ZIRP: Our Future

Well folks, approval of the massive bailout plan wasn't enough to calm global markets, so it looks like the Fed will cut rates again - soon!

Based on Bernankes gloomy speech and the cratering of global markets today, the Chicago Board of Trade, futures market is indicating a 48% chance that the Fed will lower its Fed Funds Rate (FFR) to 1.5% from today's 2%; additionally the futures showed a greater chance (58%) that the rate will be cut 3/4% to 1.25%.

Note: This will likely be a nice positive for Gold, a negative for the US Dollar and highly inflationary for consumer wallets.

Anyway, if you can recall back to April of this year - when the market movers (due to rising inflation pressures, a slowdown in unemployment figures, a rising equity market and a less volatile credit market) were all talking in unison about a rate pause and likely future rate increases. I raised the BS Flag Immediately!

My Quote:

" I don't buy it, as there are still far too many uncertainties out there for the Fed. I expect a 25Bp cut this time around followed by another in June (or an emergency cut if warranted beforehand) and a 1.25% rate by the end of the year."

" We are nowhere near the end of this housing/credit/insolvency crisis and think ZIRP (Zero Interest Rate Policy) is not out of the question in our future. Each time a new crisis erupts, the fed will print/cut/inject in an effort to contain it, but will eventually run out of monetary ammunition... That's when the real hyperinflationary fireworks will begin."

Speaking of ZIRP:

Back in a November 2007 post Will the Fed Cut Rates again on December 11? I made fun of Paulson's "Strong Dollar Policy" and then got to the crux of the matter: The Fed and PPT would use EVERY tool/instrument at their disposal to fight off the deflationary impacts of the credit crisis and the banking/financial system implosions

My Quote:

" Ultimately, reduced credit leads to reduced money creation, which leads to reduced spending which leads to a deflationary environment - But have no fear, Ben and the Boyz are here."

Based on the comments Ben Bernanke made in his 2002 speech before the National Economists Club in Washington, D.C., Helicopter Ben made it clear the Fed would do everything in its powers to prevent deflation: Deflation: Making Sure "It" Doesn't Happen Here


So, what are the tools Ben feels the Fed should use to prevent deflation?

The Fed could cut rates to ZERO, while simultaneously they could print/inject massive amounts of fiat money into the system. See excerpts from the link below (Note: Emphasis is mine)

“ But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument - the federal funds rate - were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way."

" Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

There you go, he said it - print more money to reduce its value and to generate more spending (sounds like a call for Hyperinflation)

“ Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. "

"Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”

"Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly. However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window".

"Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities."

Closing:

Thus far, though out of order and minus ZIRP, Ben and the Boyz have used every single tool mentioned/outlined in that 2002 speech.

With another rate cut in the works and with financial system troubles mounting, my April 2008 call for a 1.25% FFR by end of year will likely come to fruition.

What then should we expect to see?

Well folks, when stuck with a measly 1.25% FFR going into next year, the fed will have very little ammunition left in his "bag-o-tricks" with which to fight the worsening battle, so ZIRP will be implemented in 2009 followed by a massive monetization program.

Bottom Line:

Massive Monetary Inflation (ZIRP + Monetization) coupled with Severe Asset Deflation (Credit Crisis + Collapsing asset values) and high unemployment = A HYPERINFLATIONARY DEPRESSION

Hope this is an easy enough concept for everyone to follow

Randy

Plunge Protection Team (once again) to the Rescue!

The DOW fell hard from opening today and the losses accumulated throughout the afternoon - at one point (~ 2:45pm) it was down 800 points and the meltdown was all but assured, but wait! Take note of the hand of God coming into the picture at ~ 2:50 - pulling the DOW back up over 400 points in the last hour of trading.

Free markets?

Absolute Bullshit!

These four malicious, lying, thieving bastards (Heads of The Plunge Protection Team), need to be crucified!

Treasury Secretary Paulson (Chairman of the PPT)

Ben Bernanke (Chairman of the Board, Federal Reserve System)

Christopher Cox (Chairman of the Securities and Exchange Commission)

Walter Lukken (Chairman of the Commodity Futures Trading Commission)

For those who don't know: The Plunge Protection Team (PPT) was created by Ronald Reagan back in 1988 through executive order 12631. The Working Group on Financial Markets, also known as the PPT was created to respond to events in the financial markets surrounding October 19, 1987 ('Black Monday'). They are chartered with providing recommendations for legislative and private sector solutions for "enhancing the integrity, efficiency, orderliness, and competitiveness of United States financial markets and maintaining investor confidence".

Former Federal Reserve Board member Robert Heller, in the Wall Street Journal, opined that "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole."

Today however, they are both flooding the market with liquidity AND actively engaged in manipulating the entire market spectrum - using their game of charades in an attempt to game confidence in the markets - an abominable crime!

Remember Martha Stewart and her small-time mischievious "insider trading" - HA!

How about these guys DISTORTING THE ENTIRE US MARKETPLACE? - They should be locked up for LIFE!

WAKE UP PEOPLE! It's almost time to grab the pitch forks and march on Washington!

Signed - a very disgusted Randy

DOW Update

I'm sure most readers here know the DOW took a 500 point spanking today (a 4.5% hit).

What many may not know is: Currently, DOW futures for tomorrow's open are pointing DOWN for ANOTHER 130 points (currently @ 10,800) - may get worse before the night is through.

Anyway, if you remember my July post: DOW: Next Downside Support @ 10,700 , I mentioned 10,700 is a key downside support level and if we break through it, 10,200 becomes the next support - followed by support levels in the 9,000 range - my ultimate DOW prediction for 2008.

So, will the PPT be able to pull a rabbit out of their hat, or will we see 9K before year end?




Thoughts?

Randy

End of week economic reality check

The DOW had quite a rally this week -- a FED week with very few economic reports due out in the early part. Funny - this PPT routine is becoming quite typical of our new "Free Market Economy". Prior to official Fed Speak, Gold gets crushed, the dollar rebounds and stocks soar on great economic (well, less worse than we thought) news! Then the Fed makes his obligatory worthless statement "We're gonna get tough on inflation soon, we promise - as the world laughs -- knowing these Fed geldings are stuck and WILL NOT RAISE RATES!

Mark my word -- we'll see another cut before a rate hike.

Anyway, I expect the DOW to close lower on Friday than where it is today.

Why Do I think so? Good Question:

With few economic reports due early on and as a show of force for our castrated Fed gods, much of this rally was engineered by the PPT.

Now, with the August game of Fed charades over, and with them now in a better overall position (lower gold/oil, stronger dollar and higher equities markets), it's probably time to drop the crack pipes, take off the clown suits and have an economic reality check.

I expect, as several economic/financial reports come due in the week's latter half, this recent rally to turn into a sell-off as the week progresses.

Due tomorrow:
Initial Unemployment claims, Pending Home Sales and Consumer Credit

Due Friday:
Productivity and Wholesale Inventories

More Importantly:

AIG just took another Major Dump after the closing bell today: Forbes

After the closing bell Wednesday, American International Group turned in a loss of $5.4 billion, or $2.06 per share. AIG has lost more than $18 billion over the last three quarters due to investments tied to subprime mortgages.

Freddy Mac lost another $821 million -- NYT Today

The gloom over the nation’s housing market deepened on Wednesday as Freddie Mac, the big mortgage finance company, reported a gaping quarterly loss and predicted that home prices would fall further than previously projected.

“Basically, things are still bad,” said Steven D. Persky, chief executive at Dalton Investments, a $1 billion fund in Los Angeles. “Freddie Mac is telling us that nobody really knows how much worse they will get.”

Lastly:

RBS is likely to post a Major Loss on Friday -- TimesOnline

and Barclays May Fall Most in a Decade -- Bloomberg

RBS:

The international credit crunch is set to claim its biggest Scottish casualty later this week when the Royal Bank of Scotland unveils a pre-tax loss for the first half of the year that analysts believe could reach £1.7billion.

Such a loss would be the biggest in British banking history and have major consequences not only for the financial sector, but also the Scottish economy.

The results, due to be announced on Friday, will underscore how far-reaching the credit crunch, which began in the United States more than 18 months ago, has been.

Barclays:

Barclays, the U.K.'s third-biggest bank, probably will say tomorrow that net income dropped 42 percent to 1.52 billion pounds in the six months ended June 30, analysts estimate.

Barclays said that it had 4 billion pounds of collateralized debt obligations backed primarily by residential mortgages, 4.2 billion pounds of U.S. subprime loans, 4.5 billion pounds of so-called Alt-A loans, and 12.6 billion pounds of commercial mortgages. Unlike RBS, Barclays hasn't marked down the value of its 7.3 billion pounds in buyout loans. The bank said in May that the loans were ``performing.''

``Many regard Barclays's management as being in denial in terms of writedowns on toxic assets,'' said Gordon of Exane BNP Paribas.

Best regards -- and a sincere thanks to all of you who commented to my Adsense post

Randy

US Dollar Intervention

The Dollar made some gains along with equities yesterday, while commodities and metals fell.

So, can one now assume the dollar crisis is over? NOT a Chance!

Then why the uptick and how long should we expect it to last?

The strengthening dollar can likely be attributed to coordinated global dollar intervention by the central banks of the world -- to prevent a full-blown dollar rout and stave off rapidly spiraling inflationary pressures. Bernanke even stated such in his congressional testimony last week: "Dollar intervention may be justified in Disorderly Times."

In a nutshell: By supporting/manipulating the dollar, short traders are forced to cover, thus causing the dollar to rally and energy prices to fall. When used in conjunction with other instruments in the PPT arsenal (i.e. large gold and energy shorts) the effect can be pronounced.

Timesonline: Ben Bernanke highlights fight against inflation

The dollar rebounded from Tuesday's record lows as Mr Bernanke combined his own emphasis on the Fed's determination to rein-in inflation by again brandishing the threat that Washington could intervene to halt the slide in the US currency.

In a new signal of growing concern at the Fed that the dollar's rapid decline on foreign exchanges is stoking inflationary pressures by driving up America's import bills, Mr Bernanke fired a fresh warning at the markets, making clear that currency intervention remains a weapon at the disposal of the US central bank and Treasury.

“Market intervention is a policy that's been undertaken a few times. I think it's something that should be done only rarely, but there may be conditions in which markets are disorderly where some temporary action is justified,” he said.


Forbes: Time is now for intervention to prop dollar:

Intervention by the U.S. Federal Reserve, undertaken in concert with the European Central Bank and other global economic powers, could be an inflexion point for the dollar after its 6 year fall.

And with the falling dollar playing a substantial role in rising oil prices, official action to back the currency could provide relief for consumers and ease the pressure from inflation, both in the United States and globally.

It would also be a very useful and timely insurance policy against any run on the dollar should global holders of U.S. debt take fright at what may be a massive bill, and proportionally huge supply of new U.S. debt, to backstop Fannie and Freddie and sort out problems in U.S. real estate and banking.

"This is a situation crying out for intervention and leadership," said Nick Parsons, head of market strategy at nabCapital in London.

The Bush administration has long argued that the value of the dollar should be set in the free and unfettered market, though where exactly a free market can be found I am increasingly unclear.
The serial bailouts, first of Bear Stearns and now Fannie Mae and Freddie Mac, have robbed that argument of much of its moral and intellectual authority, though probably not all of its emotional appeal.

So, with that understood, how long should we expect the rally to last?

My bet is: we may see 74-75 as a rebound high for the US Dollar index, but the rally will probably end not later than August 5th... On that day, people will finally realize that Bernanke's hands are tied and can not/will not raise interest rates AT ANY TIME this year. Shortly thereafter, dollar selling will once again commence in earnest -- ultimately overtaking the efforts of our global central bank interventionists.

Bottom line: I still feel 70 will be taken out later this year.

US Dollar Index Daily Chart

US Dollar Index Weekly Chart

DOW COMMENTS

The DOW has rebounded nicely over the last week or so, but I now think it's time for another leg down. With Jobless Claims, Existing Home Sales, New Home Sales, Mich Sentiment and Durable Goods releases due later this week, I think it's likely we'll see a Friday closing number lower than today's 11,632.







Regards

Randy

Fannie and Freddy -- walking dead

I've been hammering Fannie and Freddy since my very first post in 2005 and have always suspected that they were merely walking dead, but the Gvt. couldn't allow the public to know this, so they propped up their carcass of a body just like the characters did their boss in "Weekend at Bernie's"

Well, it now looks like the cat is out of the bag, as former St. Louis Federal Reserve President William Poole said Freddie Mac and Fannie Mae are insolvent and that the government might need to step in to rescue the struggling lenders.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole said Wednesday.

In other words, he believes they're virtually bankrupt!

Fannie, Freddie Tumble on Bailout Concern

July 10 (Bloomberg) -- Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S. home loans, fell to the lowest levels in 17 years in New York trading after a former Federal Reserve president said the companies may need a government rescue.

Fannie Mae tumbled as much as 24 percent and Freddie Mac slumped as much as 34 percent in New York Stock Exchange composite trading after UBS AG analysts said in a report today that Freddie Mac's decline creates ``challenges'' for the company's plan to raise $5.5 billion

Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don't have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.

The companies, created to boost homeownership and promote market stability, own or guarantee about half the $12 trillion in U.S. home loans outstanding. In addition to those obligations, Fannie Mae has $831 billion in company bonds outstanding, while Freddie Mac has $644 billion, according to Bloomberg data.

Government Ties

Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote home buying in the U.S. The companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default.

The government will likely be forced to take over the companies because of the mortgage meltdown, Poole said.

``We know in a crisis the Federal Reserve tap would be open,'' said Poole, now a senior fellow at the Cato Institute.

The bailout of Bear Stearns Cos. by JPMorgan Chase & Co., arranged by the Fed, demonstrates the government's unwillingness to allow ``large, systemically important'' financial institutions to fail, he said. Bear Stearns collapsed after customers fled amid speculation the company faced a cash shortage.

``I worry about those institutions,'' retired Richmond Fed President Alfred Broaddus said. ``They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don't know how you do it other than extend money and the public takes the loss.''

Bottom line:

This is huge folks! If Fannie and Freddy were allowed to fail (won't be allowed), we would quickly fall into an ECONOMIC DEPRESSION (i.e. lack of new home loan credit = lack of new money circulating, destruction of debt/bond/equity markets, a complete lack of home sales/swiftly building inventories, MANY times more home loan defaults than expected and an ABSOLUTE COLLAPSE IN HOME PRICES -- compounding several times over the current banking/financial system crisis and significant economic pains that we are now experiencing).

If the GVT indeed does bail them out (likely) expect a HYPERINFLATIONARY Spiral -- followed by a depression anyway. We're talking TRILLIONS of new dollars quickly added to a bloated fiat system that is already creating new money at a near 20% annual rate -- adding explosive fuel to a raging forest fire and increasing the velocity of US Dollar decline and ultimately Dollar hegemony collapse.

Once again, the Plunge Protection Team and Gvt are stuck between a rock and a hard-place, and the days of easy fixes have long since past... We should have taken our harsh medicine after the Dot.com crash, but the Maestro (Greenspan) wanted to leave his chair on a high note. Though honored, knighted and revered around the globe, Alan Greenspan (when history is written/analyzed) will likely go down as one of the WORST Fed Chairman EVER! I hope he can sleep well at night, knowing what he hath wrought.

As an aside: for those who don't understand the word hegemony (used above), I highly suggest you read a superb Ron Paul article written back in 2006: The End of Dollar Hegemony

All the best

Randy

Breakdown

Markets tanked again today
- DOW closed down 236
- S&P 500 down 29
- NYSE down 144
- NASDAQ down 59

DOW

S&P 500

NYSE

Note: NASDAQ (below) is the only index listed here that hasn't busted through its earlier year low, but it's only a matter of time.

NASDAQ

Looking at the charts above, one would have to assume the Plunge Protection Team has a real problem on their hands. The last vestige of a propped up pillar of consumer/economic confidence is ready to tumble, and the breakdown is here.

Closing Note:

For those of you who don't know, the NASDAQ lost ~ 80% of its value between 2000-2002. Hitting a peak intraday of 5,132 reached on March 10, 2000 and an all-time low of 1,114 in October 2002. While not as bad, the S&P 500 lost ~ 50% during the same period and the DOW ~ 40%.

To combat the deflationary ills caused by collapsing equity markets, Alan Greenspan spawned a new inflationary cure -- The HOUSING BUBBLE.

Now, this new (BIGGER) bubble is popping and the contagion is spreading globally... Could this crisis spur a similar 80% meltdown in the S&P and/or DOW in the coming months/years ahead? Personally, I don't think it's out of the question...

Looking at it from a different (lighter) perspective: Even if we took the smaller 40% haircut (from the above "prior loss" examples) this time around, we'd still be looking at a DOW in the 8K range and an S&P index in the 900's.

Regardless, it looks like the markets are finally waking up to reality and the ultimate outcome does not bode well for our economy, our country, or our way of life.

Hold on to your hats, because life will soon become far more difficult for millions of Americans.

Best Regards

Randy

Look out below!

The DOW lost another 131 points and even broke through the psychological 12,000 level today. As I've stated before, keep your eyes on 11,900, 11,700 and 11,600. If we fall below 11,600 (which I certainly expect, as the PPT loses control sometime later this year -- and probably quite soon) then look out below!

DOW -- Trouble Ahead?

Tumultuous Week Ahead


DOW Daily and Weekly Charts Below





Randy

DOW Outlook and Economic Reports

The Dow Jones Industrial Average fell another 205 points today - closing at 12,083.

Since the start of trading last Friday, the DOW has lost 4% of its value and we're now only ~ 150 points away from the key downside resistance levels I warned you about last week: DOW -- Trouble Ahead?

The issue now is: we may see some additional losses later this week, as a potentially toxic mix of retail sales, jobless claims and inflation data is due for release tomorrow and Friday -- could this trigger a new selloff? Will we actually fall below key downside support? Will the Plunge Protection Team be ready and save the day once again?

Economic Reports due tomorrow:

- Import/export prices @ 08:30 EST (Consensus: 2% change)
- Jobless Claims @ 08:30 EST (Consensus: 365K)
- Retail Sales @ 08:30 EST (Consensus: .5% & .7% excluding autos)
- Business inventories @ 10:00 EST (Consensus: .3% increase in inventories)

Economic Reports due Friday:

- CPI @ 08:30 EST (Consensus: 0.5% & .2% excluding food and energy)
- Consumer Sentiment @ 10:00 EST (Consensus: reading of 59.8)

NOTE: Friday's CPI and Consumer Sentiment are biggies! Take a look at the Sentiment chart below -- last month's University of Michigan report showed U.S. consumer confidence fell to a 28-year low in May. Another grim reading on Friday could wreak havoc on the markets.

In Closing: Regardless of what the shills are saying, all is not well with our world economy and I doubt the DOW will hold up the the increasing downside pressures... Taking a quick peek as I pen this brief post -- even the Asian Markets are tanking tonight: Major World Indices .

- Shanghai is down > 3% and below 3,000
- Hang Seng is down 2.5%
- Nikkei 225 is down 2.5%
- Taiwan Weighted down 2.5%
- Straits Times down 2%

Bottom Line: We may very well see an interesting close to this week -- w/DOW possibly closing below key support levels. If it DOES break through this first resistance level, get ready for a serious fight in the days/weeks ahead, as the PPT will defend 11,700 - 11,650 with everything in their arsenal... And if that level doesn't hold, look out below!

Best regards and good night

Randy

DOW -- Trouble Ahead?

Last Dec/Jan the major US equity markets experienced significant sell offs, and the Dow nearly plunged through 11,600, but support was found, and for the next couple of months the DOW hovered slightly above the 12,000 range... Then came the month of March 08, when Bear Stearns was imploding and bad news started to pour in from every angle.

At that time, I knew the situation was grave and opined that the Plunge Protection Team (PPT) was wide awake at night, trying to find a solution -- otherwise the last leg of confidence in their "Goldilocks" economic charade would fail.

Here's my Sunday Evening, March 16th, 2008 post: Tumultuous Week Ahead

Lo and Behold, within hours of that post, opening markets around the globe began to tumble -- causing the PPT to panic and come out fighting (on a Sunday night)... With their big cannons and guns ablazing, it was announced the Fed would immediately:

Modify the Discount Window -- On March 16, 2008, the Fed further extended the term for borrowing to 90 days, and further reduced the spread to the target federal funds rate to 25 basis points.

Open the Primary Dealer Credit Facility -- The establishment of the PDCF was announced on March 16, 2008. The Board determined that unusual and exigent circumstances existed in financial markets, including a severe lack of liquidity that threatened to impair the functioning of a broad range of markets, and announced that the PDCF will be in place for at least six months and may be extended as conditions warrant.

These two new unparallelled additions would immediately join two other unprecedented actions taken earlier in the year:

- The Term Auction Facility (TAF) in Dec 07
- The Term Securities Lending Facility (TSLF) on March 11, 08

Within days, easy liquidity created through these four new monetary spigots started to calm markets, and as increasing gains were made many shills began to pronounce: "The Credit Crisis is Over".

Well, here we in June 08 and things aren't looking so well again...

With recent reports of:

- The biggest jobless increase in over two decades
- The largest housing bust since the Great Depression
- Oil/gas at an all-time high
- Contagion spreading across the banking sector (significant losses ahead)
- Recent MBIA and AMBAC downgrades

Last Friday's 400 point drop in the DOW should have been a wake-up call.

Let's look at a chart of the DOW:

Note: I'm not a chartist, but I do have a lot of common sense and believe that anyone can relate to/understand what I'm about to say.

Looking at the chart above, last Friday the DOW closed at 12,209. On the assumption more bad news will follow in the days/weeks ahead, where can one expect to see the next level of downside support and will we eventually break through it?

If you follow the chart over to March 2007, you will see that 11,939 is the next downside support level. If we break through there, it's quite likely we will also test the following downside support level-- found in Jan 08 at 11,634. Now, this 11,700-11,600 level will provide very strong downside resistance and the PPT will fight tooth and nail to prevent failure, but if we DO break through it -- look out below as automated sell signals kick in from around the Globe—potentially creating a selling panic/free-fall.

From there it's a 1,000 point drop to the next downside support level -- July 2006 @ 10,683.

Closing:

I don't expect to open in a free-fall tomorrow or the next day, but want you to be aware that we're only 300 points from breaking through key downside support levels. Once that happens (which I'm sure it will in the coming weeks) the next support level @ 11,700-11,600 becomes very vulnerable -- and if that one doesn't hold, expect all hell to break loose as the last leg of propped-up confidence in our economy gives way to unknown panic/crisis.

With that said, and expecting more bad news to roll in each and every day, I feel quite confident in stating that both of these downside support levels will eventually be broken (this year), but the real question ultimately relates to timing and the PPT -- What else do they have up their sleeves? No one yet knows, but expect a fight.

Best Regards

Randy

Economicrot.blogspot.com

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Bernanke's Next Moves

Federal Reserve Chairman Ben Bernanke this week took the unusual step of defending the US Dollar and stated:

"We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."

In layman's terms: We understand that our policy of cutting interest rates and injecting massive sums of money into our banking/financial system is causing significant dollar devaluations which is, in-turn, stoking massive inflation and future inflationary pressures. We the Fed, are on top of things and are in the process of formulating new policies to stave off these pressures, so don't bet on future rate cuts and you might even want to plan on seeing future rate increases.

HA! What a bunch of bologna... He's trapped and knows it!

With reports of the biggest jobless increase in over two decades, the largest housing bust since the Great Depression, Contagion spreading across the banking sector -- with massive writedowns to follow, recent MBIA and AMBAC downgrades, and credit crunch phase-2 ready to kick in, he is absolutely, unequivocally a caged animal with no room to move.

If he dare increase rates (he won't) our current, severely understated economic contraction will intensify and the downward sliding economic snowball, gathering momentum, will likely burst into a banking/financial system collapse.

Previously, I stated we'll likely see a 2% FFR in 08 and a 1% rate in 09. Thus far, I've been right in 08 and I still feel strongly I'll be right in 09.

As I see it, the Fed will hold five more FOMC meetings between now and the end of this year and rate announcements will be announced on the following dates:

June 25th
Aug 5th
Sept 16th
Oct 29th
Dec 16th

Baring any drop below 11,700 on the DOW between now and June 25th, I expect the fed to pause at the next FOMC meeting(no action on rates) -- If we do drop below the stated number, expect a new rate cut.

I expect Credit Crunch Phase-2 to kick in by Aug/Sept 08, and it will likely make phase-1 look like a walk in the park, so expect a cut at one of these meetings and another in October 08.

By December, semantic debate over our full-blown economic recession will be over/recession will be unquestionable and our newly elected President will demand action -- so expect another cut.

Bottom Line: Expect a 1.5% or lower FFR between now and the end of this year and a 1% or lower in 09.

Helicopter Ben's recent "strong dollar" talk is just that -- "talk", so don't expect any change from current policy.

US Dollar index going below 70 this year and inflation will intensify... His rant was all smoke and mirrors for the gullible.




Best regards

Randy

Economicrot.blogspot.com

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Interesting day

Today is my wife's birthday and we just got back from a family dinner out (did our part to stimulate the downturning LV economy tonight), so I really don't have much time to post up.

On that note, it was quite an interesting day on Wallstreet. A significant equities downturn was led by the financials once again... And the bad news was exacerbated by Treasury Secretary (and PPT leader) Paulson who added to the glum mood with a downbeat statement, saying it will be months before the problems end.

Note: For him to say such things, I imagine the looming "credit crunch phase-2" is worse than feared and he's making an attempt to prime the masses...

US STOCKS-Wall St ends lower, hammered by bank woes

NEW YORK, June 2 (Reuters) - U.S. stocks ended lower on Monday as financial shares slid on fears of more fallout from the mortgage crisis after Standard & Poor's cut debt ratings of three big securities companies and Wachovia, the fourth-largest U.S. bank, ousted its chief executive.


Morgan Stanley, Merrill, Lehman Ratings Cut by S&P

Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. declined in New York trading after Standard & Poor's lowered credit ratings for the investment banks, saying they may have to book more writedowns on devalued assets.

Morgan Stanley, the second-biggest U.S. securities firm by market value, was cut one level to A+ from AA-, S&P said today in a report. Merrill Lynch, the third-biggest, was also cut one level to A from A+, as was Lehman Brothers, the fourth-biggest. Goldman Sachs Group Inc., the largest of the group, was affirmed at AA-. The outlook on all four New York-based companies remains negative, S&P said.

The downgrades may make it harder for the banks to sell derivatives such as credit-default swaps that are tied to bonds or loans, said Brad Hintz, an analyst at Sanford C. Bernstein in New York. Single-A rated firms are less desirable as trading counterparties for fixed-income derivatives that extend longer than five years, he said.

``You'll see derivatives profitability drop off over a period of time,'' Hintz said of the three downgraded investment banks. ``We estimate somewhere around 1 percent to 1.5 percent of fixed- income revenues are at risk.''

The firms are also likely to have to post more collateral on the trades they've already made with other parties, raising their costs, Hintz said.

Collateral

In its last quarterly filing, Merrill said a one-notch downgrade of its credit rating would require it to post an additional $3.2 billion of collateral on over-the-counter derivative trades.

Morgan Stanley estimated in a regulatory filing that a single level downgrade would mean posting an extra $973 million. Lehman said a one level downgrade requires about $200 million of additional collateral.

Morgan Stanley spokeswoman Mary Claire Delaney declined to comment, as did Merrill spokeswoman Jessica Oppenheim and Lehman spokesman Mark Lane.

Morgan Stanley, Merrill and Lehman sank in New York Stock Exchange composite trading. The cost of insuring against a default on each of the companies' debt jumped initially and then retreated later in the day.

Lehman fell $2.98, or 8.1 percent, to $33.83 in NYSE composite trading, while Merrill lost $1.30, or 3 percent, to $42.62. Morgan Stanley dropped $1.13, or 2.6 percent, to $43.10. Goldman declined $4.07, or 2.3 percent, at $172.34.

Writedowns

The S&P rating ``actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,'' Tanya Azarchs, an S&P analyst, said today.

S&P suggested the banks may have to sell more stock to help offset the charges, according to Hintz. The report said financial institutions have raised too much capital in the form of so-called hybrid securities, exceeding S&P's limits on such instruments.

``The risk of further equity dilution probably has gone up,'' Hintz said.

The biggest banks and securities firms have booked about $387 billion of writedowns and credit losses since the beginning of last year, as the collapse of the subprime mortgage market prompted a contraction in credit markets worldwide. So far, the firms have raised about $270 billion of capital.

`Negative Outlooks'

S&P revised its outlook on Bank of America Corp. and JPMorgan Chase & Co. to negative. Citigroup Inc. was taken off review for a downgrade and given a negative outlook, while Wachovia Corp. was placed on review for a downgrade.

Wachovia shares fell to the lowest level since July 1995 after the bank ousted Chief Executive Officer Kennedy Thompson today, signaling the company may report a second-quarter loss.

``The outlooks on the large financial institutions sector in the U.S. are now predominantly negative,'' S&P said in today's statement.

Best regards
Randy

OPEC and the Dollar Peg

As I've pointed out in the past, the 1974 US-Saudi Arabian Joint Commission on Economic Cooperation established the Dollar as the sole Monetary Instrument for the purchase of oil through OPEC and this action reaffirmed the US Dollar as the World's reserve currency after the years of currency turmoil brought about by Nixon yanking the gold-dollar peg in 1971.

This agreement has allowed the US Dollar to flourish for many years, as countries who needed oil had to earn or borrow dollars to buy oil and trillions of these Petrodollars were eventually recycled through New York and London banks -- allowing for the creation of new credit, holding dollar interest rates lower than they would have been otherwise, and helping to expand our credit/debt bubble economy.

I have also pointed out that: (with the exception of IRAN and mainly due to inflation pressures internal to their domestic economies: 1) Vietnam removed their dollar peg; 2) IRAN (an OPEC Nation) no longer accepts US Dollars for oil and opened their own Oil Bourse this year; 3) Kuwait (an OPEC Nation) has pulled their dollar peg; 3) Venezuela (an OPEC Nation) has been very vocal about moving to price oil in other currencies.

Well, the OPEC rhetoric is heating up:

U.A.E., Qatar May Drop Dollar Pegs Within Months

May 26 (Bloomberg) -- The United Arab Emirates and Qatar could abandon their currency pegs to the U.S. dollar in favor of a basket of currencies within months, and Saudi Arabia may follow the move late next year, The National said, citing a Merrill Lynch & Co. report.

Gulf states have been under pressure to drop their dollar pegs after inflation hit record levels. Kuwait dropped its currency's peg to the dollar last May, but others have all kept their links, citing the need to keep currencies fixed until they form a monetary union in 2010, and the limited inflationary impact of the weak dollar.

The heat is on, so today Henry Paulson, US Treasury Secretary and leader of the US Plunge Protection Team, met with Saudi's Finance minister to reiterate his typical B.S. propaganda about supporting a "Strong Dollar" and publicly stated that any dollar-peg transition would be a "sovereign" decision... Yea right! I wonder what is stated behind closed doors?

Paulson says strong dollar in US interest, Saudi peg 'sovereign decision' UPDATE

JEDDAH Saudi Arabia - US Treasury Secretary Henry Paulson reiterated his support for a strong dollar today after meeting with Saudi Arabia's finance minister, but he also said the decision on whether to maintain the Saudi currency's dollar peg is entirely up to that country's government.

Asked about increasing talk that Saudi Arabia and other Persian Gulf countries might decide to remove their currency pegs to the dollar, given the effects of its plunge, Paulson signalled the US would not try to deter them.

'That is a sovereign decision,' Paulson said, adding, 'the dollar peg I think has served this country and this region well.'

On the same question, Saudi Arabia's finance minister Ibrahim al-Assaf said 'We have no intention of de-pegging or revaluation.'

Well folks, as I see it, it's only a matter of time. We have very few barganing chips left and our geopolitical goodwill is completely shot. When the dollar peg is eventually removed and then when oil is priced against a "basket" of currencies vs just the dollar, we'll be praying for the God-send of $4 gal gas.

Hold on to your hats!

Randy

Thursday's Economic News Roundup

The Major US indices closed in the green today on good news from Ford and an unexpected drop in US Jobless claims:

Wall Street rallied Thursday after the government's jobless claims data and Ford Motor Co.'s first-quarter results helped reinject some optimism about the economy into the market.

The Dow Jones industrial rose more than 80 points as investors focused on the Labor Department data showing weekly unemployment claims dropped and word that Ford had a $100 million profit in the first quarter.

Investors were also able to set aside any concerns about another drop in factory orders for big-ticket manufactured goods and weak forecasts from Amazon.com Inc. and Starbucks Corp.

OK, I'll give the indices credit for this, but what of other news today?


New home sales plunge to lowest level in 16 1/2 years, prices drop by largest amount in 38 years

Sales of new homes plunged in March to the slowest pace in 16 1/2 years as a two-year housing downturn extended into the start of another spring sales season. The median price of a new home in March compared to a year ago fell at the fastest clip in 38 years.

Sales of new homes dropped by 8.5 percent last month to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991, the Commerce Department reported Thursday.

The median price of a home sold in March dropped by 13.3 percent compared with March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.


As financial markets grow increasingly worried about inflation pressures, Freddie Mac reports that fixed-rate mortgages move higher--Rates on 30-year mortgages now top 6%

"Average rates on mortgages increased across the board this last week as the most recent economic data raised inflationary concerns in the capital markets," said Frank Nothaft, Freddie Mac's chief economist.

Fueling those concerns was a bigger-than-expected 1.1% jump in wholesale prices and a renewed surge in energy costs, which have pushed gasoline and crude oil prices to record levels.


US Airways, following Delta & Northwest, Reports Loss

US Airways Group Inc. said Thursday it swung to a loss in the first quarter, punished like other airlines by the rising cost of jet fuel.

US Airways said it lost $236 million, or $2.56 a share, in the January-March period, compared with a profit of $66 million, or 70 cents a share, a year earlier. Excluding special items, the net loss was $239 million, or $2.60 a share.

US Airways' earnings report came a day after Northwest Airlines Corp. and Delta Air Lines Inc. reported combined losses of more than $10 billion. Most of those losses came on write-downs to reflect a decline in market value.


Motorola 1st-qtr loss widens as mobile-device sales plunge and it forecasts 2nd-qtr loss

Struggling cell phone maker Motorola Inc. disappointed investors Thursday when it posted a wider first-quarter loss and failed to meet revenue forecasts.

The suburban Chicago company, which is in the midst of a massive reorganization that includes splitting itself into two publicly traded companies, said it lost $194 million, or 9 cents per share, for the quarter that ended March 31.

Sales fell about 21 percent to $7.45 billion, down from $9.43 billion a year ago.


Microsoft reports 11 pct profit drop

Microsoft Corp.'s third-quarter profit fell 11 percent, the software maker reported Thursday as executives renewed their warning that they may go hostile or walk away from their $44 billion-plus offer for Yahoo Inc. if Yahoo doesn't agree to a deal by Saturday

Sales of Windows software were not as strong as Microsoft or analysts had predicted in the quarter, despite Microsoft's comments that sales of Vista licenses -- now at 140 million, up from the 100 million mark reached in January -- are on track.

Revenue in that division fell 24 percent to $4.02 billion.


American Express profit falls 6%; New York-based credit-card company slips as U.S. cardholders struggle to make their payments.

American Express Co.'s first-quarter profit slipped 6% as the credit-card lender saw more U.S. cardholders fail to make their payments, it said Thursday.

Like other lenders, the New York-based company has been writing off more loans as unpaid as U.S. borrowers struggle with slumping home prices, rising costs, and a less certain job market.
The company's total provisions for credit losses amounted to $1.27 billion, a 48% increase from the first quarter of 2007.

U.S. card services profit fell 19% to $523 million in the first quarter compared with the same period a year earlier, as profit from international card services rose 30% to $133 million.

The writeoff rate in U.S. card services, including both on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans, increased to 5.3% from 3.7% a year ago - faster than the company anticipated.


United hikes fares 3% to 5%, blaming fuel costs; The second-largest U.S. carrier increases almost all of its domestic airfares for the third time in two weeks.

United Airlines, the second-largest U.S. carrier, raised nearly all its domestic airfares by 3% to 5% Thursday as it struggles to cope with soaring fuel costs.

The widespread increase is the third in a row initiated by United in just over two weeks, and will likely entice other carriers to follow suit. The Chicago-based carrier's last two attempts were quickly matched by competitors and remain in place in many markets.

The move comes just two days after Delta Air Lines Inc. Chief Executive Richard Anderson said domestic carriers need to raise tickets 15% to 20% just to break even at existing fuel prices.

"This is the most challenging financial period in the history of the industry," said John Heimlich, chief economist of the Air Transport Association. "Just at the same time we have this unprecedented surge in jet fuel prices with no end in sight, we're bumping up against a weakening economy."


My Thoughts:

Maybe I'm biased, but based on the news reports above, it certainly doesn't look like our economy is getting any better... Could the PPT and pundits possibly be trying to lull the cattle into a false sense of security while leading them to the slaughterhouse? Oh well, until the sheeple (cattle) pull their heads out of the sand there is really nothing I can do about it...


OK, last but certainly not least, here is a very good opinion article that I thought you would enjoy:

The U.S. Dollar has Been the Gold Bug’s Best Friend – Until the “Amero” Debuts

As all gold bugs know, gold’s historic rise since 2001 has largely been attributed to the dilution of the U.S. dollar. Trade deficits, government overspending and the more recent sub-prime mortgage debacle have all helped deflate the greenback while driving up the price of gold.

However, what would happen if the U.S. dollar just disappeared? How would gold and other hard assets be valued then?

This week the three NAFTA amigos, President George Bush, Prime Minister of Canada Stephan Harper and Mexican President Felip Calderon met to ram new polices down our throats which will impact gold and other commodity prices going forward.

The reopening of the North American Free Trade Agreement is the first strategic move toward a North American Union that will create a new currency to compete with the Euro.

On Tuesday, the U.S. dollar sank yet again with the Euro breaching the psychologically significant $1.60 mark for the first time.

It’s only a matter of time before the U.S. dollar collapses to the point of no return internationally. With the Fed unable to manage the slide with higher interest rates due to the economic slowdown in the U.S., the three amigos are setting up the chess pieces for the inevitable next move: the creation of a North American currency, the “Amero.”

The Hallmark of Bush’s presidency could very well be the creation of the Amero, the perfect solution and savior to the failing U.S. dollar. Whether it’s Bush or the next president, at some point in the not too distant future the dollar will be abandoned and a new game will begin.

International trade has already started to price commodities in Euros as foreign governments holding dollars have lost their shirts while holding Euros has increased their buying power.

The Euro was introduced with the same degree of stealth such that the citizens of Europe had little choice but to adopt it.

Some thought a European union was an impossible dream but now they have 27 nations under its authority with more members waiting in the wings.

The U.S. is already facing economic hardship which will only get worse. The Amero will be introduced to the American public as the administrations solution to recover from the current financial mess.

In Canada, the Canadian dollar has been trading at close to par for several months. Canadian politicians can easily sell the idea of the Amero by simply making promises of cheaper gas prices (Americans pay amongst the lowest prices in the western world.) Plus many Canadians who live near the border travel to the U.S. for major shopping binges buying assortment of much cheaper goods from dairy products, used cars, electronics and clothing. If they can get the same prices at home, the NAU will be an easy sell.

As far as the Mexicans are concerned well, doesn’t nearly everyone already speak Spanish from California to Florida?

In the interim, gold’s still got a long way to go so stay tuned. However be aware that the Amero will put the brakes on gold’s march as the illusion of strength and power will put confidence into the world’s latest fiat money system. Also know that in the history of mankind, fiat money systems have always failed. The U.S. dollar is the latest victim. Bill Ridley: jameswinston.com/


Best regards

Randy

Is the Credit Crunch Over?

The recent stock market & dollar rally, coupled with the massive commodity/metals sell-off, has led many to believe that the Fed & Plunge Protection Team (PPT) were able to sucessfully restore liquid credit markets and the turmoil is now over.


My Thoughts:

Aside from unprecedented/wide-scale PPT market manipulation, and a mere slowing of the credit implosion helped by new Fed lending apparatuses, nothing has been resolved. Homes are still foreclosing in record numbers, legislators are now calling for new regulations to prevent future “similar” banking/credit issues, lending standards are getting tighter, financial institutions still have no market (aside from the Fed monetization window) for their gargantuan off-balance sheet/tier-III toxic waste piles, and American consumers (trying to cope with huge inflation waves, combined with a collapsing wealth-effect brought about by falling home values and lack of available “new” credit) are starting to pull back on discretionary spending. Note: 70% of the US economy is consumer spending

Bottom line: Recent sentiment change created by Financial Wizard market manipulation is all smoke and mirrors – the PPT is trying to re-establish faith and trust in markets (and a currency) that are ready to implode.


What manipulation am I talking about?

Let’s look at the recent precious metals sell-off: Gold and Silver took their worst beating in years during the recent commodities smack-down. How in the world could these metals get crushed so badly when dealers are overwhelmed with orders and can’t get or keep enough products on their shelves?

Must see this link (and pictures below) to understand what I’m talking about: Silver Shortage: 19 dealers reported "Sold Out"

Bullion Direct

Kitco

Additionally, I received this message via email from APMX just yesterday:

Due to the OVERWHELMING demand for precious metals, our online ordering system has been unable to keep up with our customers’ needs. We have had to disable the APMEX ordering system to allow us ample time to upgrade our site to accommodate the increased demand. We apologize for this temporary problem. In the mean time, we will be accepting telephone orders for the following items only as we have them available:1 ounce Gold American Eagles1 ounce Gold Canadian Maple Leafs1 Ounce Gold Krugerrands100 oz Silver BarsMisc Generic .999 Fine Silver90% Coin SilverDuring this time, we will have a minimum order of $5,000. We regret we have had to make this drastic change to our ordering process and rest assured, we are working expeditiously to correct the problem. As soon as we have our new site up and running, we will notify you via e-mail when you can again place orders online.

Or how about this one:

High Demand for 2008 Silver Maple Leafs: The Royal Canadian Mint has found itself unable to fully meet the unprecedented demand for silver Maple Leaf coins with its current supply, and has temporarily suspended shipments. This situation is temporary until more of this fine bullion product can be struck and shipped. Because many of our customers want to purchase this product at today's prices, Northwest Territorial Mint will accept orders now for shipment when the product becomes available, which we expect will exceed 30 days. If the wait for product proves too lengthy, we reserve the right to substitute a similar silver product.

OK, if there is such a supply shortage, why did PM prices crash this last week?

It was a PPT manipulated paper smack-down (through engineered margin call selling of futures, options, etc – to fry the longs, destroy prices and signal an end to the commodity boom) that has changed none of the underlying precious metals supply/demand/inflation-hedge/flight-to safety fundamentals.

But it did provide a great buying opportunity – could be a very good time to back up the truck and load up w/physical…

Take a look at who is taking advantage of this smack-down:

Asia jewellers on buying spree as price sinks-- It probably won’t be too long before PM prices regain their footing..

Jewellers across Asia rushed to buy gold on Thursday after prices tumbled more than $100 an ounce since spiking to a record above $1,000 an ounce this week, pushing up premiums in key bullion trading centres. Gold fell more than 2 percent to hit a 1-month low of $920.30 an ounce as funds sold bullion after pushing up the price to a lifetime high of $1,030.80 on Monday.


Superb comment from a reader at a PM blog I routinely visit -- summarizes the situation perfectly: Somebody took advantage of a short trading week to slam PMs - on options expiration week (saving the shorts' shorts!) - and by the same token make a "double-top" appear out of the blue - to signal "an end to the commodities bull" and "an end to the bearish dollar" - based on NO REAL PHYSICAL TRADING - just "PAPER"...

With our manipulation discussion out of the way, what about the credit crisis being resolved?

Bloomberg Today:

Goldman, Lehman Rating Outlook Cut to Negative by S&P (Update3)

March 21 (Bloomberg) -- Goldman Sachs Group Inc., the biggest U.S. securities firm, and smaller rival Lehman Brothers Holdings Inc. had their credit-rating outlook cut to negative by Standard & Poor's, which said Wall Street banks' profits may fall as much as 30 percent in the coming year.

``Our current expectation is that net revenue could decline'' at least 20 percent for independent securities firms, S&P said in a statement today.

Or this one:

Big U.S. finance company faces credit crisis, and shares fall

The crisis in the credit markets is threatening to engulf one of the largest commercial finance companies in the United States.

The CIT Group, a century-old company that lends money to small businesses and midsize corporations, drew on $7.3 billion of emergency bank credit lines on Thursday, causing its shares and bonds to plummet.

CIT, whose businesses range from making student loans to financing purchases of airplanes and railroad cars, announced that it would try to sell some assets or businesses to raise cash and repay its debts. Analysts said the tightening credit squeeze could drive the entire company into the arms of a bidder.

The developments at CIT suggest that the credit troubles that felled Bear Stearns this week continue to spread, despite efforts by the Federal Reserve to encourage banks to lend to other financial companies.

Another:

Credit crisis puts vise grip on leveraged companies

There are 93 US companies at risk of defaulting on $53 billion in debts, a new report shows, marking a 50 percent jump since last June, when the credit crisis started. Many of these debt-laden companies were involved in giant leveraged buyouts.

Standard & Poor’s ‘‘weakest links’’ report is forecasting that 75 US companies will default on their debts in the next 12 months. Of the 93 companies at risk, more than half were involved in takeovers by big-name private equity firms, including Boston’s Thomas H. Lee Partners, Bain Capital, and J.W. Childs Associates.

The sectors worst hit are media and entertainment, and consumer and retail. Many of the names are familiar to consumers, like Uno Restaurant Holdings Corp., the Boston-based pizza restaurant group; Linens ‘n Things Inc., the home goods chain; and Univision Communications Inc., the Spanish-language television and radio company.

‘‘This is just the beginning,’’ said Diane Vazza, managing director and head of Global Fixed Income Research at Standard and Poor’s in New York. For companies struggling with debt payments, she said, ‘‘There’s no way in a slowing economy, potentially a recessionary economy, to grow out of that.’’

I could go on with additional links to illustrate the depths of this credit crisis, but I think you get the point—the recent smoke and mirrors caused by PPT market manipulation has solved nothing. Our banking system is still insolvent and the fed is pumping money into a bottomless pit.

BOTTOM LINE: A one or two day turn around for stocks and commodities means little.

NOTHING, absolutely nothing regarding underlying fundamentals has changed from last week, except the titanic has taken on a bit more water, and the captain is desperately trying to reassure us by saying -- "it's only a small leak and lifeboats (PM's) won't be needed."

Go ahead and trust the captain -- but at your own peril...

OK, my doom and gloom is out of the way -- how about some closing funnies?

Regards and happy easter to all!

Randy

Nefarious Market Manipulation

As I wrote in my Sunday post: Tumultuous Week Ahead, the Plunge Protection Team (PPT) certainly has been busy.

Yesterday, the team bailed out/monetized Bear Stearns debts with $30 Billion of public money (and I'm sure we'll see plenty more where that came from).

Today, not to be outdone by the previous day’s activities, the nefarious market manipulators (PPT) pulled out all stops and their orchestrated manipulation operation was synched up perfectly to the FOMC announcement -- and was so extreme/blatant (across all spectrums), that I nearly fell ill from disgust.

Specific Examples of their Manipulation:

FOMC Rate announcement took place today at 2:15PM EST and the cut was 75bp.

To anyone with a working brain, the results of a significant rate cut like this should be dollar negative and gold positive (right?) Well look at the charts below—especially after the FOMC announcement

US DOLLAR INDEX CHART—Note the Dollar’s increase after 2:15 PM

SPOT GOLD—Note the fall in gold price after 2:15 PM (down > $20)



How about the DOW sell-off immediately after the 2:15 announcement (investors were disappointed with a 75bp cut—they expected 1%) and the PPT rescue, and huge rally later in the day?


S&P Chart below is nearly identical to the DOW above


We have a “free market" economy/society?

Come on, cut us a break — We may act like sheep sometimes, but we're not stupid, and your manipulation operation was obvious to anyone with a heartbeat.


I guess the NY Times was spot on with their article yesterday:


Fed Acts to Rescue Financial Markets. (Snippets below)

The New York Fed, which runs the Fed’s daily market operation and has long been the Federal Reserve’s primary channel for dealing with Wall Street...

In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as “primary dealers” and trade Treasury securities directly with the Fed.

Much like a $200 billion loan program the Fed announced last Tuesday, this program will essentially allow the government to hold as collateral a wide variety of investments that include hard-to-sell securities backed by mortgages (My 2 cents--Worthless Toxic Waste). But Fed officials told reporters on Sunday night that the new program would have no limit on the amount of money that can be borrowed. (Did he just say “NO LIMIT”???)

“The Federal Reserve, in close consultation with the Treasury, is working to promote liquid, well-functioning financial markets, which are essential for economic growth,” he said. “These steps will provide financial institutions with greater assurance of access to funds.”

I guess the next question is: Will their incessant nefarious manipulation schemes work? Will they be able to re-instill confidence and liquid, well-functioning financial markets?

My thoughts are: They will not fix a thing, but will merely prolong the inevitable agony...

But for today, Bernanke's Prayers were answered...

Please post up your thoughts/comments on the issue.

best regards
Randy

Tumultuous Week Ahead

I imagine the Plunge Protection Team (PPT member pictures below) put in quite a bit of overtime this weekend -- in an attempt to repair the damage caused by Bear Stearns, before the contagion spreads throughout the financial world and causes irreversible damage.

Treasury Secretary Paulson (Chairman of the PPT)

Ben Bernanke (Chairman of the Board, Federal Reserve System)

Christopher Cox (Chairman of the Securities and Exchange Commission)

Walter Lukken (Chairman of the Commodity Futures Trading Commission)

Well today, Secretary Paulson let it be known to the world that they are worried, and stated they will stop at nothing to calm the markets:

Treasury Secretary Paulson Says Administration Will Act to Calm Chaotic Economy

WASHINGTON (AP) -- The Bush administration will "do what its takes" to stabilize chaotic markets and minimize the economic damage, Treasury Secretary Henry Paulson said Sunday after a tumultuous week capped by the government rescue of a teetering investment bank.

All eyes now are on Wall Street as leading financial advisers prepared for a Monday meeting with President Bush and the Federal Reserve weighs another deep interest rate cut Tuesday to stem even more deterioration.

The treasury chief sidestepped questions about what would have happened if the Fed had not ridden to the rescue, whether other firms are on shaky ground and the possibility of additional bailouts similar to Bear Stearns'.

At the same time, however, Paulson sought to send a calming message that the administration is on top of the turbulent situation. "The government is prepared to do what it takes to maintain the stability of our financial system," he said. "That's our priority


As if the Bear Stearns problem wasn't enough to deal with this weekend, it now looks as if Goldman Sachs will report huge write-downs early next week.

As the former chairman and chief executive of Goldman Sachs, I imagine the PPT leader (Secretary Paulson) is monitoring the situation very closely…

Goldman Sachs to reveal $3bn hit

Goldman Sachs, Wall Street's most powerful investment bank, will this week announce asset writedowns worth about $3bn (£1.5bn), its biggest jolt to date from the crisis threatening to engulf the world's financial markets.

Goldman, which has largely thrived amid the turmoil elsewhere on Wall Street, is expected to report a fall in first-quarter earnings of about 50 per cent. The write-down will underline how the financial turbulence is now affecting even the most stellar performers.


With this said, I believe we will likely see Wall Street take an “E-Ticket” ride next week – potentially one of the wildest rides ever.

You see, the indexes are so incredibly close to extreme downside support levels that the PPT will fight tooth and nail to prevent a break below support.

If we do happen to fall below key support—automated sell signals will kick in from around the Globe—potentially creating a selling panic/free-fall. Example: Next downside support on the DOW is 11,630 (S&P and Nasdaq look very similar)

With that said, aside from the downside pressure caused by mounting credit problems and looming (additional) write-downs, we can also expect to see numerous Economic reports released next week (I expect very few to be positive) :

Monday
- NY Empire State Index
- Net Foreign Purchases
- Industrial Production
- Capacity Utilization

Tuesday
- Housing Starts
- Building Permits
- PPI
- Core PPI
- FOMC Policy Statement (likely to see a 100bp cut)

Wednesday
- Crude Inventories

Thursday
- Initial Jobless Claims
- Leading Indicators
- Philadelphia Fed


Additionally, it was only a mere 6 months ago that Congress approved a debt ceiling increase for our country (increased ceiling from $9T to $9.8T).

Well, with only $400B to go (see debt clock below) and plenty of bailouts/monetization schemes ahead, it now looks like our inept congressional leaders are once again looking to raise the allowable debt limit.

The Gross National Debt

If passed, this new $10.2 Trillion cap should hold us to ~ Jan 09, but what then?

Why don’t we just raise it to $100 Trillion and be done with it for a few years? Are they scared they might send the wrong signal in doing so?

Come-on, they aren’t fooling anyone… The hole is already far too deep and there are only 2 ways out of this mess: #1) Default or #2) Hyperinflation… I think we all know which route was selected...

House seeks debt limit increase to $10.2 trillion

WASHINGTON (Reuters) - The government's debt limit would be raised to $10.2 trillion under a budget plan for next year approved by the U.S. House of Representatives.

The House's fiscal 2009 budget, which passed on Thursday, would increase U.S. borrowing authority by $385 billion from the current limit of $9.815 trillion, according to the House Budget Committee

Congress last approved an increase in Washington's borrowing authority last September, increasing the credit limit by $850 billion.

Some lawmakers recently have estimated that the Treasury Department could bump up against the current $9.815 trillion limit either shortly after November presidential and congressional elections or early next year, depending on revenues and economic performance.

Lastly, allow me to share with you some snippets from a fantastic Christopher Laird article (from http://www.prudentsquirrel.com/), as Mr. Laird understands the current situation far better than most.

Gold Says That Central Banks Fail To Stop World Deleveraging

Right now, we are looking at the precipice of a total world financial collapse. When the stock markets finally let go, people will wake up to the reality of world financial bankruptcy. Millions of people will lose much of their retirement savings, in a super world stock crash, and you will again see stories about people refusing to open their 401k statements because they don’t want to see how far down they are. That’s what happened right after the Tech crash. Well, think of that episode as merely a taste of what is to come.

I am not exaggerating. To date, the US and EU central banks have put up an astounding $2.5 trillion worth of money to their respective banks and bond markets. They are doing this to prevent a total banking collapse. So far, they are barely staving off a massive wave of bank failures world wide, but particularly in the US and the EU region.

Unfortunately, the ones really on the hook for all this coming market collapse will be the big retirement funds, as they are the ones invested in all these bubbly world asset and financial markets. That shoe will drop.

Bond and securitized debt chaos

We are not going to detail the many stories about how the bond and credit markets are collapsing. But, suffice it to say that many huge credit markets are literally frozen. Whether it’s the mortgage derivative securities, a $3 trillion plus market, or the US GSE markets, something like $ 7 trillion in size (this is Fannie and Freddie and such), or municipal bond markets, $10 or more trillion, and if you can believe this, or even the US treasury secondary market (already existing US T bonds that are sold between investors), these credit markets are freezing up in a big way.

Securitized debt markets new

Just to make a comment on this, the securitized debt market is fairly new. This is where large investors bought big packages of mortgages, or whatever kind of debt you can imagine like credit cards or student loans, that were securitized and sold off. There are many types of these, like CDOs, MBS, SIVs, etc. (CDO – Collateralized Debt Obligations, MBS – Mortgage Backed Securities, SIVs – Structured Investment Vehicles).

This type of lending became a standard in the last ten years, and has effectively absorbed the entire world lending market for everything from corporate bonds to municipal bonds to credit cards to mortgages.

Being a new and very complicated market, and utterly gigantic, the treasuries and central banks have stated that they don’t understand them well enough to try and solve all the problems. The Fed, the ECB, and the BIS have all commented that they don’t understand this new securitized world debt market that has taken over all credit worldwide. This is not a good thing – to put it mildly.

What I am trying to say is that this entire new, huge, world credit apparatus is now imploding.

Gold says central banks are failing this time

Gold has risen in tandem with the credit crisis because the central banks are falling behind the world credit deleveraging since August. If the gold markets felt that the central banks had a handle on the credit crisis and world financial meltdown, ie that cutting rates would work to stop financial deleveraging and economic contraction, then gold would not rise as much.

This time, gold is clearly giving a verdict that Central Banks are failing to reflate a massive world deleveraging, that markets are going to unwind no matter what the CBs attempt to do.
If central banks fail to reflate credit and financial markets, then the only alternative for world governments is big deficits. More programs to bail out banks, more central bank $ trillions to try to stem the losses...Effectively, more debasement of world currencies.

If central banks could succeed in stopping the world deleveraging, and stop the massive financial hemorrhaging on every consumer’s balance sheet, every financial institution’s balance sheets, then gold would not rise as much as it has. If gold expected things to normalize, and gold expected that central banks could escape outright monetization of problem markets this time, gold would not be rising as much as it is now. Gold is up 50% since August, when the credit crisis and world deleveraging began.

Clearly, gold has decided that central banks have lost control of the situation, and the only alternative is more interest rate cuts, which makes borrowing cheaper and is economically stimulative, but lowers the value of currencies. On top of interest rate cuts, central banks are now doing outright bailouts, which also devalue currencies. Outright bailouts are monetization.

World economy credit driven

The trouble is, none of these central bank efforts seem to be working. New big credit markets are freezing up each week. The already frozen ones are not recovering either. Given the fact that our world economy is primarily credit driven, what do you think that means for the next several years for the world economy? I’ll let you answer that yourself.

What is happening in general is that financial and asset markets are deleveraging. The general world economic situation can be regarded this way, as deleveraging, and it won’t be a bad oversimplification. All this borrowing that went into bidding up world financial and asset markets is now going to be unwound. I read a banker’s comment around September that ‘The credit unwinding will not be denied.’

That appears to be exactly what is happening.

USD, Yen, Euro, gold

If you agree with this, then what is the prognosis going forward for the Yen, Euro, and USD? And thusly for gold?

In a nutshell, the central banks will attempt to stop the deleveraging. They have failed so far, and will continue to fail. As the economic contraction worldwide gets more and more painful, they will make more big efforts to stop the deleveraging that ‘will not be denied.’

At some point, I expect one of the central banks among the ECB or BOJ to give up on the reflation efforts (to counteract the deleveraging.) At some point, they will realize that the efforts to stop the deleveraging is futile, and only adding to public debt, and just making things worse.
At that point, everything just finishes unwinding rapidly. It will be very very scary for everyone and every country. The implications are really rather staggering.

Which is why the central banks are fighting this deleveraging as hard as they are now. In fact, the Fed would have cut interest rates faster, but they risk cutting the ground from the USD. Their hands are tied to a significant degree.

The ECB will be forced to cut this year, otherwise the Euro continues its painful strengthening. The Fed has basically no choice but to continue cutting. The alternative would be collapsing stock markets. That will likely happen anyway.

Maxed out this time

Basically, the only solution to massive unwinding of credit, theoretically, is to get borrowing and economic activity to start growing again. That way, world consumers would then start buying everything and, if the economies recover, then the present leverage out now can be carried forward.

But that is not happening, is it?

Why is it not happening? Why are lower interest rates failing to restart things? Because, this time, unlike 2001, people cannot borrow any more. They have already borrowed all they can. This time, cutting interest rates will not work to revive economies. The only other option is government spending, and or using currencies to stimulate things. Using currencies to keep things going will fail because the deleveraging worldwide is way too vast.

If cutting interest rates will not work to revive economies this time, then the deleveraging will continue relentlessly. It is that simple.

And, why are the bond markets freezing, and such? Because lenders of all types, who bought all the securitized debt, now realize that the present levels of debt in every sector, public and private, cannot be kept up. So, then, why do new lending? Everybody is maxed out. The reason for the collapse of the credit markets is also that simple.

The only thing standing in the way of a total world financial collapse right now is all this massive emergency lending by central banks to financial institutions. That means that, when enough big investors realize there will be no economic recovery from cutting interest rates this time, the stock markets will finally collapse big. I expect this to happen sometime this year, election or no election. The problems are just too big.

For the full article, please click link: Gold Says That Central Banks Fail To Stop World Deleveraging


Bottom Line: Things are going to get much worse before they get better and this upcoming week could be the beginning of “the much worse to come”…

As I pen this message, World markets are starting to open with downward pressure (due to ongoing credit turmoil), while the dollar continues its slide into the abyss. Meanwhile, Gold/Silver are up almost ~ 1%.

Hold on to your hats!

Randy