Tuesday, August 9, 2011

Visiting Shut-ins

The world markets went on a wild rollercoaster ride in the past 24 hours with some markets in Asia down more than 10% before “rebounding” to only 4 to 6% down. That’s just for the day, overall they are down 20%, mostly on inflation jitters in China. As the day progressed the European markets had a similar but less extreme theme park experience but finished up a couple of percent. US markets opened in positive territory with the Dow starting out up 200 points but fell through the floor losing 400 points on the Federal Reserve’s announcement that they will not be doing a QE3 anytime soon. Further reading of the Fed’s arcane language apparently soothed investors with the Dow closing up more than 420 points to the good, all in the last half hour.

It’s not time to breath a sign of relief about that retirement nest egg, as the Fed didn‘t say anything positive beyond predicting the economy will grow, but very slowly, because it‘s worse than we thought it was. Which is like saying the sharks aren’t circling as fast but there are more of them. The Fed board only agreed by 7-3 vote to keep interest rates down for the next two years and then only if the economy remains bad. This means “if” the economy starts to pickup they will raise interest rates and tank it all over again which we already knew but the markets seemed like it.

The three dissenting votes are a big deal, normally all Fed decisions are announced as being unanimous. The dissenters are certain that there will be runaway inflation which rules out any stimulus from the Fed. Economists are pushing for another 2 trillion in QE3 which they estimate would be the same as the government spending between 500 and 800 billion. This would in theory get the total stimulus up close to what it should have been originally.

Fiscal policy is a terrible way to try to fix an economy but it’s the only tool out of reach of the Republicans but it seems that they hold enough sway on the Fed board to keep even that from happening. Without further money printing by the Fed there is no chance of significant inflation and we are likely to fall into a deflationary spiral instead, as one does when in a major Depression. The market is betting that continued loans from the Fed at zero interest will overcome all that.

Gold continued to climb hitting $1780/oz driven by high demand in Europe where 950,000 ounces were traded on exchanges Monday (that’s on paper) and the dealers claim that the sales of physical gold bars and coins are at record highs. We are still well short of the record price of $850/oz set in 1980 when adjusted for inflation to around $2500/oz. Before you start thinking this is a good time to buy, keep in mind that gold fell to roughly an eighth or less of that high (depending on how you factor inflation into it) before the big run up in the last few years. The only way gold is a good buy is if you are certain that the USD will become worthless but with the bond vigilantes from Wall Street taking down the Euro that is becoming increasingly unlikely. You have to use something for trade, deer hides or sea shells, something, so the USD wins by default, at least for now, but going back to barter isn‘t that farfetched.

In the first test of the US credit since the downgrade, the Treasury auction had winning bids pay only 0.5% interest on $32 billion in 3 year notes. Brokers bid to buy three times the amount that was offered and this is unusually high demand.

That’s not to say we are out of the woods or anything like that. We could drift along in this state for years like the sick old lady in the upstairs flat spending her days in a wheel chair. Some days are better than others, until some tea bagger comes to visit and pushes her down the stairs. (google Richard Whitmark as Tommy Udo, he won an Oscar) In short we are at the mercy of any sociopath who comes along and there is no shortage of them on the right.    

I’m getting comments from people that seem to be saying that since “safe” investments like T-bills pay next to nothing that they need to go into something with more risk. If anybody listened when I said get out of the stock market and into “safe” bond funds then they have made money as bonds have gone up and stocks have tanked. With commodities falling, just being in “cash” will likely “make” money. But no, I don’t offer any advice for market timing except to buy low and nothing is low right now, except our prospects.


Anonymous said...

Richard Widmark won a Golden Globe for "Kiss Of Death"; not an Oscar.

Widmark was nominated for, but did not receive, an Oscar for Best Actor in a Supporting Role.

John said...


You said: "The market is betting that continued loans from the Fed at zero interest will overcome all that."

How is "continued loans from the Fed at zero interest" different from Q3 ?

John Puma

prairie2 said...

There is a big difference between QE and zero interest loans. QE puts money in the hands of people who have money tied up in bonds or what ever the Fed buys. Loans go only to the big banks, which is why the banks who all tanked on Monday came back big time after the Fed announcement. The Fed took care of the big banks, who would have thunk?

Anonymous said...

I read Naked Capitalism and Zero Hedge and they are great, but they presume so much technical knowledge and they go on and on and on.

Really like your succinct and bold comments on the economy: they are short, to the point and are written in plain English. Even my teenagers like to read them.

Can you point out a good site where the mechanics of how the fed words, who profits from it and the mechanism of buying and selling bonds, interest, inflation versus deflation and other aspects of the great financial game are played?