Gaza

The fact that everyone is pleading with both sides to stop the hostilities suggests that this is more serious than usual. Keep watching very closely. Oil could go either way. So could gold, especially paper gold. Physical gold is a pretty safe investment at today's prices ($880) -- oil isn't.

A very Happy New Year to all my friends here. Thank you for visiting my Compass.

Make your New Year Resolution be to levitate yourself above events and try to look at them from above -- as if you were a ruler, a god or even God Himself. If people seem to be talking nonsense, they ARE talking nonsense. In this world, if someone does something for you they expect quid pro quo.

Reading recommendations:-- Alan Greenspan's book

29th December Update

A very brief update between Christmas and New Year (I have been off with pneumonia and a bit out of it all, unfortunately).

Watch the Treasury bubble unwind, and the USD fall. Will be gold positive in USD. Watch oil rise on technicals + ME situation. Watch EUR reverse soon.

EUR is grossly overvalued. Ridiculous. Impossible for PIGS (or frogs or krauts come to that). Fundamentals and technicals will see EUR fall sharply - sell.

Gold probably set for its assault past $900 but still very political and volatile. Not good for leveraged trading.

At home -- UK and US -- the big issues are the High Street and consequential job losses, plus the car makers. Retail prices still set to decline for many weeks to come showing apparent 'faux' deflation. This is not deflation but price cutting on stock liquidation. Very different.

Will comment again soon, sorry for the brief brief. Happy New Year!

Obama also said he wants to enact measures designed to protect workers and families from future recessions.

By this Obama apparently is talking about measures to bail out companies so the workers (and their families) are 'protected'. The measures he is outlining involve subsidising inefficient and insolvent industries from the public purse. That is the communist method -- a command economy, not a free market economy (don't bring capitalism vs communism into this discussion at this stage, we are only talking about investment by government into private industry).

I suggest that the best way to protect workers (and their families, etc.) is to:-

a) Provide a stable financial and economic climate for business.
b) Ensure that workers make adequate provision from their regular income to protect themselves from the consequences of leaner times. i.e. Saving.
c) Provide a regulatory environment in which fraudsters will be detected early. Today's problem is that a sizeable part of the world's financial system was trading fraudulently. I knew that. Why didn't the experts?
d) Put into place satisfactory safety-nets to protect those who cannot afford the basics of food, water, shelter, clothing, education for their children and basic health care.
e) Declare that the USA will not borrow money other than to defend herself and provide the basic care outlined in a) through d) above.

Government borrowing to support wonky industries so they can continue to make products that nobody wants to buy, is crass.

Iraq

I have never wished or intended for this blog to be 'political' in the doctrinaire sense so it is with some caution that I blog on the subject of Iraq.

Let us be absolutely clear about this:-

1. The invasion of Iraq had nothing whatsoever to do with human rights in Iraq or the dreadful Saddam.
2. The invasion of Iraq had nothing whatsoever to do with any security threat to the west or 'WMD'.

Iraq was simply the best available place to get US and British troops on the ground to protect our oil interests in the Middle East. Those troops will stay there in appropriate bases with appropriate logistical support and supplies until 'we' no longer need them.

Why have troops on the ground in the Middle East? Because, as the first Gulf War showed, without troops you cannot move forward to secure territory. If you don't have your own bases you are under the political control of host nations (Saudi was the biggest host in the first Gulf war and supporting the USA caused immense harm in Saudi's relations with the rest of the Arab world). Iraq has ceased to be a sovereign nation in any meaningful sense -- it is an an occupied territory under the control of the USA.

If you wanted to go round the world rooting out evil tyrants you would not have started with Saddam and you certainly wouldn't end your crusade there.....how about the mad, murderous Mr Mugabe?

The oil price crash is causing social and political upheaval in an already unsettled region. Never has the west needed troops on the ground more than now. Without access to affordable Middle East oil you can forget 'recovery'. Period.

The USA is now headless and directionless

Remember the $700 billion 'Poulsen plan'? It's now known as the TARP - Troubled Asset Relief Program(me). The idea was for the Treasury to buy up dodgy debt and store it in a quarantined environment. Having taken off the dodgy debt from banks' balance sheets the banks will be OK. Not so, as we know. But things are happening to the TARP fund. Bush has failed to get Senate approval for a bailout of the carmakers so he has agreed to bail them out from the TARP fund. Yikes, is this even legal? In any case, we have the spectacle of major US carmakers being paid by the Government to make cars that nobody wants.

The twist today is that the original $700 billion was actually voted in two tranches - of $350 billion and it so happens that after giving the carmakers their $14 billion or so, there is nothing left of the first tranche. So Congress needs to approve the second tranche. But now Congress is insisting that if they are going to vote for this, money will also have to be made available from TARP for 'homeowner relief'! Where is this all going to end? The TARP fund has become just a big pot of cash for corporate and individual welfare.

One problem is that this money is being borrowed and printed. The other problem is that it is not going to do anything to resolve the underlying problem -- it is a panic measure to try to maintain the status quo for a few more months. The carmakers are going to go down. The vulnerable homeowners are going to lose their homes. This must be obvious to everyone.

The real issue is that the United States, the world's largest financial and military power, is headless and directionless. That is terrifying.

Sterling Crisis

Following up previous blog entries in which I had forecast Sterling recovering; the present price action and economic news -- and, importantly, SENTIMENT in the UK -- I am concerned that GBP/EUR will plunge through parity. I am not convinced that Europe is any stronger when you take into account the mix of the whole of Euroland but Sterling seems on a one way ride right now.

Aside from the implications for British trade and industry, this could destabilise an already unstable banking sector. At this stage in this crisis we need to focus on unstable sectors rather than individual assets and the banking sector is both the most vulnerable and the most vital.

I hope that all readers of davidscompass still have at least one month, preferably more, of cash in the sock drawer; enough to pay all bills? The income you are getting from your deposit and savings account is now near-zero so there is no incentive to leave it where it is vulnerable.

Take those nuts and satsumas out of those Christmas stockings and fill them with good old-fashioned folding money -- or gold coins, or both.

Oil price collapse signals instability

While we will all take some personal comfort in oil falling - at the time of writing - to $36, this is indicative of a huge instability in the world's economy. There are very major undercurrents taking place at this time and it is not clear what is happening, or about to happen. This is a massive machine, constructed and designed by no-one, essential for the maintenance of twenty-first century life, that is breaking down -- crumbling -- in front of our eyes. We are on a cliff-edge.

Oil falls after a 9% OPEC cut - go figure!

You don't have to 'go' very far to 'figure' why oil is down despite an OPEC cut of 9%.

A) The recession is looking more like the most severe depression the world has ever seen
B) Central governments are in a flat spin, trying to fight the 'crisis' -- the measures being taken are disproportionate to the official line. People realise that something very nasty is about to happen. This will be oil-negative.
C) The oil producers need to increase their incomes -- they have their own domestic issues. Regardless of any OPEC agreements, the producers will pump whatever they need to pump.

The Fed cut created a short lived rally, as I forecast. Daily, the news on our televisions becomes more dire. Something very serious is about to happen -- I have felt this for some weeks and now the pressure is building to a panic level. I shall be very surprised if we don't have some major news within weeks and almost certainly before the end of January.

Very gold positive. Gold has gone through the resistance and the dramatic pullback earlier this year has become a memory. Gold and the Swiss Franc are set to gain.

Fed Rate Cut -- what does it mean?

As most commentators have said, the effect of the latest cut to near zero will not have any significant effect on the economy. It does mean, of course, that there can be no further significant cuts.

What really matter is WHY have they chosen to cut rates to this level? This will no doubt become clearer as the story plays out.

US Car Makers may be forced into bankruptcy

Overnight news suggests that the Bush administration might force GM and Chrysler into bankruptcy. This is hard on the heels of the earlier official statement from the White House that they are considering using some of the TARP $700 billion after the Senate turned down the proposed bailout.

While this is of vital interest to those involved in car making throughout the world, for most of us the significance of this play is whether the US is going to support lame duck manufacturing companies or let them go to the wall.

Unless these companies are allowed to fail we will end up with monstrous manufacturers in the US producing products (subsidised with state aid) that nobody wants to buy. This would equal any of the stupidest policy decisions made by the former Soviet Union in the last 60 years.

If they subsidise the car makers you will see the dollar fall faster than it is going to anyway but it will help support the stock market which will, in turn, support the banks at a time when they most need it. The end result will be the same; it is a question of timing.

Dollars and Pounds and Euros -- and Gold

At the time of writing we still have a frenzy of investment into US Treasuries but it seems probable that this is the final stage of the fear bubble, before it pops. At present, yields from US Treasuries are near zero or even negative so, why not just buy US Dollar notes and store them, instead? Why buy debt instruments with all the complications and risks, when you can put your money in cash -- of the folding-money sort? The problem with keeping dollar bills is the cost of storage, insurance and the fees banks charge for handling cash but we have come to the point where that would be a better investment than Treasuries if -- and let me stress, IF -- the US Dollar is where you want your money.

The US Dollar does now seem to have peaked and at some stage it will fall very sharply indeed at the same time that Treasuries fall. Timing is very hard to predict but I think we are talking days to weeks at the outside.

The GBP (British Pound) will recover against the Dollar and the Euro however the market is talking it down to parity with the Euro. It could be that it needs to touch parity before a recovery takes place. The dynamics in the short term are likely to be a small recover in GBP/USD, a sharp recovery in EUR/USD and still some decline in GBP/EUR.

Much of the money that has been going into US Treasuries will need to find an alternative safe haven. Some will go to the CHF (Swiss Franc) and some will undoubtedly go into gold. While gold will remain potentially highly volatile (making leveraged positions dangerous) we seem to re-established a bull phase which should take gold back through $1000 and beyond.

The Global Village was

The Global Village was a nice idea, but it is over. No country -- not even the once-mighty USA -- can afford to allow competitive products from overseas free access to its markets where that will result in its own workers losing their jobs or earning less.

Protectionism will return suddenly, and with a vengeance.

Those countries that have allowed certain industries to decline or fail will be poorly-positioned; the United Kingdom, under the arch Global-Villageist, Tony Blair, will be very badly hit in this respect as will the United States.

Bush decides to tap TARP

As I said in this morning's blog, I expected Bush to use TARP to bail out the car makers and that has now been confirmed by the White House. Expect a bit of a recovery in the bourses and then continued falls as investors realise just how hopelessly out of control is the USA.

US Car Makers - Senate reject $14 billion bail-out

Last night the Senate rejected the $14 billion bail-out scheme passed by Congress. Overnight, stocks in Asia tumbled between 4% and 7% and oil fell by 5%. The Bush administration still has the option of tapping into the £700 billion pot approved earlier this year, for the financial industry.

The US motor industry has been in a terrible state for some years; in recent years they have been almost giving vehicles away -- almost anyone who wanted a new SUV had one, and on very, very easy terms. The market is saturated with new cars. Most US cars have much higher fuel consumption than their European counterparts and will oil prices surging to £140 this summer, people realised for the first time that the need for fuel economy is here and now. It will take the US manufacturers time to adapt, meanwhile they are poised to lose market share.

If they are going to spend $14 billion (which is surely just a first installment) then it might be better spent on welfare for those who will lose their livelihoods and force the companies to restructure, adapt and emerge in a new form. Let us not forget that it was only few weeks ago that the CEOs of these car firms arrived in Washington in several business jets, while begging for a handout of $14 billion! The shere nerve of these people is astonishing; they have no idea. Even after receiving a presidential rebuke for such conspicuous over-consumption by their executives they only agreed to cease using their biz-jets after January. If they were plane-makers you might understand but these are car makers.

My best guess is that Bush will tap into that $700 billion and use it as an excuse to go back to congress to re-fill that pot. Meanwhile, the uncertainty will cause a major rout on the world's stock exchanges, and a fall in the dollar. Bizarrely, Treasury notes are still rising with yields nudging from zero to negative. This is a panic reaction -- where else can people put their money? The public can put it under their mattresses but corporate, institutional and third-party investors (such as trustees) don't have that option.

Fortunately today is Friday and there will be time for a pause over the weekend but a rapidly falling stock market is going to re-open the liquidity issues in the banking sector. Banks could fail. If only for that reason, some kind of support for the car makers might be justified.

US Treasuries Bubble

Dec. 11 (Bloomberg) -- The rally in Treasuries that pushed yields on bills below zero percent this week is adding to concerns that the $5.3 trillion market for government debt is a bubble waiting to burst.
Investors seeking safety from losses in equity and credit markets charged the Treasury zero percent interest when the government sold $30 billion of four-week bills on Dec. 9. A day later three-month bill rates turned negative for the first time since the U.S. began selling the debt in 1929. Yields on two-, 10- and 30-year securities touched record lows this month.
“Treasuries have some bubble characteristics, certainly the Treasury bill does,” said Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk?” he said in a Bloomberg Television interview yesterday.

When this bubble bursts or deflates, the USD will fall, gold will rise and inflation will rise. The threat of deflation will pass. Interest rates might then be set to rise again. Depending on how fast this unwinds, we could be talking about a matter of a few weeks.

They are wrong about deflation

I am now 95% certain that 'they' are wrong about the threat of deflation. I no longer even believe that this is what 'they' believe. What they are doing is to try to salvage businesses (which, for the most part are bankrolling the politicians) for the sake of the business owners. The flood of newly-printed public money going into the financial markets will result in hyper inflation on a scale never experienced before in the UK or USA.

Jobs will not be saved. These businesses are producing goods and services for which there is a dwindling market.

Monday 8th December

We are seeing a small but sharp rally on the bourses. Some analysts are suggesting that this is due to the Obama proposal for major infrastructure works. However, given that the effect of that will not be seen until 2010 at the earliest, that is not the whole story. To some extent the rally is due to shorts being closed before the Christmas break and possibly an effect of quantitative easing by the Treasury which is buying any assets at its discretion; support of the stock markets will be a priority action for the Fed/Treasury to avert the looming banking crisis. Banks are still not lending. The fundamentals for most equities still look terrible with deteriorating conditions being reported on a daily basis. We could see this rally continue into Christmas but volatility is very high -- if you want to get involved, this is a market to trade, not a market to buy.

Oil is in the spotlight at the moment with OPEC due to hold another meeting on 17th December. It is being tipped that they will cut production by 2 million per day. Certainly OPEC will not tolerate oil under $50 for long since even those producers that can produce at lower prices already have huge budget deficits. My forecast is for oil to rise back to $50 to$60 fairly soon; while it is impossible to rule anything out in this crazy market, I think that the probability of oil falling further to $30 or $20 are very small indeed.

Commodities in general have continued to fall -- the October rally reversed and prices have continued to fall along with the dollar's rise. I think that the effect is, to a great extent, due to the strengthening of the dollar with continued pessimism on industrial activity, particularly in Asia.

Gold is much firmer with continued reports from bullion dealers of record demand by investors, for bullion. It is interesting that while the official price of gold has been very volatile the demand has been increasing steadily and bullion is selling at 20% or more above the official price. The reason for this is that most gold trading is through gold futures -- these are paper transactions and traders seldom take delivery. With the extra powers now given to the US Treasury under 'quantitative easing', the Treasury is now in a better position to influence the price of gold than hitherto; there is no evidence that is actually has been doing so as the Treasury is not obliged to report which assets it has bought or sold, so that is conjecture. It is also quite likely. The central banks do not want to see a strong gold market; they want to dissuade people from investing in gold. Many gold investors have bailed out after recent sharp pullbacks although those with a longer-term strategy have been doing very nicely. It seems most likely that gold will continue to rise as this financial crisis gets worse. Investors should take the longer-term view and invest in physical gold. Ideally, buy coins and take delivery of them.

Thursday 4th December 2008

Every day yet more bad news comes out...massive job losses (Credit Suisse cutting 11% of their entire workforce), panic interest rate cuts by central banks, new safety-nets needed for those who are in financial difficulties, company profits turned to unimaginably high losses, bail-outs of private companies by governments, and falling oil prices (bad news because it is politically destabilising).

Let's look at the compass and see where we are headed.....

Governments are trying to halt the decline in business by reducing taxes (mainly for the bottom tier as they spend it fastest) and by making money available to the banking system so that it can lend to consumers and revive the housing market (so people can continue to borrow against their houses for income) . The idea is that if the consumer has more money then he will spend more. The problem is that they are trying to fight a natural cycle. It's like trying to turn the tide. Canute wasn't able to and neither will governments.

I think that we can safely dismiss the idea that present policies are going to do anything for the downturn -- they might help to prevent a collapse of the banking system and it could be that's the main objective, in which case fine; a collapse of the banking system would leave us so deeply in poo we might not recover for decades. Yes, decades.

Accepting that business is going to contract for at least the next twelve months (and that is very optimistic) can we see any more clearly now what is going to happen?

There will be massive new demands on the public purse as unemployment rises and private pensions fail to provide for their pensioners. Tax revenues will fall with reduced earnings and spending, and reduced corporate profits. Added to the billions of pounds spent supporting the banks and other companies, the deficit will become unmanageable. The US and UK will issue more money (dollars and pounds). The Euro will probably follow but more reluctantly. Inflation at this time appears to have fallen to nearly zero and there are fears that we will slip into a long period of deflation, like Japan.

That is possible but I believe that they are looking at the wrong signals. The 'deflation' (i.e. falling prices) that we are seeing today are due mostly to stock clearance and price wars. This will not continue. Normally, most of the stock is cleared out by the end of January -- what doesn't sell before Christmas is sold in the sales. This year, it looks as though it will take longer to sell. Maybe March or April during which time shops will close down and goods will be sold at fire-sale prices, adding to the apparent 'deflation'. If the central banks continue to respond by printing more money in an attempt to fight non-existent deflation then when the glut of product dries up, and new product has to be ordered from the factories, the prices will be much, much higher. This could happen very quickly. In this situation we would have an economy drowning in money with low stocks of products to spend it on. The classic recipe for inflation. Only this time, the numbers will be so massive that the inflation will be a monster.

When you are making investment decisions I strongly caution you not to assume that we will be entering a period of deflation. It could happen, but it's far more likely that we will see hyper-inflation early in the New Year.

Monday 1st December

The stock markets in Asia fell overnight and at the time of writing are falling again today. Wall Street looks certain to open lower. These are large falls, and it looks as though last week's bear market rally is over; we will probably see quite a sharp pullback to new lows during this week.

Meanwhile, hedge funds are falling apart and unwinding their positions. Many have halted withdrawals. There is chaos in the financial markets and most asset classes are being hit as people dispose of hard assets in order to cover paper (derivatives) positions.

This has resulted in even gold pulling back quite sharply today possibly as part of the unwinding of commodities portfolios by the hedge funds.

Oil was in the news over the weekend. It looks as though OPEC is going to let the price drift down, if that's where the market wants to take it. This lower price is going to hit Russia very hard just at the time when she is going through a crises on the stock market, the Rouble and industry. The main issues for Europe are continuity of supply of oil and gas, and the worry about a destabilised Russia at her back door. Both are critical issues.

I think that this week is going to see some major casualties in the financial sector (banks, insurance companies), industrials and retailers. We can expect to see more major retailers fail before Christmas - some have been hanging onto the hope of a last minute surge by Christmas shoppers and if that does not materialise, they will have to go public about their financial situation. As I said last week, then was a good time to offload stocks during the short rally. For now, it is down.

Many people now have put a significant proportion of their portfolios into gold. I think that the underlying trend is again bullish despite today's pullback. However, gold is controlled politically and does not respond in the way you'd expect it to in a free market. The only safe way to hold gold is physical gold -- ideally take delivery. If you are holding physical gold, hold onto it and even add to it. Over the next six months gold is almost certain to gain in value in real terms while most other asset classes are likely to fall in value, in real terms.

Rouble Trouble

The Rouble is collapsing. Bad news for Russia but what about all the customers who now depend on Russia's oil and natural gas? Oil is already trading at around $50 with forecasts of further falls -- Russia needs on average $70 to break even. Russia has already spent nearly $150 billion of her dollar reserves in supporting the Rouble.

While this is a tragedy for the Russians, the consequences for Europe, which has become dependant on Russian oil and gas, are very serious. While the Europeans are paying in hard currency, vital for Russia, the political and social consequences of the collapse are incalculable if they cause disruption to energy exports.

Russia was one of those 'emerging markets' that was supposed, according to most economists, to be able to manage without the west. China, Japan, and Russia are now in dire trouble, along with the Middle East, Europe, the United States and much of South America....Australasia,....

Black Friday

The stock market rally has paused. It's impossible to say whether this is a point of inflexion and we continue up for a while, or whether the downtrend will resume. We should consider this as only a bear market rally, in any case.

Key pointers today are continued dire forecasts and comments from companies. Forecast losses. Gold edging up a little and oil down. Soft commodities firming, and metals softening on forecasts of deeper recession in Japan and China.

We are also seeing a weaker Dollar, firmer Euro and a British Pound waiting to rise. The Swiss Franc is looking good. The flight to US Treasuries is ending. The US and British Treasuries will start to have real trouble with new issues particularly longs. I wonder if we will see some new undated issues on the same formula as War Loan and Consuls?

The general position continues to be a worsening financial crisis, worsening company results and flight to gold. This is a time not to be in equities or derivatives.

High Street Crash

Nov. 27 (Bloomberg) -- Woolworths Group Plc appointed administrators for its chain of stores and MFI Retail Ltd. collapsed, putting almost 30,000 U.K. jobs at risk, as the economy’s slide caused consumer spending to slump.

Woolworths, which opened its first shop in 1909, had Deloitte appointed as administrators today after an attempt to sell the stores ended. MFI appointed administrators yesterday.

I fear that this is barely even the tip of the iceberg. Many retailers make almost all of their profit at Christmas and this year they are being hit by at least a 10% fall in volume and up to 50% fall in selling prices, taking them well into the red. Due to the shortage of credit for business, few firms will be able to extend their debts to tide them over.

Bad though this is for the retail sector, and the employees and their families, it will also hit the suppliers of products and services to the retail sector. I have argued for many years that retail is the engine behind the western economies. Almost everything else produced or service rendered is, at the end of the day, strongly linked to retail in one way or another. When the retail trade collapses, so does everything else.

It will be interesting to watch the supermarkets. We all have to eat. Will they retain their market share or will food start to be distributed through local markets, traders, 'white van man', etc. at lower cost and margins? For the time being, the huge purchasing power of the supermarkets and their ability to hedge and buy forward might give them the advantage but there is a huge market opportunity for small traders to undercut them by a useful margin. Anyone can drive a white van. There are plenty of good, highly motivated people with retail experience out there who now have no job and in most market towns in the UK there is a right to erect a stall.

I stand by my earlier comments that the more enlightened supermarkets will open smaller convenience stores (as J. Sainsbury has recently announced) but each day that goes by makes the outlook look bleaker. As politicians dig us deeper into debt for very short-term gain, we will sink lower. We might be looking at the closure of shopping malls and hypermarkets on a grand scale - a collapse. This would start at the luxury end of the market and work down. The small traders will be there to take the business for essentials and this movement will be driven from two directions....

From the top down --- Luxury goods and high-overhead malls start to lose money and close

From the bottom up --- Small traders - white van man - starts to take volume from established fixed retailers.

Stock Market Rally - What's going on?

The present stock market rally is the steepest since 1933 and has gone over four days. Have we bottomed? NO. All of the earnings and turnover data is dire. This is an engineered rally, by the PPT, possibly to help support the banks (when stocks fall banks solvency is reduced). It is neither a good thing nor a bad thing (unless you were short before the rally and haven't closed your position). If you have been sitting on shares waiting for some recovery, this might be your last good opportunity before the next sharp leg down. We are looking at the S&P going to the low 700s before we have any hope of finding a bottom. At the time of writing this, the S&P is at 888.

To support this view, look at LIBOR, which remains high, yet more market stimulation, this time in the EU, and notice that oil is still down in the low $50s where it has become range-bound for a while. Meanwhile, gold remains firm.

It will not be long before commodities rise again as inflation kicks in and the value of the USD falls against commodities and other currencies, particularly the EUR and GBP. I am not as pessimistic about cable (GBP) as most other commentators seem to be. True, the UK is in a terrible pickle and the economy is being badly mismanaged by Mr Brown and his Chancellor, Darling, but then again, that is true of the USA and all other EU countries. No country seems prepared to bite the bullet.

I am watching constantly and will update again when I have something useful to add. We are in the fiercest financial storm ever seen on the planet and it is impossible to predict the outcome with any certainty. The best we can do is determine the approximate direction and speed but timing is particularly hard to judge. To a great extent, the timing will depend on how long the politicians can keep the public confidence of the banking system. If that goes, the entire structure would fall down with fearsome consequences.

LIBOR going up -- HEADS UP

Indications are that LIBOR is going up again. i.e. banks won't lend to banks. In this present environment it doesn't reflect a shortage of money but, rather, a lack of confidence by bankers, of other bankers.

This is the banking crisis I have been talking about for some weeks.

The banking crisis IS THE CRISIS. The banking crisis is why governments are in a flat spin, a panic.

Be vigilant. A banking crash would have implications far outside banking.

I'll come back to this when I think I have something useful to add.

This Stock Market Rally

Why are the stock markets rallying? Have they bottomed? Is now the time to get back in? Is the end of the recession in sight? Have commodity prices bottomed?

Stock markets are not just left to fend for themselves....

Executive Order 12631 - Working Group on Financial Markets - Mar. 18, 1988; 53 FR 9421, 3 CFR, 1988 Comp., p. 559.

"By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:

(1) the Secretary of the Treasury, or his designee; (2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee; (3) the Chairman of the Securities and Exchange Commission, or his designee; and (4) the Chairman of the Commodity Futures Trading Commission, or her designee.

Section 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.

(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.

Section 3. Administration. (c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."


This little group is generally known as the "Plunge Protection Team". It operates by playing the futures markets in commodities, currencies, gold and stocks. Since it is backed by the US Treasury, it's power is awesome, if not unlimited. I think that this present rally has been manipulated (at least in part) by the PPT. Once a rally starts, it tends to find its own momentum so the PPT can unwind its positions and actually make a profit on the exercise. It is the ultimate Insider Trading given that the PPT is comprised of the policymakers! The world's capital markets are NOT a level playing field....beware. Edit:- A reader has kindly given me a link to a Washington Post article that describes how the PPT work... http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm

So, is this the bottom? No. Nowhere near. We have to go down to the low 700s (S&P) at least before we bottom and we will not see a genuine recovery until some fundamentally good news appears on the horizon. At this time, the situation is becoming more dire by the day. Any rallies at this time are bear market rallies most likely engineered by the PPT.

Is now the time to get back into the stock markets? No. Even if you are prepared to see your investment fall by averaging-down (a well-known investment strategy advocated by stockbrokers, financial advisors and practiced by idiots and philanthropists) many of the firms you might invest in will have gone bust or bailed-out before things get better. If you can cherry-pick and you really know your stuff you will find some firms that will actually profit from this recession, but I can't help you with that.

Is the end of the recession in sight? No. The recession hasn't really started yet. Most firms are still trading and most people still have their jobs. In the US and UK we will see up to 30% job losses before this recession bottoms. In these countries we have built economies that feed on themselves, financed by external borrowing. The borrowing is going to have to stop. The present government initiatives -- spend and borrow to 'halt' the recession -- are insane and due to blind panic. It won't work, it will make things worse and it will cost a fortune. Of course it could give a Christmas bonus to those who would otherwise have lost their jobs but it'll be worse for them in February than if they had done what they SHOULD have done -- cut public spending and cut borrowing.

Have commodity prices bottomed? Maybe. As the debts are unwound and safely wrapped-up in toxic waste dumps the monetary debt-deflation that has been soaking up all the spare dollars will start to fall. With the monumental sums of USD being deluged onto the world, we will soon be awash with dollars. That is called monetary inflation and it results in higher prices because a large number of dollars are competing for a finite resource. If you have $1000 in your pocket you don't argue about the price of an ice cream -- $1 or $3, doesn't seem to matter much. If you only have $10 in your pocket, it makes a huge difference and either you do without the ice cream, or you haggle, or shop around for a better deal. It's the same thing in the world's markets from commodities to finished goods.

Economists are split between those who think we are headed for deflation and those who think we are headed for hyper-inflation. If you see commodity prices start to rise again it could signal the start of a rapid rise in prices, probably completely out of control with inflation running at rates unheard of in the US or UK.

Update Sunday 23rd November 2008

Fear has been increasing in the markets last week, leading to a continued fall in equities and rise in gold as a safe haven. The real issue at the moment is stability of the banking sector. Citi is the headline but there are many others out there in as much or more trouble. That's why LIBOR stubbornly refuses to fall and why banks won't lend despite government pressure.

It's a double-edged sword for the banks. Their financial base is being eroded by falling stock values (their own stock and the stock held as collateral on outstanding loans), and their customers' performance is going to plummet over the next few years due to the recession, hitting banks' income. Because most banks are so over-leveraged many will not survive. Some will be bailed out by government, some will amalgamate with others and others will go to the wall. The problem will come if (or when) ordinary customers lose their money or can't get hold of it. That is the risk -- a run on the banks. That is what governments are terrified of and that is why they are all in a blind panic.

You should have already made provision for these things -- make sure you have cash 'in the sock drawer', at least two month's worth for all expenses. If you haven't, do it now. The interest you will lose will be trivial at today's rates and you can always put it back in later. You will feel much more comfortable with a couple of month's cash to hand.

If you have funds available, and you have not already done so, put some money into gold coins. For UK taxpayers, UK legal tender coins (sovereigns and britannias) are free from CGT. All gold bullion and coins in the EU are free from VAT. I don't suggest you buy gold coins from Ebay unless you really know what you are doing. The best way is to phone a gold coin dealer, agree a price and then go and pick them up in person. Keep them in the same sock drawer you use for your folding cash and don't tell anyone. If you are going to invest a large amount in gold, consider asking your own bank for a safe deposit box. I would not entrust my gold to any gold coin dealer to store for me.

It'll be an interesting week ahead!

Update 19th November 2008

I am privileged to have friends and acquaintances who work at a most senior level, in industry and banking, in Europe. I have just returned from a social visit and I am sharing the essence of what was said.

Many banks are expected to disappear. There will not necessarily be failures resulting in loss of depositors' funds (although that was considered very possible) but nobody thought that most banks would survive this crisis.

Currencies are in 'red for volatile' conditions. Most are bullish GBP and neutral EUR (both vs the USD). Gold is seen as rising or trading sideways around the mid-700s. 650 is considered to be a absolute floor for gold.

Everyone regarded last week's G-20 'summit' as a complete waste of time (at best) or a fraud. Talking to people who have some insight, it seems that USA might have some alternative agenda that they are not prepared to announce just yet...but that's speculation.

The bourses are tipped to continue to plunge. This is threatening banks. The situation remains dire and getting worse.

Sorry to be the bearer of bad news.

After G-20 Oh dear, oh dear, oh dear

The 'outcome' of the G-20 summit is about as dismal as was possible. For the details, see http://www.whitehouse.gov/news/releases/2008/11/20081115-1.html

All they have done is to agree dates for subsequent meetings and a glib 'agreement to think about it'. Not even an 'Agreement to agree'. I had hoped for 'Heads of Agreement' stating those things that had been agreed in principle, subject to the fine print by lawyers and ratification by local administrations, but instead, they assure us that they will think about it. Good-oh.

What does this mean? As I wrote on Friday, more borrowing and more fiscal stimulation. Tax cuts and bailouts financed by borrowing. Mr Brown is widely tipped to give a massive handout to the 'poor'. Not, you understand, because the 'poor' are 'needy' but because the poor tend to spend what they get the instant they get it (could be WHY they are poor??). The Government wants instant results and political capital so it hands out billions of pounds of taxpayers' money to people who are mostly already net recipients of benefits. How fair is that? Not just unfair, but as policies goes, it is insane for fiscal reasons.

We are in the biggest financial tempest the world has EVER seen. It has never before happened on such a scale and there is no end in sight.

What is not helping is economists tinkering around at a micro level with the odd % here or there, with interminable debates about how "more stimulus is needed" and where, and how it should be stimulated. What would really help us is for these utter idiots who, only a few short months ago were telling us how this was all going to be contained, to shut up and let some 'handbag' economics take over.


1. Let GBP find its own level in the market - do not support it.
2. Provide no state funds for failing businesses but instead provide benefits, training and job-search assistance to those who are in severe financial difficulties.
3. Cut out -- ALTOGETHER -- all government spending that is non-essential. No more gender/race/age/ commissions. Slash administrators in every field of government spending to the core. Cut the upper-tier state-employees salaries by a large margin. Slash government-funded expenses and allowances to subsistence and pure reimbursement levels.
4. Put all government pensions on a fixed basis. No more index linked.
5. Remove the concept of 'performance-related pay' from the public sector.
6. Accept that there is no such thing as a business that is 'too big to fail'. It is all part of a life-cycle. All large businesses are born, grow and die, just like people. Think British Leyland, and how that came about.
7. Refuse to take on any further public sector debt for any reason whatsoever other than imminent defence of the nation.
8. Make a public statement that the servicing of government debt will be the number one fiscal priority.

G-20 Meeting this weekend

Starting tomorrow, there is to be a meeting of the G-20 nations, in Washington, to discuss the present financial crisis. I have been researching the mainstream thinking of economists and am saddened to find that the consensus is for more fiscal stimulation, greater borrowing and no mention of a reserve currency as an alternative to the US dollar. For those of you who are interested in reading some papers from some of the world's leading economists, you can download:-

http://www.voxeu.org/reports/G20_Summit.pdf

The language is not too technical and most of it is quite readable -- if lamentably stupid. It is the same sort of thinking that got us into this mess.

I'll be reporting back to this blog over the weekend, as news filters through.

Managing Contraction

You will find very little work or training on the subject of managing a business to contract. Virtually all management training and experience assumes an environment that is growing; more people = more consumers = growing market in volume and value. Furthermore, virtually all management training assumes that the corporate objective is to grow the business within the market -- i.e. take greater market share. It is this ethos of trying to grow market share within a growing market that is the fixation of every management team.

What this means is that the infrastructure companies use to carry on their business must grow. Leaving aside technological changes and outsourcing, generally this means moving to larger premises, bigger plant, more HR, accountancy and other support staff, etc. As companies grow, they borrow (or raise from their investors) more capital to run the business. The justification to the investors (and lenders) is a bigger income, and a bigger profit.

Now, consider a market which is falling. At first sight you would think that you could contract a business in the reverse order -- like letting air out of a balloon -- but it isn't as easy as that. You can't reduce the size of the plant or premises by 10%. That's because companies tend to distribute functions between different sites or departments. If you sell off the plant that makes the ball bearings you need you will have NO ball bearings but all you wanted was a reduction of 10%. So you'd have to outsource the balls and you might not save the 10% which was your original requirement.

Those lenders and investors who had put money in your business because of your growth targets are going to want their money out.

You might have seen Sainsbury's little-publicised news this week that they are going ahead immediately with up to 100 new "convenience" stores? So they are planning to grow their business in this present market? A supermarket that has positioned itself over years to be at the premium end of the market? No. I think you are seeing a rare example of a management team trying to manage contraction. Once the convenience stores are online they can close down or mothball a hypermarket. The plan is no doubt to find funding to keep one step ahead of the game and keep investors in place while the turnover and profits fall. That's going to be the hardest part because the investors won't understand the game plan or the inevitability of the business contracting. Other, less enlightened management teams, are simply piling-in to the downmarket sections where, in some cases they have little experience. Like Northern Foods. You can't have all the players fighting for market share at the bottom of the market. It will be survival of the strongest balance sheet and most determined investors. That'll favour companies with old family money invested in them, not companies owned almost entirely by institutional investors.

Certain businesses seem to be at more risk than others. Large manufacturing plants such as automotive, aerospace and high volume manufacturing are at the gravest risk but consider also the financial services companies (and I include all insurers in that). Banks, health-care insurance, general and motor insurance and IFAs. Pension providers (and funds) are a unique nightmare; a disaster waiting to happen. How do banks contract and yet still provide a competitive service at a local level? If Bank A closes its branch in Little Rissington then the Little Rissington residents will probably go to Bank B, where there is still a branch. So cutting, say, 10% off the branch overhead could result in a much larger decline in business than 10%. Everything is easier when the overall market -- the number of consumers and what they are spending -- is growing.

The point that I am making here is don't expect an investment of £100 in a FTSE 100 tracker fund to track the market. If the market falls by, say, 10% (which is wildly optimistic, the contraction will be much larger, probably around 30% to 50% before this mess bottoms). Entire companies will go bust. The shares will be valueless. Any kind of chart analysis that suggests the DJIA will bottom at the 2002 lows, for example, is rubbish. There is no rational basis for such a prediction. It's like trying to predict the landing speed of a 747 that has lost its wings, based on previous landings. It's absurd. There will not be a soft landing.

That is not to say that we need to despair and run around like the proverbial headless chickens (although that is clearly what the US and UK administrations are doing this week) but you need to back teams that are showing they can manage contraction, survive and thrive in a contracting market. I don't think that all the management teams are going to share their thinking so you will need to be watching out for sensible moves, such as Sainsbury's.

Thursday 13th November 2008

The bourses continue to plunge, increasing the risk of bank failures and deficiencies in pension funds.

Company earnings and forecasts continue to plunge with gloomy CEO outlooks in most cases. It is plunging earnings and insolvent balance sheets that are the real problem today. People have stopped buying things and now businesses will have to stop making things (or at least, not as many things). That's a 'heads-up' to GM and Ford.

MasterCard say that gasoline consumption in the USA is now down 4% (presumably adjusted seasonally, but my report does not say). Official figures are due out later today. 4% is a huge fall. Nearly one journey in twenty has not taken place.

The US dollar is far too strong for the USA to stand. At present levels the US cannot be competitive in many export markets and we can be sure that there is huge political pressure within the US to weaken the USD. Of course, a weakening USD would also reduce the value of debt, in real terms, so has two benefits. What is not clear right now is how much control the US has over its exchange rate.

The outcome of tomorrow's Washington summit will be very interesting. I won't go as far as to suggest that you short the dollar but it might be wise to close any long positions before Friday.

Wednesday 12th November 2008

Just two days to go before the summit in Washington. There has been so much kite-flying and cage-rattling by world leaders it is looking nearly certain that any policy agreement will be interventionist. More liquidity, support of banks, and support of major industries.

The US automobile issue is becoming more serious. This is a huge industry (see below) and the implications of paying all these people, the service industries, retirees and hangers-on (and biz-jets) solvent to make cars that nobody wants, needs or can afford is folly on an unimaginable scale that will hurt the entire world economy, breaking international free trade agreements. It would be better to pay these people to sit at home and make sandwiches. But they want to make cars, not sandwiches. They have enough clout to make that happen, it seems.

Here's a little bit of a report from Bloomberg today.....

Nov. 12 (Bloomberg) -- House Speaker Nancy Pelosi has thrown her support behind the premise that General Motors Corp., the largest U.S. automaker, is too big to be allowed to fail.

In urging Congress to enact emergency aid for the ailing auto industry, Pelosi rejected calls to let GM collapse and sided with the company and its allies in trying to prevent a ``devastating'' domino effect that would cost millions of jobs.

``Trying to reorganize the auto industry in bankruptcy would be as close to reorganizing the whole U.S. economy as you could get,'' said Alan Gover, a bankruptcy lawyer with White & Case LLP in New York. ``The vast supply chain involves thousands of businesses, millions of existing jobs and just as many retirees, as well as whole communities and states.''

Passage of an industry bailout plan may keep GM from running out of operating cash by year's end, which it says may happen without U.S. help. GM is the second-biggest provider of private health-care benefits and was the third-biggest advertiser in this year's first half.

``It's truly one of those companies that's too big to fail, and everybody understands that,'' said Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts. ``If it does collapse, it could make the recession deeper and longer.''

Behravesh said a GM bankruptcy could send the U.S. jobless rate as high as 9.5 percent, up from a 14-year high of 6.5 percent in October, and produce a recession comparable in length to that of 1980-82.

Oil is another key issue that is about to surface. Many oil producers have now geared themselves to need an oil price of around $100 per barrel. No industry experts forecast oil ever coming down to below $60 ever again. While the USD has firmed against most other currencies, that fact is not especially important for most oil producers, who tend to buy their imports in USD.

I think what we are seeing is crazy volatile swings in currencies, commodities and stock markets. The system has become unstable. As in any engineering system, it is usually impossible to predict what an unstable system will do unless you have a working mathematical model of the system -- clearly we don't have that or we would not have 'sleepwalked' right into this situation!

There is no asset class other than gold that seems safe at this time. I see instability increasing, panic at government level and such negative thinking in the population that there is no way this is going to settle. The run-up to Christmas will be hugely significant since 2/3 of profits of many companies are earned as a direct result of Christmas.

Keep focusing on the summit on Friday. Maybe they will surprise us yet, but I have my doubts.

11th November 2008 Update

Shares around the world have been falling again, as I predicted. The Chinese stimulus is not likely to do much for the western world.

The two issues worth looking at today are the forthcoming economic summit in Washington, on Friday and President-Elect Obama's pressure on the Bush administration to 'save' the Auto manufacturers, Ford and GM.

The general feeling among world's economists is that we need to spend our way of of this problem. To my mind, that is rather like trying to pump water through the Panama canal to stop the Atlantic tide from going out. There always have been and always will be economic cycles and to fall back on a misinterpretation of a half-work by a half-baked early 20th economist (J M Keynes, whose theories have been discounted for over fifty years by mainstream economists) seems absurd. But that is where we are. I can predict with gloomy confidence that whatever comes out of Friday 15th will be a spend policy. If you have capital, and income from your capital, you need to consider how they might try to finance that and try to take steps to protect yourself. Inflation - which is mostly a deliberate policy, they have an inflation target! - is the usual form of state capital theft. There are other ways including the sequestration of private assets.

Saving Ford and GM is quite pointless. For several years the car makers have been almost giving away their products on a marginal cost basis to keep their plant open. Most of those cars sold were on particularly advantageous credit terms and especially in the USA anyone who wanted a new car who could conceivably have been granted credit to buy one, has already got a new car. Who are they going to build the cars for? The numbers are so wildly stacked against keeping the main car plants open I cannot see this happening even with determination from the top.

Going back to my recent posts on the banking situation. We need to remember that shares are part of the collateral (one way or another) of every bank. When the stock markets slump, so the balance sheets move into the red. It is the stock market crash that poses the greatest threat to financial stability in the world today. Banks are already on the precipice, further significant declines in the bourses could tip them over. If one of the really big banks should go down, it could take the rest of them down with it. Don't be at the end of the queue at the cashpoint if that should happen.

The Chinese Stimulus

The big news over the weekend was the $586 billion economic stimulus package to be spent on infrastructure, tax cuts and farming subsidies. I haven't anywhere seen published how the Chinese plan to pay for this. Will they spend some of their $1.9 trillion ($1900 billion) foreign reserves. There are three important issues here for the outside world:-

1. What effect will this stimulus have on commodity prices?
2. What business opportunities will be available to non-Chinese companies?
3. If this money is coming from China's USD reserves, they are presently invested, mostly in US Treasuries. Selling those is going to be very dollar-negative and the effect of the money in circulation is going to cause dollar inflation. It isn't clear to what extent.

Looking inside China, I think that we will see utter carnage in the export manufacturing sector. Factories will close, workers laid-off and decrease in spending on non-essential goods, tightening the grip. In the past, commentators (though not I), have generally agreed that the Far East, especially China, will continue to expand and that their economies will be the new 'engine' for the world economy. That is not going to happen. This has happened too early in China's emergence for them to go it alone and if anything China will be hit harder than other western economies.

Further to my previous posts, it seems that I was right that the Euro has bottomed and we are now seeing useful gains against the USD. There is little doubt that this was going to happen anyway but the Chinese package will speed it up. We could see quite a sharp bounce in EUR/USD and long EUR is probably a good call. Commodities priced in USD will also rise but the world demand for industrial commodities (metals, minerals, etc.) will fall. The price rise will be due to a devaluation in the USD - inflation. The effect of China spending its dollars would be inflationary.

I don't see that there will be much opportunity for outsiders to benefit from the Chinese stimulus. We wouldn't really expect it, either, as the plan is to stimulate the Chinese economy, not the western world's.

In summary, stocks rising on the back of the Chinese announcement seems illogical. When the penny drops, they will go back down again. Gold is making some serious gains right now. Keep that in mind as a fear indicator. We are still not out of the woods in the banking sector and a major collapse is still a possibility. Indeed the actions being taken by governments last weeks suggest a greater level of panic than at any time up to this stage and you can be sure that governments will know long before the rest of us.

The massive 1.5% cut by the Bank of England last week was very significant.

I don't enjoy posting gloomy news and views but then again please understand that I am not responsible for the present circumstances. Don't shoot the messenger.

Saturday 8th November

Sorry for the temporary disruption to service; I have a serious computer virus which the anti-virus chaps have yet to find. This has held back my research -- if I am looking through a keyhole at the world, I can hardly synchronise the compass!

The essential issues today are still the bourses weakening the balance sheets of the banks. We are still on the very precipice of a collapse of the banking system which is why LIBOR remains so high despite unprecedented fiscal stimulation and political pressure (stronger pressure than ever, given that many banks are not part-nationalised).

The western economy used to revolve around the automotive industry - from the early post WW2 period to the early 1990s. After that, financial services and domestic real estate started to edge up and become more important. It is the bubble in 'house prices' and the leveraged derivatives in the financial services market that have brought us to this particular position. Now we have serious warnings for GM and Ford, both of whom are burning cash at such a rate that they will be out of business by Christmas.

It is not just the GMs and Fords, of course. More people are indirectly involved in the automotive industry than realise it. Consider three main pillars - Cars, Homes and Financial Services. Two of those pillars have collapsed and the third has been diagnosed as being in imminent danger of collapse.

This is not a time to trust the banks. LIBOR is encouragingly lower but it has been manipulated there. While none of us want to see a run on the banks, on the quiet, those of us with funds in banks might take steps to protect our cash. At this time inflation is falling but it will surely rise rapidly at some time in the future. But for the time being the risk/reward ratio is clearly in favour of cash under the bed.

Cash injections into the markets - What's it all about?

The Press seems to be getting confused about all the money that's being pumped into the worlds' financial system. Money is going into two distinct areas --

A) The Banks - to try to prevent a meltdown in the banking system
B) Economies - via tax cuts, public spending projects, etc., in the hope of stimulating economies to reduce the severity of the recession.

The banking crisis is less acute at the time of writing, with the interbank lending rates a bit lower than it had been. We are by no means free of risk, however. Not only is there potentially a lot more bad news to come (nobody knows for sure) but as the recession bites this will put strain on the banks. The recession has barely started biting - only a very small proportion of ordinary people have yet felt any significant effect on their lifestyles.

Pumping cash into the banks to prevent their collapse was essential. The problem is the way in which it was done. Pumping money into economies to lessen the effects of recession is a very old and largely discounted technique originally put forward by Keynes in the 1930s. The problem is that these vast sums of money - hundreds of billions of dollars - are being dumped into schemes that will make people spend it quickly with no lasting benefit to individuals, society or the infrastructure. In the UK there is talk about massive road and military projects but those are just the headlines - the bulk of the money is planned to be given to the poorest who will spend it quickest - on anything! The Government doesn't care, as long as it is spent quickly. History shows that this is seldom very effective and it destroys wealth.

The question facing us is "How will the markets react?" Markets are fickle and especially at this time they are so volatile they don't factor in genuine trends - to this extent free markets are serving us very badly right now. The serious, long-term, investors are not going to impressed at all this window dressing. Short term speculators are going to respond positively to hundreds of billions being dumped into the economy to pump it up.

I see the decline on the world's bourses continuing - the decline has a long way to go - for many months but the unprecedented cash transfusions will exacerbate the usual bounces on the way down. This is a day trader's dream though volatility will be terrifying and margin requirements could be high.

The dollar is going to turn soon - it has gone far too far, too fast. When it does, it could move down at astonishing speed. We are in completely uncharted territory, beware!

Peasant's Revolt in Kuwait

In Kuwait, the peasants are revolting.

Nov. 2 (Bloomberg) -- Abdullah Hajeri led a march on the Emir's palace in Kuwait last week, demanding the oil-rich nation's ruler stop stocks from plunging. Adnan Mohammed Saleh, down the Persian Gulf coast in Dubai, said he wants more government protection from the global financial crisis.

``Every day the market is crashing,'' said Saleh, a 42- year-old trader, staring dumbfounded last Tuesday as company names scrolled across the Dubai Stock Exchange's outdoor ticker in red.


It's hard to get terribly worked up about the 'plight' of the oil-rich states when we read of all the problems closer to home - some of which can be directly attributed to the high price of oil over the summer. BUT, look at the other news this weekend. Barclays has decided that it doesn't want anything to do with the British Government bank bailout as it considers the terms too onerous (the limits on the Directors' remuneration, perhaps?, Please tell us Barclays, and leave a comment here). The other news is that Gordon "SleazeMeister" Brown has been in the Gulf this weekend with a begging bowl to scrounge money from the Gulf's Sovereign Wealth Funds, to support British industry.

What we are witnessing this week is the Gulf equivalent of the Peasant's Revolt and the influx of the wealthy G7 nations all with begging bowls at the ready....while oil prices have fallen from $140 to the low $60s! If this doesn't sound like desperation and futility, I don't know what does.

The markets will not be too impressed on Monday, fasten your seat belts.

Saturday 1st November

An overhaul of the world's financial system is a possible outcome of the Global Economic Summit to be held in Washington between 20 global leaders, on November 14th. Sarkozy is pushing hard for major changes and he has much influence in Euroland. The Euro is, today, a challenger to the US Dollar as a future reserve currency. The point of this conference (as far as we have been told) is to find a new mechanism for exchange rate 'fixing' that allows rates to vary over longer time frames while providing a stable exchange rate over shorter times, to allow businesses to plan. Volatile exchange rates are difficult for businesses who either carry the risks (in which case they need to trade on higher margins), buy forward (expensive and they could lose if business levels don't meet the forecasts) or hedge (same problems as buying forward).

The whole point of the capitalist system is that success is rewarded and bad companies, products and services either improve or go bust. The same is true of currencies; if you postulated an environment in which a country could print as many banknotes as it wanted without affecting the exchange rate, that's exactly what governments would do! Nobody is going to accept crass stupidity like that. At the present time, the US Dollar is the world's reserve currency. Presently, the US Government is over-borrowing and over-issuing US Dollars as cash and new debt. Under normal circumstances, the markets would devalue the dollar but US Treasuries have become a safe haven - a "Flight to Safety" - as the last remaining refuge for cash, in the face of a possible meltdown of the financial markets. I am very doubtful whether the US Dollar is any safer or more immune than, say, the Euro right now. We have seen a huge distortion in capital movement from equities and commodities into government bonds and massive swings in exchange rates. This in itself is adding to the stress on the financial system.

Given that an artificial peg between currencies makes no sense (unless you move from being a capitalist free-market system to a command economy) what might this conference come up with?

I suggest that the most logical choice is a return to a Gold Standard in some form. The holding of gold reserves by governments (and the IMF) is still common, and the mechanisms are all still in place.

I don't think that there is any sound alternative to a return to a Gold Standard in some form. For the private investor considering buying gold the question is whether this would result in a rise in the price of gold, or a reduction. My best guess is that governments will manipulate the price of gold by foul means if not fair to a price at which the gold producers can still produce at a profit. The price of gold dictates which mines can produce at a profit - this is a political decision insofar as each government will require the price to support gold mining in its own territory. Taking this into account and considering the huge extra demand for new gold as the world returns to a Gold Standard, suggests to me that the price of gold would rise to around $1250 in the short term, in constant money, i.e. today's purchasing power of the US Dollar. With today's price of gold around $725, there looks to be a good upside opportunity for gold for the private investor.

I return!

I'm back from my wanderings with longer arms and a nasty cold. I am a little bit out of touch but I am pleased to see that the immediacy of the crisis has reduced just a little. I'm not sure that there is anything very useful being put forward right now, other than 'Son of Bretton Woods', which is inevitable. Another news item is worthy of comment ---

- WASHINGTON (AP) -- With defaults on credit card debt spiraling amid a global financial downturn, banks already reeling from the mortgage crisis are losing billions more from unpaid credit card bills.
Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.


This is a quite outrageous suggestion in that it forces those who are not in debt to repay the debts of those who are in debt! Quite apart from being outrageous, it is the opening gambit to start the whole spending merry-go-round off again. I don't see how it can happen as governments are only the source of fiat currency, not wealth. If they issue more fiat currency to repay these debts and in the process generate new debt, then the currency will be devalued - it is inflationary. There continues to be debate among economists whether we are headed to a long period of deflation, as in Japan, or hyper-stagflation along the lines of Wiemar. The latter would destroy the paper wealth of most private individuals. My own view continues to be that as soon as the present flood of USD is freed up and flows into the financial system, we will see inflation race away out of control.

Gold seems to have found a floor and it looks as though these levels are a good buying opportunity. I would urge gold buyers to buy and take delivery of their own physical. Don't use ETFs, buying clubs and pools or even so-called allocated gold. At this time, you need to be able to have it in your own hands.

In writing a blog and other comments I wonder to what extent I could be open to defamation action. Suppose I say "Bloggs Bank seems to be representing itself as something that it is not and some of its investment schemes look dodgy". I am likely to get a stern threat of legal action. Suppose I say "Bloggs Bank does not overly impress me and I suggest that you meet the Directors before investing your money in them" seems safe, I suppose, but does it convey what was intended? It's all very difficult but there are quite rightly means of redress available when a party has had its reputation harmed due to unfounded allegations. As another example, suppose you observe that a car has no road licence disc, there is no certainty that the tax is unpaid; the disc could have been stolen, for example, and a duplicate awaited. Would it be fair to suggest that there might be safety issues given that IF the car has no disc, it MIGHT not have passed its annual test (which is a requirement before a new disc is issued). But this would only be an inference even if you could actually see safety issues on the vehicle, such as poor lights, tyres, wiper blades unless you are deemed by the law to be sufficiently expert. All very complicated; best not to judge anyone, I suppose?

Pause

I am possibly not going to be able to post over the next two days as I am taking steps to protect my own assets. Will post as and when possible. Protect and Survive. Do not underestimate the gravity of the present situation - it is so easy to look out of your window, see the cars, taxis and buses, the aircraft, and everyone doing what everyone has always done. When it stops it will stop rather suddenly. Good luck.

Implosion leading to Meltdown

As I have been warning, the world's stock markets are continuing to plunge with the futures sharply lower this morning. The Euro continues to plunge while the Yen is worryingly strong. Commodities are continuing to fall. Money market rates are beginning to rise again in Asia.

What we are witnessing is the implosion of the world's financial and capital markets which will result in meltdown.

No currencies (with the possible exception of the Swiss Franc but don't bet on it) are going to survive this collapse without massive devaluation. Exchange rate volatility is making international trade almost impossible. We are watching the system implode - it is collapsing in on itself - and the effect is to further fuel the collapse. There is no power on earth capable of reversing this; all that is uncertain is timescales. This week could see capitulation on the stock exchanges with further bank failures around the world to follow.

There has never been an economically more dangerous time in the history of money and finance. This is completely uncharted territory and nobody can predict what will happen.

The biggest issue facing the world will be the rule of national and international law, and the protection of the property rights of individuals. With such an upheaval, it might be impossible for governments to protect their citizens. Martial Law is a real possibility even in G7 countries. This is the time to protect yourselves and your families. You DO need to keep a good sum of cash (i.e. banknotes) in your home. If you can, get a mix of currencies. Gold is well worth considering if you can find any at a reasonable price but remember, gold is under political control so there are risks.

Watch very carefully the military situation in the Middle East right now. This is a very dangerous time.

I will be watching this happen in real time and will post as often as I have something worth saying. Some of you will remember a slogan from an old civil defence campaign.... "Protect and Survive". Exactly.

For those who are interested, I have produced a short Gold buyer's guide which is on sale at http://www.3r.co.uk/gold

Saturday

Huge losses and negative sentiment again yesterday. There are plans to produce a 'Son of Bretton Woods' agreement which will re-define how the world's monetary system will work. Meanwhile, the US Dollar continues to be undeservedly stong with the Euro (and British Pound) plunging to new recent lows. None of this helps anyone - business needs stability, not volatility.

There is a lot of talk about the crisis moving into the 'real economy'. The chart below is of the Baltic Dry Index; this shows the volume of goods being shipped around the world at any time. I think that the chart speaks for itself. If all those goods are no longer being transported, chances are they are no longer being made! That means that the firms that made them will close (or contract), the workers laid off and - very significantly - all the raw materials needed to make them will be left with the producers. Commodities have fallen not because investors have stopped investing in them but because there is a reduced demand for them.

Friday Lunchtime Update

``The panic levels are now quite unseen,'' said Christian Gattiker, Zurich-based head of equity research at Bank Julius Baer & Co. which manages about $307.6 billion globally. ``It's difficult to have any words for this situation right now.''

Friday Morning

Stock markets slumped across Asia overnight, money markets showed signs of rising on concerns that other countries are about to go the way of Iceland and Argentina. The Euro and Pound Sterling continue their plunge. Oil continues its fall despite the noises coming from OPEC and evidence that production cuts have already taken place. Gold continues to lose. US Treasuries are the clear winners, with the entire world wanting to buy US Government debt. There is fresh speculation that the world's financial markets are in dire trouble. The volatility index 'VIX' is still at an all-time high indicating that fear is still at record levels.

While typing this blog, I was listening to a live interview on Bloomberg with a European banker who said that nobody had ever seen anything like this present situation and was recommending investing in gold "as a hedge despite the recent falls".

With the huge losses on the world's bourses and today's futures for the EU and US looking like the abyss, I wonder whether they might need to suspend stock markets for a while. This flight to the 'safety' of US Government debt is highly dubious; as I have discussed recently, the huge injection of US Dollars into the system is set to devalue the US Dollar. We are living through a financial tsunami and it is not possible to make much sense of the daily movements; we need to try to look at the big picture, hence the name of this blog "davidscompass". To survive this financial crises we need to take a view on the conditions that will exist when we come out of this mess. I can see no alternative to hyper-inflation, potentially of Wiemar proportions.

------- STOP PRESS -------

Denmark raises interest rates to boost Krone. This was unexpected.

Thursday Morning

More heavy losses on the Asian stock markets overnight point to possible further heavy losses in Europe and the US.

There is an almost total loss of confidence in any asset that you cannot hold in your hand. Gold's continued fall is, therefore, very surprising until you realise that the price is being manipulated down by intervention. Officially, gold is at £454 per ounce but if you want to buy any gold in London you will have to pay between £500 to £550 per ounce - you might have difficulty in finding any stock at £500. The official price of gold has now become meaningless. It will be interesting to see how the large bullion dealers who are members of the LBMA will cope with this...if they don't pay a fair price for bullion that they are storing for clients then their clients will withdraw it and sell it on the open market, themselves. Even more interesting to watch will be those who have unallocated gold holdings in firms such as BullionVault, Kitco, Perth Mint, etc. It looks as though they would be stuck with the official price or 'paper gold' as it has become known. Interesting times ahead! Possibly this situation will disappear once the heavy intervention stops but free markets become very unpredictable when manipulated.

The biggest news item continues to be the continued strength of the US Dollar. It might be showing signs of bottoming but it has a lot of unwinding to do and, as the world's reserve currency, when it does fall it is going to cause yet more stress in already fragile markets.

Commodities continue to lose, on the worldwide economic downturn, though staple foods might have stabilised. Further job losses and factory closures in the industrialised world suggest that wages will either fall, or, at best, not rise.

All of the indicators are screaming "DEFLATION AHEAD!". However, we have, locked up in the banks, the largest cash injection ever seen on the planet, by two orders of magnitude! When that finally unwinds there are going to be enough surplus US Dollars to buy a nice new car for every man, woman and child in the western world. This is clearly crazy and will not happen; what will happen is that all of that money will chase the same goods and services, so prices will rise. The classic cause of inflation; too much new money. Unless central banks can somehow mop-up all of those excess Dollars, I can't see how this can be avoided.

So how might central banks mop-up the inflationary surplus Dollars, when the time comes? The most obvious way is by massive new taxation and seizure but this effectively steals money from citizens and goes completely against the principle which states that free markets can only work when the property rights of individuals are respected and protected. The levels of new tax and seizures by governments required to remove this excess liquidity would need to be vastly higher than any taxes seen before and would cause distortion in the distribution of wealth. Those who had worked and saved diligently would have to be the target as they would be the ones with the money, and others, who had done nothing but borrow and spend would benefit by becoming net recipients in a vast new interventionist state. The way it is going now, I see little alternative other than hyper-stagflation. Stagflation is when you have inflation and an economy in recession; it is a rare thing and causes immense social injustice at the bottom of the ladder particularly the elderly and those on fixed incomes. Think Boomers and the Perfect Storm, which I discussed a few days ago.

Of course this is all fairly easy to predict if you take the time to read the news and put it into the framework of fairly elementary economics (think Adam Smith and free lunches). This is not 'far-out' theory, it is what all of the economic pointers are predicting.

That's what is behind the new gold rush. The biggest driving force behind the massive public buying of physical gold is the fear that governments have now lost control and that the ordinary man in the street is now in a lose-lose situation. I hesitate to recommend to anyone that they should buy gold because the could lose, however, physical gold bars or coins either in hand stored in a safe for you seems worthy of careful consideration. Email me for further information or have a look at www.3r.co.uk/gold

Wednesday Morning

The Argentinian crisis has helped trigger significant overnight falls on the Asian stock markets which could signal a fall across Europe and the US later today. More importantly, the US Dollar continues to strengthen which, as I discussed yesterday, is going to need to unwind. The unprecedented extra liquidity added to the world's financial system and an unwinding dollar, poses the greatest threat to the stability of the world's financial markets at this time. It is quite incredible that the Dollar continues to strengthen but we are living through uncharted, unprecedented times - we are like explorers in a new land and we have no idea what we are going to find over the next hill.

It is interesting to see oil continue to fall; the oil exporters do not need to wait until their emergency meeting to cut production or send signals to the market. Part of this fall is undoubtedly due to the strength of the Dollar but the main influence today seems to be the growing realisation that the Far East - particularly China - is not going to escape from this deep recession. Indeed, this might de-rail China's economic miracle.

It seems probable that gold will rise as the Dollar unwinds although, as I discussed yesterday, there will be a huge intervention by central banks to try to keep gold low. Nevertheless, gold is now oversold and the conditions for a strong rise to challenge $1000 are in place.

The Argentinian seizure of private pensions will send shivers around the world. Free market economies cannot exist unless private property rights are vigorously protected; free markets depend, to a great extent, on trust between people and between the people and their governments. When this breaks down so does the free market. In today's environment, such things might be highly contagious.

I am seeing serious fault lines developing in the capitalist free market system worldwide. The part-nationalisation of the banks is going to delight naturally interventionist, left wing governments such as France, Italy, Canada, Australia and, more recently, the United Kingdom. Those governments are not going to hand back their ill-gotten gains to the people without a struggle, if ever. Those of us who still believe that despite the present problems the free market system is the best system available need to keep focused on the political implications of each and every government action. You'd better believe that every right, freedom and privacy you give up will be lost for ever. People do not win back rights and freedoms other than by revolt. Revolt is becoming less possible in an age where central governments can (and do) scan every phone call and email you make and, with a network of mobile phone locators, CCTV cameras with facial recognition and car licence plate recognition, the ability to track individuals wherever they go. Political dissent is going to be very difficult in any society whose government chooses to suppress it. This is a situation that the UK has been sleepwalking into over the last five to ten years. Other EU nations are a long way behind but the technology is easy to replicate and install, given the will to do so. For those who haven't noticed the extent to which this has been happening have now been warned.

This is what is happening...

What started out as a "credit crisis" due to huge volumes of bad debt has become a different animal. We now have:

a) Huge quantities of bad debt around the world that will have to be written off.

b) A deepening recession affecting all major economies with signs of increasing severity. Pointers are that this will be deeper than the 1930s.

c) A banking crisis caused by banks having lost a large part of their capital due to bad debts. This is why many banks are being taken into whole or part state ownership.

d) A dire liquidity crisis - a shortage of the world's Reserve Currency, the US Dollar which led to the "Paulson Plan", the $700 billion bailout.

Governments, banks, businesses and individuals around the world are hoarding US Dollars. That is why the Interbank lending rate has been high and that is why governments are pumping tens of billions of dollars a day of surplus liquidity into the system.

Due to the recession, businesses are de-stocking and instead of making more products to replace stocks (which would be normal in a flat economy) or continuing to increase stocks (which would be normal in a growing economy such as we have enjoyed for the last decade) companies are selling off their stock and using the income to pay off debt or hold on account.

We are now awaiting yet another stimulus package to be presented to Congress while the UK has announced its own massive state spending programme including new nuclear weapons, and massive infrastructure investment. All of these packages are being presented to the public as 'essential' with no analysis of the long term issues - how the debt is to be repaid.

At some stage this process will reverse but there is no mechanism to remove this vast surplus and the world will be flooded with US Dollars. To describe this as 'inflationary' would be like describing lung cancer as 'a bit chesty'. When the process has bottomed and starts its reverse we will see commodities and factory prices start to rise. There will still be a deep recession which will hinder workers from getting matching pay rises. Pensioners will be on reducing incomes as the value of underlying stocks and the income therefrom has fallen to about one third to one quarter of their previous highs. The 'Boomer' generation will be heading for retirement and age-related health issues at the same time, making conditions for a 'Perfect Storm'.

I'm sorry to be so terribly gloomy this morning but it is better to understand what is happening than to be left in ignorance. Please don't shoot the messenger (me!). Timeframes are very, very hard to estimate. Over the last decade or two even the most lauded economists have found that the economy moves slower than they expected (see Alan Greenspan's book 'The Age of Turbulence' and ask yourself why he chose that title, back in 2007).

I shall be watching the development on this blog and you can look for certain pointers yourself. Watch commodity prices and factory prices. Look for signs of increasing inflation. The de-hoarding could happen very quickly when the process starts and if it does, we could see almost a step-function with the US Dollar taking a plunge more akin to a devaluation than inflation per se.

What about gold? Gold is the perfect hedge against this. At the moment it is very hard to obtain gold bullion; the major bullion dealers in London are now reporting zero availability of coins and bars with delays of months for silver, platinum and other precious metals. So why has the price of gold fallen back from its highs? This is almost certainly due to government intervention; as reported by a previous Governor of the Bank of England, at times of crisis it had been essential to keep the price of gold down to prevent a rush from currencies into gold. This is what he said in his memoirs....

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore, at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K." Eddie George, Bank of England, September 1999

Today, we are staring into a far deeper abyss. Private holdings of gold have soared and we have the incredible situation where you cannot buy physical gold because the price is too low - holders of gold are not prepared to sell. This is what happens when governments intervene in free markets. As courtiers to King Canute found, even the king couldn't hold back the tide.

Overnight news

We saw some gains on the Asian markets and notable gains in oil and gold. Commodities seem to have bottomed although copper and zinc have taken a plunge on reduced growth in China.

The US is about to table a second fiscal stimulus package to encourage people to spend, spend, spend.

BUT...see the next post "This is what is happening"....

Monday Evening

Stocks have again risen - in Europe and the US.

Gold and oil are also up.

According to governments, sentiment is improving. The position is that the world is heading deeper into recession, there is a systemic fault in the world's financial system which is being buoyed-up by daily injections of billions of dollars into the money markets and banks. In addition, we are promised huge public spending programmes.

If I sound too negative about all this, then people will accuse me of being 'negative' and of 'talking us deeper into recession'. So I won't do that and instead I will ask you to consider what would happen to your household budget if, on getting a final demand from the bank, you decided to borrow more and go on a spending spree. As our American cousins say...go figure.

What we want to hear is the money market rates are reducing and that billions of dollars per day are no longer required to keep banks working. That seems a long way off, right now.

Monday Morning

Overnight, the Asian markets made good gains, and both oil and gold made significant gains. The Euro has firmed, and technically we should see a Euro bounce. This morning, the European markets started firm but are showing signs of pulling back just over an hour into trading. The stock markets are not for the faint-hearted, right now. Today, we are waiting for more news, however the background news from Trichet and the latest UK housing report from Rightmove is, frankly, abysmal.

I will try to make more sense of this this evening.

Sunday Evening

I am postponing my post on the proposed 'Bretton Woods' discussions; George Bush has promised to host a summit in the very near future and a lot of information is likely to surface soon. I will post this as soon as we have enough information in the public domain.

What should we expect overnight? Well, the central banks continue to pump billions into the world's money markets on a daily basis. Governments are talking about underwriting all debtors, public and private, massive new spending on public works as well as pumping billions into the banks.

I see no fundamental basis for investing in equities at the moment. Stocks are likely to continue to be highly volatile - a daytrader's dream but an investor's nightmare. I believe that we still have much deeper falls to come - another 30% off of present stock prices seems likely.

I continue to believe that the Euro has bottomed in this present cycle and expect the dollar to start to retreat. It could be that the US Treasury will maintain the dollar until after the election on November 4th. That is certainly within their power.

Saturday Morning

The European bourses ended up a useful 3% to 5% though the Dow ended down a little. There was nowhere near the volatility that options traders had feared - maybe the Plunge Protection Team were intervening, I doubt that we will learn the answer for at least ten to fifteen years.

We are seeing a commodities bounce (with the exception of gold, silver and oil). The bounce is right across the spectrum, both hard and soft commodities. There is no doubt in my mind that commodities are oversold and for those of you who are looking for somewhere to invest, now might be a good time to look at commodities - maybe a commodities fund. Of course this does mean that inflation might move up again, led by commodities.

Gold and silver are almost certainly being manipulated down by central banks. Most industry experts expect gold to rise to $1000 fairly soon (the futures are, today, at $788). I note that there seems to be more availability of gold coins in London - there has been a huge shortage, with investors queuing up at bullion dealers to buy anything they can. If you are prepared to carry the risk, then now might be a good time to buy your gold coins. The risk is political - governments are trying to discourage the holding of gold so they manipulate the price down to scare people off. It works.

Oct. 17 (Bloomberg) -- Confidence among Americans fell by the most on record and single-family housing starts hit a 26-year low, posing an increasing threat to consumer spending that accounts for more than two-thirds of the economy.

Over the weekend I shall be posting about the wider situation and the suggestion that a new Bretton Woods is introduced. In essence, this would surely mean the end of the US Dollar as the world's reserve currency. This is a truly huge issue and the ramifications would be felt around the world.