Thoughts on Markets

Wednesday, October 22, 2008

Danger Ahead!

As Gary North has said in his recent Remnant Review, America has changed since the gold window was closed by President Nixon on August 15, 1971. He removed all ties of the dollar to gold and ripped apart the Bretton Woods agreement which made the U. S. Dollar the reserve currency of the world after WWII. At least, the death bells for it began to ring, in a way similar to that of Adam and Eve in their original sin. They did not die immediately, but put into motion the fact that death would end their temporal lives on earth under the judgment of God.

We are in the mist of a huge change in financial markets world wide. The central banks of the world and governments have gobbled up the banks and mortgage companies with the numerous bailouts. The extreme case is here in America. The government now controls the mortgage industry in the virtual purchase of Freddie Mac and Fannie Mae. The Federal Reserve has taken over most of the banking industry.

The Federal Reserve even “force fed” the banks with cash in an effort to unlock the credit markets. Many of the banks first refused to accept the paper dollars. At best, this band aid will provide only temporary relief. Bernanke is pressuring Congress for another stimulus package. Consumers would be well advised, if it comes to pass, to pay off debt or to buy silver and gold coins with the Congressional bribe. Consumption would not be wise.

Even our automobile industry has received a $25+ Billion bail out. In spite of that, it seems that Chrysler and General Motors are about to merge. Can it be long before Ford joins in to create one failed automotive industry? Our auto manufacturers are on the ropes, and desperately trying to avoid bankruptcy.

It is a shame, but regulation, taxation, and unions have driven most of our manufacturing capability away. The tragedy is that we were blessed by God through the capitalistic, free market economy from our earliest days. However, as we turned from God’s stable and unchangeable Law to man’s ever changing law, we trampled on the very economy through which we were so blessed. We have lost our way and stumbled into a virtual democracy with numerous violations of our original Constitution. It is important that we pinch ourselves from time to time and remember that democracy is majority rule. It is rule by the bigger mob and lends itself to all types of abuses.

President Bush and his policies have so turned much of our population sour on republicans and made it almost impossible for McCain to be elected. With regret, that leaves us to face the future with President Obama and a democratic congress. That will mean even greater change toward the most liberal, socialistic government we have ever faced.

The false or pseudo conservatives have joined with the liberal socialist to make us wards of the state. Slaves is likely a better description of our plight. We depend upon the state to provide for us from the cradle to the grave. As this becomes the mode of life, an ever greater portion of the population sees the government as the messiah. I would remind you that it is a false messiah and can never replace the Sovereign Messiah Jesus Christ.

The government is not even a messiah to those who look for solutions to all life’s challenges. Government is cause, not the solution to the problems we see. However, even so-called conservative often seek the government solution for pragmatic reasons. They believe that temporary government solutions, though drastic intervention in the markets and our lives, are necessary. However, can you remember one time when the government gained more power to solve a problem when the government surrendered the power after the problem was solved? There is tendency in government to grow over time in power and cost just as ours has done.

We are heading for an extended period of recession. Certainly, the excessive amount of dollars created to “solve” the financial crisis will eventually lead to price inflation. The price inflation is likely to be put off for about 12 to 18 months or so. I must admit that there is a good deal of price inflation today in the food, education, health care, and in some other areas. It is currently masked to a great extent by the lower price we see at the gasoline pumps.

What are we to do now? I believe that cash and precious metals are the two assets which will be vital for us to weather the recession and following price inflation which will follow. It is wise to reduce debt, as debt will become more difficult to service as many lose their jobs. The wise employee will always do more than the minimum which is expected of him. He will make himself valuable to the employer. That means that he must work as if trying to please the Sovereign Ruler of all: King Jesus. If our output is pleasing to the Lord of Lords, it will certainly please earthly employers.

Additional sources of income are important, as well. Perhaps, one can turn profit from a hobby. We should develop skills that are marketable in a time of financial distress such as we are now facing.

Let us be wise as serpents and harmless as doves. Let us use God’s Word as our guide and our God given minds to discern the proper actions to prepare.

Above, all, each of us must from the heart be dedicated to serving the Lord in obedience to His commands. He has stated several times, that those who love Him are His obedient servants. He also commands that we love our brothers and sisters who are of the faith of Abraham.

It is a joy to serve the Lord. He has paid the price of our reconciliation with His Father. We are reminded that “It is a terrible thing to fall into the hands of the living God.” Only sinners forgiven through the Son of God will escape the eternal wrath to come.

Best to each of you, Doug

Now let us take a brief look at the markets.

Gold is down to 734.20 and silver is down to 9.46. They are both out of favor in view of the higher valued dollar. The DJI is down some 331 to 8702. All mining stocks are down. For example: DROOY is at 3.99; HMY 6.71; KGC 9.61; PAAS 11.23, and SSRI is 7.81. All markets are nearing lows again. There is a rush to get out of stocks of all types. The shortage of silver and gold coins still exists, as dealers are unable to supply the demand.

The dollar continues to be strong without a real fundamental reason. Perhaps, it is strong, because people are familiar and comfortable with it. Here is a summary of currencies from The Daily Pfennig:

"The pound sterling slid to the lowest level in more than five years against the dollar after the BOE Governor Mervyn King said Britain's worst banking crisis since World War 1 is likely to push the economy into a recession. Kings comments came after the Bank of England released minutes from their Oct. 8 meeting when they voted unanimously to lower their benchmark rates 50 bps. Yesterday's decline of the pound was the steepest intraday decline in 16 years. And the short term outlook continues to be bearish, as weekly and monthly stochastic and trend indicators show a target for the pound of $1.60.

The Bank of Canada reduced its main interest rate by a quarter of a point, less than economists predicted. But Central bank Governor Mark Carney said they will probably need to act again to fend off the effects of the global recession. The Canadian dollar joined most of the other currencies and slid vs. the US$ yesterday after the rate announcement. Canadian exporters will be hobbled by a US recession, and commodity prices which have been in free fall. But policy makers stopped short of saying Canada's economy is headed for a recession. Canadian banks were rated as the soundest in the world this month by the World Economic Forum, but these banks are still reluctant to lend. A further cut in rates, and falling commodity prices will keep the loonie under pressure.

Emerging market currencies were the biggest losers overnight as Argentina's planned seizure of private pension funds stoked concern the nation faces its second default this decade. South Africa's rand fell to a 6.5 year low against the dollar joining the Brazilian real and Mexican pesos as the worst performing currencies. The rand moved above 11 rand per dollar for the first time since April 2002 as the move away from emerging markets combined with another fall in the price of gold to put downward pressure on the currency. South Africa's economy is similar to the US in that they rely heavily on portfolio inflows to fund their current account deficits. These portfolio inflows aren't going to be forthcoming in the current environment of risk aversion.

Brazil's currency continued to fall in spite of government efforts to shore it up. Brazil has spent $22.9 billion in the past month in an attempt to slow the fall of the real. Sales of reserves to buy reals in the spot market totaled $3.2 billion from Oct. 8 through Oct. 20, central bank President Henrique Meirelles said in testimony before congress late yesterday. But Brazil is not alone in trying to prop up their currency. Mexico, which has a smaller economy, spent even more on currency intervention during the same period. Mexico's central bank bought $6.4 billion worth of pesos on Oct. 10 alone to shore up the currency.

Brazil is getting somewhat of a bum rap by the currency markets, as their economy is doing fairly well amid the global credit crisis. The government's debt as a percentage of gross domestic product fell because the country is a net dollar creditor. Capital levels at Brazilian banks exceed the minimum amount required under international guidelines. And while Brazil is known for commodity exports, only 13 percent of their GDP comes from exports. They depend more on domestic demand than foreign markets, so they should be somewhat protected from a reduction in global trade.

In other emerging market news, Hungary's central bank raised interest rates 300 bps today after a series of earlier measures to prop up the forint failed to halt the flight of investors. The first emergency increase in five years came after policy makers left rates unchanged at their scheduled meeting two days ago. Investors should continue to monitor the situation here, as Hungary continues to attempt to avoid further falls in their currency.

To end on a positive note, the Japanese yen has benefited from all of the deleveraging, and traded back down below 100 overnight. The yen continues to be the only bright spot in the currency markets over the past 3 months as it has gained 8.2% vs. the US$."

From The Independent out of London:

Spending on gold nears $3bn as investors flee shares

By Mark Leftly
Sunday, 19 October 2008

Read the entire article HERE


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