Hat Trick Letter

May 18, 2004

A tumultuous several weeks for currencies, bonds, precious metals, and energy. Exaggerated claims about a robust US Economic recovery have arrived in recent jobs reports. Nevermind seasonality lifts and assumed (imputed) new business creation. Markets heard what they have waited to hear, which brought about a severe smackdown. The markets overreacted to China plans to slow their growth, from torrid to maybe plain hot. The metals and mining stocks felt the impact directly. A meaningful change in Federal Reserve Chairman Greenspan's language on balance of risk has roiled the bond market, which now expects rate increases. Official statements like they can afford to raise interest rates "at a measured pace," which might be very slow, or too slow to arrest their inflationary effects.

The Fed had its bluff called in the bond market by exaggerated jobs reports and amplified economic growth, as measured by the GDP. Most people still believe USGovt statistics. My doubt remains fierce on the validity of every single one, backed by dissection and analysis. The Greenspan Fed's has a difficult 3-fold task, which will revive the engines of speculation and keep the inflation process intact. The May issue goes into some depth on how the jobs report was promising in headlines, but distorted the story in the text and methods described.

The Fed will hike short-term (ST) rates, dragging their feet to be sure. Long rates might rise faster than short rates, which will damage both yield spread contracts and the Treasury carry trade. Investing in long-term (LT) 10-yr TNotes will prove unprofitable, if not destructive. This is good news for gold traders, PROVIDED THE USDOLLAR STOPS RISING. The Fed's slow action will certify a positively sloped yield curve, the signal that price inflation is at work, and deflation is not to prevail. This will ensure a revival of gold investments generally.

Will long rates offered by the 10-yr TNote rise faster than the 3-month TBill rate offered? That is the big question. For the yield curve to remain steep, the desired signal, the long rate must move as fast as the Fed. Rising costs keep the economy from catching fire. These described conditions are usually great for gold, with strong signal confirmed by a rising CPI, echoed by rising long rates. However, we are not in ordinary times. Gold absolutely requires the USDollar to resume its decline. Formula-based speculators flock to the USDollar when interest rates rise in USTNotes. Formula-based speculators also abandon gold when the US$ rises. Gold has been hit by a two-step domino effect.

The sentinel signal which trumpeted the gold bull rush back in 2002 was negative real interest rates. When short-term rates are below the CPI, we say real rates are negative. Gold cartel tactics remind the public that gold offers no yield, but they overlook negative returns on investment??? With elections over the horizon, the Fed will be slow to raise rates, enough to ensure the CPI to register higher levels. It is good bet that the CPI will remain way ahead of the Fed's ST rates. Gold will find strong support from continued negative real rates, even increasingly negative real rates. The Fed has much out of its control. The sick irony is that nobody wins if the USDollar rises. It is in the best interests of Wall Street bankers and brokers for the USDollar to resume its decline. The Fed will work to make it happen, through policy and talk.

DOLLAR BOUNCE UNDERWAY
In the last three months, the USDollar is experiencing a solid bounce. So far, the current bounce is also 7% in size. Three strong elements of resistance are at work, and are to date succeeding in the arrest of the bounce. My belief is that the bounce is in its 8-th or 9-th innings, the final legs. Several other writers agree. A fuller discussion of technicals is offered.

My preference is to confirm currency forecasts, support & resistance levels, and trends by looking at individual euro and jyen charts. The euro appears to have support at the 117-118 level, which is holding. The jyen gave way at 88-90 support. Notice the sizeable gap being filled for the jyen at 87-89. Traders have used the modest USEconomic strength to target that gap for some juicy profits. The Japanese face a financial fork in the road. They are dealing with powerful opposing economic and political forces which bear on financial markets, currencies, and international trade.

DREADFUL DOLLAR FUNDAMENTALS
Anytime a substantial correction has taken place, fundamentals must be examined in a fresh light. In this case, the US Economy and USGovt budget and Federal Reserve actions must be reviewed as with a check list, in order to decide whether symptoms of extreme distress, hemorrhage, imbalance, and extraordinary accommodation have indeed changed. Details are examined in the full May issue.

The March trade gap was announced this week, up 9.1% to a record gargantuan $46.0 billion. This goes counter to all inept economist projections from the last two years. As the US$ declines, our trade gap has widened, which is a longstanding forecast of mine. Why? Because our recovery is driven by consumption, and we purchase foreign imported products. Widening gaps amidst a declining currency was not expected by the majority of our cast of clueless economists. In the FOREX, this phenomenon is a major issue, but not spoken about. It points to an endless continual decline, which I addressed in my "Vicious Circles and the USDollar" article. The US Economy has a deep structural imbalance, struggling to seek remedy. Just as we heard incessant babble about the New Economy myth in the late 1990 decade, we hear lately about the New Macro rationalization model. One must also consider election politics dynamics.

GOLD & ENERGY
In the last three months, gold has experienced a serious retracement and consolidation. After two years of strong gains, the gold price has seen a few significant assaults. Three strong elements of support are at work, in mirror image to the US$ resistance. The 370 to 375 price range is important to hold, and is worth watching closely. On a technical basis, the gold long-term pullback is nearing an end. A fuller discussion of techicals is offered.

The gold and US$ charts are inverse images of each other. Brokerage analyst opinions vary widely. In order for gold to break down, the USDollar would have to rise with strength with DXY moving toward 95. This is possible, and warrants close watch. This may sound backwards, but neither the Greenspan Fed nor the Wall Street traders want this to occur. They made easy money during the US$ decline, and want it to resume. The potential exists in any of several areas for gold to suddenly revive. Geopolitical factors focused on Saudi Arabia, Iraq, even the Athens Olympics, enhance gold and energy. To confirm that precious metals are underpriced, Silver Standard Resources has announced plans to invest in physical silver. This action goes counter to statements made by friends of the gold cartel that gold as an investment is losing its luster.

Saudi excess capacity has been called into question. The oil traders have called their bluff. Russia has announced no excess oil capacity. A major exporter to the USA, Venezuela is deteriorating rapidly as marxism has higher priorities than production and prosperity. To confirm that crude oil is underpriced, Chevron Texaco announced a big share buyback plan.

LABOR ABSOLUTE DISADVANTAGE
Much hubbub has been made of "comparative advantage" and how the United States benefits from round after round of creative destruction. The hollow message has that in free trade, both sides win, and where a job is lost, new jobs are created. Few if any advantages can be identified in the present framework, whereby lost jobs seem to be replaced mainly by debts inside the USA. Economists badly misinterpret the labor market here in the USA. They incorrectly label the delay in domestic job creation as "short-run friction," when the entire business cycle clearly has been altered, perhaps permanently broken. David Ricardo's doctrines, outlined in 1817, are misunderstood. The US has an absolute disadvantage on labor costs, across the board, which affects manufacturing, service, and more. His principles are discussed in today's light in the May issue, and shown why wealth is lost in the USA and gained abroad.

As the work of John Maynard Keynes has been misapplied on federal stimulus, so now the work of David Ricardo is being misinterpreted on exported labor. Expect the entire topic of job export and its misconstrued benefits to become a raging explosive issue.

CONCLUSIONS
Important objectives are laid out for the speculative crowd, who operate the lucrative carry trades. They must take advantage of the USDollar decline resumption. Fundamental changes are coming for the US$ and USTBond market inter-relationships. The Fed now has a real challenge. The bond market shows a diminishing confidence in Greenspan, especially claims of no price inflation. It is rampant. They must allow the USDollar to resume its downward course. At the same time, the Fed must keep the Treasury yield curve slope upward. This critical signal indicates that inflation prevails over deflation. The path for the Fed has narrowed. Some say they walk on a tightrope.

Goldilocks is not walking in our midst. She is a Wall Street window mannequin. Pandora's inflationary winds will make it very hard for Goldilocks to remain in view or keep her balance. Given the election season, the Greenspan Fed will be slow in raising ST rates. The key for gold is negative real rates and a widening yield spread. Will real rates go deeper negative? These topics are treated fully in the May issue, along with a review of certain stocks in the mining and energy sectors. The latest week demonstrates the unwillingness of the HUI goldbug unhedged index to plumb lower levels, even as the Canadian Dollar struggles to find support.

Click on the link below and subscribe to this monthly newsletter. The May issue has just been released, and will be available mid-month, each month. The objective is to continue coverage of the US Economy (its reality, govt statistics, and its myths), and to some extent the critically important economies of Japan and China. A big problem is that so many economic thinkers have been hijacked and hired to deceive. They have been turned into frontmen, apologists, and carnival barkers. Not me. I offer an alternative viewpoint with thoroughly explained analysis. I expose the methods they use to deceive. Illiteracy starts with poor math skills and inability to understand analysis. These areas are my strengths, which I bring to bear on the economy and current trends for currencies, bonds, gold, as well as energy.

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Jim Willie CB is a statistical analyst with 23 years of experience in industry. He holds a PhD in Statistics, and functions unencumbered by the limitations of economic credentials. Any stock cited requires due diligence for personal investment, with no guarantees given. Past performance is no guarantee for future results. No compensation has been received by any company for opinions offered. Visit his website to find articles from fine authors and charting tools at www.GoldenJackass.com.

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 JimWillieCB@aol.com

 

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.

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