Math for Geniuses
According to the recent insights gained by educators around the world from the international test of students worldwide, called PISA II, there is a very strong correlation between the capabiltiy of reading and understanding textual content and the ability to deal with numbers, i.e. mathematics.
Based on these pedagogic facts I've come to the simple conclusion that Mr. Alan Greenspan, US States' Central Bank Chairman is fundamentally "reading challenged", or in the simple words of Father Know Best, "Honey, the teacher said Junior is basically a dork".
Since years the Fed Chairman has been impudently working hand in glove with the administration in trying to delay the worrisome pitfalls of the 2000 bear market by extraordinary pumping of massive amounts of liquidity into the US system, ie. creating US Dollars out of thin air, or in other words, no real productivity was ever produced. Federal interest rates were thus dropped significantly to enable massive borrowing and to enable consumers an "easier" time of things. This liquidity has now, as we all know, long spilled over into the asset market; houses at irresistible financing, autos at 0% financing, etc. Likewise, triple budget deficits within the US still there and still growing, inflation is certainly creeping back into the picture, oil has exploded northwards since the $20 barrel of just a few years ago and commodities have been on an extended advance while most people don't even know what commodities are. The public is still enamoured with a lot of this. So much for economic principles.
I think it was around the 3rd grade that most of us understood that selling lemonade for 10 cents a cup on a hot summer day could provide for lucrative bubble gum money as long as we knew that it cost us in total 5 cents for the time, labour, materials and patience. We were all reading geniuses by then. Alan was obviously selling his lemonade for 3 cents a cup and had plenty of customers, but sadly was locked out of the Bubble Gum Blowing Championships in Poughkeepsie, New Jersey, in Eddie's tree house on 3rd Avenue that year, as he had no money for bubble gum, and Mom wouldn't give him any either.
But suddenly Alan, with his 78 years, has obviously had a tutored crash-course in reading comprehension, and with it, the accompanying quantum leap in economic understanding of fundamentals. Suddenly, on the eve of the G-20 Finance Minister conference in Berlin, Alan has come out with statements warning of dire consequences to the US Dollar should asian and other countries no longer see the need for supporting it and admonished the politicians for deficit spending programs.
Help from abroad for US Dollar support may not be withheld immediately simply because that would cause too much hurt and suffering in so short a time - the key word here being "immediately". Long term, all economists, and now the politicians it seems as well, are talking of the need, out of simple economic mathematics, for the US Dollar to gradually devalue - some are talking about a 25-40% downward correction - in order to address structural imbalances to the US deficit and for a certain stability to be maintained within the global markets.
What this now means is that the US 30 yr. long bond will - if we read our coffee grinds correctly - need to drop thus pushing longer term interest rates higher. This might be the ushering in of even more pain for housing / mortgage holders, especially those with adjustable mortgages. Equally, with a devaluating US Dollar, i.e. weaker purchasing power, imports become acutely more expensive and thus US consumers might throttle purchases and MIGHT even think about saving a dollar or two. This, in turn, would play out on the equity markets and would likely give a renewed case for bearish long-term scenarios, which have been talked about for the last 4 years but which have not yet taken fully hold in their fullest prominence. Despite the current mini-bull euphoria, or maybe because of it, the PAPA Bear is still out there somewhere. When and how the angry bear will crawl out of his lair is not precisely known, but for all those who take a view "a strong defence is the best offense", it might do well to take heed now, rather than later. If the short term is a mini bull then by all means participate while keeping in mind the fundamental outlook.
And finally, this takes us back to the consequences for the commodity markets. Both gold and silver have been advancing as of late. With the US Dollar now at the bottom of its channel, and gold at the top of its channel, we are all waiting for the markets to flinch - to give a sign of what the next step will be. Although I have been expecting a gold pullback of some sorts, could it be that with the recently, and well received Gold ETFs, too much "positivism" in the gold market will not allow for any players to simply "move" the markets as heretofore? Likewise, with the political statements coming from all sides now, and even Alan himself, about the need for US deficit imbalances to be redressed, have they now resigned themselves to a higher gold price? We certainly do NOT know this today, but I certainly believe that the time is soon coming when a plethora of factors will come together and start to provide us with more of the puzzle pieces.
Meanwhile, all you savvy readers, do your economic homework now and at least mull over the consequences of a 25-40% drop in the US Dollar. What has held its value during the last 30% drop over the last 3 years? Gold. The Money of Kings. So, in conclusion I like right now : some physical gold, some physical silver, some gold & silver shares and some diversification into the Euro and Swiss Franc. Equally, I would NOT write off oil and or drilling at all - there are certainly still explosive issues within the Middle East which have yet to be resolved.
Final note: the bellwether equity Newmont could be considered a proxy for the gold market in general, since it is one of the largest suppliers. Notice the rise since 2000 is almost in direct proportion to the physical gold market advance. Should the tea cup formation (bullish) break out over the 60 level, then all bets are off as what price gold could reach in 2005. It is a relatively moot point to discuss that question because at this point either you believe the economic fundamentals of the world economy are displaced and need correcting, or you don't, and will continue as usual. I would advise a strong defence while considering the former.