Financial topics

[John]

-- Market Summary, Tuesday Morning, November 11, 2008

With the market down 3% this morning, the analyst commentary sounds
increasingly desperate. There's increasing recognition that the
bailouts are doing no good.

Oil prices fell below $60 per barrel this morning -- down 6% to $58
per barrel. Commodities in general are falling.

The fall in oil prices from its high of $147/barrel just a few months
ago has particularly screwed the Russians, who had assumed that oil
prices would keep going up, rather than crash.

The value of the ruble against the dollar fell sharply today, and
Russia's stock market index fell 10% today.
http://www.bloomberg.com/apps/news?pid= ... fer=europe

As I wrote last night, China's government is in a state of panic, and
has announced a monstrous stimulus package that has no chance of
working.

** Panicked China announces gargantuan stimulus package, as AIG bailout is almost doubled
** http://www.generationaldynamics.com/cgi ... 11#e081111

Now you can add Russia to the list of countries taking desperate
moves.

Just so no one can accuse me of being too gloomy, here's a bit of
"good news":

IMF has just forecast global growth of 1% in 2009. Ha ha ha.

Sincerely,

John

[John]

From a web site reader:

> Your website entries and analysis are really excellent. I have a
> theory that the reason no one else is reporting what you are is
> because the ramifications are so profoundly disturbing that they
> are forced psychologically into a very strong case of denial. It's
> a form of pain avoidance. There are actual medical conditions like
> this where someone has a stroke and can't move part of their body
> but the denial is so strong they are truly not aware of the
> problem and deny their is a problem when you point out to them
> that they can't move their arm or leg. It is truly amazing. Sadly,
> this is what I think is happening to a large segment of our
> society currently (of course an even larger segment is so
> completely ignorant and disconnected from current events or
> incapable of thought that they don't have a clue and never will).

Perhaps many investors have also suffered a stroke. Here's something
I've posted several times:

> "Insanity in individuals is something rare - but in groups,
> parties, nations and epochs, it is the rule."

Insanity is certainly the rule today.

> I've got one question I'd appreciate your thoughts on.

> I completely agree that currently we are in a deflationary spiral
> and likely will get a generational crash in the near future. In a
> deflationary environment the only safe asset is and has been cash
> and short term treasuries and I've been in those from late last
> year so have suffered no losses yet. However, given the magnitude
> of the current problems, their global scope, and how current (and
> future) authorities are intent on doing things that will make the
> final outcome worse, I do hot have a high degree of confidence
> that cash or Tbills will necessarily fare as well in the future.
> At a minimum I think we'll see a major dollar devaluation in a
> last ditch attempt to arrest the deflationary spiral as was used
> in GD1.

As a practical matter, it's not possible for America to devalue or
revalue the dollar, since the dollar is the international standard
reserve currency on international forex markets.

For example, the ruble fell against the dollar today. America could
not "devalue" the dollar against the ruble, although it would be
possible for Russia to "devalue" the ruble by refusing to defend it
against the dollar.

> At worst, should that not work, with further desperation deficit
> spending, we face the very real risk for currency flight and a
> bond market crash which would ultimately cause higher government
> higher borrowing costs to crowd out the public sector credit
> market. This would deepen the negative spiral of falling GDP and
> falling tax revenue ultimately potentially leading to a
> government debt default as debt service costs exceed tax revenues
> and borrowing receipts. Should that occur, the dollar and
> treasuries could be worthless. I'm curious how likely you think
> this scenario is?

You have to separate the dollar from the bond market, including
Treasuries. The dollar is in a deflationary spiral that will
continue, but it's impossible to predict what will happen to bonds,
except that we can be pretty sure that many bonds will never be
redeemed.

> In the current deflationary environment, although precious metals
> such s gold are likely to continue to suffer losses for some time,
> should we get a dollar devaluation or a sovereign debt default, I
> would think that precious metals would retain or increase (perhaps
> markedly) in value. Of course the timing is what's so hard to
> predict. As a strategy, at this point, one might split their
> assets between Tbills and gold and accept the fact that one of
> them will lose some or all of it's value regardless of what
> happens but at least you'd probably preserve a good part of the
> rest. There are of course issues related to governmental
> confiscation but that is another subject. I'm curious if you agree
> with this thinking and if you see any alternative strategies to
> try to preserve capital should things get as bad as they very well
> might?

Many people recognize that gold is not a good investment vehicle, but
buy gold anyway because they love its feel and they love having it
around for certain types of disaster scenarios. These considerations
become more viable as the price of gold continues to fall.

Sincerely,

John

[malleni]

It really looks that gold does not perform something special in the last 20 years...
Not at all...
Just opposite - in last couple months...




Even interesting - The ratio of the Dow Jones Industrial Average index divided by the price of an ounce of gold:



Source:
http://www.sharelynx.com

On the other side the investing in American "paper" was even better deal since 70-ties.
Strange, that today first time in the last almost 40 years - the reserves of world central banks (predominantly in dollars) started to DEcrease.
The "phenomena" started this August (2008).

Now, if the Reserves are no longer growing but diminishing, this might indicate that the exporting countries are no longer buying and accumulating more US debt. If they are not accumulating more foreign currency bonds and debt, then the fiscal deficits of the US are no longer being funded.
On the other side, the US, which is running an immense fiscal deficit, what with the US Treasury going into debt like a drunken sailor on account of the need to bail-out all and sundry debtors.
Now if the US deficit is not being funded, then that means that the fiscal deficit is simply being monetized by the Fed. Or .... ?

The US is on track to incur a fiscal deficit of $1 Trillion, perhaps much more, in this fiscal year.
If the International Reserves are not growing, that means it will be impossible to fund that deficit.
That would mean....?





On the end it would be interesting to see dollar performance against gold in the longer time interval in annual average USD price of gold pro ounce:





Strong. Very strong.... (dollar "performance" in the last 40 years...)

Sincerely
malleni

[John]

-- Market Summary, Wed morning, November 12, 2008

Treasury Secretary Hank Paulson declared victory in a press
conference this morning, saying that the world financial markets had
improved substantially in the last few weeks, and systemic risk had
been prevented.

The Dow Industrials index fell steadily during his press conference,
and currently is down 300 points.

John

[John]

Paulson announced that the $700 billion bailout money is no longer
being used to purchase toxic assets (near-worthless mortgage-backed
CDOs and CDSs).

Instead, the money is being used to purchase stock of troubled banks.

Barely a day goes by any more when I don't just shake my head in
sheer disbelief.

John

[John]

In his press conference today, Paulson declared victory, but then
declared a major change of course, since the original plan wasn't
working.

The original plan was to use the $700 billion to purchase
near-worthless mortgage-backed securities, so that financial
institutions wouldn't be forced to write down their assets because of
mark-to-market rules. Apparently they will now have to do exactly
that. Perhaps Paulson is hoping that there are no more toxic
mortgage-back securities.

The reason for the change in direction is that it's now becoming
apparent that structured securities backed by consumer loans are just
as toxic as structured securities backed by mortgage loans.

So the new plan is to throw money at financial institutions that are
in trouble because of things like credit card loans and auto loans.

Meanwhile, pressure is building to throw money at the automobile
companies.

Investors did not respond favorably, apparently believing (correctly)
that Paulson's change of direction was just one more move of
desperation. The indexes fell 5%, down for the third day in a row.


Dow 8,282.66 -411.30 (-4.73%)
S&P 500 852.30 - 46.65 (-5.19%)
Nasdaq 1,499.21 - 81.69 (-5.17%)


John

[mark]

I live in Colorado.

Coming down out of the mountains on Interstate 70 toward Denver, there is a huge yellow sign with flashing amber lights, that says [roughly] "Truckers don't be fooled. You are only halfway down."

I paraphrased the sign, because I don't remember the wording, exactly. It is on a stretch of interstate highway that has 5% to 6% downgrades. My guess is about seven miles of steep downgrades from the sign. In an automobile, you can take your foot off the gas, and still be going 75 to 80 mph on the downgrade and have to hit the brakes to slow down. You can see the eastern plains, you think you are down, but many a trucker has lost his brakes thinking he was down, but was not. On interstate 70 past the sign, there are runaway truck ramps for trucks that lose their brakes.

My guess for the stock market: we are about halfway down in percentage terms from the top, before we get some kind of meaningful reversal. Many think they see the bottom, but they are fooled.

[RochFireball]

Looking at the news, I see that the fed has loaned $2 trillion to a number of banks. This is on top of the $700 million Congress approved and other funds expended, such as to AIG.

I have read the US will increase its borrowing, but the figures I see are nowhere near $2.7 trillion dollars of increased borrowing.

I can only assume that the fed 'created' this much money by fiat. (I.E. when the Fed writes a bailout recipient a check or transfers money to the recipient's account, it appears by fiat. When the fed 'gives you money', you assume it is good! Since money is backed by nothing but 'the faith and credit of the US Government' the government can 'print' all of the money it wants. (Actually they don't even have to print it, since it is all 'blips on a screen'!)

Am I understanding this correctly, or am I missing something?

[malleni]

Looking at the news, I see that the fed has loaned $2 trillion to a number of banks. This is on top of the $700 million Congress approved and other funds expended, such as to AIG.

I have read the US will increase its borrowing, but the figures I see are nowhere near $2.7 trillion dollars of increased borrowing.

I can only assume that the fed 'created' this much money by fiat. (I.E. when the Fed writes a bailout recipient a check or transfers money to the recipient's account, it appears by fiat. When the fed 'gives you money', you assume it is good! Since money is backed by nothing but 'the faith and credit of the US Government' the government can 'print' all of the money it wants. (Actually they don't even have to print it, since it is all 'blips on a screen'!)

Am I understanding this correctly, or am I missing something?

It looks even worse...

http://www.bloomberg.com/apps/news?pid= ... refer=home


"...as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return...."

"...
Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.
..."

AND ... As expected - nothing happened....

[mannfm11]

You have to quit thinking of Fed actins as printing Federal Reserve notes. For the most part what you hear the Fed doing in nothing more than accounting entries, swaps of assets. The Fed is like any bank in the sense that it has to have assets to match its liabilities. Go to your bank. If you had $1000 in your account, chances are they would give you $1000 when you closed your account, but they would probably try to get you to take a check. If you had $1 million, there is no chance they would give you cash because they don't have it. So, what the Fed generally does is facilitate the movement of funds between banks, though generally banks lend it back in the overnight market called the Federal Funds market. I had never given any thought to this before, but evidently the banks don't have guarantees when they make loans to other banks and can sustain losses. The NY banks, the big ones, have made so many wild deals that they owe the other banks a fortune, which is dependent on the other banks needing to pay them back. There is no faith in bank paper so the Fed is having to fund the overnight balances. We aren't talking this time about the fed facilitating credit growth, but instead facilitating liquidity in general in the overnight markets. They are also funding the commercial paper market that froze up. They are pretty much creating the movement of funds between banks. In the case of a bank like Citi, it has $400 billion in Fed fund liabilities, thus it needs to borrow to keep its books in balance($400 BILLION WAS STATED IN THEIR FINANCIALS IN THE SUMMER OF 2007 AND I doubt it has improved). Because Citi has made these loans and the money flowed to other banks, they still have the assets, the loans and securities acquired in the course of business and the Fed loans against this stuff. I believe one of the reasons that t-bills are so low in yield is the others in the banking system are buying those securities with the surplus fed funds. I am certain the $700 billion will be asset swaps, bonds for preferred stock or toxic crap.