California Dreamin'

March 1, 2010
Last week I made a parallel between Greece in the Euro Zone with the situation in the state of California (as well as others) vis-a-vis the US Fed (neither can issue currency on their own). Today I see that at the annual meeting of JP Morgan last Thursday, its CEO Jamie Dimon - ranked among peers as the best big bank chief in the US - said the bank could handle a Greek problem, but investors should be more concerned with California. So I'm in good company.

It is hard to see any way out for California if you're not smoking one of their biggest agricultural products (which it would love to legalize, then levy a tax like on cigarettes). At the same time, it highlights the bind that the US Fed is in, because to support California any further would make it impossible not to do the same for at least a half-dozen other US states. The US central government can print as much as it wants, but the resulting negative potential for the USD is obvious. As it is, it is becoming hard to tell whether the Fed, in some of it's most recent bond auctions, is not "buying" (read that to mean 'failing to sell'[) some of its own issue, disguising the transactions as those of some other unnamed government in order to prevent market rates from rising. That would kill the US economy and re-kindle all sorts of bank and real estate mayhem.

Also less obvious is how the simultaneous effect of the Greek-inspired symbiotic pressure on the UK pound is currently masking USD weakness. Here we have, simultanously, talking heads pontificating about how vulnerable gold is to being in a current bubble, citing technical grounds. This certainly sounds like shilling for the Fed, since USD strength is associated with a price decline in gold. Lou Dobbs, the economist and long-term commentator who was pushed out of CNN late last year for his various non-mainstream economic and social positions, coined a phrase I love: "faith-based economics" with regard to people, including officials, pushing opinions on government economic policies that had no other possibility of success. As with any pullback in a rising market, the drop - if continued - would be bad.

So far gold's chart is intact. A gold bubble might make more sense if it were racing uncontrollably into new high territory. However, it has been moving sideways for quite a while and really not looking much like a comet in the process of consuming itself. Of course in an imperfect world anything could happen. But at present, the resumption of a downward trajectory of the USD still looks much more like reality. I think the money currently moving into the Cdn and Aussie dollars thinks so too.

At the same time, the US continues to jawbone China about it's "unfair" unofficial peg to the USD (although knowing that every Walmart customer would pay more at the checkout on any rise in the yuan/dollar ratio). But at least it would still be China's fault. One way the Chinese could move, would be to increase the percentage of gold they hold as official reserves in relation to that portion held in US Treasury bills, which is quite low. Since China is now the world's largest producer and is about to launch its new international gold vehicle imminently - which by the way earns in yuan (or renmimbi or RMB), I think I will stick with my present position.