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

To: Knighty Tin who wrote (19100)	12/20/2004 3:30:49 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Heinz Blasts Pimco's McCulley McCulley: Old Europe, does not have the right stuff. It's got many of the same demographic challenges as Japan, as well as the anti-demand pain of falling real wages for the young, as cradle-to-grave socialist policies, including employment policies, give way to the reality of global capitalist competition. What is more, Europe is shackled with decidedly un-Keynesian aggregate demand policies, led by inflation nuttery at the ECB. In this regard, Japan is a lot better off than Euroland, in that the BOJ is an enlightened reflationist, committed to printing Yen - including for the purpose of buying dollars - with no limit until the inflation dog finally comes home. In contrast, the ECB specializes in preaching the joys of deflationary pain and regrettably practices what it preaches, on its own score by refusing to print up Euros to sell against dollars, so as to temper deflationary appreciation in the Euro and one-step removed, in advocating that fiscal policymakers pursue pro-cyclical tightening in a deflationary lacuna. And if it weren't so sad, I would laugh at the ECB's latest self-tied knot in its Calvinist shorts: Headline inflation is above the ECB's 2% target, rendering the ECB unwilling to ease (intervening against the appreciating Euro and/or cutting short rates), but the primary reason headline inflation is above the ECB's target is administrated price hikes, as fiscal authorities put up taxes to try to appease the ECB's call for fealty to the Growth and Stability Pact, which is fundamentally flawed in that it does not cyclically-adjust deficit structures. pimco.com r_2004.htm Heinz: there's nothing 'enlightened' about 'reflationist' policies or Keynesian 'aggregate demand' policies. these are the very same policies that have never worked before (first famous failure: FDR's 'new deal'), and only serve to lengthen downturns unnecessarily by preventing the necessary liquidation of malinvestments. why does McCulley think have Japan's 'reflation' and Keynesian deficit spending policies failed to deliver any tangible results for 15 years running?? shouldn't it be clear by now that these policies do NOT work? in this case, the ECB has it exactly right: better to allow a lot of short term pain, than endless, never-ending sickness. and if Europe's politicians don't find it in themselves to implement economic reform, well it isn't the ECB's job to do that. its job is only to provide a sound currency (inasmuch as that's possible in a fiat money system). McCulley (and many others) believe the bank should proceed to make the currency unsound on top of all the other ! problems Europe has - that's insane.

To: Knighty Tin who wrote (19100)	12/20/2004 3:50:01 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Discussion with Heinz about gold rallying in all currencies Mish: Check out a chart of gold in euros or OZ$. Not much there at all. As long as the US$ keeps sailing south, gold is probably not going to do much against a basket of currencies outside the US. If the US$ rallies NOW, I bet gold tanks. Yes there could be some external event that changes that, a panic of some kind, Bush has a heart attack or the Saudi govt collapses or something like that, but right now the fortunes of gold seem to be tied to the US$. There are a couple possible scenarios. Slow and painful as every country tries to trash their currencies to gain competitive advantage. This is the slow motion dive to 0% rates worldwide as nation after nation falls in the "Japan Trap". In this scenario, when the US$ bottoms and we see what a sham the Euro is, the Yen is, and the pound is, that is when gold does its march against all currencies. This could take quiet some time to play out if no one panics. Best guess for this scenario to play out is about 3 years minimum. Perhaps we even see the markets breathe a big sigh of releaf at that point, currencies stabilize and the US$ has some kind of big false rally, taking gold major league south with it. ..... ..... I sent that piece to Heinz for comment and received this short reply: i agree...it'll be a while until gold rallies in other currencies too. and one needs to keep in mind, when that happened in the late 70's, it was actually the final blow-off. ======================================================================= Mish: If and when we get there and it does start a massive rally in all currencies, it will be time to be thinking of how best to profit by it, not selling too early, but most of all thinking about when and how and what signals to use to exit. More than likely gold will be the talk of the town and go from page 16 news to page 1 news. Perhaps that will be what to watch for. Right now it still seems like a US$ thing. Mish