Why is the FED so scared?

For all readers who prefer to read my Spanish version, please click on http://themusingsoffritz-espanol.blogspot.com/

Dear reader

Going through my musings I realized that unfortunately the information is getting less positive. I am truly sorry about that because I would rather post positive information. However as I believe that knowing what is going on, although the information is not necessarly from the feel good category, should help you to be better prepared in case the situation should get worse.

In order not to disturb your positive feelings before Christmas I have decided that this post will be the last one this year.. My next post will be in January and it will be about the Kondratieff cycle.

Dear reader, I'd like to use the opportuntity and send you my best wishes for a merry Christmas and especially a very successful 2008 with a lot of fun, joyful fulfilling moments, good health, positive vibrations and that all your wishes will become reality. As our whole life (including our body) is vibrations, let’s keep the positive vibrations in order to keep the positive things positive and hopefully to change negative ones into positive ones.


FED

From shadowstats.com: The Fed seems scared. The Fed is either fully corrupt – pandering to the needs of Wall Street manipulators – or it sees something terribly frightening about to happen in the financial system. Given the people involved and the background of financial and economic conditions, there likely is an unhappy combination of both factors at play. Unquote
Just until recently the messages from the Fed where rather that there is no further rate cut to be expected. However the latest messages indicated that the Fed will do a cut in December. The market already expects a 50bps cut.

What are we going to do once there is no possibility for further rate cuts anymore?
All what those cuts and messages do, is help the markets in the short run. So we might see higher markets although the current news is far from positive. In fact the DOW rallied lately because of the interest cut expectations. The reason for the move up certainly was not the US Financial market news which were horrible. The only rationale behind all this excitement is the outlook for lower interest rates. The investors believing that this cure will solve all problems might be surprised at some point. The underlying difficulites of the economy have not changed at all. Therefore any central easing will do little to spur business activity because although interest are lower, you still need banks willing to to lend and borrowers who want to borrow. As both, lenders and borrowers have been burnt lately, neither is likely to engage at this point, particularly the banks. They are already beginning to feel a capital strain from the evolving crisis.
What is up? What is it that scared the Fed so much?
http://jessescrossroadscafe.blogspot.com/


Market manipulation

Please read http://www.nypost.com/seven/11292007/business/the_treasurys_missing_minutes_mystery_378734.htm

Please read the following essay. It is in my opinion an excellent essay. The topic is managed markets, Central Banks, credits
http://www.321gold.com/editorials/schoon/schoon120507.html


Credits
Most people thought that the worst is over. But is it? “Suddenly the mood has darkened,” reports the London Times . “Just when bankers and investors were hoping the worst was over, a second devastating wave of writedowns from major banks has rocked confidence. In recent weeks, Citi announced it would write down a further $6.4 billion in losses related to the sub-prime mortgage crisis. Merrill has also revealed more losses, while HSBC last week said it would take $45 billion back onto its balance sheet by rescuing two structured-investment vehicles. Last month Barclays wrote off $1.3 billion.
“More pain looks inevitable. Analysts expect Citi to be hit with a further $15 billion of writedowns. Investors will be nervously scrutinising a Royal Bank of Scotland trading statement this Thursday when the bank is expected to reveal sub-prime-related losses of more than £1 billion. Goldman Sachs analysts have estimated that the total sub-prime-linked losses could reach a whopping $500 billion – far higher than Federal Reserve chairman Ben Bernanke’s initial estimate of $50 billion, later revised to $150 billion.

Some more information on this topic. Next about special funds, such as pension funds and so on:
http://money.cnn.com/2007/11/30/news/economy/florida_investments.ap/index.htm?cnn=yes

some more examples to shows us that we should be careful with our investments (not everything that seems safe is safe!!)
http://globaleconomicanalysis.blogspot.com/2007/12/sell-now-ask-questions-later.html

The revenge of the SIV’s:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a9XaFLKPaCBE&refer=home

What does that all mean? It means that billions are lost on supposedly safe investments offered by Wall Street. It means as well that in the case of the Florida fund, some underpaid and underappreciated teachers will lose a lot. Most of them will struggle to pay their bills. Just imagine how they feel now, finding out that their pension fund is worth nothing. How will their Christmas be comparing to some of those Wall Street geniuses who have sold the fund the toxic waste of papers and for doing so will receive a nice bonus?


Citibank

The $41B Bomb Citi Doesn't Want You to Know About
posted on: December 02, 2007By Teeka TiwariSeeking AlphaPart of our job here is to call "Shenanigans" when we see them. Earlier this week, Citigroup ( C) announced that they had cut a deal with the Abu Dhabi state-sponsored fund, AIDA, to pump $7.5 billion into the company. This has since been widely hailed by the media as the reason that the market has begun to rebound.Balderdash!The market rebounded late this week because, a) it was incredibly oversold; and b) we’ve seen the US Dollar rally, and that has taken some of the air out of oil prices.If you closely examine the Citigroup deal, you will see that it is executive denial at its finest, and is not in the interest of shareholders… well, maybe Abu Dhabi’s shareholders. After all, they managed to secure 5% of an iconic American bank at multi-year lows for the equivalent of about 5 billion Euros. Oh, and did I forget to mention that it’s a convertible preferred that pays 11% and is convertible into common stock between $31.83 to $37.24 a share?So, why did Citigroup agree to dilute existing shareholder interests by 5%? Why didn’t they just cut the $10 billion in dividends that they pay each year? More importantly, why wasn’t this deal done with an American institution?I’ll tell you why. Citigroup didn’t go with an American buyer because any American buyer would have demanded a seat on the board and a voice in righting the ship. Heaven forbid that the company get an outspoken voice for change!Their foreign friends are apparently quite happy to take their 4.9% stake with no board seat. They took 4.9% so they didn’t trigger the filing requirements of a 5% stake. Mmm, I wonder why? What do they have to hide?…


Equity markets

Yes looking at the Dow Jones performance this year, we can say that the market is higher than it was in January. However really important is not the investment as such but what it can buy. It that sense I’d like to remind you again that in fact the Dow has lost in purchasing power. This both in the international purchasing power due to a lower USD and national purchasing power due to an inflation which was averge above the 10% this year. Now let’s go to the actual situation; As mentioned in a previous post, according to technical analysis, the Dow Jones confirmed the breakdown of the Transport index as the Dow Jones was closing a few days ago below the August low of 12,845. This is not good news. The rally we saw after that close was because of the news of the new investor in Citibank. Furthermore the market was clearly oversold and therefore a technical correction could be expected. However the markets do clearly need the action of the PPT (aka Plunge Protection Team) in order to keep the US markets in positive territory. This task seems to be more and more difficult and therefore the help of the Fed is needed. The problem is that there will be a point where the rate cuts of the Fed simply will not have the same effect anymore. That means to me that the inevitable is just delayed. Anyway the actions done by the PPT do cost considerable amounts of money. Gues who pays? Looking at M3 and inflation numbers it seems to be everybody having to use the USD to pay for real “stuff”.

By the way do you know why your investment advisor tells you that stocks should be bought for the long term? Well to be honest I do not know it but I am convinced it is not because of his/her knowledge that it took 25 years until prices did regain their 1929 highs or because he/she knows that stock in fact did go down between 1966 and 1982.

Yes these are facts. Facts that are easily forgotten after a certain time. I believe that one should look at long cycles in order to understand certain trends. The Kondratieff cycle indicates that we should already be in the Winter phase. Greenspans low interest policy had the effect that the Winter start was a bit delayed maybe.


Gold (the only real money and only true store of wealth)

Goldman Sachs (Grandich, believes that G-7 now stands for Goldman since so many former executives are in the top central banks positions of the G-7 countries) came out with below recommendation:
… But the 2008 top trades list, drawn up by Goldman's global markets team, suggests investors short gold priced in U.S. dollars in order to capitalize on a gradual relaxation of credit concerns in the financial sector over the coming months and as an avenue to benefit from the prospect of the U.S. dollar stabilizing. Bullion has been one of the main beneficiaries of the financial turmoil that began in August as investors sought alternative stores of value to the weakening U.S. dollar.
The recommendation contrasts with a forecast published two days ago by New York-based Goldman analyst Oscar Cabrera, who predicted the average price of gold in 2008 will rise to $800 an ounce, from about $687 this year. ``We see upside risks to our forecast,' Cabrera wrote in a research report
The last time Goldman came out with such a recommendation the gold price went up considerably. Not everybody is believing these guys anymore.
What one certainly cannot expect is a bullish outlook on Gold from Wall Street and the mainstream financial media. Why? Because it would come at the expense of financial assets. Anyway, Gold has performed extremely well over the last 6 years. That means that although those entities mentioned before are shooting against gold again and again it will not mean anything looking at the big picture. They will win their small battles from time to time and might clap on their shoulders for having foreseen correctly any correction but this will clearly not change the long term outlook for gold. As long as the “normal” investor is not interested in precious metals and Wall Street is far away from any recommendation to invest in precious metals I am confident that we will see much higher prices. Those who argue that precious metals are in a bubble would better spend their precious time and study bubbles. History if full of bubbles but according to my knowledge there is not one of these bubbles having burst withouth the masses having been invested in it beforehand.
http://goldmoney.com/en/commentary.php#current


Commodities

Is the correction already done? Well calling the bottom is difficult. If you believe what I believe, namely that the physical demand out of China and India will stay high, it might be a good moment to start to build a position in industrial metals. Why should the physical demand out of China and India stay high? Well although we might see a slowdown in the US economy and therefore certainly will have some kind of impact on those countries that so far did sell their goods in the US market, I do not believe this effect to be so strong in order to stop completely or reduce considerably the demand for industrial metals. China and India still have huge masses of rural population moving to cities. Both countries will have to build/invest in infrastructure just to provide those people with the basics infrastructure. Furthermore all the oil producing countries earning billions will use some of this wealth to improve their infrastructure. Their wealth will not only be used to build infrastructure but as well for consumption of “real stuff”. So it seems that we might just go throught a correction phase and that we will see higher prices next year.


Peak Oil

Again, as mentioned a few times, I do not have any doubt that we will see oil prices somewhere between USD 120 and 150 / barrell in 2008. However to me it seems that we need a technical correction before. Therefore I still believe that we will see an oil price of somewhere around USD 70/barrel over the next 2-3 months. The level of USD 70 will, in my opinion be an excellent level to buy oil related investments. I certainly will do it for myself.
Please read the essay, which covers 100% my opinion, on the following link http://www.financialsense.com/editorials/gue/2007/1202.html

Peak Oil and medical system
Dear reader, I am sorry that most of the info posted does not belong to the “feel good” kind of information. This one unfortunately is in the same category. However, although not nice to read, I truly believe it is important for us to be aware what oil or petrochemicals do mean to our live. Petrochemicals can be found almost everywhere (even in your cloth) and at a certain point we will need alternatives. Will we be ready to switch to alternatives quickly? I am not so sure yet.
Let’s take the example of the medical sector.
Directly, petrochemicals are used to manufacture analgesics, antihistamines, antibiotics, antibacterials, rectal suppositories, cough syrups, lubricants, creams, ointments, salves and many gels. Processed plastics made with oil are used in heart valves and other medical equipment. Petrochemicals are used in radiological dyes and films, intravenous tubing, syringes and oxygen masks. In all but rare instances, fossil fuels heat and cool buildings and supply electricity.
http://www.post-gazette.com/pg/07336/838187-109.stm

Have you ever thought what could happen if oil supplies from the middle east would stop considerably due to geopolitical problems?
Please go to below link. C.Hynes describes the possible outcome in a funny way. At least I enjoyed the reading. By the way, those of you that remember the 70ies, might remember that oil was not available easily. In Europe several countries introduced “car free Sundays”.
http://themusingsoffritz-peakoil.blogspot.com/2007/12/sixty-days-next-year.html


China

From the Prudent Bear webpage
Bears on China have been common for the last decade, and their track record has not been good. To take just one unfair example, Henry Blodget, the former Internet genius, wrote in Slate in April 2005 “You’ve probably been daydreaming about the fortune to be made in Chinese stocks. Well, keep dreaming….you’ll eventually conclude that you could have done better selling insurance in Toledo.” That was about six months before the Chinese market took off, and if anybody has made 500% on their investment by selling insurance in Toledo during that period, I haven’t met him.To see why a crash may be coming, it is worth examining the behavior of the China Investment Corporation, the $200 billion sovereign wealth fund set up by the Chinese government in September. Now $200 billion is a fair chunk of cash; you could almost buy all but three US corporations with that (at today’s prices, ExxonMobil, General Electric, Microsoft – there are 4-5 others including Google that barely top the bar.) Six weeks ago, the power of sovereign wealth funds was celebrated and China Investment’s moves into the market were awaited with bated breath.Well, so much for that. A third of China Investment’s portfolio is to be invested in Central Huijin Investment Company, a purchaser of bad loans from the Chinese banks, and another third will recapitalize China Agricultural Bank and China Development Bank, to shape them up for privatization. $3 billion of the fund was invested in the private equity manager Blackstone in May – that may have bought China useful political contacts, but it is now worth $2 billion. And the remainder is being invested very carefully, primarily in US Treasury securities – which are also losing money steadily in yuan terms.
For more info, please go to
http://www.prudentbear.com/index.php?option=com_content&view=article&id=4854&Itemid=53
This is certainly an excellent overview. However I do have my issue with the comparisons to the US. Why? Because whenever comparisons to the US are made the offical US numbers are taken. If we would take the real numbers (negaitive GDP for the US for several years now) the situation would look absolutely different.


USD

Do we see the expected correction? The USD is somehow like the Oil only reverse. The long term trend for the USD is in my opinion still down. However over the last weeks we have seen such an acceleration of the down move that it seems that we have seen to much of it for this time. A up correction therefore would not surprise me at all especially taking as well into account that there was strong oversold situation. Well, if you did not start your diversification out of the USD yet, you very well might be given another good chance in a few weeks.