Looking Back on the Grasshoppers’ Indian Summer

It was as though the winter would never arrive. The slumbering summer stock markets of 2010 lept to life. September recorded the best market month since 1939. In early October, with Wall Street jubilating, it cracked the 11,000 ceiling … a mere 3,000 points shy of its October 2007 high.

Nothing, not even the facts, could mute the summer chirping of gleeful grasshoppers on that ceiling-cracking Friday. Not the Wall Street Journal front-page headline, “Dollar’s Fall Roils World.” Not Bloomberg’s headline, “Payroll Drop in U.S. Exceeds Forecasts.” Nor the fact that 95,000 jobs were lost in September … and that the jobless rate had topped 9.5 percent for 14 straight months – the longest losing stretch since the 1930s. No news was bad news on that buoyant October 7th market day.

The recession was over. The Business Cycle Dating Committee of the National Bureau of Economic Research, the official arbiter of such matters, officially cited June 2009 as the date the recession had “officially” ended.

“We will not have a double-dip recession at all. I see our businesses coming back almost across the board. I am a huge bull on this country,” exulted Grasshopper-in-Chief, Warren Buffett, “America’s most beloved investor,” according to Forbes magazine, which ranks billionaires for numbers of billions and also for belovedableness.

In full Indian Summer delirium, the “best and brightest” and richest of grasshoppers appeared incapable of believing that winter was on its way, even though the signs were everywhere.

Unemployment kept rising, GDP was slowing, the trade deficit worsening, and despite trillions already squandered on ineffective stimulus programs, the Fed signaled it would keep pumping even more trillions into the economy in the belief that what didn’t work before would somehow work later.

The dollar was falling like autumn leaves. Unintended or not, what the Fed’s money dumping policies had achieved was to devalue the currency. Couldn’t the grasshoppers see the consequences?

Commodities Prices Soar as US Dollar Hits 10-Month Low

The US dollar tumbled to a 10-month low against a basket of currencies yesterday, lifting oil prices and driving up gold to a record high.

The dollar has been weakened by concern in global financial markets that the Federal Reserve will soon embark upon a programme of quantitative easing (QE) – asset purchases – in order to rescue a floundering economic recovery.

Investors, fearing the world’s most powerful central bank will soon pump more dollars into the financial system, have fled from the greenback for the safety of gold and crude oil futures.  Gold prices rallied to record highs of $1387.10 an ounce yesterday before falling back to around $1375.

Silver, oil and copper also rose in value on the back of dollar weakness. Since commodities are priced in dollars, they are more of a bargain for traders who buy them with foreign currencies.  (Herald Scotland, 15 Oct 2010)

The aftermath of a plummeting dollar was as predictable and ineluctable as winter following autumn. The defining element was the price of gold. And it was not only Fed policy that was driving it higher.

“War” had been declared!

“We are experiencing a currency war,” said Brazilian Finance Minister Guido Mantega. “Devaluing currencies artificially is a global strategy.”

In an effort to juice exports, nations vied with each other to see who could devalue their currencies the most. What an ingenious concept – printing cheap paper!

For exporters, at least it held open the possibility of providing a temporary boost. But for everyone else, it simply meant that it would take more paper to buy what less paper used to buy. That’s what you get when you devalue the currency.

The world was flooded with cheap paper. It was very, very easy to understand why gold prices were going higher and why they would continue to go higher still.


Gerald Celente
for The Daily Reckoning

[Editor’s Note: The above essay is excerpted from The Trends Journal, which is published by Gerald Celente. The Trends Journal distills the ongoing research of The Trends Research Institute into a concise, readily accessible form. Click here to learn more about and subscribe to The Trends Journal.]