Weekly Outlook and Analysis of the
Global Investment Climate
28 November 2000
Turkeys Cannot Fly
from Monty Python's, The Life Of Brian
but which side is going to shine next year and the year after,
the dollar bulls or commodity bulls? Or is it dollar bulls vs.
dollar bears, or commodity bulls vs. commodity bears? Both want
to see the Fed lower interest rates, but that is about as far
as their interests converge before facing reality, which is that
their interests are as mutually exclusive as those of two Siamese
fighting fish in one small fish tank. The basic reason is that
both of their values are relative to one another.
Theory of Relativity
As applied to currencies, relativity is precisely how our global
fiat currency regime has been able to survive. Consider the current
circumstances in a world where there is only one currency, the
dollar. Now look at the oil chart above and tell me how one might
interpret the situation without the existence of the chart
next to it. Houston, we've got a problem right? Who then could
point to the strong dollar? Now bear with me and let's stick with
this one global currency assumption for a moment, while we look
at some other charts.
am showing you only a few here, but there are a decisive majority
of agricultural commodities, which have risen strongly relative
to the US dollar this year. The Goldman Sachs Agricultural Index
for instance, which we showed recently, is looking more bullish
not less. All of the energy markets (except for unleaded gasoline)
are without a doubt blazing a bullish trail, with natural gas
prices in a virtual vertical ascent, rising 30% so far this month
alone. Metals markets are mixed, but overall they have mostly
pulled back this fall. Yet except for Gold and silver prices (whose
declining prices have effectively sterilized the incredible rise
of the other precious metals, platinum and palladium), most of
them are generally rising at a solid clip for most of this year.
Palladium prices, in particular, look set to fire off into another
universe, while silver prices depict the steepening slope of Angel
point is that neither the alleged productivity gains in the tech
sector (and agriculture industry) nor the incredibly rising global
dollar "exchange rate" are broadly suppressing prices any longer.
That's not good for a dollar buying cycle, which works well when
there is little dollar inflation, but not too well when the dollar
cannot hold its value against important world commodities.
if the dollar has trouble holding its "objective" value, why would
foreign investors continue to hold or buy more dollars? The fact
that Europe needs to buy dollars in order to buy OPEC oil underscores
the mechanisms that the Treasury has in place to automatically
fight (I should say hide) any possible dollar inflation. But the
use of these mechanisms is really at the sellers' discretion.
In other words, when OPEC decides it is no longer in its interest
to accept dollars for its oil, the dollar might have trouble hanging
on to its more "subjective" international values (utilities) as
well. In fact, it seems that even Venezuela is going to be pushing
for Euros, or at least that has been the talk ever since their
oil minister made OPEC secretary general/treasurer.
they get their wish, which no one on this continent seems to expect
that they will, a not insignificant pillar of dollar support will
have been weakened. We haven't been able to find much "official"
European opinion on the matter so far, only the odd acknowledgement
that there is no oil shortage on world markets (implying a dollar
problem). However, there is no surprise there, as we know all
too well how sensitive financial markets can be to a true political
statement. Yet still, dollar bulls claim that however bad the
dollar situation is, the Euro and Yen situation is worse.
The Other Currencies Are Even Worse Off
That's why George Soros would evidently buy more dollars, or advise
that foreigners do. But before I tear a strip off of him, consider
again the logical fact that the main reason that this dollar system
has survived your confidence so far is due to the existence of
a relative fiat structure in the global currency regime.
In other words, if the other crappy paper currencies didn't exist
in the first place, one could not falsify the dollar's value.
So each time that you hear someone tell you that they think the
dollar will go up simply because the other currencies are even
worse off, remember that they are working off of the theory of
relativity as applied to currency markets. And that therefore,
if you ask them when the dollar will stop going up and they reply,
when the world has one currency; you will already know that such
a condition is impossible.
let's be a little bit more realistic here and have a look at what
is really happening in the forex market.
could be that the Euro is ready to roll
This weekend, Wim Duisenberg gave EU-11 finance ministers a briefing
on the economic and exchange rate situation, which (presumably
for the benefit of the press) resulted in a post meeting reunited
confidence in the Euro's prospects... they now expect the currency
to challenge the dollar parity mark, which is 20% higher than
these levels. When? When financial markets figure out what they
have confidence in. According to them, it is when the world sees
all of the good things that are happening in their economies.
But their reported confidence begs another question… is the Fed
ready, perhaps, to hand the baton over to the European Central
for a moment that the world's leaders are dutifully aware of the
existential aspects of the current relative structure of the global
currency regime, meaning that they know that they have to keep
this structure intact over the long term to avoid a reversion
to a gold standard. Is this a fair assumption? It is a safe one…
never underestimate the intelligence of the market's puppet masters.
Anyhow, considering such an assumption it isn't too difficult
to see how the Fed and the Treasury will have to concede at least
a temporary Euro victory, if only to preserve the global currency
it is not surprising that when Wim Duisenberg spoke at a private
luncheon on Nov 17th in Amsterdam that he sounded a lot like Mr.
Greenspan. While espousing the virtue of monetary discipline on
the one hand, he tried hard to justify the more cloudy "discretionary"
components of the ECB's monetary policy strategy. Nonetheless,
it was gratifying to see that the ECB keeps as its first priority
a check on the growth in monetary aggregates, by anchoring such
growth to an arbitrary reference value (a growth rate of 4.5%
in M3 is apparently acceptable). But it is still disappointing
to see that more weight in reality is placed on the second pillar
of policy, the discretionary process, which has allowed M3 to
already grow at over 5% since inception in 1999. Though it has
recently moderated to 3.6% in September. The discretionary process
of course has plenty of legitimate justification as always, such
as the flexibility necessary for a new currency in a complex and
rapidly changing economic environment, which involves the merging
of 11 different nations and/or economies.
perhaps the most familiar words spoken were when he cautioned
his audience about reading too much in the higher than normal
HICP (consumer prices) rate of 2.8% in September as certain "temporary
external" factors are occurring in energy markets and in exchange
rate markets, which monetary policy cannot counteract.
we know that is a lie, we now know that the ECB will have the
support of the Fed on the next currency intervention!
does the Yen fit?
The Yen traded right through the lower end support point of a
12-month trading range this week, apparently because markets perceive
the political strife in Japan as negative for the economy. Strangely,
this explanation is made even as economic authorities have finally
adopted more recent international accounting standards with the
unexpected result that Japanese GDP actually grew 1.4% last year
instead of the originally reported 0.5% -- calculated using standards
developed in the sixties. Some explain the sudden Yen weakness
by making reference to the rapid stock market decline in Tokyo
this year. Yet with other economies in the region gaining momentum
(it was reported on Friday that Hong Kong's 3rd Quarter GDP grew
by an unexpectedly strong 10%) it is difficult to perceive this
to be an entirely accurate explanation. Besides, we're looking
for a bottom on the Nikkei in here as the index has moved to within
an inch of its 1998 lows.
is interesting to watch the dollar gain momentum even as economic
growth rates converge around the world. In such an environment,
it is difficult to properly explain the dollar's increasing parabolic
trajectory, especially when this meteoric rise in value against
other paper (fiat) currencies lags the rise in value of commodities
relative to the global (fiat) purchasing power of the dollar.
|9 year charts
perhaps this might have something more to do with recent dollar/yen
strength, or if not, at least might explain recent Yen weakness...
the Bank for International Settlements reported that Japanese
Banks' cross border lending totaled $52 billion (dollars) in the
second quarter. That figure is up 75% compared with the same quarter
one year ago and it is only 5% below the amount of capital, which
Japanese banks exported in all of 1999. That's a lot of dollars.
The Japanese thus continue to export capital at a rate, which
is equal to a little more than half of the US trade deficit. By
the way, this figure does not mean that all of that money went
to US markets. But it is also an old figure, which may not yet
reflect the accelerated rate of growth evident in the issuances
of so-called Samurai bonds (bonds issued to foreigners, denominated
in Yen) since the second quarter.
analysts are concerned that Japanese investors will stop purchasing
these bonds from foreigners after the HITIC default and the Xerox
uncertainty, the fact remains that issuances are in record territory,
for the moment. In 1999, a total of about $6 billion in Samurai
bonds was issued. So far this year, that number has tripled to
roughly $18 billion, but half of that was issued since only the
end of the second quarter (we should be quoting this in yen, but
chose to keep it simple - for our own benefit).
do fully expect this demand to ebb, particularly if there are
other defaults, but it is unlikely to ebb tomorrow if nearby expectations
for a strong dollar continue. The Japan Times made the following
comment over the weekend:
Muramatsu, foreign exchange manager at Commerzbank in Tokyo, said,
"Since there are no reasons for buying the yen or the euro, the
only (major) currency remaining is the dollar," he said. The possibility
that Texas Gov. George W. Bush will win the still unresolved U.S.
presidential race continues to be taken as a dollar-supportive
factor, he said. Bush holds a slender lead over Democratic challenger
Vice President Al Gore.
with comments like that coming from Japanese investment dealers,
it is difficult to perceive that the demand has ebbed quite yet.
But it is equally difficult to perceive that the demand for US
debt in particular can grow much more beyond this point. Accordingly,
we find little reason for a sustained Yen decline, particularly
if the Bank of Japan stays on its current course for tougher interest
What an appropriate week to have Thanksgiving. The Dow sank another
160 points last week and the NYSE (composite) closed down almost
12 points, but that concealed some of the technical damage done
to the market early on in the week. On Friday, the Dow bounced
firmly off of support giving the broader blue chip average (NYSE
Comp), as well as the ND and the SP500, a boost before retracing
a portion of these gains by the closing bell. It was kind of good
timing for this "bounce," as the broader markets sold off just
hard enough the day before thanksgiving to give bullish players
a case of mild indigestion.
see, up until then, NYSE bulls have been busy trying to maintain
a pretty sequence of higher highs and higher lows, which they
started in mid October. But Wednesday's lower low the day before
an American holiday, which is statistically bullish for stocks
by the way, followed new lows in the tech heavy ND and lower lows
in the S&P 500. The moves threw a bearish bias into the charts,
working the bears up for yet another plunge at October's lows,
and very possibly beyond.
rather than resting its full tummy the day after, the shrewd bull
found yet another buying opportunity too irresistible to ignore.
Besides, after a decent close in Tokyo and in European tech markets
earlier in the US session, loading up on even more allegedly oversold
tech issues seemed like the right thing to do. Friday's three
best Dow performers were Intel +6.7%, Hewlett-Packard +5.6%, and
is going to have to be a decisive day for the bulls because Friday's
bounce was not a rally. Twelve months ago, such a bounce at such
a point would have turned into a ferocious bull assault on bearish
strongholds, in a rally about three or four times as powerful
as the bounce on Friday. Lest we get too tough on the bulls though,
we suspect that most of them weren't all that worried about the
week's action. For at least it didn't show up in the put / call
ratio, which implies about the same degree of bullishness that
existed in early November... just before the Dow and the Nasdaq
got nailed for 600 points.
are the options markets predicting a rally or are they telling
us that there is too much complacency for a rally to develop?
Normally it would be the latter and we see no reason why that
shouldn't be the case going into this week.
Dow Utilities started the week off at new highs as oil prices
remained generally sticky and the media gradually warmed up to
the potentially bullish energy story as we thought that they might
when we wrote our thesis... Wall Street Kisses Goldilocks Goodbye.
Though they fell back by Friday, in sympathy of the Thanksgiving
bear raid this year... turkeys. Meanwhile, the Dow Transports
have been acting up lately and we find it difficult to explain.
Apparently, higher oil prices haven't drowned out bullish noise
about expected growth in the travel industry.
the call is out to bulls everywhere... they had better show up
to the ball game this week, for if this thing isn't gonna bounce
here and now it will have to bounce off of a lower level. For,
the path of least resistance in the rest of the market is increasingly
toward lower lows / lower highs... for almost all stocks.
Jones World Stock Index
Dow Jones World Stock Average bounced around important support
for most of the week and closed down 2.3%, but closer to the high
end of the week's range than the low end. Nevertheless, it was
representative of the global stock market scene on the week; at
least in US and European equities... hum drum, quiet, but perhaps
telling... have the worst news and more pessimistic expectations
been discounted? You might think so by glancing at the extent
of the markets declines so far this year, but it is never wise
to take a contrarian position when sentiment indicators still
reflect tons of bullishness.
Gerard Jackson, in March 1997, wrote an article for The New Australian
Markets and Democracy,
a reply to George Soros.
the article, Mr. Jackson, a well-read economic historian, replied
to Soros' attack on the free market system and of it threatening
democracy, correctly accusing him of ignorant economics. I will
not spend time on the argument, but have provided the link for
your own interest... just click on the title of the article above.
we all know, Mr. Soros strongly believes that financial markets
are inherently unstable. Extrapolating such a view, it isn't difficult
to reach statist, socialist, or communist conclusions on the topic
of individualism and market mechanisms, but I am amazed at who
it comes from. What ever happened to his supposed understanding
is less important, however, than perhaps the fact that his view
of free markets (he is publishing a new book by the way) may be
increasingly and frighteningly representative of today's leaders.
Now I re read this article because I was dumfounded by comments
that he made in a recent interview last week, where he claimed
that the condition of rapidly vanishing savings rates can go on
for some time, that the government's bourses are well intact due
to the US fiscal budget surplus, there is no inflation, and that
the dollar will stay strong because foreign interests are all
with his critique of the ECB's monetary policies, I don't know
if he is lying because he is short the dollar or because he has
become an agent of the US Treasury (part of the establishment,
so to speak). Anyway, the part of the Gerard Jackson article,
which I found particularly interesting and goes right to the heart
of Soros ignorance (or agenda) is this:
are basically stable. What is not stable is monetary policy. And
it is faulty monetary policies that destabilize economies. When
the gold standard reigned supreme financial markets never witnessed
the kind of prolonged financial gyrations that we are now experiencing.
These wild fluctuations are basically caused by constant changes,
and anticipated changes, in money supplies, price levels and exchange
rates. Furthermore, banks unofficially going off the gold standard
by artificially lowering their interest rates through credit expansion
caused nineteenth century depressions. The roots of this theory
can be found in Ricardo and the Currency School. The Austrians
refined the theory and integrated it into capital theory. (Unfortunately,
the Austrian view has been successfully suppressed in Australia
- and not by the Left, who probably do not even know it exists)..."
Gerard Jackson, March 1997.
please refer to the two charts at the beginning of the report
and remember that it is both, in the interests of "today's" dollar
bulls (or so they think) as well as it is in the interests of
today's commodity bulls (dollar bears), to see to it that the
Fed will lower interest rates soon.
the fact remains that it is in the Fed's interest to raise interest
rates high enough to prevent the inflation from spreading, now,
while inflation expectations are still in check. In our opinion,
this is true whether it is acknowledged or not. Unfortunately,
Mr. Greenspan and company cannot afford to do what they must to
ensure the survival of the Federal Reserve System, for it has
got to be difficult for the man of the decade to put everyone
out of work in order to "prevent" the otherwise inevitable currency
/ economic collapse.
So what is it going to be next year, commodities or the
dollar? Before you answer, just remember that Turkeys cannot fly
very far (corniness intended)
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