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The Big Lie & Gold

Halloween 2007 brings a scary Fed announcement for savers, investors and gold buyers...

goes back more than 2000 years to the ancient Celts, writes Gary Dorsch for Global Money Trends.

   Druidic priests saw the end of autumn as the end of the year. Not only did what's become October 31st mark their celebrations of the year's harvest, but it was also a festival for honoring the dead.

In order to appease the wandering spirits that they believed roamed at night, the Celtic priests made fires in which they burned sacrifices, made charms, and cast spells. As they danced around the fires, the season of the sun passed and the season of darkness would begin.

And as Halloween 2007 approaches, traders in the global money markets are betting that Federal Reserve chief Ben Bernanke will sacrifice the US Dollar with another rate cut, in order to cast a magic spell over Wall Street.

But if "B-52" Ben delivers another big-bang, a half-point rate cut to 4.25%, it might unleash a cadre of evil spirits, ghosts, and demons that would haunt the US Dollar to its grave.

The US housing slump, already the most severe in more than a decade, has taken another turn for the worse, convincing the vast majority of global currency, commodity, and stock market operators that the Fed will opt for a small 0.25% rate cut on Halloween.

But the Bernanke Fed shocked the global markets on Sept 18th with its half-point rate cut to 4.75%, justifying the aggressive cut as a pre-emptive strike to keep the credit crunch from toppling a faltering US economy.

Did the magic work? US sales of previously owned homes and condos fell 8% in Sept. to a record low of 5.04 million annual units, amid tighter lending standards, and a meltdown in BBB-rated sub-prime mortgage debt to 25 cents on the Dollar.

The slower pace of sales drove the inventory of unsold homes to 4.40 million, representing a 10.5-month supply, the highest since 1999. The national median existing home price for both single-family and condos, meantime, dropped 4.2% from a year ago to $211,700.

Monetary guru "Easy" Al Greenspan – the "godfather" of the sub-prime mortgage crisis said on Sept, 16th that he would not be surprised if US home prices fell by double-digits into 2008. A fall in home prices on that scale would be unprecedented in US history. Residential real estate has an aggregate value of about $21 trillion, and is the single biggest source of US household wealth.

If home prices fall 15%, it could wipe out $3 trillion of household wealth, and deal a huge blow to consumer spending.

A double-digit decline in US home prices could also spark big job losses.

Construction employment fell about 15% in both the 1990s and 1980s recessions, and it dropped 18% in the recession of the mid-1970s. In each case, the sector's declines were far steeper than job losses in the overall economy, and the recovery took longer.

About 7.6 million Americans workers are employed by construction companies, so a 15% decline would translate into the loss of 1 million jobs. Building permits fell 7.3% to an annual rate of 1.23 million in Sept., the slowest pace since March 1995.

No coincidence then that last Friday, the yield on the US Treasury's two-year note plunged to 3.78%, the lowest in two years, discounting Fed rate cuts of 50 basis points to 4.25% by year's end. But the Bernanke Fed is slashing the Fed funds rate at a time of extreme hyper-inflation in the global commodities markets.

Crude oil is hovering near $92 per barrel, the Gold Market is eyeing $800 per ounce, and soybeans are above $10 per bushel. The US Dollar, driven lower by Bernanke's dramatic Sept. rate cut, is skidding to record lows, making a sham of the US Treasury's "strong Dollar" mantra.

Old timers can remember the days when central bankers would respond to higher commodity and oil prices by lifting interest rates, to keep inflation in check.

But in today's world, global central bankers are addicted to double-digit money supply growth, in order to inflate their economies to prosperity. The net result is the onset of the current "Hyper-Inflation" now fueling near parabolic rallies in many commodity and stock markets. Sea-borne shipping rates are up 150% this year, a clear marker of price inflation in traded goods.

In his first year as Fed chief, Dr.Bernanke tried to shed his dovish feathers by hiking the Fed funds rate 75 basis point to 5.25% by June 2006. "The Fed will be vigilant to insure that the recent pattern of elevated monthly core inflation readings is not sustained," Bernanke said on 5th June 2006, trying to reincarnate himself as a wise old owl.

"The Fed must continue to resist any tendency for increases in energy and commodity prices to become permanently embedded in core inflation."

But a year later, on 10th July 2007, Bernanke was reverting back to his natural self, arguing that the historic rise in crude oil and agricultural commodities were just speculative bubbles, and not worthy of consideration when calculating inflation pressures within the economy.

"If inflation expectations are well anchored, swings in volatile energy and food prices should have relatively little influence on core inflation," Bernanke told the National Bureau of Economic Research.

Bernanke also told the NBER that the "monetary aggregates do not have a special role in the formulation of US monetary policy [because] our experience has shown a relatively weak relationship between money and inflation and money and output."

He also said "monetary policy was not a good tool to pop inflated asset prices," yet Bernanke has no problem with propping up the stock market with interest-rate cuts.

MZM is the preferred measure of the US money supply for economists, because it represents money readily available within the economy for spending and consumption. It's a mixture of all the liquid and zero maturity money, included in M1 plus institutional and retail money market funds, less small time deposits.

And since the Fed halted its rate hike campaign in August 2006, the annual growth rate of MZ has tripled from 4% to 11.8% last week. Yet on Sept. 27th, Fed governor Frederic Mishkin was boasting that, "Inflation has come down in the old-fashioned way. Tighter monetary policy and a commitment to price stability by central banks throughout the world have led to lower inflation and an anchoring of inflation expectations," he declared.

On Sept. 11th, Mishkin added that "Gold is not a particularly useful indicator of inflation expectations," even while the Gold Market was breaking through the psychological $700 per barrier.

One reason behind the US Treasury's devaluation of the Dollar is to boost US exports overseas, offsetting the drag on the economy from weaker home prices.

US exports hit a record high of $138 billion in August, and helped to reduce the US trade deficit to $57.5 billion in August, recovering from a record shortfall of $67 billion in July 2006.

Still, crude oil has spiked $20 per barrel higher since August, which will widen the deficit again. To finance its external deficits, the US must still attract $2.1 billion per day, or watch the Dollar fall under its own weight.

   The Bernanke Fed's addiction to monetizing the stock market and cheapening the US Dollar has some interesting side effects.

Each Fed rate cut has translated into higher oil and Gold Prices, which only fuels inflationary psychology worldwide. Yet the Bernanke Fed escapes criticism from the mainstream media for destroying the purchasing power of the greenback. Instead, the mainstream media accepts doctored-up inflation statistics, fashioned by government apparatchiks as gospel.

This enables the Bernanke Fed to argue that inflation is under control, while it turns up the money printing presses at full speed. However, Gold Buyers and crude oil traders are not easily duped by the government's propaganda, making life difficult for the Fed.

And then suddenly – one day before the Fed's Halloween meeting – the Wall Street Journal ran a last minute article, casting doubt about the inevitability of a Fed rate cut on Oct 31st and citing "anonymous" sources. It sparked a shakeout of overextended and overzealous commodity bulls.

Tokyo Warlords Repeat the "Big Lie"

"If you tell a lie big enough and keep repeating it, people will eventually come to believe it," Nazi propaganda chief Joseph Goebbels once remarked.

"The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State," the master of the "big lie" tactic went on.

For the past eight months now, Tokyo apparatchiks have repeatedly told the big lie. Japan is the world's largest food importer and fourth largest oil importer, yet the Japanese government says consumer prices are 0.1% lower today than a year ago.

Tokyo's fuzzy math indicates that Japan is the only place on earth that is not feeling the pinch of soaring commodity and sea borne shipping rates. Contrary to the government's "big lie" however, the price of crude oil in Yen terms is up 44% from a year ago, soybeans are up 42%, and the Baltic Dry Index, which measures the cost of shipping dry goods by sea, is up 250% from a year ago for local importers.

Yet on Sept 7th, Bank of Japan deputy Toshiro Muto said, "There is not yet any evidence of inflationary pressure in the economy."

But Tokyo gold traders have seen thru the government's "big lie", lifting Gold Prices to ¥90,000 per ounce last night, up 100% from two years ago.

On August 23rd, Mr Fukui acknowledged that the BoJ's ultra-low interest rates are fueling global inflation, "If market players come to think the BOJ will keep rates at a low level that deviates from economic conditions that would prompt them to tilt risks excessively and create distortions in asset markets," he said.

On Oct 11th, with Tokyo gold hovering around ¥85,000 per ounce, Fukui acknowledged:

"While the official consumer price index is barely moving, there is a chance the public's perception on prices is changing significantly"

Yet Fukui has ruled out a rate hike for the rest of this year, with Japan's economy flirting with recession. Japanese gold traders thus see a world beset by hyper-inflation, but Japanese bond traders have adopted the government's "big lie" about deflation, and are locking up yields at 1.60% for the next ten years.

When the 10-year Japanese government bond yield tried to climb above key resistance at 2% last summer, BoJ chief Fukui jawboned them lower:

"The recent movements in long-term rates are very problematic, so we need to watch them closely," Fukui warned, using the accepted code words for market intervention.

Can the Japanese keep the "big lie" running even as Gold Prices and oil race to new highs? Will Ben Bernanke continue to pretend inflation's not a problem – or use the media to defend his weak Dollar policy? And what of the European Central Bank, the Chinese Yuan, the runaway growth of Saudi Arabia's domestic money supply?

For expert insight on all this and more – plus special “Audio Broadcasts” posted on Monday and Wednesday evenings during Asian trading hours – subscribe now to Global Money Trends, also now including a model portfolio of our top 20 picks in the global stock markets.

This is all in addition to our regular newsletter, published on Fridays, for 44 weekly editions. The article you just read is only the "Tip of the Iceberg"! Click through and subscribe to Global Money Trends now...

GARY DORSCH is editor of the Global Money Trends newsletter. He worked as chief financial futures analyst for three clearing firms on the trading floor of the Chicago Mercantile Exchange before moving to the US and foreign equities trading desk of Charles Schwab and Co.

There he traded across 45 different exchanges, including Australia, Canada, Japan, Hong Kong, the Eurozone, London, Toronto, South Africa, Mexico and New Zealand. With extensive experience of forex, US high grade and corporate junk bonds, foreign government bonds, gold stocks, ADRs, a wide range of US equities and options as well as Canadian oil trusts, he wrote from 2000 to Sept. '05 a weekly newsletter, Foreign Currency Trends, for Charles Schwab's Global Investment department.

See the full archive of Gary Dorsch.


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