A very cogent summary of todays situation with the dollar IMHO.
Any comments anyone?
One enormous question that nobody seems to want to address is the
dollar.
But John Plender, writing in today's Financial Times, takes a crack at
it.
And he's very good. Plender notes that having a reserve status
"incorporates
a wonderful incentive to become decadent . . . because it allows a
country
to write checks that no one cashes. You can spend more than you earn to
a
far greater extend than anyone else. That is what the US now does."
Then he notes that it is difficult to change the dominant currency.
It's
cheaper and easier to use than switching to potential competitors.
Still,
economic power changes and that means that currencies change. Plender
doesn't see Europe as a potential economic competitor to the US. The
decisive power shift, he says, is to Asia, and that would mean China
and the
renminbi. But that brings up the question of whether a nation without a
democracy and without adequate property rights could run a dominant or
reserve currency.
So what might overtake the debt-ridden US and it's dollar reserve
currency?
It could be a basket of currencies. Plender thinks we may be moving
into an
unstable period where much experimentation goes on. He believe that
"people
will worry about political instability and exclude the renminbi from
official reserves."
I'm not so sure. I obviously don't know China's intentions, but my
guess is
that China wants to become a super-power, and that it will do what it
has to
get there. One thing that I believe China will eventually do is make
the
renminbi fully convertible with a gold backing. That would make the
renminbi
very attractive. This will take much time and many revisions on the
part of
the government of China.
But we should remember that new generations are growing up in China,
and
many of the new leaders will be Harvard, Yale, Stanford and NYU
graduates.
These are not the old Communist geezers who have run China for decades.
These are the new leaders, and they are smart and ambitious as any
leaders
in the US.
Personally, I'd be reluctant to place any large amount of money in
China
today. But I'll be watching China intently. The Chinese invented
gunpowder
and they invented paper money. What else they will come up with remains
to
be seen.
.......................................................................
Now let's turn to the markets. In view of what I wrote above, it's well
to
note that gold closed Friday at it's highest monthly close in 15 years
(that's years, not months). I wrote on Friday that gold is in a primary
bull
market. My view is that gold has completed its first psychological or
sentiment phase. The first phase is the phase where sophisticated
investors,
sensing a new bull market, make their initial bargain commitments. That
occurred during the 1999-2001 period when gold was selling in the 260
to 300
area and gold stocks were literally being given away.
We're now early in the second phase of the gold bull market. This is
the
phase where the public and the funds start to pick at gold -- buying a
bit
here, a bit there. At the same time they begin to buy some of the gold
shares. The second phase is usually the LONGEST phase of a bull market,
and
this phase could last another year to a few years longer. The second
phase
of this gold bull market is being EXTENDED by the anti-gold element
which
continues to manipulate gold or short gold.
As the second phase moves along, brokerage houses will suggest taking
"a
small position" in gold, and gold will occasionally pop up in the news
as it
creeps to new highs. Later in the second phase the public will start to
buy
gold, this in reaction to increasing political and social uncertainty,
rising debt levels and nervousness as to the future of the dollar.
The third phase of the gold bull market will see a frantic rush by the
public to buy gold. In this phase gold will surge to "undreamed" of
heights -- level beyond what anyone now envisions. This will be the
final
blow-off for gold, following which I believe gold will be reinstated
behind
paper money.
Over the near-term, the Commercials continue to increase their short
positions in both gold and silver. This creates more and more "supply."
Ultimately, the Commercials will take their profits as gold corrects.
How
far gold is fated to correct, of course, it what we don't know.
On to the stock market. The present is one of the most complex and
difficult
situation that I have ever wrestled with. I've been following the
Lowry's
statistics since the '60s. These are statistics derived from the actual
action of the market. Friday closed with Lowry's Buying Power Index in
a
rising trend for the last five months. Lowry's Selling-Pressure index
on
Friday dropped to a multi-year low. That indicated a dearth of the
desire to
sell, and a steady increase in the desire to buy. Lowry's doesn't deal
with
"why." Lowry's deals with what's actually happening.
In the meantime, their "operating-companies-only" advance-decline line
rose
to an all-time high. In other words, a ton of stocks are in rising
trends.
Against this the big-cap stocks, as typified by the D-J Industrial
Average,
have been in a declining trend since last February. Furthermore, the
Industrials have formed an eight-month series of lower peaks and lower
lows.
This pattern is bearish.
So what conclusion can we draw here? Is this a healthy market or a
dangerous
market?
Since I've never seen anything like this market, my own instinct is to
be
very careful, along with a high portion of suspicion.
In the big picture, as I see it, this is early in the second phase of a
primary bear market, and it's a second phase that has been levitated by
massive debts and deficits, manipulated low interest rates, and
continuous
really outrageous spending.
The backbone of today's profit picture stems from the financial area,
with
an emphasis on the banks. The weekly chart below shows the Financial
Sector
of the S&P 500. The financial stocks now represent about 30% of the
value of
the S &P 500. The real money in the US economy has been made by the
financials during the last few years. And, of course, much of this
money has
come from the "carry trade," which the Fed's low short-term interest
rates
has fostered.
The financials made their high in March and have been moving sideways
ever
since. This is the group that I've been watching with interest. This is
where the huge profits have been generated. I want to keep my eye on
this
group. They've been the money-makers of this economy.
Gold tend to move opposite the dollar, so gold (and it's been
overbought)
could be ready to correct. Commercials continue to build their short
positions in gold shorts. I just got back from a two day meeting with
Progress. We discussed the Progress investment portfolio, which isa
coombination of international bonds and stocks and 10% gold and oil
fuwtures
with 40% in dollars. I tried to get them into lmore gold and less into
stocks and bonds - especially US
Gold's 50-day moving average crossed bullishly above its 200-day MA on
October 5. The 50-day MA for gold is 414,60. The 200-day MA for gold is
405.70. Gold is obviously well above both MAs, and maybe too far above
its
200-day MA. |
