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Michael Nystrom has just published an article, entitled, “Our Debt Money System Explained.” Once you have a basic understanding of our monetary system, lets examine what happened this last week and try to put it into a perspective of what is really going on. On Wednesday, August 22nd, four of the largest U.S. banks borrowed $2 billion from the Federal Reserve’s Discount Window. This came three days after Deutsche Bank borrowed an unspecified sum from the Discount Window. The terms of the loan were altered by the Fed. Interest rates on these loans were reduced from 6.25% to 5.75%. The normal 1-day term was lengthened to 30 days. This may sound normal, but in fact, it is unprecedented. The normally conservative Forbes Magazine commented on this move. The Federal Reserve Discount Window is considered the credit line of last resort, so why are these major banks borrowing at a considerable loss there? Mish’s Brave Face Masks Bold Lie may have something there. "Basically this is a PR move coordinated by Fed to hide the fact that going to (the Fed) window is (an) emergency move. It hides the fact that some banks have to." Was it Deutsche Bank? Or one of our own? Needless to say, there is more to this story that we don’t know. In any event, Dr. Bernanke is prescribing bleeding the patient (more loans) as a cure for anemia. The Nikkei recovers partially, but not out of the woods.
The news of the Bank of Japan’s involvement in the subprime debacle may have been the catalyst for last week’s rout in the Nikkei. After four days of rally, the Nikkei pulled back by .4% this morning. There still appears to be some unfinished business on the downside for the Nikkei. Investors are still flighty and the rally may be attributed to short-sellers covering their positions. The Shanghai index seems unstoppable…
…but the news of the Bank of China holding $13 billion of subprime debt is rattling some. Is this the end for the Chinese stock market? The recovery from last week’s sell-off suggests not. Bank of China’s Hong Kong shares fell 8.1% on Friday as it reported heavy involvement in subprime loan. But on Mainland China, where the press is heavily censored, Bank of China’s shares rose. Is this bounce D.O.A.?
Last week I noted some parallels between the current market and the 1929 and 1987 crashes. This is the sixth day of the rally, which now matches the rally out of the initial low of the 1929 crash. Investors and clients are asking me if it’s time to get back in? The answer is “Nyet.” Can bonds break through the ceiling?
Another way of asking the question is, can interest rates go lower? The reason for the spike down in bonds earlier in August was that the perceived risk to all the markets was rising. Now that the Fed has apparently smoothed over the rough spots, the bond market has interpreted that as an “all clear” sign. That may not be the case. Searching for a bottom?
CNN Money headlines read, “Home Builders Search for a Market Bottom.” The gist of the article is that the bottom may not occur anytime soon. If the cycle phasing is indicating anything, the answer is that we may see a bottom in the housing market later this year. You’ll notice that interest rates have dropped substantially, but the problem isn’t interest rates, it is the availability of loans, which have suddenly dried up. The U.S. Dollar takes a breather…
…but the trend is still positive. Today’s decline in the dollar was linked in the press with credit market woes. This couldn’t be further from reality. The dollar becomes more valuable with scarcity, not abundance. Credit woes will bring scarcity, which should raise the value of the dollar, not weaken it. The press is talking up what a strong rally gold had this week…
…but the chart shows only a portion of the decline was reclaimed. Granted, a gain of almost $11 is pretty substantial, but what we are really seeing is the product of increased volatility, not any fundamental shift in the value of gold. The charts suggest another decline is in the offing. A miss for Dean, gasoline buyers can relax for now.
The EIA's report on Wednesday tells us that Hurricane Dean was a large concern a week ago, since its path included hundreds of oil rigs as well as refinery installations. So what is concerning our petroleum advisors now? It’s the high consumption of what supplies of gasoline we have. The concern is that we have minimal stockpiles of gasoline and that could add volatility in the future. BTW, the chart suggests higher prices soon. Bye, bye, Hurricane Dean!
The hurricane threatening the Gulf Coast did not affect the U.S. natural gas infrastructure, says the Energy Information Agency. Last week I suggested that , once the hurricane crisis passes, that lower prices would follow. Boy, did they ever!
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