Central Banks Blowing Bubbles

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch
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Central Bankers Blowing Bubbles in Global Markets

Gary Dorsch
SirChartsAlot
The Swiss franc is counted among the top-5 reserve currencies in the world, alongside the
US-dollar, the Euro, the British pound, and the Japanese yen. The Swiss franc holds this top
distinction, even though the Swiss economy does not find its place among the top five
economies of the world. Instead, its annual output of $488-billion of goods and services ranks
as the worlds 22nd largest.
When the Swiss franc nearly reached parity with the US-dollar this week, it raised many
eyebrows, since its a remarkable achievement, considering the fact that Switzerlands
economy is only 1/25th the size of the US-economy. However, rather than speaking volumes
about the intrinsic worth of the Swiss franc, its climb towards $1.00 is signaling that the world
can no longer rely, as it has done since the end of the gold standard, on a currency issued by
a single country.
At present, roughly 62% of the $7.3-trillion of currency reserves held by central banks and
sovereign wealth funds are held in US-dollars and 25% in Euros. But World Bank chief Robert
Zoellick warned in late September, The United States would be mistaken to take for granted
the dollars place as the worlds predominant reserve currency. Looking forward there will be
increasingly other options to the dollar. To that end, the SDR basket of currencies might be
modified to include the Chinese yuan, the Indian rupee, and Brazilian real as well.
The Swissies surge from around 94-US-cents in late August, towards parity with the USdollar in October, began shortly after US President Barack Obama nominated Ben Bubbles
Bernanke to a second term as head of the Federal Reserve. Soon after, a British newspaper
revealed that finance ministers and central bankers from the Arab oil kingdoms, China,
Russia, Japan, and France had held a series of secret meetings to plan an end to the use of
the US-dollar for oil trading by 2018.
Under the scheme, the US-dollar would be replaced with a basket of currencies, including the
Euro, the Japanese yen, the Chinese yuan, and Gold. If correct, such a move would be an
economic bombshell. An end to the US-dollar as a medium of exchange for trading in a vital
commodity such as crude oil would deal a powerful blow to the greenbacks pivotal role as the
worlds reserve currency.
http://www.24hgold.com/english/printarticle.aspx?pagedest=503348&langue=en&vie... 2009/11/20
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The Swiss National Bank (SNB) usually keeps a tight rein on the Swiss M3 money supply,
limiting its growth rate to a 3% annual clip, thus bolstering the francs appeal to offshore
investors. Because of Switzerlands lack of natural resources, its created an economy that is
heavily dependent on a steady tide of foreign capital inflows, for its banking services, wealth
management, and global trade.
But the SNB was suddenly forced to loosen its tight-rein on M3, when the Fed began slashing
the fed funds rate towards zero-percent and shifted to nuclear Quantitative Easing (QE. The
SNB responded by slashing the 3-month Libor target rate by 250-basis points to 0.25%, and
said it would engage in its own variant offshoot of QE - printing unlimited amounts of Swiss
francs, if necessary, to weaken its currency against the Euro, and to widen the profit margins
of its exporters.
This year, the SNB has ratcheted-up the growth rate of the M3 money supply to an 8%
annualized clip, weakening the franc against the Euro, and slowing the francs ascent against
the US-dollar. However, these radical moves by the SNB, pale in comparison to the Feds
onslaught, which is flooding the world with trillions of cheap dollars, and pegging the fed
funds rate below the SNBs 0.25% Libor target.
Whereas interest rate differentials often influence foreign exchange rates, in todays
hallucinogenic world of zero-percent interest rates and nuclear QE, - its the degree of risk
appetite in global stock markets, thats become the key factor moving the Aussie, Loonie, the
Euro, and the Swiss franc. And every piece of paper that can be electronically printed by
central bankers is losing ground to the king of currencies Gold, now hovering above
$1,100 /oz.
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In earlier decades, the Swiss franc displayed an 80% correlation with gold, because the Swiss
constitution called for the franc to be backed by 40% with gold reserves. This link was broken
however, when a panel of government experts delivered a report in October 1997 finding that
1,300-tons of gold were no longer necessary for monetary purposes and could therefore be
withdrawn from the Swiss National Banks (SNB) balance sheet and used for other purposes.
Over a five-year period ending in March 2005, the SNB sold nearly 1,300-tons of its gold at
an average selling price of $351.40 /oz, and raked in Sfr 21.1-billion. Thus, these
controversial sales turned the Swiss franc into a relic of the gold standard. In June 2007,
the SNB shocked the markets again, by saying it would sell another tranche of 250-tons of
gold thru September 2009, and use the proceeds to increase its foreign exchange reserves.
The SNBs decision to dump more than half of its gold holdings was in retrospect, one of the
greatest blunders in financial market history. It probably ranks alongside the British
Treasurys determination to sell 400-tons of Englands gold in a series of 17-auctions between
1999 and 2002, when the price was at a 20-year low. More than half of Englands gold
reserves were sold at an average price of $275 /ounce, - a blunder costing the BoE about 7billion pounds at todays prices.
Despite the SNBs massive sales of gold, the yellow metal continued to climb on an upward
trajectory, hitting 1,150-francs /oz, an all-time high. Golds value in relation to the Swiss
franc has more than doubled since March 2005, when the SNB completed its first round of
gold sales. The SNBs vow to print unlimited amounts of francs in January, and threats to buy
other currencies at a fixed rate, helped fuel golds rally from 800-francs /oz to as high as
1,150-francs today.
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SNB chief Jean Pierre Roth, a 30-year veteran of the bank, announced his intention to retire
in December. Sometimes, central bankers will issue a mea-culpa, or a confession about their
inner thoughts, before leaving the world stage. Its a break from tradition for central bankers
to speak candidly about key issues, after theyve operated behind a veil of smoke and
mirrors, throughout their careers.
When asked on Nov 12th, if he believed the G-20 central banks would be inclined to lift their
interest rates to calm stock market exuberance, and pre-empt the emergence of dangerous
bubbles, Roth told the Swiss newspaper Le Temps, If the bourse is euphoric, do we have to
raise interest rates? I do not believe that, right now there is, within the G-20 central banking
circles, the belief that interest rates should be an instrument to use to limit euphoria, he
said.
With Swiss consumer prices falling at the fastest rate in 50-years in July, the SNB issued a
stark reminder that its determined to fight deflation risks by printing Swiss francs. In the
process, it pumped-up the Swiss Market Index (SMI) to the 6,400-level, - creating the illusion
of an economic recovery. However, when measured versus gold, the SMI has actually
tumbled by 11% since its peak on August 20th. In hard money terms, the SMI is trading at
5.5 ozs of gold, the level which prevailed in mid-July, when the SMI was last seen in the
vicinity of the 5,600-area.
Plunge Protection Team Engineers Global Recovery
In the United States, the infamous Plunge Protection Team (PPT), has been busy at work,
engineering the most remarkable recovery in the Dow Jones Industrials, since the 1930s. The
Dow Industrials is up 60% from its 12-year low of 6,500, and is perched near the 10,400level. The euphoria and greed that dominates stock market psychology today, is completely
reversed from the fear and panic meltdowns that prevailed in the aftermath of the default of
Lehman Brothers, a year ago.
The central mechanism behind the PPTs clandestine scheme is a gradual devaluation of the
US-dollar through the Fed, which has carried out the electronic equivalent of printing $1.75trillion through the purchases of Treasury notes and mortgage backed bonds, and flooding the
global money markets with ultra-cheap credit. The tidal wave of liquidity has enabled Wall
Streets Oligarchic banks to reap bumper profits in stocks and bonds, and awarding their
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traders with record bonuses, while making US exports cheaper and foreign imports more
expensive.
The historic rally in global markets is part of a trend that has emerged since hitting bottom in
late March global stock markets generally move in the opposite direction of the US-dollar.
Also in keeping with the dollars 16% slide since late March, crude oil, base metals, gold, and
grains have also surged sharply higher. The connection between soaring commodity and stock
markets and a falling dollar points to the speculative nature of the carry trade. Yet carry
traders should be careful about what they wish for, - if the US-dollars gradual slide suddenly
lurches into a free-fall.
The US dollar has supplanted the Japanese yen as the top funding currency in highly
leveraged carry trades. Speculators are borrowing US-dollars at near zero-percent, betting
that the greenback will decline further, and investing the funds in volatile stocks and
commodities around the world. Over the past six-months, the US-dollar is off 20% against the
Canadian dollar, down 16% against the Euro, down 11.4% against the Japanese yen, and is
36% lower against the Brazilian real.
Nuclear QE and the US-dollars devaluation have already led to the rapid unwinding of the
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deflationary forces in the global economy that threatened a second Great Depression. The
Dow Jones Commodity Index is now 10% higher than a year ago, portending an outbreak of
inflation in 2010. Like its Swiss counterpart, the rally in the Dow Jones Industrials is also a
monetary illusion. When measured in gold terms, the Dow is 11% lower below its peak level
on August 24th, trading at 9.15 ounces of gold, - reflecting the PPTs monetization of the stock
market.
With the gold market surging above $1,100 /oz, its comforting for gold bugs to know, that
Fed chief Ben Bubbles Bernanke views the surge in commodity markets as a signal of a
revival in global economic activity, especially in resource-intensive emerging market
economies, rather than the early warning signs of accelerating inflation next year. Instead,
the Fed chief argues that inflation will remain subdued for some time and that gives the Fed
leeway to hold rates at record-low levels for an extended period, he said on Nov 16th.
Jawboning is only weapon in the Feds arsenal right now that can be used to defend the
despised US-dollar, without actually lifting interest rates. Its a delicate balancing act thats
likely to go down in flames before a sophisticated audience. We are attentive to the
implications of changes in the value of the dollar, and the Fed will help ensure that the dollar
is strong and a source of global financial stability, Bernanke declared. Yet traders are
skeptical, given Helicopter Bens reputation.
By pegging interest rates at zero-percent, the Fed is inflating speculative bubbles worldwide.
Right now, Gold has become the most coveted sanctuary from the G-20s money printing
orgy. Even with gold zooming above $1,100 /oz, Bernanke said on Nov 16th, Its
extraordinarily difficult to tell if a bubble is forming. Its not obvious to me in any case. His
right-hand man, Fed governor Donald Kohn, went one step further, revealing for the first
time, that the Feds ultra-easy money policy is in fact, meant to encourage traders to shift
money into risky assets, and argued that hiking interest rates isnt the appropriate tool for
deflating asset bubbles.
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Beijing fuels Gold, Commodity Rally,

In unusually blunt criticism of the Feds bubble blowing policy, on Nov 15th, Chinese banking
regulator Liu Mingkang said the Feds pledge to hold down borrowing costs for an extended
period of time is creating a new systemic risk for the world economy. This situation has
already encouraged a huge dollar carry trade and has a massive impact on global asset
prices. It is boosting speculative investment in stock and property markets and will pose new,
insurmountable risks to the global recovery and, particularly, to the recovery in emerging
markets, he warned.
Fan Gang, a top member of the Peoples Bank of Chinas (PBoC) monetary policy committee,
said on Nov 18th, The US needs to address how to raise interest rates to curb excess global
liquidity and rein in volatility in the dollar. Speculative capital inflows or hot money into
China has become a problem, he said. In order to maintain the US-dollars exchange rate at
6.84-yuan, the PBoC has cranked up its money printing operations, and ordered its state
owned banks to extend a record amount of new loans, 20% of which filtered into the
Shanghai stock market.
Chinas M2 money supply is expanding at a +29.4% annualized clip, and sowing the seeds of
faster inflation in China and around the world. The late Milton Friedman, the godfather of
monetarism, once remarked that, Significant changes in the growth rate of money supply
impact the financial markets first. Then, they impact changes in the real economy, usually in
six-to-nine months, he observed. Indeed, in China, the rapid expansion of the M2 money
supply began in Nov 2008, and the subsequent upturn in the commodity based inflation
began to jettison higher in July 2009.
Beijing is wary of printing money at such a fast pace, since an outburst of hyper-inflation
would be just as debilitating as a slump in exports. Thus, former Chinese central bank adviser
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Yu Yongding warned US Treasury chief Timothy Geithner in June, I wish to tell the US
government, - Dont be complacent and think there isnt any alternative for China to buy your
bills and bonds. The Euro is an alternative. And there are lots of raw materials we can still
buy, he said.
China has already begun to experiment with alternatives. Beijing has signed currency swap
agreements with Russia, and Asian and Latin American countries, in order to settle bi-lateral
trade in their own currencies, rather than the US-dollar. Moreover, Beijing is increasingly
using its $300-billion sovereign wealth fund (SWF) to buy minerals, and stakes in base metal
miners, oil companies, and commodity trading firms, rather than to purchase US Treasury
bills at near zero-percent.
Hong Kongs Central Bank Inflates Stock market Bubble
Beijing has kept the yuans value frozen against the US-dollar over the past year, and it
leading to cries of foul from US-companies, Asian exporting nations, Brazil, and Euro-zone
officials, complaining that their currency appreciation against the yuan is giving Chinese
exporters an unfair advantage. Either all countries should have a fixed exchange rate, or all
should have a floating exchange rate, said Brazils finance minister Guido Mantega on Nov
9th.
Asian central banks are printing vast quantities of money, and pegging interest rates at ultralow levels, in order to prevent their currencies from rising further against the dollar, and by
default, against the Chinese yuan. The most glaring example of currency manipulation is the
actions of Hong Kongs Monetary Authority, which has injected about HK$546-billion into the
foreign exchange market over the past 12-months, in order to offset huge demand for Hong
Kong dollars, and to keep the US-dollar fixed at an artificial rate of 7.80 HK-dollars.
The parabolic surge in Hong Kongs FX reserves, to $220-billion last month, reflects the
amount of HK$s pumped into the local currency market in exchange for US-dollars, which in
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turn, ends-up inflating the local stock and property markets. The HKMA has slashed its
overnight repo rate to a record low of 0.50% from 6.75% two-years ago, encouraging
speculation in risky assets. Thus, the HKMA is also pursuing QE, thru its currency intervention
tactics.
Hong Kongs chief central banker remarked last week, a US-dollar carry trade spawned by
ultra-low interest rates threatens to inflate dangerous asset bubbles in emerging markets, the
same way low Japanese rates did in the 1990s. But St Louis Fed chief, James Bullard said
US monetary policy wont be formulated with regard to prices outside its borders. Its very
hard to identify bubbles, and I think if theres problems in real estate markets in Asia, its not
very practical to say that you should raise interest rates in the US, he declared.
President Obama bows to Japanese Creditors,
In Tokyo, the six-month US-dollar Libor lending rate fell below the Japanese yen rate for the
first time in 16-years, as the Fed signaled it would keep the fed funds rate pegged near zeropercent or an extended period of time. As the US-dollar has lost its interest rate advantage
against the Japanese yen, its tumbled from around 122-yen in June of 2007, to around
89.25-yen today. The Yen carry trade, which dominated the scene from the beginning of
2005 thru the first quarter of 2009, has been virtually unwound, and is no longer causing
markets to tremble.
Successive Japanese finance chiefs, have always come to the rescue of the US-dollar after
sharp declines, since the yens appreciation threatens to undermine Japans export-driven
recovery and prolong its pain with deflation. The current level around 90-yen is a bit painful,
said Yukitoshi Funo, vice president of Toyota on Sept 25th. Sure enough, Japans new finance
chief Hirohisa Fujii heeded the call for help, and issued his clearest warning yet that Tokyo
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would intervene to prop-up the tumbling dollar. If currencies show some excessive moves in
a biased direction, we will take action, Fujii warned on October 3rd, stabilizing the dollar at
88-yen.
Japans economy has contracted by -7.2% from a year ago, and its annual output of $4.9billion is roughly eight-percent of the world economy. Japans industrialized economy has few
natural resources, and foreign trade enables it to earn the currency to purchase raw materials,
energy, and food supplies. Its also the second largest creditor to Washington, holding $751billion of US Treasury notes, up sharply from $617-billion in September 2008. Thus, it wasnt
surprising to see President Obama bowing last week before Japanese Emperor Akihito at the
Imperial Palace.
Increasingly, the US-dollars privileged role as the worlds top reserve and trading currency is
being called into question. This was highlighted when Indias central bank purchased 200-tons
of gold at an average price of $1,045 /oz in the second half of October, in exchange for $7billion held in its FX stash. The dollars demise highlights the transformation of America from
the worlds industrial powerhouse, and into the center of global financial speculation and
highly leveraged carry trades.
This article is just the Tip of the Iceberg of whats available in the Global Money Trends
newsletter. Subscribe to the Global Money Trends newsletter, for insightful analysis and
predictions of (1) top stock markets around the world, (2) Commodities such as crude oil,
copper, gold, silver, and grains, (3) Foreign currencies (4) Libor interest rates and global bond
markets, (5) Central banker "Jawboning" and Intervention techniques that move markets.
GMT filters important news and information into (1) bullet-point, easy to understand analysis,
(2) featuring Inter-Market Technical Analysis, that visually displays the dynamic interrelationships between foreign currencies, commodities, interest rates and the stock markets
from a dozen key countries around the world. (3) Charts of key economic statistics of foreign
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Subscribers can also listen to bi-weekly Audio Broadcasts, posted Monday and Wednesday
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Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
Also by Gary Dorsch
Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief
Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and
Company, and a commodity fund at the LNS Financial Group.
As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch
handled thousands of customer trades in 45 stock exchanges around the world, including Australia,
Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand,
and Canadian oil trusts, ADR's and Exchange Traded Funds.
He wrote a weekly newsletter from 2000 thru September 2005 called, "Foreign Currency Trends" for
Charles Schwab's Global Investment department, featuring inter-market technical analysis, to
understand the dynamic inter-relationships between the foreign exchange, global bond and stock
markets, and key industrial commodities.
Disclaimer: SirChartsAlot.com's analysis and insights are based upon data gathered by it from various
sources believed to be reliable, complete and accurate. However, no guarantee is made by
SirChartsAlot.com as to the reliability, completeness and accuracy of the data so analyzed.
SirChartsAlot.com is in the business of gathering information, analyzing it and disseminating the
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SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

Central Bankers Blowing Bubbles in Global Markets

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

Beijing fuels Gold, Commodity Rally,

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

SirChartsAlot - Central Bankers Blowing Bubbles in Global Markets / Gary Dorsch

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