"Right now you can't find one recession in the entire world economy. "If you look around in terms of financial crises, we don't see a major financial crisis anywhere."
That is a quote from US Treasury Under Secretary John Taylor taken from remarks given at a conference at Stanford University's Institute for Economic Policy Research
One would have thought that in a world which, according to Mr Taylor, exhibits not one recession, it would be a bit difficult to spot a financial crisis. It is interesting that in such an economically upbeat world, Mr Taylor was evidently looking for one. Perhaps it has something to do with the fact that he "pinch hit" for Treasury Secretary Snow during the recent G-7 summit in London. Mr Snow couldn't make the summit, he had a cold.
It is absolutely remarkable how quickly, and on how little substance, perceptions can be made to change in the financial and investment world. Here is a selection of global financial headlines that we published back at the end of November 2004 in The Privateer (Issue #515)
As we pointed out at the time, these headlines were not gleaned from crackpot armageddon advocates, wild eyed currency cranks, or rampant "gold bugs". They were taken from impeccable establishment media sources, the likes of CBS, Reuters, The London Financial Times, The Guardian, etc. etc..
That was only a little over two months ago. Then, the US Dollar was falling fast. Now, it is not falling fast, or rising fast. In fact, it isn't doing much of anything. Then, the Gold price was breaking above the $US 450 level. Now, Gold has just regained the $US 420 level after having traded as low as $US 410 on two separate days this week.
US debt - government, foreign, commercial, consumer, mortgage, trade, and current account - has not declined since November, it has grown. The situation in Iraq has not "improved" since November, it has worsened. The fiscal and financial prospect facing the US has not been "shored up" since then, it has simply been ignored.
In his State of the Union Address, Mr Bush promised to "fix" (and we use the term advisedly) Social Security and to halve the US federal budget deficit - by 2009. As a first step on the path to halving the deficit, Mr Bush has just presented a 2006 budget to the Congress which increases federal spending from the latest estimate of 2005 spending which is $US 2.4 TRILLION to $US 2.6 TRILLION next year. That'll fix the deficit, for sure. In November, Alan Greenspan was telling us that there would inevitably come a time when the rest of the world was simply gorged on Treasury debt and couldn't buy any more. Now, Mr Greenspan is saying that the US trade deficit, which is being financed (along with some of the government deficit) by foreign buying of Treasury debt, is going to stabilise, and then start to fall, soon.
A little lift in the US Dollar against the Euro and the Yen. A not so little "correction" for Gold against the US Dollar - and everything else. A little bounce on US stock markets. Another little 0.25% rise in the Fed Funds rate. A little request to the Europeans from the IMF that they kindly refrain from raising their interest rates. A little suggestion from the US Congress to the Chinese that they float their currency to avoid 27.5% tariffs being slapped on all their exports of manufactured goods to the US. A little communique from the G-7 summit which was almost word for word the same as the last two or three of them. Mix them all together, throw in various other ingredients, and you have a situation in which the financial world goes from impending destruction to sweetness and light in about ten weeks.
Has anything REAL been done to solve ANY of the problems which resulted in those dire November 2004 headlines quoted above? Nope. Are there any discernible and credible plans anywhere one looks that might even begin to effectively address the problems? Nope. Is the opposite the case? Are the plans, especially those outlined by the Bush Administration, going to make all the problems worse, much worse? Yep.
So we are now in one of those episodes so beloved of historians and other students of the follies of (most of) mankind. There are so many to choose from. "Better hurry up and enlist or the war will be over before you can get in it!". That was echoing through every capital in Europe in August 1914. "You've never had it so good!". That was echoing throughout the length and breadth of the US in September 1929. "In ten years, nobody will be able to recognize Berlin". That was stated, to a rapturous multitude, by Adolf Hitler in 1935 - he was right, too. "Mission Accomplished". That was Mr Bush's famous "aircraft carrier speech" of May 2004.
Now, Mr Taylor, Undersecretary of the US Treasury, "...can't find one recession in the entire world economy."
We have said it before on these pages and in The Privateer, but it bears repeating. The one single most infallible indicator of a coming recession is an inverted yield curve - short-term yields above long-term yields - on government debt paper. The four major English-speaking nations in the world are the United States, the United Kingdom, Canada, and Australia. The UK (Britain) and Australia have inverted yields curves right now. In both nations, two-year government debt paper yields MORE than paper of ten-year maturity. The situation in the US is shown (for Privateer subscribers) on this page. Please note the precipitous and accelerating dive of the spread betweeen two and ten-year yields over the past eighteen months.
The fourth English-speaking nation, Canada, is the best off it this regard. The spread between Canadian two and ten-year yields is 1.25% (the US spread is 0.78%). Even in Canada's case, a nation with a budget surplus AND a trade surplus in sharp contrast to the other three nations mentioned above, the spread between two and ten-year yields has plummeted recently.
As you can see on the chart at the beginning of this report, the $US Gold price briefly dropped below its 200-day moving average earlier this week before recovering by $US 8.10 on February 10 - 11 to close back above the $US 420 level. The $US index remains about 4 points - or about 5.0% - higher than the multi-year lows it set at the beginning and the end of December.
Two months on, and the dire predictions of late November 2004 have not come to pass - YET. The REAL economic and financial situation remains just as it was then. The plans to "fix" the situation guarantee that this state of affairs won't last much longer. They might still get a little "better", at least as "measured" by government statistics, for a while. But when the latest bloom wears off the financial rose, they are guaranteed to get a LOT worse.
Meanwhile, Gold (and Silver!) has abruptly changed direction over the past 48 hours. We don't expect a bound right back to the highs of December last year. What we are now waiting to see is whether $US Gold can consolidate back at $US 420 or higher in coming days/weeks. If it can, then the necessary base will be laid for another assault at late 2004 highs. Stay tuned.