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HOPE AFTER FALSE SIGNALS FOR GOLD

In the last 18 to 24 months, two key “False GO Signals” lifted the gold price from its low in 2003 of $320 per ounce to its recent high of $455 in December 2004. The markets finally figured it out though, and the gold price has languished. In the recent history, certain signals were highly reliable for a powerful rise in the gold price. However, in the age of Chinese renaissance the signals might not be so reliable anymore. Few in the gold community seem to have identified either signal as anything but a major bullish indication for much higher gold prices and strong continuation of its bull market, even after several failed gold rallies. This here analyst does not share such a view, and my analysis has elaborated in much detail as to why much of the banking system’s inflationary machinery has been operating in a reverse gear, in quiet subtle support of the secular deflation underway. Even Greenspan acknowledged this week how the bond conundrum might be answered by globalization and the unleash of cheap Asian labor. Most new money goes to dreaded new debt, unproductive dead end destinations to be sure. The fundamental force behind the false GO signals is Chinese industrialization, and their interference with the US Federal Reserve reflation initiative.

The two signals, which to date have not succeeded in generating systemic price inflation inside the US Economy are:

1. fast rising USDollar money supply growth

2. negative short-term real interest rates

The key is whether the US Economy is a CLOSED SYSTEM. By any reasonable rational open- eyed definition and assessment made by a person with a pulse, the US Economy is a highly open system, replete with one-way global trade, massive outsourcing to both China and India, and staggering trade deficits to prove it with almost every single nation on earth. Closed system? Get serious. Don’t insult my intelligence. Let’s examine why each signal is false. Finally, rays of hope are offered on changes to the signals themselves, and how they might finally turn positive. Don’t be too heartened and warmed. The rays of hope owe mainly to increasing strain with China politically (possible trade war), and strain internal to China on profit prospects (stagnant profits).

LACK OF PARALLEL STILL IN PLACE

In my earlier article “Lack of Parallel with 1970 Decade” an argument was made that passing along higher costs, while China pours exports into our back yard, is next to impossible. While China blocks the “cost push” on the manufacturing side, India interferes effectively on the service side. This much is clear. Unlike decades ago, the United States now has massive trade gaps financed by consumer debt for the purpose of buying foreign worker output. What used to be an “alarming” $100 billion trade gap is now a “no big deal” $600 billion gap. Consumption used to be tame and unremarkable. Now retail sales and omnipresent spending make up the central pillars of the US Economy, a sure signal of trouble. Debt service has become an indication of total economic suffocation, as almost 78% of all transactional flow for goods & services is devoted to payment of principal and interest.

The North American Free Trade Agreement brought the offshore manufacturing movement to our continent in 1994. NAFTA lowered costs for participating corporations, and developed free trade zones in Mexico (since shuttered as workshops went to China). The 1999 Most Favored Nation status was granted to China, surrounded by controversy and strident objection by the AFL/CIO. Global trade would never be the same again. Worse still, with the aid of technological advances in broadband transmission, computer networking, and fiberoptic connectivity, the service sector was laid vulnerable to outsourcing of knowledge output. That trend is accelerating. On the domestic front, the prevalence of “Big Box Superstores” has changed the retail front. Supplied largely by Asian goods, they reinforce the trade gap and abandonment of US workers. New jobs are of shabby quality, but in the eyes of the Bureau of Labor Statistics, a job is a job!!! The end result of all these undeniable changes has been the profound engrained structural absence of pricing power and wage pressure.

The gold community must come to grips with its mediocre analysis as far as inflation is concerned. If the standard key signals for a gold bull market have failed to lift the gold price, then one must ask what went wrong. Too much blame is placed on the gold cartel. If the signals were valid, the gold cartel would have been steamrolled long ago. Perhaps the key signals are just premature on that long awaited gold price explosion. Perhaps. China must be subdued. Its blockage of the customary inflationary machinery outcomes must be removed. With the large powerful Chinese arm, the gear shift is firmly in reverse for the US powerful inflationary engines. That strong Chinese arm must be removed, so that a forward gear is engaged.

BAD MONEY SUPPLY GROWTH

The wider M3 money supply has grown from $7.3 trillion at the start of 2001 to $9.6 trillion through March 2005. “That is a lot of chicken!!!” Just where did it go? Did the USA use it constructively? NO. Did we build something advantageous with it? NO. Did we waste it? YES. Did we gamble it away? YES. Did we blow it like a drunken sailor on shore leave? YES. Did we buy trinkets, gadgets, and junk with it? YES. Did we try to keep up with the Joneses in lifestyle and designer clothes? YES. Did we buy into the moronic notion that US consumers should power the world economy in yet another sick New Paradigm? YES. Is it any wonder that all this occurred when Viagra sales shot through the roof? NO. Is it any wonder that all this occurred when piggish Sport Utility Vehicle sales shot through the roof? NO. Is it any wonder that all this occurred when obesity blossomed across our land? NO. Is it any wonder that all this occurred when the illiteracy rate rose across our land? NO.

Newly minted crisp money simply does not come easy into gold in order to push a major bull market. Not yet. In 2002 and 2003 and 2004, the process was a snap to flow into gold and miner stocks, the annual spring swoon corrections notwithstanding. The unspoken foundation premise behind the flow into gold from fresh funds was the expectation of systemic price inflation, since that was the stated objective of the US Federal Reserve. They publicly stated intentions to inflate the debts away, to reflate, to generate inflation throughout the economic system. We have witnessed the exact opposite, more debts, puny wage gains, and little inflation except in costs.

The implied assumption was that, just like in the famed 1970 decade, a virtuous cycle of higher supply costs (for energy) would be passed along to customers. Households and businesses could afford to pay the higher prices. Worker wages would rise in lockstep. Companies would receive more for their products, as profits rose. It was a relatively easy process on the drawing board, once it got started, which required a three-year wait. Almost no factor from that 1970 decade is similar today across numerous categories. We have price inflation nowadays, but in checked fashion. Most notably, it is sorely missing in jobs and wages, the biggest failure zone.

From 2002 to 2004, China and India interfered with the reflation initiative on a truly MASSIVE basis. The evidence is lackluster job growth inside the United States (with porous boundaries) which has barely kept up with population growth yet is called robust by politicians. The evidence is a truly MASSIVE trade deficit with Asia.

Where did all the easy money go? We are tired of hearing it, but we must. It went into broad consumption of retail stuff. It went into new cars. It went into new and ever larger houses and second homes. It went into house appliances, expensive home electronics, and luxuries. It went into sustenance of a ripe lifestyle. Almost nothing of these unproductive destinations is a constructive avenue to generate rising wages for US citizens. Unfortunately, the USFed stimulated Asian economic growth, truly MASSIVE Asian industrial base building, Asian job hiring, Asian wage growth. This Fed Reflation initiative will go down in history as the most wasteful, most unproductive, most destructive, most counter-productive in US history. It has built up China first as a supplier and partner, second as an emerging competitor, ultimately our next formidable geopolitical adversary.

WASTED NEGATIVE REAL INTEREST RATES

The argument goes like this. If short-term interest rates cannot keep pace with price inflation, then an investor in the 3-month Treasury Bill yield falls behind on a practical basis, even moves backwards. One is better off investing in gold, the ancient store of ultimate value. With the Fed Funds rate held fixed at 1% for 18 months, the path for gold was laid out in plain fashion. The Consumer Price Inflation, although suppressed by telltale tricky techniques, rose at a tame 2% to 3% for all those months, well above the yield of 1% of bond. Negative real rates were the original foundation for the gold bull market. However, something went awry. The foundation shifted. The foundation was subjected to the powerful erosion of global trade with China.

In the shadow of this unstable foundation of sand, the USFed encouraged the only price inflation possible within our shores, namely in financial instruments, our aberrant strong suit. Since 1980, our manufacturing base has been abandoned, discarded, dismantled, and permitted to rot and waste while US firms eagerly invested in Asia. Great advantages existed in Asia, so WHY NOT? Lower labor costs, lower taxes, lower regulation, lower payroll mandates, and so on ad nauseam.

So the USFed accomplished asset inflation from the last remnant bulkhead remaining in the US Economy, the financial sector. Can you say BONDS? The Treasury bond bull has given steroids, after already having taken long-term rates from the mid-teens in 1980 to 6% in 2000. Mortgage backed securities followed suit. In response, stocks rose due to the screwball sham known as the Fed Valuation Model, which calls for price/earning ratios to rise inversely to long-dated bond yields. In response, housing prices rose. This is the ballyhooed Asset Economy financed by Asian credit in boasted flexibility. Put this Economics Chapter in a textbook Appendix whose leading description begins with insanity, desperation, deception, heresy, disinformation, and propaganda.

The outcome is rather tragic trade deficits and the hemorrhage of current account deficits. In a stark example of Orwellian language distortion which would impress even George Orwell, our bloodletting is described by both the Federal Reserve officials and Wall Street leaders as a sign of strength. If that is strength, then a prone cadaver drained of blood is vibrant and fully prepared to sprint.

RAYS OF HOPE, TROUBLE WITH CHINA

The gold price is like the speedometer on a souped-up turbocharged Ferrari race car. In the first 18 months on the track, the first gear which powered the sleek race car was clearly the euro currency. A 35% rise in the euro versus the USDollar gave lift to gold, pushing it from $265 lows to $430 in the winter of 2003 and $455 in the winter of 2004. THE SECOND GEAR MUST NEXT OFFER GOLD ITS POWER FROM THE ASIAN CURRENCIES. TO DATE, THE FOREX CLUTCH HAS SLIPPED, AND INTERFERES WITH SMOOTH MOVEMENT TO THE SECOND GOLD GEAR. The next move is from China, whose leaders are under pressure the world over. Their labor costs advantage is monumental, between 10 and 30 times that of the US labor, depending upon whether skilled or unskilled.

Beijing leaders insist on the maintenance of a rigid yuan peg regime, fixed at 8.3 Chinese yuan to the USDollar. Unless and until the Asian currencies realize a fully justified considerable rise, gold will continue to struggle. Like with a car whose clutch cannot find the next gear, aggravated by the shrill sound of grinded gears, speeds stutter, and the car slows down. Gold will find its next gear and make great strides in price. However, to conclude that it did so easily in the 1970 decade and therefore will again, such is evidence of shallow economic analysis. Almost every conceivable factor worked in its favor back then, and now many powerful factors work to provide a stiff headwind of resistance.

Next up is resolution of imbalance by means of currency adjustment. If it proceeds in orderly fashion, the Chinese yuan currency will be reset to something besides the tight tether ratio to the USDollar. If reallocation of their $620 billion of foreign reserves by the Peoples Bank of China is any indication, the new pegged regime is likely to be a fixed basket of the euro, the yen, gold, and the USDollar. Look for all of Asia to follow suit in what could develop into a rout of the USDollar even if it begins in orderly fashion. If the process breaks down, with trade tariffs and other assorted protectionist levies and obstacles, followed by retaliation, then expect disruption and perhaps chaos. The trouble is, with such extreme imbalances, the hidden forces are an order of magnitude greater than the seeming calm foretells. Even a constructive start could degrade into rampant disorder over time.

Gold will absolutely love the changes, whether orderly or disruptive. The change will permit higher Asian import prices, greater pricing power, puffed profit margins, and likely even a wave of hiring or at least wage gains. The loser might be US Treasury Bonds, since consumer prices will show up as on the rise, led by import prices. Could we be seeing an engineered USTBond rally as a preface for exactly this development? Methinks YES. These and many other related topics and difficult issues are discussed in detail in my HAT TRICK LETTER. The outcome is unclear, but the changes are certain. The rays of hope for the gold community are wrapped tight around the Asian currency becoming released and unlocked. The golden race car requires a shift into the next FOREX gear for renewed acceleration of a higher quality price inflation. Gold demands it, and will almost certainly see it, regardless of how the process begins. The important requirement is that it begin. Depending upon the level of cooperation, maturity, and wisdom, order will rise or fall, be maintained or deteriorate. Get me my ringside seat.

Oh yes, by the way. Almost nothing has been accomplished to rectify imbalances inside the US Economy during the three years of USDollar devaluation. Import growth has greatly exceeded export growth. The USDollar has recently risen, not from economic strength, but from a queer combination of favorable interest rate differential with Europe, and faltering imports to the USA.

As the USFed continues its rate hikes, it applies stress to the US Economy even while encouraging bond speculation in the euro carry trade. That chapter is coming to an end soon, if not already. The lion share of the narrower trade gap came from reduced imports, which in April fell 2.5% even as exports gained 1.5% from a much lower base. Could we be seeing an engineered USDollar rally as a preface for a resumed bear market and Chinese currency adjustment? Methinks YES. Could backroom deals have been cut with the stubborn Chinese in order to convince them to budge? Methinks YES. These and many other related topics and difficult issues are discussed in detail in my private newsletter. Get me my ringside seat.

THE SIMPLEST SIGNAL FOR RESUMPTION OF THE GOLD BULL MARKET IS FOR THE 10-YR TREASURY NOTE YIELD (TNX) MOVING ABOVE 4.0% AS BONDS COMPETE WITH GOLD IN A STABLE STORE OF VALUE. The TNX moved well below 4.0% last week and remains below it still. Its upward move will accurately signal trouble with China and an actual currency adjustment, which will release price inflation finally inside the distorted, dependent, and debilitated US Economy.

NEWS TIDBITS

General Motors expects to close more US assembly and component plants as it battles high costs and shrinking market share. GM expects to save $2.5 billion a year. A benchmark annual report on North American manufacturing operations released last week ranked GM dead last among leading automakers in assembly plant capacity utilization (unused plants). Wagoner said at least 25,000 US jobs would likely be cut in the period 2005 to 2008, from an hourly work force that stood at 111,000 at the end of 2004. In contrast, analyst Bruynesteyn of Prudential Equity Group said eliminating 25,000 or more hourly jobs through 2008 would only be in line with the normal 5% annual retirement or attrition rate at GM. The UAW is not convinced that GM can simply shrink its way out of its current problems. GM expects to spend $5.6 billion on employee and retiree health care this year. GM executives have argued that hourly union workers should pay the same out-of-pocket medical expenses as the company's white-collar, salaried workers. That would save GM an estimated $1 billion a year. “We're going broke. It's time for a change,” said a long-time Buick salesman.

The Toyota chairman fears a backlash if GM and Ford fail. The outspoken chairman of Toyota Motor, Hiroshi Okuda said he feared the possibility that US policy could turn against Japanese auto makers if local giants such as GM and Ford were to collapse. “Many people say the car industry wouldn't revisit the kind of trade friction we saw in the past because Japanese auto makers are increasing local production in the United States, but I don't think it's that simple. General Motors and Ford Motor are symbols of US industry, and if they were to crumble it could fan nationalistic sentiment. I always have a fear that that in turn could manifest itself in policy decisions,” he said, speaking as the head of the Japan Business Federation.

US monetary policy makers warned anew that a quest by yield starved investors for higher rates of return may be pushing them to take on excessive risks. According to Fed officials, real estate and hedge funds are two strategies luring investors hungry for higher returns against a backdrop of long-term interest rates that have remained puzzlingly low despite the Federal Reserve's steady escalation of short-term interest rates. Atlanta Fed President Jack Guynn said low rates may be the culprit behind mounting signs of speculative behavior in some booming US real estate markets. Still, Guynn said he didn't think the Fed had a tool to address the issue “other than trying to get the economy in the best possible balance that we can between the growth risk and inflation risk.” Echoing concerns expressed by some Fed officials about real estate bubbles in some pricey markets, Fed Governor Susan Bies said “an aggressive lending culture” on home mortgages was veering toward unsound lending practices in some communities. “Bank home equity loan portfolios may be vulnerable to a rise in interest rates and a decline in home values,” she told a banking conference in Chicago. Fed Governor Edward Gramlich remarked that the housing market reminded him of beer. “There is froth in some areas but not in all areas. I think it's a mixed picture. I keep thinking of a bar and a bottle of beer.” Finally, an analogy admission to what this here analyst has been referring to for a long time. The Fed and Greenspan act more like monetary drug dealers.

Inventories at US wholesalers rose 0.8% in April, double the Wall Street expectations, as automotive stocks swelled. The Commerce Department also revised up its March wholesale inventory advance to 0.6%, from an originally reported 0.4% gain. Rising inventories can signal either growing business confidence about future demand, or an unexpected sales drop that causes unsold stocks to pile up. Stocks of durable goods (products meant to last three years or more) rose 0.4% in April after a 0.2% advance in March. Car inventories rose 1.5% in April, reversing direction after a 2.2% decline the month before. Professional equipment stocks rose 1.4% and computer equipment inventories rose 0.1%.

The European Union warned it would not hesitate to slap import duties on Chinese footwear if it was clear that unfair trade practices were behind over a 100% leap in shipments since the start of this year. The spotlight on cheap Chinese exports of shoes and slippers comes amidst mounting tension over moves by the United States and the 25-nation EU to curb huge rises in imports of textiles and clothing from China. “The European Commission has noted the concerns of the EU footwear industry that this rise is causing considerable market disruptions to EU producers,” the European Commission said. The EU executive said there had been a near seven-fold rise in imports of six categories of Chinese footwear in the first four months of this year, with shipments of some shoes jumping more than ten-fold. Prices dropped by 28% over the same period. Commission spokeswoman Veron-Reville said an EU Trade commissioner may travel to Beijing to try to clinch an agreement on restraining a surge on textile exports, which was unleashed by the abolition of a decades-old global quotas regime on Jan 1st. Italy, which has a tradition of shoe production, pressed the European Commission to monitor imports of Chinese footwear after the elimination of quotas for this sector at the end of 2004. “When quotas were lifted at the end of 2004, [shoe sales] boomed, up more than 300% in the first three months of the year,” said Leonardo Soana, director general of the National Association of Italian Shoemakers. “The average price for a pair of leather shoes from China is 2.40 euros, down 10% on last year. We can't even buy the raw materials for one pair of shoes for that. Shoes exported from Italy cost an average of 22.18 euros.”

The Energy Department announced inventories in crude oil fell by 3.0 million barrels, even as gasoline supplies fell by 0.1m barrels. Distillate inventory rose by 1.3m barrels. After rising 50 cents on the news, the crude oil price reversed to close down 1.22 per barrel. Demand for distillates has grown by 6.6% in the last 12 months. Higher distillate supplies (for diesel and heating oil) triggered the decline.

China has shocked the energy markets with an announcement to raise the Chevron bid for Unocal. Just when we thought the deal was final with a domestic acquisition of and by an American firm, China throws a wrench in the works. Could a bidding war for energy properties be unfolding? Methinks YES.

The judge in the racketeering case against cigarette makers questioned whether “additional influences” prompted the government to drastically reduce a sanction it is seeking against the industry. During a second day of closing arguments in the trial, US District Judge Gladys Kessler speculated about the Justice Department's decision to seek a $10 billion, 5-year program to quit smoking, far smaller than a $130 billion, 25-year program proposed last month by a government witness. “Perhaps it suggests that there are some additional influences being brought to bear on the government's position in this case,” Kessler said. The government's reduced request, outlined in court, has provoked speculation by tobacco analysts and some lawmakers that politics played a role in the decision. “Big Tobacco is one of the top donors to Republicans, and it is getting what it paid for,” New Jersey Democrat Frank Lautenberg said in a statement. With rollbacks on Microsoft rulings in 2001, rollbacks on Arthur Andersen convictions last week, and rollbacks on tobacco settlements here, one is hard pressed to claim that the current Administration holds the rule of law as any high priority at all. The real priority is corporate profits and campaign donations, as well as high oil prices.

Wall Street watchdog NASD hit 15 financial firms with penalties totaling $34 million for giving certain mutual funds special treatment in exchange for getting brokerage business from the funds. Such arrangements, known as “directed brokerage” and “shelf space” deals, have drawn regulatory scrutiny in recent months as investigators move beyond the initial trading abuse scandals that rocked the $8 trillion fund industry in 2003. The US Securities & Exchange Commission adopted a rule in August barring such dealings, which critics say can cause brokers to steer investors toward mutual fund shares based on commissions, not on what benefits the investors.

TODAY’S MARKET by Mike Hartman

Shortly after the opening bell this morning, the Dow Industrials moved 45 points higher and held the modest gains through the morning hours with low volatility. Treasury bond prices also demonstrated low volatility as the U.S. Treasury auctioned $14 billion of five-year notes and will sell another $8 billion of ten-year notes tomorrow. I have noted many times that low volatility across all market sectors is very typical behavior whenever the Treasury needs to sell more debt. In similar fashion, the U.S. dollar began the day slightly lower, but has since reversed to move higher versus all major currencies. Throughout the morning, the markets were quiet overall, except for the gyrations down in the energy pits.

Analysts expected crude oil inventories to remain basically unchanged, but the surprise came with a decline of three million barrels, according the Energy Department. The American Petroleum Institute, however, reported a massive decline of 13.8 million barrels. According to FxStreet.com, “Oil futures rallied after weekly U.S. inventory data revealed an unexpected fall in crude stocks, analysts said, with dealers confused over massive discrepancies between government and industry figures.” Shortly after the inventory reports, crude moved to $55.00 a barrel, but ended today’s trading session by closing $1.16 lower at $52.60.

Supposedly, traders shifted their attention to distillate inventories which are basically in line with expectations for this time of year. Overall crude inventories are expected to decline from now through September, but all eyes will be watching to see if refineries around the globe will be able to keep up with demand for gasoline and other distillate products. Two weeks ago I posted an “opportunity” chart of natural gas. Since my posting, natural gas has moved from $6.30 to $7.40, and has now settled back to $7.01. I expect natural gas to remain bullish through the end of this year, with plenty of volatility along the way. I like to think of natural gas futures contracts as a trader’s paradise where volatility and leverage dominate the landscape!

In the early going, the higher oil price gave energy stocks a bounce adding to the gains from General Motors to lift the Dow into positive territory, but everything seemed to start coming unraveled right at 2:00 pm Eastern. Stock and bond prices both began sliding lower when the White House cut the fourth quarter year over year GDP forecast from 3.5% to 3.4%. Stocks did not take kindly to the news, especially the economically sensitive retail and transportation sectors.

With the lower forecast for GDP growth coming from the White House, you would think that stocks would decline as they have, but you would also expect bond prices to move higher on the economic weakness, but not today. While the Executive Branch sees lower GDP growth, they also revealed significantly higher inflation expectations, which the bond traders began selling. In December, the forecast called for inflation of 2%, but in today’s report, they have bumped their estimate to 2.9% inflation. They said they do not expect the CPI to maintain its current inflation rate of 3.5%....looks like they will need more fictitious adjustments to make the numbers cooperate and move lower.

The weaker GDP forecast along with higher inflation expectations took their toll on stocks and bonds, but the dollar rallied all session long to close at 87.90 on the U.S. dollar index, with the euro at $1.223 and yen at 0.932. If you haven’t diversified any funds out of the dollar yet, I find the Swiss franc attractive under $0.80. The Swissie closed today at $0.7971. Supposedly the dollar is continuing its rally on expectation the Fed will continue to raise interest rates to fight inflation. The report today depicting elevated inflation expectations put a bid in the dollar, as the Fed is expected to continue raising interest rates. To that same point, Fed President Guynn indicated interest rates have not yet risen to neutral. He also said that each measure of inflation is heading higher, indicating more rate hikes to come.

Also on the interest rate front, the Mortgage Bankers Association reported its application index rose 6.5%, with the purchase index up by 3.6% and the re-finance index higher by 10.3%. Time to get those mortgages while the getting’ is good!! The thirty-year fixed rate fell six basis points to 5.55% while the average one-year ARMS rate was unchanged at 4.09%. I mean it when I say, get a good mortgage while the getting’ is good, because it appears the Feds are growing more concerned about the bubble and rampant speculation in housing. Note the following from Bloomberg today:

“June 8 (Bloomberg) -- Federal Reserve governors and other U.S. banking regulators are growing concerned that easier credit standards and greater use of interest-only loans are fueling home price speculation, increasing risks to the U.S. banking system as interest rates rise.”

``Financial institutions may not be fully recognizing the risk embedded in these portfolios,'' the Fed, the Comptroller of the Currency and three other regulators warned in a May 16 letter on home-equity loans to lenders and bank examiners. Fed Chairman Alan Greenspan, who talked the same week of ``froth'' in the housing market, will likely be questioned on the topic during congressional testimony tomorrow.

``The new development is the volume of these interest-only first mortgages we're seeing,'' acting Comptroller Julie Williams said in an interview. "Banks should be evaluating the risks of these types of loans, not just based on the initial loan terms, but based on the loan terms that may roll into effect over the life of the loan."

“Central bankers and regulators say they are concerned at the prospect of a real-estate bust that would cascade through the banking system, causing even healthy banks to pull back on lending. That would limit the ability of the Fed to influence bank lending and the economy through interest-rate policy.”

I guess one of the big questions for the Fed is how to keep interest rates low so the economy doesn’t get choked-off, but at the same time stop the speculation in real estate markets. I believe interest rates will head higher after fourth quarter shopping is done, so we should still have some time to batten down the hatches. Greenspan himself thinks long-term interest rates will continue to remain low and in the report from the White House today, ten-year Treasury yields are expected to move from 4% to 5.5% by 2007.

All eyes have been on our Fed-Head Alan Greenspan as interest rates continue to be the near-term focus. This is a classic tug-o-war between lower rates needed to stimulate economic growth and the higher rates needed to contain inflation and subdue the speculation in real estate. For now, the markets will be eagerly awaiting the comments from Mr. Greenspan tomorrow when he testifies before the Joint Economic Committee in Washington. Some analysts are suggesting the gloves could come off tomorrow as committee members become more forceful with Mr. Greenspan due to his departure from the Federal Reserve on January 31st. We shall see how the world’s greatest inflationist Fed-Head will hold-up to some tough questions from Congressmen tomorrow. I’ll be paying especially close attention to how he addresses issues surrounding the speculative excesses in the residential real estate market.

Today the Dow Jones Industrials wrapped up at 10,515 (+32), S&P at 1199.6 (+2.3), Nasdaq at 2066.6 (-0.5), TENS yield 3.919% (+2.9 bpt). Currencies closed with Euro at 122.37 (-0.46), JYen at 93.32 (-0.56), Can$ at 79.95 (-0.37). Metals finished with gold at 424.7 (-0.1), silver at 745.8 (+2.9), copper at 159.85 (+0.55). Energy ended with crude oil at 52.54 (-1.22), natural gas at 700.0 (-12.7), unleaded at 146.94 (-0.59). Prices are at major futures contracts.

Jim Willie CB and Mike Hartman

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