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FOMC Starter Gun For 2006

January 4, 2006

When the December Federal Reserve Open Market Committee meeting minutes came out on Tuesday afternoon, it was akin to a starter gun shot at the beginning of a race. Debate will persist on interpretation. Regardless, the year 2006 has begun with a bang. The S&P500 loved it. The SPX rose 18 points, sensing an end to restrictive money. Gold loved it. The metal rose $15 per ounce. Crude oil loved it. The black tea rose almost $3 per barrel, surely aided by the Russian & Ukrainian skirmishes. The euro currency loved it. The EU "stock" rose almost 200 basis points in two days. Wow!!! The clowns on the financial networks cannot even properly interpret events. Did gold rise in sympathy to the Gazprom extortion maneuver on the energy front? Or did gold rise from expected lost pillar to the USDollar and the world monetary foundation? Did crude oil rise from rattling sabers in Eastern Europe? Or did oil rise from expected lost pillar to the USDollar and the world monetary foundation. These media harlots (perhaps only incompetent) attribute higher USDollar exchange rates to robust (they are exaggerated) economic growth, when support for the clownbuck owes primarily to bond arbitrage carry trades feeding off the higher US Treasury yields over Europe and Japan. The lost pillar of higher US interest rates will have a profound effect on the USDollar, gold, and crude oil in the new year 2006. Perhaps they should listen to Rick Santelli more often. He gets it. He has smelled something rotten from the inverted yield curve signal. But does not connect the dots to conclude a weak USEconomy and declare an invalid GDP statistic.

It is my opinion that the big stories this year will be

  • the end of the USFed tightening of interest rates
  • the slowing housing market, and drag on the economy
  • the worldwide scramble for energy, complete with raging violent conflicts

My full expectation is for a very tumultuous year. US economists will receive a wakeup call on how dependent the USEconomy actually is on the housing sector, and especially home equity loans. Fully 50% of domestic growth is tied to the housing boom (aka bubble). In the first week, we have been treated to a nice preview of the financial stir of its cauldron. Expect more pyrotechnics in the next few months.

Absurd talk continues of USEconomic robust strength. It is really robust philandering corruption distortion and deception in the calculation of all major economic statistics. A mere 12-yrold kid can unmask the lies on the statistics. Gee, wages will rise to catch up to strong productivity! Well, the benefits of this imported productivity are in Asia. Gee, robust performance with "full employment" is the mindless manipulated mantra. Well, such a boast requires not counting those who no longer receive jobless insurance benefits. Gee, low price inflation has returned to our shores. Well, let's stop driving, shipping, heating, and eating for that matter, and ignore asset bubbles.

The December Institute of Supply Managers (ISM) reports a drop of 9.2% in two months, from 59.1 in Oct to 58.1 in Nov to 54.2 in Dec. Detroit carmakers are bleeding still. General Motors sales in December are down 10%, Ford sales are down 9%, and Chrysler domestic sales are down 5%. Even Honda US sales are down 3.3% in December. The Mortgage Bankers Association seasonally adjusted purchase mortgage index fell 3.4% to 418.3 from the previous week 432.9, its lowest level of activity since February. The index is considered a timely gauge on US home sales. November new home sales are down 11%, with 503k homes in inventory, which makes for a 4.9 month supply. New home prices are down 4.1% over last year. November existing home sales are down 1.7%, and sport an inventory the highest since 1986. Yet consumer sentiment and confidence are each surging, those wondrous soft statistics more linked to the S&P stock index than reality. Easy money prospects push up the major stock indexes, so the consumer gets a lift. The punch bowl is to be refilled, even as household credit card balances have reached an average of $7200.

All this blizzard of evidence must be placed against a backdrop of an inverted Treasury yield curve. The 5-yr TBill yield is still below both the 2-yr and the 10-yr TBill yield. The bond market has it right, and fully contradicts the corrupted manhandled falsified GDP economic growth statistic. Anyone who truly believes the Q3 GDP of 4.3% growth is an infant and naïve at best, a moron or a hustler at worst. It was mostly price inflation, not removed properly, then labeled as growth, aided by hedonic lifts to technology spending, compounded by chain weighting. If you don't understand its calculation, you have no legs to stand on when making such claims.


Kiev, breath-taking capital of the Ukraine

Anyone who hears or reads of the recent Russian battle with the Ukraine, and does not feel shivers down the spine, well, he or she must have no central nervous system at all. The energy wars have ramped up, as Russian conglomerate giant Gazprom has been directed by Vladimir the Great (Putin) to shut off the spigot. He has attempted to quadruple the natural gas price, but accepted a mere double in price. An eerie fragile peace has broken out. Short of necessary supplies, the Ukraine appropriated natural gas in the pipelines, and denied that supply to Europe. Russia has finally flexed its muscle. Putin has sent a cannon shot across Europe's bow, more like the West's bow, for interference with Ukrainian presidential elections in 2004. Imagine, democracy won in Kiev. Our so-called friend Putin retaliated. My scribbles for two years have pointed out how Putin is not a friend to capitalism or free markets. See "Putin & Petro-Dollar Revolt" from Nov2004. Further energy market developments have occurred, hardly reported by the intrepid lapdog snoozy US press & media. My highlighted theme for 2006 is how more and more world oil output will be gradually taken off the market, locked by China and India and other growing economies. Nations will tend more and more to use their horde of US Treasury Bonds to secure their supply, invest in energy projects, and even build military alliances. Shipping lanes will be the next battleground. The United States like in a torture chamber will be locked out, one contract at a time.

In my upcoming January Hat Trick Letter issue, which is posted in mid-month, four charts are displayed. Gold via its mining stock index is showing an overshadowing new dominance relative to four other major indexes. Each of the four indexes serves as the standard bearer to prevailing manias coming to an end. Also, a theory is purported as to why the XAU gold stock index has broken out before the HUI gold stock index. Ratio stock index charts are highly valuable. Last year at this time, my doodles pointed out the early 2005 new phenomenon. In "Oil to Prevail over Gold" fair warning was granted to investors, that energy stocks would race forward. They did just that until April.

The tide is turning toward gold, which fights the geopolitical battles in the arenas dominated by the great central banks. Try as they might, currency wars cannot ignore gold. The correction in the energy markets might have ended, with possible retests of support if the US balmy weather remains more akin to late October than to January. Look for OPEC to strive toward stable revenue cash flow, sure to prompt production cuts. The wild cards are Russia and Iran. Is Teheran a threat on the nuclear front? Or is Iran repeating what Saddam did, selling oil in euro denomination. The USGovt cannot make any claim on such threats, clear of deception regarding foreign threats.

Few seem aware of the importance of the petro-dollar superstructure wherein crude oil is bought and sold in US$ denomination. The maverick madman Saddam violated the rules and got slammed. The March splash to the Iranian Oil Exchange heralds a new dawn, putting a message on financial billboards of a massive challenge to the US$. The petro-dollar system links oil to bonds and currencys.Russia has promised military support for Iran if attacked. China has inked numerous deals with Iran, ranging from oil projects to natural gas deals and liquefied natural gas port facility construction, and yes, Silkworm missiles. Look for Israeli "black bag" operations to hit Iran. Their first strike occurred last summer, again unreported by the US lapdog press. They hit, harmed, and temporarily shut down Iran's largest oil facility. By reporting the Teheran demonstrations, and not the previous attacks, the public is being steered like cattle into a corral of public opinion. The Iraqi War was built upon a false justification. Look for the same if a coordinated attack is waged against Iran. My position is not to take political positions, but rather to present information and to provide interpretation. You decide.

In time, the United States will wake up and realize that nuclear power and uranium should become a more critical component to our national energy plan. Hey wait!!! The USA does not have an energy plan, but rather an amalgam of corporate incentives for producers, surely not to be confused with an actual plan. Any national plan takes a back seat to lobbyist efforts and corporate agendas. Look for the USGovt to react defensively, on an increasing basis with military action.

The year 2006 will introduce a lethal mix of energy, money, and military. My guess is that as much as 90% to 95% of the US and Western Europe population remains unaware. It is to our advantage to be properly positioned. We can profit handsomely in the coming year.

THE HAT TRICK LETTER COMBINES MACRO ANALYSIS WITH INVESTMENTS. From subscribers and readers:
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"I just read your latest piece about the yield curve. You are right on the money with pretty much everything you say, as usual. Also, those are good insights [on why the XAU index has jumped before the HUI]."
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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD 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. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at [email protected]

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

Jim is gifted with an extremely oversized brain as is evidenced by his bio picture. The output of that brain can be found in his articles below, and on the Silver-Phoenix500 website, on his own website, and other well-known financial websites worldwide.

For personal questions about subscriptions, contact Jim Willie at [email protected]

 


The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).
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