Last night, on CNBC, Larry Kudlow suggested that the price of gold is pointing to inflation. (Incidentally, I now call him “Notradarmus” Kudlow, following his brilliant “50 and 50” Fed rate call -- 100 percent better than my call of a grudging “25 and 25” cut).
I almost fell off my chair -- as we have long argued as to the “true” level of inflation. Having recovered myself, I replied that gold was “shouting” inflation and dollar crisis. I should have said “roaring” and added “stagflation”, but it would have complicated matters too much for a sound bite debate.
Here, we should point out that the price of Gold does not reflect a true “free” market. It reflects a “dirty” market, heavily distorted to the downside by coordinated central bank sales, designed to “demonetize” nature’s natural money. So the “shout” of gold is being heavily muffled by central banks. The realty is that the price of gold is “roaring” alarm!
We see two major threats facing our Fed -- stagflation and panic. They both have their roots in the “Great Inflation Lie”, of which we have long warned.
Both, are now being manifested in a dollar rout!
As we said yesterday, every man, woman and child in America will now have to pay the price of the Fed rate cut. We are now all “down on the floor” [as in the E-Trade ad.] as we are robbed, by hourly depreciation of our dollars, not by our local bank, but by our Fed!
In April, we devoted our issue of Financial Intelligence Report to the issue of stagflation. We now think the Fed sees stagflation staring it in the face.
Until now, we have held off talking about panic, for fear that the very mention of the word, might lead to one. But on Tuesday, our Fed (FOMC) sat down facing that day’s New York Times cover photograph of a run on a British bank (Northern Rock), caught in the sub-prime contagion ripple, of which we had warned.
Following the lead of the New York Times, we now feel free to at least discuss the risk of panic.
We believe that we face not one, but three main types of panic and that the rise in the price of gold is, in part, reflecting two of them.
The first and most obvious potential panic is about the recent Fed Rate cut, leading to a run on the U.S. dollar.
As we pointed out yesterday, Telegraph.co.uk reported that the Arab Gulf States are now very nervous about our dollar. Together, they manage some $2,500 billion, some 3 times the $800 billion managed by China. That money is relatively liquid and hot.
Yesterday, we also presented a chart showing how the foreign net purchases of U.S. Treasuries sung from a positive $27 billion in May ’07 to a negative $8 billion in July! We expect the figures will show a worsening trend for August and especially for September.
This indicates heavy selling pressure on our dollar -- pressure that could lead to panic if our Fed continues, as the stock market hopes, to lower rates still further.
It also points to higher U.S. interest rates, if we are to continue funding our government debt at these levels.
The second potential panic staring at us is the financial virus of the mortgage credit derivatives that are now embedded in our massive but delicate financial system.
In essence, our financial system is crucially dependent upon trust. Today, that trust is in question. The result is that, despite massive injections of liquidity, the banking system is chocking with the vital Commercial Paper market still shrinking, according to the latest Federal Reserve figures.
This has caused some depositors to become concerned as to the safety of their deposits (Northern Rock).
A run on the banks is always very serious. In today’s overleveraged economies, it could prove catastrophic.
It was the prospect of a run on banks, even a minor one, that prompted the hawkish Mervin King, Governor of the Bank of England, to undertake a very public and embarrassing U-turn rescue operation.
We can not be sure, but we feel that it was this same New York Times photograph that “forced” a reluctant Ben Bernanke to accept a “50 and 50” rates cut in order to achieve the important “unanimous” vote from his FOMC. So, in order to avoid the panic of a bank run, our Fed may have precipitated a panic run on our dollar!
Our readers may ask, “Why did our Fed have so little 'wriggle' room?”
It is a great question. The answer is that our Fed also faces both recession and inflation in our economy—in short—the stagflation, we warned of in April.
Firstly, our researches show that our economy has been in retraction for the past three years. The Wall Street media have consistently denied this, mainly by taking any up-tick, on the downward trend and annualizing it!
Secondly, you will see that whilst the Wall Street media highlighted (and still does) the June up-tick in productivity as a reason to buy (cheap?) stocks, the truth is that the trend has been down for the past four years.
At the same time unit labor costs have been rising for the past three years.
Our researches also show that, fed partly by a massive liquidity and leverage boom and partly by increased world demand, the price of commodities and raw food, have been rising, almost exponentially, over the past six years. So, despite the “officially cooked” inflation figure of some two percent, most consumers have experienced far higher levels of “real” expenditure, particularly in regular major items such as: food, gas, and health.
If irregular expenditure items such as housing, automobiles and computers are netted out, the real “current” inflation actually experienced by consumers is, we feel, far higher than the “politically cooked” two percent inflation, published by the Department of Commerce.
In addition, the American consumer is experiencing: a decline in house values; an upward re-pricing of credit and increasing concern over employment. Little wonder then, that the Consumer Index is at a low.
This spells recession ahead. Normally this would lead to lower rates. But, we believe the Fed both sees the ‘real” figures for money supply and does its own inflation calculations, on the old, pre-Clinton, ‘uncooked” basis!
We believe that seeing the “true” rate of inflation, has prompted the Fed not to cut, but to hold its rate, in the face of much criticism, over the past year.
In short, we believe that our Fed recognizes the ghastly specter of stagflation, of which we have warned, and higher rates.
Now, our Fed has been "forced”, by fear of a banking panic to cut rates, precipitating a dollar route, that will unleash yet further inflation and stagflation. And stagflation is the very worst of economic ills. As was illustrated by the legendary Volker/ Reagan team, its cure normally requires higher interest rates -- much higher.
This leads us to the third potential panic -- the stock market.
Even the Wall Street media are now accepting that our economy is slowing and that inflation lurks. Normally, this would indicate falling corporate profits and rising interest rates -- both bad for stocks. And yet our stock market heads ever upwards, fed on a diet of expectation of lower interest rates and booming world trade.
But, we believe the American economy is still a key engine of world economic growth. With the American economy in recession, what is the realistic outlook for continued world growth and even of the oil price?
We believe that the stock market is having a hard time accepting the new reality of today.
While our dollar plunges, our credit markets choke and our economy slows, our stock markets rise, based, it appears, largely upon past corporate earnings and the fond hope of more interest rate cuts!
We believe that it should be the growth of future profits that is the true inspiration of healthy markets, not merely interest rate cuts.
It appears to us that there is a serious disconnect between today’s reality and our stock markets.
We feel that major bearish factors are already at work and that the dawning of realty could cause the third panic -- in the stock market!
We feel that the recent Fed cut was merely a “morphine” shot to deal with a patient who was on the verge of shock (panic). When the effects wear of, there will be a price to pay.
What should our readers do?
Stick with our recommendation to accumulate: cash, 90-day Treasuries, gold and agricultural commodities.
Cash is already a King. We believe it may soon become an Emperor.
Then, depending upon the degree of political backing given to the Fed to eradicate inflation, cash could be severely eroded and gold will rein supreme.
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