Reality Check - How Much is that Priced in Euros?

Reality Check - How Much is that Priced in Euros?

Courtesy of Phil of Phil's Stock World

It’s as if 2008 never happened.

Once again the worlds investors are pumping up bubbles that will probably explode in their faces. After the popping of a real estate bubble led to the first global recession since the 1930s, world markets are frothing like shaken Champagne. Pundits claim to have spotted price increases that are unsupported by economic fundamentals in assets ranging from U.S. farmland to Israeli biotech to Australian housing to Chinese cemetery sites. Commodities have soared. Global junk-bond issuance hit a record in the first three months of the year … this is the granddaddy of them all, an almost-encompassing bubble right at the heart of monetary systems. - Peter Coy & Roben Farzad

Business Week has an excellent slide show on various bubbles that are in progress around the World and this article is a must read for fans of reality, as is Paul Farrel's "2008 Crash Deja Vu" from Market Watch (which follows on with my article from last week "How to Make 500% On the Next Crash" - which you'd better read too - just in case), in which he notes:  

Another crash is coming, unavoidable, just like 2008. Not because our totally dysfunctional government is collapsing into anarchy, thanks to the 261,000 Super-Rich Lobbyists. Not just because our monetary system is run by the Bernanke Printing Press Company. And not just because a soulless conspiracy of Wall Street CEOs cares nothing for democracy and the public interest, only for their stockholders and their year-end bonuses.

Another crash is coming soon because we’re back playing the same speculative games as we did for years prior to the 2008 crash. When we collapse, it will be because America’s leaders never learn the lessons of history. Never.

David Fry (his charts here) does a great job of summing up our strategy this morning of outlining the conflict we face as we are fundamentally disgusted with the markets and by the policies being set by our government but, for the sake of staying with the market, technically bullish.  As David says: "It’s a con plain and simple. I’ve bought into it because I must. Overall we’re long and will be until the jig is up. Until then, I’ve advised subscribers for many months our Lazy Portfolios are the path to success as Fed policies steamroll most technical systems beyond HFTs. When it ends, and it will, it’s back to business as usual."

The great con of course remains current inflation which Bernanke alluded to briefly in his comments today. They cling to “core” inflation as their measure of choice while we commoners who shop everyday for essentials know better. Turbo Tim even had the nerve to say the other day high gas prices are something we’ll just “adjust to” and “won’t hurt” the recovery. He has a government car and driver. He also had the nerve to reiterate the necessity to maintain a strong dollar. Yikes!

As you can see from the chart above, the Dollar is down 20% in 12 months with half of that decline coming in the first 4 months of 2011 as the Fed's policies continue to kick our currency while it's down.  So what then, does that say about both corporate earnings - which are barely improved from last year or our National GDP, which was $14,446.4Bn in Q1 of last year.  In order for GDP to keep up with the decline in the dollar - we will need to see at least $17.335Tn for Q1 2011 and I'm kind of doubting we are even up to $15Tn actually.  

Do you want to measure GDP in real stuff? No you do not because it's ridiculously depressing but I'll do it because it's my job so, like a doctor who has to rip off a band-aid, I will now painfully point out the reality of our situation.  Last April, $14.5Tn bought us 181.25Bn barrels of oil at $80 a barrel, this year, it buys us 128.88Bn (down 28.9%).  Wholesale gasoline was $2.40 last April so our GDP was good for 6.041Tn gallons.  At $3.37 yesterday, we're down to just 4.302Tn gallons - 28.7% less.  Gold was $1,150 and our GDP bought us 12.6Bn ounces but this year we will disappoint a lot of rappers with just 9.5Bn onces at $1,526, 24.6% less teeth to cap.  Are we starting to see a trend here?  

• Copper was $3.25 a pound and we had 4.46Tn of them last year, now it's 3.41Tn pounds at $4.25 a pound (down 23.5%)
• Silver was $18 an ounce last April and our GDP was good for 805.5Bn ounces.  At $47.80, that's dropped to 303.3Bn ounces (down 62% - ouch!) - I guess we'd better ignore that one, right?
• Corn was $3.60 a bushel and that gave us 4.027Tn of them last year.  This year, many will go hungry as our GDP now buys just 2.636Tn bushels at $5.50 (down 34.5%)
• Wheat came in at $500 a ton last year for 29Bn tons worth in our GDP but this year, not so much at $750 and just 19.3 tons (down 33%)
• Rice has held steady at $12 and that's pretty much the only thing staving off global starvation at the moment so, yay, I guess.  

So thank goodness for the weak dollar or consumers in this country would probably be getting downright depressed as our real economic numbers and real corporate earnings fall off a cliff. That's why the Russell 2000 index is at an all-time high, punching past it's July 2009 bubble top at 855 yesterday as our small-cap companies exist almost entirely in the weak-Dollar bubble. Hopefully, Uncle Ben and Timmy can keep the dollar at all-time lows so we don't get a repeat of that nasty little incident in 2008 when we had a flight to the Dollar that sent it back from 71.31 in July of 2008 up to 88.46 in November (up 24%), which caused the Russell to drop all the way to 371 (down 56%).   

Now the Dollar is back to 73 and the Russell is back to that 855 range and we are throwing a party as if we have accomplished something other than setting the economy up for another multi-trillion dollar value shock.  Based on the declining buying power of our dollars, if your stock is not up about 30% from last April, you are losing ground to inflation!  One way we try to keep our heads above water is through our inflation hedges and I listed on on USO and one on GLD on Monday, both with short-term 400% return potential and if you take one of those (which I don't believe in fundamentally) to hedge against our 500-1,000% disaster hedges - you can be in pretty good shape whichever way things turn out.  

As we are still, like Dave Fry's group, bullish in our long-term positions, we keep pecking away at bearish day trades, hoping to be in the right place, when it is finally the right time.  Yesterday we caught a nice break with a 60% gain on our QQQ puts from the Morning Alert but all that really does is make up for 3 20% losers and, clearly, most days have been up and up.  

The important thing is to have some hedges in place because the conventional wisdom that "you can't fight the Fed" has proven true for 2 years now and it's very clear from Bernanke's speech last night that he's willing to drop our buying power another 30% in the coming year - if that's what it takes, to make his Banker buddies happy.  Here's a technical look at our major indexes priced in Euros to compensate for the rapidly declining dollar:  

Note that the Transports and the Russell are making a "death cross" - where the 200 dma falls below the 50 dma and, other than oil - all of our indicies are in a firm downward channel to the Euro (the same would apply to the Yen, the Pound or any other real currency).  What the American technical traders are looking at is nothing more than a magic trick, an illusion to distract the rubes in this country who are trained from birth to buy into hype - and the Banksters live for the hype, don't they?  Here's how dropping your buying power by 33% makes it look like your stocks are up 33%:    

Of course one Bankster's happiness is another person's misery and we are exporting a World of misery as the Shanghai Stock Exchange dropped 1.3% this morning and the Hang Seng fell 0.4% on a harsh 300-point (1.4%) rejection off the 24,000 line. China's B shares are down for the 5th consecutive session, hitting a 5-month low on speculation that the Government will impose a capital gains tax to reign in speculation.  “There are lots of rumors about B shares such as a capital gain tax and yuan appreciation and all these things are weighing on the market,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “It’s an opaque market dominated by retail investors, who tend to believe market rumors and then sell in panic.”  Shanghai’s B-share gauge is valued at 18 times reported earnings, compared with the multiple of 16.5 times for the A- share gauge, according to data compiled by Bloomberg.   

The misery train moves on to India, where Mumbai home sales drop to a 2-year low as a combination of record prices and rising rates have rapidly shut down the real estate market.  The World Bank is already warning that, in China: "Shocks to the property sector that would slow down construction significantly could have a large impact on the economy and on bank balance sheets,” the Washington-based lender said in its China Quarterly Update released in Beijing today. “A property downturn could affect the finances of local governments which do a lot of the infrastructure investment."  In India, like China, food inflation is out of control - hitting new 3-week highs on yesterday's 2% drop in the Dollar, which The Bernank claims has nothing to do with inflation.  

Rising food prices (and, don't forget it was rice that tipped us over the edge in 2008 - quiet at the moment) force the Reserve Bank of India and other emerging markets to hike rates to strengthen their currency and INCREASE the buying power of their people.  Already rates are 8.08%, up 2% after 8 0.25 hikes since last March but still not keeping pace with 8.98% inflation.  

This is how the Fed can appear to do nothing and blame other countries for inflation.  We cause initial inflation with our zero-rate policies, other countries defensively raise rates, the Dollar drops further against those currencies, once again pushing inflation along as most commodities trade in Dollars and that forces governments to buy Dollars (our debt) and keeps our rates low while they have to tighten further and end up dropping the value of our Dollar (and the notes they are forced to keep buying) ever downward.  

This can go on until the average US consumer reaches the income equivalence of the average Indian or Chinese consumer and, so far, the sheeple are putting up with it while we make day trades that return 60 and 75% - it's a great system from the top down - not so much from the bottom...

There's another way this can end.  If the rest of the World gets fed up with the Fed's BS policies and refuses to play Bernanke's game anymore.  That was the premise of our short position yesterday as my feeling is that EITHER Bernanke would apply a little bit of brakes and give some relief to the rest of the G20 by strengthening the Dollar (this did not happen at all) or the rest of the G20 will begin to work together to counter the US's weak-dollar interests, since they are contrary to the interests of the rest of the World other than the not-too-abstract case of the US being "too big to fail".  

Well, maybe not all that big, with just a 1.8% rise in GDP, just over half of last Quarter’s growth pace and a far cry from keeping up with the 20-30% decline in our buying power but it’s "in-line" with low expectations.  Spending rose 2.7% overall, driven by a 3.8% pace of "official" inflation, which offsets the rise in food and energy with the 6% decline in home prices and the fact that a new IPhone has two cameras for the same price as you used to get one camera so, therefore, you are getting more for your money when you buy an IPhone for the same price (see Penn and Teller video again if this logic confuses you).  

A big decline in federal government spending also weighed on the economy. Federal spending fell 7.9%, the biggest drop in more than a decade, compared to a 0.3% decline at the end of 2010. National defense spending fell by 11.7% in January through March. State and local government spending also contracted.  The housing sector resumed its decline, falling by 4.1% in the first three months of the year.  Real final sales, which is GDP minus the change in private inventories, rose by 0.8% in the first quarter, down from a 6.7% rise in the fourth.

Even the Fed's beloved PCE, the most BS of all inflation measures, was up 275% from the previous quarter, from 0.4% to 1.5%.  The overall PCE index is up 123% from 1.7% to 3.8% with the Fed predicting 2.1% to 2.8% in it's forecast.  

Meanwhile, 429,000 Americans got pink slips last week, up 25,000 from the week before and 10% more than the 390,000 job losses expected.  Is this news so bad it's going to be good?  That's been the pattern lately when the worse the data sounds, the more likely it will be that Bernanke will keep the free money spigots flowing.  Currently, we have 7.26M less people working than we did in January of 2008 with 3.6M of them drawing continuing unemployment claims and the rest of them just screwed.  

Believe it or not, my principal concern for the markets remains the Dollar, which is not dead yet - despite all appearances to the contrary.  The Dollar is still the go-to currency in a global panic and ignoring Japan's ongoing nuclear catastrophe and the economic melt-down in Greece, where the government has to promise to return 148% to borrow money for 2 years - now we have UK Consumer Confidence falling to the lowest level since the March '09 crash.  

How many warning signs (the same ones we saw in 2008) can we ignore as we push the markets ever higher on a sea of weak Dollars?  I was talking to Ilene (our editor) last night about how things get ignored until the last minute and I came up with this example:

Let's say you are on an island with 10,000 people and 1M fish and all of the people need to eat 1 fish a week to live.  That means you have a 100 week supply of fish right? But what if 1% of the people (100) eat 50 fish each per week each (5,000) but they live at the top of the island, on the other side of the pile of fish and the other 9,900 people only read about them in the paper and can't even fathom their 50 fish per week lifestyles?

What happens after 6 months? Well the 9,900 people eat 257,400 fish and the 100 people eat 130,000 fish and there are still 612,600 fish left so the bottom 9,900 people go about their business and eat their 1 fish per week and the top 100 eat their 50 fish per week and everyone is happy.  This can go on for another 6 months and then you have 225,000 fish left.  At what point do the bottom 9,900 begin to be directly harmed by the actions of the top 100?  Only at the point when there are less than 14,900 fish left because, at that point, the "needs" of the top 100 force some of the bottom 100 to starve.   

That's what we're doing now.  The top 1% of this country are doing quite well with our inflation hedges and our derivatives trading and our commodity speculation and we are sucking all of the capital out of the system while the bottom 99% get less and less every week.  Where is the breaking point?  Certainly none of us want to take less but, at some point, the huddled masses will rise up - this was my prediction in "A Tale of Two Economies" and we are right on track for the next American revolution but it's a slow train so grab those fish while you can, my friends - you may need them to barter with down the road!  

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Comments

[GFORCE]

The technical levels of the DXY are now irrelevant. The U.S. dollar is now carry trade of choice for the trillion dollar speculative ramping.

If you want to see how this plays out, look up a weekly chart of any Yen cross circa 2004-2008.

[FeralSerf]

[FeralSerf]

Borrow dollars, buy gold and silver.  What could be more obvious or simple?

[SuperRay]

This guy is talking about the importance of hedges?  Read the title, dude, this is Zero Hedge.  Live your dream - go for what you believe. Like PM's... this diddling around, hedge this, hedge that, straddles, blah, blah, too much work to make ten cents...

[gwar5]

Thanks Ilene. Good stuff.

After all the Fed happy talk of GDP numbers in USD lately I'd been searching for the easy botton on notional GDP vs  GDP adjusted for the lower USD.

And there you had it! --- a 20% decrease in GDP adjusted for lower USD vs the small increase in publicly stated GDP, I was thinking it was about 15%.

Devastation. GDP is double digit negative in real terms and is a total wipeout. That's just great. I'm sure we'll pull out of this one no problem. Low king dollar will bring all the jobs back. /s

Thing is a strong dollar would be one of the best economic advantages for the USA. Being able to buy raw materials and energy resources at relatively cheap prices, with our high productivity, is one of the few ways we could compete against the cheap labor in other countries. But nooooo..... They're forcing China to take that one too. 

WASF -- we are so fucked.

[tiger7905]

Latest from Martin Armstrong on passing the torch to China, he notes zero interest rates will only ever lead to captial hoarding, fleeing, or speculating...

http://goldandsilverlinings.com/?p=843

[alien-IQ]

It's kind of amusing (in a tragic way) how so much attention or, more accurately, lip service is given to the notion that a lower USD will help US exports (as if we had anything other than debt, war and weapons to export) and no mention of how a weaker dollar will affect the price of our imports (otherwise known as everything we buy).

[Quinvarius]

People don't complain about speculators and bubbles in a real bubble.  Which is why the people sitting on paper money don't realize they are in one that is bursting never to return.

[Kina]

Gold going nowhere in AUD.

[sherryw]

yeah Kina, and shares no better.

[falak pema]

we are now in the situation where we cannot move forward nor move back...we are addicted to oil and there is no more oil increase and we must now stay put or invent something else. In the meantime our virtual growth built on paper profits will burn under the mid-day sun...Mad dogs and Englishmen...and their american sons...

[PulauHantu29]

Buy gold and oil....and....

Be Happy!!!

[disabledvet]

I never saw the Fed allowing us anything but equities from day one--but it didn't stop me from freaking out when the Republicans took the House in November.  I will let "the other guy" argue with the tape.

[Chuck Walla]

From the Fed Press Conference after-party.

http://www.flickr.com/photos/sweetdreams_n_flyingmachines/2514911776/

[Ancona]

I'm waiting for the dollar to fall below 69. At that point, silver will be at 65 on its way to 650.

Silver bitchez! It's what's for dinner!

[apberusdisvet]

But Goolsby stated that this administration had created 1.8 million jobs.  The only problem is that they are in the BRIC countries.

[freddie freeloader]

"Note that the Transports and the Russell are making a "death cross" - where the 200 dma falls below the 50 dma"

Really?

[RockyRacoon]

From Julian Phillips:

Dollar price of gold not a good indicator of where it really stands

The U.S. investor in particular generally looks at the gold price in U.S. dollars, but in reality should be looking at the price in Euros as the recent apparent price appreciation has been mostly due to dollar decline.

Julian Phillips
April 27, 2011
www.mineweb.com
BENONI

We are writing today from the euro gold price point of view to illustrate what's really happening to the gold price. The gold price continued to pull back as the euro price of gold stood at €1,030.41 ahead of the gold Fix. It has pulled back from €1,041 over the last couple of days and still is far away from its peak at €1,065.

However, across the Atlantic in the U.S., the dollar continues to fall against the euro and, ahead of the first London Fix, the dollar stood at $1.4631 against the Euro and continues to look anemic. Consequently, gold is higher in US dollars at $1,507.65 but lower in the euro, before the first London Fix.

The London Fix continues to dominate the gold price in both currencies and accurately reflects London and Asian demand. The London afternoon Fix continues to reflect both European and U.S. demand for physical gold and the main global open market supply of gold.

Prices outside the Fixes reflect the local conditions of each market where they are quoted. Physical supplies for those markets usually come either direct from individual suppliers or from London.

How can U.S. investors see the gold price clearly in global terms?

THE FALLING DOLLAR

We find that U.S. investors struggle with a global view of gold and silver markets. In the U.S. gold is seen as having a predominantly dollar price, whereas the euro price of gold more accurately describes demand and supply at this time. As a result, U.S. investors are excited by record U.S. dollar prices and fear they may fall back.

But U.S. dollar record prices are not due to record gold demand but to the falling dollar.

A record gold price in the euro was seen a while back at €1,065. Should the U.S. dollar fall to $1.50 against the euro we must see the dollar price of gold stand at $1,597.50 if gold were to merely equal record euro prices. If the dollar continues to fall, the gold price will move up through $1,600 and more, without moving up in the euro!

UNDERSTANDING WHY

Until U.S. investors adjust to these realities, we expect only the more globally focused U.S. investors to value gold as a protection against a falling dollar. The global viewpoint will look at the dollar as just another currency, albeit the world's main one. With its structural problems, it has virtually ceased to measure value. It is now both the tool, as well as the consequence, of the U.S. monetary authorities.

As a tool, there is no doubt that the U.S. stands to gain considerably in international trade if the dollar continues to fall. With the falling dollar, the price of U.S. goods in foreign currencies falls too. The Trade Balance of the U.S. has been a fact of life for more than a decade and is unlikely to return to a surplus, simply because U.S. manufacturing has been outsourced to places like China and other parts of Asia, by U.S. companies seeking lower labor costs and greater profits.

This remains a structurally unchangeable fact until U.S. wages, measured in foreign currencies such as the Yuan, are cheaper than foreign wage levels. No doubt then U.S. manufacturers will then want to relocate back home. By then, Asian manufacturing companies will be so entrenched that U.S. companies will find it difficult to compete with the people they taught. The dollar has to tumble considerably more for this to be even remotely attractive to U.S. manufacturers.

As a consequence of loose monetary policy out of consideration for the U.S. economy, a near complete disregard for the dollar's role internationally, the dollar has and will cheapen much more. That will be the case if other nations' monetary authorities permit it to [without trying to undermine their own exchange rates]. If they don't, currencies will cheapen together making precious metals still stronger.

By implication, a global ‘reserve currency' has to serve as a currency that is capable of defining the value of products and remaining stable enough for prices to provide sufficient profits for businesses to continue. An unstable declining currency clearly fails to do that. It will eat profits up [Often between 5 and 30% of price]. For instance, a price set when the dollar was at $1.25 to the euro may incorporate such margins. If it falls to $1.50 against a dollar-priced product, the entire margin disappears. Meanwhile, where an exporter prices in the dollar [which is usually the case] and buys forward exchange rate cover to protect his margins, his contract costs will rise to reflect the instability of the dollar and his costs creep higher and higher over time. This makes manufacturing an exchange rate gamble or extra cost to his business that raises prices. But he does have the option of not using the U.S. dollar in international trade. But this lowers the use of the dollar in international trade, eventually lowering the exchange rate of the dollar even more.

We believe that the current myopic view of the gold price in the U.S. dollar will continue for a while still, until there is a shock that will force a more global perspective. It may happen slowly or suddenly. The earlier investors arrive at this viewpoint, the greater the profits they will make out of the precious metals and the more effectively they will protect their existing wealth against a falling dollar.

[falak pema]

The Oil scene looks frozen supply side. This means that nobody wins except <russia and ME> until we have a new paradigm. This is a situation that only knows one issue in terms of historical perspective : war! Sad to say...

[Geoff-UK]

So you're saying Ann Margaret's NOT coming?

[Flakmeister]

Coming?? She ain't even breathing hard...

[becky quick and...]

she's coming, but it will be like that scene in apocalypse now where the show has to be cancelled halfway through the first act because the natives rush the stage.

[falak pema]

maybe Nat Wood is making a come back from way beyond.

[Flakmeister]

@Ilene.... no comment on oil supply-demand issues? I suggest that you refrain from posting anything on oil until you at least become aware of the Export Land Model...

[ilene]

Hi Flakmeister, I haven't had time to read your link (and the one to the model) yet.  I'm not an expert on oil, but if you have a question, I can ask Phil - I don't understand what you're looking for?

[Flakmeister]

You just claimed to "not be an expert on oil", and you have the termerity to contribute articles about the oil markets? Now that is chutzpah! Where one cannot speak one should be silent.

Are you aware that since 2005 the amount oil on the market is down 10%. If you take the IMF price inlasticity for oil, the price of Brent and the DXY in 2004 that you get current price of ~$120 for Brent...

Pass the link on to Phil.... maybe he will get it..

[hardcleareye]

FM, Didn't see your referenced link.  (If you posted it earlier and I missed it sorry.)

[Flakmeister]

Here it is:

http://flakmeister.blogspot.com/2011/03/drilling-down-in-oil-patch.html

I don't post much... been mulling a post about the best ways to invest in oil but the train seems to have left the station...

[JacktheTab]

@Flakmeister, would love to read that post.  Always follow your remarks avidly

[ilene]

Phil is the expert in oil futures trading, the person who was interviewed in the article. I am an editor at PSW and have never claimed to be an expert in oil.  But I will relay your question to Phil.

[Arkadaba]

I've linked to this before but am going to do so again:

http://www.youtube.com/watch?v=wYuLjGQQ-jg

In the next 50 years - local, local, local.

[mynhair]

An intriguing model.  How do we get all of DC on a ship again?

[Robslob]

not you becky...thought I was the first poster!

[Robslob]

Gold bitch

[becky quick and...]

if the usdx breaks 70 you won't have to worry about any of this anymore, everything will be on fire.

[SuperRay]

Beck quick is actually a 12 year old boy with a nice wig...

[Sudden Debt]

68 is the critical support.

[alien-IQ]

I'm not sure how you arrived at 68 being critical support when anything below 70.68 is completely uncharted territory?

I'm not knocking your statement, just curious about what the basis for 68 is...?

[SuperRay]

you guys are rearranging deck chairs.  the takeaway here is we are totally fucked.  Charts don't matter any more - they were useful during the age of actual capitalism, when free markets were relatively free.  Don't matter no more - more important in preparing for the total apocalypse that is about to engulf us like a tsunami..

[ebworthen]

There 'ya go...

[THE DORK OF CORK]

What is the basis of this critical support ? is it 70 , 68 , 65 or........... 50

Maybe the world cannot afford to export to the US anymore - maybe a truely gutted dollar is the basis of American reindustrialisation.

Who the F£$k really knows.