Part 7 now addresses the second (of 3) part of the Economic Pillar (part of the Commulism Response Framework), titled the Commulism Impact Factors - Bernanke Strategy, Oil, Gold and Rate Cuts. This is Section B of the Economic Pillar.

Section 2 - Economic Pillar (cont.)

B) Commulism Impact Factors

The following insights are provided to dig into a few key granular areas or factors which will impact CCMP policy going forward and identify some integrated, actionable trigger points. Call them the Bernanke, Oil, Gold and Rate Cut Assessment “Commulism Impact Factors”:

Bernanke Strategy:

Worth noting is that Fed Chairman Bernanke “appears” to already understand the Commulism threat, evidence his clever but masked approach (reason) to lowering interest rates. While he has recently been lambasted in the media and investment communities for not having the big picture as respects recent policy actions and statements, he does indeed seemingly “get it” in a much different and correct way - It’s not the credit crisis, it’s Commulism.

A perfect proxy for the collective media and investment communities “Bernanke bashing” is  outspoken Jim Cramer of CNBC Mad Money. Love him as an intelligent entertainer but he’s completely FUBAR’d (excuse my military) this most important call. Then again, no one’s perfect. He does however redeem himself on a different matter later in this section.

So Mr. Bernanke, Cramer may “boo ‘ya”, but this Analyst is here to “applaud ‘ya”.

When one considers the usual need to cut rates is to predictably stem a forecasted recession 6-12 months on the horizon (given it takes that long for a rate cut to have substantive economic impact), one must argue with the logic to do them now, that is as respects the issue of recession only. That said, there is no real “traditionally inherent” need to (now) reduce interest rates in an economic environment encompassing a record low dollar, record high oil prices and GDP growth (despite many economist recession-eers) still positive, and (mild) recession if occurring, already at the doorstep, not 6-12 months away. In reducing rates to stem recession, then a case of being a day late and dollar short.

Late Publishing Note – Given the service sector data released Feb. 5, 2008, a (very) mild recession is now likely (underway)..

In fact, Mr. Bernanke stated before Congressional Committee on Jan. 17, 2008 that he saw a slowing (not recession) during the first half of 2008 and an economic pick-up in second half. He’s not panicked like others.

Why is he not panicked and why is he lowering rates? Because he is beyond the Pollyanna tempest in a teapot recession cries. Instead, he’s focused on addressing the big “long term” economic threat picture (Commulism). The byproduct in doing just so happens to be avoiding what most others fear – possible near term recession, while too providing a platform to both challenge Commulism and create sustainable growth for the U.S. economy.

So either Mr. Bernanke is the world’s smartest idiot as Jim Cramer would argue, or he’s the brilliantly courageous pioneer in understanding and engaging the new global battlefield of geo-financial/economic warfare. Again note, “brilliant” as respects uniquely understanding the real threat being Commulism, not recession, yet certainly not “perfect” in all the interim steps to address the aggregate threat, as evident later in this section on the economic stimulus package.

Mr. Cramer et al, this Analyst takes a contrarian view to your own and argues for the brilliant pioneer branding for Mr. Bernanke as supported below. 

Mr. Bernanke doesn’t fear what the Analyst will coin “Responsible Recessions”. In other words, he fears not a “healthy recession”, to the point that he astutely realizes that nothing goes up forever and there always needs to be the expected pause that refreshes. Or perhaps better characterized as an argument for no pain, no gain.  

What he does however rightfully fear, is what the Analyst will also coin as an “Irresponsible Recession”, one which would be healthy and minimal but for the fact it was injected or triggered with a performance enhancing dose of misplaced hysteria, thereby artificially exacerbating the situation, to actually create an economic downturn where one was not imminent or expected and/or actually making an expected downturn much worse.  

In times of “irresponsible recessions” and related market chaos and meltdown situations, as the one he’s fending off now, Mr. Bernanke must put his grander plan on temporary hold and grudgingly step in, not to treat the economy but rather to cure the panic. In fact, he becomes the antidote to the market’s periodic unplanned “irrational irresponsibility”.  

Mr. Bernanke is sure to be even more upset, and rightfully so, with the premature need to reduce rates, now knowing this recent bout of irrationally irresponsible market panic arguably and quite stunningly triggered by a staggering $7 billion plus loss engineered by lone rogue, junior trader at Societe Generale. To think, here Mr. Bernanke sits at the pinnacle of western economic defense, with a Plan to defend it over time against global Commulism, only to be duped (as was everyone else participating in the ensuing global equity sell-off) and accordingly usurped in his plan’s (rate cut) timing execution by having to address the global fallout from the actions of but one lowly, unsupervised, $140,000 per year Generation X’er.

Analyst’s Late Publishing Note: On Jan. 31, 2008, with the Fed’s 50 basis point rate cut, the financial television viewer audience witnessed “Cramer Capitulation”. He grudgingly had to shift from basher to endorser, well perhaps more appropriately neutral “non-basher” of the Fed. Not that he humbly admitted Mr. Bernanke is juggling two balls (China/Commulism (strategically) and U.S. recession (tactically)) very well, but rather boastfully, vainly taking credit for Mr. Bernanke’s actions. While not getting the recognition he deserved from Mr. Cramer, perhaps Mr. Bernanke can take some comfort and relish in his victory with Mr. Cramer on national TV putting his obnoxious, misguided and mis-wired “the Fed knows nothing” button out of commission. Mr. Bernanke, that’s about as close as you’ll get to a “Fed got it - from the start” button acknowledgement from Mr. Cramer. Enjoy it.

On GDP, noting that unexpected strong Q3 ’07 result as being achieved despite and confounding the forecasts of the expert economic gloom and doom recession-eers. In fact the third quarter showed a remarkably robust and much higher than expected 3.9% growth, which was upgraded from economists’ collective expectation of 3.1%.

This prompted Commerce Secretary Carlos Gutierrez and Ed Lazear, the Chairman of the President’s Council of Economic Advisers, to comment “that the data showed that the slowing housing market has not affected other areas of the economy as some had feared…..adding, this third quarter was fueled by consumer spending, business investment, rising net exports and non-residential construction. Housing remains a concern, but its impact is being offset by growth in other sectors of the economy", with Lazear contributing “that this is an indication of "an extremely resilient economy," noting that it is holding up even amid the housing slump and the worldwide credit crunch. Despite that, we still ended up with nearly 4 percent growth following another quarter where it had nearly 4 percent growth. So that, really, I think is quite an impressive statistic, and it's certainly encouraging to us”.

Of note too as respects “economic resiliency”, is that despite the many pessimistic economist estimates predicting a recession in Q4 ‘07, the economy instead eked out .6% GDP gain. The point being is it’s not a negative number. Rather it’s growth, albeit slower growth than both the previous quarter and Q4 ‘06. But still Q3 and Q4 were both significantly stronger than original economist estimates, meaning when one rationally looks past the gloom, usually there’s little doom.  

In short, with the theme of this piece being China and (control of) the global economy, it is time to begin to think of the U.S. economy and the tools that influence it in global terms too. If the global economy is truly integrated as China astutely believes, then so too should the U.S. and WEAST. That linkage and integration to it is key. No longer can the U.S. go it alone or think of itself as an economic (resort) island. That is both good and bad. It’s good from the standpoint the U.S. economy can no longer go bust on its own, yet not so good that it can no longer boom on its own either. The boom times are tempered yet so are the bust times, with the real objective to achieve sustained healthy growth rates.

Like a stock portfolio, consider the U.S. economy part of a portfolio too so to speak – i.e. a diversified global economy. One of the benefits of this integrated global economy, when it is healthy in the aggregate, as it is now, is its ability to absorb and mitigate pockets of geographic hiccup or pain, as is the case now with the U.S. That would not have been the case several years ago with a more decoupled, less integrated global economy.

In effect, the U.S. economy has become a coupled component, albeit significant one, but still a part of the global economic fabric. Global economic integration then in effect results in a built-in shock absorber effect - mitigation to both the upside and downside, creating greater stability and disciplined growth.

Those experts pontificating that the combined credit (sub-prime) crisis, housing slump and record oil prices will drive the U.S. economy into recession miss the big picture, as they do too the benefits of a lower dollar on recession avoidance and/or mitigation. They take a myopic U.S. economy only approach, rather than how these issues impact the U.S. from a global economy integration perspective and how that global economy reciprocally affects the U.S.. With the global economy healthy and growing, and most economists and analysts arguing that will continue, even if tempered slightly, then the risk of recession in the textbook sense, to the “aggregate” U.S. economy from its own noted self inflicted wounds (credit/housing), will fortunately be greatly reduced. The result being even less of a chance of recession, and even if it does slip into recession, will be one that is shallow and short lived. Again, this assumes the global economy continues growing, and conceding the U.S. economy may still endure as it already has, some serious “sector recessions” as is occurring now in the housing sector for example.

Late Publishing Note: The over-reaction this past Tuesday in the equity markets (Dow down 370 points) to the disappointing information on the service sector, is in this Analyst’s opinion, not cause for concern. In the context of a theme of “no recession and/or a very mild and short one”, there is still more news for sure to come, which like this news, while less than positive, won’t change the overall outlook either.

Therefore, while the U.S. economy benefits from an integrated global economy in the near term, China benefits far greater both short to long term. That integrated global economic fabric making it that much easier to overlay a spider-web of economic control.

Economic Stimulus (aka “Botox”) Package: The Stimulus Plan does not even pass the “Botox test”. Botox at least provides a brief, artificial and superficial improvement, which quickly disappears as if it never happened. Indeed, its akin to costly “no benefit” indulgement. The Stimulus, on the other hand, won’t even provide immediate superficial improvement, given it stimulates China, not the U.S. (see “Which Economy?” below). In fact it becomes nothing but a “Placebo shot” to the U.S. economy.   

Contrary to the Chicken Little economist and investment communities, mild recessions are not all bad and are actually long term quite beneficial as they create opportunities for important awareness and needed direction/course adjustments in an environment of little pain. If one believes the U.S. is either not going to reach the textbook case for recession (see late publishing note above), or at worst it will be a mild and very brief 0-1.5% downturn (contraction) adjustment, then all the hoopla in Washington and the press about an economic stimulus package is for naught. This is not a deep, two year recession situation. At worst, it will be brief and mild, however, counter-intuitively, slightly exacerbated “because” of the perceived stimulus messaging (i.e. things are worse than they seem) by the consumer.  

Adding further senselessness to the politically driven (election year) economic stimulus package, “if” (and the Analyst contests it was never needed earlier or now) it was needed at all to really impact, deflect and/or mitigate recession, then it should have been implemented 6 months ago. Instead, it was only recently recognized as but one more new political twist to mix into the campaign rhetoric – to try and keep (make) it interesting. Now adding further delay to an idea who’s time should never come, especially not now, the need to fully draft the Plan, pass through both houses of Congress (after weeding out the expected usual pork earmarks and add-ons always attached to new bills) and then approved by the President. “Assuming” Congress expeditiously agrees on a plan and passes it, given the high profiled public spotlight of the plan, and the President promptly signs it by mid to late February, the checks will then not even likely being mailed “until May/June”, given the bureaucracy execution challenges. Of course, if there are partisan and/or House/Senate related delays (as noted above in the Senate), the checks won’t go out until much later.

Late Publishing Note – On Feb. 6, 2008, the Senate version ($205 billion) failed to pass, given the $40 billion or so add-ons above and beyond the $161 billion House approved bill – meaning “delay”. Interestingly too, it failed to pass by just one vote, 58-42. That “no” vote (#42) an unexpected last minute surprise flip by Majority Leader Senator Harry Reid.

So it’s either politics (as usual) or an epiphany moment that it indeed is not sound fiscal policy. If the former, clearly a leadership issue and politics more important than trumped up “urgency”. If the latter, perhaps Sen. Reid is delaying putting his John Hancock on what he has now concluded is a very bad idea, wanting to be that one lone, brave voice shouting “no”. If so, the number 42 deserves to be hung in the rafters of the Senate Chamber, and Sen. Reid a consensus selection to the Congressional Hall of Fame.

Unfortunately, the Analyst leans more toward Sen.  Reid’s reason being politics, rather than epiphany.  

Even recession proponents suggest the recession will hit in Q1 ’08 (some even called for it in Q4 ’07, which it did not) and last through Q2 and into Q3 ’08. Therefore dumping (i.e. wasting) $161 billion that could instead be strategically and beneficially deployed elsewhere, e.g. bond insurance crisis, rather than on an economy poised to grow on its own when the package finally does take effect, is simply a failure, if not complete breakdown in fiscal judgment, by many. In fact, nothing but wasteful and costly election year folly (noise), given its underpinnings are politically, rather than U.S. national/economic security strategically motivated.  

At best, the analysts think the $161 billion (House only approved) stimulus can add perhaps .5-1% improvement to GDP. So again, why bother. Particularly when compounding that (dated) assessment with the real point to be made that today’s impact from such a stimulus plan is very different than what would have been the impact 10-15 years ago with the same plan. In fact, that .5-1.0% is historically referenced, not real time based. It does not account for the dramatic change over the last 10-15 years from a producing to an import economy. So with the economy now import driven, the .5-1% impact is grossly over-inflated as there is little remaining U.S. infrastructure to stimulate. It’s been shipped to China et al.

The question really then becomes “Stimulus Package for which Economy?” The answer is of course, China, not Detroit (U.S.). In fact, it might better be called for what it really is, the “China Stimulus Plan”. 

As a proxy for that statement, recall again the concentration of “Made in China” (import) products in Wal-Mart and Target et al. That is precisely where the lion share of the $600 per individual stimulus plan rebate checks will be spent. Therefore, the stimulus is not stimulating the U.S. economy, but rather further stimulating/fueling an already overheating Chinese economy. Note China’s growth rate in 2007 was a staggering 11% plus.  

Therefore, some young, gutsy Senator and/or Congressman/woman with Presidential aspirations in 10-15 years might consider exercising some personal fortitude and march against the political grain now to be hailed tomorrow for a hero like Alamo-like last stand on the House and/or Senate floor, which will be roundly applauded in the years to come. As Nancy Reagan might say, just say no. Or even better, launch a new rallying cry for the American people to demand redirection of  these funds to just about anything else, rather than what is being done with them now, flushing them down the toilet.

Call it the “Anything But (the Stimulus)” campaign.

That said, the stimulus package’s significant and precious financial resources should be redirected (and better invested) from treating an internal economic symptom to instead addressing the real external threat (negative causation) to the longer term economy - Commulism. Unlike the ill-conceived, unnecessary and wasteful “tactical” stimulus package, using these resources instead to thwart Commulism would be considered a prudent “strategic” investment in this country’s long term economic and national security.

For example, the vulnerability/health of the U.S. economy and therefore the ability to fend off Commulism hinges currently on a crisis of devastating proportion. The bond insurance industry, a bulwark of the U.S. finance system, stands on the precipice of collapse. If it does, the negative impact on the economy and stock market will dwarf by perhaps orders of magnitude, the meaningless short term blip in consumer spending impact from the stimulus package. A collapse more importantly weakens the U.S. finance system so seriously and for such a long time to come, that the U.S. becomes that much more vulnerable to Commulism. The choice then, give in large part, the $161 billion to China vis-a-vis Wal-Mart et al and watch the bond insurance industry collapse and devastate the U.S. economy or do the right strategic thing – use those resources to instead prudently bail or buy out the bond insurance industry, and stem a financial collapse, thereby buttressing and strengthening the U.S. economy. If the government decides to do “both”, rather than either/or, the U.S. is still wasting $161 billion, it can ill afford to. 

The 2008 $161 billion (House only approved) stimulus package in historical retrospect years from now will be deemed as having thrown money down the toilet and one of the top 5 worst fiscal decisions of all time. Not only were these precious resources/funds mis-used and mis-directed, but the mis-guided decision to do so sent an undesired signal that things are much worse than previous thought, triggering a stock market sell-off and greater consumer pullback than would have occurred without the stimulus announcement. Ironically, precisely what the “brilliant” originators of the stimulus idea thought to avoid, further evidencing what a truly bad idea it is. Many argue it is simply “to little, to late”. This Analyst calls the stimulus idea “to wrong” in fact, ALL WRONG. Anyway, it is what it is and the equity markets recent sell-off, just like the recession panic, heightened with the attitude “hey, it (recession risk) must be even worse if the government has to do this”, are overblown as will be borne out in due course.

The Analyst notes however, any recession occurring, may be “ever so slightly” more pronounced than previously thought (i.e. before the thoughtless, lame and consumer scare stimulus plan idea floated). This Analyst (and urges others too) makes one final plea to promptly rescind the stimulus idea and prudently redirect these funds as noted below. Doing so would have the added benefit of triggering a 500-1000 point Dow rally. Why? Investors appreciate when bad fiscal decisions are recognized and corrected. The market rewards when that recognition and rescission takes place “before” the mistake is allowed to take root.

The bond insurance business, led by companies such as MBIA and AMBAC and others underwrite some $500 billion in coverage, with growing losses setting the stage for collapse of the entire amount. A full scale collapse if allowed to occur could yield zero cents on the dollar, devastating the banking and other industries built upon this risk transfer vehicle. As the saying goes, “no risk, no gain”. In other words, companies (must) take risk to prosper and grow. They do so when they have an insurance backstop. Without that backstop (bond insurance industry) they won’t take risk, resulting stalled and/or no progress/growth.  

Here’s where Mr. Cramer is right and Mr. Bernanke could do more, in fact much more. And also where the world is looking at not necessarily the U.S. downturn but rather how the big picture U.S. economy is managed. Fair to say that every discussion at the recent World Economic Forum in Davos, Switzerland, was within 2 degrees or less separation of the topic of the U.S. economy and equity/credit markets impact on global economy and how U.S. government and corporate leaders collectively are addressing the driving issues. 

So as Mr. Cramer astutely noted and the world would promptly recognize the U.S. trying to manage the right issues/problems, the bond insurance industry is teetering on collapse. A collapse would make a routine recession look like a cakewalk. Mr. Cramer to his credit, flagged the issue and the U.S. is only now beginning to explore solutions. The immediate question, is there time and the right commitment to fix it?

This is an industry that is not standalone but rather completely integrated into the U.S. financial/corporate fabric, rippling through the economy. Collapse would lead to a disastrous cascading/spiraling chain reaction, or domino effect of failures of the downstream economic underpinnings and drive the economy and stock market into the abyss.

If ever a government (NY state and/or Federal) bail-out or buy-out was necessary (and universally supported by the voting public) to preserve the good of the whole, saving the bond insurance business is it. That being Mr. Cramer’s excellent point. Government or private sector intervention averts a devastating downgrade (they are being reviewed now) of these insurers by Moody’s/S&P, and thereby avoiding a failure of confidence and collapse of the industry itself.

While Mr. Cramer identified the issue, this Analyst argues here’s one of several ripe opportunities to prudently “divert” the $161 billion (House only approved) stimulus resources to instead something substantively beneficial to the U.S. economic security. Redirect the $161 billion (i.e. the $600 one day “Wal-Mart shopping spree”; given the “Made in China” product concentration, most money then goes to main supplier – China, ironically the real source/cause of the original problem) as the sourcing funds to buy-out/bail-out the bond insurance business, which restores confidence/certainty and ends the crisis.

Unfortunately, a bail-out also bails out the rating agencies. So who then gets penalized, if the crisis is bail-out/buy-out averted? A learning lesson price certainly needs to be paid (by someone), to ensure a similar situation never arises again.

Analyst Note: There remains a serious issue as respects the rating agencies oversight due diligence and their linkage to the overall problem. Where were they over the last few years to identify and stem this problem before and/or as it emerged? Their prior and current reluctance to now downgrade the likes of AMBAC and MBIA, if required, while stemming a bond insurance industry and resulting economic/equity market collapse, also beg the question then “what purpose do they really serve?”. Clearly in their role as the watchful eye, they missed the problem.

Question(s) – Given the bond industry’s (economy) backstop aspect so to speak, does this industry require greater scrutiny than what rating agencies currently provide? Do the rating agencies (S&P/Moody's) require greater formal separation (e.g. “Chinese Wall” relationship) from those companies they analyze/evaluate (e.g. AMBAC, MBIA)? Does the industry  require regulation? Should the SEC receive greater powers and new regulatory control over this industry? Given the scope and potential broad economy ramifications of the current crisis situation, and to avoid a similar future fiasco, this Analyst would indeed argue yes to all.

As to why Mr. Bernanke supported the stimulus in his Congressional testimony, or rather did not denounce it, the (stimulus) plan simply provides more air cover for his covert counter-Commulism game plan. “Cramer at al” wanted a pre-Jan. 31 Fed meeting “growth (recession prevention) oriented rate cut”, which would interfere with Mr. Bernanke’s grand de facto China plan. Paulson’s stimulus plan thus gave a temporary bone to the media mob crying for an emergency rate cut, thereby providing Mr. Bernanke needed breathing room to stay on plan and avoid knee jerk rate cuts. Or so he thought, until Societe Generale unexpectedly entered the picture.

Analyst Note: Even though the stimulus resources are not Fed money, Mr. Bernanke should still have however prudently argued this stimulus money be re-directed to address the bond insurance crisis or other countering aspects of Commulism. Perhaps he was being a bit to stealthy with his own China plan. While his de-facto anti-Commulism plan is correct, he still must factor in other economic hiccups, like the bond insurance crisis, which could derail his own bigger picture objectives.

Unless of course, Mr. Bernanke saw the stimulus package for what it was – a pass through to China, further stimulating its economy and exacerbating its growth and inflation, thereby further pressuring China to raise its own interest rates and indirectly leveraging up the valuation of the Yuan. Again improving the U.S. export picture, and without reducing U.S. rates.

Late Publishing Note: At time of publishing, there is some encouraging valued discussion emerging as respects a Consortium of 8 international banks (Gang of 8?) coming together to work with the New York State Insurance Dept. to explore possible solutions (likely in buy-out versus bail-out fashion) to end the bond insurance crisis. With Moody’s and S&P reviewing the bond insurers MBIA and AMBAC, and a formal decision to downgrade (from AAA) or not due mid February, this Consortium will need to move very fast to avoid that devastating potentiality (i.e. bond insurer downgrades). Other investor names like Wilbur Ross and Warren Buffet are being bandied around too with potential involvement interest. We shall wait and see what happens.

The bad news, the (politically motivated/oriented) Bush/Pelosi economic stimulus plan remains in a “damn the torpedoes, full speed ahead mode”. An incredibly imprudent, if not sinful waste of precious U.S. financial resources (taxpayer money) that could instead be strategically beneficial in the big picture fight against Commulism or other good investments. Accordingly, this stimulus decision will unfortunately come back to haunt, tarnishing both the Bush and Pelosi legacies. No comment on their individual legacies pre-stimulus.

And if not redirecting these stimulus targeted funds to instead bail out the bond insurance industry, then use them to fund the “Commulism Response Framework”. For example, redeploy them to completely overhaul, reengineer and integrate the strategically critical U.S. intelligence system, to finally match up to the threat. It doesn’t mesh or measure up at all now, as evidenced earlier. Mix in the related overhaul and drastically needed upgraded infrastructure for CFIUS (see note below re: FINSA - flawed), and connect it right into the revamped intelligence system.

If the country’s political establishment refuses to terminate the stimulus plan and not prudently and strategically redeploy the $161 billion to help thwart Commulism, then if nothing else, be it known the funds would better serve the United States and the American people as a whole, by sensibly investing them instead into the long overdue rebuilding of United States infra-structure (roads, bridges, tunnels, utilities/distribution, etc), which is crumbling. The Analyst asks “Is the front page (for a week) 2007 Minneapolis bridge collapse a proxy for the state of disrepair of the entire nation’s infra-structure and a flurry of related incidents to come?”. The Analyst would argue yes. Do you think ten years from now anyone will remember their 2008 one day shopping spree at Wal-Mart? The Analyst would argue absolutely not, particularly if they lost loved ones in the likely many more bridge et al collapses to come, caused by the negligent use of funds ten years earlier, which could have prevented these tragedies.

Bottom line, the $161 billion should be invested in the U.S., not China, whether it be in the Commulism Response Framework, bailing out the bond insurance industry or re-building U.S. infrastructure or other TBD substantively beneficial ways. Another way to look at it on a “relative basis”, the U.S. stimulus plan puts the U.S. $300 billion worse off versus China. It should be up $161 billion if the funds are invested “in” and working “for” the U.S. Based on the analysis above it’s not. Therefore, it’s lost. And the $161 billion in large part leaves the country for China. Arguably China gains $161 billion (not all but a large part). Thus an arguable $300 billion plus “relative” swing in China/Commulism’s favor.

That said, it therefore still took real courage for a Fed Chairman to sit before a Congressional Committee and agree to a Treasury Plan to stimulate the economy, when most would argue that’s the Fed’s job. On the surface, seemingly admitting he got it wrong and someone else had to do his job. Not a pleasant experience for him, but he stuck to his game plan of calculated rate cut timings. Calculated from the standpoint of a carefully planned, “throttle-up” response to China; rate cuts spread out and just large enough to avoid detection for what they are – China cuts, not sub-prime cuts.  

Oil and Gold: 

Since it’s front and center in all the financial media and direct linkages being made to the Fed rate cuts, let’s quickly address and be done with the oil and gold pieces, both being “Commulism Impact Factors”.  

In this Analyst’s opinion, what’s driving oil prices is not pure fundamentals (i.e. supply/demand imbalances) which suggest $65-75 oil, but rather “premature speculation”, opportunistically fueled by the fed rate cuts and resulting weak dollar. On gold, it’s not fundamentally being driven by temporary power outages in South Africa mines, as many argue. 

One need only look at the oil and even more so, gold price chart action. In each case, an argument to be made for the greater fool theory, with gold the most compelling. The price action perhaps even rivaling tulipmania (aka bubble-like market conditions) in 1637.  

Oil: 

Specifically on oil, interestingly the Nov 19, 2007 edition of the Wall Street Journal noted the real supply/demand imbalance which would fundamentally support $100 and even higher oil prices being not likely to arrive until 2012 when global demand (now at about 85 million barrels per day) catches up with current available output capacity/supply (approx. 100 million barrels per day). So a case here for short term tulipmania in advance of price justification later. 

The experts said $80 per barrel oil was absolutely unreachable, then quickly came $90 and but for the Saudi’s stating they would increase production by 500,000 barrels (and then did not), and triggering a pullback, $100 even faster. Oil temporarily peaked with that statement at $99+. With the slight (excuse/respite) pullback then to the upper $80’s, the price moved higher again, finally broaching $100. A pullback now to the high $70’s, low $80’s and then a rise to the $115-120 range before the last fool gets in, is certainly a plausible scenario and outlined in the analysis below. 

With China’s insatiable appetite and demand for oil increasing daily, and oil’s impact on Commulism’s growth, oil does represent a key Commulism “impact factor”, therefore an academic assessment of “potential” oil (and gold) price action in the future is important. 

Indeed counter-intuitive, this Analyst argues China prefers higher global oil prices. Why? With China’s almost inexhaustible $1.5 trillion foreign exchange reserves, which grow $1-2 billion per day (note this being equivalent to 15-20% daily global oil revenues), it can handle higher oil prices better than anyone. In fact it thrives on higher prices as significantly higher oil prices reduce global demand, allowing China to contract more and more of that dismissed supply.  

Therefore, lower oil prices provoke greater global demand, thereby denying China of increased oil supply access to feed its ravenous, oil demanding economic engine, and by default, denying Commulism fuel to grow.

Bottom line, in terms of countering Commulism, lower oil prices and greater global (ex China) demand is better as it reduces China’s access to “lost demand” surplus global oil supply generated from high prices. Thus the need to get quickly through this “Fibonacci price rise” (see Analyst Note below on Fibonacci Technical Analysis) and back to more modest lower oil pricing levels. In other words, hasten the Fed rate cuts and the price rise to point ”D” in the Fibonacci valuation, to accelerate the return to lower oil prices, aka the Fibonacci “confluence pricing” area. 

Analyst Note: Since the Analyst makes the case that the price of gold and oil do factor into the Commulism gameplan, the Analyst feels some obligation to provide some mental gymnastic pricing perspective to create debate on where oil and gold prices might be going and their role in the Commulism Response Framework. He uses technical analysis employing Fibonacci ratio methodology to provoke that important pricing debate. It is very important to note however that Fibonacci analysis is NEVER perfect and choosing the right A,B,and C to get D pricing points being the real challenge. Three different Fibonacci experts looking at the same chart may come up with three very unique and different assessments, some strikingly different. However, it is a useful analysis tool to if nothing more, generate needed pricing discussion/debate in the “Commulism Impact Factor” context, as is its sole purpose here. 

The Analyst provides his Fibonacci oil/gold price interpretations below for “illustrative and discussion provoking purposes” only.    

Therefore, in overlaying and applying Fibonacci pricing points and ratios to the oil price chart to determine the oil price Commulism impact factor, a case can be at least argued for the Fibonacci pricing point ABCD rise as follows:

- Point A (A1) - $47

- Point B        - $100 (recent near/intermediate top)

- Point C        - $77.5-82.5 (pullback - Note 1)

- Point D        - $115-120 (Note 2) 

Note1: With the economic slowdown tempered with rate cuts, a less severe pullback is expected. The analyst uses the better case Fibonacci 38.2%. That 38.2 retracement factor was then applied to the $53 A-B rise. The Analyst used $20 plus or minus $2.5 as the resulting potential retracement. 

Note 2: Since B-C is less than a 50% pullback, means C-D rise should be approx. equivalent to the A-B rise. However, given the pivotal “consumer mental block” demand sensitivity to $100+ oil, the Analyst factors in a modest 20% reduction of the A-B rise. Also, considering the premature peaking at $99-100 because of the unexpected Saudi announcement (prematurely stopped upward momentum) and resultant momentum dragging sideways price movement since, Analyst factored in another 10% reduction, yielding a C-D rise of $53 x’s .7, or $37.  

That yields an approximate “D” pricing range as noted. 

From Point D, the price can be arguably projected to then retrace and stabilize to/in the Analyst’s suggested Finbonacci “confluence area” of $75-85 per barrel.  

Pricing Analysis Application Conclusion: As respects thwarting Commulism, the sooner to Point D and then to the confluence area, the better as reasoned earlier.   

The professional speculators are leveraging fed rate cuts and dollar weakness et al to suck in buyers to drive the price to artificial and unsustainable levels in the “near to intermediate” term, not long term.  

Gold: 

As respects gold, a similar going forward yet far more exaggerated pricing case when comparing both the fundamentals versus its chart action’s accelerated rise to $900+, coupled with its historic inflation adjusted high. While oil teeters and nearly touched its inflation adjusted high, gold is less than half of its own. Not to say gold will too rise to its inflation adjusted high which would be approx. $2,100 per ounce but rather a much more significant percentage move to come in gold than what oil has left in it. Afterall, the prior 1980’s pricing high in “gold” had huge speculation already built into it, whereas “oil’s” previous historic high was more heavily fundamental based.  

The recent surging gold price rise is reflecting some fundamentals but even more inflation speculation, which arguably from above is built upon other (oil price/dollar/commodity prices, etc.) speculation, not fundamentals, coupled with a market viewpoint that Fed rate cuts are always inflationary when instead as argued below may not necessarily be so, at least to the level some predict.  

As done for oil, given gold also being a “Commulism Impact Factor”, here then is the Analyst’s illustrative Fibonacci pricing case interpretation for the precious metal: 

In applying Fibonacci pricing ratios to the gold price chart, a case can be at least argued for discussion purposes, for the Fibonacci pricing point ABCD rise as follows: 

- Point A (A1) - $430

- Point B         - $936 (recent near/intermediate top)

- Point C         - $775-825 (pullback - Note 2)

- Point D         - $1,350-1,400 (Note 3) 

Note 1: The temporary power outage generated mine disruptions in South Africa should not impact the analysis. 

Note 2: With the dramatic fed rate cuts already and still to come, further fueling the speculative inflation and dollar weakness fires, the Analyst assumes a less than 38.2% pullback, using 30% (of the A-B rise) instead to provide the approximate C pullback range.  

Note 3: Since B-C is predicted to be 30% type pullback, means C-D rise would be greater than A-B rise. Analyst factors in a modest 15% increase to the A-B rise (i.e. $506 x 1.15) to determine an approx. $582 C-D rise. Call it $575. That yields an approximate “D” pricing range as noted. 

From Point D, the price can be arguably projected to then retrace and stabilize to/in the Finbonacci “confluence area” of $775-875 per ounce.  

Pricing Analysis Application Conclusion: As respects thwarting Commulism, the “Yuan for Gold” strategy (discussed later in Part 8) should be executed at the top of the C-D price rise ($1,300 plus). 

Rate Cuts - Assessment: 

Oil/gold and their respective associated price speculation/projection aside, now shift back to tangible reality and the dollar/export relationship piece. The even lower dollar makes U.S. export goods that much more competitive on world markets, thereby allowing the U.S. to relatively speaking, export more and therefore “mitigate” some of the growing trade imbalance, in part driven by as outlined later, Chinese “enhanced protectionist” practices. Exporting more is clearly good for economic growth, providing then the added benefit of helping further minimize any potential recession in terms of length and severity. Note here the mention of mitigation rather than reduction. This effort attacks the acceleration in the trade deficit. The rate cuts really then are solely aimed at Commulism, yet opportunistically and conveniently hidden behind appeasing the investment community demands under the smokescreen mantra of “addressing the credit crisis”.  

Analyst Note: Not discussed by the investment community is the fact that while reducing rates does intuitively tend to weaken the dollar, in this case that weakening is in part mitigated by the rather dramatic boost in U.S. exports from those rate cuts, leaving room for more – rate cuts. 

At this point in dealing with Commulism, a weaker dollar is mandatory. The U.S. has no choice. An accompanying cost with the lower dollar of course being the lowered price of U.S. assets and real estate relative to foreign buyers and there own stronger domestic currencies. The Jan. 20, 2008 NY Times highlights the flood of foreign buyers to the U.S. to pick these up on the cheap. Since the dollar needs to remain low, consider the sale (loss) of some assets (not unlike the Rockefeller Center type transactions to the Japanese in the 1980’s) to foreign interests an unfortunate U.S. cost for decades of gross neglect in managing its financial/trade/economic relationship with China. The only thing that can be done to mitigate the loss is to weed out those transactions, regardless of percent ownership sought, which in any way are connected to the Chinese government and leverage a TBD drastically upgraded Exon-Florio provision to deny it. 

As most Wall Street analysts and economists will attest, the 50 basis point cut in Fed Funds rate in September ’07, followed by 25 more each in October and December will continue doing virtually nothing substantively to fix the credit (sub-prime) crisis. Nor will the emergency 75 basis point cut on Jan. 22, 2008 and Jan. 31, 2008 Fed meeting 50 basis point cut. Neither will those  75 and 50 point rate cuts really take hold and have effect until the (potential) recession is over – end of Q3. The timing of that emergency cut then strictly a knee jerk to boost confidence, not stop recession. It provided some needed confidence support to stem a collapsing global equity market, ironically triggered by the (Societe Generale rogue trader situation) Asian market meltdown in response to overblown U.S. recessionary fears, and the accompanying asinine, at best, U.S. stimulus plan. In fact, the meltdown being an irrational herd-like response, necessitating the premature rate cut.  

Analyst Note: When one thinks about rate cut impact, did it do anything to help Merrill Lynch and its write-off? Will it do anything more for the others not yet reporting or aware of their (significant to huge) total sub-prime et al credit exposure. Will it bail out the homeowner? Will it bail out the bond insurers? The answer is an emphatic no, on all accounts.  

Given the 6+ month lag effect of rate cuts on the economy, the 225 basis point cuts will miss having any impact on stopping a potential recession in Q1 or Q2. However, they will dramatically mitigate the length and depth of that recession, if to occur. One could realistically argue if a recession begins in Q1 ‘08, and assuming worst case that the collective 225 basis point rate cut didn’t occur until Feb. 1, 2008 (which is not the case) that the economy should be coming out of recession in Q3 ’08.  

So aside from prematurely pulling the rate cut trigger for purpose to restore confidence in equity markets, why does Mr. Bernanke fundamentally cut interest rates? What is his real underlying plan and hidden agenda? The answer is simple. To mitigate the growth and effects of the Commulism induced trade imbalance (staving off/mitigating recession being a beneficial byproduct), by driving the dollar lower against an artificially manipulated and grossly undervalued Yuan.  

These rate cut(s) are really then a very subtle, if not intentionally inconspicuous in this scenario anyway, “anti-Commulism” measure. Under the premise a lower dollar helps address the surging trade imbalance, an even lower one then is better. A further 100-150 basis point reduction (beyond the recent collective 225 basis point cuts) by the Fed over the next 12-18 months would therefore not be surprising. Of course that assumes the Yuan value is still essentially fixed (manipulated – not allowed to strengthen more than the current max of 5%) at its grossly undervalued level by the Chinese government rather than allowed to naturally and fully float against the dollar and WEAST currencies, as Treasury Secretary Paulson recently again demanded of the Chinese.  

So rather than marquis them as the media et al de-facto refers to as credit crisis medicine, instead call them what they are but heretofore not referred to, even by Mr. Bernanke, as being the “Bernanke China Cuts” – and not a bad thing when considering the real economic threat is Commulism, not sub-prime/recession. Sub-prime is a substantive and difficult short term corporate write-off, not a long term driving economic fundamental. It’s worth noting the next shoe(s) to drop in this same regard will be the commercial real estate and bond insurance markets. While painful in the short term, the collective (sub-prime/commercial) credit crisis or rather necessary “credit cleansing” process has a therapeutic healing effect in improving the longer term health aspect of the credit and other financial markets.  

A year, maybe two from now, the “sub-prime/commercial/bond insurers (i.e. collective credit) crisis” as many now refer to it, will be reflected upon as a very sharp and painful but innocuous blip in the overall scheme of U.S. stock market (event impact) history, whereas China will be that much further along in its plan, making (global) enduring financial and stock market (impact) history. 

And as respects the great Shakespearean-like debate as “to recession or not to recession”, it really becomes irrelevant in the scheme of the broader relevant theme and real overarching issue of this piece – thwarting long term global Commulism, not short term U.S. recessions.  

Putting a final label on what is real and not, to resurrect an often mentioned quip from the past, yet with a real time relevant twist, Mr. Bernanke is undeserving of the rampant myopic ridicule of Fed policy by the investment community. If he can be faulted, it might be that he’s not acting as fast as he might (addressing China) which is somewhat fair, but not for the wrong investment community perceived reasons (sub-prime/housing/U.S. recession). Contrasting that viewpoint, he in fact is appropriately dealing with U.S. global picture competitiveness, not the localized U.S. housing/credit picture, and saying it without saying it: 

Coming Next: “Commulism Series” – Part 8. This is the third of the 3 part Economic Pillar section (part of the Commulism Response Framework), and addresses the Trade Imbalance, Counter-Leveraging and Economic Sovereignty components.

                                                 

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