Highlights from the last week

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10/05 – We begin tonight with a MUST read story from Tuesday’s London Independent newspaper.  Secret meetings have been held recently by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on a plan where oil will no longer be priced in dollars. According to Chinese sources the transitional currency will be gold as most of the Middle East oil rich countries have large dollar reserves ($2 trillion). China imports 60% if its oil from the Middle East and Russia giving it a huge incentive to push this new program forward. I have been bullish on gold for months when gold was under $1000 and now trading at $1020 in Far Eastern trading tonight. It is clear the Chinese are buying on every price dip and my long term target of $1300 seems attainable in 2010.

Back up the truck

10/05 – The next “back up the truck” trade is in the on-deck circle awaiting a break out from the current trading range of long gold and short the Japanese yen.  The red line represents resistance at 95,000 and the green line is firm support at 85,000 with the current price of 91,000 yen per ounce of gold. The yen is close to its peak as can be seen in this chart.  The red line is at 90 yen per dollar and is a “key level”, the blue line is the price of yen to the dollar and the pink line is a 10-day moving average of the daily sentiment index. 90% of traders are betting on a higher yen (towards 85 to the dollar) and yet each time the sentiment index has reached 90% it was a good time to bet against these traders. The yen is trading tonight at 89.15 and a move back above 90 should seal the deal for the yen and give us the green light to enter the “back up the truck” trade for 2009, long gold/short Japanese Yen.

The really BIG news

10/04 – Every Sunday evening I write about the bad news from the previous Friday’s Fed H.8 report. It’s like watching the world of finance shrink without anyone realizing how devastating the effect is on the economy. With the federal government providing guarantees and liquidity everyone assumes the patient is alive, breathing and ready to resume normal activities. If the government pulled back it would find the private sector unable to function as banks continue to contract credit at a record pace. Last week bank credit fell $29 billion with losses in commercial and industrial loans, real estate loans and consumer loans. They increased their cash reserves by $64 billion and invested and additional $31 billion in Treasury securities and $17 billion in mortgage back instruments. Banks are taking ALL of the cash being printed by the Fed and funds from loans paid off to invest in bonds guaranteed by the US government. Banks are too afraid to lend because the value of the collateral used for the loans continues to fall.

3.6 million letters?

10/04 – An amazing story from Sunday’s San Francisco Chronicle about a home owner’s home equity line cancelled by Wells Fargo. She claims that an underwriter told her the bank sent out 3.6 million letters to customers notifying them of the cancellations. If each of these borrowers had a $100,000 line that would represent $360 billion and the total amount of home equity loans in the entire banking system according to this week’s h.8 report is $3.7 trillion so this represents 10% of all outstanding home credit lines.

The Fed prints but it is being held in vaults for safekeeping

10/01 – Many worry the increase in the monetary base will lead to explosive lending, increasing velocity and eventually inflation. BUT the weekly states from the Fed (h.3 report) continue to show almost 100% of the money growth going back to the Fed to be held as reserves. Today’s report shows growth in the monetary base of $31.757 billion BUT $31.426 billion or 98.9% of money growth going back to the Fed. How can you have inflation if almost ALL of the money being created by the Fed is NOT going back into the economy?

China

9/30 – World markets are heavily dependent on Chinese demand and causing many commodities to rise in price due to an increase in stockpiling but an article from the Financial Times talks about rising overcapacity leading to a surge in non-performing back loans. If the Chinese cut back on purchases what chance do other countries have of rebounding, especially those with large amounts of natural resources.

Government intervention and unintended consequences

9/29 – Cash for clunkers created an increase in demand for new cars and a sharp decline in the supply of used cars (they were destroyed) and the result was higher used car prices and very few sales in September. The big three dealers reported an increase of 7.8% in prices for September with few incentives offered to remaining buyers. 3rd quarter GDP will be higher because of the government program but higher prices and low sales will have the opposite effect in the 4th quarter.

Long term interest rates

9/28 – Why is everyone convinced rates are headed higher? Friday Fed Governor Warsh wrote an article in the WSJ stating the Fed would need to raise overnight rates BEFORE the unemployment rate peaked and the economy bottomed. Do Fed Governors know what the FOMC is going to do ahead of time? Hardly and I remind readers of a speech in April 2002 by St. Louis Fed President Poole that warned of Fed tightening despite rising unemployment. Did the Fed raise rates? No they lowered the overnight rate later that year to 1.25% from 1.75% and Poole’s timing couldn’t have been worse because the 10-year declined from 5.44% in April 2002 to 3.61% in November 2002. There are hundreds of examples of FOMC members that wrongly predicted Fed rate action in the last decade and those that followed these forecasts would have lost a great deal of investment capital. If the Fed raises the overnight rate as Mr. Warsh suggests it would have a devastating impact on an economy that is losing oxygen (credit) every week.

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