year later, Werner Heizenberg proved the "Heizenberg Principle,"
which guaranteed him the Nobel Prize in physics, in 1932, for
his role in the creation of Quantum Mechanics.
this issue of the Global Investment Climate:
it a sucker's bottom… or just another selling opportunity?
boyz really hammered oil prices, but boy… was it the wrong
markets take a breather as Dollar teases to break down
implications of Gold Gate for your full faith and credit
hints at "recession," but markets rally on interest rates
focus continues to be directed toward aggregate demand, by
a wily group of bankers confused by the function of their
Object of FedSpeak is not Transparency
In 1999 Lawrence Lindsey (an ex-governor of the Federal Reserve
Board) published a book called the Economic Puppetmasters, in
which he explores the thinking of four individuals, Alan Greenspan,
Dr. Yen (Sakakibara), Helmut Kohl (former Chancellor of Germany),
and George Soros. In the book he describes Greenspan as the "contrarian"
central banker, often having to enact 'out of favor' policies
in order to neutralize potential economic imbalances.
I read the account, it became enlightening to then observe the
Fed Chairman speak and enact policy in the real world. I had begun
to understand why so much ambiguity poured from the lips of Alan
Greenspan and the various Fed governors over the years. More importantly,
why it had to. Because the object of FedSpeak (a slang term used
to label the general public opinions, speeches, and comments made
by members of the Federal Reserve Board) is not transparency;
indeed the prime directive of any public statement must be to
minimize Heizenberg's principle.
other words, and perhaps in its most appropriate role, it (FedSpeak)
exists primarily to neutralize participants' expectation sets
in order to prevent (or minimize) the uncertain influence of the
observational bias - a slight twist on the original idea. Extrapolating
this hypothesis, it becomes apparent that pretending that there
really is no stock bubble, or an inflation problem or vice versa,
is not really a bad thing… especially if your words can affect
an unpredictable outcome.
are many ways to maintain an organizational transparency, without
having all of your directors give ambiguous daily speeches, which
almost any analyst will tell you give us less insight into the
organization by way of the constant contradiction. Thus, the process
is born of scientific (read political) necessity. For, the truth
may be that our monetary leaders are running an economic experiment
in which they are trying to anchor our expectations. If you are
unfamiliar with the concept of Heizenberg's principle, please
review the two unrelated analogies below:
politics, as much as in physics, Heizenberg's principle that the
measurer cannot help but affect what he measures is true. These
national polls, moreover, do not actually measure anything of
much relevance (a candidate could easily have a substantial lead
in a single national ballot and yet lose the electoral vote if
his support is divided across small states,) and so the polls
only affect the election and do not truly measure it. (Yuval
Larry Grossman, the columnist, author and former president of
NBC News, noted that the problem of impartiality begins with the
Heizenberg Principle, the theory that the act of observation itself
alters the event. This increasingly is a problem for a press corps
that the public sees as not its surrogate, but a player in the
scientifically called the "principle of indeterminacy," it was
named after Werner Heizenberg, who received the 1932 Nobel Prize
in Physics after a spirited fight in 1926 against the leader of
an opposing faction of academic thought. His opponent, Schrödinger,
felt that the two theories yielded the exact same mathematical
result, but that his own (Wave Mechanics - where light is made
up of waves) was easier to calculate and understand. Hence, he
all but concluded that the existence of Heizenberg's theory (Matrix
Mechanics - where light is made up of particles) was redundant
and not necessary. Heizenberg proved, however, that the simpler
calculations over looked the "principle of indeterminacy," and
soon after a walk in a park under a starlit sky, we are told,
he had the epiphany that light was not only wave, but also atomic
the same year, he wrote a 14-page letter to Wolfgang Pauli, where
he defined the mechanics of the uncertainty "premium," which occurs
while trying to measure an experiment, and which results from
either error in the theoretical interpretative framework for the
observation, or simply, in the act of the observation itself.
principle is especially relevant in the social sciences, for very
much like the processes that go on within the atom, here to, Newton's
laws of gravity need not apply. Nonetheless, if this is indeed
the object of FedSpeak and is intended to replace the role of
anchored policy, it is fallible because creating the inflation
expectation set is perhaps the best weapon that the Fed actually
has, at its disposal.
reason we feel that way is that it is unfeasible to neutralize
the expectation set of prospective receivers of dollars outside
of the Fed's immediate communications, or like, domain. Thus,
the enforcement of legal tender outside of US borders is and always
has been determined not by US pressure, but by how the principles
of monetary economics interact with foreign interests, and thus
the international monetary arrangement (order). In order for a
particular fiat currency to sustain a stable economic unit of
purchasing power throughout the world, homogeneously and over
a consequential period of time, the nation enforcing the fiat
would ultimately have to take over the entire world or it would
sooner or later have to holdfast to the discipline of the economic
principles, which govern money supply and demand.
our point is not that this government and monetary authority believe
that they can manipulate the economy simply by "sterilizing" our
psychology, but that in order to stop the inflation, the Fed will
have to do more than neutralize an increasingly global set of
participants' expectations… it will have to focus its policy on
the monetary principles of supply and demand, for dollars. Greenspan
& company will have to actually act, which means that he will
have to raise interest rates and perhaps enact 'out of favor'
policies at a time when we really do not want him to, like when
stock prices are reeling or when the economy is contracting faster
and faster, and all the while, prices continue to rise.
he were to do that while simultaneously telling people that there
is no inflation (a possible prognosis), conceivably his credibility
would be shot and then his mandate would be constrained by the
general public confusion, or at least by an angry mob or two.
Perhaps the best weapon in the Fed's arsenal is to come clean
(why does that seem so taboo these days?), tell people that there
is a problem, present a solution that they can have confidence
in, and proceed to cross their fingers in the hope that the public
will not invent their own solution.
are not trying to invent new policies here, but rather we are
trying to point out that the policies of the FOMC continue to
err on the side of inflation. For as it becomes increasingly difficult
to manage the uncertainty principle with respect to dollar policy
(psychology) on foreign markets, where there is less communications
influence, inflation expectations are indeed on the rise. Thus
the deterioration of the purchasing power of the US dollar in
international markets has already begun, and we have already shown
this to be the case in recent commentary. And if this is true,
then it is also true that the Fed is behind the curve on interest
rates. Finally, if that is true, then one of the two prognoses
(in the preceding paragraph) ought to follow.
will rally off of lower levels
Notwithstanding, Mr. Greenspan apparently feels that inflation
expectations have been getting a little out of hand on Wall Street
as of late, which explains last week's "FedSpeak." Our peers have
done a good enough job at criticizing the speech, so I do not
need to. But it is perhaps of significance to report that while
he hinted at recession, conceivably to neutralize the growing
inflation expectation set, capital markets naturally interpreted
his statements bullishly to mean that he will be lowering interest
rates next week. I cannot help but wonder if this is an unintended
outcome resulting from the application of the Heizenberg on a
misinformed audience? Oh, the irony.
our guess is that if it (the stock market rally) continues, it
should prompt another sterilizing non-action from the FOMC next
week. Having said that, it is also our guess that it will not
continue, which may in fact prompt the Fed into action. So our
Fed model assumes that the Fed will react to psychological imbalances
with psychological counterweights, and that it will react to economic
imbalances with policy action. Of course, the model already falls
short of perfection as the evidence suggests that the Fed only
reacts with discretion and after much deliberation, and only to
imbalances that it perceives as fear inducing. Nothing wrong with
that, I suppose, if you're an eternal optimist.
in a bear market, all news is bad news!
Isn't it the truth? Ironically, in this case it means that even
lower interest rates might come as bad news, especially if they
come without being precipitated by a stock market debacle. There
are two reasons. The first is that the move may imperially confirm
the already weakening confidence in our economic prospects to
our foreign interests, and the second is that they just might
have already shown our readers reasonable evidence that dollar
owners and/or acquirers have progressively more preferred to exchange
those dollars for oil, natural gas, palladium, platinum, and other
commodities than they have preferred to exchange them for more
equity. The evidence came in the form of two charts, which compared
the rate of return on dollar denominated assets to the rate of
return on the dollar price of important commodities over the past
two years. Guess who won.
the US Dollar Index and Crude
the relative slopes as the arithmetic chart scale conceals the
out performance of crude prices. Thus it is not surprising to
us that this loud yet oddly silent battle still dominates the
general stock market current.
Global Stock Markets
Kong's Hang Seng Index
500 Large Cap Index
London Stock Index
it is therefore not surprising to us that the main theme in a
bear market rally over this past week has been a nostalgic reversion
to the goldilocks dream. This is evident in the strong relative
performance of the technology and transportation issues over the
utilities and oil sector stocks last week.
But what does it
We think it doesn't mean a heck of a lot. In light of the fact
that Mr. Greenspan's Tuesday speech ID's him as the conspicuous
leader of the ticker tap parade, it is appropriate to wonder whether
he was indeed sent out to encourage this theme, or at least rally
the troops, by teeing up the Greenspan Put for next week. Yet
despite that, the Nasdaq indices still only put in an inside week
- technical jargon meaning that they closed the week off by registering
a high below the previous week's high and a low above the previous
technicians ought to point out that while encouraging, there was
no real significance to last week's Miss Goldilocks pageant, other
than fresh evidence that some horses were still willing to go
to the trough on command. That being said, a decisive move through
3000 (on the Nasdaq), might summon enough momentum to challenge
the 200 day moving average, which is quickly approaching the 3500
mark. Beyond that, however, conditions are not yet right for a
meaningful general market bottom to have already occurred. There
is still a lot of work to do. On the two-year weekly charts below,
the last bar on the right in each case depicts last week's market
100 Stock Index
SP500 ended the week by consolidating near (but underneath) its
50 day moving average and well underneath the 200 day. I will
admit that the bulls have done a decent job at bending some of
the charts back in their favor. The Dow Industrials and the NYSE
composite index were both rallied above their respective moving
averages just in the nick of time, since the bearish crossover
divergence in the NYSE composite occurred on only Wednesday of
last week. In doing so, wounded bullish forces were able to contain
prices in what appears to be a symmetrical consolidation of lower
highs and higher lows, a neutral chart pattern, over the past
10 weeks. I do have to say that it is amazing to watch these narrow
averages way up here, still near all time highs, while the rest
of the market has been literally falling apart.
main reason, I think, is that the "Point of Recognition," while
perhaps having occurred, has been somewhat obscured, by the psychologically
manipulative tactics of the Fed, and of course, some Wall Street
so while this still might come as a surprise to the bull's militia,
the primary market debate does not revolve around the next President,
but instead, inflation. Specifically, whether or not we are at
the breaking point of a run away inflation in commodity prices,
as the result of a misguided US Dollar policy… whether or not
all the charts of all commodities will soon look like this…
some visual aids…
Sachs Commodity Index
of the above are two-year weekly charts, depicting a trend that
has been evolving for nearly two full years now. Not that one
would know by reading anything that the Fed, administration, or
the average curb monitor has to say about the market. Please observe
two important points; first, that a growing proportion of commodity
prices are rising not falling, despite a quickly slowing economy.
Second, that a 20% retracement in oil prices (over the past 14
sessions) has had hardly a negligible effect on either the CRB
or the energy weighted Goldman Sachs Commodity Total Return Index.
is that for some truth serum? So while Greenspan is telling you
that the Fed is working hard to slow "aggregate" economic demand,
he is probably hoping that the reason for rising prices is in
fact an overheated economy. For then, an economic slowdown should
cool the inflation, right? Yet even as the US/European manufacturing
sectors continue to crumble, as corporate credit markets get squished
(sorry, trying a new word), global stock markets are pummeled,
and the heavily indebted consumer struggles to find a way to shorten
his or her Christmas list, prices continue to generally rise against
the dollar. And arguably, even as the evidence of global recession
mounts, prices continue to generally rise. Think about that next
Tuesday when the FOMC meets to decide on whether or not to shower
the market economy with more, cheap fiat currency. Think about
whether the FOMC ought to consider the theory of aggregate economic
supply and demand over the theory of money supply and demand,
in setting interest rate policy.
course they shouldn't.
OPEC, for one, would certainly love it if they did!
Iraq may soon be flowing oil onto international markets provided
that the UN follows through on whatever concessions it apparently
made in order to keep Saddam on side, including accepting Iraq's
new price formulae, which we are told included partial payment
in Euros. This took me a little by surprise, as I didn't think
that the UN would cave to the extortion, but I miscalculated the
apparently diverging interests within the United Nations. I also
did not anticipate the logical call, in hindsight, on the IEA
for its support in manipulating oil prices… two factors, which
are directly behind the collapse in oil prices so far in December.
both the IEA (International Energy Agency) and the USA have already
been selling oil into the market since the IEA announcement on
December 1, apparently in order to avert an economic disaster.
Though, we feel that the move is a bad one, and will probably
precipitate an economic disaster. If the driving force behind
a reversion to objective values (refer link to dollar utility
article) for the dollar is the relative scarcity of certain commodities
with respect to the relative abundance of currency, then will
not creating a larger shortage in the reserve accounts of major
oil dependent nations ultimately fuel the inflation? Perhaps not
if US economic authorities are correct about the "temporary nature"
of the oil price spike.
the importance for US authorities to be correct on this supposed
temporary nature of the oil price spike cannot be understated.
For if the economy continues to slow and oil prices continue to
grow (the rhyme is unintentional), rather than decline as they
should, on a slowing in "aggregate" demand, the market will have
broken the Fed and its psychological game.
think that they are wrong
These temporary shocks should dissipate quickly if our argument
on dollar inflation is indeed correct. In fact, they may have
already done so. The amount of influence that any price taker
has, in setting oil prices (especially in a market that consumes
80 million barrels of oil each day), is minimal. As they say in
Forex markets, intervention only works to smooth and aid a trend,
rather than to determine one. So in this case, here you have the
organization, which represents the world's oil importing collective,
selling its strategic oil reserve into a market that is on fire
with dollar inflation, believing that it is only a temporary shock?
Yeah, Mr. Greenspan better be right, that the spike in oil prices
Wall Street Gets
Behind The Transportation Sectors
Could it be that speculators have determined that airlines have
more pricing power than might appear? Have profits or customer
traffic in the transportation business suffered over the past
year as the industry pushes fuel surcharges in a bid to pass on
the higher fuel costs?
October 6th 2000, Paul Kangas interviewed Julius Maldutis, managing
director at CIBC World Markets on the Nightly Business Report.
airlines have started to hedge oil very significantly. And second,
airlines put through three fair increases and a fuel surcharge.
So, in effect, they've neutralized the corrosive impact of oil
answered my curiosity about the recent leg in the Dow transports.
While there is certainly a relative undervaluation in the transportation
issues compared with the overall market, the bulls (consistent
species that they are) also perceive that there is a relative
over pessimism with regard to the traditional relationship between
the financial performance in the airlines and the rising cost
of oil, even though it is their second largest cost category after
labor. Maldutis also revealed that the airlines have been working
really hard, using the Internet, to improve on the filling of
typical excess seating capacity, which traditionally results in
lost revenues. Furthermore, their Internet initiative has been
putting the squeeze on the likes of PriceLine and other travel
agents, by providing you with direct access to ticket purchases.
This way, the overall price of travel does not rise to the consumer,
yet the overall share of the profit pie in the travel industry
grows in favor of the airline stocks. Do you see what the bulls
if the government can keep pressure on oil prices just until the
end of the month, there is a good chance that the aforesaid broad
hedging activity in this sector will show some off balance sheet
windfall profits in the next reporting season (January?), provided
that the gains are realized. So you see, the market debate is
about inflation, and if the boyz are wrong about what they are
telling us, then this hedging activity will ultimately result
in "extraordinary" losses for some of the new puppies in the game.
Do you see then, that represented by the stock market leadership
last week, the tape is positioning itself around expectations
for lower oil prices?
Another Great Selling
Without a doubt, if you ask us. We're not buying Greenspan's line.
Besides, one of our most consistently reliable indicators is flashing
a short term pink again:
2 year put/call against 2 year S&P 500
Forex markets have been quiet over the last few sessions, after
the Dollar index broke through minor trend line support and what
some might call the neckline on a small double top. This might
in fact be the quiet before the storm. Note the concurrent up
tick through a similar trend line in gold prices below. If this
were to continue, we see not less than a few catalysts ahead for
gold prices. But what is the catalyst for the dollar? The point
of recognition in the inflation argument and a resumption of the
bear market in equities ought to do the trick.
supporters put their money where their mouths are
When Bill Murphy (Chairman of GATA) told me that Reg Howe had
just filed a complaint against the BIS, Greenspan, Summers, JP
Morgan, Chase, Goldman Sachs, etc., my first thought was holy
tulips, someone is gonna have a bird! Anyhow, the BIS (Bank for
International Settlements, created in 1930) shareholder issue
is a strong hand for GATA because the central banks have been
underhandedly maneuvering to privatize the Bank… another initiative
for more market transparency (sarcasm intentional).
move is clearly controversial because no one thinks that these
guys have any proof. But the timing is extraordinary, as one smoking
gun after another is discovered in one market after another. With
a little help from the market forces already in motion, this could
turn out to be an explosive story. As I write this, the BIS already
responded on its own, suggesting that the claims have no merit.
Is that all they got?
Edmond J. Bugos
The GoldenBar Global Investment Climate is not a registered
advisory service and does not give investment advice. Our comments
are an expression of opinion only and should not be construed
in any manner whatsoever as recommendations to buy or sell a stock,
option, future, bond, commodity or any other financial instrument
at any time. While we believe our statements to be true, they
always depend on the reliability of our own credible sources.
Of course, we recommend that you consult with a qualified investment
advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and
barring that, we encourage you toconfirm the facts on your own
before making important investment commitments.