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.