In 1994, the movie, "The Shadow", was released, starring Alec Baldwin as the suave Lamont Cranston, a sophisticated playboy residing in New York City. Unknown to all but his trusted driver, a dark secret however lurks beneath his debonair exterior. A former Tibetan opium dealer and a ruthless crime lord he once raped and pillaged and was renowned across the Asian steppes for his cruelty and vicious genius. His ambition knew no bounds until one day he attempted to take the life of the emperor himself. In so doing he encountered a power and ability he had never seen before and was powerless against. The realization makes such a deep and lasting impression that he renounces his life of violence and enters into studies sitting at the feet of the man he once tried to kill. Under that tutelage, he learns to subdue his dark side, gaining mastery over it and in the process acquiring the skill to "cloud men's minds". In effect, he has learned to harness his dark side and turn it for good. Taking this skill to America, he becomes a sworn enemy to the evil darkness that lurks in men's hearts and motivates them to a life of crime. When the bad guys threaten the law abiding, Cranston's alter ego emerges to take them on. In the process he becomes "The Shadow".

What is unique about the Shadow is his ability to inject thoughts into men's minds making them forget what they were about to do. Their "minds being clouded", he is then able to implant his own suggestions into their minds and move them to do his bidding. Of course, this power is used solely for good.

Why bring up such a movie? (By the way, if you want an enjoyable diversion, treat yourself to the DVD of the movie.) Simple - in seeing the movie recently, I was struck by the remarkable similarity of the Shadow's ability to cloud men's mind and the ability of Alan, "the Shadow", Greenspan, who has seemingly acquired the same power as Cranston. Through whatever alchemy Greenspan has acquired, whether through his testimony before the Congress or through his many minions also known as Fed governors whose words continue to beguile the public, he has managed to cloud the mind of millions of investors and traders apparently making them take collective leave of their senses en masse. In this feat, he has managed to "outShadow" the Shadow himself, since Lamont Cranston confined his mind control to one individual at a time.

What I am referring to is Tuesday, July 13's, price action in the U.S. Dollar and by consequence, the price action of gold for the same day. The Commerce Department's release of the May trade balance of payments data revealed a deficit of "merely" $45.95 billion instead of a widely expected $49 billion. Traders reacted to the release with gleeful abandon causing another classic short covering squeeze in the U.S. Dollar. Naturally, gold was smashed close to $8.00 as a result before settling $6.10 lower on the day at $402.30.

Various reasons have been given for the violent reaction but the crux of the matter is that no one can offer a rational explanation for such an idiotic reaction. I can almost hear the voice of the Shadow Greenspan: "You will buy the dollar and you will buy lots of them. You do not want Gold. You do not want Silver. You want lots more paper. You love paper." Suddenly, as if driven by some impulse deep within them, traders mindlessly found themselves furiously banging away at the "Enter" key on their internet based trading platforms sending dollar buy order after dollar buy order into the pit while simultaneously jettisoning anything remotely resembling precious metals. Upon completion of their exertion, no doubt a sense of dumbfounded ness stole across their minds and they awoke as if from a dream. "What did I just do and why?" was heard uttering from their lips.

While this of course is meant to be a bit of lighthearted humor the simple fact is that today's reaction to the trade deficit figure was patently absurd no matter how one wants to look at it. After all the various reasons are given, under no circumstances whatsoever can today's numbers be considered "dollar friendly". How can it be when the cumulative total trade deficit from January through May of this year stands at $231 billion? On an annualized basis, that projects to $554 billion - that is half a trillion dollars that must be financed by foreign inflows of capital! Think about the repercussions of so staggering a sum. When combined with the expected federal budget deficit, which numbers were also released today by the Treasury Department and is expected to come in at $520 billion through the fiscal year, the total amount of foreign capital that will be needed to fund both deficits this year is over ONE TRILLION DOLLARS. When is the last time you actually wrote down the number, 'one trillion?' For those of you who are interested, here it is: $1,000,000,000,000.00

What I personally find so perplexing is that traders and investors could digest this kind of information with such a lackadaisical response. It truly is as if some great force has clouded men's minds making them seemingly oblivious to the fact that this situation is not sustainable. What are these seemingly hypnotized, hapless dupes going to do when suddenly foreigners decide they no longer want to play ball with us?

"Yes, but the deficit number declined," say some, inferring that the trade deficit is beginning to improve and the cause for concern is lessening. Two points -The first is that we had civilian aircraft exports increase from the previous month and reach $2.1 billion for the month of May. That number alone is nearly the difference between the $49 billion deficit the market was expecting and the $46 billion that it got instead. How many aircraft are sold each and every month? After all, they are not exactly like buying socks or underwear which need replacing every few months. Secondly, and more importantly - by bidding up the dollar upon hearing that the trade deficit improved, traders are actually working perversely to worsen the very situation they are extolling. A rising dollar will do nothing but exacerbate the deficit as it will raise the cost of our exports abroad while serving to lower the cost of imports from abroad. The end result is that we will import more and export less. If "Al the Shadow" had not clouded men's minds, the proper reaction to the release of the news of a trade deficit that narrowed would be to force the dollar further in the direction that was serving to help correct the problem thereby hastening the cure. What direction is that? Down of course! Assuming traders decide to follow the subliminal message they have received and continue to bid the dollar further up - what can they expect to see down the road in the upcoming monthly release of the trade balance figures - an improving of the situation or a worsening? It should be pretty obvious what the answer to that one is.

The reality is, Shadow Al or not Shadow Al, if the gargantuan trade deficit is ever going to be corrected, the dollar will have to weaken substantially making the cost of imported goods more costly while simultaneously lowering the cost of American made goods abroad. This necessary adjustment process will entail serious repercussions to the U.S. economy. Consider the fact that America imports well over half of its crude oil needs from abroad and it is a foregone conclusion that in the matter of this one area alone, a weaker dollar is going to entail higher imported crude prices translating across the board in higher gasoline, diesel and aviation fuel costs for the American end user. In other words, if we attempt to cure the trade deficit, we unleash the monster of inflation. If we do nothing, the deficit grows larger and larger and all we do is postpone the day of reckoning, making it even worse when it finally arrives.

Perhaps, when the fog that has descended upon the brains of traders at Greenspan's beckoning departs, they will come to their collective senses and realize that the U. S. Dollar is in serious trouble and that the sensible play is gold. In the meantime, get used to rational creatures acting in an irrational manner. Why? Only the Shadow knows…

Dan Norcini
July 14, 2004

Dan is a professional off-the-floor commodity trader residing in Texas and can be reached at dnorcini@earthlink.net with comments.