Daily Digest - Nov 30

Sunday, November 30, 2008, 9:05 AM

Bank of Zimbabwe congratulates US and EU authorities' recent actions,  Citi analyst posits $2k gold, bank repo failures, Fed quantitative easing program, and a cautious Black Friday.




As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central 9 Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests. 

1.16 That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

1.17 Yet there are telling examples of the path we have taken from key economies around the world. For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.  

Citigroup says gold could rise above $2,000 next year as world unravels 

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup. 

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist.
"The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.  

More on repo fails 

Why the Federal Reserve is not urgently considering regulation is bewildering. As yet, the US Treasury has merely asked for market participants to sort out the situation themselves. That might help reduce fails but it will not eliminate them, and in panic periods they will simply creep back up. The global economy has significantly contracted since the collapse of Lehman Brothers, which spurred the fails to deliver. More market-shocking events are certain to lie ahead. The solution is simple - delivery needs to be enforced, and liquidity returned. If not, confidence in the US treasury markets will be lost. Loans made using treasuries as collateral will be reconsidered, bond markets priced off treasuries will further dry up and, with equity markets so volatile, central banks and investors will not know where to turn.   

Even central bankers should be held accountable: they play with public money after all  

How can any instrument backed by US mortgages be considered safe when house prices are still falling and most mortgages are non-recourse? How can any instrument backed by US credit car receivables or car loans be considered safe? By making statements that are so blatantly untrue, the Chairman of the Fed risks losing the trust of the markets and of the public. Instead of instilling confidence, such lack of trust may lead markets and consumers to fear the worst, and to cut back on spending and financing even more than is warranted by the poor fundamentals. 

With the Federal Funds target rate at 100 basis points, the Fed is almost out of conventional monetary policy ammunition. Quantitative easing - the massive expansion of the Fed's balance sheet, through the acquisition of private and public securities, financed through increases in the monetary base (mainly bank reserves with the Federal Reserve) - is the main remaining monetary policy tool. The Fed will be acquiring, either through outright purchases, or as collateral in its lending operations, a steadily wider range of private securities. These securities will be subject to steadily higher degrees of credit risk. This deterioration in the average credit risk attached to the Fed's assets reflects both the deterioration of the credit quality of existing Fed holdings of private securities as the economic slump worsens, and the purchase or acceptance as collateral of additional classes and categories of securities with ever lower degrees of creditworthiness than the current average. The end to this quantitative easing is not in sight. I can see the Fed purchasing index funds of US equities before this is over.  


Consumers Pull Back (NY Times Chart)


Black Friday shoppers spend -- with caution

The holidays are a crucial time for retailers -- sales from November and December usually make up 25% to 40% of annual revenue. It was too soon to tell whether Friday was a success; early sales figures are expected next week. 

Holiday sales grew 2.4% to $460.2 billion last year compared with the previous year, according to the National Retail Federation. Many retail experts are now saying that if this season's sales figures are comparable, it will be a good year.

And although thousands of shoppers hit the stores across Southern California, industry experts worried it still wasn't enough to save Christmas.

"I don't think the holiday has a chance at all. No way," said Marshal Cohen, chief industry analyst at market research firm NPD Group. "This year, that spirit is gone."

Desperate for a strong day of sales, retailers took no chances and opened their stores earlier, slashed prices even further and offered discounts on entire purchases.

"Everything seems like it's 50% off or 2 for 1, or they're running specials until noon," said Jackie Fernandez, a retail partner at accounting firm Deloitte & Touche, who was at Glendale Galleria to survey the action. "It's just endless."


Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »


Related content


Davos's picture
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Nov 30


Doug's picture
Status: Diamond Member (Online)
Joined: Oct 1 2008
Posts: 3200
Re: Daily Digest - Nov 30

Is this hyperinflation or what?  I believe the 15% tip should be $186,488,250.  I hope the service was really good. :^)

ashtonw's picture
Status: Member (Offline)
Joined: Aug 7 2008
Posts: 23
Re: Daily Digest - Nov 30

The debasement of the currency would result if the new money was added to an intact money supply not reduced by the credit collapse.  But credit in excess of $1 trillion has been written off, or soon will be, with the effect of reducing the velocity of money and the money supply.  Much of the money created by the US government's recent action, therefore will replace - not be additive to - a portion of the money supply in existence prior to the financial crisis. 


Davos's picture
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Nov 30


Interesting. Are you saying that the Fed is going to write off the toxic junk it is buying and has baught with a majic sponge to sop up the extra money debt it exchanged for money and treasuries it handed out?

Question. Who is going to buy the bonds? Couldn't there be a collapse of the dollar based on just this? Quantitative easing, buyers fleeing near 0% yields (I assume for gold and for another 50 day stock market bubble) and just the shear fact that there aren't enough buyers to support our new deficits.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments