Living in denial all over
the place
Der Invest
Informant
Randy Buss
14 April, 2005
Ashraf
Laidi, chief currency analyst for MG Financial Group, said the
currency traders were more focused on the minutes of the March
meeting of the Federal Reserve, due to be released at 2 p.m.
ET Tuesday, with the expectation that the Fed will signal it
could become more aggressive raising interest rates at upcoming
meetings.
"This
does not mean that currency markets have completely eliminated
all concerns about the trade deficit when assessing the dollar,"
said Laidi in a note to clients. Instead, he said the traders
will support the dollar as long as they believe the Fed will
offer higher interest rates than found from central banks in
Europe, Japan or Canada.
Jay Bryson, global economist with Wachovia Securities, said the
fact that the dollar did not fall Tuesday on news of the larger
than expected trade deficit is one sign that the country can
continue to live with a trade gap above $60 billion a month for
the immediate future.
He said it would take some kind of shock to the economy, such
as another terrorist attack, to scare away the foreign investment
that has supported the dollar.
"Assuming the spark does not happen, it can go on much longer,"
said Bryson. "Nobody wants it to stop. We don't want to
contemplate sharply higher rates and prices. The Japanese and
Chinese don't want to contemplate it either."
Now, either Mr. Bryson was former fortune-teller and mystic Seer
of the future, now turned global economist, or he is walking
out on long limb, more likely a willow than an oak. Not only
did the US monthly trade gap "come in a little higher"
than expected folks, it came in the highest of all time. Ever.
And YAWN go the markets. Nice to know Mr. Bryson can forecast
the "immediate future," ...whatever that is.
The US Dollar rose most of the day and then slightly rolled over
to close out the day. Gold and silver got whacked at the 8am
EST bell and spent the day trying to tread water and stay in
place while taking on some losses. The HUI looks like a sick
dog in need of some tender loving care. I called a colleague/analyst
friend of mine and wanted to know his take on the situation as
to why gold was not showing a bit more "spunkiness."
To be honest, I don't have an immediate answer for that just
like I don't immediately understand how the USD on such poor
trade data news did not do poorer than it did. We just have to
accept it right now for what it is.
Even as Mr. Bryson and Co. are busy analysing the immediate future,
the immediate past tells us that the broad money supply figure
M3 has now shot up a mere $40 billion as of 22 March. I haven't
looked at the M3 chart lately but no doubt it shows an upward
60 degree triangle formation, or at least something very similar.
So even as the US economy is dependent on the $2 billion per
day of foreign investment, and the M3 continues to grow, the
real story must then be: Who will flinch first - The foreign
investors or the Fed? In fact, I believe the foreigners and the
Fed are in this together until the very end. The Fed needs the
foreign (mostly Asian) Central Banks to soak up the US Treasuries.
The Asians only soak up the Treasuries to keep their currency
from rising against the USD in order to facilitate exports and
hence keep their own factories rolling along. Meanwhile the foreigners
build up their manufacturing capacities while in parallel the
service sector economy is at wage war in the US with outsourcing.
From an outsider's perspective it would appear the US is being
economically attacked on both the manufacturing and service sector
fronts from the Asians - meanwhile the US internal house has
not even begun to address the military costs, the Medicare costs
and the Soc. Sec. costs. To top that off, the final front, we
still here talk of tax cuts although admittedly this has now
become less so after the election, of course.
So is the US economy and consumer living in denial? It would
certainly appear so. Even military strategists will tell you
that you cannot win a war on 3 fronts. The US economy is now
facing at least a 3 front war. The only question that remains
is will the Fed fully capitulate? Hell no it won't, at
least not if it gets its own way - it will continue to throw
sufficient liquidity firepower at the problem. But we all know
the results of carpet bombing - a decimated infrastructure but
the enemy is still out there and likely hiding. And that is why
the Fed cannot allow any of the fronts to crumble because they
are all intricately intertwined with one another. Unfortunately
for the Fed, the enemy is the one who controls the battle. Hence
the Fed is constantly in a re-active defence as opposed to a
pro-active offense. It has nothing to counter with except liquidity.
***
Here is a true story. This story is happening 100 hundred times
each day although you likely never hear about it. I work in the
telecommunications industry and I hear first-hand accounts of
such things. Siemens, the German manufacturing giant, wanted
to set up a manufacturing facility in China to benefit from the
cheap labour. A condition of the local Chinese council was of
course that a number of high ranking state officials would become
board members of the joint venture. Siemens acquiesced.
When proposing the deal, it was also negotiated which units would
be sold and built. Siemens wanted to sell them initially the
most expensive units and hence obtain a higher profit margin
while securing a future manuf. base. The Chinese absolutely refused
and insisted on the cheapest units for delivery and eventual
production plans. Again, rubbing their greedy hands together
and wanting desperately to "join the Chinese manufacturing
band wagon" Siemens acquiesced and finally agreed to the
second condition in order to save the deal. So, Siemens would
secure a large order and build the units in China. Perfect.
After setting up the facility, the Chinese ordered the agreed
number of cheap units and then began to order the upgrade units.
Important to remember is that such technical units I am speaking
of - communications equipment - takes thousands of man years
to design, develop and bring into a production. Those man-years
come from highly trained Western and expensive engineers like
you or I. It is the crème of technical achievement in
some cases, both from hardware and software perspectives.
Over time, the Chinese were able to completely COPY the entire
blueprint for the ENTIRE system including the adds on technical
upgrades. Thus, within a few years, thousands of man-years of
Western ingenuity and know-how were lost to the Chinese in a
matter of years. Finally, the local Chinese council kicked Siemens
out of the province on a pretext and hence they lost not only
a large contract but now the Chinese produce exactly the same
high-tech product at a fraction of the cost. In a competitive
world market, Siemens lost much more than a contract, they lost
highly valuable intellectual property.
Think about this scenario. It is happening in China, India, everywhere.
And it is being propagated within Western management circles.
So, who is the real enemy and who is living in denial?
More on this in upcoming issues
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to Der Invest Informant here.
As well, please visit the site daily and read my Latest Letter.
12 April, 2005
Randolph Buss / Berlin, Germany
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