Dollar carry trades herald next crisis: sell stocks, buy gold
Posted on 10 October 2009 with no comments from readers
The Federal Reserve and its central banking friends have pumped a lot of cheap money into the global banking system, that is to say money for which the recipients pay very little interest.
And it appears this dollar carry trade is finding its way into stocks right now, and sustaining a rally that by any conventional valuation metric ought to be dead.
Dollar carry trade
The way to see this is that the low interest rates being paid on dollar deposits are allowing institutions to jack up stock prices and profit on the difference. This dollar carry trade is therefore funding a classic liquidity bubble.
We have seen this before in US housing, the Nasdaq bubble and indeed throughout history there have been investment bubbles pumped up by cheap credit. They always crash. It is just a matter of time.
Eventually the money runs out, or the sums required to push the boom higher just become too big. Those who join this party late in the day are always toast.
Fed planning
So how do you judge where we stand today? Does the Federal Reserve have an unlimited capacity to inject money into the economy? In theory it does but in practice the Fed also knows it is playing a dangerous game, and has to back off at some point.
If the Fed does not then eventually markets will tip against it. There will be a quiet and then a very loud and rapid shift out of all assets denominated in US dollars, a true currency crisis.
That would play havoc with global financial markets and lead to severe volatility without much directional logic. For leveraged players it could quickly mean a wipe out situation, and buy-and-holds would have to keep their nerve.
Precious metals
There would be a huge shift into gold and silver as the currency of last resort. Again this would fuel up a bubble situation and an eventual topping spike in the price of gold.
Eventually the central banks ought to be able to agree something to produce a new currency regime to cool things down again, if only because so much of the debt in the system would be squeezed out by a collapse.
How far away from this currency crisis might we be? That is much harder to tell than to envisage this scenario. But it is most unusual to see bubbles in both stocks and bonds running concurrently, and the rising price of gold indicates danger ahead.
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Central Banks – A Blight on Humanity
Yesterday, Rob Kirby wrote a very interesting commentary entitled: Central Banks, a Blight on Humanity. I couldn’t have picked a better title!
I encourage all inquiring minds and serious investors to read it. While I understood a part of the reason for the rise in the gold price over the past 8 days, I didn’t fully understand why gold was rising so fast; Kirby explains it well. The link is:
http://news.goldseek.com/GoldSeek/1255111200.php
Hopefully, my commentary here will shed further light on WHY the Central Banks, and the US FED in particular, are undertaking these actions.
JPM is the FED’s Agent
So in the LBMA gold trade that Kirby mentioned, how was it settled? Since the exchange couldn’t produce the physical gold, they had to offer a huge premium in order to complete the settlement. Who paid the 25% premium? Easy answer: it came from the US FED.
Interestingly, for every trading day the gold price has been rising, JPM, et al (but principally JPM!) have been entering an equivalent amount of “short positions” for every “long” position taken by foreign Sovereign Funds, et al. JPM and the other bullion banks (principally HSBC, DB) are now “net short” a total of 33 million oz. of “paper” gold, and I estimate that approx. 70% of this total short position is held by JPM alone.
So Why Would JPM Deliberately Lose Money?
The short answer is that JPM ain’t losing a dime, because most of the “mis-invested” funds is money that JPM receives from the FED. JPM does what it has been doing for decades; they do the “dirty work” for the FED, in order to keep the US dollar from eroding too quickly.
The Motive Behind Central Banks
Central banks are desperately trying to hold back the continuous tide of debt defaults around the world. That is their primary objective; but they are also “protecting” their own currencies. So in addition to the primary objective, they are desperately trying to prevent a rapid rise in the prices of gold, oil, base metals, soft commodities or anything else that might be considered an indicator of inherent value. Why do this? As Peter Warburton said in his essay back in 2001 or 2002, it is simply to deprive the independent observer of any “reliable benchmark” against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. What a blight on humanity.
Now Here’s a Shocker!
Interestingly, since 1970, the US dollar has lost 97% of its inherent value, when compared against gold.
Got gold?