Friday, 12 December 2008
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.
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.
Thursday, 11 December 2008
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.
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.
Monday, 8 December 2008
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.
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.
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, 4 December 2008
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.
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, 1 December 2008
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.
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.
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