Waterloo

Der Invest Informant
Randy Buss
12 May, 2005

Only with hindsight was the folly of Napoleon clear, and probably even to himself, as he left the field of battle at Waterloo. That's the way hindsight works - it's all so clear after the fact. And this is how I sense the world economy at the moment. Certainly a bit of queasiness on part of the lowly foot soldier but who is he to question the Supreme Commanders of both The Markets and Industry ? "By God we shall rally 'round the Wall Street flag and give it our best. I fear only fear itself." Many a good men have been lost with such twaddle and blind obedience to pure madness. For even as Napoleon had a good chance at winning, I suppose, he neglected a number of key things : weather and terrain, the surprise appearance of the Prussian Commander Blucher to the flank and likely an ego to be challenged by none.

It was only four years ago in the Portuguese capitol of Lisbon, at an EU Summit, the politicians declared their goal to become one of the most dynamic and competitive economies in the world. Likewise the EU often touts itself as having an explicit goal of competing with the US Dollar as an equal and/or effective alternative as the world's reserve currency. These are truly lofty and enviable visions yet having high-minded visions and having delusions of grandeur are often only noticeable in hindsight, sadly.

In those four years since Lisbon we have arrived at the here and now. The socialist leaders of EU have done little or nothing at the macro level to ensure that those visions can take solid root and blossom. Sure, they have tinkered here and there, made headway on a number of key issues, talked of wonderful cross-border transactions and of freeing the labour forces from their ball and chains and harmonizing corporate taxes and and and. What it seems they have actually come up with is a self-enforcing bureaucracy of disharmonisation while adding legislation in heretofore areas which seemingly functioned perfectly well, oh and by the way, Waterloo is just outside of Brussels, the EU capitol - ...thought I'd mention that.

The big truths are very sobering: the BIG 3, Germany, France & Italy - the so-called CORE of Europe, the big economies, look more like dead ducks in the water, or at least severely wounded and floundering. Germany has revised it's yearly growth prospects for 7 straight years - always downwards. It's REAL unemployment rate is somewhere between 15-20% (taking into consideration state assisted work programs, etc). It has now come to light that the German economy will now also fall considerably short in tax revenue and is contemplating a VAT rate hike, which of course would be the nail in the coffin for German consumption and may even drive more to participate in the off-the-books black economy. French socialists are up in arms over losing their mandated 35 hr work week all the while French industry is screaming for more flexible wage and less red tape, as are the Germans. Finally, the basket-case Italy has been last in nearly every single category of financial measuring: productivity, taxes, balance of payments, etc. And, as is the case, if any of the 25 nations DO NOT ratify the EU Constitution (800 pages) then the entire project is officially shelved for the intermediate. Although it has now been rumoured that euro politicians are feverishly working on "Plan B" just in case it all falls apart in the public referendum phase.

So where does this leave the ECB? The ECB has now gone into permanent "auto pilot" on the rate issue and left rates unchanged at its latest meeting last week, at 2%. So, one must come to the overriding conclusion that Greenspan and Trichet had been reading from the same rate-script book, entitled, "Pumpers Live Longer". The ECB as staunch fighters of inflation have nevertheless been pumping plenty of liquidity into the system. How does one explain real wage decreases while asset prices go frighteningly upwards? The little man on the street is getting whacked hard. The story is quite simple: The Eurozone is stagnant and with the Damocles Sword of EU Constitution ratification on the agenda, a resounding YES for Europe by its own people seems highly unlikely. So while people like me, on the ground in Europe, do not see stupendous growth ahead, nor do I see complete disparity - in essence, we've arrived back at the "muddle through" definition. While not exactly a highlight for Europe, nor is it the death knell of the Euro. Why? Because still the Euro does not TODAY have a large and growing budget or trade deficit against it in the short term. In the longer term Europe's demographic and socialistic transfer system's look much more under threat, to the order of 2 times more than the USA's estimated transfers.

But the markets live for the day, and today, the Euro still simply has the "We are not the USD" going for it. This may change in the near term if the whole European political landscape becomes more frayed or simply where the voting mechanisms are unclear and tortuous. Markets try to avoid RISK.

Now, over these last weeks we have seen the USD rise and consolidate. Today, ahead of the US trade deficit figures out tomorrow, we could very well see the USD re-trenching and heading lower just as Gold and Silver were seen making stronger rises today. The previous month's deficit record at $61 billion may even be surpassed. If a poor figure does occur, then we may see the Euro trading range of recent weeks be tested to the upside around 1.31 or 1.32 which would very likely add an impetus to the precious metals complex.

A few other interesting items : the CAFTA proposal by Bush for a trading area with Central America looks to receive little or no support from Congress while there is a new-found camaraderie between the EU and Russia. Talk is now of expanding the EU eastward across Russia, not necessarily as a full partner but as a "preferred" partner similar to that of Switzerland and Norway currently. This would supply EU with sufficient energy needs and could necessarily even open an EU weapons corridor to China as Russia and China are long-standing allies even if now they have tended to drift apart. This would necessarily aggravate the US. Meanwhile the US has spoken of its need for repatriating its forces back to the US at an estimated cost of $20 billion....empires are expensive.

So while all of this is going on my impression is simply that people are losing confidence in their politicians in the West just as, or because, prices seemingly never stop spiraling higher, nor the lies. This will continue. Not because of any one reason per se but because of a plethora of economic and demographic factors combined with a lack of fiscal restraint and a decoupling of market relationships. The intertwining of economies has now brought upon the masses a de-facto economy of which they no longer have control and which their leaders are no longer able to fully control. Those with the longer leverage will be in control.

It is my premise that the reasons and drivers often given by many writers as to the logic behind a rise in gold and/or silver within either inflationary or deflationary times is missing the main point, or at least the catalyst. I contend that the rise in gold or silver will not only be driven by the logic of purchasing power within a deflationary or inflationary environment, but rather will more likely be driven by a (abrupt) loss of confidence in paper money within the constraints of a globalized economy which single nations are incapable of solving on their own. This price rise scenario in precious metals could further be exacerbated by a country/player converting over either to increased gold backing of its currency or issuance of legal tender coins in gold and/or silver. This would necessarily cause not only a major tremor through the financial community but would also call into question others who should talk down at such a move.

The point being: gold is now slowly starting to move from its being handled as a commodity to its being handled more like a currency. Should certain key levels of the gold price in Euros and Swiss Franc start their breakout above key highs and hence move out of consolidation that will likely be the time when global complacency leads abruptly to global fear. So, instead of waiting for Blucher to cover your flank, it might be prudent to make a few defensive moves now before the battle gets going. Who knows, he might come to the rescue, but then again, he might not.

Charts : since the beginning of this year gold has been trending higher in both currencies. We are not yet near major breakout levels but rather are seeing a slow stealth movement.

Tomorrow is Wednesday, strap yourself in for the US trade deficit figure. It could get a bit bumpy...

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10 May, 2005
Randolph Buss / Berlin, Germany

email: editor@dinl.net

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