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Monday Market Watch

Monday, September 29, 2008, 7:41 AM

I am going to be keeping an exceptionally close eye on the markets today, obviously.  It is vitally important that the world respond 'appropriately' to the US bailout plan.

By appropriately, I mean that all paper assets need to go up in price.

At the outset, it's quite the mixed bag.

As expected, the dollar was bought with a vengeance all night long.  Don't open any economic textbooks, especially those that rely on any theories of "supply" and "demand," for an explanation of why this should be.

USD index chart

Now, one of the things that you can (usually) take to the bank is that when the dollar is up, gold will be down.  With the dollar up this much I would have expected gold to be down somewhere between $20 and $30.

Gold

Nope, didn't happen.  This is very unusual.  I am not quite sure what to make of it yet. For now, I am going to keep an eye on it.

The big surprise to me, though, was what happened to the US stock futures. This is a pretty serious decline.  What 'normally' happens after a big policy decision like this is that at 3am, plus or minus a few minutes, US futures are aggressively bought, assuring a positive open to the US markets.

index2

At this point it is assured that our stock markets are going to open down.  I will be shocked if a lot of sustained buying doesn't appear 'out of somewhere' within the opening 30 minutes.

If it does not, then I have to assume that there's a new game in town and that the bailout plan is DOA as far as being a market rescuing event.

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59 Comments

gsti's picture
gsti
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Maybe nobody believes anymore

Agreed, Gold should be down or going down, and yes futures up, and if that is not happening really soon, it means nobody has any faith in this bailout plan, so no point in selling anything and buying into dollars. 

If we are very lucky, the only people left thinking the bailout could work is paulson and  co.  :)

RSLCOUNSEL's picture
RSLCOUNSEL
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Skimmed the House Bailout Bill Specifics

last night and didn't see any modifications to the Community Reinvestment Act.  If you believe that CRA was at least a contributing factor, it seems part of the root cause has not been addressed.   If, as a bank, I am still required to issue a certain percentage of bad loans in order to meet statutory requirements then $700B is just the start.   Am I missing something here?

 

bcoop's picture
bcoop
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Stock Futures

RE:  "What 'normally' happens after a big policy decision like this is that at 3am, plus or minus a few minutes, US futures are aggressively bought"

 

I suspect they are "herding congressmen" like cats to vote for the plan by turning up the pressure a bit, but if the bid doesnt explode in the morning after the market opens, it looks bleak.

locklimitdown's picture
locklimitdown
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Posts: 46
"""""""""MARKET"""""""""

Here comes the futures jam/gold and silver slam

 12 spoos and over 100 Dow points of the lows overnight. Settling back again now but over the operators line in the sand 11000

Crude under serious attack -6.00 and pulling down the precious metals. Dont ask why but that is the way they play the game. No doubt many hedge funds have sell oil/sell gold as a paired trade making it easy for the gold cartel to suppress pm with any down tick in crude.

 Silver seems to be the number one enemy this morning. Suppliers now paying a premium for silver that I have not seen in over a decade. THERE IS ALMOST NO SUPPLY. It is extremely difficult to find yet they have knocked it back 1.00 in a little over a day of trading

Another attack is in progress as I type

The cartel has paper silver at 12.90. The problem is there is none to buy as demand is through the roof and back orders have been skyrocketing for months. Little doubt a massive derivatives monster will be unleashed should they lose control of silver.

Another round of selling as the American CONex silver exchange opens for business at 0830

New lows coming for the move sinking out of sight.

There is no market when it comes to paper silver

 

cmartenson's picture
cmartenson
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Dollar strength

I know that I was "prepped" by the numerous articles in Bloomberg and Marketwatch all weekend showing near unanimity across all foreign trading desks that the dollar was set to go higher, but I still need an explanation for why this should be so.

I cannot locate a single fundamental reason for this strength.  

The only thing that makes sense is that a hit to the dollar would represent a serious blow to balance sheet strength of foreign central banks (and the Saudi's impressive holdings) and on that basis any further declines would be most unwelcome.

So, OK, the dollar is being bought and propped.

But to what end?  This is where I get stuck.  The reason the propping needed to happen at all was because of a serious imbalance in the number of dollars being held in foreign central banks. 

Now that the US is going to create them in ever larger, more unbalanced amounts, how does supporting that behavior by accumulating even more dollars help the foreign central banks in any way, shape or form?

It doesn't.  It just digs the hole deeper.

All I can guess is that they are in "crisis mode" over there too and that there is no long-range plan.  Only a desire to not have to face the music at this time.

Which will only make the eventual date with reality all that much more severe.

gsti's picture
gsti
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Banks... soon there will only be a few left

Anyway, how many banks do we really need?

Today four, thats right FOUR euro banks were either taken over by a competitor or nationalised.

http://news.bbc.co.uk/1/hi/business/7641193.stm 

 

Its a bit like the great depression, small banks out of business only a few very big ones left

 

cupabj's picture
cupabj
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Dollar Strength
What I see here in India is, US mutual funds and other Institutional Investors are selling stocks in Indian companies. They are apparantly doing this to cash out profits of the last 5 years. This cash (INR) is being converted to USD, generating huge demand for USD, pushing up the price. From what I read in the local newspapers, daily transactions are of the order of tens of billions of dollars. This is causing a huge stock price decline in the Indian stock market. I'm not certain why US institutions are in such a great hurry to sell stocks while Indian companies are not likely to be affected too much due to the US downturn. Perhaps the US financial institutions need USDs back in USA to meet their liabilities?
scotttherrien's picture
scotttherrien
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Great Link...
For those not 100% sure of the financial events that Chris has been trying to communicate, see link below for a very good interview ...this is an excellent picture of the macro events happening in the market right now and enormous risks facing the US dollar.  Listen to 
Doug Noland (Market Strategist, Davis Tice & assoc)... this is excellent...
cmartenson's picture
cmartenson
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Market crash underway?

Wow.

I am shocked by what's developing here.

The S&P 500 is already down more than 40 points, gold is up $40 from its lows, and the dollar is giving up its carefully built gains.

Commodities (besides gold) are all in full retreat

The signals here are consistent with a deflationary collapse.  The market seems to be saying that the last minute looting operation arranged by Paulson is being voted upon as a negative by the rest of the world.  Who'd have guessed that?

The fed is already in panic mode and this morning they opened up the money floodgates:

Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmarks Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously.

These steps are being undertaken to mitigate pressures evident in the term funding markets both in the United States and abroad. By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk.

84-Day Maturity TAF Auctions The increase to $75 billion per auction will triple the supply of 84-day maturity credit to $225 billion from $75 billion. TAF credit at the 28-day maturity will remain at $75 billion. The total amount of TAF credit available in the 28-day and 84-day auction cycles will double to $300 billion from $150 billion.

That's nearly $500 billion dollars of new liquidity dumped in a rush after the market open proved to be a failure.  THAT is what gold is reacting to this morning.

Bernanke has the pedal to the metal and is saying "no deflationary collapse on my watch!".

This is exactly the outcome I have been warning about and predicting for years. 

We are there.  The time has arrived.

salisbury's picture
salisbury
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Re: Dollar Strength

cupabj,

Thanks for your post; great to see people from around the globe posting here. This gives all of us a broader picture of what's happening globablly.

I'll do some looking around, but your last question seems pretty plausible to me - that USDs are needed back in the USA to cover liabilities. The banks here are hoarding cash to hedge against bank runs like we saw at Bear Stearns and Lehman Brothers, causing the credit squeeze. I imagine they're scrambling for cash anywhere they can find it...

switters's picture
switters
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Why are commodities prices dropping?
Forgive my ignorance, but if the dollar is on its way to a collapse, why would commodities prices (like silver) be dropping? Wouldn't investors buy silver if they thought the dollar was collapsing?
bluebird's picture
bluebird
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Uh oh

 

I think we need your last chapter soon as you can finish it. Great Crash Course videos, I have sent the link to my family and friends so they can understand better what is happening. Thank you for your time and dedication. 

Fabio's picture
Fabio
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Slightly Off Topic: International Impact

Today I got the latest edition of the german magazine "Fonds Professionell" (http://www.fondsprofessionell.de/). In the editorial, they discuss the Crash Course, especially the Peak Oil parts.

Best whishes from Germany!

Fabio 

 

 

markf57's picture
markf57
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Huckabee

I watched the monologue of the new Fox show, "Huckabee" over the weekend. He had a line that was scary, funny and true.

 

"In this election, for the first time is US history, it could be the winner that asks for a recount". 

cmartenson's picture
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Re: Slightly Off Topic: International Impact

Thanks Fabio!

Wish I read German.

Best,
Chris

 

bearing01's picture
bearing01
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German->English Webpage Translator

Chris,

You can translate the German webpage to english.  This is good for reading European to get their take on us.

http://babelfish.yahoo.com 

http://babelfish.yahoo.com/translate_url?doit=done&tt=url&intl=1&fr=bf-h...

 

LAClimber's picture
LAClimber
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$630 Billion?

Can someone explain how we can inject $630 Billion separate from the proposed $700B bailout?

 

Fed Pumps Further $630 Billion Into Financial System (Update1) 

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahwz_k5JvuB8&refer=home

 

George 

 

 

bearing01's picture
bearing01
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I'm going to assume this is

I'm going to assume this is the normal FOMC activity.

 The Fed Open Market Committee regulates the fed fund's interest rate (the interest rate which banks lend to each other) by printing new money and buying bonds from the bank reserves.  Doing this basically gives them dollars for the bonds.  This gives the banks more cash and increases the desire for banks to again lend to each other.  As a result, real time fed funds interest rate will fall back to the target.

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BBC Business Editor's latest Blog

The day the bill arrived

  • Robert Peston
  • 29 Sep 08, 02:30 PM

Since the onset of the credit crunch in August of last year, there have been bad days, worse days and today.

What a horrible coincidence of accidents and emergency resuscitations we've seen.

Here they are, in no particular order.

1) The collapse and nationalisation of Bradford & Bingley, set to cost our cash-strapped banks at least £9bn over the coming years (see my notes of this morning).
2) The injection into Fortis, a continental bank rather bigger on one measure than the Belgian economy, of £9bn of Benelux taxpayers' cash.
3) The takeover, with US taxpayer support, of Wachovia - the huge battered US retail bank - by Citigroup, a bank which has had capital-deficiency problems of its own.
4) A massive penny dropping on Wall Street, the recognition that Congress will extract back from financial firms in a few years the $700bn to be injected into banks to keep them alive.

It's the day when no-one could be under any illusion about the costs of rebuilding our structurally impaired financial system.

That cost will fall directly on taxpayers and on banks.

Indirectly it will hurt businesses - some of which are already being starved of vital capital by banks' inability to lend.

And for millions of people in the US and Europe, there's the double blow of an erosion in the value of their wealth (through declining property prices and the falling value of long term savings in pension funds) and of an increased risk of redundancy.

Or to put it another way, for most of us, there's little in the way of shelter from the storm.

Don't forget that last week we had a massive injection of one-week loans into the banking system by the Federal Reserve and Europe's troika of leading central banks. And in the UK, the Bank of England auctioned £40bn of three-month loans.

That was supposed to calm nerves and reduce the price of money for banks.

But the cost for banks of borrowing from each for three months in sterling, euros or dollars has risen again.

Banks are as worried as they've ever been about the credit-worthiness of their peers. Trust and confidence are almost extinct qualities.

Share prices too are falling hard - which in part is a belated recognition that the crisis in money markets will have an impact on the prospects for most companies.

If economic growth was going to be slow before the events of the past three weeks, it's going to be a lot worse now.

And if you wish to know which economies are perceived by global investors to be most flawed and vulnerable, you could do worse than look at the price of insuring sovereign debt in the credit default swap market.

Those CDS prices tell you that Austria, Belgium, Denmark, Finland, France, Germany, Sweden, and the Netherlands are all perceived to be more credit-worthy - to be in a better position to service their national debt - than either the US or the UK.

PS. Silly me. In my list of financial firms in receipt of massive first aid, I forgot to mention Germany's Hypo Real Estate, the commercial property lender, which has received a whopping £28bn in credit guarantees from the German government in collaboration with a consortium of banks.

Oh, and Iceland's third largest bank, Glitnir, has been nationalised.

ike's picture
ike
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Monday's market actions as last scare tactic before vote?

Is it possible that what's happening today is simply being orchestrated to scare/convince any congresspeople who were on the fence that they really need to put this through?

 If the PPT (plunge protection team) can push things up, then they can certainly push things down...

gfuehring's picture
gfuehring
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Nothing new (for you) in our Editorial

We just inform our readers (independent financial advisors) about chapter 17 of your excellent crash course. Our conclusion: energy will be the NEXT big issue (if we "survive" THIS crisis) and it could be a good idea to weight it in a portfolio.

Kind Regards

Gerhard Führing

publisher FONDS professionell 

 

steve b's picture
steve b
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The time has arrived

first off, many thanks for the series Chris, i have been glued to the current financial fiascoe for the last year, i am not a money man or investor, just a good hard working UK citizen. If I saw this coming a year ago why was action not taken back then,,, everyone at work said i was mad, ha ha ha.

Steve - sitting back and enjoying the ride, not much else i can do realy

Thanks Chris, your a top guy

joe2baba's picture
joe2baba
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?

chris i am just guessing here but in trying to figure the markets i think we have to think from the top down. how is the stategy that the international banking cartel is employing benefiting them? one thing is pretty obvious there is a great amount of bank consolidation, which for the international bankers is a primary goal." competition is sin" jd rockefeller.

as far as the transfer of wealth which is also primary it is natural to get the low hanging fruit. which always means increasing debt. certainly pension funds, 401ks etc would seem to be choice targets. they already got the social security fund. their final goal a one world order would be much more appetizing than complete economic meltdown.can you say financial terrorism

IM AGONNA MAKEA YOUA OFFER YOU CANTA  REFUSE

 

maybe why they are jerking the rug from under the second fasftest growing economy in the world. where i live half the year india. just the musings of an old conspiracy wacko. maybe i am wrong. any ideas?

oh my other question which has been driving me crazy for a few weeks

IS IT RAPE FIRST THEN PILLAGE OR DO YOU PILLAGE FIRST THEN RAPE?

joe2baba's picture
joe2baba
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HUCKABEE

yep that's my ex gov gotta love him toobad it wasnt him istead of mccain it would have been a lot more humorous

whoooo pig sooooieeee

gauntlett's picture
gauntlett
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Other Central Banks
If the other central banks around the world are also inflating won't that help avoid a dollar collapse?
LAClimber's picture
LAClimber
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Printing Cash and Bond Value

Thank you and that makes sense.  A few points:

 

  • So the Fed printed $630Billion cash.  Maybe I'm naive but ... that's not good.
  • What does this do to the value of bonds?  If national like China and Japan owns bonds, what does this do to their confidence?
  • If this infusion of cash is not helping, why would the $700B cash infusion help?  The main difference is that the banks balance sheets will improve but is that going to help interbank lending?
Thanks again!

 

rlee's picture
rlee
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Bigger than just us!

Let's all say it together:

 

"World Government - World Currency"!  That's the next big sell to the sheeple of the world 

bearing01's picture
bearing01
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Printing more money expands

Printing more money expands the money supply and devalues the dollar.  It increases inflation and as a result, if you hold a bond, when it matures and you get your money back that money has less purchasing power.  In a normal market such an activity would require bonds to trade at higher yield in order to earn a little more money on the bond.  However, today's market is behaving in panic mode where people want bonds to guarantee their money is safe.  People are willing to take a loss for the security that the bond offers.  Long term when things settle down, printing all this means that interest rates will eventually have to rise to fight off the inflation it will create.  Otherwise the Asians won't buy any more bonds and this country won't be able to borrow any more money.  Any bailout or cash infusion uses new money because our Gov't bank account is already overdrawn $9.5 trillion.  It's all bad news for the value of your dollar.  Get ready for $6/gallon gas and $5/gallon milk.

jrf29's picture
jrf29
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Bailout Fails!
Bailout bill fails! 2:07pm
Xflies's picture
Xflies
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The Central banks are trying soooo hard to keep the $ up
Soros must be having a field day... if the markets can break the fed banks, buh bye...
gsti's picture
gsti
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WOW !! Who said congress

WOW !!

Who said congress was ****

rlee's picture
rlee
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Biggie drop!

Chris,

You were wondering why the market was doing what it did this morning?  Well, maybe the world hadn't bought into this looting scheme the way everybody thought they would!  It seems that congress may have listened to the masses (mark your calendar for a first!)  and the world knew it.  Since we're not the only banking system in the world with these kinds of troubles it appears that the other nations are looking out for themselves this time around.

500 points down at mid-day trading!  Say goodbye to the almighty dollar! 

Zay294's picture
Zay294
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This was definitely
This was definitely unexpected. Everyone for and against the bill expected it to pass. What now? This looks like some scheme to let the market tumble, blame democrats, and then garner more support than ever by scaring people.
NHAero's picture
NHAero
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Why gold up, silver down?
Why does gold shoot up and silver drops?
Zay294's picture
Zay294
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Fox news is going insane.

Fox news is going insane. No mention of paulson, no mention of the evils in this bill. No mention that the middle class was screwed. All they are doing is demonizing the democrats and terrorizing people. This bill is not dead. It will pass on the second go. shock doctrin at its best.

http://en.wikipedia.org/wiki/Shock_doctrine

There is no mention of the real reasons this was rejected. They are telling everyone that congress fought like kids over hurt feelings. They literally compared it to a high school argument. The masses are being led to believe that this bill was the only thing that could save us. Watching mass media is depressing. 

jdb123's picture
jdb123 (not verified)
Gold Confiscation
With Gold being the investment of choice considering the markets.....and the US treas. already taking action to limit public supply and ownership....and....considering the confiscation that occured in the 30's.....wouldn't it be reasonable to conclude that Gold-Silver confiscation is "ON THE TABLE"  as every other depression era manuvere is attempted and failed(ing).....as this financial system comes to its end...........What possibale scenario could play out regarding confiscation...?  Whats the best way(s) to advert confiscation...? 
cannotaffordit's picture
cannotaffordit
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Why a "public money" bailout?

Chris,

 Would you please help us understand why a public (taxpayer)  "bailout" of huge financial corporations that have benefited enormously from their own games, is the best way to deal with the economy at this time?  Why couldn't those who were paid billions and got into this jam, not be accountable for getting out of it?

Here is a quote from Nuriel Roubini's site this morning:  ".....the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented - many on the RGE Monitor Finance blog forum - alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners."

 "Privaztizing gains and socializing the losses."  Yep.  That about sums it up for me. 

 Eager to hear your response.

Ben

bluebird's picture
bluebird
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scheme to let the market tumble?

How so? More Democrats voted for this bill than Republicans. Since the bill didn't pass, and more Republicans voted against this bill, shouldn't the blame be on the Republicans?

 

see how your rep voted 

http://clerk.house.gov/evs/2008/roll674.xml

 

gauntlett's picture
gauntlett
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The Dress Rehearsal

I agree, and am led to think that this is all a rehearsed plan!

http://www.trevorgauntlett.com/2008/09/cnbc-says-it-perfectly/

joe2baba's picture
joe2baba
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confiscation

yes good point jdb123

in the last update of the patriot act they slipped in a provision that any transaction for gold paid for with plastic or check gets reported to them i dont know if that includes silver.

so i would assume that they saw this coming.

we are dealing with a family that has been at this for centuries

anybody remember the law to tighten up the bankruptcy laws?

they control the money they know th effects of every little movement.

they have the most powerful computers  in the world. 

jackson beat them in the 1830's they came back with a vengance.

this is a chess game and they are many moves ahead of us.

we took a pawn today but they still have us in check

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gsti
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Probably not

I don't think Americans own anything like the amounts of gold that they owned in the 30's.  Gold was still very popular then.  I doubt American citzens own enough real gold to make it worth the exercise. As for confiscating all gold shares, that might be somthing different altogether.

 

joe2baba's picture
joe2baba
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gold

hi folks just a question from a conspiracy theorist

they suspended the minting of gold coins right?

where does the gold come from?

do they buy it on the uh open market from mines?

do they use the gold out of ft. knox?

which some believe is long gone.

i dont know does anybody out there?

gauntlett's picture
gauntlett
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Great Chess Analogy

I've been attempting to figure out what the future plays look like... So far I haven't come to many conclusions except a world that looks quite different from where we are today.  

 Love to hear anyones thoughts on potential outcomes... 

machinehead's picture
machinehead
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Laughed till the tears rolled down mah cheeks

Oh Jesus, when I heard what ZimBenwe has done, I laughed till I was gasping for breath, and couldn't see for the tears.

A couple of years ago, I forecasted that Weimar Ben would be remembered for expanding the Fed's balance sheet by -- oh, $200 or 300 billion a year, up from a chintzy $50 billion.

But never, in my wildest, psilocybin-fueled, hallucinogenic fantasies, did I imagine that he would CRANK THE BALANCE SHEET BY $300 BILLION IN A SINGLE MORNING.

ah ha ha ha

AH HA HA HA HAAAAAAAA ....

BEAM ME UP, BEN! THERE'S NO LIQUIDITY LEFT ON THIS PLANET! Tongue outTongue outTongue out

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DavidC
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Hank and tax relief on GS stock

I've just heard on Bloomberg TV that Mr Paulson esquire was able to obtain tax relief on the sale of $500 million worth of Goldman Sachs stock when he went to work for the Fed, this being one of the reliefs available when taking a job at the Fed. I haven't double checked this, but if it's true, well done Hank, you're certainly in touch with the American people (not).

 777 points on the Dow, 105 on S & P, and STILL Gold isn't going up through the roof?

Chris, you're doing a fantsatic job with this site. As a recent addition to the readership of this site and the Crash Course, I feel it should be required reading by everyone.

 

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joe2baba
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Posts: 807
future

hey gautlett enjoy your posts

the long emergency by james howard kuntsler is one opinion of what the future looks like. not for the faint of heart.

i have been having these discussions since the sixties. any scenario for a livable outcome always hinges on the social fabric remaining intact. when we were looking for our land in the 70's we came across a guy who would only sell for gold and was going to move to alaska ( i think his  name was palin--joke) he was going to get off the grid and be so far out no one would find him. gold was $35 an ounce then. i think it always comes back to all wealth comes from our mother and the closer you can get to her the better. i dont think the amish even know anything about what we all have our panties in a wad about.

but in the chess game the king wants us to be serfs, obedient little serfs farming the kings lands mining the kings gold etc. so my assumption is whatever the external trappings we will be serfs

the other scenario is the social fabric unravels............ well i dont want to be here or anywhere.

funny thing tho the banker always has more money than the king how come he isnt on the board?

joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
machinehead

glad to see you are into organic psychedelics. synthetics are so hard on the body

ia m having serious trouble typing this i amlaughing my ass off the tears are oll over the keyboard

i am going to copy and paste this so i can email it to my whole email list. with your permission of course

i have not laughed this hard  since i dont know when

i really needed this after my marathon of writing and calling.

one correction tho i think it is nothing but liquid there is not a solid thing left

 

ahahahahahahahahhahahahhahahahahhahahahahahahahhahahahahhahahahahahhahahaaaaaaaaaaaaaaa

 

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5729
Re: Why a "public money" bailout?

Ben,

I cannot think of a single way that handing over a huge pile of money to banks helps us in the least.   Some wax on about the importance of liquid credit markets but I don't buy it.

Here's why.

If the goal was to single-mindedly recreate the loose money borrowing conditions of yesterday, then I suppose the bailout plan is your best option although you might as well place all your chips on the green square at Roulette.  But even if this had a higher chance of success I am still against it because the last thing we need is to return to our unthinking, overconsuming ways of the past.

Instead we need to immediately (or sooner) recognize our monetary and energy and resource depletion predicaments and set to fixing those.  What we need is a crash program of reinvestment.

But first we need a redirection of thinking and this is where any attempts to "fix" things by attempting to return them to where they were before displays an appalling lack of awareness of what our current probelms are or how we got here.

So will a bail out plan "help"?  First we have to ask "what needs helping most?"  While the bailout plan might help some things it will be the wrong things.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5417
answer: inflate

I honestly think the next policy move might involve a deliberate attempt to inflate.  Since the Fed controls the currency, they can make this decision without any input from Congress at all.  And what the banks want, the Fed provides.

Think about it.  A swift dose of a 3 year 10% inflation regime would reflate housing prices (in nominal terms) back up where home prices are no longer underwater.  Incomes would increase as well.  Everyone could suddenly be able to pay their mortgages.  And the psychology of the market would also change.  People would work hard to stay in their homes, because they would now be an inflation hedge - a store of value.  And it would happen invisibly.  Nobody would get a "bailout" or a special deal.

It's not ideal from the standpoint of the banks, but I'm guessing it beats 50% default rates on batches of mortgage backed securities.  And if they know ahead of time (which they would, since they control the Fed) they can probably find some clever way to hedge their interest rate risk at the expense of some other sucker.  And perhaps the Fed can continue to keep rates low as they monetize, giving the banks big, fat spreads.   It might be easier now that there are only 3 major banks - JPM, Citibank, and BAC.

Of course gold would spike, so would oil, so would interest rates and the deficit, and the buck may well lose its reserve currency status.  But who cares, really.  You're a bank, and you want to get out of the jam you're in.

But how to prevent those depositors from fleeing the banks?  You would have to enlist the aid of Congress & the federal regulatory agencies.

You could install some "temporary" capital controls greatly hindering the flow of capital from the country, and prohibit "speculation" (participation by the public) in commodities markets - in the name of controlling the inflation you created.  So no more foreign bond mutual funds, and no more commodity funds.  And while you're at it, tax the crap out of anyone having "windfall profits" (i.e. any industry producing real things like oil, food, etc).  Limit ownership of foreign bank accounts too, while you're at it. 

Step by step, US citizens would find their money confined to the US.  But at least the housing crises would be over.

In case you're wondering I'm not advocating the solution at all.  But I am suggesting it might be the next thing they try. 

Dave Fairtex

 

gsti's picture
gsti
Status: Bronze Member (Offline)
Joined: Jul 21 2008
Posts: 60
Quite possible

Hi Dave,

I think that is a good post.  I have heard the idea of inflation being used before, to reduce a large amount of debt ;)

If you have huge debts and access to a printing press, inflation can be a good thing.  I think your suggestion of how America will be getting through this is quite likely. 

 

Gary

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