Global Disparities Put Crack Up Boom At Risk
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, November 1st, 2007.
The oil market is out of control according to OPEC, where to go along with crude prices rapidly approaching $100, China is having to raise fuel prices because of shortages. So, what's really happening here outside of what we will dub 'pathetic' news coverage? As observed earlier in the week, with the Fed rapidly creating monetary aggregates to bailout it's floundering economy, US trading partners are having to compensate by upping their own currency debasement rates, as was openly admitted by Hong Kong authorities just yesterday, which is fuelling global hyperinflationary conditions. And again, to paraphrase OPEC in terms of what we can expect for oil prices, 'it's out of control'. Or, in other words 'the sky is the limit', where irreparable damage is currently being done to long-term global growth prospects due to disparities between Western economies and emerging markets.
In this respect the global dichotomy that exists today is exemplified well in last quarter's MasterCard results, where growth abroad remains healthy due to growing demand, while at home (US) it stagnates, with increases primarily due to rising prices. No matter how you stack it up then, the effects of inflation are now becoming evident everywhere, and it's starting to hurt just about everyone. And in terms of Western economies the fun is just beginning, where if stressed consumers can't make their mortgage payments (or qualify for conventional mortgages), then it makes a great deal of sense credit card debt is next on the list to intensify the larger credit crisis. In this respect it appears MasterCard shareholders should take this opportunity to celebrate, because this is likely the peak.
Of course there are those who would scoff at such talk, purporting the fun is just getting started in emerging markets. And while this may be true in a sense, economically it's difficult envisioning global growth conditions being maintained at current levels if the US consumer is taken out of the picture with skyrocketing energy costs that are sure to be passed along as prices streak into triple digit territory. Add to this escalating inflation today is actually in response to a collapsing credit bubble, a condition that isn't going away anytime soon, and again, we had all better enjoy these inflationary times, because the hangover is going to be brutal.
Why? Because extended periods of excessive monetary largesse designed to offset collapsing consumer demand can only go on for so long in a global environment where commodity suppliers are booming because of tight supplies. And that's the situation today. The world is being torn apart in dichotomies, where the current Crack Up Boom characterizing global macro-conditions is coming under increasing stress as commodity inflation is rapidly striping away purchasing power from increasing numbers. On the same day crude hits $95, US monetary authorities cut rates, and then overnight we hear talk of the Ausi's having to raise rates next week because of their strong economy. If you are thinking the Crack Up Boom is in jeopardy of cracking up, you are correct in my estimation, with the only real question being timing.
As with the rate decision in the States yesterday, monetary authorities will always err on the side of inflation in such matters of course, as has been the case since the Fed's inception in 1913, so as long as the bond market behaves, the party should continue. And with pandering fools like Bill Gross helping to shape thinking in this regard, this is assumed to be natural by those bullish on inflation. Of course the bond market didn't like what is saw yesterday, as the yield curve is now pressing resistance at the 50-day moving average. All we need now is for the ECB to actually raise rates next week, which we think unlikely by the way, and the picture of global dichotomies would be complete. What does an international investor do under such circumstances except continue fading the dollar ($) in favor of tough talk coming out of the Euro Zone? Never mind the $ is already falling off a cliff and stressing out the global system outside of a few nervy speculators.
So what does a precious metals investor do under such circumstances? Answer: Pull your horns in, even if it's only to avoid seasonal weakness anticipated in November. You see there has never been an instance of negative stock market returns for the week ending October along with the first few days of November, but next week could be interesting if long rates were to take off in spite of hawkish talk out of the ECB. Here, if they hold rates steady next week, one might expect the $ to catch a bid with traders reading between the lines, and you know what that would mean for equities based on our discussion from the other day. Of course given the nature of the cake eaters running the show these days, this is obviously too much to ask for given the Amex Gold Bugs Index (HUI) appears set to continue vaulting higher, where if I am not mistaken we are now commencing Intermediate Degree Wave III of Primary Degree III.
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Good investing all.