S&P 500 vs GOLD

GOLD : STEADY AS SHE GOES

Amidst the total chaos in world financial markets, gold has remained fairly stable.

Since early to mid July, the US Dollar staged a comeback as the sell off across asset classes continued. At some stage, this trend is going to reverse, and we might see all the USD Bulls run for cover as the USD Bond market sells off.

Carry trade unwinding resulted in the Japanese Yen strengthening significantly, and this has put immense strain on the results of Japanese Export majors like Toyota and Sony (incidently, gold is down only in JPY!)

The Indian Rupee has weakened substantially vs the USD, sinking to around 1USD = INR 50 recently, as compared to 1USD=INR 39 a while ago. This currency volatility has resulted in FX losses for many companies whose USD borrowing suddenly turned more expensive, and also losses for many in the export-import business, who till very recently were expecting the INR (Indian Rupee) to stabilize around INR 43 to the USD.

TERROR ATTACKS + ECONOMIC CRISIS + LACK OF LEADERSHIP

Well it’s over 24 hours now, and the gun battles and hostage situation in South Mumbai continues.
My heart goes out to the innocent victims and families who have lost near and dear ones in a totally bizarre and premeditated terrorist act.

The equity markets here have been volatile and volumes have been low, as signs of an economic slowdown have started to kick in. Pile up of goods at the ports, Airlines cutting back low traffic routes and auto companies announcing production cuts and running reduced shifts. Layoffs and retrenchments are going to be next in the news, as companies shelve expansion plans.

This is not just an India specific phenomenon, but is something that countries across the world are going through.
A disturbing fact however, has been the complete ‘lack of leadership everywhere’.
Let’s start with Bernanke and Greeenspan refusing to acknowledge the US Housing Bubble in 2006 and in August 2007 continuing to tell us everything was fine, as Bear Stearns Hedge funds were collapsing. Then hedge Fund managers and Investment Bank CEOs paying out huge Christmas bonuses in December 2007, as their firm were on the verge of collapse. Ad hoc and spur of the moment changes in bailout plans and totally opaque financial rescue/bailout packages, have done nothing to restore confidence in the system.
This is not just a liquidity crisis as the authorities claim, but a crisis of confidence.

Back home in India, with upcoming General Elections next year, each political party is going to use the events of the last few days to point fingers rather than work out any long term solution.
For a country with so much long term ‘domestic’ potential, and a hardworking and talented workforce, its sad to say that our politicians ‘stink’.

If the world is to recover from the current economic turmoil, something must be done before things take a turn for the worse, and now more than ever, there is a need for LEADERSHIP.

GOLD : THE FRIDAY REBOUND

Even as the US Equity markets rallied late on Friday, the Gold rally seems to have gone unnoticed on CNBC (big surprise!!!).
Short covering by Hedge Funds, Bullion Banks or naked short sellers...........who knows!!
The US Stock markets have been all over the place and are impossible to trade. They can be up or down 2-4% a day without any major newsflow.
Equity markets everywhere appear extremely oversold, something that becomes especially evident on long term charts. Maybe another market bounce, post a CITIGROUP or GM bailout/rescue package.
GOLD
Over the past few weeks there have been rumours of Saudi Arabia and then Iran purchasing GOLD.
Rumours that the COMEX might default on deliveries of its DEC2008 gold contracts.
http://meltdown2011.wordpress.com/2008/10/22/warning-comex-may-default-on-december-gold/
Rumours that CITIGROUP could collapse!
Whether panic buying or short covering, the move after stabilizing in the $ 700- $ 750 range is encouraging.
Here is Mish's take on it.
http://globaleconomicanalysis.blogspot.com/2008/11/i-like-gold-here.html

I hope people are finally beginning to realise, that the guys running things are no longer in control, but are just confused bystanders, whose opaque policies and inconsistent decisions are doing more harm than good.

CITI NEVER SLEEPS

............and neither do any of their investors it would seem, given the way the stock has tanked!!!

The Government of Singapore, the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Prince Alwaleed bin Talal of Saudi Arabia have all seen their investments slide sharply in value.

A few weeks ago, I commented on the lack of interest from Sovereign Wealth Funds to invest in global financial institutions. Do they know something that we don’t!!
A year ago, these guys were stepping up to the plate as white knights, but now they seem to have abandoned these ‘emergency one time cash infusions’ in institutions that are losing money faster than the automakers.

The management has tried to reassure panic stricken investors, but after the Lehman Brothers debacle, no ones taking any chances.

CITIGROUP vs. GM
If push came to shove, which one would they bailout?
White-collar jobs vs blue-collar jobs?
Could the Fed & Treasury risk a collapse at Citigroup?
Are we in for a ‘Bailout Weekend’, and could we expect a government rescue by Monday?

WATCH THIS SPACE!!!

SUB 8000 - THINGS COULD GET NASTY!

Panic about deflation. A crashing CPI and many more Bailouts to come!

Too many 'experts' are calling for a bottom, and so I think there is more downside to come.

With each passing day, despair and delusion continues to spread.

Only when all hope is lost, and fear and regret( of not having cashed out earlier) take over, can the foundations of a 'market bottom' be laid.

GOLD prices meanwhile have remained reasonably stable in the $735-$744 range.

It will be interesting to watch how gold reacts to this 'asset deflation' and 'commodity rout.'

How will gold react to deflation amidst unstable fiat currencies,turmoil in the '''Central Bank Reserve Currency economy''' (USA), record debt levels, and unimaginable levels of OTC derivatives outstanding??

Short term directional calls are impossible, but, I maintain my positive views on Gold- as a true store of value, and an insurance in a world where no one, I repeat ''no one'' knows how bad its going to get.

OTC DERIVATIVES & COUNTERPARTY RISK

Sorry for not posting regularly this month! I'm back now and there’s a lot to catch up on.

http://www.bis.org/statistics/otcder/dt1920a.pdf
Now this is something that caught my attention!!!!!
What the heck is going on!!
The whole world is falling apart and the OTC Derivative time-bomb continues to grow.
It going to turn nasty, that’s for sure. Amidst talks of Clearing Houses for derivatives, Fed & Treasury Bailouts for anyone who may be too big to fail ( or possibly too big to save), it seems that the authorities are just keen to buy time and hope this whole mess just goes away.
Counterparty defaults and Bankruptcies are going to add fuel to this OTC derivative bonfire.

A combination of record debt levels & a bout of deflation will ensure that the markets retest 'new' lows over the next few quarters.

Who is Anna Schwartz?

Who is Anna Schwartz?
She is a revered economist at the National Bureau of Economic Research in New York City, and is about to turn 93! Yes, she was born in 1915!!!
She worked with Milton Friedman on ''A Monetary History of the United States, 1867-1960'' and is the one person who has really been around long enough, to make sense of the current state of chaos.

She expresses disappointment at the ad hoc program announcements by the authorities, which have only undermined faith in the US Financial system.
She also disagrees with the Fed’s idea that the only solution to our current problems is to flood the system with liquidity.

Anna Schwartz -

• On Policymaking: It’s like there’s a bunch of guys that are making it up as they go along.
• On the FED: The new group at the Fed is not equal to the problem that faces it.
• On Monetary policy: It is clear that monetary policy was too accommodative. Rates of 1 per cent (2003- June 2004) were bound to encourage all kinds of risky behavior.
• On Disclosure: They talk about transparency and what they present is opacity. This only increases the already high levels of uncertainty and anxiety.
• On Inflation: She is worried that policy makers are not even considering inflation, after the massive increase in the monetary base.
• On Recapitalizing banks: Recapitalizing institutions on the questionable premise that the accounting of potentially bad assets on the bank balance sheets is correct and accurate. She says the treasury has shifted from trying to save the banking system to trying to save banks.
• On Derivatives: A bewildering array of instruments with uncertain prices. The problem comes from a lack of ability to price the instruments, and not a lack of liquidity. We don’t know who’s solvent and who’s not.
• On the current crisis: This is not due to a lack of money available to lend, but due to a lack of faith in the ability of borrowers to repay their debts. She says the Fed meanwhile has gone about as if there is a shortage of liquidity!!!

I think she makes some really valid points.
The President elect is in for a baptism by fire. I don’t think he has a solution, but I hope new actions don’t worsen the current chaotic pandemonium. As the unemployment rate rises and underfunded pension funds face market stress and healthcare costs escalate, 2009 is going to be a terrible year for Barack Obama. Good luck to him, and lets hope that he takes note of Anna Schwartz’s words of wisdom!

Source Links:

http://online.barrons.com/article/SB122489726575668975.html?mod=googlenews_barrons

http://en.wikipedia.org/wiki/Anna_Schwartz
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/2782488/Anna-Schwartz-blames-Fed-for-sub-prime-crisis.html
http://online.wsj.com/article/SB122428279231046053.html

http://economistsview.typepad.com/economistsview/2008/10/anna-schwartz-o.html