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Living in Denial All over the Place

Ashraf Laidi, chief currency analyst for MG Financial Group, said the currency traders were more focused on the minutes of the March meeting of the Federal Reserve, due to be released at 2 p.m. ET Tuesday, with the expectation that the Fed will signal it could become more aggressive raising interest rates at upcoming meetings.

"This does not mean that currency markets have completely eliminated all concerns about the trade deficit when assessing the dollar," said Laidi in a note to clients. Instead, he said the traders will support the dollar as long as they believe the Fed will offer higher interest rates than found from central banks in Europe, Japan or Canada.

Jay Bryson, global economist with Wachovia Securities, said the fact that the dollar did not fall Tuesday on news of the larger than expected trade deficit is one sign that the country can continue to live with a trade gap above $60 billion a month for the immediate future.

He said it would take some kind of shock to the economy, such as another terrorist attack, to scare away the foreign investment that has supported the dollar.

"Assuming the spark does not happen, it can go on much longer," said Bryson. "Nobody wants it to stop. We don't want to contemplate sharply higher rates and prices. The Japanese and Chinese don't want to contemplate it either."

Now, either Mr. Bryson was former fortune-teller and mystic Seer of the future, now turned global economist, or he is walking out on long limb, more likely a willow than an oak. Not only did the US monthly trade gap "come in a little higher" than expected folks, it came in the highest of all time. Ever. And YAWN go the markets. Nice to know Mr. Bryson can forecast the "immediate future" ...whatever that is.

The US Dollar rose most of the day and then slightly rolled over to close out the day. Gold and silver got whacked at the 8am EST bell and spent the day trying to tread water and stay in place while taking on some losses. The HUI looks like a sick dog in need of some tender loving care. I called a colleague / analyst friend of mine and wanted to know his take on the situation as to why gold was not showing a bit more "spunkiness". To be honest, I don't have an immediate answer for that just like I don't immediately understand how the USD on such poor trade data news did not do poorer than it did. We just have to accept it right now for what it is.

Even as Mr. Bryson and Co. are busy analysing the immediate future, the immediate past tells us that the broad money supply figure M3 has now shot up a mere $40 billion as of 22 March. I haven't looked at the M3 chart lately but no doubt it shows an upward 60 degree triangle formation, or at least something very similar.

So even as the US economy is dependent on the $2 billion per day of foreign investment, and the M3 continues to grow, the real story must then be : Who will flinch first - The foreign investors or the Fed? In fact, I believe the foreigners and the Fed are in this together until the very end. The Fed needs the foreign (mostly Asian) Central Banks to soak up the US Treasuries. The Asians only soak up the Treasuries to keep their currency from rising against the USD in order to facilitate exports and hence keep their own factories rolling along. Meanwhile the foreigners build up their manufacturing capacities while in parallel the service sector economy is at wage war in the US with outsourcing. From an outsider's perspective it would appear the US is being economically attacked on both the manufacturing and service sector fronts from the Asians - meanwhile the US internal house has not even begun to address the military costs, the Medicare costs and the Soc. Sec. costs. To top that off, the final front, we still here talk of tax cuts although admittedly this has now become less so after the election, of course.

So is the US economy and consumer living in denial? It would certainly appear so. Even military strategists will tell you that you cannot win a war on 3 fronts. The US economy is now facing at least a 3 front war. The only question that remains is will the Fed fully capitulate? Hell no it won't, at least not if it gets its own way - it will continue to throw sufficient liquidity firepower at the problem. But we all know the results of carpet bombing - a decimated infrastructure but the enemy is still out there and likely hiding. And that is why the Fed cannot allow any of the fronts to crumble because they are all intricately intertwined with one another. Unfortunately for the Fed, the enemy is the one who controls the battle. Hence the Fed is constantly in a re-active defence as opposed to a pro-active offense. It has nothing to counter with except liquidity.

- - - - - - - - - -

Here is a true story. This story is happening 100 hundred times each day although you likely never hear about it. I work in the telecommunications industry and I hear first-hand accounts of such things. Siemens, the German manufacturing giant, wanted to set up a manufacturing facility in China to benefit from the cheap labour. A condition of the local Chinese council was of course that a number of high ranking state officials would become board members of the joint venture. Siemens acquiesced.

When proposing the deal, it was also negotiated which units would be sold and built. Siemens wanted to sell them initially the most expensive units and hence obtain a higher profit margin while securing a future manufacturing base. The Chinese absolutely refused and insisted on the cheapest units for delivery and eventual production plans. Again, rubbing their greedy hands together and wanting desperately to "join the Chinese manufacturing band wagon" Siemens acquiesced and finally agreed to the second condition in order to save the deal. So, Siemens would secure a large order and build the units in China. Perfect.

After setting up the facility, the Chinese ordered the agreed number of cheap units and then began to order the upgrade units. Important to remember is that such technical units I am speaking of - communications equipment - takes thousands of man years to design, develop and bring into a production. Those man-years come from highly trained Western and expensive engineers like you or I. It is the crème of technical achievement in some cases, both from hardware and software perspectives.

Over time, the Chinese were able to completely COPY the entire blueprint for the ENTIRE system including the add on technical upgrades. Thus, within a few years, thousands of man-years of Western ingenuity and know-how were lost to the Chinese in a matter of years. Finally, the local Chinese council kicked Siemens out of the province on a pretext and hence they lost not only a large contract but now the Chinese produce exactly the same high-tech product at a fraction of the cost. In a competitive world market, Siemens lost much more than a contract, they lost highly valuable intellectual property.

Think about this scenario. It is happening in China, India, everywhere. And it is being propagated within Western management circles. So, who is the real enemy and who is living in denial?

More on this in upcoming issues - if you would like to know more, please sign up for a free subscription to Der Invest Informant here . As well, please visit the site daily and read my Latest Letter.

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