Dear reader I posted this post already a few days ago. Things are really changing at an ever faster speed. Today the Fed lowered the Fed rate 75 bsp. This is a lot and shows that there are serious troubles around. Following a copy from www.shadowstat.com alert
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Mr. Bernanke’s panicked 75 basis point (0.75%) interest rate cut this morning, in the face of what appeared to be a likely troubled open for the U.S. stock market most certainly was done in conjunction with the activities of the Plunge Protection Team (PPT a.k.a. the President’s Working Group on Financial Markets). Beyond manipulation of stock futures contracts, PPT coincident activities in past crises also have involved direct, coordinated central bank intervention aimed at supporting the U.S. dollar and at depressing gold and oil prices. Such appears to be at work as stocks "rally" off their opening lows around 10 a.m. ET.
Bernanke appears to have moved, as Greenspan did in the October 1987 financial panic, to abandon fully the greenback in hopes of propping stocks artificially. Irrespective of what happens in the markets today and tomorrow, there is no happy news in this circumstance, with the U.S. financial system so heavily dependent on foreign capital for liquidity. Beyond the short-term games played by the central banks, the general outlook remains pretty much the same, with a deepening inflationary recession, a major bear stock market, heavy selling of the U.S. dollar, heavy buying of gold, and an eventual flight to safety away from the greenback that will spike long-term interest rates (currently negative net of inflation). What is changing is that the eventual flight to safety away from the greenback is being pulled rapidly into the near future.
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Following the post, posted on Saturday January 19th
Hello dear reader. I hope you had an excellent start into the New Year. There is much money to be made this year if you invest wisely. Wish you all the best anyway. To start with, I would like to mention a few administrative items.
First of all I’d like to let you know that I believe that the information about the Kondratieff cycles (posted in my last post) is a piece of information you should know. If you did not find the time to read my last post, you will find at the end of this post a copy the most important information about the Kondratieff cycle.
Furthermore I’d like to mention that I added on my last post the possibility for you to rate my posts. I know that many of you did read the post but did not rate. Please make the evaluation. Your evaluation should help me over time to improve my posts. Please take note that I have not the tools to see who did what rating. It is anonymous. So please do not worry just rate/evaluate the way you believe it should be rated.
Furthermore I added polls. This again is anonymous. The idea is to get an idea what the readers think or do expect. I shall let you know the results in due time. Therefore please participate. Thanks.
Finally I added on the right hand side, top corner the tool to let you subscribe to me feed. That means if you use for example Google or Yahoo homepages, you could add my feed to your page. This allows you to see my updates on your page.
Please take note that for the moment being there is a problem with the links added to the post. Unfortunately clicking on the links that are in the post does not allow anymore going directly to the respective webpage. That means that you have to copy the address and post it into the webpage address field. Sorry for the inconvenience, I hope the Google will solve this problem soon.
If time permits, I would like to make more frequent but shorter posts. However please take note that from January 30 to April 31 I will be traveling and might therefore not be able to do the post as frequent as I wish to do.
Oh, almost forgot, in case you have any suggestions, please send a mail the mail indicated on this page. If you like to recommend this blog to your friends, please do so.
Now to the information:
Credits
Well the New Year started well for some and not se well for others. Some of the not so well category is; those managing public sector funds and having invested in the Florida state run investment pool. Why? Because after having had requests for large amounts of withdrawals, the pool had to freeze any transfers out of the pool. That means that those having money in the pool are not able to withdraw. Not a nice situation. Please read the article below, which in my opinion is very interesting and shows that surprises regarding so called conservative, secure investments can happen from time to time
http://www.nytimes.com/2008/01/01/us/01pool.html?pagewanted=1&_r=2&hp
Another member of the not so well category seems to be Merrill Lynch who already had to take an USD 8 billon hit related to subprime investments.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aza8vH4Q9hhg&refer=home
And further we go; Citigroup is posting staggering losses including a recent fourth quarter loss of USD 9,83 billion
http://www.bloomberg.com/apps/news?pid=20601087&sid=auWQOJdZc8yA&refer=worldwide
In fact the bad news is pouring in so fast it’s hard to keep track of it all.
By the way talking about credits, there are other segments to worry about.
Commercial Real Estate seems to be the next victim of the problem. Furthermore we should worry about credit card debt and consumer debt. An interesting piece of information about this segment you can find on below link
http://www.latimes.com/business/la-fi-autoloans30dec30,0,4058852,full.story?coll=la-home-center
Well as mentioned at the beginning. Some are doing well others not. Following is an example of some who do well in the actual situation. Of course it is not a business I would like to be involved in any case but nevertheless it is in my opinion an interesting aspect within the whole topic of credits.
http://comment.independent.co.uk/commentators/article3300967.ece
Credit Derivatives May Lose $250 Billion, Gross Says
Jan. 8 (Bloomberg) -- Credit-default swaps, used to help protect against the risk a company won't pay its debt, may cause losses of $250 billion this year, helping send the U.S. economy into a recession as corporate defaults rise, Pacific Investment Management Co.'s Bill Gross said.
``Credit-default swaps are perhaps the most egregious offenders' in today's banking system, Gross wrote on the company's Web site today. ``Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.'
http://www.bloomberg.com/apps/news?pid=20601087&sid=amYmMtQWHhHo&refer=home
Following some news of the past week taken from lemetropolecafe.com
1. Retail sales for Dec. were very disappointing, as 2/3rds of the reports were below already lowered expectations.
2. On Thurs., the big municipal bond insurer MBIA announced that they sold $1billion of debt at an interest rate of 14%!
3. Also on Thurs., Bank of America announced they were buying Countrywide Credit for about $7 per share, or $4billion. Countrywide was a $45 stock last Feb.. BofA invested $2 billion back in Oct. at a strike price of $18 dollars. So in 3 months Countrywide has lost 60% of its value. In 1 year they have lost about 85%. This company has been a part of one quarter of all mortgages written in the last 5 years! Thurs. morning saw rampant speculation that Countrywide would go bankrupt any day, then we got the buyout offer from BofA in the afternoon.
4. American Express announced after the close Thurs. that card usage was beginning to slow, while delinquencies were beginning to rise. The stock was hit for 11% on Fri.
5. The trade gap announced on Fri. widened by 9.1% to $63.1 billion in Nov.
6. Shopping center vacancies rose to an 11 year high.
7. Fed chairman Bernanke actually spoke of weaker growth and higher inflation in the same breath. His proposed remedy as always was, drumroll please.................. lower rates, and more credit! Imagine that? He has for all intents and purposes said "the Dollar be damned, we don't care about inflation, and we will save the system at all costs".
8. Goldman Sachs forecasts a recession in 2008, David Rosenberg of Merrill Lynch says we are in a recession NOW!
Other companies in trouble are AMBAC and MBIA.
http://www.marketwatch.com/news/story/bond-insurer-woes-may-trigger-more/story.aspx?guid=%7B590076D4%2DFB70%2D4304%2DB6B4%2DC444A554401C%7D&siteid=yhoof
http://news.yahoo.com/s/ap/20080118/ap_on_bi_ge/bond_insurers_11
http://www.reuters.com/article/marketsNews/idUKN1748885020080117?rpc=44
Having these two companies in trouble, what does it mean? Well it means that all the municipalities having relied on the guarantee and excellent rating of the two companies in order to receive themselves a good credit rating will have to accept much higher financing costs in the future. That means as well that these higher cost will be felt throughout the US as the costs for building infrastructure, school etc. will go up considerably. This combined with lower tax income due to the slowdown in the economy does not paint a nice picture.
Stock market
Well dear reader, you know already that I have not been in favor of the stock market as such for quite some while. Why? Well because the market in fact did only hold up thanks to the PPT (Plunge Protection Team or to use the official term, the Presidential Working Group for Financial Markets). In fact it was not difficult to see their manipulation of the markets. There were countless days where the market without any reason started to go up the last hour before closing on days when the market has been down for the whole day. The possibility that this pattern does repeat itself without the kind help of some manipulating entity is one to some several millions. This is not normal market behavior. You certainly have seen as well that in general terms the Fridays seem to be very important. Why? Well the week should always close in positive territory therefore the PPT was very active on Friday’s in order to have a positive closing. So then, what is happening now? Why this miraculous maneuver of the PPT does not work that well anymore? Well, what is happening now is that the bad news hitting the market (we should not forget that already before the level of bad news was at a considerable high level) is so much, that it simply cannot be ignored anymore. That means that even TV commentators cannot deny the actual bad situation anymore. The past dubious justifications they used time and time again do not work anymore. It seems that the PPT has serious trouble to keep the markets in shape. We certainly will need the kind help of the FED by lowering soon the FED rate in a considerable manner.
Gold
Yes my dear reader, you know it already. As a gold bug, being bullish for gold since 2001, it is really a satisfaction seeing the price of gold going up nicely and thus outperforming other investments. From a dollar point of view we have been in a bull market over the last six years. However the real bull market only started approximately two years ago, when the gold price started to move up against all currencies. That means since more or less 2 years the price of one ounce of gold in Swiss Francs, or in Euros or any other currency did go up as well. This shows that we are now in a real bull market. So my friends, I believe we have a couple more years to go until this bull market stops. Possibly we have passed through the first stage of the bull, the stage where the “smart” money starts to accumulate. To me it seems that we are now at the beginning of the second phase, where the professional financial investors start to buy and accumulate. According to Elliot Wave this phase is by far much stronger than the first one. So we should be in for a nice ride to much higher prices of the precious metals.
Richard Russell about Gold
You don't time your gold purchases, you simply accumulate gold. Gold is pure tangible wealth and therefore it can never go bankrupt. In contrast, no fiat currency has ever survived the passage of time. All fiat currencies eventually become worthless in that over time they lose almost all of their purchasing power
http://www.321gold.com/editorials/russell/russell010108.html
Ups, I almost forgot. How can I? Yes my dear reader, gold started very well into the New Year. In fact on the first trading day in the New Year, January 2, gold stormed like a fine top race horse, out of the box and made a new all time high with a closing above the old historic high of USD 850 an ounce, a price last seen back in 1980. This seems a high price already. But wait, it is definitely not. If we look at inflation adjusted prices, we would need a price of USD 2,100 approximately to have a price that reflected the 1980 top price of gold. Please take note that this would be adjusted to the official inflation numbers. If we look at real inflation numbers the price of gold would have to be above USD 6,000.—in order to have a new, inflation adjusted high. With other words, buying gold at a price of USD 900 is like buying gold back in 1980 at a price below USD 400 an ounce. Really very favorable prices still. Great for all who like to purchase more.
Please read the essay from James Turk on the following link
http://www.sfomag.com/homefeaturedetail.asp?ID=1167686165&MonthNameID=January&YearID=2008
He explains in a clear way, why one should own gold.
Richard Russell
Gold Fundamentals -- My old New York friend, Ron Rosen, provides some of the best writing on gold that I've seen anywhere. In a recent Internet report ("Precious Metals Timing Letter"), Ron notes that as of January 5, 2008, the national debt of the US was $9,197,435,162,839.30. In case you're confused (which you should be), that's nine trillion plus dollars. Ron writes --
"It’s rather obvious that the national debt of the United States has grown a heck of a lot faster than the price of gold. It has taken only 28 years for the national debt to grow from nine hundred billion dollars all the way up to NINE TRILLION DOLLARS. That means the national debt has grown 10 fold in only 28 years.
"Over the same 28 year period the price of gold has done nothing but go down and then back up to where it was when the national debt was only nine hundred billion dollars. That was a round trip from $850 an oz. down to $250 an oz. and then back up to $850 an ounce.
"The trip down from $850 to $250 for gold bullion was like being squashed by a giant metal press. Every last drop was squeezed out of it until it was hardly visible by most folks. There were a few who kept their eye on gold all the way down. That must have been extremely frustrating, particularly because the Dow Jones Industrial Average went from a low in 1974 of 577 to a high in October 2007 of 14,164."
Russell Comment -- What Ron is noting is that while the National Debt has been surging ever-higher, the price of gold was "squeezed" lower. For gold, this was like a giant force literally pressing down on the metal, compressing it from its 1980 high of 850 to its 1999 low of 250. But now gold has returned from the dead. Ever since its 1999 low, gold has been pushing up through the lies, through the ignorance, through the negative propaganda and now gold has finally broken out above its 1980 high. Suddenly, the great force that has been compressing gold, holding it back -- has been removed. Now, all the stored-up energy of 28 years of compression is being released...
And another one from Richard Russell
Richard Russell (Dow Theory Letters): A mighty interesting move coming up for gold
"Now that gold is at all-time highs, is there any way to tell where gold might be going? I’m going to repeat the words of W.D. Gann. Mr. Gann is considered by many professionals to have been one of the greatest commodity and stock traders (and thinkers) of all time. Here are Gann’s words (courtesy of my old New York friend, Ron Rosen).
"‘When a stock or a commodity advances into new territory or to prices which it has not reached for months or years, it shows that the force or driving power is working in that direction. It is the same principle as any other force which has been restrained and breaks out. Water may be held back by a dam, but if it breaks through the dam, you would know that it would continue downward until it reaches another dam, or some obstruction or resistance which would stop it.
"‘Therefore, it is very important to watch old levels of stocks and commodities. The longer the time that elapses between the breaking into new territory, the greater the move you can expect, because the accumulative energy over a long period naturally will produce larger movements than if it only accumulated during a short period of time.’
"It took 28 years for gold to break out above its 1980 high of 850. In view of what Gann says, this should be a mighty interesting move coming up for gold."
http://investmentpostcards.wordpress.com/2008/01/06/words-from-the
-wise-for-the-week-that-was-dec-31-2007-%e2%80%93-jan-6-2008/
And most important Gold again did better than equities. Please see following chart and read the respective article at http://www.safehaven.com/article-9129.htm
Mentioning the performance of the equity markets against gold, I’d like to give you the following additional information regarding performances in 2007.
Dow finished the year up 6.4%
The S&P 500 ended up 3.5%
And the NASDAQ reigned supreme once again, up 9.8%
But the real growth story in equities have been the emerging markets such as for example
The Shanghai Composite ended the year up 96%
Brazil end with a plus of 76% and
India with a plus of 74%
Well of course we do not know if this story goes on. However it seems that equity investments do better in emerging markets, at least for the time being, and of course in any companies related to commodities.
Oil
In my last post I mentioned that I was expecting a correction, which we had to some extend. My expectation was based on technical analysis only. Looking at that yes the crude price should have gone down a bit more than it did. So technically speaking we still should have the correction down to a price of somewhere between USD 80 and USD 85 per barrel. This of course can happen and I truly hope it will happen. However it seems that for the moment being, the fundamental situation plays now a much more important role. What do I mean with that? Well I mean that we are now at the plateau regarding oil production. That means that what is daily extracted from mother earth is more or less covering the daily demand. Oil production can at this point clearly not be increased and this situation will remain like this at least for some time (if not for ever). Demand on the other side is increasing in a steady form. The increasing economies of the emerging markets are demanding more and more of the crude. Per capita consumption in most of these countries is still in the range of low to extremely low, compared to developed countries (in below chart you see that in some developing countries the consumption per capita has increased tremendously). If this consumption only goes to average we will be faced with a much higher demand already. Now being at the plateau means that whenever there is a problem that indicates that production might be disrupted for some time, oil prices immediately spike up. If a real problem arises in the sense that oil production in some place on this planet has to be reduced or stopped, it means immediately that daily production cannot cover daily demand anymore and this leads to higher prices. Well being at a plateau most probably will mean that we will face huge price fluctuations with a clear trend towards higher prices due to the fact that in a relative short time demand will be higher than supply. If we will have this huge fluctuations I do expect, it will mean that this situation will be excellent for traders. Furthermore I believe one should buy oil whenever we see lower prices.
Following some savvy information from www.lemetropolecafe.com (once again I truly recommend to subscribe)
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The most significant news to hit the tape recently is the insolvency of the bond insurers AMBAC and MBIA. This lets the derivatives scam genie out of the bottle. For 7 years or so at GATA we have hammered on the fact that derivatives are just a huge Ponzi scheme. Derivatives are essentially special performance contracts where a specific event occurring with the underlying asset triggers a pay-out. They are used to insure against something not happening or bet that something will happen. However, the counter-party must have the financial means to pay out. Considering that the notional value of derivatives is now 500 Trillion dollars worldwide clearly the counter-parties as a whole do not have the funds to pay out. They probably don’t have enough funds to cover more than 1% of the contracts…so this is "fractional reserve" insurance!
Most of the world’s biggest financial institutions and banks who are supposed to be savvy about investing have fallen for the scam hook, line and sinker. They thought they could invest in some of the most risky assets on the planet such as junk bonds and take out cheap insurance against the bonds going into default. They thought they could buy junk bonds paying 25% interest and buy insurance on them for 5%! They thought in this way they would have a guaranteed income of 20+% and no risk of default!! What is wrong with that picture? What is wrong is that it is too good to be true. For any sane person it is obvious the insurance premium is under-priced. Any insurance company that under-prices risk will not be collecting enough premiums to accumulate adequate capital to cover the eventual defaults.
In the case of the bond insurers the rating agencies turned a blind eye to the obvious mis-pricing of risk and rated the bond insurers as AAA. The junk bonds the insurers sold insurance against then became AAA rated! When catastrophic events don’t happen for a long time it makes investors feel that such things won’t happened. Even sophisticated risk analysis models that use historical data become distorted.
The FED, along with the PPT and Counterparty Risk Management Policy Group CRMPG have been meddling in the financial markets for over 25 years and have tried to avert any financial catastrophe from happening through massive liquidity injections and cheap credit. They have suppressed the price of gold to mask the economic colonization of the world. More than 50 years ago portfolio risks were hedged with up to 5% of gold ownership. This has been supplanted with hocus pocus computer generated risk hedging via exotic derivatives and US government debt instruments. When ever the press talks of investors going into a safe haven play it is always treasuries! Gold is NEVER mentioned as a safe play option. Many commentators have lamented the exporting of America’s manufacturing base to third world countries. As far as the cabalists are concerned there is only one manufactured product that is important and that is US Dollars. If these can be produced in ever increasing quantities and other countries will accept them as payment why bother to make anything yourself!? To cheerlead this scam the FED Chairman often warns against a rise of protectionism in American markets. This rhetoric veils their own fierce protectionism that nothing should compete with their own monopoly to manufacture and export the global reserve currency out of thin air.
But today there are big cracks in the dam. The fallacy of risk free, high returns via fiat money financially engineered products is coming unglued. Through 6000 years of history there is only one asset that has consistently and efficiently hedged risk and that is gold. As the new fangled high tech risk management tools fail miserably it is reasonable to assume that investors will go back to the traditional ultimate hedge.
I have been remarking for months that there are strange things occurring on the COMEX. The Open Interest refuses to go down. The Cartel has made attack after attack for over 6 months but has not succeeded in making a dent in the Open Interest. It still sits at an all time record high of almost 600,000 contracts (see chart below). In all of the bull market to date we have not seen such an anomalous rise in OI nor have we seen any large rise last for so long. So there is no doubt that something different is going on. What then is the explanation? The large meteoric rise in gold COMEX OI commenced in August 2007. This corresponds exactly with the sub-prime mortgage problem becoming highly public in the US (AHM bankruptcy) and the Northern Rock bank run in September.
In my opinion the sudden appearance of massive credit problems triggered some smart money to move into the ultimate risk hedge.
Well dear reader, we have to make sure that we have a chair when the music stops. I certainly will put some weight in the form of precious metals on the chair and will sit on it.
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Kondratieff cycle
The Kondratieff Cycle is a long-wave cycle in the economic activity of the capitalist system focusing in particular on the price level (inflation) and debt. It is named after the Russian Nikolai Kondratieff, who published his findings in a 1922 paper. Visions of his cycle had already been observed by earlier economists.
Kondratieff analyzed 21 economic statistics for the major economics (US, Britain, France, Germany etc.) including price level, interest rates, wages, production, employment, imports and exports etc. In 15 of the 21 statistics he claimed to identify a long-wave cycle with an average length of 54 years. Kondratieff began his analysis in the late eighteenth century which he believed was the beginning of the “broad development of industrial capitalism”.
When Kondratieff completed his work in 1922, he had identified two full cycles and part of a third cycle which subsequently ended in 1948 when a fourth cycle began. Analysts disagree slightly on the exact timings but the following list reflects the consensus:
First cycle: 1789 to 1844 (55 years)
Second cycle: 1845 to 1896 (51 years)
Third cycle: 1897 to 1948 (51 years)
Fourth cycle: 1948 to today (59+ years)
Interesting is that he brought together the inter-relationship between the behavior of economics and financial markets with social and political issues (including wars, revolutions and innovation).
In general terms the Kondratieff cycle is essentially an economic cycle of boom and bust. There are a multitude of different cycles which are closely linked and responsive to the principal cycle. The principal cycles contained within the Kondratieff economic cycle are an investment cycle, an interest rate cycle, a credit/debt cycle, an inflation cycle and a crowd confidence cycle. Each full Kondratieff cycle last about 60 years, which is effectively one lifetime. During the Kondratieff cycle there are four seasons, because each Kondratieff season shares characteristics similar to the climatic seasons. The Kondratieff spring constitutes the birth of the economy (June 1949 to February 1966). The summer is when the economy bears fruits (February 1996 to August 1982). Autumn is the season of satisfaction (August 1982 to 2007?). During the Kondratieff winter the economy (partly) dies. In terms of time each of the Kondratieff seasons last approximately 15 years. Spring and Summer in the current cycle both covered about 16 years.
So what are the characteristics of the four seasons?
Spring:
Confidence: Fear of return to depression – fragile confidence
Inflation: Begin inflation – gradually increasing
Credit: Slow increase in credit
Interest Rates: Rates start from very low levels, gradually increasing
Best investments: Stocks, real estate
Summer
Confidence: Growing confidence
Inflation: Inflation rate quickens to peak at end of summer
Credit: Increasing credit principally to corporations
Interest Rates: Pace of increase picks up, peaks at summer end
Best investments: Real estate, commodities, Precious metals
Autumn
Confidence: Increasing confidence – extreme confidence- euphoria
Inflation: Falling inflation throughout Autumn
Credit: Massive increase in credit, principally to consumers
Interest Rates: fall throughout autumn
Best investments: stocks, bonds, real estate
Winter
Confidence: concern, fear, panic, despair
Inflation: fall of inflation quickens to outright deflation
Credit: following credit crunch, virtually no credit
Interest Rates: rates fall, then rise in credit crunch, then fall lower
Best investments: Gold, Cash and Bonds (but after credit crunch)
From an investment side the seasons have the following characteristics. Spring represents the birth or rebirth of the economy. Accordingly, it stands to reason that the best investment in this initial season of the cycle are those which benefit most from a developing economy; that is common stock an real estate
Summer has always been the inflationary season of the cycle, because there has been a war in each of the four K cycle summers, which always were financed by excessive monetary expansion. Real estate, commodities and precious metals are appropriate investments during the inflationary summer and real stuff like art, diamonds, antiques, coins etc.
Autumn is always the season during which there is massive speculation, particularly in stocks, bonds and real estate. Investment returns generated by these markets are a once in a lifetime experience.
This happens because monetary inflation does not stop once the summer war ends. In autumn, the availability of easy credit, based on falling interest rates and large infusions of the money supply to the banks, promotes speculation, principally in stocks and towards the end of the cycle, real estate. Rising equity prices attract more and more money for investment until, near the top, a feeding frenzy of mass speculation captures the imagination of the entire country.
In each of the four K cycles, the autumn period has always followed a significant summer-ending recession, which led to a speculative boom based on an inordinate excess of credit.
Winter which might be at our doorsteps will be a different story. Are you prepared for the possible winter? With all the excesses we witnessed lately the coming winter might be an ugly freezing one. Holding precious metals and land is certainly not such a bad idea.
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