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I Am My Neighbors Keeper
By Jon Nadler

The aggressive but totally unsurprising Fed rate cut came and went this afternoon. The result? Another case of " Buy the rumor, sell the fact." Stocks headed lower, gold lost $25 of its prior robust $30 gain for the day, and the dollar continued at pre-announcement levels (down roughly 0.90 on the index at 84.90). Crude oil, which started the day well into the plus column, ended with a better than $5 gain at $67.75 per barrel.

So, here we are, with interest rates as low as those last seen in 2004, and with the Fed leaving the door open to 'more cuts' - if needed. Ummm, like two more half-point events? And then what? Start paying people to borrow money? At the end of the day, thirteen months ago, gold was in the same $730-$775 range and rates were much, much higher. During the ensuing rate slashing campaign, the dollar refused to roll over and die, and while inflationary pressures did become a concern by mid-year, they have clearly been replaced by deflationary ones of late. Thus we got a slew of a new series of excuses that it matters not what gold did or (especially) did not do in the crisis, because we already have a new/improved but still 'down the road' reason due to which prices will have to explode. Like to $7,000 per ounce. Or, $13,000 per ounce. Why not. It's just a number, right?

Otherwise, the midweek market landscape offered a mixed picture to global investors, pleasing some while frustrating others. Advances in equities in Japan and Europe lifted spirits some more, following yesterday's explosion in the Dow. However, by this morning, Dow futures were indicating a less than euphoric start to the day. Most of the various markets' currents hopes were pinned on the aggressive Fed rate cut. Thus, we had a start at lower levels for the US dollar (85.70 on the index), which then became a much, much lower level as the rate cut was priced in, but gold bullion was last seen barely hanging on to a $10 gain in the afternoon hours - still orbiting in the $750 - $760 per ounce zone. The metal ran into resistance right at the $775 level we mentioned this morning.

Clear direction is still lacking in all of these markets, and conditions will pivot on a single news item, or someone's mood souring for no apparent reason. Around the world, the slalom continued as Hungary got a nice $25 billion intensive care package from the IMF, China cut interest rates for the third time in...three weeks (!), and the Bank of Japan was considering doing something similar with only half a point left before the nil figure signals the end of the line.

Following the lowest reading ever in US consumer sentiment, and the deterioration of pretty much everything that is traceable, the Fed finds itself with less room to maneuver than a Hummer in Tokyo. Whether or not the next rate accommodation (some are already calling for another cut soon) will succeed in having the intended effect, is entirely another story. At any rate, the numbers counter is clearly running out of digits, and markets may have already priced in even the possibility of a big fat zero to come - still, without signs that such a move might 'do it.' The White House has already practically ordered banks in the US to start lending. Ha. Thus, far, the only 'lending' (at no cost, and without the need for repayment) that the banks receiving the government's money have done, have been to the McCain campaign. Interesting trail money can take...

The self-fulfilling prophecy of a consumer recession sparked by consumer fears about a recession is already unfolding, and there is little that a half-point cut can do to stimulate a consumer who is more likely to wait for a real stimulus - in the form of a second check from Uncle Sam. Even that handout might just be socked away, at a time when the Thanksgiving to come will likely consist of giving thanks than one still has a job, and is still residing in their home. Amid such conditions, Keynes' "paradox of thrift" will turn savers ( a very rare species in the US since...forever) into the culprits who not only prolong the economic swoon, but could also have them become the instruments of their own losses of jobs and homes.

Gold's recent bounce from the depths at under $700 might last a bit longer under these rate and economic conditions, with significant resistance emerging once again, only beyond the $775 area, and that is still another $100 away from the 200-day moving-average line. Waning open interest in the metal is a further sign to be monitored for its potentially negative effects. Durable goods came in better than anticipated, and the news lifted stock futures as well as gold shortly after it opened - the idea being that rising equity markets might alleviate the liquidation avalanches seen over recent weeks.

Newmont's Q3 profit fell by over 50% but it also revealed that its costs to produce an ounce of the shiny stuff were in the mid-$400s, on average. Earnings reports in other industries continue to remain in focus as well, as are layoff and merger announcements for various icons of the US corporate Hall of Fame. News from the industrial world continues to dominate the white and noble metals. Silver rose 68 cents to $9.87, platinum fell $27 to $798, and palladium climbed $14 to $191 as the complex still awaits clearer signs from the automotive and other sectors of demand.

And now...for something completely wacky. Another bailout. Of your next-door neighbor who got in over his head and bought the McMansion he was not intended to qualify for. This is for real: "Regulators are working on a new federal program worth up to $600 billion that would provide government guarantees of home mortgages to help prevent foreclosures, a source familiar with the discussions told Reuters on Wednesday. The Federal Deposit Insurance Corp and the U.S. Treasury Department are hammering out the large foreclosure prevention program, which could provide guarantees for up to 3 million at-risk mortgages, the source said. The program would be managed by the FDIC and would require banks, savings and loans, investment funds, hedge funds and other mortgage holders to restructure them based on homeowners' ability to pay, according to the source."

Gee, I get to stay in my Mediterranean cookie-cutter, keep my plasma screen, reduce my mortgage to $500 (based on 'my ability to pay' ) and all is well. Meanwhile, my neighbor, who happened not to miss a payment on his mortgage and bought the home based on reasonable price vs. income vs. loan service parameters, will keep on doing his part while watching 20 or 30 percent be chopped off the value of his home due to my irresponsible behavior. Full stop. Say no more.

While everyone offers this and that solution to the world's current woes, some market observers have taken the philosophical road less traveled, and are trying to delve into the crux of the matter from a different angle. Before today's story on guaranteed mortgages hit the wires, Minyanville's writer Todd Harrison offered this interesting insight and his own preconditions for the turn that so many are hoping for during this dark time, courtesy of Marketwatch:

"Oscar Wilde once said that skepticism is the beginning of faith. Investors around the world are finding faith as a function of need.

It's easy to be consumed by the shifting social mood as the world turns and Rome burns. Societal acrimony is percolating into the election, geopolitical risks persist, and an uneasy feeling abounds that another shoe will soon drop.

We've explored both sides of the market ride as this process of price discovery permeates. The friction between opinions is where true education resides and we must assimilate the spectrum of risk and reward if we're to proactively prepare for the future. See related MarketWatch column.

While a multitude of factors will define our forward progress, one dynamic has been a consistent and persistent theme. As global indices swoon, the value of investments decline and standards of living erode, the transference of guilt abounds as people point fingers and place blame.

I recently watched a debate about who is responsible for our current state of hate. Wall Street, Washington, the Middle East and mainstream media were all mentioned as root causes of the financial crisis. I couldn't help sense that the discussion itself was endemic of the mindset that got us into trouble in the first place.

The immediate gratification "zero-percent financing" lifestyle that was enjoyed by many and encouraged by most finally came full circle. The unwinding of societal abundance and attendant austerity will come to define this time with the benefit of historical hindsight.

There were certainly predatory lending practices in play and those who abused the system. Those actions were magnified by a grand experiment designed to suspend the business cycle and replace legitimate economic expansion with credit-fueled growth. See related Minyanville column.

My grandfather used to say that what goes around comes around. The current crisis is the comeuppance of cumulative imbalances that have built since the turn of the century. The free market system forever changed and the ramifications will manifest for years to come.

While some see this as a nasty path, I'm viewing it through a constructive longer-term lens. Debt destruction and asset class deflation is a painful, yet necessary, progression that needs to occur before a stable economic recovery emerges. In order to get through this, we need to go through this and we're going through it now.

'Lately I've been running on faith. What else can a poor boy do?'

— Eric Clapton

In 2006, I shared that we would likely see a "prolonged period of socioeconomic malaise...entirely more depressing than a recession." See related Minyanville column.

While I don't profess to know how long this process will persist, I'll offer that with global indices down 40% to 50% year over year, the arbiter of time and price is moving in the right direction. That, on the margin, is a healthy evolution that will present profound opportunities for those who preserved capital.

The single biggest risk to the golden age of globalization is the emergence of isolationism. The dot-gov bubble has seemingly burst and nations have taken steps to protect their own interests. The faith and credibility of the U.S. government and its policy makers are paramount as we edge through these trying times.

If the U.S is to regain respect on a global stage, there are intuitive steps than can be taken. Protect savers by backing deposits, hold individuals that over-extended on credit culpable for their largesse, investigate institutions that engineered the financial machination and punish policy makers that were compliant through acceptance.

We must establish a fresh international foothold, admit the error of our ways and begin to rebuild trust. From there, we should allow for a seismic readjustment that will bring currency, commodity, equity and credit markets back to the state of equilibrium from which we'll together grow.

There are no easy answers for what ails the global financial landscape but a bit of humility and a dose of humanity would go a long way.

True redemption -- whether it's in life, love or the markets -- always begins within."

Todd offers no clues as to what values such a 'seismic' readjustment would yield in the US dollar, gold, oil, the Dow, and other assets. Our take is that they would be significantly different that those we are seeing today. And, while we journey towards those values (provided there is a resolve to get this over with) the road will be laden with more potholes and boulders than the one traveled by the truckload of stale nitroglycerin in the "Wages of Fear."

Drive Carefully and don't do donuts in front of your neighbor's house.

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