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Jim Willie CB

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US$: Revolt, Downgrade & Disorder


By Jim Willie CB            Printer Friendly Version

May 18, 2006

For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market. Articles in this series are promotional.

Anyone who cannot detect rumblings with more magnitude than early volcanic tremors is brain dead, plain and simple. For a full year, the USDollar enjoyed a sizeable counter-trend bounce. It relieved the long-term oversold condition. In usual times, in typical markets, such a period of time would offer the fundamentals an opportunity to catch up, for the remedy to work its medicine, for the condition to heal itself. In the case of the USDollar, the trade deficit worsened. The Jan2005 trade deficit was a grandiose $58.3 billion, pretty doggone rotten. By Jan2006, a full twelve months for the “fix” to take hold, to work through the system, the trade deficit had ballooned to a shocking, yawning $68.6 billion, as nothing but more metastasis flowed their the body economic. Our Pied Piper Sir Alan Greenspan, who skipped town before the upcoming crises, much like Robert Rubin skipped town in June2000, proclaimed the lame line that financed deficits were a sign of flexibility. Plenty of flexibility is manifested in a bank overdraft on a stretched credit line awaiting default also. The Maestro and GoldBugs should be aware, that a revolt, an insurrection, a mutiny is in progress. The greenback is being rejected, perhaps as much as the USGovt leadership is getting a global vote of “NO CONFIDENCE.” Polls internal to US shores show low confidence in our leadership trio, in parallel.


In recent months a new phenomenon is unmistakable, dangerous, ominous, and so real. The world is not only sensing the unfixable nature of all things USDollar-based, it has begun to create alliances to protect itself from the US hegemon. No longer does the United States rely upon innovation, investment, and work, but rather upon attempts at “full spectrum dominance,” deceptive coercion, and blatant inflation. Refer not to the pocket monster, aka pokey-mon. The hegemon is the dominant big guy who plays dirty, throws his weight around, ignores the law, and dares a reaction. No, he even retaliates in the face of warranted protective response. For those who do not understand this “hegemon” term, think of the nastiest evilest wretchedest bully who didn’t just steal school lunch money, but who would kidnap your daughter to ensure debt payment in shylock setting. Think of dark shadowy men who threaten and deploy the most sinister of weapons against a perceived enemy. From the other side of the chess board, recall Georgi Markov, a Bulgarian writer thought to inspire a dissident movement against the Soviets from London. He was assassinated by a KGB agent using an implanted ricin poison capsule by means of an umbrella on a city street sidewalk.

Think of installing tyrants in foreign lands, rich in resources, for the unexpressed unsanctioned purpose of securing contracts for commodity supply to fulfill the needs of the insatiable USEconomy. Think of criminal access granted to gold miners for leasing and selling the US national gold treasure, at nil interest rate for years on end, and zippo accountability before the people’s representative in Congress. Think of the IMF and pressured tactics to raise interest rates in Argentina, after putting that nation’s accumulated deficits on an installment loan, then warning aristocrats to vacate their bank accounts into New York City accounts before bank closures and confiscation of accounts. My sister-in-law was such a victim. Think of heavy pressure leaned upon the Bank of Japan, to comply and to supply the West with 0% money in return for no trade tariffs whatsoever as Tokyo accumulates over $600 billion in reserves in return for the favor of open market access to US retail centers and car showrooms. Note the cries of foul when China does the same trick without a central bank for the hegemon to control. Think of disinformation and distortion of intelligence for the purpose of motivating then waging a war in a land rich in crude oil and fresh water. Think of conducting naval exercises off the coast of nations which make public statements against the USTBond and the implied coercion to recycle Asian trade surplus into bloated USTreasury Bonds. These are tactics used by a hegemon. Foreigners are very familiar with these nasty weapons, while Americans are largely ignorant of them. Remaining in the dark might be a necessary ploy in order to maintain distrust of outsiders. We are all too familiar with the tactics of the underworld crime syndicates, with much more obvious devices like murder, extortion, bombings, fires, kidnaps, hijacks, loan sharks, and basic heists. The hegemon strives to walk the fine line balancing respectability, deniability, professionalism, and diplomatic leadership, a narrow walk indeed. This hegemon is slowly being disrespected, challenged, undermined, as opponents openly plan their alliances and devices of their own making. A revolt is in progress. A scheiss storm comes.


A new phase is about to unfold in the currency wars. The G7 Finance Ministers decided the USDollar must endure a substantial reduction. The Second Plaza Accord has begun (first was 1985) an initial phase, whereby Asian central banks are on notice to permit their currencys to rise, and European bankers will cooperate on a coordinated USDollar decline. Martin Feldstein gives intellectual cover for a more competitive (lower) USDollar. At issue is the gargantuan chronic US current account deficit (trade gap & more), but more importantly the foreign central bank lost confidence in the USDollar as the reserve currency. The US and foreigners see the problem from different vantage points, but they do share the common objective of significant US$ devaluation. My view is that the US trade deficit is structurally based and unfixable without a deep recession, and surely not by means of a currency adjustment alone. That is, unless the US$ falls by 50% or more. Entire industries have gone extinct. Formal attempts to bring down the USDollar will result very ugly serious fallout, all sure to meet opposition, none of which to find political favor. US economists expect little if any price inflation impact, a fairy tale forecast.

World finance ministers have lost confidence in the USDollar. The G7 Meeting communiqué, announcements by Japanese leaders, statements from European bankers, warnings by out of Beijing, outcries from South Korea, criticisms from Russia, agreements in Asia, even statements by the IMF, they all add up to a global banker revolt. US imbalances are not being rectified. The Russian finance minister Kudrin openly questions the USDollar as worthy, given substantial and chronically dangerous deficits. Expect a rocky several months to contain turbulence, minor panics, and some derivative accidents (likely in bonds). Chinese leaders steadily make pronouncements about the hazard to the global banking system from its USDollar foundation, cite the high risk to financial markets of big selloffs, remind of their steady grand subsidies to US consumers, and defend their slow progress in relaxing currency controls. Basically, at spoken issue is the legitimate viability of the USDollar as world reserve. USTBonds, mortgage bonds, and corporate bonds are collectively held as ransom. Asians meet among themselves, for to coordinate mechanisms on a regional monetary unit, one useful in establishing financial stability. The parallel Asian currency is device to be used for certain purposes.

Even the IMF, an organization with a near perfect track record of destroying economies through currency devaluation and interest rate hikes, now calls for the USDollar to be devalued. They believe simple currency adjustment will lead to an orderly resolution. Wow! That is downright clueless. Give me some of that stuff they’re smokin’. The USEconomy has structural problems, much like a fat man missing a left leg trying to walk normally down the street. A currency fix would be akin to lengthening a leg which no longer exists. Orderly resolutions without vast consequences are next to impossible. The US banking leaders and USGovt leaders have taken us way too far astray to be called home without missing dinner. The bread crumb trail has been washed away by vast floods of liquidity from previous storm relief. It is no wonder that officials are calling for the equivalent of yet another mythical SOFT LANDING, this one for the crippled bloated USDollar. This is mythology spoken aloud, queer attempts to control markets teetering in disarray.

The G7 topic of USDollar devaluation and insurrection is discussed and analyzed in the May Hat Trick Letter issue in more detail.


Chairman Bernanke denied any “managed depreciation” in the USDollar on one end. However, intellectual cover has come from former White House economist Martin Feldstein, as he called for a more competitive US$ exchange rate, but one with domestic strength. This is an important acknowledgement, one made clearly with USGovt sanction to herald a new currency phase shift in policy. He senses urgency, hopes to improve the trade balance deficit, and addresses the housing decline and consumption threat, sure to jeopardize economic growth. His historical reference to tame price inflation seems goofy. But his is just spin, from a drafted hired gun.

Unfortunately, an orderly decline for the USDollar will be a monumental challenge, with the entire world of forces aligned against it. Leveraged instruments, heavy US debts, currency traders, foreign control of USTBonds, and the halt of self-destructive official intervention can be powerful tailwinds to assist the USDollar downhill. The gas pedal has none other than the man who has written favorably about inflation for most of his career. When a central banker has a track record of extolling the virtue of operating a monetary printing with near zero cost, the inherent national currency is in grave danger. Weimar Ben was chosen precisely because he is mad as hell and fully willing to run the press day and night in order to avoid economic and financial seizures. However, the USDollar is the pressure valve. When monetization is the device to rescue and control, no floor can be claimed on the USDollar.

The G7 topic of USFed slipped confidence and general blundering is discussed and analyzed in the May Hat Trick Letter issue in more detail.


Japan and China jockey for control and influence, as seen in the Hyderabad India meeting of the Asian Development Bank last month. The US delegate was rendered a neutered puppy, with shallow points made and dismissed. An Asian Currency Unit (ACU) has entered policy making arenas, one to regulate Asian currency exchange rates. The ACU is expected to be used as a fulcrum of exchange rate management. Ministers from China, Japan, and South Korea met with the 13-nation ASEAN in order to come to agreement on a basket peg useful for any Asian nation to manage and fix the value of its currency within a band. This in my view is a pan-Asian currency equivalent in function to the euro currency. Regard the ACU as a device which Asia utilizes in devaluing the USDollar in unison and out of our control, a crucial device in the event of a monetary crisis. What Japanese ministers hatched and promoted, now the Chinese have taken leadership with, even somewhat heavy handed control with.

The G7 topic of Asian coordinated challenge to the US systemic dominance is discussed and analyzed in the May Hat Trick Letter issue in more detail.


Numerous forces work in opposition to an orderly desired decline in the USDollar exchange rates. Market momentum, financial leveraged instruments, speculative investments, managed fund priorities, these are almost uniformly aligned to take advantage of and to exploit the falling USDollar. US debt engorgement is a massive orgy widely known worldwide. Currency traders nowadays are like sharks aided by leverage. Foreign central banks and their managing directors realize risks similar to conditions before the Asian Meltdown. Resistance and shedding is to follow. The notion is dawning on them that intervention to support the USDollar in quick descent might be like inviting a dozen gigantic obese cousins to dinner every single night, night in and night out. Enough is enough. No, no, this USDollar correction might turn into a rejection, then an outright revolt. Its decline will be orderly at times, but with sudden tumultuous down drafts. One must wonder to what extent international disapproval of the United States will be registered in votes against the USDollar, since votes against the US Military are dismissed.

The G7 topic of mounting worldwide disorder is discussed and analyzed in the May Hat Trick Letter issue in more detail.


Key nations are entering a dangerous new stage of worldwide energy war, with numerous fronts in conflict. Government leader behavior has begun to resemble underworld syndicates in their methods, tactics, even revealed strategies. Geopolitical forces and actions urge perceptions of the energy market to be the same as a global energy war, with governments alongside warlords controlling key regions, with military bases guarding important energy production zones (forts), with military bases constructed as toeholds in untapped energy deposit zones (new fronts), with product & pipelines used as weapons (reinforcement supply lines), with nuclear threats perceived and delivered, with counter offensives triggered in response, with high profile abductions and executions, with special operations and even mercenaries (behind enemy lines), with urgent calls for conscripted contract workers (draft), with new alliances forming against the United States axis.

The first action was the attack, occupation, and annexation of Iraq, an event which launched the global energy war. The second action was by Russian President Putin in securing by force Yukos for oil, Gazprom for natural gas, as weapons, then using them against Ukraine, Europe, and England. The nationalization of natural gas fields in Bolivia, and similar anti-investment actions in Ecuador and Venezuela emphatically confirm my viewpoint in military terms for this war. Bolivia is the largest natgas supplier in South America. Venezuela is the largest oil and energy product supplier in the region. The war has finally reached South America, home to vast copper and iron deposits, 25% of the known world copper supply. Will mines be next?

New oil exchanges are springing up like jonquils and daffodils, as they plan to sell oil not in the USDollar. Saddam did so with euros, its discontinued practice a prime motive for the Iraqi War. Sweden in euros, Iran in euros, Russia in rubles. Each nation has its own motives. Russia wants respect and control, even dominance. Iran wants a sphere of influence outside US control. Sweden wants to avoid loss from a corrosive foundation. Both Dubai and Qatar plan new oil exchanges, but presumably in USDollar transactions. The USGovt offers security to the Saudi royals and neighboring emirs (napoleons in white robes) who hog their national wealth and keep their nation impoverished. Such is a longstanding arrangement (security treaty, contract) for reliable US suppliers.

The G7 topic of global energy war and its counter-attacks is discussed and analyzed in the May Hat Trick Letter issue in more detail, actually in a Special Report.


It is perplexing. The announced hesitation for Tokyo to begin a rate hike tightening cycle is given as the main reason why commodities and their stocks declined. Let’s step back a minute and think about that one. In refusing to hike rates, the Bank of Japan in essence admits that have decided to embrace very big inflation risk without a policy reaction. Instead of curtailing the yen carry trade, which is the largest financial engineering machine in modern history, they openly reassure its continuation. They admit they will continue with massive monetary inflation, not hike rates, and supply the Western financial markets with evermore money to borrow at nil interest rates. SINCE WHEN IS THEIR CONTINUED ZERO INTEREST RATE POLICY BAD FOR COMMODITIES??? SINCE WHEN IS CONTINUED QUANTITATIVE EASING A HINDRANCE TO COMMODITIES???

No, no, the continued role and associated behavior by Tokyo as the Far Eastern lackey office to the US Federal Reserve is hardly negative for commodity prices at all. Instead, Asia in general will remain a strong foundation of commodity demand, a locus for speculative investment, and of strong basic demand for energy, industrial metals, and gold.

The yen carry trade is responsible for generating much of the Western world financial wealth. The carry trade speculative flow will continue in all its cancerous glory. Any discontinuance of the yen carry trade might actually cause financial seizures from fast rising US long-term interest rates!!! Furthermore, news of Tokyo reluctance to hike at all is even more credence that USFed has some excuse to halt hikes on its own, to pause. The BOJ announcement is equivalent to Little Ben’s tease of a pause, yet it had the opposite market reaction. Straaaaannnge!!!


Much of what we are witnessing in the past week is the annual spring selloff in commodity stocks. Also, an unstable situation developed. Gold rose from $600 to $700 in less than one month. With breaktaking leaps comes a need to catch one’s breath, even for a market. Look at the old trusty 3/8-ths retracement rule for guidance, a reliable tool in my kit. In a bigger sense, the breakout in gold in March from $570 to the May $730 high would see a 60-point pullback to $670. With more short-term eyes, the breakout extension in April from $635 to the May $730 would see a 30-point pullback to $685. So one might consider a healthy correction to send gold back to the (670-685) range, provided the gold bull still is alive and strong. Fundamentals scream that the bull has many years to live, run free, even stomp down both disbelievers and obstructive participants without mercy.

My personal view is that, given the monetary breakdown in the USDollar foundation and institutional insurrection against it, given the global energy war counter-attacks and govt warlord behavior to foment it, gold might be justified in a move somewhere between $900 and $1100 before it re-evaluates the crises in progress, the pathetic fixes in place, even the progress toward resolution. Through any reasonable person’s eyes, all movement is away from remedy and toward deeper crisis, widening the gulf between reason and lunacy. The shocking ingredient is that the USGovt seems to intentionally provoke greater conflict. Given the chief US exports continue to be debts, jobs, faulty banking systems, patents, obesity, and given the principal strength of the USEconomy is military investment, foreign beach head establishment, and leverage upon governments, it seems the United States Axis has actively chosen a path toward greater chaos to secure commodity supply in an environment whereby our military strength can be utilized.


It is hard to say how far this correction in commodity stocks might go. Surely, the mainstream press enjoys what they proclaim as the end of the bull. However, they forget that only a global recession will interrupt this commodity bull market. They forget that energy stocks were the biggest single engine in the S&P500 index last calendar year. A case in point is the strong and growing global demand for gold bullion as the USTBond erodes in confidence. A case in point is the relentless twin deficits indicative of extreme hemorrhage and foreign capital dependence. A case in point is the 20% decline in official copper inventory at the exchange warehouses, the challenge to Indonesia copper supply, the socialist (and water) threat to Andean copper supply in Peru. Sorry, but these three factors remain very much alive, either without evidence in any way, or not even addressed.

Three requirements are necessary before the commodity bull is interrupted:
1) emerging developing economies must stall in growth altogether, like China, India, Southeast Asia, including the construction boom in the Middle East
2) the multi-year USDollar decline must come to an end, in a real sense from remedy to its crippled fundamentals in astronomical trade deficits and burgeoning federal budgets
3) the imbalances whereby global commodity demand overwhelms commodity supply must find equilibrium in the midst of historically low inventories and supplies at risk.
Sorry, but none of these requirements has been met, as all are still in force.

This hegemonistic policy will ultimately backfire, with blocked supply routes and supply chains, along with a mushroom of global alliances in opposition. Its policy will fail from an insurrection in the USDollar and rejection of the USTBond (its paper observe side). My forecast from early 2005 was for the world to separate into four trade zones: Europe, Asia, Middle East, and Americas. There is far more cohesion in the three non-American zones than in our zone. Iran is the rogue within the Middle East. Venezuela, Ecuador, Bolivia, and Cuba are the rogues within the Americas. Russia is the rogue within Europe. The four zones in time will produce their own single currency, as well as their own dominant commodity supply. As the months pass, shipment of commodities across zone boundaries will become increasingly problematic.


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