I am extremely concerned about the things that I am seeing in the markets. The U.S. dollar carry trade, soaring gold, and the passing of health care reform are the last straws that are going to eventually break this market’s back. Words: 1248

Further edited excerpts from the original article* at http://thehousingtimebomb.blogspot.com goes on to say:

My Investment Strategy
I have tweaked my investment strategy as follows to raise cash – enough physical cash at home to pay one month’s worth of bills and 6 months’ worth of available cash in a safe conservative bank or credit union. If you do not have the money to do this and live paycheck to paycheck, I would suggest cutting back your 401k contributions to the minimum amount at which your company matches.

The Stock Market is Going to Crash
What really spooked me into my cash call was when I saw the IRX (13 week T-bill) drop below zero. The last time we saw rates that low on the IRX was when the market crashed in 2008. This tells me that the big boys are really spooked. They would prefer to sit and actually lose money in treasuries versus investing in the equity market.

Taxes are Going to Soar
Taxes are going to soar down the road as a result of our bulging deficits. You would probably be better off taking the 50% hit on your 401k now because at the rate we are currently spending, the tax rate might be 70% or higher when you are retiring and getting ready to use it. There is no reason why we won’t see the same thing happen all over again if we ever plan to pay off our trillions in debts because our debt vs. GDP is completely out of control. It’s beginning to make The Great Depression look like a walk in the park.

The Current Situation is Not Sustainable!
The world is rapidly losing confidence in the U.S. dollar as our debt load continues to soar. Gold is slowly decoupling from the dollar and continues to move higher regardless of what bucky does. This is a very troubling sign.

The Fed is Trashing the USD
Move over Yen! There’s a new carry trade in town: It’s the U.S. dollar! This is what has been holding up the equity markets recently. If you haven’t noticed, the market trades right in synch with the U.S. dollar. If bucky drops, the markets rise. If bucky rises, we tend to see moderate sell offs. The Fed is trashing our currency with massive deficits while keeping interest rates at zero at the same time. This is the perfect setup for a currency carry trade.

This is how the carry works: Investors borrow dollars at zero interest rates and then sell the dollar and buy an appreciating currency. After converting the money into a stronger currency like the Aussie dollar, they then run around and buy up assets around the globe that offer a higher yields then the zero yield they get sitting in treasuries. This is a beautiful trade for now because you win twice. You make money based on the simple appreciation of the currency as the dollar continues to fall, PLUS, you also get a nice yield spread off the foreign bonds that you bought that offer yields of say 5% or so.

The problem here folks is everyone is piling into this trade. This is rapidly turning into a speculative mania. Congratulations Fed!: You just blew up another bubble that now has to burst just like every other one has.

Interest Rates Could Increase
So what are the risks here? There are a few that really concern me. The first one is what if the dollar gets disorderly and begins to plunge? The Fed would then be forced to act and protect the dollar by raising interest rates. This would be disastrous for the economy, and anyone stuck in the dollar carry trade would get slaughtered because the dollar would soar as a result. Many of the carry traders use huge leverage so they could potentially get wiped out.

Higher interest rates would also be a disaster for the housing industry and the banks’ balance sheets that are filled with garbage loans. We would also see the market plunge because of the damage higher rates would do to the economy.

A Short Squeeze Could Develop
If the dollar starts to rise on its own which then triggers a short squeeze on all of the investors on Wall Street who have gone short the US dollar which is practically everyone at this point?

We all know when too many people get on one side of the boat it usually flips over. If this occurs, we will see the same cascading effect that I presented above.

The Bottom Line
I see no way out of this fiasco without a lot of pain. You may ask why I advise you to build cash positions if the dollar is in such dire straits? My answer to this is for the immediate future, it will remain the currency that we use in this country. There are also some people out there who believe holding FRNs (Federal Reserve Notes) otherwise known as physical paper dollars is the way to go. The reasoning behind this is the amount of actual dollars in circulation pales in comparison to the amount of debt we have in this country. Some believe that if the economy blows, actual dollars will be very valuable. I am not entirely sold on this idea but it’s an interesting theory.

The market in the meantime could still move higher as long as the dollar carry trade is working. The chance that this can last for a sustained period of time without eventually crushing the dollar is very low in my opinion.

Also keep in mind the fact that the Fed is rapidly running out of QE money and without government stimulus this market is toast because there is not enough liquidity in the economy to replace the Fed and its dollars. This massive debt bubble is going to implode once the Fed pulls its liquidity.

Ironically, if the economy begins to recover globally (and there are some signs of this in some countries), this could potentially be the trigger that pops the debt bubble because a recovering economy would force the Fed to pullout and raise rates as a result of the risk of inflation.

The market basically doesn’t want a recovery right now. It loves high unemployment and a bad economy because it allows the Fed to keep rates at zero which is highly profitable for Wall Street via the games that I described above. Of course our crippled economy is an absolute nightmare for the rest of us as we lose our jobs and our homes as Rome continues to burn.

*http://seekingalpha.com/article/175060-another-crisis-looms-right-around-the-corner

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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Japan experienced in the late 80′s what the world experienced in the lead up to the recent ‘global financial crisis’ – a huge property and stock market bubble. In the interim their government has done everything possible to get back to where they had come from yet more than two decades into its economic nightmare, Japan is still fighting hard to keep its economy from a complete and utter collapse. Words: 861

In further edited excerpts from the original article* at www.thedailybell.com, Frank Suess goes on to say:

Japan’s ‘Weak DecadeS’
With the U.S. stock markets experiencing weak performance over the past decade, filled with weak monetary policies, weak fiscal policies, weak geo-political progress and weak leadership the 2000′s could best be described as our “Weak Decade” andl ooking back we can’t avoid being reminded of Japan’s earlier two decades of weakness. Today, at [less than 11,000], the Nikkei 225 stands pretty much at the same (nominal) level as it did around 1987 and it´s a lot lower than it was at the end of its great bull market in 1989. On December 29, 1989, the Nikkei peaked at 38,876. In other words, the price level of the Nikkei today stands at roughly a quarter of what it was 20 years ago!

Is This Deja Vu?
It´s an ongoing debate whether global economies and financial markets have entered a similar path as did Japan more than twenty years ago:

1. Japan experienced repeated and substantial rallies on the way down. If indeed we should consider the Japanese story line a blueprint for the decade ahead, then the current market has potential for more upside in the current bear market rally before it goes a LOT lower.

2. Patience is big factor in these kinds of markets. Bear markets can take a long time. Similar to the Great Depression, when the Dow took approximately 23-and-a-half years to regain the nominal level it first reached on September 1, 1929, the Nikkei is taking a very long time to regain its health. Despite all the monetary inflation around the globe and certainly in Japan, hardly anyone would at this point expect the Japanese market to regain its 1989 highs anytime soon.

3. Similar to the US, the Japanese stock market boom was accompanied by a property boom of immense proportions.

In summation, Japan experienced in the late 80′s what the world experienced in the lead up to the recent ‘global financial crisis’ – a huge property and stock market bubble. In Japan, the collapse came in early 1990 and the nation’s economy has not recovered since.

The Japanese ‘Remedy’ Has Failed
As mentioned in the introduction, the Japanese did everything possible to get back to where they had come from but today, after twenty-some years of unprecendented ‘deflation fighting’, Japan remains mired in deflation, with unemployment on the rise once again and the economic ‘recovery’ once again losing steam. The Hatoyama government is increasing the deficits and growing the country’s debt even further. At this point, there appears to be no other way to keep Japan from tipping over completely.

Comparing Our ‘Weak Decade’ with Japan’s ‘Weak DecadeS’
Yes, there are differences between the lost decades of Japan and our Weak Decade.
1. the Japanese people continued to save throughout the crisis and largely stayed away from living beyond their means
2. the Japanese economy did continue to produce real goods and to export.
3. Japan relied on the Yen ‘carry trade’. However, since 2007, the problem has been that as the rest of the world (notably the US) quickly erased the ‘advantage’ Japan’s ultra-low interest rates gave it, the Yen has been going up (+27% against the US dollar) which has destroyed Japanese exports and rendered huge damage to the Japanese economy.

The Cost of Economic Growth Getting More Expensive
Economic growth is getting VERY expensive! So far, lower interest rates have been a trend largely produced artificially by governments and central banks. However, we have reached rock-bottom and the fact is that governments and central banks can only manipulate the price of money to a certain degree. Once short-term interest rates start rising – yields for long-term bonds are on the rise already – financing the boom will become increasingly difficult.

Every time government fights the economic downturn with fresh and huge amounts of taxpayer money, a true recovery is postponed and the artificial daydream of economic growth, financed on the back of coming generations, becomes yet a little more expensive.

The Japanese monetary and fiscal anti-deflation reflex in reaction to the crash in the 90´s was very much the same as the recent and currently ongoing global pumping approach. Japan has been running exactly the same “stimulus” as the rest of the world is now employing to fight the downturn. It didn´t work in Japan and I doubt it will work globally.

If ever there was an economic illustration of the fact that “stimulus” cannot revive a REAL economy, Japan is that illustration.

*http://www.thedailybell.com/739/Frank-Suess-2010-And-Beyond-Deflation-Japanese-Style.html (Frank Suess, chairman and chief executive officer of BFI Consulting Inc., a Zurich, Switzerland wealth management and consulting company.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

As I see it there are only two outcomes. Either the gold cartel will fail or the U.S. government will have destroyed what remains of the free market in America. I hope it is the former, but the flow of events from Washington and the actions of policymakers suggest it could be the latter. Words: 1654

In further edited excerpts from the original article James Turk (www.gold-speculator.com) goes on to say:

Governments want a low gold price to make national currencies look good. Gold is recognizable the world over as the “canary in the coal mine” when it comes to money. A rising gold price blurts the unpleasant truth that a national currency is being poorly managed and that its purchasing power is being inflated.

U.S. Government Intervening in Gold Market
Given the U.S. dollar’s role as the world’s reserve currency, the U.S. government has the most to lose if the market chooses gold over fiat currency and erodes the government’s stranglehold on the monopolistic privilege it has awarded to itself of creating “money.” As such, the U.S. government intervenes in the gold market to make the dollar look worthy of being the world’s reserve currency when of course it is not equal to the demands of that esteemed role. The U.S. government does this by trying to keep the gold price low, but this is an impossible task. In the end, gold always wins — that is, its price inevitably climbs higher as fiat currency is debased, which is a reality understood and recognized by government policymakers.

Recognizing the futility of capping the gold price, the government, instead, compromises by letting the gold price rise somewhat, say, 15 percent per year. In battlefield terms, the U.S. government is conducting a managed retreat for fiat currency in an attempt to control gold’s advance. Though it has let the gold price rise, gold has risen by less than it would in a free market because the purchasing power of the dollar continues to be inflated and because gold remains so undervalued notwithstanding its annual appreciation this decade.

Gold Dropping as % of Money Supply
Until the end of the 19th century, approximately 40 percent of the world’s money supply consisted of gold, and the remaining 60 percent was national currency. As governments began to usurp the money-issuing privilege and intentionally diminish gold’s role, fiat currency’s role expanded by the mid-20th century to approximately 90 percent. The inflationary policies of the 1960s, particularly in the United States, further eroded gold’s role to 2 percent by the time the last remnants of the gold standard were abandoned in 1971. Gold’s importance rebounded in the 1970s and its percentage rose to nearly 10 percent by 1980. Gold’s share of the world money supply thereafter declined, reaching about 1 percent in 1999. Today it still remains below 2 percent.

From this analysis it is reasonable to conclude that gold should comprise at least 10 percent of the world’s money supply. Because it is nowhere near that level, gold is undervalued.

So given the ongoing dollar debasement being pursued by U.S. policymakers, keeping gold from exploding upward to a true free-market price is the first thing they gain from their interventions in the gold market. The other thing they gain is time. The time they gain enables them to keep their fiat scheme afloat so they can benefit from it, delaying until some future administration the scheme’s inevitable collapse.

How the U.S. Government Manages the Price of Gold
It is simple. They recruit Goldman Sachs, JP Morgan Chase, and Deutsche Bank to do it, by executing trades to pursue the U.S. government’s aims. These banks are the gold cartel and they act with the implicit backing of the U.S. government, which absorbs all losses that may be taken by the cartel members as they manage the gold price and which further provides whatever physical metal is required to execute the cartel’s trading strategy.

How the Gold Cartel Came About
There was an abrupt change in government policy around 1990, by then-Federal Reserve Chairman Alan Greenspan, to bail out the banks back then, which, as now, were insolvent. Taxpayers were already on the hook for hundreds of billions of dollars to bail out the collapsed “savings and loan” industry so, because adding to this tax burden was untenable Greenspan came up with an alternative way to resolve the problem.

Greenspan saw the free market as a golden goose with essentially unlimited deep pockets, and more to the point, saw that these pockets could be picked by the U.S. government using its tremendous weight, namely, its financial resources for timed interventions in the free market, combined with its propaganda power by using the news media. In short, it was easier to bail out the insolvent banks back then by gouging ill-gained profits from the free markets instead of raising taxes.

Banks generated these profits through the Federal Reserve’s steepening of the yield curve, which kept long-term interest rates relatively high while lowering short-term rates. To earn this wide spread, banks leveraged themselves to borrow short-term and use the proceeds to buy long-term paper. This mismatch of assets and liabilities became known as the carry trade.

The Japanese yen was a particular favorite to borrow. The Japanese stock market had crashed in 1990 and the Bank of Japan was pursuing a zero-interest-rate policy to try reviving the Japanese economy. A U.S. bank could borrow Japanese yen for 0.2 percent and buy U.S. T-notes yielding more than 8 percent, pocketing the spread, which did wonders for bank profits and rebuilding the bank capital base.

The Gold Carry Trade
Gold also became a favorite vehicle to borrow because of its low interest rate. This gold came from central bank coffers, but central banks refused to disclose how much gold they were lending, making the gold market opaque and ripe for intervention by central bankers making decisions behind closed doors. The banks clearly jumped feet first into the gold carry trade.

The carry trade was a gift to the banks from the Federal Reserve, and all was well provided that the yen and gold did not rise against the dollar, because this mismatch of dollar assets and yen or gold liabilities was not hedged. Alas, both gold and the yen began to strengthen, which, if allowed to rise high enough, would force marked-to-market losses on those carry-trade positions in the banks. It was a major problem because the losses of the banks could be considerable, given the magnitude of the carry trade.

So the gold cartel was created to manage the gold price, and all went well at first, given the help it received from the Bank of England in 1999 to sell half of its gold holdings. Gold was driven to historic lows but this low gold price created its own problem. Gold became so unbelievably cheap that value hunters around the world recognized the exceptional opportunity it offered and demand for physical gold began to climb.

As demand rose, another more intractable and unforeseen problem arose for the gold cartel. The gold borrowed from the central banks had been melted down and turned into coins, small bars, and monetary jewelry that were acquired by countless individuals around the world. This gold was now in “strong hands,” and these gold owners would part with it only at a much higher price. So where would the gold come from to repay the central banks?

While the yen is a fiat currency and can be created out of thin air by the Bank of Japan, gold is a tangible asset. How could the banks repay all the gold they borrowed without causing the gold price to soar, worsening the marked-to-market losses on their remaining positions?

Further Federal Reserve Intervention
In short, the banks were in a predicament. The Federal Reserve’s policies were debasing the dollar, and the “canary in the coal mine” was warning of the loss of purchasing power. So Greenspan’s policy of using interventions in the market to bail out banks morphed yet again.

The gold borrowed from central banks would not be repaid after all, because obtaining the physical gold to repay the loans would cause the gold price to soar. So beginning this decade, the gold cartel would conduct the government’s managed retreat, allowing the gold price to move generally higher in the hope that, basically, people wouldn’t notice.

Given gold’s “canary in a coal mine” function, a rising gold price creates demand for gold, and a rapidly rising gold price would worsen the marked-to-market losses of the gold cartel. So the objective is to allow the gold price to rise around 15 percent per year (it rose 24% in 2009) while enabling the gold cartel members to intervene in the gold market with implicit government backing in order to earn profits to offset the growing losses on their gold liabilities. The gold cartel’s trading strategy to accomplish this task is clear. The gold cartel reverse-engineers the black-box trend-following trading models.

Just look at the losses taken by some of the major commodity trading managers on their gold trading over the last decade. It is hundreds of millions of dollars of client money lost, and the same amount gained for the gold cartel to help offset their losses from the gold carry trade – all to make the dollar look good by keeping the gold price lower than it should be and would be if it were allowed to trade in a market unfettered by government intervention.

As I see it there are only two outcomes. Either the gold cartel will fail or the U.S. government will have destroyed what remains of the free market in America. I hope it is the former, but the flow of events from Washington and the actions of policymakers suggest it could be the latter.

*http://www.gold-speculator.com/james-turk/6552-james-turk-short-history-gold-cartel.html

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.