Our U.S. Economy - A Commentary in the making

By Benjamin Train
May 12, 2007

Several well-paid talking heads have taken aim at the U.S. economy and the forces of global influences on our economic policies. Many more have opinions that counter common sense, just to make you feel good. Below I have posted simple, easy to understand facts that may help you be better prepared for what is about to come, and further commentary by Mr. Norcini.

1. The U.S. trade deficit widened more than forecast in March as higher crude oil shipments drove the biggest increase in imports in more than four years. The gap in goods and services trade widened 10.4 percent to $63.9 billion from $57.9 billion in February, the Commerce Department reported today in Washington. Imports and exports were the second highest on record.

2. The Bank of England increased its key interest rate to 5.5% today and the European Central Bank signaled it will follow next month as policy makers seek to contain inflation.

"The risks to the outlook for inflation in the medium term remain tilted to the upside,'' the U.K. central bank said in London. " Strong vigilance is of the essence to ensure that risks to price stability in the medium term do not materialize,'' ECB President Jean-Claude Trichet told reporters at a press conference in Dublin today.

Foreign interest rates are rising despite the fact the British Pound and Euro have already made strong gains against the U.S. dollar, causing one to wonder whether U.S. economic policy has a serious disconnect with the rest of the world.

3. One day after the Federal Reserve failed to recognize the weakness in April payrolls and March consumer expenditures, U.S. retailers posted their biggest sales decline on record in April (negative 2.3%) as reported by the International Council of Shopping Centers.

The report prompts worries that Friday's release of April retail sales will come in negative, in which case will begin to weigh on the US dollar on resurfacing expectations of a Fed easing.

4. Thursday, May 10, 2007 Morgan Stanley put out a number of comprehensive analyses of the demand for commodities and the outlook for some mining companies. In short, they remain bullish and the main reason is demand by Chinese and other Asians (especially Indians) as their wealth continues to grow. They raised their price objective for gold and the platinum group metals for 2007 and 2008 as well.


Are Precious Metals a headge against inflation?
If so, what is driving the price of Gold Down this Week?
Commentary from Dan Norcini Thursday, May 10, 2007:

Gold was obliterated today as long liquidation was forced by predatory shorts that began in yesterday's session.

There is really not a lot to say about this other than the fact that ECB gold sales prevented gold from breaking through first, the $700 barrier, and then, the $690 barrier.

Seeing that overhead gorilla and bullion bank price capping, longs have thrown in the towel out of disgust while brand new fresh shorts are coming in as well leaving an absence of buying.
Such is the nature of this gold market.

It can never set back slowly and gradually but instead goes into free fall mode as the black boxes all get out at the same time and trample each other in the process.

The good thing about that is they finish up the liquidation process very quickly and get it over with. The physical market buyers then show up and bid it back up as they see value and the funds then come pouring back into all over again and we repeat the process for the umpteenth time.

There are two things you can say with certainty – the sun rises in the East and gold will get bashed periodically, scare the dickens out of gold longs and then climb higher on its next leg back up again.

Another thing is that these gold bashings tend to occur very close to rollover time in the lead month contract. That means a large number of speculative long index fund positions MUST be rolled into the next month, in this case the August.

It has been my observation that these predatory gold bear raids are timed to coincide with the rollover period. Again, there is nothing particularly skillful about the trading tactics of the perma gold shorts – they telegraph their intentions so clearly that anyone can see what they are up to.

Skillful traders manage to conceal the brunt of their buying and selling. These guys are big gorillas. The problem is not the skill of the gold perma shorts – it is the lack of skill among the hedge funds that play gold. They simply have not learned how to play the gold game and their lack of discretionary trading allows them to be quite easily preyed upon.

By the way, one of the culprits for the gold sales coming out of the ECB has been largely the Bank of Spain. They announced that they sold 40 tons in March.

Euro gold was set at 498.667 for the London PM Fix. It dipped under the psychologically significant 500 euro level for the first time this week.

So much for all the ra-ra from the talking heads about the improving US trade deficit picture. It shot up by an astounding $6 billion from February coming in way above analysts' projections at $63.9 billion. February was revised to $57.9 billion.

The dollar ignored the data as it always seems to do when this data is released any more choosing instead to focus on the "inflation fighting Fed". Remember, these are the same guys who continue to flood the system with massive amounts of liquidity judging from the cleverly reconstructed substitutes for M3 out there.

They are talking out of both sides of their mouth or better said, what they are taking back with their mouths, they are giving away with both hands.

Another good idea for a cartoon about these guys would be a picture of Chairman Bernanke dressed up in buckskins wearing a coonskin hat looking like Daniel Boone and holding a nice Kentucky long rifle.

He has his foot on the dead carcass of a `possum with the word, "inflation", scribbled on it. As he stands there proudly basking in his triumph, his powder horn is leaking gunpowder causing a large pile of the stuff to accumulate behind him. Another fellow has crouched down next to the pile with a flint and is making sparks – he is named "Speculator and Stock Market Bull".

As a general note - , the USDX was trading between 85.00 – 83.50 for the month of February – the month that the trade data released today was detailing.

It has put in a near term bottom above major support which is not too surprising given the interest that all of the major Central Banks of the world have in preventing a dollar collapse right now. That serves no one's interest at this point in time.

Incidentally, anyone who does not believe that the major Central Banks of the world do not communicate with each other about forex levels needs to be in a different profession.

Dollar bears have covered and are in the process of further covering shorts which should provide a bit more of a lift to the dollar unless we get some data release which shows an abrupt slowdown in the US economy.

Euroland rates are going to go up next month but that has been factored into the price of the euro already so we will need to see something else to push the dollar down against the euro for now. It will probably have to come in the form of a further narrowing of the interest rate yield between 10 year German paper and 10 year US paper.

The retail sector reported disappointing April sales. That got the attention of some who are worried that high gasoline prices are cutting into consumer spending. As I write this commentary the stock indices are all sharply lower for the day.