This is considered by some experts to have been the reason for the Mid-East oil crisis, as the Arabs love their gold and didn't want to give up their oil for fiat dollars (fiat is faith in Italian).
As a result of this default, the Jamaica Accords saw the demonitization of gold and an allegedly secret deal that would keep dollars strong and gold weak while the Arabs become the Fanny Mae, Freddie Mac of paper gold delivery contracts from large mining companies. In other words, the Arabs were able to take long-term delivery of gold mining production while the dollar was kept strong and oil kept low as the Arabs were able to buy cheap gold with cheap dollars. This is the reason, again per some experts, that gold has been held down and actually dropped over the period of 20 years since 1979.
Currently the Federal Reserve and Goldman Sachs and other bullion banks have been actively participating in a large paper gold sales effort culminating in the Bank of England auction whose direct result was to knock gold down to its 20-year low of $252 per ounce. Some suggest that the BOE gold auction is being orchestrated to keep the price of gold down while certain key bullion banks unravel some of their 10K to 14k ton paper-gold short position. Paper gold is defined as gold derivative contracts that leverage physical gold at times up to 100 times the actual amount of metal available.
Why are bullion banks trying to restrain gold? Gold is earmarked informally in some circles as the great inflation indicator. We have all heard the express gold only goes up in times of inflation. One analyst I know believes that inflation is currently running at 6-10% per year. One thing is certain is that 79 billion dollars have been added to the money supply in the last several months in direct anticipation of Y2k. Now, if your entire dollar supply (physical dollars) is only $400 billion or so dollars and you add to that in one year by almost 25%, one might construe that inflation isn't dead. Certainly gold isn't reacting to normal market forces as excess dollars compete with gold.
As I see it, the US dollar is likely to lose its stature as a world reserve currency. When that happens, the Euro will takes its place. Signs of this are evident now. EU long term bonds seem to be equal or better sellers than US long-term bonds. I am even hearing discussion of oil contract settlement in Euro dollars versus US dollars. As oil turns the world, as oil countries prefer gold to dollars, and as the Euro is less encumbered with debt than the US is, whose debt is estimated to be 5.7 Trillion dollars and whose derivative positions and counter-party risk contracts go into the 10's of trillions, the Euro and EU investments will likely become more enjoyed by savvy investors, including gold-based investments, stocks, and bonds.
The EU is going to treat gold differently this time than at any other time in history. They have said they will allow their currency to be marked to market or be valued at the price gold on the open market at the end of each quarter. If the price of gold were to double, that would back the Euro effectively with a 30% gold-backing. If gold doubled again, they their current money supply, which is all digital currently, would be backed by 60% gold. This is sufficient to interest the Saudi's in their quest for gold instead of dollars. For when Saudi oil is gone they don't want dollars, they want the gold.
So what does this mean for the US? I believe it means a massive stagflation or inflation of commodities and gold ($10K gold ?) and a recession where current housing prices and real estate come down as this market mania unwinds with the flow of dollars overseas to EU investments.
Is this a guaranteed analysis? No, but it certainly breaks a mold of current CNN and CNBC financial guru's and wizards who talk their book and predict the trend. Any market at an all-time historical high is subject to a massive reversal coming out of left field, from where nobody suspects. I say watch the gold market, watch the EU, and watch England. They are making noises about jumping the dollar ship and moving into the EU. Further, watch the settlement of oil. If that moves towards the Euro then the writing is on the wall.
One other factor may also surprise people. The stock option plans of the tech companies creates a bookkeeping profit only if the prices of these stocks continue to rise. Here is how it works:
Company A hires employee for less than good wage with stock options. Employee A sees that stock rises and exercises options. Company A gets to expense at the tax rate of the employee the amount of the options exercise and puts the cash from the sale of options into its bank account. Company A profit rises as a result of the write off. Now, if the stock doesn't go up, Employee A doesn't exercise his or her options. Company A doesn't get the cash, doesn't get the write off, and their profit is reduced accordingly. Profit goes down, stock price drops further.
If the company isn't making a profit then the pattern intensifies.
Combine these factors and the rosy outlook of the US economy becomes somewhat susceptible to foreign inflow of cash and an ever rising high-tech stock market. Combine that with a competing Euro for world reserve currency status that will orphan lots of excess dollars whose sole purpose was a reserve of a foreign CB. When that money needs a home, where will it go? The US.
When that situation reverses because of the liquidity that is constantly being pumped into this market dries up then this could turn out to be worse than the crash of 1929. Keep in mind that the 30-year old stock broker has never seen a bear market, never seen a depression or a recession and never handled a one-ounce gold coin. That tells me since they have been trained to buy on dips, they may just buy all the way down on the dips of the big dipper. Interesting thought anyway. I know that I have held stocks down to a low, in hopes of a reversal, and I did it even knowing about recession and stock collapses. What of the 30-year olds out there. Are they that smart they will know when to get out of a down market? Not.
No, somehow, we have gotten used to an ever increasing stock market that now can't afford to go down. When the momentum dies, then so will lots of wealth. The market is friendly to the least amount of people possible. When the market breaks that rule then it is time to turn on the bear sensors. Beware the Ides of March not to mention any oil disruptions as a result of Y2K glitches (FED EX already announced a 3% surcharge on shipment prices as a result of high oil prices).
Steve Hickel
5 January 2000
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