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Latest James Smith perspective. Watch out for that monkey with the
loaded gun <g>...
JW
(note: I have no affiliation with this service.)
-----Original Message-----
From: James Smith [mailto:JSmith@xxxxxxxxxxxxxxxxx]
Sent: Tuesday, June 13, 2000 10:11 PM
Subject: Would you drive your car by only looking thru your Rear View
Mirror?
It would appear that the market gets so fixated on
the numbers coming out that they can't see what's
right in front of them. A mild May PPI number
comes out and it becomes an excuse to rally the
market. Analysts see it as reason to believe that
the FED will be less likely to raise rates again on
June 28th. A lower-than-expected Retail Sales
number comes out and investors rally the market
again. Again, analysts see an emerging economic
slowdown as further reason for the FED to refrain
from rasing rates here in June. They'd rather
see Low Retail Sales pointing to FED inaction
rather than seeing a link between lower-than-expected
Retail Sales and Lower-Than-Expected Earnings....
yet to come.
What they are really telling us that any excuse to
rally the stock market will do. They want their
Summer Rally. I don't doubt that a summer rally
may occur, I'm just saying that it would be a more
sustainable rally were it to begin from lower levels.
Think about it, would you drive your car by only
looking thru your rear-view mirror. Looking at
May PPI to judge inflation is silly. First, we know
that both PPI and CPI are manipulated, so why
place a lot of emphasis on the number. Second,
even if the numbers were not manipulated, why
put so much emphasis on a May number when
you know darn well that future numbers are apt
to be a lot higher. Even as PPI and CPI for May
come out, Crude Oil prices are shooting higher.
This should come as no surprise to our clients.
We stated in our daily report over a week ago
that a weekly close above 30.30 basis the July
Nymex Crude confirms a move to 34.20. We
cannot guarantee that crude will stop at 34.20.
The risk in a bull market is that you always go
higher than most people are expecting.
Certainly people in Chicago were not expecting
to pay $2.25/gallon this summer....unless of
course they had been regular readers of this
column.
As I have stated in numerous emails, the idea
of maintaining low inventories going into summer
is like giving a loaded gun to a monkey. If you're
lucky, nothing will happen. If you're unlucky the
monkey is going to pull the trigger and you will
be on the receiving end of a bullet. (Hello Chicago!)
Whatever disposable income people have is
going to go increasingly to OPEC. Why can't anyone
see a link between rising oil prices and declining
retail sales? Sure, people who drive SUVs
aren't going to care if they pay $2.00/gal because
chances are they can afford $2 or $3.00/gallon gas
given they could afford $30,000 to $40,000
to buy the SUV in the first place. In fact, their very ability
to pay more (the wealth effect) is what is driving
prices higher for everybody. The average guy is
going to cut back his spending on other goods (Retail
Sales) in direct proportion to the continued rise in oil
prices. I haven't actually figured out how this helps our
economy....maybe I'm too slow.
People may grow very alarmed at how fast
gas is going up in price, and no doubt the
idiots in Congress will make noises about
punishing OPEC. But this won't change anything.
The reality is that OPEC will not be able to
control price rises in a bull market any better
than they controlled price declines in a bear
market. Using a 20 Day Moving Average to
decide when to add more supply to the market
is not very timely. By the time OPEC gets
around to supplying more oil, the price could
already have spiked to $34.20 or possibly as
high as $40.00.
Sure OPEC has an incentive to keep oil
from rising too fast, but like any other
bureaucracy, they are slow-moving and
unable to respond quickly to market
changes.
What is likely to keep oil in a bull market
over the next few years is the same thing
that started the bull market....increased
demand.
Asia (except Japan) is continuing to
recover from the 1997 Asian Currency Crisis.
Europe will soon realize how stupid it was
for the ECB to raise rates by 50 bps. Any
further rate hikes would more than likely
throw the continent into a strong recession...
so the politicians in Europe will not want to
see another rate hike any time soon.
Traders have already suspected as much.
In fact, even as the news of the rate hike hit
the wires, the Euro failed to rally appreciably.
Normally the Euro should have rallied more
on this surprise annoucement, but, most
traders feel that the ECB may be done raising
rates for now.
Just as the US economy growing faster than the
European economy, meant a stronger dollar,
it will soon be apparent that a European
economy slowing faster than the US economy
will also mean a stronger USD.
IF YOU OWE TOO MUCH YOU OWN YOUR BANKER
So many economists are focusing on the
dangers of record-setting US trade deficit,
they are worried the dollar will decline sharply.
They can't seem to understand the obvious.
If you owe your banker $1000, then your
banker has control over you. If you owe
your banker $1 billion, then you have control
over your banker.
Before the Asian Currency Crisis, Japan
was successfully diversifying their exports,
with a nice balance between SE Asian, Europe
and the US.
After the Asian FX crisis, Japan has become
very reliant on exports to the US. Japan cannot
afford to see exports to the US fall off.
The real risk for Japan is that the US suffers
a hard landing rather than a soft landing. Japan
would be forced to devalue their currency in
direct proportion to the severity of the US
slowdown.
Who else are they gong to sell to?
Europe just raised rates and they are going to
slow down even faster than the US.
Get ready for competitive devaluation....
from both Europe and Japan,..
and possibly China. Its a party folks....and
your banker (Japan) is about to give the US consumer
a bigger credit line!
WHY DO YOU S'POSE GREENSPAN IS
AGAIN TALKING UP THE VIRTUES OF
PRODUCTIVITY!
Let's get real....Greenspan never utters a
word without calculating the effect it will
have on the markets.
In December of 1996 Greenspan was
worried about "Irrational Exuberance."
He didn't seem think productivity was
going to offset the exubance in stock
prices...at least not in December of '96.
Then in the last couple of years he
reversed course, saying that "higher
productivity" allows us to grow faster
and maintain a non-inflationary rate of
economic growth with lower unemployment.
Then in February he reversed course
again, telling us that due to the wealth
effect, productivity can lead to higher
inflation.
And today he's reversed course yet
again...praising the virtures of productivity...
telling us how it helps the economy.
What is Greenspan really saying?
In February he was trying to use
the productivity story to deflect attention
from the fact that he had supplied so
much liquidity to the system in front
of Y2K. He needed to drain liquidity
from the system after Y2K turned out
to be a dud in order to avoid a bubble
(oops...too late!), but like a good magician,
he didn't want you to focus on this fact. Watch
my left hand....while I do something else
with my right hand.
Now he may be considering the idea
of not going with another rate hike on
June 28th, so he is playing up the virtues
of "productivity". Is Greenspan preparing
us not just for "no rate hike on June 28th,"
using the Productivity story as a cover.
Why might he not want to raise rates
again on June 28th? He knows that
Europe is going to slow down soon
given the 50bps rate hike irrationally
levied by the ECB. He also knows
that Japan cannot afford to see a
hard landing in the US. Greenspan
is worried about the global economy
as much if not more than the US economy.
Its like playing 3 dimensional chess. He
can't focus solely on the US economy.
He has to be aware of the risk of global
competitive devaluation...the logical
outcome of a hard landing in the US. .
As to Greenspan's flip-flopping on
productivity, where do you see in the
FED charter, the mandate for the FED
chariman to be consistant?
Greenspan does not need to be consistant.
There is some truth to both arguments...
that productivity lowers inflation and to
the opposite argument, that a wealth
effect that results can lead to higher
inflation.
Greenspan is happy to use either
argument when necessary to suit his
own agenda.
Our models suggest that the dollar
is in a longerterm bull market.
A dollar rally as the US trade
deficit widens is the kind of idea
that bugs the hell out of
most economists, but so be it.
The problem with economists is,
they don't understand economics.
In the long run, the dollar will crash
.....but as Keynes said, "in the long
run, we're dead."
You saw how quickly the rumors
spread of BOJ intervention as
the dollar dipped last week to
JY 105. If Japan can't stomach
the Yen rising to 105, how long
do you think it would be before
they monetized (read: devalue)
if the Yen rose quickly to JY 100?
Any short-term weakness for the dollar
can only lead to chaos. A dollar
slide would quickly take the Nikkei
towards New Lows. The Nikkei at
New Lows cannot be allowed
to happen because it would take down
many major Japanese banks and
shake the global financial system to
its core.
I'm not saying the dollar is going to
JY 100...but if it does, it will move all
the faster in the opposite direction as
the BOJ is forced into printing yen.
Likewise, Europe cannot afford to
see the dollar rally too strongly.
More on that later.
http://www.pei.com
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