Friday, November 27, 2009

Sand for sale

Dubai was all over the news over its inability to make the mortgage payments on its showpiece development to the tune of 60 billion USD. The resulting hubbub pushed world markets down with fears that this could start an avalanche of bank failures.
After all if a country that literally sits on a pool of money can’t pay, who can?

Compared to the US crash this is chicken feed but it is of course it's just the tip of the iceberg. The Fed has been pumping tens of trillions of Dollars into the world economy over the past few years in order to keep the Wall Street elite in business even though they do nothing constructive. Indeed they had existed for many years by shredding the real economy in the US and have simply run out of raw meat. Now they are dragging down the rest of the world economy by selling investment vehicles that amount to Ponzi schemes that they inflate until they burst.

The entire world is crisscrossed with dodgey investment schemes put together like a cheap sweater. Will Dubai be the loose thread that unravels it all? Probably not, it is relatively small but it will expose even more loose threads. Sri Lanka purchased 10 tons of gold the other day from the IMF and other countries have been buying up gold in order to get away from the USD. Afghanistan is rumored to have a huge gold mining potential so don’t plan on us leaving there anytime soon. China has put a high priority on gold mining and has over a thousand tons on hand including a hundred tons quietly purchased in recent months.

There is simply no predicting exactly what will happen except that things will be volatile and for many tragic. Economists talk about the paradox of how if consumers behave conservatively that they drive down the economy further. Since nothing has been done to reform the underlying corruption, there is no point in the consumer doing anything "for the economy".

Wednesday, November 25, 2009

Eaten by the Bear

Fears that the USD would strengthen and cause the worldwide market bubble to burst came to naught as the USD met a grizzly end early today. The Dollar was surging early on comments by the Fed Chairman Ben Bernanke that the Fed was committed to a strong Dollar. This didn’t last long as the Dollar was dragged out into the Canadian forest and eaten by a bear. This was the result of Russia announcing that it will be dumping an unspecified amount of its 400 billion in USD reserves in favor of the Canadian Dollar.

The CanD jumped up about a nickel on the news and the Dollar plunged to a new low against gold and other metals. It also fell to a sixteen month low against the Euro but keep in mind this is also a paper currency and not immune to its own collapse given the damage that Wall Street has done to the world economy.

Unemployment claims dropped last week but the Fed Chairman made it clear that unemployment will remain high. Good news for capitalists as they can continue to drive down wages. Bad news for anybody in the real economy. It is expected that there will be a 140,000 jobs lost on the next monthly report. This is a smaller number than we’ve been seeing if it is true but by no means good news.

We need 125,000 new jobs per month just to keep up with population growth. So even if the government numbers are accurate, we are still losing more than a quarter million jobs every month and they are just plain gone. To put this in real terms this is like losing every job in a good sized American city each month. This damage will catch up with us soon, no matter how big the bonuses on Wall Street.

Weakening the Dollar is a back door way of putting tariffs on imports and eliminating the debt. Germany did this to pay off its WWI reparations and it is a risky game. Fascists like Prescott Bush have a way of inserting themselves into these schemes and they can produce unforeseen consequences.

Monday, November 23, 2009

Mutton, chicken and canned goods

The stock market was up today, supposedly because home sales were up 10% in October, but a third of the sales were first time buyers getting government subsidies. Since buyers and sellers were all expecting the program to end, it is likely just a temporary spike. The real reason the markets are up of course is the cheap Dollar policy. The Fed is basically giving money to the big banks at a loss and they have so much money that they are simply driving the market like a flock of sheep. (mutton anyone?)

Germany is warning the US about creating market bubbles, echoing China’s fears. Germany is despite paying union wages and benefits to everybody , Germany is the world’s largest exporter of manufactured goods with twice the volume of China. They don’t like the game of chicken that Obama is playing with China.

Since March, the Euro has jumped more than 18 per cent against the dollar. At the same time risky assets have sky rocketed, the S&P 500 is up more than 60 per cent and a barrel of oil up 125 per cent to around $76 and has been higher. Long term oil futures have been around a $100 per barrel. Gasoline has been trending down however, as the economy has been collapsing faster than refineries can shut down. The collapsing Dollar is driving gold to a new high everyday.

Things have gotten so spooky in the financial markets that interest rates for short-term US Treasury bills have turned negative - meaning that investors have been buying securities at a loss. This has been good news for the government with interest so low that they are currently spending only 200 billion per year on interest on the more than 12 trillion in debt. The bad news is they have only been able to do that by putting most of the debt on thirty day notes. A spike in interest rates could easily drive that to a trillion in interest and if nobody wants to buy the government’s debt, it or rather we could be on the hook for paying out trillions to redeem notes overnight. (baaa...)

Negative interest rates can foretell deflation or it can just be the banks stockpiling safe securities on their year-end balance sheets - a strategy meant to appeal to regulators and risk-averse investors. The problem is that everything so poorly balanced on top of an house built of worn out playing cards that was left behind by the Republicans that simple prudent behavior can trigger a panic.

The National Retail Federation forecasts a 1% drop in holiday sales, this has to be a first as this industry group is always irrationally exuberant. Expect the drop to be much worse as shoppers are much more prudent this year on top of all the people who have no job and no money. The prudent purchase of some canned goods would help boost retail sales.