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"Money is too Important" to Trust with Central Bankers!By Gary Dorsch
Financial chiefs from the Group of 20 industrialized and emerging economies could hardly believe their good fortune, as they huddled behind closed doors on Nov 19th. Central bankers from Great Britain, Canada, France, Germany, Italy, Japan and the United States, and 13 emerging economies, including Australia, Brazil, China, India, Russia and South Korea, implemented a joint strategy six months ago to derail the "Commodity Super Cycle", and they hit pay dirt in the Fall of 2006. Central banks from a dozen countries worked in close synchronization to either raise their short term lending rates, or lift bank reserve requirements, in a concerted effort to drain the global liquidity swamp that had lifted the "Commodity Super Cycle" to its highest level in 25-years. The strategy worked for awhile, as frightened hedge fund traders unloaded a wide array of commodities, from crude oil, copper, unleaded gasoline, gold, silver, and natural gas over the next few months. The most ambitious tightening among the G-20 nations, which account for 85% of the world's economic output, came from the Bank of Japan, which dismantled its 5-year ultra-easy money policy, and drained 26 trillion yen from the banking system. The BoJ capped its historic effort with a rate hike to 0.25% on July 14th, just when crude oil prices were hitting all-time highs of $78.40 per barrel in the spot market.  Whether by sheer luck or apt skill, the BoJ rate hike above zero percent, the first of its kind in six years, triggered an unwinding of the "yen carry" trade, and partially contributed to the 30% plunge in crude oil to as low as $54.86 /barrel on Nov 16th. A $15 per barrel Iranian "war premium" also evaporated from oil prices. In turn, the plunge in crude oil overrode concerns of a slightly tighter G-20 money policy, and ignited a powerful 16% rally in the Morgan Stanley All World Index, which measures blue chips stocks in 43 stock markets. The plunge in crude oil also suggested that global economic growth would reach 5% in 2006, extending the longest period that growth rates held above 4% since the early 1970's. But the baby-step rate hikes by members of the G-20 were deceptive, because short term interest rates are still pegged at or below inflation rates, and did not cap the explosive growth of the world's money supply. Behind the smiles at the G-20 meeting in Melbourne, Australia on Nov 19th, were underlying worries about a revival of the "Commodity Super Cycle" and a weaker US economy, which accounts for 28% of global GDP. "At a global level, we have a level of real rates that is quite low," said G-10 spokesman Jean "Tricky' Trichet. "We have a correct anchoring of inflation expectations. But there's absolutely no time for complacency. Being credible in price stability is extremely important."  Undoubtedly, the G-20 noted the strong rebound in global commodity prices in October and November, and OPEC's moves to put a floor under the crude oil market, with significant production cutbacks. At the same time, global manufacturing growth fell in November to its lowest level in 15 months as US factory activity shrank for the first time in more than 3-1/2 years, resurrecting the ghost of "Stagflation." The global manufacturing indicator, produced by JP Morgan fell to 53.3 in November from 53.9, its slowest pace in 1-_ years and new orders growth hit its lowest level since August 2005. The global employment index also slipped to 51.9 from 52.5, largely linked to a decline in US factory activity below the key 50 mark, dividing growth from contraction, to a reading 49.5 from 51.2 in October. Weak US dollar disturbs the OPEC cartel The G-20 is also worried about a fall in the value of the US dollar, which can exert upward pressure on global commodity prices, and undermine export oriented economies in Asia and Europe. On Dec 11th, former Fed chief "Easy" Al Greenspan told a Tel-Aviv business conference, "I expect that the US dollar will continue to drift downwards until there will be a change in the US balance of payments." "There has been some evidence that OPEC nations are beginning to switch their reserves out of dollars and into Euro and yen. It is imprudent to hold everything in one currency," adding that at some point the US dollar will be moving lower. "That will be the experience of the next few years," Greenspan predicted. The US dollar Index has declined 5% since Oct 26th, when guru Greenspan made similar remarks.  The weaker US dollar is eroding OPEC's petro-dollar purchasing power. The dollar hit a 20-month low against the Euro, and a 14-year low against the British pound, punishing OPEC producers who sell their oil for US dollars, but buy most of their goods and services from Europe. As a result, most OPEC ministers are leaning towards cutting oil production beyond the 1.2 million barrels per day they agreed in October, to reduce high world inventories and shore up prices. "The weak dollar is not helping matters. It affects revenue. If there is a significant drop, it is of concern to us," said United Arab Emirates' Oil Minister Mohammed al-Hamli on December 4th. "OPEC is in the process of taking up the challenge of a market that is clearly and steadily getting out of balance, after 3-years of a very strong bull run," said OPEC's Secretary-General Mohammed Barkindo on Dec 4th. To read the rest of this article, click on the hyperlink below: http://www.sirchartsalot.com/article.php?id=46 Gary Dorsch 321gold |
