End of last week, gold was slightly lower against the USD, as oil continued to rise (for which we have few meaningful explanations, especially because high oil prices seem to be on everyone`s tongue nowadays). EURUSD was almost totally unchanged, but the USD was generally stronger against most of its peers. European bourses underperformed other markets, in contrast to the outperformance of beginning of the week.
Interestingly enough, last week's data releases show inflation cooling further in the U.S, and growth disappointing, coming lower than the consensus 2.5% figure. Excluding the cost of food and fuel, CPI for goods and services rose at the slowest pace since 1959, according to a Bloomberg report.
The deceleration of inflation, which is termed disinflation in economic discourse, is clearly the main theme of this year. For all the endless talk of dollar death, U.S. going bankrupt, the Federal Reserve destroying the American economy, hyperinflation risk, and all the myriad rumors about the imminent demise of American dominance along with the global financial system itself, all that we have to show is the trend in inflation going stretching back to the Lehman Bankruptcy days. There is not a shred of evidence that the Federal Reserve`s actions have brought on the results feared by Congressman Ron Paul, and his Tea Party fellows.
Why is this the case though? As we like to repeat here, it is not because the Fed`s chosen track is the right one, or that the enormous amounts of money created are just evaporating into the air, but only because they are being directed to where there is growth and yield, we do not see the anticipated dollar sell-offs, and inflation. Many who expect the dollar to die are simply out of touch with the fact that the whole world is one market nowadays, and all governments, more or less, are playing the same game according to the same rules, so all are going to lose if the U.S., or any similarly weighty pillar of the system collapses. So when the Fed tries to inflate the economy, and bring down the dollar, the excess created here is absorbed by the Asians into their own bubbles (which the misguided majority believes to be the symptoms of healthy growth), and the USD remains stable, although pointed to the downside. In consequence, although that the USD is going to go down from here is an easy bet, if you do take this choice, you must be careful about sharp swings.
Readers will be tempted to ask if this gigantic global Ponzi scheme being run by Japan, U.S., China, E.U., and a number of large emerging economies is going last forever. It won`t, of course, but it is hard to say when exactly it will reach its end. One of our favored scenarios foresees the breakdown of economic relations between U.S.-China leading to the end of the global alliance, and in this context, a recent piece of information is worthy of notice.
The Obama administration is planning to widen the front in the incipient stages of the undeclared trade war with China, as the Trade Representative Ron Kirk`s office reports, today, on the filing of a complaint at the WTO over China`s subsidies to its wind power manufacturers. "China’s Special Fund for Wind Power Manufacturing requires recipients of aid to use Chinese-made parts and amounts to a subsidy, both of which violate WTO rules," the statement reads.
The launch of this campaign is just one of a long list of demands by the Steelworkers Union, which had lodged a complaint with the U.S. trade office on September 9th relating to many well-known China-related issues, including export credits, forced technology transfers, discrimination against non-Chinese firms, and many others.
This one issue of wind turbines is probably being pressed by the administration only as a warning before stronger action will be taken. With the Chinese firmly committed to doing nothing on the currency issue, it seems a matter of certainty that the Obama administration will have to take further action, especially as the election period comes closer and closer. The trade disputes have the potential to eventually create a rift between the two Ponzi partners, China and U.S., and that would of course create the kind of crash that many in the market, including ourselves, are worried about. For now we can do little more than waiting to see, but this is definitely something worthy of close watch, and, as always, we`ll keep our eyes on developments in the region to update you on turning points as they occur, and as we notice them.
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