Global Recap

ECM-Wave-2011-2020

Three regional Federal Reserve officials have called on the central bank to stop buying mortgage-backed bonds, citing the recent improvement in the U.S. housing market. Indeed, the US economy has improved and the rise in the stock market has the talking head talking to themselves in disbelief. The 800 pound monkey remains the German elections and this is not going well. Whatever the politicians in Europe can do to screw up the world they are going perfectly. We are at the edge in the middle of nowhere. Old Marxist ideas dominate the political circles and they cannot see that just as Communism collapsed, it is their turn now. The younger generation are out of work and not buying this nonsense of taxing the rich that does nothing but line the pockets of politicians. This is going to take a lot more pain before we see political reform.

The dollar MUST rise sharply OVERALL between now and 2015.75. This is what we need to reverse the economic fortunes of the US so the entire global economy then turns down 2015.75-2020.

1900$X-Y 2012

The Fed Stimulus will end. As the Dow rises and they see the problems of Europe after the German elections, the efficacy of continued (bond) purchases will cause a reversal of fortune. Ultra low interest rates and hundreds of billions of dollars of Fed stimulus money led to the gold promoters calling for higher prices for gold and other commodities  on a perpetual basis. This has been purely a domestic view ignoring the global consequences of Europe and the failure of the Euro that has led to the underlying support for the dollar and introduces the risk of it even making new highs above 1985 by 2015.75. As you can see from the above chart on our Dollar Index 1900=Par, the underlying strength in the dollar is formidable.

Despite better U.S. economic data since the start of this year, Fed Chairman Ben Bernanke has been reluctant to take his foot off the pedal because he see there is a problem with the economy insofar as true economic expansion. The recovery has been rather fragile.

The critical problem in Europe remains the faulty capital base of the banks. This is substantially different from the US where that is not an issue. The European banks have sovereign debt among the member states that created a structural flaw, which is why the ECB is touting to take depositor’s money because this is a political crisis that they intend to blame the banks for. This is similar to the S&L Crisis where Congress directed the S&Ls to lend on real estate and then the Democrats raised taxes reducing the amortization schedules creating a one-way sellers market. Then they locked up S&L owners for fraud when they created the mess. Europe has done the same thing and is trying to blame its banks for buying their debt that they cannot pay. The European banks will have to suck up the losses and recapitalize as Tim Geithner did in the US back in 2009 by threatening the banks that that had 6 months to do it or the government would take them over. Geithner was probably bluffing but the Fed then opened the window and the politicians looked the other way as banks cut what they would pay people but failed to lower what they were charging. They increased the spread between bid and ask to historical levels and recapitalized themselves.

The US economy is in far better shape than the EU and the US banking system is now cashed up. So ironically, the risk of US bank deposits being seized is minimal before 2015.75 when things start to get questionable again. The US lending base is rising while lending in the EU continues to shrink. That does not appear to be changing anytime soon. The austerity pressure from Germany will keep the economic deflation in place for Europe as a whole. This the German politicians cannot see that they are shrinking the EU economy and that will reduce their exports and result in a German negative growth rate as well.

The US is the only game in town and it will continue to attract capital both from Japan and Europe. The rising dollar with a rising stock market is creating the international boom much like Japan saw going into 1989. This is a serious risk of creating a US Bubble and the talking head are still babbling that it is not real.

In the US, no one questions the solvency of the banks as is the case in Europe. This is negative for gold as fears have subsided. We are seeing to some degree a moderate

  • re-industrialization in the USA and the expansion in energy is creating a new dynamic. Even natural gas is starting to replace gold as the place to be. The fracking technology in the US is creating a cheaper energy future for the US compared to Japan and Europe.

It is true that the gold promoters have focuses on the Fed’s monetization of the debt as they have purchased more than 60% of new debt. But compared to even Britain, that has been over 90%. With 2013 being 31.4 years from the 1981.35 high in interest rates, we should start to see rates rise and the Fed will shift its focus to the stock market knowing that the banks are no longer in trouble.

The Swiss peg to the Euro will not hold for they will suffer tremendous losses buying Euros. ECB’s Outright Monetary Transactions (OMT) by buying bonds is comparable to what the Swiss National Bank does with the FX peg to the EURO.

Chancellor Merkel mentioned the word “Durchgriffsrecht” (right to get hold of assets for non-performing countries) and cannot see that this is the undoing for Europe as a whole. Major political reform is coming, but most likely not until after 2015.75.