SOS Myth on US Dollar

By Nico Isaac Here, these recent news items capture the bullish buzz surrounding the precious metal:
"Gold $2,000."(AP) AND -- "NIA Says Gold Could Rise to $5400. It looks like this breakout above $1000 could be permanent." (Reuters)

"High Gold Prices Here To Stay... The gold market has spoken loudly and definitely in the longer run." (Forbes)

Gold prices are still 53% below their inflation-adjusted 1980 peak. "Even at above $1000/ounce, gold still looks cheap in terms of other financial assets." (Bullion Vault)

"Bargain hunting boosted gold futures. Prices below $990 have increasingly been seen as a buying opportunity." (Wall Street Journal)

"Gold Prices Show No Signs Of Slowing... Analysts say there's little standing in the way of more advance. The only way this doesn't continue would be a stronger dollar. I can't find anybody out there that is saying that is going to happen." (Associated Press)

To summarize the picture: Since 1913, the purchasing power of the dollar has fallen 96%. To match that loss, gold should be up 25 times from its pre-1934 fixed value of $20.67.
It's not. It's up 50-times. On this basis, gold is 50% overvalued.

In Bob Prechter’s own words:
"A gold buyer today must be really convinced that inflation is going to take off in order to justify buying at today's prices. Of course, buyers today are convinced that inflation will rage, just as they were convinced that inflation was no threat at all back when gold was at $253.”

MyView

Currency is fiat money, but, this fiat money is relative. It comes in pair, i.e. USD/EUR, USD/Yen.

Gold is real money? Well Gold contracts traded in Comex is also fiat money, isn't it? But it is also relative to USD dollar and other currencies. Although gold price per USD has increased lately, but against Australian/Canadian/other major currencies, it dropped, i.e. get less currency.

Gold has appreciated against USD.
Gold has depreciated against AUD.
AUD has appreciated against USD.

So if you are an American and has lots of USD, will you buy gold or AUD?

SOS Myth - Stock market leads the Economy

Does the Stock Market leads the Economy?

What determines trend in BOTH stocks and economy is the trend in social mood. Stocks are its most sensitive barometer, that's why they react before the economy does. But don't mistake the stock market for the driver of future trends; it's just an indicator. Just because it's rising or falling doesn't mean it sets the tone; social mood does.

That's why expecting the stock market to pull the economy out of the recession is like expecting your right leg to lead the left one, while in reality BOTH are only following your brain signals.

MyView

So what is a good tool to forecast the social mood? Elliot Wave? If you observe the US Market commentaries, you will realise they are looking via the rear mirror. Their comments are made to compliment the movement of the market.

When the market goes up, their comment will be, the recession is over due to better than expected result from the financial sector.

When the market goes down, their comment will likely be, after 7 months of rally, most investor is taking profits.

Lets look at another chart above on the KBW Banking Index. The moral of the story is not to get suck into the market by the media commentaries. Read the social mood.

SOS Myth on Inflation

By Jason Farkas 21 Oct 2009

An increasingly loud chorus of investors expects the imminent demise of the US dollar and US Treasuries. They also expect that an exploding monetary base and the US’s structural problems will lead to massive inflation. This opinion may prove to be correct in the very long run, but evidence continues to mount that a deflationary phase will come first.

1. Inflationist Arguement

First, let’s summarize the inflationists’ view: Debt in the US is out of control, and the actions of the Fed, Treasury and Congress will continue to offset any deflationary slowdown in the economy. Deficit spending and interest rate cuts from almost every nation on the planet are inflationary. The US’s exploding monetary base, which has more than doubled over the past year, and large fiscal deficits, which may exceed $1.2 trillion this year, will eventually devalue the US dollar and cause foreigners to flee the Treasury market. The interest payments on our national debt will rise because of this exodus from the US Treasury market, which will weaken the dollar further.

2. Debunk by Deflationist (point to point)

We believe that people are incorrect to always look for inflation. At rare times, deflation happens, and here are the two key points which show holes in the inflationists’ near term outlook for inflation.

i. Treasury markets are attracting record demand -- Until foreign central banks flee from US Treasury debt, one plank of the inflationists’ platform is missing. Wholesale abandonment of US Treasury debt would cause interest rates to soar, which would raise the cost of capital in the US. But the data clearly shows that foreign central banks have not abandoned the US Treasury. As the chart indicates, foreign net purchases of Treasuries hit an all-time high at $100.53 B in June 2009, with China and Japan leading the way.


ii. Collapse in consumer credit -- The US monetary base has expanded, but banks have raised lending standards and consumers are spending less. Consumer credit has fallen by $60 billion in the last five months, the sharpest drop in more than 50 years, and the new trend towards less spending is likely to continue. This drop in consumer credit should warn the inflationists that a new trend is in force -- one of deleveraging, which runs counter to the idea of inflation. The expanded money supply is potential inflation, but it is impotent if the credit is not actually being extended. As Bob Prechter points out in Conquer the Crash, “The ultimate success of the Fed’s attempts to influence the total amount of credit outstanding depends not only upon willing borrowers but also upon the banks as willing creditors.”

3. How do we know if Inflationist is correct?

If inflationists are to be correct, we will likely see confirming action in the currency and bond markets. While not required, an impulsive (in Elliott wave terms) sell-off in the US dollar and Treasury bonds would at least be a warning that inflationists were on the right track. But Elliott wave patterns in the US dollar continue to suggest a significant bottom at hand. And in the Treasury arena, along with the scramble for cash, investors are likely to scurry away from risky assets into the one US market that’s still rated AAA -- US Treasuries.

Just as accounting scandals and fraud were unearthed towards the end of the technology collapse from 2000-02, be prepared for similar bombshells to explode along with Primary wave 3 down. (My apologies to non-subscribers for using another potentially unfamiliar term.) They will come from areas where inflationists haven’t thought to look, such as emerging markets, derivatives, high-frequency trading and terrorism. Only after bombshells begin to burst will most investors realize that a slumping economy and deflation are underway. And only once deflation has been embraced by the mainstream is the point when inflation will become likely.

MyView

• Inflationist says deficit spending and interest rate cut will cause inflationary (deflationist says consumer spending drop, credit drop, saving increase, bank reserve increase because not lend out)



• major QE and fiscal deficit will eventually devalue US Dollar and cause foreigner to flee Tresuries (On contrary, June 2009, net purchase of Tresuries by China and Japan)



• interest payment will rise and further weaken the US Dollar (so far no major sell-off of US dollars and Tresuries bonds)

Is the arguement above convincing enough? Well time will tell, get your portfolio prepared, perhaps a wiser move is based on deflation first then inflation later (couple of years down the road)

SOS Myth on Debts

What is the the source of US Crisis?

Is it too much Debts?

Those are identifiable debts, consumer debt, corporate debt and federal debt, what about..

1. future debt on medicare, medicade and socialcare (USD104 trillion)



2. federal debt next 10 years circa (USD9.1 trillion)



3. unrecorded toxic debt (derivatives i.e. CDO, CLO, CDS, MBS) (USD200 trillion)

Can printing money solve the structural problem i.e. more debt to resolve the economy that already have too much debt?

Is bailout the solution, it only shifting private debt into public debt, with a hope that prolonging the debt will reduce drastically the Non Performing Loan. Will it work? Well it can defer it, but not eliminating it. Japan tried it, look at them, lost 2 decades. Japan is a Creditor nation, USA is a Debtor nation.

If Debt are used productively, i.e. used to invest into a cash generating assets for long term, it will value add to the economy.

What will happen when the Growth of Debt is faster than the GDP?

Is the GDP sustainable?

What about deleveraging? It may takes a while to unwind such a hugh debt (private debt of USD45 trillion)

Look at Japan, although they have shifted part of the private debt into public debt, the share market did not grow since 1989 to 2009. It is a myth that stimuli will resolve the too much debt issue. Something need to give. If it can be resolve so easily, every time we face with debt problem, we just print more money and problem solve.

The longer the debt is dragged, the longer the economy will suffer.

SOS Myth on Gold

The major non-confirmation between these two markets is clear, as is the overlying message: IF demand for gold truly outweighed supply, then its value as measured in other currencies would increase.

The rise in gold is primarily the result of speculation and a falling U.S. dollar. These are exactly the “untenable” forces that contribute to a Bubble, not a genuine Bull market. The difference is only a matter of time.

4 Factors to know Gold price increase is Genuine or just another Bubble




To know whether a diamond is real, it must cut glass. And, to know whether the bull market in gold is real, it must encompass at least one of these FOUR traits:

A surge in demand that outpaces supply
A falling stock market, which raises the “safe haven” appeal of precious metals.
A real (not imagined) threat of inflation
An increase in value relative to major foreign currencies

Right now, the Gold market can NOT check off a single one of these items. Case in point:Supply: Demand for gold from jewelry makers – which comprises 60%-70% of the market – has plummeted to its lowest level in 20 years.

“Safe haven” appeal: From its March 2009 bottom, the U.S. stock market has soared 50% right alongside rallying gold prices.

Inflation: As the October 2009 Elliott Wave Financial Forecast (EWFF) notes: An increase in money supply is only inflationary if it is used to RAISE the total amount of credit. This is NOT happening, as both bank credit and consumer credit levels are contracting for the first time since World War II.

A gold rally in other currencies: Again, the October 2009 EWFF presents the following close-up of Spot Gold prices VERSUS Gold denominated in foreign currencies such as the Canadian dollar, the Australian dollar, the euro, franc, pound, and yen since 2007. (see chart above)

MyView

• Most major media is in a view of GOLD is going to hit the roof (on basis of inflation - which is a myth)
• Most hedgefunds, traders and speculator, is gearing up, to buy gold, guess what will happen when the US dollar rally, like in July 2oo8, all other financial assets dropped (commodities) but at different pace (energy will drop first, then agriculture, then precious metals)
• Now only 3% is bullish on US dollar vs March 9, it was 98% bullish dollar
• Don't forget, there is a new game in town call US Dollar carry trade (how will it turn out when it unwind)

The rise in gold is primarily the result of speculation and a falling U.S. dollar. These are exactly the “untenable” forces that contribute to a Bubble, not a genuine Bull market. The difference is only a matter of time.

The right question would be, will US dollar continue to slide?

If yes, hard assets will continue to rise

If not, like in 2008, all financial and hard assets will drop

One way to find out is the bullishness in US Dollar is only 3% vs March 2009 at 98%. It is very clear that when US dollar weakens, crude oil, gold, commodities soar. This is not REAL demand and supply of HARD ASSETS, this is demand and supply of FINANCIAL ASSETS, i.e. Dec Gold contracts using borrowed money is USD12 billion.

SOS Myth - Fed is in control

It is clear to some that the Fed's policy is to weaken the US dollar, and there is evidence that it will continue to do so for quite some time. Gold and equities react to this by going up. Don't you think that until the Fed's stance changes, all the talk about the stock market topping should be suspended?
Responder: Vadim Pokhlebkin	Date: 10/16/2009
Regular EWI's Message Board readers will remember seeing questions like "Won't the Fed prevent the crash?" two years ago, before the DJIA tanked the first time. The Fed did intervene -- remember when central banks first tried stop the crash? December 2007, with the DJIA near 13,500. Bob Prechter wrote about it his December 2007 Elliott Wave Theorist: "The world’s 'big five' central banks -- the Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank -- have just made the announcement of their lives. Apparently working all night on Tuesday-Wednesday, the Fed arranged all these players’ cooperation in order to come up with a plan to bolster confidence among the world’s creditors and borrowers. The Wall Street Journal (12/13) calls it 'the biggest coordinated show of international financial force since Sept. 11, 2001.' ...This consortium of money monopolists announced to the world that it would provide billions of dollars worth of 'liquidity'... essentially presenting them free passes to make money in the LIBOR market and elsewhere. In this one blazing statement broadcast worldwide, it seems that the dream/nightmare of believers in perpetual inflation has come true: With unlimited fiat credit at their disposal, the world’s central banks are proudly coordinating a drive to create more inflation." Despite central banks' best efforts, the DJIA still lost 58% (Oct. 2007 high to Mar. 2009 low). Yet most people continue to believe that the Fed is in control. Bob Prechter explains in Ch. 13 of Conquer the Crash why they were powerless against the first round of deflation -- and why they are likely to fail again. MyView It has been proven again and again by Bob Prechter that Fed or combined effort of largest central bank in the world can stop the change in Social Mood Most Keynesian Schools oversimplified economic theories that does not apply in reality (also proven by Steve Keen in Debunking Economics)

SOS Fiat Money

GOVERMENT - total USD121.8 trillion

1. Healthcare plan - USD1 trillion
2. Govt deficit next 10 yrs - USD9 trillion
3. Existing Govt debt - USD11.8 trillion
4. Unfunded Obligation (socialcare, medicare, medicade) - USD104 trillion

PRIVATE - total USD300 trillion

1. Private or Corporate Debt - USD45 trillion
2. Debt held by Foreign countries - USD7.9 trillion
3. Derivatives - USD250 trillion (some are contra off)
   

GDP - total USD14 trillion (2008)

1. GDP = consumption + govt spending + investment + [export - import]
2. Consumption = USD10 trillion
3. DJIA earnings about USD0.5 trillion to USD0.75 trillion (average 2007-2008)
4. DJIA earnings 2009 = less than USD0.14 trillion or USD140 billion

Current Indicators (consumption related)

1. Savings rate of consumer increased since early 2009
2. Lending is down (but reserve is up, arising from QE)
3. Borrowing is down (overleverage, credit cards, mortgage)
4. 98 banks bankrupted to date
5. Unemployment rate increases

MyView

1. Most says USD continue to collapse
2. Most says run to hard assets i.e. commodities
3. Most says Hyperinflation is the current threat
4. Most says China & Russia & Emerging market will save for global economy
5. Most says gold price will at least double over the next few years
   

I say, these most people are the same most people that read the same indicators and came from the same economic school.