Underlying Fundamentals Are Deteriorating
But The Dollar Gets Stronger. Why?
Jay Taylor
In his most recent monthly issue of Shadow Government Statistics, John Williams presented the following headlines:
- Underlying Fundamentals Deteriorating.
- Extraordinary High Systemic Risks Remain. Depositors Moving to Cash?
- U.S. Treasuries at Risk of Downgrade?
- Economic Activity Tumbles as Inflation Intensifies.
- GDP Revisions Suggest Shadow of Protracted Recession.
As he typically does, Williams backed up his headlines with a huge number of statistics. Having looked over most of this material and following John’s work on an ongoing basis, I must say I think he is right, even with the following remark: “As discussed in the April 8th Hyperinflation Special Report, the current inflationary recession eventually should evolve into an inflationary depression and then into a hyperinflationary great depression.”
We hope and pray that somehow John is wrong about that last sentence. We certainly don’t want to see that happen, no matter how high the value of our gold and gold shares rises, vis-à-vis increasingly worthless paper money. What we are trying to do is protect ourselves as much as possible against the poverty and mayhem that is most likely headed our way thanks to the moral decline of America that of course manifests itself in the increasing thievery by the government and its fascist partners that control the banking system.
But if things are so bad, why has the dollar strengthened so much? In fact, John Williams thinks the recent dollar strength, which has hurt our Model Portfolio to a very significant extent, will be very short lived because the fundamentals of the U.S. economy are worse than those of other countries, bad as many of them may be. (Note from the chart below how the “stronger” U.S. dollar and gold have moved in opposite directions over the past few weeks.)
First, in checking out the chart above, it is important to put the dollar’s recent “strength” into proper perspective. The dollar index is still well below that all-important 0.80 level at 76.28. And it is 35% or 40% below its highs since the beginning of the century. In other words, while from a short-term perspective the dollar has risen sharply especially against the Euro (which is dominant in this index), it is still very weak, from a long-term perspective. And this strong dollar has not only correlated to a collapse in the price of gold and gold shares, but in energy and base metals as well.
But still, why has the dollar risen so much if Williams is right about the plunging fundamentals of the U.S.? Is there a logical explanation? Williams himself noted how the Fed and the media have been spinning facts to try
to support a strong dollar and he also thought it likely that the Fed has no doubt engaged in some covert market manipulation as well.
James Sinclair Explains – Covert Dollar Manipulation Won’t Work
In a missive he put out to his fans last week, James Sinclair offered the following:
We have just witnessed the first massive act of intervention coming off the 0.7199 USDX and $1.5974 Euro. We have covered why this happened and its meaning in terms of the instatement of currency parities, albeit this time on a floating basis.
Now you need to understand how intervention works when repeated over time:
1. Currency intervention is like being addicted to a controlled substance. Your first experience at the height of the controlled substance produces mind-altering feelings and emotions. From this point forward you require more and more of the controlled substance to reach anything near the first experience. When you fail to get the fix, the pain and/or downer is
unbearable.
2. Each subsequent experience of foreign exchange intervention demands more vocalizing and funds. That being said, you have just seen the most success you will see in the Euro via intervention - and thence gold.
3. Eventually it becomes much too expensive to sell a more valuable and appreciating currency in return for fundamentally weak and therefore depreciating dollars.
4. The operation loses capital input because it is the reverse of what central banks in the East wish to be a part of.
5. The operation runs out of capital as one central bank after another uses intervention to covertly unload US treasury instruments into demand.
6. The operation runs out of power as the market senses a wounded strategy. The seven trillion dollar a day turnover in the world dollar market now fades it. That means taking the opposite position to the desired impact of the intervention earlier and earlier in the process.
7. Eventually the operation moves to 75% verbal intervention and 25% capital-driven intervention.
8. As the price of the fade comes in closer, the power of the strategy weakens. The USD troops will move up in price as a secondary line of defense for the ongoing operation.
9. Eventually the strategy fails at that level. This is why you have heard many times that intervention in foreign exchange markets always fails. Intervention in foreign exchange markets never has nor ever will change the trend in any currency.
Intervention can only have legs when it floats the temporary parities in the direction of the major market trend. Understand this and you will understand why and how much of an influence the strategy will produce. When the vocal instruments get louder, the reactions become smaller until the strategy at that level of floating parity is checkmated by the world marketplace.
August 16, 2008
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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