Crisis, take 2

Crisis, take 2




Well dear reader the relative calm the first days of 2009 seems to be gone already. Well, I have been warning that the crisis is not over at all and that the financials will suffer a lot more. Last week we got already a taste of what is in the pipeline. Before we go to the information let’s start with the overview from www.prudentbear.com and what’s hot and not.

The S&P500 dropped 4.5% (down 5.9% y-t-d), and the Dow fell 3.7% (down 5.6%). The Transports sank 9.0% (down 11%), and the Morgan Stanley Cyclicals fell 9.3% (down 5%). The Utilities slipped 0.3% (down 1%), and the Morgan Stanley Consumer index declined 1.9% (down 3.7%). The broader market wasn't quite as weak. The small cap Russell 2000 declined 3.1% (down 6.6%), and the S&P400 Mid-Caps fell 2.6% (down 4%). The Nasdaq100 dipped 2.0% (down 1.1%), and the Morgan Stanley High Tech index declined 3.3% (up 0.4%). The Semiconductors slipped 0.4% (up 1%), the Interactive Week Internet index fell 3.8% (down 0.7%), and the Nasdaq Telecommunications index lost 2.6% (up 0.9%). The Biotechs rose 3.2% (up 1.6%). The Broker/Dealers were hammered for 8.5% (down 7.1%) and the Banks sank 20.8% (down 28.8%). With Bullion down $12.55, the HUI Gold index decilned 1.0% (down 9.1%)



Well definitely the following guy is back




Gold

Weimar style policy is now global. With nothing backing paper currencies except other currencies and the increasing speed of creation of more of the same, disaster awaits. As Marc Faber says "citizens, who are not dumb, realize that the Central Banks are engaged in a contest to print the most money, to keep the cost labor low, the employment high and to erase the Nationial debts. This will destroy the currencies, confidence and create instability. Therefore dear reader I do expect that more and more people will buy gold and that we possibly will see at some point a situation that everybody wants physical gold when no physical gold will be available at all.

David Hale: Only one alternative to the dollar -- gold
http://www.gata.org/node/7062



Texas Congressman Ron Paul:
Throughout the ages, gold has stood the test of time as a consistently reliable medium of exchange, and has frequently been referred to as “God’s money,” as only God can make more of it. Seeking superhuman power over money in the way alchemists did in ancient times caused society to shun them as charlatans. In much the same way, free people today should be sending the message that this power and control over our money is no longer acceptable. 

The irony is that even had the ancient practice of alchemy been successful, and gold was suddenly, magically made abundant, alchemists still would have failed to create real wealth. Creating gold from lead would have cheapened its status to that of rhinestones or cubic zirconia. It is unnatural and dangerous for paper to be considered as precious as a precious metal. Our fiat currency system is crumbling and coming to an end, as all fiat currencies eventually do.
Yup, nothing to add.



Well dear reader the “smart” money started to accumulate gold already back in 2001. Prices were so low that it was a screaming buy. Well guess what. The “smart” money was on course. Today more and more people and especially the wealthy ones, want to buy physical gold in order to protect their assets. Following an excellent article about that trend
Merrill Lynch says rich turning to gold bars for safety
Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4177766/Merrill-Lynch-says-rich-turning-to-gold-bars-for-safety.html

Before going to other information, please read the excellent article from Eric Sprott
http://www.sprott.com/pdf/marketsataglance/MAAG.pdf



Economy

Manipulation
Well dear reader in one of my past musings I expressed my doubts about the new Obama team, especially the economic team. Well in fact it is a copy of the Clinton team and although most people think that Clinton did well on the eonomic side, I must say that that is not true at all. Unfortunately the negative trends started already in the Clinton area. The person who until recently was on the Citi board was certainly an important architect of the manipulation (strong dollar policy). The person on the cartoon below had his part in the game too as he was part of the PPT in the recent past.


>

Well dear reader it should not come as a surprise that the whole economy is going Madoff




Does it come as a surprise to you that Madoff was able to follow his scheme for such a long time? Knowing that in fact the system is bankrupt it should not come as a surprise. The so called “banana republics” might have less corruption than the mighty US or as a friend mentioned to me, might have less possibilities to hide the information than the US.

Well dear reader the stimulus package promised by Obama might look nice, however it is not really a solution that would help to reduce the actual problems. No way!


More about Obamas economic team:
Steve Lendman on Obamas new economic team. A must read in my opinion
http://sjlendman.blogspot.com/2008/12/obamas-new-appointments.html



Following dear reader an information I received from a reader and friend
http://www.contrahour.com/ItsJustTimeMartinArmstrong.pdf

Well before Christmas I mentioned in one of my musings that for example guns was one of the items most bought. It looks like the trend is going on:

The New Paranoia: Hedge-Funders Are Bullish on Gold, Guns, and Inflatable Lifeboats
By Timothy Sohn Published Jan 11, 2009

During the final months of 2008, as the financial markets imploded, talk on trading desks turned to food and water stockpiles, generators, guns, and high-speed inflatable boats. “The system really was about six hours from failing,” says Gene Lange, a manager at a midtown hedge fund, referring to the week in September when Lehman went bust and AIG had to be bailed out. “When you think about how close we were to the precipice, I don’t think it necessarily makes a guy crazy to prepare for the potential worst-case scenario.”




Preparations, in Lange’s case, include a storeroom in his basement in New Jersey stacked high with enough food, water, diapers, and other necessities to last his family six months; a biometric safe to hold his guns; and a 1985 ex-military Chevy K5 Blazer that runs on diesel and is currently being retrofitted for off-road travel. He has also entertained the idea of putting an inflatable speedboat in a storage unit on the West Side, so he could get off the island quickly, and is currently considering purchasing a remote farm where he could hunker down. “If there’s a financial-system breakdown, it could take a year to reset the system, and in that time, what’s going to happen?” asks Lange. If New York turns into a scene out of I Am Legend, he wants to be ready.

He’s not the only one. In his book Wealth, War, published last year, former Morgan Stanley chief global strategist Barton Biggs advised people to prepare for the possibility of a total breakdown of civil society. A senior analyst whose reports are read at hedge funds all over the city wrote just before Christmas that some of his clients are “so bearish they’ve purchased firearms and safes and are stocking their pantries with soups and canned foods.” This fear is very much reflected in the market—prices of corporate bonds have been so beaten down at various points that they suggest a higher default rate than during the Great Depression. Meanwhile, while the overall gold market has fluctuated, the premium for quarter-ounce gold coins—meaning the difference between the price for gold you can hold in your hand and that for “paper gold,” such as exchange-traded funds—rose to an all-time high of 20 percent. “Gold is transportable, it’s 100 percent liquid, and it’s perfectly divisible in the context of ounces, bars, or coins,” says the head of a California research firm who keeps a supply of it, along with food, water, and guns, on hand. “And most important, there’s no counterparty”—i.e., it’s an investment beholden to no one, and perhaps one of the few assets that will retain value if the financial system collapses.

While it may look like these Wall Streeters are betting on such a collapse, their embrace of survivalism is an outgrowth of their professional habits of mind: Having observed the economy’s shaky high-wire act from their ringside seats, they are trying to manage their risk and “hedge” against a potential fall. “It’s like insurance,” says an investor who has stockpiled MREs and a hand-cranked radio. “And by the time you need it, it’s way too late.” Leave it for others to weep for the collapse of the social order. These guys would prefer to be in a high-speed boat or ex-military vehicle, heading off toward their fully provisioned compounds in pursuit of the ultimate goal: to win the chaos.


Government statistics
For the increasing number of new readers, I’d like to mention that official government statistics should not be taken as 100% accurate. In fact in some countries these statistics are manipulated in such a way that the picture looks rosy while the real situation is lousy. The US is maybe the master of manipulation of these official statistics. Of course there are some other third world countries that are great at doing it too (yes dear reader it is in fact meant to say other third world countries and not only third world countries). John Williams, which I quote from time to time, offers an excellent service that shows the real picture in the US. If you go on the following page, you will see, possibly as a great surprise, that the real economic situation is quite different to what they want us to believe.
http://www.shadowstats.com/alternate_data



Well as you can see, GDP has been negative for years. Therefore the supposedly great GDP numbers over the past years and therefore an economic growth which supposedly is much better than in other developed countries is nothing but a lie, period.
Looking at inflation, we can say that since approximately 1997 the US had an inflation rate of above 8%!!! That means that the purchasing power of the USD has fallen more than 65% in a bit more than 10 years. Yes dear reader this is the truth and the real picture. Most people I tell this fact, react in a way like “yes the car I love has cost me 30,000 ten years ago, now I have to pay 100,000, or an acre that has cost 30,000 10 years ago now costs more than 100,000 and so on. Well of course with the actual economic situation this might change soon.




To cheer us up, following a funny video from Down Under
http://www.youtube.com/watch?v=NIfH0vY2ANA&eurl=http://whatreallyhappened.com/&feature=player_embedded

Well dear reader following some more information about the economy

Steve Saville, Speculative Investor:
No reasonable person would be against economic stimulus schemes involving increased government spending if these schemes actually worked as advertised, or even if they only smoothed the transition from one growth period to the next. But as we've noted many times in the past, such schemes cause long-term damage by a) preventing or delaying necessary economic adjustments and b) reducing the quantity of real savings in the economy. It must always be kept in mind that the government does not have any real savings of its own, so it can only fund its various job-creating/economy-boosting packages by borrowing or plundering the private sector's savings. It then uses these savings in a sub-optimal way, usually by targeting spending with the primary goal of increasing its own popularity. It should also be noted that the less real savings the private sector has to begin with the more long-term damage will be done by an increase in government spending. 

By preventing or delaying necessary adjustments and destroying real savings, the government's counter-cyclical economic policies lead to greater imbalances, slower real growth during the next economic upturn, and, quite likely, an even bigger bust in the future. Furthermore, the monetary inflation stemming from the attempts to counteract the bust will eventually cause boom conditions to emerge somewhere in the economy, which, in turn, will promote more mal-investment. But whereas busts are considered bad, inflation-fueled booms -- the natural precursors of busts -- are considered good. Therefore, monetary and fiscal policy will typically be framed with the aim of extending the boom for as long as possible, even though the longer the boom the greater the misallocation of real savings and the more devastating the ensuing bust. 

The logical consequence of government intervention designed to prolong booms and curtail busts should be a long-term boom-bust cycle with increasingly large oscillations, which is exactly what is occurring (it's nice when the data meshes with the theory).
Certainly true isn’t it?

John Williams from www.shadowstats.com
CBO Budget and GDP Estimates Without Precedent. Even politically neutral government entities such as the Congressional Budget Office (CBO) tend to be overly optimistic with their assumptions and projections. As such, it was something of a surprise to see an estimate of a 2.2% annual contraction in real (inflation-adjusted) U.S. gross domestic product for 2009. Such would be the worst full-year annual GDP contraction since the special circumstance of the shutdown of war production at the end of World War II. Beyond that, the comparisons go back to the Great Depression.
The worst year in that period of economic collapse was a drop of 10.8% in 1932. The Great Depression, however, like the current circumstance, was a multiple-dip downturn. The worst annual GDP decline during the second-dip of the Great Depression was 3.4% in 1938.
The CBO also estimated that the official "gimmicked" 2009 federal budget deficit would hit $1.2 trillion, in this less-than-happy environment, and such was without including the full cost of the wars in Iraq and Afghanistan, and before including the costs of the stimulus package being promised by the incoming Obama Administration. The estimates of a $2 trillion 2009 deficit and related U.S. Treasury funding needs, used in SGS Newsletter No. 48 of January 3rd, appear to be somewhat on the light side of what is unfolding.



Most realists foresee that 2009 will be a bad year with stock markets declining, unemployment rising, real estate values falling, government bailouts continuing, deflation morphing into inflation, the dollar falling, and oil prices rising. Thus far the economic downturn has not had a serious social impact. However, food banks are running short, shoplifting and other property crimes are on the rise, child neglect is increasing as is infant mortality. However, considering the pace at which people have been thrown out of work during the last year most seem to be getting by - so far.

More from Williams
Annual Change in Industrial Production at 33-Year Low. The Federal Reserve reported this morning (January 16th) that seasonally-adjusted December industrial production fell by 2.0% (down 2.4% net of revisions) for the month, after a revised 1.3% (previously 0.6%) decline in November. The year-to-year decline in December fell to a contraction of 7.8%, the weakest showing since September 1975. Such followed November’s revised 5.9% (previously 5.5%) drop. Consistent with the still-deepening recession, fourth-quarter 2008 production showed an annualized quarterly contraction of 11.5%, following an 8.9% contraction in the third quarter.
A depression is defined (SGS) as a recession where peak-to-trough contraction exceeds 10%, a level currently exceeded in annualized terms by both fourth-quarter real retail sales and industrial production.

The International Monetary Fund (IMF) is even asking for emergency loans.
“The world economic outlook for 2009 will not be good," IMF Managing Director Dominique Strauss-Kahn warned. The IMF is expected to release its global growth projections for 2009 this week, and Kahn suggested yesterday they won’t be pretty. He predicted a “significant” increase in total global financial losses and write-downs -- which have already crested $1.4 trillion.
To combat this worsened forecast, Strauss-Kahn is asking countries of the world to “find an extra $150 billion” to cushion the hit on more impoverished and susceptible economies. The IMF wrote checks totaling $41 billion in November, the biggest monthly bailout tab in its history. If you happen to “find” a couple billion in your couch cushions, let Dominique know.



Banks and banksters

Well the news about banks and banksters is definitely not good news, please read on:

Citigroup's Derivatives Reduce Bailout to a Non-Event
…For that matter, those buying Citigroup’s shares today are also perhaps unaware of the fact that, as of June 2008, Citigroup’s exposure to credit derivatives stood at $3.2 trillion (notional value), and a fair proportion of its swaps (currency and interest rates), forward contracts and options incorporate settlement references to third-world currencies, thus implying a much higher degree of pricing, counterparty and valuation risks than those commonly found in dollar-to-dollar, euro and yen transactions. A detailed analysis of the substantive downside of engagement in illiquid and undeveloped financial markets is beyond the scope of this article; but, most certainly, the rescue plan fails to address the potentially disastrous impact of a crumbling derivatives…
http://seekingalpha.com/article/113114-citigroup-s-derivatives-
reduce-bailout-to-a-non-event?source=yahoo



Well dear reader the problems at Citi definitely are huge. Therefore the solution is to take a big problem and make it absolutely enormous. Citibank and Morgan Stanley merge brokerages.
Citibank received close to US $300 billion from Paulson and they still have huge problems which made them agree on the deal or with other words forced them to give them away. Well I think it is safe to assume that not only Citi has huge problems but Morgan Stanley too. It looks like the idea is to throw them both together, mix it all up, and pray like hell that no one can trace the crisis back to the root cause. Well anyway if you put two rotten eggs together you don’t make them smell nicely. The end result is rather that the whole thing stinks exponentially.


Well dear reader although JPMorgan reported a profit for 4th quarter 2008, I strongly believe that JPMorgan in fact is not in a better situation than Citi. JPM has a tremendous derivative book which is a time bomb that can blow up at any time. I do expect some bad news about JPM towards the 2nd quarter this year. It would not surprise me at all to hear about really bad news about JPM as early as March this year.

Well dear reader I have been warning in my last posts about new negative surprises in the financial sector. The last week news show us clearly that more bad news is in the pipeline.




First bank failures of '09
Two banks go under: National Bank of Commerce in Illinois and Bank of Clark County in Washington state
http://money.cnn.com/2009/01/16/news/economy/bank_failure/?postversion=2009011622

Bank of America Posts Quarterly Loss After Bailout
http://www.bloomberg.com/apps/news?pid=20601087&sid=aa4eMvYBBEIw&refer=home

Bank of America expects net losses at or greater than Q4's for next several quarters - conf. call (8.32)
Management says there is a considerable amount of uncertainty in 2009 and as a result they will not be providing a detailed outlook for the quarter or year

Bank of America received another $20 billion government stimulus last night , the latest chapter of a book that’s so sad, it’s almost funny

Citigroup Reports $8.3 Billion Loss, Splits Into Two
http://www.bloomberg.com/apps/news?pid=20601087&sid=a717rlC3lQd0&refer=home

GE Capital May Target Up to 11,000 Jobs This Year

Jan. 16 (Bloomberg) -- General Electric Co.’s finance arm may cut 7,500 to 11,000 jobs, or at least 10 percent of its workforce, because of the global financial slump, people familiar with the company’s plans said.
The reductions are part of GE Capital’s announced plan to reduce expenses by $2 billion this year, said the peoplewho didn’t want to be identified because the numbers aren’t public. The savings goal also includes expenses such as office closings.
http://www.bloomberg.com/apps/news?
pid=20601087&sid=aTQmir5Nn9PM&refer=home

Well dear reader GE has a lot of derivatives on their books too. Another AIG?

Well like last year the problem is not only a US problem, although it was triggered in the US. Following some news from Europe:

Moments after Bank of America’s quasi-nationalization, the Irish government announced a total takeover of Anglo Irish Bank. Ireland’s government has now seized its three largest lenders.


HSBC, Europe’s biggest bank, will need to cut its dividend in half and raise $30 billion to stay afloat, analysts at Morgan Stanley predicted today. According to Morgan’s report, profits at HSBC will decline “sharply” this year and not recover until 2011.
HSBC stock fell over 8% in European trading.

HSBC falls on report it may need to raise $30 billion
http://www.livemint.com/2009/01/14222644/HSBC-falls-on-report-it-may-ne.html

Well dear reader you might remember that this kind of news were the news from banks that later on had huge problems and had to accept huge losses on their books. Therefore more is to be expected from HSBC and others. As I have mentioned a couple of times, one should not come to the conclusion that banks that so far did not seem to have had problems are safe.


Deutsche Bank warns of $6.4 billion loss
http://www.marketwatch.com/news/story/deutsche-bank-pegs-quarterly-loss/story.aspx?guid={B767E738-FF3A-421F-B2E7-D7CCE4D40A41}&siteid=yahoomy

Süddeutsche Zeitung reports that it is very probable that the crisis-ridden Hypo Real Estate bank, which owns Dublin-based Depfa, will be nationalised soon. It adds that HRE is now seeking its fourth handout from the state in almost as many months, in order to stave off collapse. Financial Times Deutschland also reports that the "scandal bank" will be taken over the by the State but unlike Commerzbank, where the German government took a minority share, a majority takeover is planned for HRE as successive liquidity injections are not solving the bank's deep problems. Handelsblatt reports from political insiders that the situation at the bank is "catastrophic". Berliner Zeitung quotes a banking expert as saying that HRE has done nothing but lie, give half-truths and incomplete information since the crisis first hit it and poses the question whether the State should throw good money after bad.
Hypo Real Estate may become 100% state-owned, Flowers unlikely to oppose plan
Hypo Real Estate, the German real estate bank, may become 100% state-owned, Financial Times Deutschland reported. The German daily cited unidentified government and parliament sources as saying the possible plans under consideration for the troubled bank include a complete nationalization. It also learned that the bank is thought to need fresh capital of more than EUR 10bn.

Well once again there will be more news. The rumors are that some of the banks that normally would report in February might go public with the bad news over the next days.

Well dear reader I hope you have fastened your seat bell and thus are ready for the bumpy ride ahead of us.

Karl Marx said, "The theory of Communism may be summed up in one sentence: Abolish all private property."
Well dear reader we are getting closer to the abolishment of all private property day by day. Whenever there is a bailout, we are getting closer to it.
Well dear reader just 20 years after the fall of the Berlin Wall, we are getting closer to Marx’s definition of Communism and surprisingly it is accepted by basically everybody because of the “emergency”. It is indeed a surprise that so few people do understand what these emergency action mean in the long run.



The Madoff Sideshow 
By Greg Hunter 1/7/09:
A friend of mine, who is a crack investigative producer, just got a gig with a major network. His new job will be to cover the Madoff story. There is no doubt this is a big story and in the press been called the “crime of the century.” Madoff is a self proclaimed fraudster who puts a face on the Wall Street “banksters” as in gangsters with brief cases instead of Tommy Guns. But for most Americans this story will be nothing more than tragic theatre. This story’s outcome will not matter to those in or headed for financial ruin.
The real story is what’s going on over at the Treasury, Federal Reserve and Congress. This trio has already spent, “loaned” or committed 8.5 trillion dollars to the economic problems plaguing our country. It appears the carnival of money printing is nowhere near ending. Now, there is even talk of another government bailout for the people who were ripped off by Madoff. This plan proposes to recapitalize SIPC, the Securities Investor Protection Corporation, with 15 billion dollars to augment its paltry 1.5 billion dollar insurance pool to protect investors. I guess 1.5 billion does not go very far when the pool of cheated customers is 50 billion dollars deep. Where do all these bailouts stop? America, in my view, has gone from a capitalistic society to bailout nation in little more than a year.
The Federal Reserve is in the process of bailing out the nation through a series of “lending facilities.” The TAF, TSLF, MMIFF, TALF and PDCF are the acronyms that are funnelling money to everything from banks to brokers to money market funds and even select hedge funds. None of these “lending facilities” were around little more than a year ago. All of this bailout activity adds up to more than 2 trillion dollars and is being done in secret without the public knowing who gets money for what! The latest facility to be added to the bailout bucket is provided by the Treasury and is called the TIP or Targeted Investment Program. This one is for “Citi-style” rescue programs. The government is clearly ready to bail out just about any business that issues a W-2.
Add all these “programs and lending facilities” together with the bailout of GM, Chrysler, AIG, the monetization of billions of mortgage debt from bankrupt Fannie Mae and Freddie Mac, along with the upcoming Obama stimulus package, and some people are getting worried about a little prosperity killer called inflation. In a few years, most people will not remember the Madoff story but will be living or surviving some pretty big price increases in just about everything they consume. In the end, it will all come down to a crisis in the dollar because just like Madoff it will no longer be trusted.
Source www.jsmineset.com

The next shoe to drop?



Well dear reader I mentioned already a couple of times that I believe that the actual crisis is not over yet. The still huge amount of outstanding derivatives of which most are pure speculative, the commercial real estate now in troubles too, the credit card debts and so on, are problems that seem to hit the fan strongly soon.

Following some information about the commercial real estate situation
Commercial Mortgages: The $400 Billion Ticking Time Bomb
The sub-prime mess could pale in comparison to the calamity that rising commercial mortgage delinquencies are threatening. Since the S&L crisis, commercial banks have increased their holdings of commercial mortgages at an accelerating rate. The Commercial Mortgage Security Association (CMSA) estimates that in 1991 commercial banks held $410 billion in mortgages and by 2006 banks held $1.28 trillion.
Please read on
http://seekingalpha.com/article/114209-commercial-mortgages-the-400-billion-ticking-time-bomb?source=yahoo


Fixed Income

China still buying?



China, which passed Japan in September as the largest holder of U.S. Treasuries, owns around $652 billion in American debt. We’ve often asserted that all China would have to do was “slow down” buying debt, not even give up the habit, and it can dramatically impact interest rates in the U.S.
So consider these trends and ask yourself why would China buy more?:
U.S. Treasury yields are at historic lows
The dollar has weakened significantly since the fourth quarter, and will likely fall further
Direct foreign investment in China has fallen by more than a third since the summer of ’08
The Chinese stock market shed over $3 trillion of value in 2008
China is expected to run a monthly trade surplus of $20 billion this year, half of the record $40 billion surplus from November
Chinese government tax revenue fell 3% in November from a year earlier
The Chinese government has promised its own stimulus package ($600 billion) that it will struggle to finance.
According to Fitch Ratings, China will grow its foreign reserves by $177 billion this year, down 42% from 2008.

Dear reader do you think that investors still have appetite for government bonds? Germany, which is in my opinion an excellent risk had its problems to auction new bonds. Please read

In a foreboding move, Germany failed to auction off its debt yesterday for the first time in six months.
The German government wanted to raise 6 billion euros to help finance more than $96 billion worth of bailouts pledged to German banks… but investors didn’t want to foot the bill. They purchased only 4.1 billion euros worth of government debt, and the German Federal Bank was forced to print money to buy up the rest.
France, Ireland and Spain are all planning similar auctions over the next few days. If this becomes a global trend… oy. You may as well bend over right now and kiss it goodbye.

More about fixed income please read the excellent essay from Peter Schiff, which in my opinion is a MUST READ:
A few weeks ago when the Fed announced a strategy designed to bring down long-term interest and home mortgage rates through unlimited Treasury bond purchases, government debt staged a spectacular rally. To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff’s social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of “buy the rumor and sell the fact”.

If it is well known that Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.

The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.

This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices the Fed will be forced to significantly increase its buying.

However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create. As inflation diminishes the investment value of low-yielding Treasuries, such a scenario will kick off a downward spiral. But the more active the Fed becomes in their quest to prop up bond prices, the bigger the incentive to hit the Fed’s bid. The result will be that all Treasuries sold will be purchased by the Fed. But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping, such as corporate, municipal and agency debt, to fall through the floor, pushing up interest rates across the board.

In order to “save” the economy from these high rates the Fed will then have to expand its purchases to include all forms of debt. If that happens, run-away inflation will quickly turn into hyper-inflation, and our currency will be worthless and our economy left in ruins.
To read the rest of the essay, please click on the following link
http://www.europac.net/externalframeset.asp?id=15132


Equities

Down. How long will it take until we see the DJI at 6300 or 4600? We are getting closer to my target which is one DJI equal the price of one ounce of gold.

Enrico Orlandini from www.dtanalysis.com

There is a lot of optimism, even excessive bullishness, with respect to the stock market. Many are convinced that the November 2008 low is the low, and we are seeing the beginning of a new bull market. Even the venerable Richard Russell has turned bullish on stocks, which I find somewhat puzzling since his beloved Dow Theory has given no such indication. Most analysts agree that the previous bull market began in 1982 and ended in October 2007, making it one of the longest in modern history. If the ensuing bear market ended in November 2008, just thirteen months later, it would be highly unusual if not downright strange. Normally you would consider yourself extremely lucky if the resultant bear market had a duration equal to 25% of
the bull market, i.e. five years. Yet today we see that analysts are in a really big rush to call an end after a duration equal to just 6% of the previous bull market. I will admit that I did not check behind every nook and cranny, but I couldn’t find a single instance whereby such a prolonged bull market was followed by such a short bear market. My experience and my instincts tell me this will not be the first.
Dow Jones Industrial Average (1960 - Present weekly)




Orlandini further opines
That brings us up to date and now I would like to focus on what I see
happening over the next couple of weeks and months. Altogether the cash
Dow rallied 1,482.40 points from the November 20, 2008 low and made
two failed attempts to penetrate the resistance at 9,063.85. Now I see three
possible scenarios:
· We hold the 38.1% retracement support of the rally at 8,469.88 and
retest the resistance at 9,063.85 one more time,
· We test the 50% retracement support at 8,293.49 and rally to test the
9,063.85 resistance one more time, or
· We test the retracement support at 8,293.49, rally for three days and
then turn down to test the 7,470.72 level.
I see the first possibility as remote and I know the other two may seem like
splitting hairs, but this is how I see the market. In any event we will see
another test of 7,470.72 and I would be very surprised to see if it holds.
The first test did not produce a capitulation and in spite of the rally stocks
are not cheap.

Currencies

Doug Noland, Prudent Bear
The 2002-2007 dollar bear market did not manifest into a full-fledged currency crisis simply because of the massive purchases of U.S. securities by the Chinese (and to a lesser extent OPEC, Russia, and India). At this point, I would not want to count on the Chinese (or others) accumulating another Trillion of our IOUs anytime soon. I don’t expect their appetite to return for U.S. securitizations, corporate bonds, and “repos” anytime soon (market perception of "moneyness" has been lost). Indeed, these IOUs have lost their acceptability as a means of global payment remuneration. It also seems reasonable that this year’s market dislocations have reduced the appeal of the strategy of holding U.S. securities while hedging underlying currency exposure in the derivatives market. And, at today’s pitiful yields, there would seemingly be little ongoing incentive to continue hording Treasuries.

It is impossible to know how much remains of the Crowded Dollar Bear Unwind. But if this dollar buying hasn’t yet about run its course, when it eventually does global markets will again face the specter of massive and seemingly unending dollar liquidity flows. At the end of the day, I expect the dollar to suffer from its relative dismal position with respect to both financial flows and our economy’s deep structural maladjustment. Years of egregious Credit and spending excesses have left an economic structure uniquely dependent upon, on the one hand, huge ongoing public sector Credit injunctions and, on the other, huge unending imports. This is a terrible predicament for a currency.

Commodities

Gold declined 1.5% this week to $842 (down 4.6% y-t-d), while silver was little changed at $11.29 (unchanged y-t-d). February Crude sank $4.83 to $36 (down 19.3% y-t-d). February Gasoline rose 4.9% (up 9.8% y-t-d), while February Natural Gas sank 13% (down 14.6% y-t-d). March Copper declined 2.5% (up 7.8% y-t-d). March Wheat dropped 8.1% (down 5.3% y-t-d), and Corn was hit for 4.8% (down 3.9% y-t-d). The CRB index fell 3.8% (down 3.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) declined 1.9% (down 1.7% y-t-d).



Well dear reader, the low commodity prices gives everybody a real great opportunity to accumulate needed commodities at sale prices. China with still a huge appetite for commodities most probably is using this opportunity to buy. Following an article about China and commodities:
BEIJING (Reuters) - China's government is using the collapse in commodity prices to further its domestic agenda, with support for stricken sectors tailored to speed up reform plans rather than rescue ailing companies or prop up prices.
To survive plummeting demand for exports -- a sharp turnaround after several years of booming global demand -- many industries are looking for state help and consolidation.
But China's policymakers are sticking to their economic blueprints and not letting sympathy for troubled corporates overwhelm longer-term priorities. Instead, they are favoring the strongest in each industry in a drive toward consolidation, and at the same time using low prices as a chance to stock up.
Please read on
http://www.reuters.com/article/ousivMolt/idUSTRE5051EO20090106


Oil

While the current credit crisis has throw the energy markets into chaos, one should not forget that oil and natural gas are rapidly depleting resources and those that control these resources will have the power to reshape the way business is done for yeas to come. These resources are extremely valuable and right now they are being mistaken for junk.
Almost no major new discoveries have been made and the large offshore discovery made in Brazil requires a price of over 75 dollars a barrel to make it worth developing. Worse yet not one drop of oil will be seen for years and even if they start to develop it now, it will not produce any oil until at least 2017 or 2018. Aside from this major discovery, no new monster fields have been discovered, yet almost all the major oil wells are experiencing declining rates of production. At some point in time, reality will set in and the majority will become aware of this fact and then oil and natural gas will be treated as the valuable commodities they are and not as junk. The credit crisis has actually worsened conditions (ironically it is very bullish for oil long term because less investments means lower future supplies of oil) for it has forced many companies to completely scale back on long term projects and in some cases completely abandon them; it takes years to re start a project once it has been mothballed.

Well dear reader to finish this post, I believe that I should once again recommend strongly to build up some reserve food stocks and what ever is needed to survive 3 to 6 months. The news about bank losses hitting the tape indicate to me that the possibility that governments could declare bank holidays for several days is increasing fast. Please do not forget that in such a situation your ATM might not work. A situation with banks closed for some time, would mean as well that the owner of the gasoline station could not buy gasoline and could not handle payments and so on. The grocery store around the corner will have to face the same problems as basically all businesses will have to. Iceland was an example which showed us clearly, that we should prepare.
So, my this weeks recommendation is; to start to prepare oneself. Build up food stock and of course as always have some physical gold available at all times. If you have questions on how to get physical or how one can protect from bank problems, let me know it by dropping me a mail.