OK, front and center this morning, yesterday I printed a quote from Karl Marx. This had been sent to me from a source that I didn’t feel as though I needed to research first. Unfortunately, as MANY of you let me know… The quote had some major errors in it. So… I apologize… I hope I didn’t burn any confidence in me with that error… I’ll do much more due diligence in the future!

The euro saw a huge sell off yesterday, and it wasn’t a case of “lets buy the dollar and sell the euro” it was a case of “lets sell the euro”… I think the latter is the worse… Here are the reasons I saw that caused this selling of the euro, and further down the line with the other currencies as well.

1. Soros says euro may not survive crisis without global plan…
2. There’s a potential for a ‘buy American’ rider in the stimulus package sparking debate on the impact on global trade
3. There was a rumor going around that the four largest pension funds in Netherlands saw their assets drop by euro 72 Billion due to the credit crisis, all are allegedly under funded.
4. The Risk Takers are hiding under rocks again…

This is the Obama bounce I’ve been talking about folks… Stocks may still be taking it on the chin, but the dollar part of the bounce is front and center!

How many people follow Glenn Beck? As you know, last summer, I wrote an article for his website on the dollar, and the loss of purchasing power. He had heard about me, when reading Craig Karmin’s Biography of the dollar, which has a chapter on me! Well… I believe that Glenn has taken my stuff and run with it… Last night, he did a great job of showing everyone the money supply that has gone off the charts since last September. He got the data from the St. Louis Federal Reserve, so it’s not like he made the stuff up! I love what he’s calling our money supply and debt situation… “An Inconvenient Deficit” Obviously, it’s a spin-off of Al Gore’s movie…

The deficit and money supply is really getting out of hand folks… I know, I’ll have a few readers send me notes telling me that the money supply stuff is wrong… But, I’ll stick with the data from the St. Louis Fed…

This un-dynamic duo of deficit and money supply, only has one ending folks… And it ends up in tears for the dollar…

But in the meantime, the dollar bulls have the dollar moving higher once again, with the euro trading all the way down to trade with a 1.28 handle.

Well… In the data yesterday, the Weekly Initial Jobless Claims, which were forecast to be below 500K, repeated the previous week’s high of 585K, with an increase to 588K! UGH! I’ve never figured out why these figures don’t feed into the monthly Jobs Jamboree numbers… You would think that you take the weekly figures by 4, and voila! But, that’s not how it works, boys and girls… The Bureau of Labor Statistics (BLS) gets to put their hands in the cookie jar and act like they know what they’re doing!

In other data, New Home Sales fell 14.7% in December to 331,000. Now, that might not sound too bad on the outside…(apparently it wasn’t to the media, for they “forgot” to include this part when reporting the data yesterday) But, when you figure in the fact that the latest 15% plunge to 331K now takes New Home Sales to the lowest since the series began in 1963, breaking below the previous low of 338K in 1981. Add to that the fact that… Sales are down 75% from its peak in mid-2005. And to finish this data set off… Something that leads me to believe we have more suffering in housing to go… The month’s supply of homes reached a new record high of 12.9 months (the 20-year average is 5.7). Can you say… inventories remain too high?

And finally, durable-goods orders decreased by 2.6% in December… UGH! The economy just continues to show more rot on the vine… Even more than most economists had forecast, for sure… There was one economist that was the front runner to all this mess, forecasting it, and being cast as a doom and gloom guy. But now receiving vindication… That’s Nouriel Roubini, who’s in Davos Switzerland this week at the World Economic Forum… That’s where the great quotes from Jamie Dimon came from yesterday… Let’s see if Nouriel Roubini threw us a bone or two…

Roubini said yesterday, that “the worse lies ahead. Banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009, he says. The consensus is catching up with me, but it’s still behind,” Roubini said in an interview in Davos. I don’t know what some people are smoking.”

We’ll get some inkling of the depths the economy has fallen to this morning, when 4th QTR GDP prints… The forecast is for a negative -5.5% to print… And when we see the “makeup” of the growth, and see that without the Gov’t spending it would have been much worse… Somebody had better think twice about suggesting this recession will be “V” shaped…

Oh… And my friends over at Critical Factors research, (they track recessions, and confirmed my call last year at this time that we had moved into a recession) sent me a note about the Leading Indicators data that printed the other day. You may recall that I was surprised to see the Leading Indicators rise? Well, looks like there’s an explanation for that… And to that explanation I turn to my friends at Critical Factors…

“Yes, The Conference Board reported that the Leading Economic Indicators increased 0.3 percent, but note this quote from their press release: “The LEI rose modestly in December, mainly due to the continued and very large positive contribution from real money supply.”

>>>> yes, there’s that “money supply” thing again!

In Germany this morning, inflation bumped higher last month to 1.1%, but still below the European Central Bank’s (ECB) ceiling target of 2%… With Oil prices being pulled up from the ashes, I’m sure the ECB ministers are watching it closely. One thing to remember when thinking of the ECB, and the euro… The ECB has a MANDATE from the Maastricht Treaty, the document that formed the European Union, to provide price stability… That means they are inflation fighters in earnest… Not just guys that decide to become one when it becomes fashionable… Read Fed Reserve…

OK… I want to go back to the Soros statement above that ripped the euro yesterday… Don’t you just love the media? They report this, when Soros probably was dissing the dollar for an hour and casually mentioned that without a global plan the euro is in trouble… Of course he could have said any currency for that matter! I think you have to take what a George Soros says with trepidation… He’s a sly fox, and only says things to move markets that he’s trading in… He’s made millions with this practice… So… For all we know, he could have been short euros, and needed the price to get lower to cover the short! Nah… He wouldn’t do something like that would he? Hmmmm… Check out 1992, and the British pound…

Hey! Jimmy Mack! When are you coming back? Did you see the move in Gold yesterday? It soared $21 on the day… And in the overnight markets it has gained another $13, to $922! I was listening to our metals traders, Jen and Kristin, the other day, and they were quoting prices for minted coins that were so far above spot, I had to stop and ask what was going on…

They proceeded to tell me in so many words, that it wasn’t any of my business and to go back to the currencies! HAHAHAHAHAHAHA! No, not those two sweet ladies! They told me that the demand for coins is still at last fall’s highs, and that the dealers, and minters are charging outrageous fabrication fees… That thought was confirmed by HSBC, (Hong Kong Shanghai Banking Corp), one of the biggest metals dealers in the world… A trader friend of mine there sent me this note…

“One of HSBC’s bullion customers is a large coin manufacturer – we learned today that the demand for investment coins continues at an astonishing pace – the order book for Q109 has already surpassed C2008. The main order flow is European.”

So… There you have it! Gold is hot!

I had a reader send me a note yesterday telling me to be more professional, and compared me to Jim Cramer! ARRRRRGGGGGHHHHH! The horror! The humanity of it! Not Jim Cramer! The reader didn’t say how long they’ve been reading, and maybe yesterday’s rant was their first go at the Pfennig… I’ve got to hope so! I did get a little carried away yesterday, didn’t I? Well… That’s just me. I can’t sit idly by and watch this all unfolding before my eyes and not say something… Oh well… That’s the beauty of this newsletter, A Pfennig For Your Thoughts, It’s FREE! You can always just delete your subscription! But… You’ll be sorry…. HAHAHAHAHAHAHA!

Currencies today 1/30/09 (Christine’s birthday): A$ .64, kiwi .51, C$ .8125, euro 1.2860, sterling 1.43, Swiss .8655, rand 10.14, krone 6.9280, SEK 8.2525, forint 232, zloty 3.4750, koruna 21.72, yen 89.60, sing 1.5075, HKD 7.7555, INR 48.87, China 6.8615, pesos 14.43, BRL 2.30, dollar index 85.82, Oil $41.88, Silver $12.55, and Gold… $921.85

Source: The Dollar Comes Back!

I had a front row seat. At the time, I ran a technology-transfer business in Southeast Asia and our central office was in Jakarta, Indonesia.

For a while it looked like the crisis might skirt Indonesia. But it didn’t. And when it hit, it hit with a vengeance. The economy had been expanding at an 8-10 percent clip for several years. Companies were expanding to take advantage of soaring sales. And banks were helping companies expand by giving out loans left and right.

The problem was, those loans were in dollars. That was fine as long as the exchange rate was stable. But the Indonesian Rupiah lost 80-90 percent thanks to the crisis. The cost of converting local currency into dollars to pay back these loans skyrocketed. At the same time, sales plummeted as economic growth screeched to a halt.

The subsequent carnage was inevitable. Companies, including banks, went out of business by the hundreds.

Mind you, these companies weren’t over-leveraged. They had not been engaged in reckless debt-driven expansion. They had not made one wrong-headed business decision after another. They were simply victims of a colossal crisis that struck with lightning speed.

And what was the advice of the IMF and the U.S.? Let them fail … spend less in order to lighten public debt … and remove subsidies.

This was the economic orthodoxy of the time. And it couldn’t contrast more with what we’re doing now: Rescuing banks and companies … increasing our debt … and handing out subsidies to undeserving companies and banks.

My five-star hotel room which used to cost $200 now cost only $60. My meals at Jakarta’s best restaurants set me back less than $10. You could go to a local high-end store and buy the most expensive suit for $40.

Yet none of that matters when your business is going down the drain. One by one, my customers withdrew their orders. Accounts receivable went unpaid. And millions of dollars worth of inventory went undelivered.

I was just one small company. Multiply my plight by the thousands and you get an idea what Indonesia went through. The Philippines, Singapore, Taiwan, Korea, and other countries suffered similar upheavals.

And now it’s happening again to these countries in Asia. Only this time China isn’t escaping the economic turmoil. And it’s happening also in the Middle East, South America, and the subcontinent.

Global stock markets have lost roughly $32 trillion of market value since they peaked in October 2007.

And the countries that were flying the highest back then, have been hit the hardest.

China’s growth engine – exports – has gone away. From a more than 22 percent growth rate in 2008, China’s exports plunged to a negative 2.8-percent rate in December.

The 45,000 factories in China’s major export cities of Dongguan, Shenzhen and Guangzhou were running overtime last year at this time. Now, 15,000 of them have been shut down. And it’s just the beginning. American consumers – their main customers – aren’t in a buying mood.

The Middle East has been hit just as hard. Their markets leaked $2.5 trillion in just the past four months. We were giving them almost a trillion dollars a year for their oil in the greatest wealth transfer the world has ever seen. This year? OPEC should ring up about $440 billion in oil revenue.

Now here’s the thing. Over the past 15 months, the Arab oil countries have been the biggest foreign buyers of U.S. Treasuries. They purchased $245 billion worth.

The next biggest buyer is … yes, you guessed it. China. It bought $233 billion worth.

With the U.S. economy in the dumps, these government bonds aren’t as attractive as they used to be. China has already said they want to diversify away from them, though nobody thinks there will be a wholesale dumping of U.S. bonds.

The U.S. government will be stepping up its issuance of bonds to pay for the bailout’s growing bill. But it’s clear we can’t expect these countries to continue buying our bonds like they have been.

We wouldn’t be facing this dilemma if we chose to follow the advice we gave so freely a decade ago to a dozen Asian countries. Something has to give. The interest offered on these bonds will go up. Or the Fed could step in and start buying bonds. Either or both outcomes point to a further debasing of the U.S. dollar, paving the way for the next inflationary storm. It’s only a matter of time.

Source: Letting the Inflationary Beast Out of the Cage

Unless we see a big bounce today, the yen will end the day with the first weekly loss vs. the US$ in two months. With a majority of markets closed, most news stories centered around the Japanese yen. Japanese industrial production fell the most in 55 years as reported on Wednesday. Factory output plunged 8.1% from October, more than 6.8% estimated by economists. Other data released in Japan showed the jobless rate climbed to 3.9% from 3.7%, and household spending slid .5%, a ninth drop.

Markets are now counting on the Bank of Japan to follow the FOMC’s lead and begin ‘quantitative easing’. Bank of Japan policy board member Hidetoshi Kamezaki said policy members would consider ‘extraordinary steps’ to help the economy. Japan’s central bank already countered the drop in US interest rates with a drop of their own, and again have the industrialized world’s lowest interest rates. Now they will turn to other means designed to pump liquidity into the financial markets. Kamezaki told reporters that the bank’s next policy steps should focus on improving funding for companies and influencing long-term borrowing costs. The bank will likely start buying corporate bonds and could actually go into the equity markets purchasing stocks to support Japanese industry.

If Japanese policy makers do adopt aggressive quantitative easing, the yen could see a fall in value. These measures pump large amounts of cash into the markets, and the laws of supply and demand tell me that these tremendous increases in money supply will eventually drive down the value of the currencies. The values of both the yen and the dollar will be challenged by these ‘quantitative easing’ measures over the next few years.

But some in the Japanese administration want a more cautious approach. Prime Minister Taro Aso has yet to implement two announced stimulus packages. He believes the Asian economies are better positioned than those of the west to endure the global recession. Instead of using all of their ammunition at once, the Prime Minister wants to take a more gradual approach to combating the economic slowdown.

One thing helping Japan weather the economic downturn is the falling price of crude oil. Since hitting a high of 147.27 on July 10 of this year, the price of oil has fallen 75%. OPEC has cut production in an attempt to slow the drop, but these announced cuts have yet to have an impact on crude prices.

The lower oil prices have kept a lid on global inflation, and several countries are taking advantage of these lower numbers to bring their interest rates down. India’s inflation slowed to a nine month low, with wholesale prices increasing 6.61% from a year earlier, down from 6.84% the prior week. Inflation in India has fallen below the central bank’s target of 7% largely due to lower fuel costs. I would expect India to continue cutting rates, which could reverse some of the rupees recent gains.

But the fall in oil prices haven’t helped all economies. Russia’s central bank devalued the ruble for the third time in a week, sending the currency to its lowest level against the dollar in two years. The Norwegian krone had also fallen as oil retreated from its highs. But the recent dollar weakness has steadied the krone, and it has been trading in a fairly tight range vs. the US$.

No data will be released in the US today, and the markets will likely be very light. Most will be heading out to the malls to try and take advantage of all of the year end closeout sales. Retailers have been dropping prices dramatically to try and salvage a tough holiday shopping season. US retail sales fell between 6 and 8% this season according to predictions by the credit card companies. This was one of the most challenging holiday seasons on record, and with a falling US economy, I would expect next year’s to be even worse.

The dollar strength we saw during 2008 will not spill over to 2009. I would think the recent dollar weakness will be the rule for next year, as the tremendous increase in money supply here in the US will help drive the value of the dollar lower. On that note I will move on to the currency scorecard:

Currencies today 12/26/08: A$ .6851, kiwi .5765, C$ .8209, euro 1.4097, sterling 1.4747, Swiss .9321, ISK 145, rand 9.74, krone 7.1259, SEK 8.022, forint 189.79, zloty 2.9163, koruna 18.728, yen 90.43, baht 34.99, sing 1.4469, HKD 7.75, INR 48.4437, China 6.8413, pesos 13.3125, BRL 2.3764, dollar index 81.214, Oil $36.37, Silver $10.38, and Gold… $848.55

Source: It’s All About the Yen

Gold edged down on Friday as the dollar firmed against the euro, but trading was quiet as investors awaited the outcome of OPEC’s production meeting this weekend and a spate of data due next week for fresh impetus.

Spot gold was quoted at $810.00/812.50 an ounce at 1310 GMT, down from $814.60 an ounce late on Thursday, as the firmer dollar dented interest in the metal as a currency hedge.

The euro slipped after data showed falling inflation in the euro zone, boosting expectations the European Central Bank will cut interest rates further. [ID:nLS548735]

Falling oil prices are also doing little to help gold, which typically moves in line with crude. Traders are awaiting the outcome of this weekend’s meeting of the OPEC oil cartel, at which production cuts will be discussed. [ID:nSP342706]

“Obviously there is still a correlation between oil and gold,” Wolfgang Wrzesniok-Rossbach, head of sales at Heraeus, said. “If OPEC make a decision which might drive the oil price up, that would also be positive for gold.”

Despite the gold price dip, the precious metal is heading for its biggest monthly gain in nine years as investors spooked by the outlook for the global economy buy into the metal as a haven.

Prices have climbed some $90 an ounce, or 12 percent, this month. Gold is also up 12 percent in euro terms, and 15 percent in terms of the Australian dollar.

“Investment (in gold) is strong because there is huge concern over the economic and financial environment, both in the short and possibly the longer term,” RBS Global Banking & Markets metals strategist Stephen Briggs said.

“The measures being taken to stabilise the situation may lead to inflationary fears down the road, so gold has a double benefit from that.”

Gold is typically seen as a hedge against inflation.

DATA

Traders will also be watching for a raft of economic data due out next week, which could have a significant impact on the dollar. U.S. auto sales are due out on Tuesday, and U.S. non-farm payrolls on Friday.

“Next week, manufacturing indices for all major economies will be released,” Standard Bank analyst Walter de Wet said. “This should indicate the speed at which manufacturing is contracting globally.”

Dresdner Kleinwort said on Friday it expects gold prices to average $870 an ounce this year, falling to $740 an ounce in 2009. For silver, it forecasts an average price of $15 an ounce in 2008 and $9.75 next year.

But Wrzesniok-Rossbach at Heraeus said delegates at a forum on Thursday organized by the precious metals group expected gold prices to hit new highs next year.

“Consensus was that in the long run all the bailouts we are seeing, whether in the car industry, the banking industry or others … will (create) inflation, and that would be positive for gold,” he said.

Among other precious metals, spot platinum was quoted at $860.50/880.50 an ounce, slightly up from $853 late on Thursday. Palladium was at $184/192 an ounce against $187.50.

Silver was at $10.12/10.20 an ounce against $10.31 an ounce.

The industrial precious metals have suffered more from the economic downturn than gold, with platinum and palladium, which are chiefly used in catalytic converters, both dropping significantly from their summer highs.

By Jan Harvey
LONDON, Nov 28 (Reuters)

Mike Shedlock of globaleconomicanalysis.blogspot.com writes that I – and people like me, who are expecting inflation – are a bunch of idiots, which is unfortunately true about me, and I am grateful that my Natural Mogambo Stupidity (NMS) is his only complaint about me. I only wish that others were equally restrained in their criticism, as there is apparently no end to either my personal shortcomings or their delight in pointing them out.

He writes, thankfully not mentioning me by name, “You would think that inflationistas would have caught on. But they haven’t. Nor will they. And articles about shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things will not change their minds either, including an implosion in China.”

I have to admit that he is right, as my wife and kids will happily tell you that I never change, except to get worse. On the other hand, I steadfastly say that neither the Federal Reserve, nor the federal government, are going to sit still when people are whining about “shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things” when they have a fiat currency that they can instantly create, with unlimited abandon, which they promised to do, will do, and are already doing.

Thus, with a staggering, unbelievable amount of money being created, these and many more deflationary problems will soon be just a quaint memory as voluntary fiscal and monetary restraints around the world are being thrown wholesale into the dumpster even as we speak, and humongous “economic stimulus plans” financed by massive increases in fiat money are being trotted out across the globe, all meaning that inflation will rise and rise.

As if to prove me right, the article went on to note that Professor Steve Hanke, formerly with Credit Suisse (NYSE:CS) and now a senior fellow at the Cato Institute in the United States, said that this month, “Zimbabwe’s annual inflation had soared to 2.79 quintillion percent”, which is the inevitable result of the moron government of Zimbabwe spending decades literally printing all the paper money that makes such inflation possible!

In case you were wondering, “a quintillion is a figure with 18 zeroes and is a rung above a quadrillion”, which I will helpfully write out as 2,790,000,000,000,000,000%!!!!!

If you are a Junior Mogambo Ranger (JMR), then you need no explanation as to why I included five exclamation points at the end of that sentence, which indicates some extreme significance.

But even if you are NOT a JMR, then you should still need no explanation as to the significance of inflation that is measured in quintillions of percent, or even inflation measured in quadrillions of percent, or inflation measured in trillions of percent, or inflation measured in billions of percent, or inflation measured in millions of percent, or inflation measured in thousands of percent, or inflation measured in hundreds of percent, or inflation measured in tens of percent, or Any Freaking Inflation At All (AFIAA) that is more than zero, because what it means is that Bad, Bad Times (BBT) are a-coming as all of this money starts chasing a static supply of goods and services and people get Very, Very Upset (VVU).

And besides the fact that inflation in the USA is already running between about 5% and 10% (depending on your source), it is going to get worse and worse, and thus a BBT and a VVU are a-coming, which is why you need gold, silver and oil.

And the fact that they have been sold off to (as is theorized) raise cash and thus drive their prices to Laughably Low Levels (LLL), should have you in a buying frenzy, gobbling up as much of each as you can, and then going around to your stupid neighbors and ringing, ringing, ringing their doorbells and knocking on their doors, and then kicking their damned doors over and over because you can hear them in there whispering to each other, “Shut up or he’ll hear you!” and so you yell out, “Buy gold, silver and oil as fast as you can, you morons, or die a horrible death by inflation like the people of Zimbabwe!”

But as usual, they don’t buy gold, silver and oil, and they don’t even answer the door. Don’t you make that mistake!

Source: When Inflation Comes a-Knockin’

You’ll recall that one of the fairest of the Bubble Era’s revelers was the idea that, over the long run, you would make money in stocks. All you had to do was ‘buy and hold.’ Who didn’t like her? She seemed so easy…so willing…so fetching and attractive.

Yesterday, the Dow lost another 203 points. Investors are down 44% so far this year. Worldwide, they’ve lost $10 trillion this month – far worse than the crash of ‘29.

The most successful economy of the 20th century was the United States of America. The second was probably Japan. It rose from the bombed-out ruins of WWII to become a worldwide export powerhouse, dominating the auto and electronic equipment industries.

But yesterday, stock prices in Japan fell to more than a quarter-century low. Investors in Japanese stocks – including your editor (who is better at giving advice than taking it) – have made nothing in 26 years.

Here’s the press report:

“Tokyo’s Nikkei 225 index closed down 6.4 percent to 7,162.90 – the lowest since October 1982 – with exporters like Toyota Motor Corp. and Sony Corp hit hard. The losses came despite a report that the government was considering massive capital injection into struggling banks in a bid to calm jittery financial markets.”

“Decades of pain and still no relief,” adds the Financial Times, noting that investors in Japan have been waiting for a recovery for the last 18 years.

With the mask off, stocks in Japan are giving investors a Halloween fright.

But what other masks are coming off?

How about the sweet mask worn by housing? ‘Housing always goes up.’ And, ‘you can’t lose money in property.’ Remember those beauties? Those masks hit the floor a year ago. Since then, the whole world has looked at the property market and gasped in horror. How could houses be so ugly, homeowners have wondered; they look like they just woke up.

Oh and there’s oil…down to $63 yesterday. Oil was supposed to go up forever. At least, that was one of the favorite masks of the late Bubble Era.

But there are still a few Bubble Era masks that have not yet come off. In fact, the belle of the ball is the mask on ‘progress.’ People still believe that the world grows and improves – if not steadily, at least episodically. It’s certainly true that long periods of history show what appears to be economic progress. Things get better. But occasionally, something terrible happens – plagues, wars, revolutions, Great Depressions and Dark Ages. Then, the world turns backward. The bull market in progress turns into a bear market of progress turns into a bear market of backsliding.

Today, people are losing faith in stocks and housing…but they still have faith in progress. Just a few months ago, they thought capitalism would make them rich. But wicked capitalism has disappointed them badly; it didn’t guarantee rising asset prices after all. So, now they turn their sad eyes to the feds. ‘Oh ye all-knowing, all-seeing, all-powerful ones…hear us. Save us – from capitalism!

They figure the feds will do the trick… And sure enough, all over the world the federales are playing along. The G7, the IMF, the central banks, the finance ministers and Treasury Secretaries – all have put on their own masks…strutting around, pretending to know what they are talking about. Curiously, France’s president Nicholas Sarkozy is a leading strutter. He’s trying to organize a New World Financial Order…based on something other than the dollar.

These poseurs don’t look too bad – as long as they leave the masks on. Take them off, of course, and you will see the same silly clowns who CAUSED the crisis in the first place.

That is what is so amusing about this stage in the collapse of Western Civilization. You see, most of the world’s financial press has come around; they see things much the way we do. They see, for example, that the U.S. Fed erred – big time – by fixing the price of credit too low for far too long.

Of course, there’s nothing in the Manual of Capitalism that allows the feds to fix the price of credit or support the housing market. This was the government at work, not the market. With the misleading signal coming from the credit markets, the capitalists just did what they always do – they overdid it.

Still, the world’s press, pundits and politicians have convinced themselves that the fault lies not in themselves…but in capitalism. And now, they expect the feds to do something about it.

But that’s just the way it works…one hallucination gives way to another. One delusion on the way up; another on the way down.

*** Even star mutual fund managers are getting walloped by this market. Chris Mayer offers us a few examples:

“Managers with great track records are faring poorly, and it may help you feel better about how you are doing. Jean-Marie Eveillard, for example, has been running money for 50 years. He’s beaten the market handily for a long time. He is a cautious type. He likes gold stocks. He likes Japan. He’s down 27% this year. Robert Rodriguez, another cautious money manager who holds a lot of cash and runs FPA Capital, is down 29%. These are among the best of the best, as the market is down more than 40% this year. William Fries at Thornburg is down 43%. David Winters at Wintergreen is down 37%. Wally Weitz at Weitz Value is down 39%. The list goes on and on…

“So you see, nothing is really working well in this market right now – at least not for investors in stocks. However, there are a lot of cheap stocks out there, bargains I haven’t seen in a long time. Unless the world comes to an end, which it has a habit of not doing, future investors will be a happy lot. Count me a cautious buyer of stocks.”

Caution is the name of the game here…and if you’d like to see what Chris has been thoughtfully recommending to his Capital & Crisis subscribers, see here.

And the bargain hunters were abound this morning, setting up a rally worldwide in the markets.

Also boosting the markets is the anticipation of the Fed’s two-day meeting, that begins today. It is widely believed that the Fed will cut rates…but it remains to be seen what, if any, lasting effect it will have on the markets.

Lurking behind this rally is this unsurprising tidbit: consumer confidence in the United States hit an all-time low in October. The Conference Board reported that expectations have turned “significantly pessimistic with the percentage of consumers expecting business condition to worsen over the next 6 months rising to 36.6% from 21% and those expecting fewer jobs rising to 41.5% from 26.9%”

*** Perhaps the biggest delusion of the financial world now is that the dollar…and dollar-based Treasury obligations…are a safe refuge. In a sense, of course, they are. The U.S. government is in no danger of defaulting on its loans. In an emergency, it can always just print up the money. But that’s the problem. An emergency is coming. More on this when we get a chance to think about it…

*** “I’ll be all right down here,” said our old friend Doug Casey. Doug has bought a place in Cafayate, a town that reminds us of Santa Fe or Aspen, before they were ruined by rich people. He’s building a world-class resort – complete with golf course, riding trails, tennis, health spa, library…everything he wants.

Cafayate also has several things going for it that Aspen and Santa Fe did not. First, it is prettier and the weather is better. It is always sunny, with pleasant temperatures. Wherever you look, you see beautiful mountains. What’s more, it produces some of the world’s best wine.

Doug’s place is right in the middle of a vineyard. In fact, he’s got it set up so that revenue from the vines pays much of the operating costs of running a golf course and so forth.

“Another big plus,” says Doug, “is that this place isn’t going to suffer too much from the credit crisis. Nobody down here had any credit.”

*** Doug is not completely right about Argentina’s credit situation. Believe it or not, there were lenders – mostly big banks – who were foolish enough to extend the nation credit. Naturally, the Argentine government treats these angels like taxi drivers in Buenos Aires treat other foreigners.

Almost every time we go to the airport, the taxi driver tries to pull a fast one. “My meter is broken,” said one, “the standard fare is 200 pesos.” (It is really about 70 pesos.) “We crossed into another zone,” said another, “so I have to add another 50 pesos.” “It’s night time,” came another invention, “after dark you have to pay a surcharge.”

It’s all good fun. The taxi drivers are merely establishing the going rate. The price for a run to the airport is much higher for naïve foreigners, but why shouldn’t it be?

So is the price for lending to the Argentine government.

This from MoneyWeek:

“In December 2001 [Argentina] reneged on its $95bn of sovereign debt.

“At the time, that was the biggest default in world history, though these days such a number looks like chicken feed compared with what the world’s bankers have recently managed to mislay. Only in 2005 did Argentina sort the final details, with a ‘take-it-or-leave-it’ 70% ‘haircut’ on face value, again the largest sovereign debt markdown ever.

“Three years later, it’s back to square one. Inflation is rocketing (some estimates put it at 20% annualized) and the government is once again running out of cash. Argentina’s borrowing needs will swell to as much as $14bn next year from $7bn in 2008, says RBC Capital Markets. And any confidence that the country will be able to repay what it owes is fast flying out of the window.

“Argentina’s 8.28% government bonds are due to be redeemed in 2033. Fat chance of that, the way things are looking right now. Now priced at 22 cents on the dollar, they currently yield 31%, as against ‘just’ 12% a month ago. And still no one wants them.

“What’s more, the price of credit default swaps – market insurance that investors can buy to protect themselves against default (Read: All you need to know about credit default swaps for more) – covering the country’s sovereign debt has more than quadrupled over the past month. These CDS now stand at more than three times the Icelandic level, and suggest there’s almost a 2:1 chance that Argentina will go bust this year.”

Does this worry your editor – who has substantial (for him) investments in Argentina? Not at all. As a dear reader pointed out, the average Buenos Aires taxi driver knows more about financial crises than Bernanke, Paulson and Greenspan put together. The Argentines know how to get through a crisis, in other words, and still put steak on the table and wine in their glasses.

We’re going to learn from them.

*** Finally, another dear reader sends a news item explaining why there was a bagpiper in front of our neighborhood church last Sunday.

It was the “kirking of the tartans,” said the headline. Turns out, the local Scottish Argentine society does this every year…a kind of blessing of the clans, performed by the local priest. “Kirk” in Scottish means church.

Source: The Masquerade is Over

The Reserve Bank of India cut its overnight lending rate from 9% to 8%, according to a government statement issued in Mumbai yesterday. The “surprise move” that came days before a regularly scheduled meeting of its policy board came after India’s central bank reduced the cash reserve ratio by 2.5 percentage points to 6.5% – retroactive to Oct. 11, Bloomberg News and MarketWatch.com both reported.

The so-called “repurchase rate” is the discount rate at which India’s central bank lends money to commercial banks to infuse liquidity into the market. India’s rupee weakened while bonds reversed losses after the central bank’s announcement. The Bombay Stock Exchange rose 2.5% for the day – closing at 10,223.09 – although it jumped as high as 5.6%, BBC News reported. On Friday, India’s key stock index fell to its lowest close since June 2006.

“By lowering rates, thereby liquefying the system and offering stimulus to deflect slowing growth, India may be ahead of the curve for the first time in making the correct monetary policy decisions to prevent a recession which it cannot afford,” said Rahemtulla, a frequent Money Morning contributor who serves as the editor of such financial publications as The Smart Profits Report and the Xcelerated Profits Report.

In late May 2007, the Bombay exchange became the third emerging stock market after China and Russia to surpass $1 trillion in market value – a surge that was helped at the time by the nation’s fastest economic growth in six decades, a flood of foreign investment and a strengthening rupee, Bloomberg reported at the time. On the day it achieved that milestone, the 30-stock Sensitive Index, or Sensex, closed at 14,508.21 – 1% below its then-record high.

“India has been one of the [world’s] largest recipients of foreign direct investment, which accounted for the boom in the stock market over the past five years,” Rahemtulla said.

Clear Fears

India today clearly fears that the ongoing turmoil in the worldwide credit markets remains a threat to drop much of the global economy into a planet-wide recession. China’s economic growth slumped to a five-year low last quarter and Vietnam reduced borrowing costs yesterday, as JPMorgan Chase & Co. (JPM) and UBS AG (UBS) said the world economy is sliding into its first recession since 2001.

“A 100-basis-point cut is an indirect admission that not all is ‘hunky dory’ with the India growth story,” Nandkumar Surti, chief financial officer at JPMorgan Asset Management India Pvt. Bank in Mumbai, told Bloomberg. “One way to look at it is that the global problem has begun to affect us.”

Fluctuations in India’s bond yields this month were the widest in more than five years as the central bank took steps to ease a liquidity crunch. India Reserve Bank Governor Duvvuri Subbarao will review his monetary policy on Friday. Ironically, just one day after the central bank cut rates for the first time in four years, an employee strike at the Reserve Bank of India that started yesterday shut down bond trading in Mumbai, meaning traders at primary dealers and banks were unable to bet on additional interest-rate reductions, according to a Bloomberg report.

About 25,000 employees of the central bank walked off their jobs to demand higher pensions. Subbarao ordered the surprise rate cut to shield India from the global financial crisis that was touched off by the collapse of the U.S. housing market.

The near-collapse of the banking systems in both the United States and Europe this month prompted the International Monetary Fund (IMF) to throttle its worldwide growth forecast for 2009 from an earlier estimate of 3.9% all the way back to 3.0% — a point the IMF itself has labeled as the dividing line between global expansion and a global recession.

After growing at an estimated rate of 9.3% in 2007, the IMF says the growth rate of the Indian economy may slow to 7.9% this year and all the way down to 6.9% next year.

Subbarao, India’s 22nd central bank governor – and who took office just last month – is scheduled to release his first quarterly monetary policy statement on Friday. He can likely afford to reverse four years of tighter credit as declining commodities prices ease inflationary pressures.

India’s key wholesale price inflation number slowed more than economists expected to 11.44% in the week through to Oct. 4 – a four-month low. Crude oil prices have been cut in half since their peak in July – a reality that’s actually forcing the Organization of the Petroleum Exporting Countries (OPEC) to hold an emergency meeting on Friday, Money Morning reported yesterday. U.S. oil prices, which hit a record of $147.27 a barrel in July, have since plunged by more than 50%, actually hitting a 16-month low of $68.57 last week. The Reuters/Jefferies CRB Index of 19 commodities dropped to its lowest in four years on Oct. 17.

“We expect a further reduction in wholesale price inflation in the next two months,” Prime Minister Manmohan Singh told lawmakers in parliament yesterday. “Nevertheless, we must be prepared for a temporary slowdown in the Indian economy. Increased public expenditure is an important part of the solution.”

Singh had been under mounting pressure to speak publicly about the issues facing India’s financial markets. And with good reason: India’s stock market has lost more than half its value this year, the rupee has fallen to new lows and cash flow problems have crippled banks – leading to jitters among investors, The BBC reported.

India’s commerce minister, Kamal Nath, said he was confident India could remain a strong force on the economic stage and told The BBC that the country’s growth rate was “not as yet” being threatened: Unlike its U.S. counterpart, none of India’s banks have gone bust due to the Asian country’s “stricter norms,” Nath told Britain’s well-known global broadcaster

Also key: Foreign-direct investment remains strong, and export growth soared 31% in September.

That export growth could pose a problem, said Rahemtulla, the newsletter editor.

“India’s economy, while insulated somewhat from the global crisis because of its minimal reliance on outside trade, may still suffer from the current malaise because of its growing export sector,” Rahemtulla said. “The rate cuts, which will likely be followed by more cuts, are being made to ensure India’s competitiveness by allowing rupee depreciation, which helps its strong outsourcing and tech sectors.”

That, in turn, will directly benefit such companies as Infosys Technologies Ltd. (ADR: INFY). Wipro Ltd. (ADR: WIT), Tata Motors Ltd. (ADR: TTM) and global IT-services provider Satyam Computer (ADR: SAY), Rahemtulla said.

Tata Motors recently gained global fame when it introduced a fully functional $2,500 car called the “Nano” for the India market.

Finance Minister Palaniappan Chidambaram asked India’s parliament for approval to spend an additional $49 billion (2.4 trillion rupees) on rural jobs, food and oil subsidies in the year ending March 31 to boost the economy, which has advanced at a record 8.8% annual clip since 2004, according to Bloomberg.

India’s leadership “must have been worried about global growth, big economies and [the fact that other key economies in] the region [are] slowing,” Sailesh Jha, senior regional economist at Barclays Capital (ADR: BCS) in Singapore, told Bloomberg yesterday, referring to gross domestic product (GDP) report for China.

Hit “The BRICs” for Superior Profits?

Although central banks in the United States and Europe have pared interest rates in an attempt to avoid a worldwide recession, only India and China among the so-called “BRIC” economies of Brazil, Russia, India and China have joined global policymakers in that battle. Russia lowered its reserve requirement for the second time in a month, while Brazil reduced the measure Oct. 13 for the fourth time in three weeks.

Back on Oct. 8, easing inflationary pressures in China enabled that nation’s central bank to pare interest rates for the second time in three weeks. It reduced the one-year lending rate from 7.2% to 6.93% on the same day that the U.S. Federal Reserve, European Central Bank (ECB) and three others lowered rates in an unprecedented coordinated worldwide action. China also reduced the proportion of deposits that lenders must set aside as reserves by 0.5 percentage points.

China’s economy, the biggest contributor to global growth, zoomed along at a 9% clip in the third quarter, that country’s statistics bureau announced yesterday.

In a report released last week, the Macquarie Research unit of Macquarie Group Ltd. said that Indian real-estate developers are facing a shortage of funds, which may slow demand for steel, cement and transportation products and services.

“The capital crunch has hit the real estate sector very hard,” Macquarie analysts Unmesh Sharma and Bharat Rathi said. “We believe the tightness will continue for a few more months, given the difficulty in raising capital through bank debt, equity markets and (more recently) private equity.”

The decline in demand is already showing in India. The nation’s output at factories, utilities and mines rose 1.3% in August from a year earlier, after a revised 7.4% gain in July, as rising borrowing costs have dampened demand from consumers.

Rajeev Malik, a regional economist with the Macquarie Group in Singapore, recently said that the “downside risks to India’s growth have increased, while the upside risks to inflation have receded. We expect inflation to continue improving, thereby facilitating a shift in the RBI’s monetary stance.”

Source: With its Surprise Interest-Rate Cut, India Puts Itself “Ahead of the Curve,” India Expert Rahemtulla Says

Shares of Hudbay Minerals (HBM) added C$0.38 to close at C$5.35, while Lundin Mining failed to attract interest losing C$0.05 to close at C$1.95.

Diversified miner Teck Cominco (TCK) added C$1.20 to close at C$16.30.

Shares of Blue Note Mining (BN) hit C$0.01 after the company announced that its Caribou and Restigouche zinc and lead mines in eastern Canada are being put on care and maintenance. Current zinc and lead prices make the operation unprofitable.

Shares of Alexis Minerals (AMC) jumped C$0.09 to close at C$0.395 following news of a 3.45 metre drill intercept running 6.81% copper at its project in Val d’Or, Quebec.

The big board gold miners got slammed yet again as Barrick Gold (ABX) fell C$1.11 to close at C$27.93, Goldcorp dropped C$1.05 to close at C$23.70, Kinross Gold ended the day down C$0.15 at C$12.75, Yamana Gold (YRI) gave back C$0.09 to close at 5.55 and Agnico Eagle (AEM) bucked the trend by adding C$0.61 to close at C$42.53.

Inflation versus deflation seems to be the trading story of the day, with several pundits now betting against gold as interest rates appear set to fall further. We will see what Monday trading has in store.

Source: Resource Stock Roundup Monday, October 20th, 2008

The buck held up despite some truly horrendous data rolling in.

Output from the nation’s factories, mines and utilities dropped 2.8% in September, the Fed reported. That marks the biggest decline since December 1974, and was nearly twice as bad as economists’ projections for a fall of only 1.5%.

Separately, the Philadelphia Fed’s index of manufacturing also plunged to minus 35.7 in October from reading of plus 3.8 in September. Economists surveyed by MarketWatch expected the index to dip to negative 5. It was the worst-ever drop in the Phillie gauge.

The one bright spot was that the consumer price index was unchanged in September vs. economists’ expectations for a 0.2% rise. But even that was greeted with a less than enthusiastic response.

“The moderation in inflation is a positive, but it is clear now that deflation will be a bigger worry going forward than inflation,” said Philipp Baertschi, an analyst at Sarasin.

Source: Dollar holds vs. euro despite grim data – Phillie Fed index has biggest drop ever

Platinum had a lot of ups and downs to no ultimate effect, as it ended at $987/oz., unchanged. Overnight, platinum is sharply higher.

Silver fared better than gold for a change, opening up in Hong Kong and holding its early gains through a 25-cent rangebound day, to close at $10.67/oz., up 50 cents. Overnight, silver has pushed higher. (Click here for charts)

It was an oddly mixed day for the precious metals, with silver up, gold down, and platinum flat. Gold fanciers had to be a bit disappointed, as the usual suspects moved in its favor, with oil rising and the dollar slipping vs. the euro.

However, gold was competing with the buck for investors’ interest, as those who have been sitting on cash went stampeding back into equities.

“The price movement of gold demonstrates how quickly demand for a safe haven could fade,” said Peter Fertig, analyst at Dresdner Kleinwort. And vice versa, we might add.

The steps being taken to avert a world financial crisis seem to have reassured stock markets. But in the long run, are they gold positive or negative? In its Monday Gold Report, USAGold.com writes:

“According to this morning’s [G7] press release, ‘swap lines between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures.’

“These latest measures come on the heels of last week’s announcement by the ECB that they would provide unlimited euro funds to financial institutions …” And, “The UK has already announced a £500 billion bailout of their banking sector …

“Unlimited dollars. Unlimited euros. All but unlimited sterling. We are talking about a global re-inflation on a massive scale … We’ve recently seen gold set new all-time highs against euro and sterling. Gold nearly set a new record high against the Swiss franc. Given ongoing strong demand for physical gold and incredibly tight supplies, one has to wonder how long the dollar gold charade can be maintained.”

A very good question indeed.

Source: Gold Sinks on Equities Rally