With a worsening trade deficit, dollar rose and gold collapsed with stocks – how can that happen?
Sam Adelton
May 11, 2007

Normally a higher trade deficit is bad for dollar. As dollar collapses, gold rises. Something went wrong today. The trade figure was very bad. Then the retail sales figure arrived. That was even worse. That should collapse the dollar. No – dollar strengthened further. Gold really collapsed even though Treasuries went higher. How do you make that out?

Well, the answer lies in what we are trying to tell you in the last two years. The economy is in terrible shape. It is on a life support system called artificial liquidity and the perception that nothing can go wrong. The deflation is here. It is hidden because the borrowed money is paying for the continuation of the standard of living. It is really scary.

The dollar rose and gold fell because deflation showed its teeth through the collapse of retail sales. The retail sales will be way lower as people finally realize their existence is in question. Not only retail sales, but also every other sectors of the economy will be affected. The cycle of deflation and depression feeds itself in a chain reaction. That is exactly where the economy is headed.

Do not make a mistake, the artificial liquidity Fed created and the perception of that will keep deflation under the rug for a while. How long? We do not know. It depends on how big a printing press they have. But sooner or later the bottom will fall off. The stock market will go down like never before in the history. The real assets including stocks will collapse in price. It will just confirm deflation.

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