As a part-time member of the press corps, I
had the good fortune to attend many of the public sessions at last
week's G-20 meeting in Pittsburgh. As impressive as it was to closely
witness the gathering of countries representing some 85 percent of the
world's GDP (along with the governors of the World Bank, the IMF and
the European Central Bank), it was equally remarkable to witness the
immense security forces deployed to restrain those who feel the
gathering harbored the forces most responsible for the world's
economic and financial problems.
The meeting got off to an unexpectedly
gloomy start as President Obama, accompanied by UK Prime Minister
Gordon Brown and French President Nicholas Sarkozy, jointly announced
the discovery of secret Iranian nuclear facilities. These revelations
were eye opening, and the mood in the room was nothing short of
electric. This contrasted sharply with comments offered the day before
by Russian President Dmitri Medvedev, who reiterated his country's
reluctance to impose tougher sanctions on Iran. As a result, the risks
of continued conflict in the Middle East remain a global
preoccupation, with major implications for the prices of gold and oil.
But despite the geo-political setbacks, the
failure to achieve any major agreements, the somber atmosphere, and
the sanguine final communiqué, the U.S. stock and junk-bond markets
continued to roar in nervous volatility.
U.S. markets appear to have taken on a
casino-like life of their own, while the fundamentals and even some
technical measures urge caution – such as the U.S. dollar plummeting
to new lows. Something just does not add up. This feeling may have
been the root cause of the somber mood enveloping the G-20.
Increasingly, there appears to be a
distinctly volatile disconnect between market sentiment and practical
reality. It is eerily similar to the market of 1931, which presaged
the second of six major downturns of the Great Depression, leaving
U.S. stock markets at only 10 percent of their pre-crash values.
There are a number of concerns that have
caused some of the world's shrewdest observers to be less than
completely credulous about the current 'recovery.' I have repeatedly
echoed these factors in my columns: continued weakness in the labor
market, lack of funds for discretionary spending, the rising
trajectory of debt and mortgage defaults, moribund corporate earnings,
and the diversion of bank credit away from corporate borrowers to
interest-bearing Fed accounts. But no amount of outcry from the
skeptics seems to sway the official narrative: ‘recovery is on its
way.'
In the meantime, the U.S. government
continues to increase its deficits, heralding a new monetary age where
‘trillion' has become the new ‘billion.' The dollar continues to sink
to levels which now threaten its privileged position as the world's
reserve. If such status is lost, the Fed will no longer be able to
print limitless dollars while holding interest rates at historic lows
– without facing monetary collapse. Soon, the era of low interest
rates could be over.
Furthermore, the world's three largest
holders of U.S. Treasuries, China (with some $800 billion), Japan
($740 billion) and Great Britain ($220 billion), may soon need access
to their funds. The UK deficit is now 10 percent of GDP, making him
prone to selling his U.S. Treasuries. Japan is slipping into recession
and may need its dollars for internal stimulation, as might China.
On that note, I noticed that my former
parliamentary colleague, Prime Minister Brown, looked a bit
shell-shocked at the G-20. Perhaps this resulted from Britain's
unfortunate decision to have sold the bulk of its gold reserves for
U.S. dollars while gold was still trading in the $700's!
From a technical point of view, U.S. stock
and junk bond markets have risen dangerously without correction, but
still just short of the rebound level of a Dow 10,000 that I predicted
for August. Nonetheless, these markets look vulnerable.
The unease is felt on Main Street U.S.A and
in the backrooms of the G-20. It's a shame that Washington and Wall
Street haven't gotten the memo.
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