Deflation?

well dear reader, as usual I start the post with the overview which I copied from www.prudentbear.com


For the week, the Dow shed 0.3% (down 12.3% y-t-d) and the S&P500 declined 0.5% (down 12%). The Transports fell 1.9% (up 10.6%), while the Utilities rose 2.3% (down 11.3%). The Morgan Stanley Cyclical index dropped 2.2% (down 12.5%), and the Morgan Stanley Consumer index declined 1.6% (down 5.6%). The small cap Russell 2000 fell 2.1% (down 3.7%), and the S&P400 Mid-caps declined 0.8% (down 5.0%). The NASDAQ100 declined 1.3% (down 7.4%), and the Morgan Stanley High Tech index fell 1.9% (down 7.6%). The Semiconductors sank 2.7% (down 10.3%). The Street.com Internet Index lost 1.0% (down 4.6%), and the NASDAQ Telecommunications index dipped 0.8% (down 1.0%). The Biotechs were hit for 3.5%, reducing y-t-d gains to 8.3%. The Broker/Dealers sank 3.2% (down 29.8%), and the Banks lost 3.2% (down 27.7%). With Bullion rallying $37, the HUI Gold index jumped 8.7% (down 16.3%).




Currency Watch:
The dollar index declined 0.5% to 76.805. For the week on the upside, the Canadian dollar increased 1.4%, the South African rand 0.8%, the Swedish krona 0.6%, the Norwegian krone 0.3%, and the Euro 0.1%. For the week on the downside, the South Korean won declined 1.2%, the British pound 0.8%, the New Zealand dollar 0.6%, the Australian dollar 0.6%, and the Swiss franc 0.6%.


Commodities Watch:
Gold recovered 4.7% to $823 and Silver 5.5% to $13.59. September Crude increased 89 cents to $114.59. September Gasoline added 0.3% (up 15.9% y-t-d), while September Natural Gas fell 2.9% (up 4.8% y-t-d). September Copper jumped 4.2%. September Wheat gained 5.0%, and August Corn surged 10.7%. The CRB index gained 3.3% (up 10.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) rose 1.7% (up 16.6% y-t-d and 46.6% y-o-y).


Market Manipulation
Dear reader I have been writing a couple of times about market manipulation, especially in the precious metal sector. The following article is excellent and a MUST read to understand what is really going on in the precious metal markets. There is a big difference between physical and real markets. Please read on.

The Disconnect Between Supply and Demand in Gold & Silver Markets
http://seekingalpha.com/article/91357-the-disconnect-between-supply-and-demand-in-gold-silver-markets


Enrico Orlandini
Enrico Orlandini at www.dtanalysis.com believes that we entered the deflation case. For quite some time the discussion if deflation or hyperinflation will be first has been going on. I suppose that we will hear more about it. However for the time being it seems that investors are going for the deflation case.
According to Orlandini, the Baltic Dry Index, a shipping index, has been falling from over 11,000 to just above 7,000 recently. This indicates that the world plans to consume less and therefore really can be the hint that we are in a deflationary phase. In a deflationary case almost everything will fall in value.
It might therefore be best to wait on the sidelines with purchases of commodities because Orlandini says that commodities amongst many other investments will not be the winners. According to him, it could mean that over the short run the USD could be the winner because many people will have to pay back debt. As most debt around the world is valued in USD and the cost of debt rises in deflationary times it might be the case that many people will decide to pay back which could lead to a temporary higher demand of the USD.

What does Orlandini say about Gold? Please read on

He ask, what investment will be the investment in a deflationary phase and his answer to that is that the only thing of his concern is GOLD. His words are:



I know that we broke a major support at 822.10 and I know that everyone and their brother is calling for a major bear market in gold, but I also know that not one of them knows what deflation is all about or called for it at this point in time. If you look at the ten year weekly chart of gold, you will see the entire bull market move from the 255.00 low back in early 2001 all the way up to the 1,033.90 top earlier this year. To date, gold has not violated any significant trend line and the bull market is intact. Furthermore, it is not in any danger of doing so. Yes, the correction is and will run deeper than anyone thought possible because everyone, including me, was focused on inflation but what we are now experiencing is deflation. Orlandini goes on as follows: When gold topped at 730.40 back in 2006, it then fell all the way down to 542.27, retracing 38.1% of the entire bull market rally. Taking the closing prices the correction was 33% (573 closing). The same thing is happening now. Friday's 15th intraday low of 777.00 is marginally above the 33% retracement at 773.60 calculated from the all-time high of 1,033.90, back down to the bear market low of 255.00. According to Orlandini, the worst case scenario will be a 38.1% retracement down to 736.50, which according to him, will offer a truly exceptional buying opportunity. He believes firmly that Gold is not going to collapse into a bear market under any circumstance, unless the US finds a way to pay back all its debt and balances its budget (which seems to be a small risk at all).

If we rally 90.6%, which was the rally after the bottom in 2006 up to the top of 1,030 the rally would reach 1,403.26 which is close to what Orlandini predicted a few weeks ago.


Well dear reader, of course there is never a guarantee that everything comes as wished. However I must say that Orlandini is certainly a seasoned analyst and investor with a very disciplined approach.
He feels, as I do, that we might be at or close to this corrections bottom. He mentioned in one of his daily publications that the e mails he received, compared to the one after the fall in 2006 are identical. Looking at the panic that we feel know it very well might be the bottom.

Well dear reader looking at what the precious metals did last 2 weeks, one could believe that now everything is fine and rosy again, at least from a economic point of view. Is it really?


Fannie, Freddie Fall on Likely Need for a Bailout
Aug. 18 (Bloomberg) -- Fannie Mae and Freddie Mac tumbled to about 18-year lows in New York trading on concern the government will be forced to bail out the mortgage-finance companies, wiping out common stockholders.
Fannie and Freddie each fell as much as 19 percent after Barron's said the Bush administration anticipates the government- chartered companies will fail to raise the equity capital they need, prompting the U.S. Treasury to step in. Fannie is down 84 percent this year. Freddie has fallen 86 percent.
``It is very, very likely to happen before the end of the third quarter,' Ajay Rajadhyaksha, the head of fixed income strategy for Barclays Capital Inc., said in an interview. ``Without government help, we think there is very little chance of Freddie completing a significant capital raising.'…

Well dear reader, my conclusion is that it might be a good idea to have physical and have it stored in a safe way.

Following some more info about the health of the economy

Dollar surge will not stop America feeling the effects of a global crunch

By Ambrose Evans-Pritchard
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/18/ccview118.xml

What will happen?
Large US bank collapse ahead, says ex-IMF economist

SINGAPORE, Aug 19 (Reuters) - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.

"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis.

"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

Rogoff's comments come as investors dumped shares of the largest U.S. home funding companies Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalise the U.S. housing finance titans.

A government move to recapitalise the two companies by injecting funds could wipe out existing common stock holders, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Rogoff said multi-billion dollar investments by sovereign wealth funds from Asia and the Middle East in western financial firms may not necessarily result in large profits because they had not taken into account the broader market conditions that the industry faces.

"There was this view early on in the crisis that sovereign wealth funds could save everybody. Investment banks did something stupid, they lost money in the sub-prime, they're great buys, sovereign wealth funds come in and make a lot of money by buying them.

"That view neglects the point that the financial system has become very bloated in size and needed to shrink," Rogoff told the conference in Singapore, whose wealth funds GIC and Temasek [TEM.UL] have invested billions in Merrill Lynch and Citigroup .

In response to the sharp U.S. housing retrenchment and turmoil in credit markets, the U.S. Federal Reserve has reduced interest rates by a cumulative 3.25 percentage points to 2 percent since mid-September.

Rogoff said the U.S. Federal Reserve was wrong to cut interest rates as "dramatically" as it did.

"Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States."

Well dear reader, regarding bank failures, we reached the number 9

SAN FRANCISCO (MarketWatch) -- State and Federal regulators shut down Columbian Bank and Trust of Topeka, Kan. -- the ninth bank to fail so far this year and the fifth since mid-July.

The Federal Deposit Insurance Corp. estimates the failure will cost its deposit insurance fund $60 million. Columbian Bank and Trust had $752 million of assets and $622 million of deposits as of June 30, the FDIC said.
The insured deposits of the failed bank, which had nine branches, were sold to Citizens Bank and Trust of Chillicothe, Mo. Also, Citizens Bank and Trust agreed to buy $85.5 million of Columbian Bank and Trust's assets.
The FDIC said Citizens Bank and Trust did not purchase about $268 million of brokered deposits at the failed bank. The failed bank had approximately $46 million in uninsured deposits held in approximately 610 accounts that potentially exceed the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers, regulators said.

Well dear reader on the following link you find the trailer of a new movie which I think is a must see
http://www.youtube.com/watch?v=HBo2xQIWHiM&eurl=http://www.agorafinancial.com/iousa.html

Some more info about the financial sector
- One might also prefer to deny the results of an independent study by Chris Whalen from Institutional Risk Analytics. It has identified 8% of all 8,500 banks in the U.S. (or about 700 banks) as being troubled. Suppose even half of these 700 institutions fail. Of the roughly $6.84 trillion in bank deposits, $2.6 trillion of these deposits are uninsured! And there was only just over $274 billion of $6.84 trillion cash on hand in these banks, according to that report.
- But the FDIC has only $53 billion to cover the $6.84 trillion of bank deposits. Once again, it is the hard-pressed (and disappearing) Middle Class American Taxpayers who have been and likely will be asked to “backstop” these deposits via the “full faith and credit of the U.S. government” (which means the American Taxpayer). And many of these taxpayers are the very homeowners who are in trouble already.

And some more news
August 22 – Bloomberg (Kevin Hamlin): “A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank. ‘If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,’ Yu said… ‘If it is not the end of the world, it is the end of the current international financial system.’”
Well to have one of the two fail is without doubt a possible scenario I would guess.

Mbs/Abs/Cdo/Cp/Money Funds and Derivatives
August 19 – Bloomberg (Jody Shenn): “Collateralized debt obligations experienced so-called events of defaults at a faster pace in early August, with a commercial-mortgage CDO joining the list, according to JPMorgan Chase… Seven mortgage-linked CDOs experienced default events, indicating even the senior-most classes may not be repaid in full… Monthly additions to the $229 billion of defaults since mid-2007 peaked with 47 in February, the report said. ‘Unwind fears,’ including concern that CDOs will dump their holdings, have pushed asset prices lower, the report said. Typical yields on AAA rated slices of collateralized loan obligations over the London interbank offered rate are at a record 2.25 percentage points, up 1.30 percentage point this year, the report said… ‘We have been expecting the next wave of EODs to come with further downgrade activities on the horizon,’ the analysts… led by Chris Flanagan wrote. CDOs repackage assets such as mortgage bonds, loans and derivatives into new securities with varying risks. CLOs repackage buyout loans and other high-yield corporate debt.”


Commodities
Well dear reader this week commodity prices started to go up again. The question is of course if we are really in a deflationary scenario which according to the Baltic Shipping Index could be the case or if we are not. If we are in the deflationary scenario it would mean that probably commodity prices will have to go down further and that last weeks move up is just a temporary move. Well as long as we do not really know if we will enter a deflationary phase or not, I prefer to be on the sidelines.

Regards,