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Market Summary - Things breaking almost too fast to follow

Wednesday, September 17, 2008, 8:54 AM

And I do mean 'breaking.'

Gold is now up more than $50 on the
December contract (futures), indicating that the direct monetization of
debt as implied by the AIG deal is being interpreted by the markets as
the potential beginning of the end for the dollar. The S&P 500 is
down 35 points.

I have long been watching for this sort of action.

Because I have not yet completed Chapter 20, let me give you the final warning sign that I am on the lookout for, which will signal that it is time to really buckle down the hatches:

When Treasury interest rates begin to rise AND the dollar begins to fall, that will be our sign that a foreign central bank (or very powerful payer such as the Saudi Sovereign Wealth Fund) has decided to cut its losses and run.

That's it. --> Interest rates up, dollar down.

When that happens, the chance of a severe 50% haircut in the international value of the dollar in a space as short as a couple of weeks becomes a very distinct possibility.

I am now officially watching the treasury market and the dollar index all day long and through the night.

My advice is simply this:

A) Anything that you think you own and would identify as wealth now falls into two buckets.

1) Stuff you actually have.  This includes real estate (especially if owned outright), cash at home, gold and silver (physical possession only, GLD and SIV fall into the next bucket below), and basic stuff at home.

2) Stuff you think you own because you have a statement that says you do.  This includes your money at the bank, stocks, bonds, and especially tracking funds such as GLD and SIV.  These all represent assets that are yours but also (and this is the key point) simultaneously somebody else's liability.

B)  Move stuff out of (2) and into (1). 

Later on, when this all blows over, we can all laugh about it and you can move stuff back from (1) and into (2).  But if it does not blow over, the chance is now unacceptably high that a general market failure will unfold with startling speed, preventing you from making such a switch.  The point is, I don't know, you don't know, and they don't know.  A heavy snowfall has landed on the steep slopes above.  My position is:  Get out of the gully.

As of today, we no longer know who is solvent and who isn't.  We know the entire banking system is insolvent, so it becomes even less clear who will survive and who won't.  Perhaps your broker/bank/fiduciary trust company will be just fine.  Perhaps not.  At this point, nobody knows.

AIG just taught us a very important lesson:  No private parties are left that can step up and take over a company that just 4 weeks ago was a financial titan.

We can now be reasonably certain that the Fed is directly monetizing debt:

Quote:
Sept. 17 (Bloomberg) -- The Treasury will sell more debt to enable the Federal Reserve to expand its balance sheet, a sign of the strains created by the biggest extension of central-bank credit to financial companies since the Great Depression.

The program starts today with a $40 billion auction of 35-day bills, a day after the government agreed to take over American International Group Inc., the Treasury said in a statement in Washington.

The proceeds will "provide cash for use'' by the Fed as it seeks to boost liquidity in credit markets struggling from $515 billion in writedowns and losses since the start of last year. The announcement illustrates the potential drain on the government's finances in taking over AIG, Fannie Mae and Freddie Mac, and taking on $29 billion in Bear Stearns Cos. assets.

"It is becoming imperative for the Fed to take actions to enlarge its balance sheet,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.

Link to Article.

What this article is saying is that the Fed "needs to expand its balance sheet," which is code speak for "print money out of thin air to directly hand to the Treasury Department in exchange for Treasury debt obligations."

Think about the absurdity of this for a minute.  The notion that a central bank can "bolster" its balance sheet by taking on more debt from the outfit that is charged with recovering its main product (dollars or 'Federal Reserve Notes') by taxation is the sort of twisted logic that only MC Escher could truly appreciate. 

It has just been announced that the FDIC fund is dwindling at a precarious pace and may soon run out of funds.

In the short time I wrote this, gold has now moved up by 10 more dollars and is now  up $60 on the day, while the S&P is down more than 50 points.

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7 Comments

SteveS's picture
SteveS
Status: Gold Member (Offline)
Joined: Sep 6 2008
Posts: 358
Retirement accounts
Whoa, scary stuff. What does one do with assets tied up in a retirement or annuity? I suppose one has to figure out if the penalty to withdraw outweighs the risk of leaving it in.
Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
Take a look at the chart of the Euro and ask
yourself... does this look like a chart that would describe LEH going bankrupt, AIG getting bought by the US gov't or talks of GS and MS filing for bankruptcy? This should put things in perspective for most people... when I look at the chart, I see that possibly it is bouncing off a bottom and the Euro could rally but putting all of this together, I don't know why the Euro isn't above 1.60. During events like this which can't and aren't modelled by any financial institution one should look at going long skew. Out of the money euro calls at less than 13% implies is cheap considering the global crisis we're about to undertake.
Roysyl's picture
Roysyl
Status: Member (Offline)
Joined: Mar 21 2008
Posts: 6
The run to the exits may
The run to the exits may have started. Did you note yesterdays TIC (Treasury Incoming Capital)?
GlennO511's picture
GlennO511
Status: Member (Offline)
Joined: Apr 11 2008
Posts: 5
Should I buy?
I don't own any gold or silver and have most of my money in a savings account, a little in mutual fund, and a little in a CD. Should I remove all and keep cash? Should I buy any gold or silver as it goes up or wait until it goes down a bit?
TnAndy's picture
TnAndy
Status: Member (Offline)
Joined: Jun 2 2008
Posts: 4
Money in a savings account
Money in a savings account or CD is returning less than the true rate of inflation. Buy some gold and silver ( if you can find any silver ) to protect yourself from the ravage of the dollar down the road. Gold below 1000 and silver below 15 is a bargain. Once the rest of the crowd figures out Treasury securities are NOT a safe haven, you won't believe where gold and silver are going.
bongo's picture
bongo
Status: Member (Offline)
Joined: Aug 31 2008
Posts: 2
Will other currencies slide?
Dear Chris,

When the US dollar begins to slide what other currencies will go down along with it? Will any go up in value?

-bongo

PS: your web site is incredible.

john50's picture
john50
Status: Bronze Member (Offline)
Joined: Sep 2 2008
Posts: 74
Historically the Swiss Franc
Historically the Swiss Franc is the stable destination during times up financial chaos, or the Japanese Yen. This decade has seen the Euro receive most of the hedging as the "anti-dollar" and the "one way bet" for its climb from .8000 to 1.6000 USD.

If you can split you USD holdings, and hedge more than 50% in Euro, then any moves down by USD are made up by increase in Euro, that has been going on for at least 6 years.

Personally, I recommend holding some Oil as a hedge, try EFT on AMEX called USO as a crude oil index, it is very cheap now in the $75 range, and could see some steady growth over the coming years. At least it is not fiat, oil like gold has a physical demand.

John

Expect the best - Prepare for the worst.
http://www.can-offshore.com

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