120 Days (The Countdown Continues) The FED staring into the ABYSS

120 Days (The Countdown Continues)
by Doug Tjaden
November 20, 2006


In late September I submitted an article suggesting that we were entering into a critical time in economic history. “180 Days – A Critical Time In Economic History” was written to speculate on two situations that might begin the end game of the US dollar within the next six months. My stated position was that housing was worse than reported, and the realization of that by the global markets might start a flight out of our beloved fiat currency before the powers that be were ready. In that article I made the following comments.

“What ammo does the Fed have to fight this? (housing downturn) They have the bully pulpit – and they will be using it to the extreme over the next few weeks and months. They have to!”

“Additionally, the Fed will have the added benefit of year over year inflation numbers that will look quite good come October and November.”

My belief was that the Fed would use tame inflation data to strike a dovish tone and talk long rates down in order to help housing. And then I gave two scenarios that could undo the US dollar despite their efforts to walk a tight rope:


“…however if (stock) markets start a decline of even 10-15% over several weeks, it will be evidence that the US is not the place to be invested now.”

“In anticipation of a slowing economy, long term rates fall. However, despite this, housing just can’t regain its footing as it moves into a seasonally slow period.”

Clearly the first scenario has not played out. The Dow is at an all time high and climbing. My hat is off to Jim Puplava for calling this one. I wouldn’t have believed it unless I saw it. So that puts the second scenario into play. With Friday’s release of the disastrous housing numbers, it is clear that the seasonal slowness in housing is accelerating the downward fall. With the release of October US housing starts, it became apparent that there is no way the mainstream media can put a positive spin on housing. They can’t even spin them as neutral. Housing starts fell 14.6% in October. Building permits fell 6.3%. Year over year, housing starts are down 27.4% from October of 2005. The situation is bleak.

With the housing market crumbling I really did expect that in order to put a prop under it the Federal Open Mouth Committee would take a dovish stance, talking long rates down in an effort to put some kind of floor in the housing market. They have all the ammo they need to do it in the form of tame inflation data. But instead, here are some of the comments from the Federal Reserve last week:

"All members agreed that the risks to achieving the anticipated reduction in inflation remained of greatest concern," – minutes of the Fed's policy-setting Federal Open Market Committee of October 24-25.

Fed Bank of St. Louis President William Poole yesterday said the U.S. is not “out of the woods” on inflation. November 17, 2006

Dallas Fed Bank President Richard Fisher, who this week said the U.S. economy is expanding “forcefully”, asserted today the Fed shouldn't be questioned on fighting inflation. November 17, 2006.

These comments strike a rather hawkish tone despite data that showed a marked decrease in price inflation. The CPI was down .5% in both September and October and the “core rate” was only up .1% in October.

Regardless of the fact that these numbers are cooked, they are the ones the Fed uses to set market expectations. In the past, the Fed would have used the CPI numbers to sooth the market’s inflation fears and to nudge long rates down. The thought never entered my mind that with housing showing extreme weakness and some timely benign inflation data that they would become hawkish in their tone. So why has a once predictable Fed shown a change in character? Has the Fed possibly found itself staring into another “abyss”? Not a rising gold price, but rather a US dollar that has been backed into a corner?

The dollar’s rally this summer was extremely weak. It is putting in a well-known “head and shoulders” reversal pattern. Technically it is set to resume its decline in a well-established secular bear market. Precious metals options are set to soon, and with a light trading week due to Thanksgiving, the setup is there for the PTB to give gold the backhand and boost the dollar, putting in the top of the right shoulder. That is assuming there is enough oomph left in the dollar to do it.

Add to this, comments made recently by Australia’s Treasurer, Peter Costello:

Treasurer Peter Costello has called on East Asia's central bankers to "telegraph" their intentions to diversify out of American investments and ensure an orderly adjustment.

Mr. Costello said "the strategy had changed" and Chinese central bankers were now looking for alternative investments. “Of course you can have an orderly adjustment," he told reporters. "And what I would recommend is that these matters be telegraphed well in advance. I think we should begin preparing ourselves for it.”

Comments like these from foreign governments are increasing in frequency. They are very nervous about their US dollar reserves and are floating trial balloons asking for help.

So mix together a dollar that is weak fundamentally and technically with increasing calls for “an orderly exit” by the world’s central banks, and a rapidly slowing US economy that is in the midst of a severe housing downturn. Add a dash of Democratic led protectionism in the wake of the US mid-term elections and you have the recipe for a potential US dollar disaster.

It appears as though this recipe has the Fed very, very concerned. I have long contended they are facing Sophie’s Choice. Although Sophie eventually had to decide which child to send to its death, that did not make the decision easy. Nor did she make it quickly. It was an agonizing choice, but in the end it had to be made. The Fed knows they cannot raise rates or housing may fall into a spiral that would send it to its “death”. But it appears now that if they allow rates to fall, even if they just talk them down a little to help housing, the US dollar might be sent to its “death”. Are they right now facing that choice?

To that question I do not have the answer, but I personally do not believe they are facing the final decision yet. The Fed has powerful tools at its disposal with which to delay the death of the dollar. I do believe that when the day arrives that they do have to make their final choice they will choose to sacrifice the US dollar in favor of housing and the US economy. One major problem with letting the dollar die today is that it would not fit with their long term plans. The long planned for Amero is not ready, so there is not a stand-by fiat currency with which to start over. The only currency standing by is God’s money – gold and silver, and they do not want to be forced to use it because it would give it too much credibility during a time when they desperately want to keep the fiat game going.

However, something just doesn’t seem right. The situation has the smell of fear. As I simply look at how the Fed is now acting and what they have said over the last few weeks, it does not fit the pattern of predictability we have seen over the last several years. The Fed’s actions seem to be saying that the dollar is in enough trouble that they cannot use the Federal Open Mouth Committee to help the housing market even though inflation data would support such talk and it is desperately needed. And if our Fed will not talk rates down to help a very sick housing market, could it be that there actually is an immediate dollar problem brewing? Will the weak housing market require the Fed to make its choice before it is ready?

We have 120 days left to find out. Stay tuned.

God’s blessing to you! Stay protected with His money.

Doug Tjaden


[link to www.financialsense.com]