Risk of Stagflation - Key Charts and Major Clues
Economics / Gold & Silver Apr 05, 2007 - 01:24 PMBy: Jim_Willie_CB
Some extremely important charts follow, each with an equally important message. The story can be told from a series of painted pictures. The USEconomy is in deep trouble. The US Federal Reserve is caught in a box. Bankers are one step from being snared in a quagmire, with vivid memories of the insolvent bank system endured by Japan for over a full decade.
The US bank problems seem worse by comparison, when factoring in mortgages, huge spread trades sure to go bad, a mountain of credit derivatives growing at 80% annually in size, and a raft of collateralized debt obligations sitting like an ominous cloud. The Bank of Japan simply cannot continue with rate hikes, given the vulnerable shaky state of all matters financial on a global basis. Gold and silver are moving to center stage, undeterred by the recent shock waves. The main shock is to the Powers That Be (King Henry & His Court of Market Manipulators), who are losing grip at the helm. A wider war, surely beneficial for many private interests, would kill the future economic prospects.
This holiday piece is intended to read like a magazine, with brief messages like captions under key charts. The sequence tells a story highly bullish for gold & energy, as well as its investments. The April full reports for the Hat Trick Letter tell the story in much more detail, delivered at the time of the US income tax deadline in mid-month. You know? That voluntary tax donation system which people are intimidated into thinking is part of law and existing statutes. Increasingly, taxpayer money supports private enterprise on a visible basis on Wall Street and a clandestine basis with defense contracts linked to the war on terrorism.
HOUSING SECTOR SPIRALS DOWN
Housing is a disaster and debacle already, soon to become a major meltdown crisis. On the tangible side is the lost opportunity to raid home equity, the lost sense of wealth, the primary piggy bank suffering erosion. On the banking side is the mortgage calamity, which is the inevitable final chapter of Greenspan's self-directed bailout from the stock bust bearing his signature also. The downward spiral for housing and mortgages must be addressed. So far the sleepy crew await further information from the patient, prone and firmly bedded in the cancer ward. The next move is for rate cuts, whether they want them or not. A major USDollar devaluation lies directly ahead. If not, national bankruptcy is assured.
BANKERS IN CEMENT SHOES
The banker stock index shows a major message of reversing prospects. This is an ugly chart, with a February shock, a flirt with an uptrend breakdown, and an odd bouncing ball decline in the stochastix cyclical measure. The combination of huge bank losses from mortgages, together with absent profit margins from the borrow & lend yield spreads, make for poison. The bankers will next demand a rate cut in order to attempt a housing rescue and avert a mortgage meltdown. The rate cut will accomplish neither. However, lower official USFed rates would assist the adjustable mortgage holders, whose ARM rate is tied to the official rate. Most important, remember that bankers dictate to the USFed, or else the USFed caters to the bank sector.
PRICE INFLATION SPECTER
The US Treasury yield curve has begun to reverse. What was a 10 to 15 basis point inversion for several months has turned in to a 4 to 10 basis point steepening. The inversion is gone, replaced by a largely flat but upward pointing curve. This could be the onset of some price inflation coupled with economic recession, known as STAGFLATION, the absolute curse of central bankers. Why so? Because it represents a failure on both their mandates, growth with stable prices. Next is an interest rate cut though! The words “Inflate or Die” come to mind, regardless of the price structure situation. Bankers need a rate cut on the low end, which would ensure a wider profit margin to lenders. Then again, lenders have begun their strike, having tightening lending standards in such a manner as to ensure a recession and further housing decline. The stochastix crossover points to a higher ratio ahead. The double bottom means the retest has been completed, and higher ratios lie ahead. The most likely way this comes about is for the long-term rates to rise, and a the short-term rates to remain low, and maybe even come down.
NATURAL GAS READY TO SPURT
Behind the global attention of a rising crude oil price is a recovering natural gas price. Sure, global warming (or whatever) factor led to warmer winter weather. But the flip side is that spring and summer will also be warmer. Most US regions cool by air conditioning powered by gas-fired electrical generation. The election motivated energy decline of last summer is long past. Reality has returned. An uptrend is showing itself. Momentum is clear in the cyclical series. Moving averages provide support. Natural gas production is in every bit as wretched shape as the oil market, but demand has slowed on a seasonal basis in wintertime. The end result will be added strain on the entire cost structure. Natural gas is used across the spectrum, from home heating to industrial processes, to ingredients to fibers and fertilizer.
YEN CARRY TRADE NOT TO UNWIND
The best forward indicator for the Japanese yen currency, and its associated Yen Carry Trade unwind, is the Nikkei stock index of major Japanese stocks. A highly bullish triangle has shown itself, also undeterred by the recent late winter shock. Given the vulnerable state of the global financial markets, and Western economies, the Bank of Japan cannot deliver a series of shocks, even though the Japanese economy is in a state of revival. The BOJ and other central bankers must weigh the risks of continued easy money in Japan where Tokyo property values are rising, versus the pain of more shock waves to the Yen Carry Trade which funds some entire financial sectors.
GOLD READY TO BUST OUT
Unshaken by the late winter shock waves, gold & silver remain strong, sturdy, resilient. The boasted resilience claim given to the USEconomy is misdirected. That accolade belongs to the precious metals. Talk about bullish signals!!! Its uptrend is strong, and improving even during the late winter shock. Moving averages are rising, undeterred. The cyclical measure measuring momentum looks outstanding. The gold market smells many things in the wind, some from banking distress extended from housing, some from the stench of war, maybe even a global boycott of USTBond purchases. See China for the latest end to continued FOREX reserves accumulation. They will next invest, most likely in oil and gold and critical metal ores. We have the foundation for a trade war with China , lacking only a spark. If and when it arrives, support for the USDollar will erode while price inflation rises due to interrupted supply of finished products.
SILVER OUTPERFORMS GOLD
The strength of the silver price continues to be the harbinger of much greater price action. A significant bearish triangle in the gold/silver ratio points to a upcoming surge in the silver price. This is not bearish for gold, but rather very bullish for silver relative to gold. No, gold looks great here, due soon to approach the 690 February high, and after that to surpass the May 720 recent high. Far too many extraordinarily bullish events and factors are properly aligned. War is not the only, nor the most important, gold factor right now. Instead, housing and mortgages are the main Achilles Heel. Jackie Chan believes silver is most likely to succumb to the gold dominance once again. That painted picture is not so certain. The constant shuttle of silver bullion from one European bank to another testifies to some desperation. The difficulty in receiving delivery of silver futures contracts testifies to some shortage, if not default in progress. Gold fights the political battles, but silver wins the investment game.
CONCLUSION
Something ugly this way comes! Gold & silver smell it. Its name is STAGFLATION and BANK CRISIS. The US Federal Reserve is backed into a corner. The US Economy, fully dependent upon housing on the upswing, now sinks on the housing downswing into the abyss. The bank sector is reeling with the strain from the mortgage finance fiasco. Currencys have begun to pressure the USDollar again. Full details are provided in the April issue of the Hat Trick Letter. Opportunities abound. Gold will thrive, almost as much as silver, which should easily surpass 20 on the next surge. Crude oil will reflect the US $ strain, while natural gas enjoys a major lift also. Talk again of a natgas cartel confirms the shortage.
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