For the BIS of all institutions to mention the word “depression,”
in a forecast of dire repercussions, is, to the best of our
knowledge, unprecedented, extraordinary, and of very great
significance.
Of course, Wall Street and most of the mainline media have taken
the BIS report to read that our Fed may be so worried that it will
not just hold its rate tomorrow, but might well lower it.
We caution jumping to such conclusions.
In its thinly veiled warning of the risks of depression, the BIS
makes some additional and interesting cautionary observations, some
of which our readers will recognize as topics we have often raised.
The BIS points to instability in China’s economy as a possible
spark to a global downturn.
[Editor's Note: Forget
China. This Is Asia's Next Tiger.]
What is most interesting however, are the most unusual critical
references to America.
Criticism was aimed at America’s huge trade and deficit
imbalances, with external liabilities growing to over $4 trillion in
just five years, between 2001 and 2005.
The BIS found the bubble created by private equity deals and
hedge fund activity to be “worrisome” adding that “The levels of
leverage employed in private equity transactions have raised
questions about their longer-term sustainability.”
Then, rather ominously, the BIS goes on, “Sooner or later the
credit cycle will turn and default rates will begin to rise.”
These comments have led most observers to conclude that they
represent oblique pressure on our Fed either to hold or even to
lower its rate tomorrow.
We, however, think differently.
We note that the majority of central bank members of the BIS are,
unlike our Fed, central bankers with only a single mandate, to
control inflation, placed upon them by their politicians.
These prudent bankers, such as Jean-Claude Trichet, the powerful,
guardian of the euro, have seen inflation threatening. As we have
reported, they have been raising their domestic rates for some time.
Meanwhile, they have watched the U.S. dollar plunge.
[Editor's Note: The
Three Best Income Stocks in the World.]
Not only has the fall in the U.S. dollar put downward pressure on
exports from their own countries, but it has threatened the role of
the U.S. dollar as the world’s main reserve currency.
Most interestingly, in this respect, the BIS took a side swipe at
the U.S. dollar, saying, “The dollar clearly remains vulnerable to a
sudden loss of private sector confidence.”
We ask, does the BIS mean the loss of confidence, of which we
have constantly warned, that could spark a financial panic and
trigger a worldwide depression?
Unlike almost all media and Wall Street, we think this can well
be read as a most unusual and serious “warning” to the Fed. “Get
your house in order before you rock the boat still further and tip
us all into the icy water of a depression.”
We see the BIS member bankers possibly reasoning as follows: “We
understand that America now faces the serious risk of a faltering
economy (with estimated corporate earnings now turning flat after
double digit growth throughout 2006) and looming signs of a housing
bust; all of which would point to a lowering of the Fed rate.”
“But,” we think the majority of important BIS member banks may
say, “Looking at the Pre-Clinton calculation of your CPI, we see
your inflation rate at some 6 percent rather than the 2.3 percent
that your Post-Clinton CPI calculations indicates. By holding your
Fed rate at a falsely low rate, you are firing highly-leveraged
speculation with falsely cheap credit, to say nothing of your fast
expanding money supply!
[Editor's Note: Inflation
Lies Exposed.]
"This is not missed by international currency traders who, in
turn, are putting such severe downward pressure on your dollar that
you are effectively doing what you accuse the Chinese of doing,
subsidizing your exports. But, even more seriously you are eroding
confidence in your dollar as a reserve currency.
"You now risk plunging the entire world into a financial panic
and a resulting depression, from which we all would suffer severely.
The time for “dilly-dallying” by merely holding your Fed rate at a
falsely low level for purely domestic reasons is over. We think it
is time to face international realism and to raise your Fed rate to
a level that will reflect the real world in which we all live and so
preclude a financial disaster of massive proportions.”
If we are right in our view of the “hidden meaning” (central
bankers’ coded signal), in the BIS report, then all bets are off for
tomorrow’s FOMC rate setting.
We believe that, all things being equal, the majority of FOMC
members want to leave their rate on hold, even lessening the bias
expressed in their statement.
However, with the evidence mounting of the housing bust we have
long forecast, resulting in a massive unwinding of “stealth risk”;
of a leveling-off in estimated corporate earnings, and of a looming
domestic recession, the weaker FOMC members may urge a cut in the
Fed rate.
[Editor's Note: Stagflation
Ahead: Protect Your Wealth from Inflation and
Recession.]
However, we believe that Fed Chairman is increasingly worried
about U.S. inflation. If he reads the BIS statement as we think it
could be read and he receives forceful “informal” advice from his
fellow BIS member central bankers, he may even urge his FOMC to
consider a toughening of the wording in the FOMC statement or even a
hike in rates.
A hike in the Fed rate would come as a great shock. But, we
believe that we, in America, can not go on in the profligate manner
in which our government has done, without facing some shocks,
possibly becoming increasingly severe, the longer decision is
postponed.
In summary therefore, we feel that the Fed is in an extremely
difficult position.
For the first time in over a year, we believe the way is now open
for all three options: a cut, a hold, and even a hike in the Fed
rate.
We are truly in interesting times.
Editor's
Notes:
Back to newsletter list
