December 5, 2000
An in depth analysis of relevant
Global Financial and Economic Debates
difficulty with scheming to deflate a bubble of this order and
magnitude is that it will still be impossible to inflate it
over again on the next go around. At least not until people
have forgotten how they got fooled, again. It happens every
time a speculative bubble pops, and the longer and larger the
bubble grows, the longer it takes for Wall Street to clean up
the mess and eventually re-earn its credibility. The massive
paper overhang will take years to absorb, not months. The party
may be about time to make room for…
The Golden Bull
a grand title. It deserves a mention because it came to mind as
I was searching for something descriptive for what we have to say
to you this week. As I wandered onto the Internet to see if anyone
else got it first, I stumbled upon a short history of the Golden
Bull of 1356, which was issued by the Holy Roman Emperor Charles
IV. I have reprinted part of the paragraph that I found in the sixth
edition of the Columbia Encyclopedia (on line). Believe me, it is
of the dissension caused by the disputed imperial election of
his predecessor, Louis IV, Charles IV devised a series of detailed
procedural regulations intended to prevent similar controversies.
The king of the Romans was thereafter to be elected only by the
majority vote of seven electoral princes. The Golden Bull sanctioned
a long-developing trend against a centralized empire and gave
the electors a constitutional basis on which to consolidate their
holdings into sovereign states. It granted them regalian rights
over coinage, mining, and the judiciary; conspiracy against them
was to be considered lese-majesty. In codifying the princes' independence
of imperial jurisdiction, the Golden Bull of 1356 set the constitutional
form of the Holy Roman Empire, which with but a few modifications,
survived until the empire's dissolution in 1806.
they lived happily ever after. What a bullish ending… democracy
won. Perhaps it will, this time as well.
Are they finally
ready to let this bull out of the gate?
Yes, the golden bull. We think it about time that gold prices stopped
faking us out anyway. With dollar inflation running rampant in most
of the other commodities and the designated protector of the international
reserve currency (dollar) denying that it is anything but temporary,
rising aggression and anti-US sentiment in the Middle East deliberately
aggravating this particular problem as well as many others, and
with global stock markets that are about to become a significant
paper weight for the global monetary system collapsing, the timing
and setting could not be better if Charles himself reappeared this
week on the COMEX trading floor holding the golden bull up as a
reminder of the political legacy it was created from.
of COMEX, Gold prices moved up sharply last Monday, breaking out
of a very narrow one month (arranged?) consolidation range ($264-$267)
near twenty year lows. We noticed. Incidentally, this turns out
to have been the narrowest trading range that we have been able
to observe since September 1999.
Gold prices; Weekly / Monthly)
volume in the December contract spiked on Monday, and open interest
contracted sharply throughout the week, indicating significant,
if not anxious, short covering. Indeed, the week's contract volume
(287,000) is the highest weekly volume figure on record since October
1999. Yet dollar bulls were able to place a price cap near the edge
of the six-month (down) trend line. Still, watching the tape last
week, it was interesting to note this strength in the face of economic
data, which continues to point to a material slow down in economic
(stock market) activity.
does this all mean for gold besides a greater likelihood that it
is the inflation rather than aggregate demand, which is the larger
influence on hard asset prices today? It means that recent sellers
are closing off their short positions, and probably throwing in
the towel on the hoped for break to new lows. Though I have also
seen this whole pattern before, in other (rigged) markets. It often
means that the shorts are getting long. Perhaps, this time will
mentioned to you last week that Palladium prices were poised to
launch into orbit. They did. They were up $48 last week (over 5%)
and closed at new highs along with Platinum prices, which also closed
right at their highest trading point on the week (+5%), though a
hair below their own all time highs.
Palladium and the GS precious metals index)
copper prices bounced strongly off of trend support to finish up
over 5% on the week. Thus I was puzzled by the late Friday sell
off in oil prices. Oil prices closed weak on Friday as the International
Energy Agency said it was prepared to take emergency action and
to coordinate the release of strategic petroleum reserves in order
to thwart an economic debacle, according to the International Herald
Tribune this weekend. Yet the same day, Iraq threatened to halt
all exports in order to extort a surcharge from the UN, in Euros.
It is amazing how hard the authorities are working to convince themselves
and others that there is indeed a shortage of crude on the world
market. If we are correct (and we really believe that we are) and
this is a dollar crisis rather than an energy crisis, the "allies"
are going to run out of crude to fight it with, quickly.
if they lower interest rates… there is no better way to guarantee
a monetary crisis at this point in time than by executing the Greenspan
Put yet again in response to an economic crisis of any kind. Yet,
there is no better way to guarantee an economic crisis at this point
in time, than by taking back some of the liquidity upon which lays
an entire pyramid.
a trader, I am beginning to sense that feeling that I get whenever
I know someone is going to try and fight a battle they cannot win.
It is the same feeling I used to get knowing that I just saw the
winning goal in a hockey game, or the same feeling that anyone would
get, I think, at that moment when they perceive a definite outcome.
If our government insists on throwing scarce crude onto the inflation
inferno, and if the Fed decides to step on the (monetary) gas pedal
with ever-lower interest rates, we will have single handedly surrendered
both our weapon and our ammunition. But I guess that this is just
another patent example of our (dare I say) desperate government.
So, our Oil conclusion is for higher prices again this week!
is unclear to me what is going on in Silver markets except that
maybe Warren Buffet is doing the Fed a favor (just kidding I think)?
For, the Silver Institute (and SafeHaven) just reported (November
27) that the US Defense National Stockpile Center has committed
to deliver its remaining 15 million ounces to the US mint for coinage
programs. Coinage programs? Anyhow, that is really a bullish fundamental
development for silver prices, because in the sixties/seventies
this stockpile (165 million ounces back then) was actually used
to manipulate silver prices.
even as this enemy stockpile vanishes into thin air, silver prices
have been trading as if demand were suddenly overcome with enormous
near term supply. Are these stockpiles finding their way back into
the market again? While that is consistent with this administration's
choice of action in oil markets, it is extremely dangerous for them
to do this with so few bloody bullets! Have our leaders become that
desperate that they have to sell their remaining silver and oil
supplies to keep the party going for just a little bit longer? Or
have they really convinced themselves that the current economic
circumstances are temporary and that these actions will therefore
work?? This is seriously becoming not funny.
The Case for Gold
Most industries fund an organization like the World Gold Council
in order to promote their self-interests and to facilitate communiqué
to the public about what the industry is up to. Usually, I also
find that most of these industry groups have relatively good market
information, but the WGC falls short even there. In conducting my
research this week, I concluded that the US Geological Survey did
a marginally better job at providing me (or the prospective investor)
with relevant information on the gold industry than the WGC.
appropriately, the Council's US membership has taken it upon itself
now to form the world's first online jewelry magazine. No kidding…
I asked my wife, she should know… there is no such thing, until
now. Good idea if you want to sell jewelry, but that isn't why I
have brought this up… it gets worse.
title of the marketing campaign is Gold Fashioned Girls
-- Fine gold jewelry gets first ad push in almost five years, with
"GOLD FASHIONED GIRLS" campaign.
they have resorted to selling sex - the oldest, surest marketing
method that ever worked - in order to persuade you to buy more "jewelry."
If you happen by their website, you might notice that their WELCOME
page looks more like the cover of a new magazine for Tiffany's than
an informative industry publication. It might work to up-tick Christmas
jewelry demand, and the Americans will have to receive credit for
promoting gold demand if it does... only in the good old US of A,
the campaign works much more effectively as a disincentive for prospective
bullion investors because although jewelry consumption is a significant
component of annual gold demand, the information that the jewelry
"consumer" requires to make a valuation decision and the information,
which the investor requires to make the same decision are very different.
For one thing, one consumes the other saves. In other words, the
consumer of gold jewelry needs to know little about the variables
that affect the purchasing power of the dollar, while the investor
has little need to know how an 18 k gold necklace looks like on
the likes of Pamela Lee Anderson.
am I discussing this? Because I have never seen anything like it.
Investors are looking
for a catalyst…
They might as well be looking for a three-legged lawyer on Capitol
Hill. The media talks in terms of catalysts because its job is to
interpret complex financial developments in the simplest terms,
for its viewers. Furthermore, catalysts may influence a short move,
but primary trends never begin on a catalyst. They just begin and
end. In our experience, fundamentals change far ahead of the technicals
at major market turning points. This is because the longer a trend
persists; the more confident is the prevailing market psychology
and thus, the less visible are the opposing forces. Professional
observers (provided that they do not get too carried away with the
prevailing trend themselves) should be able to spot these changes,
we think, and in any case often accumulate or liquidate a large
position before a catalyst actually arrives.
even while some news or other development always exists to relate
to a changing market trend, the fact is that it will be incidental
to the "primary" under current of the market. As you know, we feel
that the primary trend for stocks has turned down and the primary
trend for real things that you can use, like oil, palladium, platinum,
copper, real estate, and now maybe even gold, has begun to turn
up. Even more bullish is the probability that these changes have
yet to be widely recognized.
Cappiellio for one doesn't believe they have arrived yet. He says
that if this were the case, then the rest of the stock market would
have soared by now! Soaring stock prices on Wall Street with dollar
inflation exploding all around it? Over the long run, you will find
that stock prices actually generally decline when there is inflation.
Indeed, the opposite environment is what produced this stock market
extreme (delusion) in the first place. What Frank probably means
to say is that first, stock prices will generally collapse, as they
did in 1973/74, and then they would soar off of much lower levels
on the new commodity-stock leadership - as they did several times
in the late seventies when the big oil multi-nationals delivered
big paper profits to shareholders, a good portion of which were
derived from gains made trading inventories.
the first component of the gold price
If you asked a colleague to name the two economic laws, which influence
the price of any good, they would probably tell you that supply
and demand, do. But that is actually only one law. Let's discuss
it here. For if you think that there is a fundamental shortage of
oil on the world market, just wait until you consider some of the
fundamental developments in the gold business, which have evolved
over this past decade.
top six gold producing countries contributed to nearly two-thirds
of total world gold production in 1999.
(Insert table of reserve and production data for top six producers)
World gold reserves have expanded at the rate of about 1% annually
since 1990, somewhat less than the normal 3% replacement rate recorded
over the long run, while world wide demand has grown by over 30%
since 1992, nearly 4% annually (I could not easily find data before
1992). Central bankers have been kind enough to supply the shortfall
in jewelry demand with your money. Thus, the question to ask here
is how much has leasing activity, the gold-carry trade, and direct
central bank selling affected price discovery in gold prices, which
had led to a subsequent decline in the overall exploration incentive
(the discovery of additional reserves), and thus restricted production
from MEG (metals-economics) and the US Division of Minerals reveal
that world exploration budgets have contracted by nearly 50% since
1997, but that does not include this year, which is unlikely to
have gotten better. The data only includes exploration budgets from
a large sample of producers and/or governments, not the junior mining
industry, which actually is much more significant. In the two years
(1996/97), Canadian junior mining players collectively raised nearly
$3 billion for exploration, and it's all gone, presumably on exploration.
To put that in perspective, the USDM data shows that the total world
exploration budget for 1997 was $1.1 billion. The point is that
venture capital markets are the most critically important element
in the overall level of exploration, for gold in particular. This
is not the case in oil markets, where the cost of exploration is
often too high for the venture capitalist to afford.
without the prospect for replacement reserves, it is unlikely (or
even risky) for producers to produce too much at a low gold price.
If they step on the gas, the thinner bottom line at low prices will
not help their effort to fund new exploration. Rather, they would
be going nowhere faster. We have observed a visible, but slightly
lagging, influence on production rates from reserve growth, or depletion.
graph of correlation between reserves and production rates)
correlation coefficient between reserve replacement rates and production
rates is 0.76, but that is easily explained by a visible 12-month
lag in the production process. Thus, the number is likely much closer
to 1 than the data reveals. I think you can see that for yourself
in the chart above. Had replacement rates from 1990 to the present
stayed near the long-term average of 3%, total world gold reserves
could be expected to have grown by an additional 6000 tons, 13%
of the current total.
the data above, it is conceivable that mine production therefore,
could have approached 2900 tons in 1999 rather than 2534, which
could have reduced the need for central bankers to provide the extra
liquidity to the market in the first place, to satiate demand, which
currently runs near 3200 tons (1999).
at least, we might expect that when the artificial central bank
selling pressure ceases, the gap between demand and supply alone
(demand exceeded supply by about 700 tons in 1999) ought to become
visible enough to send gold prices on an exploration incentive creating
binge. Since the signing of the Washington Agreement then, something
should have happened. It did. Gold prices began to rise in Australian
dollar terms, Canadian dollar terms, South African Rand terms, and
more recently, in Euro terms.
these currency shocks should trigger a rapid rise in gold production,
but were it not for an outsized production hike in Uzbekistan, global
production would have actually declined in 1999. But 1999 is largely
irrelevant because the W.A. was signed at the end of the third quarter,
and also because we have found a six to twelve month lag between
the time that the market signals producers and producers (wake up)
bring new production on line, if that is even possible (we will
know better when we get the data for this year).
besides very little replacement activity, also hindering the production
process is that South African producers face escalating health problems
(read costs: 50% of the population has aids?) and mine depletion
(at these prices), which will inhibit production for many dollars
per ounce yet. Although Canada's reserve base has grown nearly as
fast as Australia's, Canadian gold producers face political and
bureaucratic bottlenecks in the production process, which continue
to choke off even current production. Australian producers have
been aggressive sellers of gold forward contracts over the past
few years, even though production rates have steadily tapered off
since 1997. Thus, their medium term firepower may be in low gear
for a while, especially if the dollar tide turns on them.
leaves Russia, China, and the USA as the only source of additional
marginal nearby gold supply. And should Al Gore win the Presidency,
we will have no choice but to expel the USA to the preceding paragraph.
Nonetheless, the already changing dollar tide may make it difficult
to keep the market well supplied anyway.
the Dollar index)
main reason is that a declining dollar will mean a declining price
of gold in Aussie dollars, or Canadian dollars, or Rand, or Chinese
Yuan. Thus, if you think that politics, shrinking reserve bases,
or slow replacement rates in the world's gold business can hold
back production rates, you ain't seen nothing yet. A weak dollar
will unexpectedly squeeze foreign producer's profit margins, which
will force them to consider production cut backs just as the dollar
price of gold begins to soar.
What of Official
Sector Gold Holdings?
Official Gold Holdings plus World Gold Reserves)
did not include official sector holdings in our previous calculations
of growth in world gold reserves because if we did, the figure would
only be more bullish - they have been on the steady decline for
a while. In the above chart we included these holdings, though without
deducting outstanding gold leases (loans) or derivatives exposures.
Calculated this way, the rate of growth in world gold reserves is
stagnant over the past ten years, making the outlook for future
supply shortfalls/shocks all the more likely.
little attention to people who divert your focus toward low short-term
lease rates in order to prove to you that there is no supply/demand
imbalance, for these rates are less relevant than ever today. Effectively,
the Washington Agreement prevents any fresh "liquidity" from moving
into the "lending pool," and the post agreement (violent) price
swing all but killed borrowing demand for the shorter-term leases…
thereby effectively shutting down the lending pool and rendering
lease rates ineffective, or at least highly questionable, at measuring
disturbances in either the physical or lending markets.
for fun, lets consider what official sector gold holdings may look
like after deducting a few things, such as gold leases outstanding
and net derivatives exposures. I will omit deducting producer hedges
because there would likely be some overlap and double counting included
with the result.
data: World Gold Council and the Gold Anti Trust Action committee)
the end of 1999, total official sector gold holdings stood at 33,400
metric tons, according to data from the World Gold Council. However,
a declining dollar may force analysts to assume that claims on both,
the bank's outstanding leased gold and their cumulative net derivatives
exposure, will be at risk. Consequently, there is a net drain of
about 15,000 tons off of the top figure, which leaves the official
sector with only 18,000 tons (or 45% less).
are conservative, widely accepted figures. Consider GATA's calculations
on the total amount of gold actually leased/hedged, and you might
as well deduct at least another 6,000 tons off of that figure, leaving
the world's central banks with less than 12,000 tons of gold to
back their currencies… a potentially significant problem.
According to data from the World Gold Council, US, European, and
Japanese gold demand in the third quarter appears to be recovering
from its Y2K indigestion, while generally speaking most of the growth
in demand over recent years has come mainly from the Middle East
(mostly Saudi Arabia, Egypt, and Turkey).
is interesting to see the WGC try to prove that gold demand falls
when gold prices rise, and it rises when gold prices fall. I cannot
be certain why they try to promote this fallacy because if you look
at their data you will notice that they are careful to compare each
demand data series against their choice of whether the gold price
should be graphed in US$ or in the local currency. If you take out
this baloney, you will find as many examples of rising demand on
rising prices as you would with rising demand on falling prices.
It is a ridiculous point, at least to the degree in which they choose
to promote the concept.
Asian demand trends were not entirely clear, due to unhelpful data
presentation surrounding the effects of the '97 Asian crisis on
gold demand. However, maybe this says it all:
presented to the Chinese government on the transition of the nation
to allow for private gold ownership… according to a Chinese news
agency (though it wasn't clear as to who the "advisors" were):
first stage is to open a gold exchange, restructure the present
policy of state monopoly of purchase and allocation of gold and
related management mechanism, allowing the exchange to complete
the task of linking production with marketing and set the gold
price in reference to the international market.
second stage is to improve the market mechanism while opening
the domestic market in an all-round way, and allow residents to
hold gold investment products and participate in gold trading.
third stage is to internationalize the market to make it a component
part of the international market.
until now, the Chinese government has strictly controlled the price
of gold at which it, and only it, buys gold from domestic producers.
The government raised gold prices by roughly 100% in 1993 and then
since 1997 has allowed them to drop by 25% to $US 9.00 per gram
($260/$280 per ounce).
the second component of the gold price
What do we need gold for anyway if we've got the dollar? Apparently
nothing if prices continue to decline relative to the US dollar,
though, since when is anything good for anything when prices only
decline? I remember when oil prices declined from $20 to $10 in
1998. How many people do you remember telling you that oil was not
necessary to us in the new economy? We know who talked the talk,
and we knew then that the talk was not true, but we also knew that
humans would believe it to be true as long as prices continued to
decline. Many investors believe that stock prices go up because
of fundamentals (or a catalyst)… as if some mysterious force (the
invisible hand perhaps) was recognizing these fundamentals and adjusting
the market accordingly. Of course, this is the ideal market condition;
but unfortunately we cannot trust the market mechanism today because
as we have shown in past commentary, discretionary monetary policy
has skewed / distorted it. Thus, fundamentals do not make the market
go up anymore, cheap, soft, and dishonest money does.
is called inflation and consequently, it is through the artificial
rise in US asset prices that the Fed (or Treasury) manipulates (raises)
our confidence in dollar denominated assets. In other words, the
invisible hand has been replaced by the Federal Reserve System,
which now gives fresh money to certain preferred junkies every time
they run out.
now that you know what really makes stock prices go up or down,
guess what happens to the psychology of a nation who has been deluded
into believing that their markets are free and operate efficiently,
when these mysterious monetary forces are making them feel wealthy?
That's right, we're doing things right! We must be, why else would
our stock market be rising at record speed over the past few years?
Yet the evidence suggests that our markets haven't been working
all that efficiently.
does one reconcile the accelerated volatility in global financial
markets, and perhaps in our economies, with the efficient market
hypothesis? If we are all working hard to make this market efficient,
shouldn't markets be closer to their theoretical equilibrium, and
therefore demonstrate less volatility? Well, having a decent market
background and mediocre observation skills, my confidence that the
market mechanism in virtually anything denominated in dollars is
working properly these days is very low indeed. There is excessive
monetary influence, and it is acutely unprecedented. The evidence
suggests that the Federal Reserve System no longer manages the money
supply. Instead, it is managed by the private banking system and
the paper they are issuing is not dissimilar from the days when
US banks were able to issue their own notes. Do we need to connect
the dots? Have another look at the credit bubble. Every credit issued
by any bank is money. Thus all money that has been issued is backed
by debt. But heck, we have so much productivity going for us here
in the United States.
Lower interest rates
will not get stocks going again!
The Fed and Wall Street dealers have been "trying" to lead new liquidity
toward the value end of the stock market in order to try to deflate
this thing in an orderly manner. A sensible way to deal with a problem
like this one, but it is not working. Instead, this liquidity has
been chasing after things that inflate, duh. Such as oil and other
real things. For value is always in the eye of the beholder and
the beholder, as we have been pointing out, has increasingly been
beholding higher values in the store of oil and gas than in the
store of dollars.
bring this up again because of how loud the call for lower interest
rates is at the moment. It is amazing to watch Wall Street's long
kept secret comprehension about the "Greenspan Put" publicized everywhere;
it is intriguing to watch stock jobbers all over the continent become
passionate buyers of more stock on the "Grande" premise that the
Fed will always save the stock market. This psychological influence
cannot be understated as the repeated execution of this increasingly
wrong monetary response has single-handedly wiped out many bears
along the way. Some of these bears conceivably read the right signals,
except that they perhaps didn't consider how high a roller(s) they
were dealing with and how much moral hazard the Fed was willing
to take on.
here we are today with speculators everywhere throwing their blue
tickets (buy orders at most firms) right at Mr. Greenspan's doorstep,
for his signature on yet another put. Yet, it hasn't been working
with the broad stock market for nearly two years, and it hasn't
worked for the economy recently nor has it worked for consumption
as of late. But again, we point out that it has worked for commodity
prices, internationally. Recall the charts (link) where I showed
you that the changing rate of return on financial assets has not
kept pace with the changing rate of return on hard assets. Now why
would more liquidity (money) suddenly do what it hasn't really been
doing? That is, go into the stock market.
Bears line up behind
the Golden Bull
I said last week that the bulls would have to come to the ball game
and put in a show of strength (if this market is to decline at a
slower rate over the long run), this week. In many market situations,
the same is true of the opposite team (the bears in this case) in
any particular week. We think, however, that considering the extreme
levels of optimism implicit in the put/call ratio at the beginning
of the week, as well as a few other developments, that the bears
had a decisive edge. Consequently, it is equally important to evaluate
their performance last week.
action overseas, the weighted French CAC stock index led European
equities lower, by falling 3.53% on the week, even though shares
in the Netherlands and in Switzerland put in a good performance.
Meanwhile, the Nikkei bounced nicely, up 3.63% (didn't we say something
about a bottom in here last week?), which gave stock markets in
the region a mild boost. Most of the world is focused on the action
in US markets, however, which continue to lead share prices on this
bears were all over the Nasdaq, tearing into the bubble like they
were in for a cold winter. The Nasdaq100 gave up the most, down
nearly 10%. The NYSE Composite faired the best, down only a tenth
of one percent on the week.
Nasdaq versus NYSE)
industry leaders on the week were, brace yourselves… Gold (XAU +9.18%),
Insurance (IUX +4.86%), and Retail (RLX +4.76%) issues. However,
the Dow leadership last week represents neither of the first two.
stocks: > 5% on the week (Insert table)
The bears obviously won the week. We thought they might. The charts
were screaming sell last weekend, yet sentiment polls were showing
rising bullishness as if the bulls had suddenly learnt how to become
were five different technology sectors that were down double digits,
led by the SOX, off by 20%. Close behind it were among this summer's
stronger bulls, the Disk Drives (DDX -18.53%) and the Hardware sectors
(HWI -16.86%). Then of course the Internets (DOT -11.57%) and the
Computer tech index (XCI -11.49%) got shot down, again. The only
other industry group, which was off double digits on the week, was
the oil services (OSX -11.46) group on concern that issues have
been recently overbought.
the Nasdaq got hammered all week long, including Friday actually,
the NYSE composite and the Dow survived the assault until Thursday
when both of them temporarily spiked through panic territory (support)
intraday. The Composite seems to developing a bearish 2-month continuation
pattern; while the Dow Industrials are busy building a one-month
descending triangle... if this is a bear market, then they should
break, especially considering the increasing weakness in the other
averages. We thought that the break would occur last week and it
might as well have, for Friday's soggy rally didn't change our mind
one little bit.
What is on tap for
This week can get a whole lot worse for equity markets, or they
could begin to look better by Friday if the bulls defend these levels
successfully. The statistics are only beginning to move to their
favor for a rebuttal. The NYSE advance decline line showed a nice
recovery of most of the week's losses, but much improvement needs
to be done there if this market is to rally materially, without
help from the Fed. The Nasdaq is now so beaten up that it has approached
its 200 "week" moving average but it has to demonstrate a better
performance than it did on Friday, or Monday, in order to muster
up anyone's confidence.
Put / Call Ratio)
are not yet the right conditions for a meaningful bounce, though
the right conditions might appear at some time this week. However,
not before stock markets discount the worst-case scenario for the
upcoming earnings season, the economy, and dollar, among other things.
Furthermore, because it seems that the stock market cannot tempt
fresh capital with the mild sell offs it has managed so far, that
bulls might just get what they ask for... a selling climax. Only
this one may put them out of business for a while.
US long bonds were generally flat on the week while shorter dated
securities rallied. Naturally, the yield curve normalized somewhat
on the prospect for a slower economy, or at the very least on the
speculation for lower interest rates come December 19. The heavily
watched employment report is due out on Friday, and it is certain
to be a market mover. Over the next few weeks, we suspect that more
earnings disappointments will trickle out of the private boardroom
meetings, as analysts marvel at how much money companies tell them
that they have recently lost in their stock portfolios.
US dollar was down against most fiat currencies as well last week,
but it was up slightly against the Canadian dollar and the Japanese
yen. [To offset the passing of the baton to the ECB, will the Fed
see it to its advantage to re-ignite the Yen carry? Ah... yes indeed
it will, for we can't have any competition for the next reserve
currency, can we? Besides, it cannot be seen as dollar weakness,
it has to be seen as relative Euro strength... perhaps this is why
the press has been highlighting the risks to economic growth in
the Asian region, though I have yet to hear them begin chanting
Euro prospects] The Euro, however, rallied impressively (+4.5%)
against the dollar on the week. While the move in no way implies
an important shift in the technical condition of the market, it
appears to have certainly injected a bullish bias for the short
run. After making a higher low last week, this week's move put in
a higher high. What lies ahead, however, is significant trend resistance
at $0.90... a couple of pennies above Friday's close.
Fed has been weakening the integrity of our reserve currency, the
dollar, by issuing too many notes, but it is our irrational exuberance,
which will have compromised our negotiating position with the rest
of the world on world currency markets.