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FYI...
JW
-----Original Message-----
From: James Smith [mailto:JSmith@xxxxxxxxxxxxxxxxx]
Sent: Tuesday, May 16, 2000 11:13 PM
Subject: The Dollar Index is telling you something.
Since the G5 caused the crash of 1987 via
the manipulation of the currency markets in 1985,
they have shied away from heavy-handed
efforts to move currencies via govt intervention.
Government is never going to admit to doing
anything wrong, but the facts are clear. The G5
concerted effort to bring the dollar down in 1985
succeeded in causing a huge distortion to the
financial markets. Their success in knocking
the dollar down sharply, caused many
foreign investors to view dollar assets as just
too enticing an opportunity to pass up.
Foreigners bought US assets (stocks, real estate,
golf-courses, prime office buidings in New York
and California, you name it) with giddy glee.
In their eyes it was a bargain. Of course it also
produced an inflationary move in US stock market
between 1985 and 1987 and we all know how
that story ended. Normally when a bubble pops,
the government will go on a witch hunt to find the
Evil Short-Seller.
After the '87 Crash they could not find one. They
went real quiet on this issue, after they read
Martin Armstrong's book, "The Greatest Bull
Market" (written in 1985), which predicted the
crash.
Click here to access "The Greatest Bull Market"
posted to our website
http://www.pei-us.com/Research/GBM/GBM-MAST.HTM
Martin Armstrong was called to Washington
by the Brady Commission which was investigating
the reasons for the crash. He explained that the crash
was caused by govt manipulation of the currency markets.
This is obviously not what they wanted to hear, but they
did thereafter give up on a search for the evil short-seller--
as close as government would ever come to admitting
the mistake of their FX manipulation.
Many of the biggest crashes in history have been
caused by governemt mistakes and manipulations.
FAST FORWARD TO TODAY
The correction we're in now, that is likely to
accelerate soon, is the result of political mistakes
as much as manipulations.
The mistakes of Europe and Japan are that they
are not moving fast enough to reform their markets.
Europe can't quite give up on Socialism, or at least
not as fast as they need to; and Japan cannot make
needed structural reforms to their financial system.
Many analysts worry that the dollar which has been on
a tear as witnessed by the dollar index over the last
few months, will suddenly give way to a sharp correction
causing foreigners to liquidate their US assets. In
fact there is some evidence of foreign selling of US
bonds. The Treasury has offset foreign selling by buying
in off-the-run bonds (to support the bond market). The FED has
also done its part with a number of Coupon Passes.
A Coupon Pass is an open market operation conducted
by the FED in which the FED buys bonds or notes,
thus injecting cash into the system and also supporting
the bond market....which has helped to delay a bond
market slide. Our Timing Models called for "Directional
Change" in bonds for the month of April. It is our suspicion
that the April 11th High in bonds was an important high
and that a correction in bonds will acclerate soon.
While a short-term correction in the dollar is still
possible, there is a more real danger
that the dollar will continue its rapid ascent, causing
enormous dislocations to the financial markets. If
the EURO continues to slide, who is going to want
to own Euro Bunds? If the Yen goes into a Free Fall,
who is going to want to own JGBs?
Inflation is back and it is putting huge pressure on
bond markets globally with special risk to bonds
denominated in currencies that are headed south.
As European and Japanese bond markets go
into a tailspin, their stock markets will not be long
in following. The US is not an island. If chaos affects
Japan and Europe, the US bond & stock markets will be affected.
Again, inflation will not go away no matter how much
the government manipulates the bond market.
Inflation is putting pressure on bonds globally,
but most especially those bond markets of countries
that have failed to make structural changes to stay
competitive. (Hello Japan. Hello Europe).
The shock is first felt in the currency markets as
both the EURO and the Yen begin to slide against
the dollar. But as the dollar continues a sharp move
higher, the effect will also be felt by the European
and Japanese bond markets and thereafter their
respective stock markets.
We cannot rule out a short-term correction in the
dollar, but the longerterm trend is clear. The dollar
is moving a lot higher into November 2002.
Even if the dollar sells off short-term, it will quickly
resume a longerterm uptrend.
Sharp moves in either direction are likely to cause
stocks to sell off. Funny thing, our timing models
show huge volatility in currencies over the next few months!
Our view is that the bigger risk is that the dollar will
continue to rally sharply. Sure the US bond market
is at risk of a sharp decline. Sure the US has a trade
deficit that is too large and growing exponentially.
Sure the US consumers carry too much debt.
Sure the overall US debt is still huge even after
all the jibberish about the Surplus (which isn't
likely to continue for any length of time).
But investors seem to be more focused
on the strength of the US economy, which
appears unstoppable. It continues to outpace
other economies. The relative rate of growth
of Europe versus the US and Japan vs the US is critical.
Perhaps the US may slow down, but if so, do you
honestly believe Japan is going to grow faster
than the US while the US slows??? If the US
catches a cold, Japan will have pneumonia.
Before the Asian Currency Crisis, more and more
of Japan's exports were going to SE Asia, giving
greater balance to Japan's export drive. After
the Asian Currency Crisis, the US market has
become all the more critical to Japan's economy.
Household spending in Japan has been declining
for 5 consecutive quarters. Why is
that? People in Japan have no confidence in
their government's ability to turn the economy
around. Japan is going thru the same experience
the US did in the 1930's. Japanese people are
increasing their rate of savings because they
are worried about their jobs. Since consumer
spending represents 2/3rds of the economy,
Japan is in real, real trouble. Confidence is a key
factor. Without it, there is nothing much the government
can do...except to monetize.
Japan will be forced to print money because the
structural reforms are not moving fast enough to
ward off another plunge in the economy and the
stock market.
Again, if the dollar climbs too fast, it presents
obvious problems overseas, which will also
impact the US.
FED WATCHERS
So many people are watching the FED, but maybe
they are not watching the right thing. A couple of
days ago, Rubin was interviewed on CNBC. They
wanted to get his view on what the FED was likely
to do with this much anticiapted rate hike. He brushed
off the question, but did go on to say, "People pay
too much attention to the FED. They should pay more
attention to the prospects for inflation."
I agree. Its not the FED that controls inflation--its
inflation that controls the FED. Higher inflation
dictates the actions of the FED.
Longerterm, inflation may actually help the stock
market. The problem up until now is that many
firms have not been able to pass on a rise in
costs to their customers. But as the WSJ pointed
out in a recent article, this is changing.
But before earnings begin to reflect the ability of
companies to pass on price hikes to consumers,
stocks are likely to sell off on heightened fears
of further rate hikes.
The FED will have to show they are serious
about dealing with inflation. So today's 50bp
rate hike was no surprise. More aggressive
comments from the FED are coming, and the
stock market will anticipate the worst.
Does this mean no Summer Rally?
If the correction is sharp as I expect
it will be, the FED will intervene, supplying
liqudity to the system. This will create a
floor under the stock market. Greenspan
will wait for stocks to sell off to much lower
levels to remove the worst excesses
(especially in the tech stocks) before he
aggessively feeds liqudity into the system.
A Summer Rally is therefore still possible....but most likely
it will start from much lower levels. See our daily
reports to get all our key support levels.
People want to believe that there are no more rate
hikes coming. Well,...the only way there are no more
rate hikes coming, is if stocks slide far enough, fast
enough til the FED is satisfied the bubble has been
truly deflated and some of the edge has been taken
off inflation.
We are more concerned here with the Tech Stock
bubble. We do not believe the DOW or the S&P
are nearly as overvalued as the Nasdaq. But as
the Nasdaq slides, the DOW and the S&P will also
suffer to some lessor extent. Again see our reports
to get all the key support levels for this decline.
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