That's the way to do it (not)

Punch and Judy Bank

An interesting article by Tim Wood in SafeHaven yesterday, in which he argues that the market is too big to manipulate. According to him, interest rates and market movements are largely unrelated and operate on separate cycles.

Much to discuss

(Daily Mail story)

"Business was off the agenda" said the Telegraph yesterday, about the Saudis' visit to Britain. I'm not so sure: somewhere in that 22-car convoy there may be a Saudi who had quiet talks with his opposite number about economic matters, while King Abdullah distracted the cameras.

Alex Wallenwein in SafeHaven yesterday reminds us that a month ago, the Saudis refused to cut rates to match the US. He sees the dollar's resistance to collapse as having bought time for European and Eastern economies, and the Euro currency, to strengthen their position. Soon, it may be takeover time, and contrarians who expect the dollar to bounce back may find that the trampoline has been whisked away.

Veneroso: up to half the gold has gone

GoldSeek (November 1) relays Frank Veneroso's assessment that central banks may have disposed of up to 50% of their gold bullion:

... The manipulation of gold prices was first noticed in the 1990s by Frank AJ Veneroso, one of the world’s top investment strategists. As more gold bullion came onto the market depressing the price of gold, Veneroso believed the central banks were its source.

When queried, central banks denied Veneroso’s assertions. Central bank records, in fact, showed their gold reserves to be stable. But Veneroso was right and the central banks were lying. The gold moving onto the markets was indeed coming from central banks via their co-conspirators in capping gold, the investment banks.

Investment banks were borrowing central bank gold at 1 %, selling it thereby depressing gold’s price and investing the proceeds in higher yielding government debt; and, as long as the price of gold moved lower, the profits of investment banks increased (see The Manipulation of the Gold Market, http://www.gata.org/node/11).

The International Monetary Fund was complicit in this deceit as IMF regulations allowed central banks to count gold “swapped” or “loaned” as still being on deposit in their vaults. Veneroso now believes that up to 50 % of gold reserves claimed by central banks have already been sold—a fact that will be instrumental in our collective bet against central banks in their house of cards...

... Veneroso believes central banks sold 10,000–15,000 tons, equal to 320,000,000 to 500,000,000 ounces of gold over the last 20 years. Just imagine how high the price of gold would be if the central banks had not sold this staggering amount.

Today’s $800/oz. gold is a bargain—as is $2,000/oz. or $3,000 oz. gold—a bargain that exists only because central banks literally sold thousands of tons of our gold onto the market in their attempts to prove gold a poorer alternative to debt-based paper currencies.

Over a year ago, Veneroso estimated central banks had less than three years supply left to cap gold’s price. He also predicted the central banks would capitulate before then, keeping what little gold they had left. When this happens, the central bank subsidy of gold will end and the price of gold will skyrocket.

On the same site, Adrian Ash (November 2) looks at gold's disadvantages and decides that it is best defined not as a commodity, but as a currency:

Given that gold doesn't pay you anything in yield, interest or dividends – and that it does not have any real industrial value – the "investment motive" for gold can only be explained as desire to quit other assets. Or at least, to hold an asset entirely free from what drives other asset markets up and down.

... perhaps the gold market says investors are looking for protection against falling bond, real estate and equity values – as well as a falling US Dollar and slumping US economy.

So they are buying protection ahead of time. And to do that, they're buying gold – a wholly different asset from everything else.

One for the speculators. Meanwhile, perhaps the non-rich among us should take the precaution of paying off overdrafts, credit card debts and any other loans that can be called in at short notice.

Put your fingers in your ears

(Picture source)

Doug Noland at Prudent Bear (November 2) agrees that bigger bangs are coming:

... as an analyst I must contemplate the likelihood we have entered a uniquely unstable monetary environment. In short, the backdrop exists where incredible dollar liquidity flows could be released (from myriad sources) upon key things (notably energy, food, metals and commodities) already in severe supply and demand imbalance. Again, how much are the Chinese willing to pay for energy? The Russians for food? The Indians for commodities? How much will investors be willing to pay for precious metals as a store of value? How aggressively will the speculators "front run" all of them? Can the Fed afford to fuel this bonfire?

... The least bad course for the Federal Reserve at this point would have a primary focus on supporting the dollar and global financial stability.

Secondary explosion

Ty Andros (Financial Sense, Friday) repeats the point made by Jim Puplava (which we reported earlier this summer), that the credit agencies' re-rating of subprime packages have ignited an explosion inside the banking system, but this may only be the detonator that sets off the main charge:

Whereas the big banks and investment houses can hide behind tier three and pray for a market recovery, the investing community cannot. Pension funds, institutions and money market funds, have fiduciary investment covenants which direct them to sell securities which are below certain ratings levels. Once an investment falls into the lower rungs on the investment scales they are bound by their own investing rules to divest the assets.

Tens of billions of dollars of securities have been downgraded since the beginning of October and this will require that they be sold in a timely manner. Once those securities hit the markets we will know their true value, and it won’t be pretty. The super SIV will quickly become an exercise in wishful thinking as their “high quality” paper becomes junk in the maelstrom of liquidation which increases every time a security is downgraded. The super SIV’s whole reason for being was to prevent fire sales and price discovery.

Stuffed at both ends

A duck and a crane being stuffed with food in Ancient Egypt

I overheard a classroom assistant talking about her monster mortgage and how it's gone up another £300 a month - just as the Council is planning to cut the pay of thousands of workers in order to tackle its huge budget deficit. Should she sell? Just as everybody else is considering the same course of action?

We look at our situation and grumble that we're stuffed, but Dr Housing Bubble (Financial Sense, yesterday) demonstrates how we're force fed with credit and high prices at the front end, too.

The figures will differ from one person to another. Do your own math, and work out what you should do - soon.

Bubble priced

"... my best estimate is that a full thirty percent of the market's current "value" is based upon fraud and deception, and not on actual value"

... says Genesis (Karl Denninger) on his site, Market Ticker yesterday. He has already organised a petition, and is now calling for a shatteringly large class-action suit against American banks.

"Dow 9,000" prediction: accelerating decline

Running to stand still: Alice and the Red Queen

November 2: Dow at 13,595.10, gold $806 per ounce. Since July 6, Dow has appeared to hold its ground, but the "gold-priced Dow" has dropped to 10,925.83 - a fall of over 49% annualised. And at this rate, gold will have doubled in dollar terms by July 2008.

China Olympics: Starter's Gun For Inflation

Image from the Summer Olympics of 1904 (St Louis, Missouri)

Robert Gottliebsen in Australia's Business Spectator (Thursday) gives thanks for Ben Bernanke's inflationary rescue of the banking system, but points out that the flight from devaluing US securities is driving demand for assets elsewhere. And there are longer-term consequences to face:

Before the latest US crisis developed my friends in China told me that many Chinese manufacturing businesses would try to raise prices by 10 per cent in 2008 -- probably after the Olympics. That determination will now be intensified because the manufacturers are not only receiving lower returns but are being forced to pay more for oil and commodities. Those seeking shelter from the US dollar will drive up prices.

Bernanke’s actions, even though they are justified, are going to inflame US inflationary pressures. So later in 2008 and in 2009 he will need to reverse the current process and increase interest rates. That will not be good for stock markets or commodities because it will reverse the current forces. But just how serious it will be for the US will depend on whether the current Bernanke medicine worked and the banking breakdown was repaired.

I think there is a chance it will work because rising stock markets are a powerful drug. But no one can be certain, and this is a very dangerous period.

Twang money - again

Pencils made from recycled money

Fiat currency can be expanded at will, but in a credit crunch can contract as easily, so I've previously nicknamed it "twang money". But it turns out there actually once was a medium of exchange known as "twang money" - the Hungarian pengo. It ended up as the worst case of inflation in history: someone writes in to today's Daily Mail (page 77) to say that by 1946, all the Hungarian banknotes in circulation, taken together, were worth one-thousandth of a US cent.

However, consider the potential uses of many tons of durable paper with run-resistant colours: wallpaper, sweet wrappers, firelighters... So for me, the story is about the buying opportunity when pessimism ignores intrinsic value.

The Clashing Rocks

Martin Hutchinson (Money Morning, today) sees the Fed caught between a rock and a hard place: as the dollar drops, oil and commodity prices go up and so American inflation worsens; if the dollar is supported by higher interest rates, the already-frail housing market stalls and maybe dives.

It's said that the Chinese pictogram for "crisis" combines the ideas of "threat" and "opportunity". Hutchinson offers ideas for those who want to take advantage: invest in...

• Japan
• gold
• natural resources
• Canadian oil
• - and a Korean bank.

"Wall of Worry" poll results

It seems respondents are as much confused as I am, about which way to go. I quoted Benjamin Graham's advice for passive investors, which is to strike some balance between equities and high-quality bonds, anywhere from 25:75 to 75:25, with a default position of 50:50.

The results are almost exactly divided: 8 at the top end for equities, 8 at the bottom for bonds, 7 voting for a 50:50 split, and one for 65% equities/35% bonds.

Another snort to keep going

Chris Ciovacco in SafeHaven today reads the historical charts and concludes that recent multiple Federal Reserve rate cuts are slightly bullish indicators:

... From my perspective, almost all the items above slightly favor the reflation trade over gloom-and-doom. However, the edge is small enough to remain diversified while keeping a close eye on the stock market's 50 and 200-day moving averages.

This would chime with Jim Puplava's assessment that "more of the same" will buy us a little more time until the system is exhausted, which he expects to happen around 2009 onwards.

There's never just one cockroach in the kitchen

... says Warren Buffett, at the trial of a former Freddie Mac chief executive.

Crazy like a fox?

I've received this unsolicited mail today. As Wavy Gravy said at Woodstock, there's a little bit of Heaven in every disaster... or is there?

Uncle Sam and John Bull

We're in it together (picture source)

Financial Sense yesterday: Adrian Ash points out that the UK has problems similar to America's, and draws comparisons with the economic situation of the 1970s. That word "stagflation" is being spoken again. He's another gold bug.

Frank Barbera looks at the ongoing credit crunch, with Structured Investment Vehicles looking for a rollover investment of £100 billion within the next few months, just as the market in commercial paper is drying up:

Bottom Line: It is simply a long way from over. So what do investors do while trying to make an honest buck? The answer is to expect more turmoil and periodic severe bouts of selling pressure rippling through the financial markets. We are looking at the battle between monetary reflation and debt deflation playing out on the grand stage.

Other bears look at the Thirties for their model. We have an advantage, in that we have the 70s and the 30s to learn from; they didn't have themselves in their history books. As Mark Twain said, "The past does not repeat itself, but it rhymes."

( Picture source)

Merrill in a panic

(Picture source)

Charles Merrill, a relation of the Merrill Lynch founder, has become a gold squirrel.

More surprises from Warren Buffett

Warren Buffett wants to pay more tax, according to NBC today.

And he doesn't have an accountant! (How many enemies can you make in one day?)

Money vs The People

(Picture source)

Money can improve happiness, below a certain income level; but above that point, the relationship is not so clear. And maybe there are distinctions between money, investments and wealth...

In Financial Sense yesterday, Robert McHugh comments:

When the Master Planners devalued the dollar over the past five years, they raised the cost of living for everyone. The Middle Class is getting annihilated from this silent event. Incomes are not keeping up. This was done because this administration “equates stock market success with economic success and has directed their efforts to drive up equities at literally any cost,” to quote one of our subscribers.

...but Tony Allison looks forward to a more energy-efficient future:

Change is seldom welcomed by most humans, but it can often bring about positive results. It is impossible to know what year the effects of peak oil production will barge into our living rooms, but change is on the way. The adjustment period to a permanent supply crunch will likely be very difficult, but some effects may be beneficial. For example, we could see a re-birth in local farming and manufacturing, as food and industrial products become exceedingly expensive to transport. We would see more public transit, more freight train transportation, more bicycles, more energy efficiencies of all kinds working their way into society.

Buffett goes South and East

MoneyNews.com (Friday) reports on Warren Buffett's investments in Brazil and South Korea. Apparently the great man has made a pile in Brazilian currency but is now looking to switch to their bonds.

Abroad elsewhere, he's looking for high-dividend companies - a combination of the standard value investing formula and hedging against the dollar.