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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (2635)	3/22/2004 8:36:59 AM
From: Kailash	Read Replies (3) \| Respond to of 116555

1) rising gold 2) rising US$ So far the negative correlation has been close to perfect. Yet gold has been no better and no worse than the euro as a store of value. If the euro joins in the currency debasement race, I could see this happening. The trend towards lower interest rates even as commodity prices are soaring suggests there is too much productive capacity worldwide. This means profits will be squeezed and the system could crack in several ways -- we could get a derivative scandal, the collapse of the US car industry, the collapse of Chinese banking -- but in the meantime, the commodity boom will continue, not because it represents a "Flucht in die Sachwerte" but because there is so much productive capacity vying for resources. Each nation in the meantime is sticking to the strategies that worked in the past: the US tries to get out of the problem by stimulating demand, the Chinese and the Japanese by saving and producing. Stimulating demand in the US is a lost cause this time, since this demand will simply be met by an unending supply from China -- it will not stimulate domestic production. Saving and producing in China and Japan is also a lost cause, as your US customer's receipts are steadily losing value. In this race to the cliff, who will stop first? Perhaps the US, which is seeing its industry destroyed. We'll get a massive demand for protectionism and back off from free trade. Yet as prices and interest rates rise in the US, the the debt burden will lead to bankruptcies and recession. Call it biting the bullet. Yet China could also stop first, for instance by tightening credit and setting quotas on commodity imports. If this staves off protectionism in the US, the game could go on for a while longer. The pressure on commodities would ease up, but prices would remain elevated. The US would keep trying to stimulate domestic demand. This is not an unlikely scenario. China would be bearing some of the brunt of the slow-down by failing to put its teeming masses to work. If neither the US nor China stops, but keeps racing off the cliff, commodities will continue to soar, interest rates in the US will stay low, and the dollar will continue to lose value until global banks pull the plug and declare the emperor has no clothes. We get a worldwide crash and a few years later, war. So who's betting on which outcome? US policy at the moment is in la-la land, with Bush pretending to be fighting terrorism and actually trying (and so far failing) to gain control of Middle East oil, and in the meantime oblivious to the huge challenges faced by an imbalanced world economy. It's hard to think of someone worse to have in charge at this crucial time. If he stays in power, we're headed for scenario 3. In the short and intermediate term, that means low interest rates in the US and Europe, competitive debasements of currencies, rising price of gold, but also high commodity prices. The end-game, however, would be hyperinflation as the dollar collapses. Neither Mish nor Russ seem to have much faith in the "cooling off" scenarios 1 and 2 -- they appear to argue it's too late to pull this off. Still, these are more attractive courses of action than the race off the cliff. China is making some attempts to moderate production, and in the US there is an election coming up. A Democratic president would likely be protectionist; this would have to be very carefully managed to succeed in just cooling things off. If we get a collaborative new trade regime, we could at least avert disaster. If the underlying economic reality is excess capacity, we're going to see a rise in gold as a store of value as paper currencies decline. Somewhere around now should also be a good time to short -- how about discussing good short candidates? Where are the obscene overvaluations this time? Who is hiding their employee options expenses? Cheers, Kailash

To: mishedlo who wrote (2635)	3/22/2004 9:28:23 AM
From: Tommaso	Read Replies (1) \| Respond to of 116555

There is no good reason for the US dollar to rise, and many reasons for it to fall, reasons that have been enumerated so often that I am not going to waste space repeating them now. The huge trade deficit is sufficient in itself. Just because it has not happened yet does not mean it won't. I think we may recover before we sink to Argentinian depths, but it will be hard.