Time: The Waiting Game

Don't look now, but a puss-filled sore festers. It grows on the USEconomic foundation. If you thought the overall economy of the United States was sick, which itself conceals a deep defective dependence upon the retail sector built upon consumption, you perceive a double dose. So let's get this right! The economy stands atop a consumer society, not an investment society. We spend on things, and expect to indulge our way to prosperity. The economy derives its funds (sustenance) from the housing sector, ready to dish out cash for equity, whatever your little hearts desire. We keep pulling money out, because houses never go down in value, right? But now a giant wrench has been tossed into the machinery, as home values have gone down in value for the first time since 1995. The dreaded day has come. Housing has begun to reverse. Our national economy is a bubbly structure dependent more upon credit than income, whose foundation is nothing but shifting sands from a housing sector kept aloft for four years now in reverse. A bubble layered atop a dissipating bubble, wow! Any trained economist who blesses such an economy as strong is plain and simple a pathetic moron or shameful charlatan. In time the over-hyped USEconomy will reveal untold massive frailty, weakness, defects, fractures, risks, and liabilities.

The geniuses who pull the levers, control the media consoles, paper over the cesspools, apply lipstick to corporate pigs, bail out their cronies, and issue orders for continued price capping, these listing ship captains have a problem. It is the USDollar. Its fundamentals, if from a private corporation, would scream of bankruptcy and dire need of restructuring, if not liquidation. The maestros were given a reprieve in 2005, when the long-term currency correction occurred naturally. The USDollar bounce fooled many smart analysts, but not the jackass, who saw rising interest rates inside the US-based system as a giant magnet for bond speculators. Hat Trick Letter partisans were forewarned in the early months of 2005 that the positive bond yield differential would attract speculative capital in the currency markets. My saying in numerous conversations, even to fellow analysts, was "We live in a bond driven world, sure to support the USDollar." One can calmly and safely declare the USDollar long-term counter-trend bear market rally as coming to an end, right about now. If not now, then in the next couple months, when the miracle of election season shuts certain doors, releases pent-up forces, and changes objectives. Care must be taken to ensure (prevent?) the unwashed from undue influence in the election process. The malleable masses are still charged with voting duties, for now. Motives might soon change from continuation of political power, back to basic profit motive.

The media is so busy with the monumentally irrelevant Dow 12 thousand high, an amusement and distraction. It means the Dow has only lost 20% to 25% in purchase power since 2001, a bonafide cause for celebration. The most important meaning of Dow 12K is that liquidity continues to slosh. The entire commodity (energy & mining) sector needs the money flow. The S&P500 confirms the new high, the Nasdaq Composite barely confirms it, but the Dow Transport Index does not. Who cares? Party on, pass the hats, let's get a buzz on! From our hard asset world, the Dow 12K might mean that the powerful corner offices anticipate a USDollar devaluation.

THE HURRICANES
Hurricanes Katrina and Rita delivered harsh blows to the USEconomy. Energy prices went through the roof, only to have them return via the chimney, all the way to the basement and out the soot chute. Like two phoenixes rising from the ashes, crude oil and natgas will soar again, from basic demand, from continued Asian growth, from endless war, from defensive positions against the USDollar. The general economy suffered a massive shock wave, not only from the energy cost fever but the severe damage to the infrastructure. Time has healed much though, as traffic along the grand Mzippi River has been restored. (That is how Southerners pronounce it.) Some semi-permanent damage remains, as Gulf of Mexico output remains behind previous years still. Time has permitted the Knights of the Oval Office, the corporate titans working (and profiting heavily, no doubt) with the USGovt to restore lower gasoline and heating costs for the plebeians. They have largely reversed the effects of the hurricanes, after a merciless assault on hedge funds, all with some market assistance, not to mention regulatory body help. It is election season, the time of promises, chicanery, and painting the background much like the movie stage sets. The harmful effects of the hurricanes has been expunged from energy prices.

ROTTING HOUSES ON THE VINE
The housing sector is in the midst of a fresh decline, one argued against heatedly from a desperate den of denial, whose stated motives sound more like a sales pitch than a forecast or competent assessment. Unsold inventories are likely to grow for another year, whose weight will bring the perma-bulls with vested interest to their knees. The incentives offered by new home builders are bordering on a carnival setting, with new cars offered, forgiven initial monthly payments, new swimming pools, all but geisha girls. In time, gravity does its job, as it has for time immemorial.

While debate continues on whether housing will level off into a Soft Landing, the housing market deteriorates. Don't let the complete lack of precedent for a Soft Landing interrupt progress or kick us off the path to prosperity through debt and consumption! Lower interest rates do nothing to alleviate much tougher lending standards, absent much of the laxity. Tell those looking uphill into their negative equity dry well about the lower available rates, which they cannot access without coming up with a scad of money. The formal recycle of sewage appears to continue, amazingly, as Fanny Mae laps up almost half of the subprime mortgages. The passing months are sure to cultivate more rot in the housing market. Key markets like Boston, Miami, Washington DC, Denver, San Diego, they are all in reverse, or preparing to adjust to the demand versus supply imbalance. In time, the USFed will be forced kicking and screaming, into cutting interest rates. Added liquidity and stimulation will be offset by damage to the USDollar and higher costs.

EUROPE STANDS ASIDE
Europe goes along with the US great game. They have stood to the sidelines while the impressive energy mountain gives back some ground. The Euro Central Bank actually hiked rates last week by 25 basis points, thereby removing some of the favorable yield differential which has supported the higher USDollar. It mattered not. In early September, the Swiss National Bank hiked by 25 bpts also, but to the exalted 1.75% level. Speculators can still find plenty of easy low-cost money to borrow in Europe, especially in Zurich. It is called the Swiss carry trade, where the sartorial splendor of pin-striped suits enables the connected to make tons of money without work. Don't expect the Swiss to raise rates enough to compete with the USTreasuries.

Positive spin helped enormously, as the miserable September Jobs Report was pushed aside, in favor of the story of a moderate August job upward revisions. Hey Europe, don't stand in front of the Morgan & Goldman Express locomotive, the big Wall Street choo-choo train! JPMorgan and Goldman Sachs are formidable financial players. Look for them to turn bullish on energy prices and somewhat constructively bearish on the USDollar before February. Why? Because it is profitable to do so, and after elections, it is not un-American to pursue profit. In time, the coiled spring pulled tighter by the locomotive will release its pressure and stored energy, enough to find its proper true value. The USDollar and gold will follow suit.

THE WINDS OF WAR
Crude oil will respond to renewed war, unless belligerence and aggression are repealed within the human psyche. The odds are not good for such an event. Man's favorite sport will always remain in pre-eminent position, chercher les femmes. Man's second favorite sport is framed in one manner or another in killing. The underlying force behind war in the Middle East is not so much religious dogma divergence, as it is that Moslems own oil and we do not. Rallies take place in Beirut, as HezBollah has been emboldened. Never before has an Israeli force been held back. In a strange way, the HezB standoff was a victory in essence. Israel is surrounded by enemies on all fronts except Jordan. Israel has re-armed, resupplied, and plans anew. While men wait and hunker down in the foxholes of their minds, Lebanon will erupt again with renewed "defensive" attacks, whatever that means. It is not our job to reason why, but rather to do and profit (not die).

Among the main certainties of life are death, taxes, poverty, pestilence, reproduction, and war. Malthus makes sense. The United States leaders want war. Many question why. The answer might be as simple as:

• They own oil & gas, the lifeblood of economic vitality, and we do not
• We have enormous debts which we cannot repay, and they hold many debts
• We have flooded the world with USDollars, choosing inflation over work
• We are free people who rushed into bankruptcy through profligate lifestyle
• We own powerful weapons, and choose not to go quietly into the night

Beware of Russia and China, the most important players not yet involved in the war. Russia has openly attacked the Petro-Dollar, backed in force by their military. China has quietly struck energy contracts over $100 billion in magnitude with our enemy Iran. So Russia and China are our friends in the global playground?

CHINESE INTERNALS
China is in the midst of developing some home-grown internal demand. Sure, they have gone too far too fast. Heck, call it a boom, maybe even a bubble. In the past two years, internal Chinese consumption has grown at a faster pace than their export business. Bear in mind that is a good signal for them. In no way can the United States make any such claim. In fact, the balance of investment income has turned negative in the last few quarters for the US, as interest paid to foreigners has surpassed interest earned by us from foreigners, like in bonds. In time, the Chinese strength from internals will become more evident, a move toward greater stability. In time, the US current account deficit will worsen. Does anyone remember the Beijing announcement in early September, whereby China will not add ANYTHING more to their near $1 trillion in foreign reserves?

The Toronto Gold Show hosted by the Cambridge House revealed a few things about China, a main topic. Several stories floated around about how many Chinese companies seek zinc, copper, nickel, with cash in hand, and cannot find supply. Metal demand is enormous and constant. The highlight in my eyes was Frank Veneroso's inspired speech with an analysis which addressed supply and price, but overlooked demand. Last checked, the economic principles have prices dictated by supply & demand, as well as to delivery. Demand has been misjudged for some time regarding China. Since no more FOREX reserves will be added, expect them to stockpile more commodities, both refined and raw ore. Any exchange of USTreasury Bond IOU coupons for tangible storable energy supplies or industrial metals or cotton or dry cement would be a good deal in their eyes. Heck, exchange of USTBonds for beaver and raccoon pelts would be a wise trade.

Veneroso did not mention his loud counsel to short copper in January 2005 at the $1.40 price. In my view, copper will make a top when Veneroso switches and goes long. He might join another key contrary indicator in Stephen Roach of Morgan Stanley. Roach has for several months endorsed the gross global imbalances, the stable instability of the USEconomy, and more. He might join Bill Gross of PIMCO, who saw lows in Treasury Bond yields several months ago, before long-term yields marched down well below the 5.0% level. It has become hard for us to tell whether they see it wrong, or are paid to see it wrong.

THE BIG GOLDEN HANDS
Large strong hands continue to gather more gold & silver. Weak hands sell their precious metals and sell their mining stocks. In every instance of the last three years, as the US fundamentals have continued to worsen, long pauses in the gold price are followed by yet more gold rallies. In time, this period will be no different. In August, my warnings were not for any gold rally on seasonal schedule. The eroding housing situation and the November election warranted a postponement of the annual September rally, a consequence of massive wealth destruction and political expedience. Time is running out on holding back the golden bull. The silver eagle will be much more impressive though.

A factor few seem to notice is that in 2006, the Asians stopped USTBond support. In 2006, Persian Gulf oil producers picked up the slack, enabled by higher oil prices. In 2007, both players might be removed from support roles. Who picks up the slack??? My upcoming forecast is for an incremental boycott by Arabs of USTBond purchases, if the US & Israel war machine rolls into Lebanon again. War will find a way in the current climate. To be sure, gold would respond well, very well. The key is time.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at[email protected]