Sunday, August 28, 2005

International Flow of Funds

The US dollar index has been rallying since it made a bottom at around 80 at the end of 2004. Then at the beginning of July it topped out and has since developed a head and shoulders pattern with a break down below the neckline. The dollar then went back up to the neckline (resistance to the upside) and retreated. The retreat from the neckline could be another lower shoulder forming. Prices going below a second lower neckline will be a second incredibly loud confirmation of the first pattern.

According to the US Fed foreign private investors have turned into net sellers of US Treasuries (read sellers of USD) and bought a miniscule $US 100,000 of US equities in June (read buying less USD than before), while Private Americans sent $US 7.9 Billion outside of the US into foreign equities (read selling of USD to buy the required foriegn currency to buy the foreign equity). No wonder the USD chart has topped and is heading down. Wait till the momentum picks up.

On bankrupt America:

A very good series of depressing charts on America's house hold surpluses and deficits from the The Northern Trust Company Economic Research Department:
A 9 page .pdf file

The US and state governments are lying like crazy with official economic stats. Both inflation and unemployment are officially low but when a new Wal Mart stored advertised for 400 new job openings for its new Oakland, California store, it got 11,000 applicants. The San Francisco Chronicle article

A July AP/Ipsos poll asked some Americans if they were concerned with the US budget deficit. 70% said "some" or "a lot". Only 35% favoured cutting government spending. Only 18% favored higher taxes. And, only 1% favored both. It's a safe bet that government will not cut spending nor raise taxes. That leaves issuing more debt for as long as it can, and then simply having the Fed create US dollar tokens out of thin air for the US Treasury to spend.

This "Give me, lend me, send me, can I borrow" mentality of Americans is going to turn America into an ugly scene.

The most important thing to watch is:
The chart of the US dollar.

"The natural right to be free of the debts of a previous generation is a salutary curb on the spirit of war and indebtment, which, since the modern theory of the perpetuation of debt, has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating." - Thomas Jefferson to John Wayles Eppes, 1813

Sunday, August 14, 2005

Iran's TOE To Compete With NYMEX and IPE

Next year Iran will start its oil trading market (TOE - Tehran Oil Exchange) where oil will be able to be bought using Euros in direct competition with New York's NYMEX and London's IPE markets where USD is required. This means less demand for US Dollars. That the price of USD in other government fiat tokens (or the USD priced in oil, gold, silver, etc. for that matter) will go down. This in turn puts more pressure on central banks to unload US dollar denominated reserve assets which puts further pressure for downward price movement of the USD. The TOE will be setting an example so that other Euro priced commodity trading facilities should spring up adding even more downward pressure on the price of the USD. And these are just new, in the near future, downward pressures on the USD.

Historically in a case like this, entities outside the country whose declining fiat tokens they are holding start sending those tokens back to the country of origin to buy tangible assets or businesses inside that country. In this case, since there are sooooo many USD outside the US, it could cause a hyper inflationary situation inside the US.

The US Treasury sometimes creates I.O.U.s and sends them to the Fed. The Fed puts these on its books as an asset and creates USD out of thin air and then sends the newly created USD back to the US Treasury so that the US government has more "money" to spend to buy votes and to spend to try to keep the masses complacent. This means that the Fed now has quite the inventory of US Treasury debt.

What the Fed can do is to start to sell its US Treasury debt to absorb the extra USD flooding back into the US. Of course it's going to have to offer higher and higher interest rates on this debt to be able to unload/sell it. Higher and higher interest rates is not good for the US economy. In fact it will be terrible. Plus, the Fed would then be in competition with the US Treasury.

A government and its central bank in competition with each other. I'd call that being between a rock and a hard place.

"A general dissolution of principles and manners will more surely overthrow the liberties of America than the whole force of the common enemy. While the people are virtuous they cannot be subdued; but when once they lose their virtue then will be ready to surrender their liberties to the first external or internal invader." -- Samuel Adams

"The economic errors of the 1960's, which gave rise to gold's explosion from 1970 to 1980, are kindergarten mistakes compared to what is going on today." - James Sinclair, Oct. 7, 2003

Saturday, August 13, 2005

Gold and Silver Disconnect

Gold has made a nice move up relative to silver. The cartel could not keep gold to a $6 dollar gain for the day on Thursday as it moved up intra day 11 and closed up 9, which I can not remember happening before. They are losing control of gold.

I suspect silver was more supressable than gold so that is where the cartel's efforts were concentrated to try and give the impression that gold wasn't doing that well if silver was not following close behind. Not to worry though. It will be a site to behold to see silver play catch up to gold and then some, particularly since silver in inflation adjusted terms maybe at an all time low. It is soooo rediculously cheap historically and particularly since it is now a lot more rare in the world than gold is, particularly considering verifiable above ground inventories.

Silver is "just this side of stealing".

In the financial markets, the crowds do not want low priced items. A quirk of human nature I guess. The crowd will want more of silver the higher the price goes till they have no more "money" to buy any more silver. Yet if you asked members of the crowd, they probably would agree with you that the way to make "money" in financial markets is to buy low and sell high. But they do not actually do that. They wait for higher prices to make sure the rest of the crowd is doing the same thing.

There are very few who can actually buy really cheap like silver is now.

Anyways, gold made it up and out of its 8-9 month long flag formation. Very bullish.

"If tyranny and oppression ever come to this land [America], it will be in the guise of fighting a foreign enemy." - James Madison