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.