Maund on the Markets

Like a petulant child raging around because it got one candy when it expected two, the market threw a tantrum yesterday when it only got a quarter of a percent rate cut yesterday when it was hoping for more - but what good would it have done if rates had been cut by half a percent, or even a full one percent? Is it really wonderful to undermine the dollar so much that it completely collapses? Is that what the stockmarket really wants, or is simply that like the spoiled brat that doesn't get the instant gratification it seeks, the market can't see past the end of its nose? Whatever, the news from the Fed yesterday caused a nasty convulsion that may mark the end of the "Santa Claus" rally - it was unspeakably cruel to withhold treats like this in the runup to Christmas.

In recent years the US economy has morphed into a vast sinkhole for international finance and savings. Like some giant industrial vacuum cleaner with its brush removed the nozzle of this voracious beast has found its way into every nook and cranny of the world's economy, hungrily sucking up any loose funds that are not securely nailed down. What have the funds been used for? - to balloon already gargantuan Federal and State deficits and to maintain an orgy of consumer spending at home by citizens who are actively encouraged and enticed to spend every last penny they have and to borrow to the hilt and spend still more, to increase military spending to unimaginable levels that exceed that of the rest of the world combined, this purportedly to defend the Homeland from a bunch of discontented eccentrics who occasionally cause explosions, and to finance wars of occupation in far flung lands.

The reason for the financial earthquakes this Summer and Fall, which are but mild tremors compared to what is looming, is that the rapacious nozzle of the vacuum cleaner has not been able to locate and suck up sufficient funds to meet its exponentially expanding needs, as foreign hosts, growing tired of having the lifeblood sucked out of them and realizing that they have been conned over the sub-prime mortgage paper and are never going to be repaid, have started to choke off the supply of funds. The result is that extraordinary emergency measures have had to be taken to prevent the banking system going into instant seizure and collapse, which have only been partially successful to date - and they had better be successful, because if we see a credit gridlock and major banks failing, the consequences could push the world economy over the cusp from a highly inflationary environment into a deflationary implosion, which needless to say would be disastrous. These emergency measures have principally involved a dramatic and hyperinflationary ramping of the money supply, the catastrophic consequences of which will emerge later. This is the reason for the unfolding collapse of the US dollar, which has two key advantages for the United States - it progressively diminishes the real debts owed to overseas creditors and it makes other economic power blocs, such as the European Union, much less competitive in world markets. A stark example of this is provided by EADS, the makers of the Airbus aircraft. EADS was severely wounded by the superjumbo delays fiasco, and the otherwise glamorous image of this aircraft has been dented by Singapore Airlines' laughably prissy decision to ask its customers who pay a grand sum for a double bed on the flight to refrain from doing what comes naturally, on the grounds that other passengers or crew might overhear them. It recently emerged that EADS, which has always had its production centered in Europe, might partially relocate it into dollar zones or even the US itself - Boeing must be really laughing about this - hats off to a falling dollar! The weakening of the European Union is a way to ultimately undermine the Euro, which is the only currency that presents a serious alternative to the US dollar, and must therefore be crippled. A low dollar will make US business, what's left of it after outsourcing that is, suddenly competitive, and turn up the heat on Europe. Faced with a suddenly plunging dollar, other countries and power blocs are scrambling to pump up their own money supply, in order to weaken their own currencies and maintain a competitive advantage. Thus the rate of competitive devaluation around the world has moved up one whole order of magnitude on the Richter scale, with huge inflationary implications, an effect of which must be a flight into hard assets such as gold and silver. The writer receives endless Emails from people declaring that "they" will never allow gold and silver to rise a lot, because this would expose the failure of their economic policies, and that they will use every means at their disposal to prevent it, such as selling off bank reserves, including those that they don't own or don't even exist, naked shorting etc. So let's get two things clear. One is that it doesn't need gold and silver going up a lot for the failure of economic policies to be obvious - just ask shareholders in Citigroup or Fannie Mae or Freddie Mac. "They" are as thick skinned as a Rhinoceros and couldn't give two hoots whether gold and silver go up a lot or not. The other is that when there is sufficient demand for gold and silver by buyers who insist on physical delivery, then no amount of convoluted shenanigans or skullduggery can stop their prices rising. If you buy a rare and expensive painting such as a Monet or a Rembrandt, you don't go home from the auction house with a scrap of paper saying that you own it - you want the thing under your arm, to have and to hold, to admire, even if it is wise to put it in the safe in between times. If you buy gold it should be the same, you should be able to gloat over your treasure - and picking up gold bars regularly strengthens the forearms.

There is an old saying that goes something like "If you owe the bank a large amount of money you have a problem, but if you owe the bank a huge amount of money the bank has a problem". This neatly sums up the situation now existing between the world superdebtor, the United States, and the rest of world. By suddenly ramping its money supply still further and dropping interest rates in an effort to avert a credit crunch, the US has thrown down a gauntlet to the rest of the world and has effectively said "The collapsing dollar is your problem - and if we go down we'll take you all with us, so you'd better help out or it's your funeral" The US is testing the resilience of the world economy to the limit and the world is already starting to crack. Evidence of this was provided by an Abu Dhabi fund stepping in to partially bail out the ailing Citigroup about two weeks ago, a surprise development that ignited the just ended strong rally on US stockmarkets. The timing if this move is thought to be no coincidence - the broad US stockmarket was on the point of breaking down completely. The driver for this unusual move was that Mid-Eastern fiefdoms have vast amounts invested in the London and US stockmarkets, and have a lot at stake if they should plunge, and it is therefore easy to get them to come running to the rescue. Scrupulous German savers meanwhile look on with dismay, realizing belatedly that they have been conned, the money that they assiduously stashed away for many years having been sucked up rapidly by the giant vacuum cleaner and blown by the US government on military expansion and overseas adventures and by US consumers on property speculation, giant flat screen TVs, SUVs and the good life generally. Like a truck driver with a cargo of perishables who finds that his refrigeration has failed, the Chinese are stuck with trillions of dollars of atrophying US financial junk in the form of dollars, Commercial Paper and T-bonds etc, and are scrambling with almost indecent haste to convert these into something tangible before their value ebbs away, an example of this being their recently publicized interest in buying the mining giant RTZ. The US message to China is also clear - if we go down, you lose your biggest export market. A major complication for the US financial system, specifically the major US banks, is now beginning to rear up, which is an impending tidal wave of lawsuits by overseas banks and financial institutions seeking redress for the massive losses they have incurred as a result of buying vast quantities of Commercial Paper that included a generous helping of sub-prime mortgage loans, that had been carefully packaged - spliced and diced - to make them more palatable to naïve and trusting foreign buyers, with the collusion of US rating agencies who presented them as being of much higher quality than was actually the case. The problem for US banks is that they can be legally forced to buy them back at face value if it can be shown that fraud was involved in the origination process. If that happens the banks will face ruin. The only alternative is that the big US banks can simply brazen it out by declaring themselves to be beyond international law and say "Let the buyer beware - you bought this rubbish, more fool you - tough luck, we're buying nothing back, it's your problem so get lost". In reality they would of course couch this message in diplomatic language. What a great post UN job this would make for Kofi Annan, who could make the best of delivering the right hook in a velvet glove, with his slow modulated android-like voice. However, we can be reasonably sure that overseas investors and banks would not take kindly to this approach, and the US banks would find themselves quarantined as an international financial pariah which would also lead to them facing ruin. Thus there is now no way out of the enormous hole that they have dug for themselves, the towering sides of which are now starting to collapse in upon them. What we are currently witnessing is a fascinating process of procrastination and obfuscation, with everyone right up to, or should that be right down to the President getting involved. The chief purpose of this is twofold - to allow the many spread across the Mortgage and Real Estate industry, the rating agencies and Wall St involved in the fraudulent aspects of the sub-prime scam time to cover their tracks and destroy as much evidence as possible, and to try to hatch a way to renege on the contractual obligations pertaining to the original loans, perhaps by issuing "updated" versions whose small print protects the issuer from liability relative to the original loans, in the hope that the gullible foreigners who are belatedly wising up won't read it. Finally lawyers can be expected to feast on everyone involved, producing documents extending to thousands of pages and dragging the whole sordid business out possibly for years, which of course plays into the hands of the perpetrators of the scam, some of whom will probably have died of old age before the legal processes are concluded, if they ever are.

What makes the current situation so profoundly dangerous is that the US stands to gain the most, or rather lose the least, from a global economic meltdown in the near future. Furthermore, from the standpoint of the maintenance and enhancement of global Anglo-US hegemony there are two threats that require to be dealt with urgently. One is the alternative currency to the US dollar, the Euro, which, as mentioned above, can effectively be undermined and crippled by first laying economic siege to the Eurozone with a weak dollar. Saddam paid the price for trying to trade oil in Euros by losing first his country and then his life. The other is the rapid ascent of China which promises to become a global superpower in its own right. The way to deal with China therefore is simply to pull the plug on its economy before it has weaned itself off dependence on the US as a primary export market. According to the logic of the chess game they are playing there are thus compelling reasons for the Anglo-US elites to let the world economy implode now. In a situation of chaos, they have the military capability to impose their will virtually anywhere in the world, except China and Russia, and have established a vast network of hundreds of military bases around the world, and particularly in Asia, to do just that. The takeover of Iran with its enormous oil reserves, is only a matter of time, with the fabrication of it presenting a threat as the pretext. Iran has recently upped the stakes by only accepting payment for its oil in Euros - treading the same path as Saddam. It will be easy to come up with a pretext to invade Venezuela and secure its vast oil reserves - this is also only a matter of time. Russia cannot be attacked directly because of its arsenal of aging nukes, so it will be encircled and placed under prolonged economic siege. CNN recently aired many times a program by "The Mistress of Pathos" Christiane Amanpour, titled "Czar Putin", which depicted Russia as a one-party country, effectively a dictatorship, with a tightly controlled media. This, of course, is in marked contrast to the US, which is a two-party country with a syndicated media in the control of those closely affiliated with the government. With the US dollar collapsing, the vast US debts will simply evaporate, and the currency crisis and general confusion will provide the perfect opportunity to amalgamate the US, Canada and Mexico into a single economic trading entity, in effect one country, with the dollar being ditched in favor of a new currency, the Amero. The Mexicans, who are currently regarded by many Americans as a nuisance will, with their cheap labor, become important bedrock support for the new enlarged country, and viewed in this context the prolonged influx of Mexican immigrants makes sense. The Constitution of the United States has already been overwritten and thus consigned to the dustbin of history by the Patriot Acts, under the provisions of which dissenters at home will be dealt with very harshly indeed.

Those in power in the United States who were responsible for creating the conditions that led first to the stockmarket boom of the 90's, then to the Tech Bubble, and then compounded the accumulating problems by dropping interest rates almost to zero, creating the environment that bred the carry trade speculative mania, the derivates pyramid and the housing bubble must have known the consequences of their actions, must have known that it would ultimately lead to an almighty train wreck - they are not that stupid, so the question is why they allowed these things to happen. Either they were guilty of short-termism - let's party today and to hell with tomorrow - or these developments were part of a grand plan that was meant to lead to the major crisis facing the world today. The writer has not - as yet - been invited to listen in on meetings of the inner sanctum of the Federal Reserve or the Pentagon, or MI6 in London, and therefore does not know for sure what the "grand plan" is and can only speculate on what their ultimate intentions are. Thus it is not known, for example, if the Federal Reserve will continue to expand the money supply exponentially and continue to drop interest rates in an effort to bail out the major US banks, which would cause the dollar to collapse further leading to hyperinflation, or whether they will suddenly and unexpectedly ramp interest rates in the not too distant future, purportedly to support the dollar, causing credit gridlock and an economic meltdown, but whichever track they send the train down it will still end up going over a cliff.

Doom mongers have been having a field day in recent weeks and months, and already have some large carcasses to pick over, and can look forward to truckloads of them as the unfolding financial plague spreads like the Black Death. The writer considers himself a realist rather than a doom monger, but can see no escape from the coming debacle, and thus this article might too be classified as being in the doom monger category. A sad irony for gold and silver investors in Canada and the US is that $3000 - $5000 an ounce gold may ultimately be scant compensation for financial and societal breakdown if you have government agents breaking your door down with a sledgehammer and demanding to know, on pain of death, where you have it stashed away.

We will now look at yesterday's reaction in the markets to the less than expected rate cut with a view to what it portends.

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Clive Maund, Diploma Technical Analysis

[email protected]

www.clivemaund.com

Copiapo, Chile, 12 December 2007