Wednesday, November 22, 2006

Spinning Disaster

EUR/USD 1.2920 Hi 1.2928 Low 1.2840
USD/JPY 116.76 Hi 117.94 Low 116.70
AUD/USD 0.7646 Hi 0.7752 Low 0.7703
EUR/JPY 150.91 Hi 151.48 Low 150.65

There are people out there who believe that anything can be sold to the great unwashed as long as you find the right words, the right angle. Most of those people these days seem to work in politics or financial markets. So while the U.S. economy is looking like a slow motion train wreck headlines go out about "cooling". Cooling is good. It sounds better than train wreck. In the same way the U.S. Army is not occupying a sovereign nation, killing hundreds of thousands of civilians, destroying infrastructure and generally causing mayhem where there was no mayhem before. No. The U.S. is bringing democracy and freedom to Iraq.

The actuation of this policy has sent shock waves around the world in places where real democracy has deeper roots than in the U.S.A., which is pretty much everywhere in the developed world and in lots of places in the third world. The U.S. myth making machine is starting to look a little tarnished and all those people holding USDs as part of their reserves are not thrilled. The U.S. economy is collapsing under a mountain of accumulated debt, the USD looks as vulnerable as it has ever been and George W. is in the White House.

Economists and pundits keep hunting around in the debris for positive news and occasionally they dust something off which sounds good. But the pickings are particularly slim right now. The best that is on offer is that because the U.S. economy is "cooling" an interest rate cut can be expected some time in 2007.

That seems to be enough for the U.S. Stock Market bulls. Lots of new and exciting ways of getting in to debt have been created and Mergers and Acquisitions are keeping the commentators talking while Mr and Mrs Joe Average work out ways to get to the end of the month by cutting back on consumption. And consumption is what the U.S. economy is all about.

But the real weak link in the U.S. story is the U.S. dependence on external capital inflows. And the USD is the litmus test. Should we see real USD weakness, and we really haven’t seen that yet, then the U.S. financial markets would likely see pressure. For now we are at the stage where we sell the USD and wait for the ramifications. More USD downside is pretty much guaranteed.

OIL 59.98
GOLD 631.30

The situation in the Middle East is starting to look clouded again. Or maybe the smoke is clearing and the stark picture is coming back into focus. The war in Iraq is still very, very ugly. George W. has ditched Rumsfeld but seems as intent as ever on "staying the course". Escalation in Iraq in fact seems to be on the agenda. Escalation is being sold as: "One last push", which certainly sounds better than more and more money channelled into the U.S. military establishment and away from the domestic economy, more troops, possibly a draft, an entrenched occupation and more deaths and destruction all round.

The Democrats still haven’t found themselves a leader who believes in anything much. The name of the game in Washington seems to be: how do I keep my seat? So the strange little ball game with the Republicans keeps going while the country goes down the toilet. Have they reconstructed New Orleans yet? No I guess not. Politicians the world over have never looked more like cubicle dwellers looking to cash their cheques at the end of the month. Tony Blair does sound bites but his grasp of international reality seems poor. Bush doesn’t even know there is an international reality and he’s the guy who kicked off two international conflicts. All of this is not good.

The Middle East could blow sky high at any time and there are lot of war mongering arms dealers working towards just that. There is still talk in some quarters that George W. believes that the U.S.A. needs to control world OIL resources and control means with force via occupation. More mayhem in the Middle East would give George W. the justification. It just depends on how you sell it: "We can’t leave now, the situation is too unstable" would probably play well on the nightly news. There are a thousand ways to excuse the inexcusable and Americans are always suckers for some story which paints them as the hero on the white horse fighting for "Truth, Justice and the American Way." Comic book culture brought to life.

A political assassination in Lebanon, dark talk of civil war, occult forces, interference by foreign powers and Israel which is gearing up for another war. This is not a good story for OIL bears even if we have a global economic slowdown underway.

It’s certainly not a good story for GOLD bears. Support for the USD is starting to fray, the PPT will probably not be in the office over Thanksgiving, and the potential of real USD selling is just a heartbeat away. GOLD will continue to benefit and we haven’t even seen panic buying yet.

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