Tuesday, August 28, 2007

One Man's Trash, Is Another Man's Treasure"

The Fed has encouraged banks across America to line up at "the window" for an unlimited supply of credit. Many have, many are, and many more soon will. What are these banks going to do with all this "money"?

When the Fed pumps money into the economy, it doesn't bail out mortgage lenders that have taken wild risks.

Nor does it go to Wall Street firms up to their ears in mortgage-backed securities.
The money goes almost entirely to commercial bankers, most of whom are running away from the mortgage markets as fast as their legs will carry them.

Result: For the Fed to persuade bankers to take the money is hard enough. To get them to dump substantial sums down the drain in the mortgage market is next to impossible.

Many people think the Federal Reserve can just pump money into the U.S. economy, and that's where it stays.

Not true. The U.S. markets are like a bucket with a hundred leaks: The more money the Fed pours in, the more money that's likely to gush out — to Western Europe, China, and Japan.

International investors are being scared off by the dominos falling in the mortgage market. And they're scared off even more by the Fed's efforts to flood the U.S. market with increasingly worthless dollars.

Years ago, foreign money in the U.S. was a small factor. Today it's the single largest funding source for our national debt, and for the mortgage bubble itself.

When that money rushes back to its home country, the dollar's decline becomes a rout, and the rise in foreign currencies becomes an explosion.
-Martin Weiss

In effect, the Fed has lit the fuse on an incendiary inflation scenario. Buy trying to "buy our way out of debt", the Fed, through it's ever secret machinations, have chosen a path to destroy the US Dollar...in the "hopes" that this will "save" the economy. As foreigners repatriate their investments in US Assets, the sewage of the US Dollar will back flow across the oceans and flood our shores. The effect of all these toxic and worthless dollars finding their way home will send the inflation meter off the scale.

When a foreign entity purchases a US Asset, he must sell his local currency and buy Dollars to purchase it. This "creates" a demand for Dollars. For the past several years, America's greatest export has been the toxic waste called "mortgage backed securities". They came with a AAA rating and the promise of "high yields". In a world seeking ever higher yields for their "fixed income" investments", these toxic derivative packages were like manna from the gods. US Treasury yields were like peanuts compared to the promise these little "debt bombs" offered.

But few ever considered them debt bombs. They came with AAA rating from the very well respected American ratings agencies like Moody's and S&P. Nobody saw past the window dressing...they only saw the "high yields". And with the world awash in Dollars, many foreigners traded in some of their money for ours, sent it back to us, and got a toxic debt bomb in return. All was hunky dory...until the bombs went off.

This is an example of how foreigners "finance our debt". If we weren't selling these high yield jewels to them, where would the mortgage bankers get the money to make more and more sub-prime loans? The cycle of money. We buy manufactured goods from overseas with US Dollars. The folks overseas buy toxic waste from us with the the Dollars we sent them to pay for the goods...over, and over, and over....

And now that these unfortunate foreign investors see the truth about US Dollar backed assets, they want nothing to do with them. Their trust in American Financial Markets and the US Dollar has, is, and will be broken. In effect these foreign investors will not only begin to dump their "investments in America", they will quit buying them all together. And that's when the US Dollar shit will really hit the fan.

You see, as these foreign investors dump their Dollar holdings, they have to buy their local money back to bring it home. [see the Japanese Yen] Foreign money leaves America, and the filthy, festering, flotsam of the US Dollar begins to pile up on every street corner in America. Viola! Inflation, what a stinking mess.

Unless, of course, if you own Gold and Silver. "One man's trash, is another man's treasure."

The Coming Flight to Gold
by Roland Watson

Panic has seized the minds of many as the shaking of a credit implosion rumbles through the marketplaces of today’s moneychangers. The ground is giving way beneath them threatening to suck them into a financial hell of derivative defaults and dishonored debts. The penalty is eternal death for hedge funds doomed never to rise again whilst for others they escape those searing flames by the skin of their solvent teeth.

The markets have taken a few blows these weeks past but not strong enough for some to believe that government debt will totter and fall. We shall see but the economic and financial assaults of the past suggest that it is the Golden Tower that men will resort to when all else fails. In that light let us consider gold.
Another morning on the COMEX, and another take down of the Precious metals right out of the box. This is getting ridiculous. Above I have posted a 5-minute chart of Gold since yesterday's close . On it I have identified the opens in Asia, London, and this morning New York. It would appear to me that the rest of the world knows the Truth about Gold and New York is trying to cover that Truth up with their paper they throw daily at the markets. Are the bullion banks stepping up to the Fed's "window" and borrowing money so they can short even MORE Gold on the COMEX every day? Think about it...how can Gold be the true inverse of the Dollar, if you can print countless Dollars to short it? Scary thought....

Gold and Silver retreated Monday as we suspected they might. Friday's dash higher obviously a "short covering" episode. We're still waiting for a short covering "event" to launch the metals higher, and get the Bulls back in the saddle. For now I guess we must be content to wallow in this puddle of uncertainty and wait for both to break from their recent consolidating trading ranges.

Gold must remain above 663/664 and clear 670. 658 remains support. Silver must, I repeat must, clear 12 with authority to get any of the Bulls in that market's attention. Support at 11.70/11.60/11.48.

This just in:

Home Prices: Steepest Drop in 20 Years
S&P Says Housing Prices Fell in 2Q by Steepest Rate Since Its Index Was Started in 1987

NEW YORK (AP) -- U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the research group said Tuesday.

The decline in home prices around the nation shows no evidence of a market recovery anytime soon, one of the architects of the index said.
MacroMarkets LLC Chief Economist Robert Shiller said the declining residential real estate market "shows no signs of slowing down."

I guess we won't be seeing inflation in home prices again anytime soon then eh?

Merrill Lynch (MER.N: Quote) has downgraded to "neutral from buy" investment banks Bear Stearns Cos. (BSC.N: Quote), Lehman Brothers (LEH.N: Quote) and Citigroup (C.N: Quote).

This news does not bode well for the general equities markets, because as go the financials, go the markets. And as of 11AM est., they have tanked. This of course has foolishly once again pressured the precious metals and commodities markets. When will people finally wake up and realize that these markets are the safe ones, not the risky ones?

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