The world-wide fiat system functions like a roach motel: Investors
check in - but they NEVER check out! By it's latest
hit on commodities, the Fed as the system-leader gave investors a shot across
the bow. The message: "If you try to leave, we will hurt you!"
("Leaving the fiat system" here means to store your wealth
in more tangible forms that are not as susceptible to engineered currency
collapses.)
Well, wasn't that just too neat?
JP Morgan Chase got to buy its long-time competitor Bear Stearns at
less than ten cents on the dollar, even at Bear's super-low share price of
the previous trading day (while the JPM co-owned Fed itself supplies 30
billion USD by "loan" to bolster Bear's balance sheet), and
suddenly everything turns around. Stocks are up, the
markets calm down, and even the commodities decline. Wow!
If all of the commodities sag at the same time, then at least nobody
can reasonably accuse anyone of "gold manipulation", can they?
Well, maybe it wasn't gold manipulation, but something surely doesn't
smell right (sniff, sniff...)
Ask yourself: has anything fundamentally changed in the markets to
cause this across-the-board commodities sell-off? Let's see:
- Mortgages are still
toxic, they are still on every US bank's balance sheet or
tucked away in off-balance sheet SPVs and
other "conduits".
- Banks are still loathe
to lend money to each other because they all know how polluted the
other's asset positions are (all they have to do is look at their own
balance sheet and remember how it got there).
- The economic outlook
hasn't changed and home prices are not improving any, so homeowners are
still going to default on mortgages like they've been doing. Result:
mortgages are still as toxic as they were before. Even the "AAA-rated"
top-grade ones.
- Persian
Gulf nations are still under enormous pressure to
go off their dollar-pegs because their inflation figures simply do not
allow them to follow the Fed's successive interest-rate cliff jumps.
- The US
economy is still in recession by all ascertainable data, and it doesn't
look like that's going to change anytime soon.
- Foreigners have
stopped buying long term US treasuries as shown in last week's 10-year
note auction (down to under 6 from previously
25%). Yet, treasury prices are still going up (so who on earth is doing
the buying, hmm?)
- There are still way
too many dollars in the world.
- There is still way to
much other fiat currency in the world.
- Ben Bernanke is still the chairman of the US Fed.
- Bush is still in
office.
- Euro-zone inflation is
still above three percent.
This list could be longer, but we'll stop here to preserve precious
cyberspace.
Here is another ground for suspicion: Sunday's mega-intervention was
done right at the point where the Dow hit theoretical support from its 2000
high at 11,750, to create the impression among investors that this technical
level has "held" and that the ensuing rally could be for real. Hope springs eternal, you know.
(If you want to know whether this level has really "held",
just ask yourself whether it would have held in the absence of any action by
the Fed!)
Yet, investors, - especially institutional ones - are acting as if all
of these negative factors have simply disappeared as a result of the Fed's
"magic."
Let's take a good look at what the Fed really did:
Actual Fed Actions:
- In December, it
instituted its series of "Term Auction Facility" (TAF) by
which it auctioned off 28-day cash loans to banks at preferred lending
rates;
- It cut rates at
breakneck speed, reducing the federal funds target rate from 5.25 to now
2.25 percent in under seven months;
- In March, it
instituted the new "Term Securities Lending Facility" (TSLF),
by which it loaned US treasuries from its balance sheets to
broker-dealers of treasuries (i.e., big banks only) for 28-day terms and
took their mortgage-slime onto its own balance sheet.
- It did an overnight,
over-the-weekend emergency cut of the discount rate (the rate at which
banks can borrow from the Fed overnight) by 25 basis points.
- Finally, it loaned $30
billion to Bear Stearns while taking Bear's mortgage-slime onto its own
balance sheet, also overnight/over the weekend, ostensibly to
"stabilize" Bear's balance sheet while getting JP Morgan Chase
to offer a paltry, ridiculous $2 per share on stock that on the Friday
before still traded for $30per share.
Mind you, all of this Fed lending is really no more than that: lending!
What good does it do a big broker-dealer bank to carry borrowed treasuries
on its balance sheet? If it needs to borrow money in the short term market,
which potential creditor-bank would be dumb enough to think that just because
the borrowing bank now has Fed-loaned treasuries on its balance sheet instead
of its own mortgage slime, the borrowing bank is now a "better credit
risk"?
It makes absolutely no sense - unless all of this is done with the
tacit understanding that the Fed's loan of "prime for slime" is
intended to be permanent, or at least nearly so until this entire mess blows
over.
So, why did the commodities begin to sell off right at the time the
Fed's sale of Bear Stearns to JP Morgan Chase was announced? And why did the
dollar bounce at that very moment?
Well, the commodities sold off because the dollar bounced. Commodities
are still mainly traded in dollar terms around the world.
Why Did the Dollar Bounce?
One piece in the puzzle may well be the following blog entry
recounting what the ECB's Bini
Smaghi was quoted as saying by Dennis Gartmann.
"The author of The Gartman Letter
referred to comments made by ECB executive board member Bini
Smaghi in September, when he detailed how such an
intervention could play out:
- Step One: Monitoring
and assessing exchange rate markets and developments, with a focus on
underlying fundamentals.
- Step Two: Discussing
these developments with other major players to assess currency
developments and policies.
- Step Three: Making public
statements on the situation.
- Step Four: Intervening
in the foreign exchange markets.
Since verbal interventions have already begun, we are between steps
three and four, with actual interventions due next, Mr. Gartman
said. Mr. Smaghi has set the table for central
banks and their governments around the world, he added."
In other words, the dollar bounced for the sole reason that the Fed
and the rest of the world finally performed what is known as a currency
intervention. The other central banks agreed to buy dollars. Nothing new,
here.
Everything Is Still the Same
The end result of all of the above is that nothing has really changed
- except for the thus-far undisclosed international dollar-support action. Other
than that, everything is still the same.
So, what was the real point of these actions? If the only change that
has any kind of teeth was the coordinated dollar-support action, why did the
world's central banks not disclose that?
Answer: Because everybody knows that such action would prop up the
dollar and probably result in a correction in the commodities markets. Under
those conditions, the battered US Fed would not be able to stand there and
accept the adulation of the cheering masses as the "hero who saved the
markets."
It's a con-man's trick, through and through.
The dollar's short-term reversal is being pointed to as proof that the
Fed's actions "saved the day" while in truth it was the otherwise
typical, very un-dramatic, and common-sense currency intervention that did
the job. At the same time, one of the Fed's owner banks was able to buy up a
competitor at fire-sale prices while benefiting from Fed-injected taxpayer
money (i.e., the $30 billion "loaned" to Bear Stern's balance
sheet).
The self-defecating, bootlicking, sycophantic financial
press hails this as the next best thing to Jesus' second coming, of course. More
sober observers can only shake their head at the gullibility of consumers of
what goes under the name of "financial news."
Has Gold Topped Out?
Doubtlessly, it eventually will, but we aren't even close yet. Has it
corrected? No doubt about that, as well. Can it drop further form here? Sure
I actually expected gold to drop back to $750 when it became clear the
Indians were selling theirs to buy paper stocks. Occurrences since then made
me revise that estimate upward somewhat, to the vicinity around $850.
If gold dropped that far, I would not be surprised in the least - but
that is a far cry from "the end" of this gold bull market, as the
following chart shows:
Gold is at weak support right now near the $900 mark, which also
coincides with where the (green) lower uptrend line of the Phase III slope
hits the right side of the chart.
The stronger "Level 1" Support is at $850, the level of the
November 2007 short-term top that is nominally equal to the 1980 blow-off
top.
"Level 2" Support lies at $725, the 2006 interim high, which
also coincides with where the green Phase II uptrend line hits the right
wall.
In fact, "the end" of this bull market would have to take us
all the way back to below $550, which is where the uptrend line from 2001
would hit the right wall, were we to bother drawing it.
Just look past the smoke, break some of the mirrors, and reality looks
exactly the way it did before Bernie staged this rehabilitation of the Fed's
image as an institution that can "save" the markets.
Of course, none of this even addresses the issue of what ultimate
effect yet another rescue action really has on the economy. It can only make
things worse in the long run - and that's what the Fed's real raison d'etre seems to be:
Destroy the world's largest, most powerful economy so the US can be
"integrated" with other nations in the western hemisphere - but do it slowly, so nobody can point the finger at one
particular Fed action and go lynch the bastards. In other words: plausible
deniability. That way, at least, that pesky thing called a
"Constitutions" that some hopelessly backwards Americans still
believe in no longer needs to be paid lip service to.
At least, that appears to be the plan.
By : Alex Wallenwein
Editor,
Publisher
The EURO vs
DOLLAR GOLD-MONITOR
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