Waiting And Watching

Thursday’s end of day rally is looking like an aberration as world markets sold off sharply Friday and US markets look very weak in premarket trading. Essentially I am still watching the same chart patterns from yesterday’s post, and waiting to see if specific index and sector ETFs break to new lows. In other words, short them as they break down. Given the action in global markets, I have a hard time seeing the buyers stepping up today.

As we read about potential government interventions to address the still-expanding crisis, at some point the realization is unavoidable: governments do not have the capacacity (financial or otherwise) to turn this around. Here are some recent articles if you doubt the point:

- AIG Has Used Much of Its $123 Billion Bailout Loan

The troubled insurance giant American International Group already has consumed three-quarters of a federal $123 billion rescue loan, a little more than a month after the government stepped in to save the company from bankruptcy.

- $40 Billion Foreclosure Assistance Not Even Close

The Treasury just released some news that they were pumping $40 billion into the foreclosure/loan modification/refi market. The details are ambiguous as best.

$40 billion is nothing. Below are real-time foreclosure stats for CA. Remember, CA is 35% of all defaults and foreclosures by count and 45% by dollar volume. While its nice to see this topic addressed $40 billion is not much considering int he state of CA, total Notice-of-Defaults and actual Foreclosures are averaging about $28 to $30 billion per month. This means on a national level, roughly $70 billion. Given this $40 billion makes for a nice headline but in the grand scheme of things, means very little.

What happens when unemployment continues to rise? Housing is not bottoming any time soon.

- International Monetary Fund set to offer $1 trillion lifeline to developing world

The International Monetary Fund believes that emerging countries will become the next victims of the credit crisis and is trying to force through a rescue package within a week to allow such economies to swap their own currencies for US dollars.

While Wall Street has speculated that the swap facility could be worth $1 trillion (£620 billion), the IMF has not detailed the size of any rescue package. IMF economists fear that countries such as Pakistan will experience the same drying up of credit facilities that has hit America and Britain.

- IMF Moves to Ease Borrowing Policy

The International Monetary Fund is putting final touches on a plan to help developing nations weather the global financial crisis by providing loans that don’t require borrowers to make far-reaching policy changes.

…It is unclear how big the lending program will be. The IMF has at least $200 billion in resources and may try to combine forces with other international institutions and individual nations.

Earlier this month, Japan’s finance minister, Shoichi Nakagawa, said his country — flush with nearly $1 trillion in reserves — would help finance such IMF bailout plans. The IMF is also likely to ask China, which has about $1.9 trillion in reserves, for additional financing.

Note the discrepancy between the $200 billion in IMF reserves, and the proposed $1 trillion in loans to developing economies. Also, consider the IMF’s relaxation of lending standards (”loans that don’t require borrowers to make far-reaching policy changes”). Sounds familiar somehow…

So where will we get all of this money? Apparently the Japanese are willing to pony up, and someone is going to ask the Chinese, who were recently unwilling to extend funds to Pakistan. We are still at the beginning of this crisis, and already deeply in the hole. Financial institutions and governments have been and still are creating mountains of debt that they intend to pass to you and me, either through higher taxation or devaluation of our monetary assets. Keep your eyes on the dynamics of inflation/deflation, and be sure to keep those assets as safe as possible.

Lastly, the always entertaining Mogambo Guru:

Well, to be fair, it is actually mostly American dollars that they are distributing with such abandon, as the Financial Times reported that “The US Federal Reserve announced it was making unlimited amounts of dollar funds available offshore to be distributed by the European Central Bank, Bank of England and the Swiss National Bank.” Gaahhh!

The Fed is now giving foreigners “unlimited amounts of dollar funds”, and yet I cannot get another dollar with which to turn my ordinary burger-and-fries dinner into a Grande Feast of double fries and two perfectly-fried all-beef patties? What in the hell is going on here?

…Fortunately, Rick Ackerman of Rick’s Pick’s neatly does the same thing for me as he writes, “The good news is that there is no compelling reason to even want to exit gold, no matter how high it goes or how hard it falls. For we should expect gold to hold its purchasing power in any case, be it inflationary, hyperinflationary or deflationary. This it has done quite well over thousands of years, and there is no reason to think that whatever is coming will change that. Bottom line: If gold soars to $5,000, you are going to feel glad you’ve got some in your safe deposit box. But if gold should collapse the next day to $100, you will still be glad, since all else save the absolute survivalist essentials will have fallen in value by even more.”

The reason is because we have fiat dollars and unrestrained fractional-reserve banking, and as Mr. Ackerman attests, “The dollar is already completely, fundamentally, wholly, absolutely and irrefutably WORTHLESS. And the U.S. is b-a-n-k-r-u-p-t. This means that the dollar’s value is purely a figment of the herd’s imagination.”

It may not be time to buy gold yet, but I am certainly watching the chart closely.

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