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

To: YanivBA who wrote (53680)	7/21/2006 7:04:03 AM
From: dpl	Respond to of 116555

Very good post.

To: YanivBA who wrote (53680)	7/21/2006 10:19:56 AM
From: regli	Respond to of 116555

I believe that the carry trade liquidity contraction will soon be last year’s problem and I am expecting gold to anticipate that trend quite soon. If anything, we are already observing hesitancy to raise rates by various central banks including Japan. It seems obvious to me that we are much closer to the end of the rate raising cycle rather than the beginning. If the RE topples as many expect here, me included, then we are much closer to a rate cutting cycle. It is interesting in that vein to observe that the Cleveland Feds already has the Fed funds rate probabilities in September at 5.25% lower than August ‘s 5.5%. Message 22635518 clevelandfed.org I continue to believe that politics significantly influences the Fed and that it will likely stop either here or at the very most at 5.5%. After the November elections we are just about immediately entering the next presidential election cycle and even if the democrats win this November Republicans will be even more concerned about 2008, as usual it is the presidential party that is held most accountable by far for the economy’s well being. Risking a further deterioration of the economy into 2008 will take lots of guts by Bernanke. There are good reasons why the stock market rallies the most in the third year of the cycle and second most in the presidential election year. It is also a given that it takes rate hikes somewhere between 6 to 12 months to work their effect through the system. As we haven’t even had a pause yet and RE is already cracking, I foresee very different concerns rather soon and just about the only way the Fed can fight those is via liquidity creation rather than withdrawal. All the liquidity withdrawal scenarios were based on a nicely expanding economic picture most especially the one from Japan. Japan will FREELY and liberally inject liquidity again at the slightest hint of a drop back into deflation which IMO will happen as soon as the U.S. or China slows. In case of the U.S. even according to the Bernanke, this slowdown is already in progress, the question is only how far. If it is only to approx. 3% GDP growth into 2007 then I could foresee further slight liquidity withdrawal. However, I personally consider 3% on the high end and expect 1% to 2% if not lower by early 2007 due to a severely constraint U.S. consumer. I also believe that a cracking U.S. RE market will quick affect negatively the U.K., Canadian and Australian RE markets and not too much later most of the bubble RE markets around the world including Latvia <g>! These developments will severely crimp consumer spending in the West, slow these markets and therefore directly affect India and most likely also slow China. I therefore expect just about all CBs including the ECB to loosen credit again. In this scenario, gold should actually perform very well as short terms interest rates will come down and money printing will increase, potentially dramatically, to fight deflation.

To: YanivBA who wrote (53680)	7/21/2006 1:07:20 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Response from Heinz: this is true, but only in the very short term. this short term reaction has already happened - during the May-June decline in gold, the liquidity created by rising margin buying power due to the previous advance was taken out of the market (the speculator long position fell from gross 610 tons to below 300 tons). in the medium to long term, gold is the asset that rises when liquidity contracts. this is why there is a long term negative correlation between gold/gold shares and the broader stock market for instance. to put it more succinctly, gold's REAL PRICE rises during periods of business and liquidity contractions. note that the liquidity driven gold rally of 2005-6 saw gold's real price actually fall. a good way of observing this phenomenon is the ratio of gold to industrial metals. the reason why this is so is gold's role as money - or nowadays, the money of last resort . obviously the purchasing power of money tends to rise when liquidity contracts - thus also the strong correlation between gold/gold shares and the yield curve. the 2005-6 liquidity driven rally was an exception, not the rule. gold merely followed the other metals in a sort of spill-over operation.