Something BIG is about to happen

Greenspan’s comments on Friday will probably be a watershed event which will probably rank higher in historical importance than his "irrational exuberance" comment. The following statement from his speech is very revealing:

"rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged this position by now is obviously desirous of losing money."

He also said:

"Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point …But when, through what channels, and from what level of the dollar? Regrettably, no answer to those questions is convincing."

He is trying to pretend that what is coming has been envisaged by all the smart people…for "people who are desirous of losing money" read "ignorant and stupid". But wait a minute! Did anyone notice the US Treasury re-instate the 30 year bond? No, of course you didn’t because it wasn’t re-instated. If the much higher interest rates were so clearly signaled then why is the US Government borrowing on a short term basis and not locking in low rates for 30 years?…especially when he cites the massive US debt burden as the reason that the system will come unglued in the first place.
In March, Fed Chairman Alan Greenspan said that ``the odds are favorable that current account imbalances will be defused with little disruption''. That can hardly be claimed as a "hey, we told you so. Get hedged against sudden adjustments or else!".

But on October 7 we had the following not widely reported comments from Robert McTeer

Oct. 7 (Bloomberg) -- The record U.S. current account deficit will lead to an inevitable decline in the value of the dollar, a drop that might be rapid and provoke a financial crisis, Dallas Federal Reserve Bank President Robert McTeer said.

In a New York speech, McTeer said a precipitous drop in the U.S. currency would lead to a big jump in interest rates. He offered no easy policy solution, saying he `` feels foolish warning about it'' because ``nothing bad has happened so far.''

The current account deficit, which reached $166.2 billion in the second quarter, ``is going to cause problems, but we just don't know when,'' McTeer said at a New York event hosted by Market News International.

At some point, foreigners will slow their investments in the U.S., meaning capital ``flows will turn against us, and there will be crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar that will be very disruptive,'' he said. ``But I don't know what to do about it.''
[Emphasis added]

So McTeer knew that the US economy is at 30,000 feet and the plane just ran out of fuel and he doesn’t know what to do. Greenspan, who could see no problems in March, now says the smart passengers should have brought parachutes with them!

Greenspan said on Friday that forecasting exchange rates "has a success rate no better than that of forecasting the outcome of a coin toss." Greenspan is now on the record as not being able to recognize asset bubbles and not being able to forecast the direction of exchange rates. By his own admission he is clueless. Perhaps he should subscribe to LeMetropoleCafe because we have a 100% success rate on both counts!

It looks to me that something big has happened behind the scenes. Has China or Japan privately said they will not support the dollar anymore? We already know that Russia has stopped weakening the Ruble. Whatever it is, it is clearly a very big deal and unpreventable.

Greenspan is rarely as lucid as in this speech. It looks as if they have come to the end of the road. Following the Greenspan "put" has been very profitable for those who have blindly accepted the infallible "wisdom" of the Wizard of OZ. The man behind the curtain is now clearly visible. As the words of the "Maestro" are contemplated by his flock this weekend it must be surely comforting for them to know that EVERY short future gold position held by anyone is underwater and that EVERY long future gold position is in the money. The Gold Cartel and Gold Cartel roadies need to workout if Greenspan is just kidding or if they have just been double-crossed. (I’ll give them a hint: Greenspan is not kidding).

The next few days or weeks will be very revealing.

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November 2004

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