Fed Move Turns Out To Be a Flash In the Pan - End Game Has Begun

Thursday, January 24, 2008

Looking at a sea of red ink in today's stock index changes after the Federal Reserve's biggest interest rate cut by 75 basis points in 24 years it appears the Fed is massively behind the curve. As only the combination of a US holiday and this rate cut had helped to prevent a crash on Monday and Tuesday this shows that investors worldwide highly doubt that the $140 billion stimulus package will help the USA to move out of the eye of the storm. While traders normally love to greet such news with a relief rally, the sudden fizzle of yesterday's upward move signals IMHO that the over-leveraged investing community has finally recognized what these mega-billion injections really are: New layers of debt.
I have lost track of all special infusions since August. But I remember a few key events:
In August the Fed started flooding the markets with countless extra repos and allowed 3 big banks to transact $25 billion each without adequate underlying equity. It helped in the short term only.
Since September the taps are wide open, alas all these new layers of debt have not helped to reduce the old debts. That this is not possible does not require a MBA degree but only common sense: It is axiomatic that more debt cannot help to have less debt.
After yesterday's rate cut by the Fed the game will go on a little longer unless investors take this lesson in financing 101.
Fed chairman Ben Bernanke left no opportunity unused so far to reinforce his image of a Nanny Benny that starts the money-throwing copters even before stocks fall. An inflationist by the textbook.
While such "liquidity" actions with freshly digitized money that has no corresponding value have not helped to combat runaway inflation - quite the opposite - they may be the primer for a return to real money, i.e. a gold standard (which has worked for 3,500 years.)
It will be as always: As soon as Joe Average finds out that his fiat money will buy him substantially less in the future, he will withdraw his savings (does this really apply in the USA?) and opt to buy goods of all kinds as a way of storing values.
A Fed Funds rate of 3.50% is a most alarming signal and could lead to a stampede out of unbacked Federal Reserve Notes (misleadingly called US dollar.) Why should I lend my money at 3.50% when inflation is already running at 4.1%? Who is so stupid except asset managers who currently pile everything into rising bond markets? This will not work in the medium or long term either.
Central Banks Keep Squandering Their Best Asset
I could go on and on about the mounting irresponsibility of the self-declared inflation fighters in central banks that have followed the worst of all investment strategies in this millennium.
Since 1971 Central banks eagerly tried to eradicate the only absolute value in finance: gold. Without gold prices politicians and central bankers would be able to effectively destroy the only way to compare historical prices with those of today. That would be most convenient for the high priests of ever expanding debt.
Prices of a bushel of wheat in gold can easily be reconstructed for the past 500 years. Try that with any other form of money.
As the gold link could not be broken, European statisticians have been applying another method to create a smoke screen: All price indices are reindexed to 100 every 5 years, making quick comparisons impossible. Check your countries CPI basket and see the discrepancies in the weightings.
ECB Gambled Away $82.3 Billion With Bad Timing of Gold Sales
It will not change my medium term outlook that calls for an implosion of both FRN's and the artificial Euro, an orphan without a common fiscal policy but fathered by 12 central bankers who immediately started selling their only asset with a positive alpha performance: gold.
I am still working to find out who exactly authorized the squandering of the only asset that is not somebody else's obligation. I cannot remember that the sovereign in the Eurozone countries (that's the citizens, not the government!) has permitted to sell the family silverware. At the end of the Central Bank Gold Sales Agreement in 2009 Eurozone central banks will have sold 4,100 tons of gold. This is 127.51 million ounces. In 2001 this represented a value of $32.5 billion dollars that would have risen to $114.8 billion with gold at $900. So the Eurozone missed out on an absolutely risk free capital gain of $82.3 billion. Somehow it is becoming difficult to maintain any respect for central bankers.
As they started at the worst possible point of time, in 1999, these central banks have effectively subsidized the smartest group of investors worldwide: Indian housewives who are expected to buy more than 1,000 tons of gold in 2008. A strange kind of development aid.
What is also interesting is that it is only Eurozone central banks who sell gold. The US Treasury has so far maintained its stance that it never sold gold since 1999. Since a few weeks the Treasury admits to have swapped some gold, an operation long suspected in goldbugs circles. Nobody has ever seen the gold in Fort Knox in the last 40 years because it is so secret. Normally central banks put their forex reserves in the show window.
Western central banks have argued that these sales make sense as gold carries no coupon and will lead to higher returns with paper assets.
This has not worked out.
Who will take the final responsibility for these irresponsible acts of giving away the ultimate savings of several nations? I remind you here on the strongly growing position of "other assets" in the ECB's ballooning balance sheet that may be an indication that the Eurozone has gobbled up a good part of the latest alphabet soup: ABS, CDS, CDO, SIV.
And where are the ratings agencies in regard to the massive worsening of nations finances. Europe and the USA are only left with debt while Eastern sovereign wealth funds sit on trillions of debt paper that only look good if it were not for accelerating inflation. At the end of the German hyperinflation in 1923 one FRN had risen from 4 marks to 4.2 billion Reichsmark. There is no guarantee that American debt, exceeding $9 trillion, will not inflate to this point too.


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