want You to Want Me
By Jon Nadler
If there was anyone
left out there who was not convinced that the
threat of inflation has faded faster than Mrs.
Palin's number of Google mentions, well, the
Bank of England placed those doubts into a very
deep and very cold cryogenic tank this morning.
Issuing a stunning 1.5% interest rate cut, the
BoE declared that the threat posed by the
economic deterioration at home and abroad
trumped any upward price pressures and then
some. Thus, the central bank borrowed the entire
arsenal of implements from "Saw V" and went on a
slashing spree to rival that of the US Fed and
anyone else in recent months. The Swiss National
Bank and the ECB did not stay far behind,
cutting rates by 1/2% themselves. Well, at least
they were within the forecasted range. Today's
rate-cut prize still goes to the BoE. Gordon
Gold prices tried to reach for $750 this
morning, while the US dollar was levitating near
85.00 on the index. However, following the
rate-cut parade over in Europe, the greenback
took off for higher altitudes, gaining 0.35,
while crude oil sank $1.16 to $64.14. As a
result, gold tempered its gains and was ahead by
only $5 prior to the NY opening, and not much
above $740 per ounce.
Today's focus will remain on the US dollar and,
of course, on the Dow, following a nasty
622-point drop in the Nikkei overnight. That
which was inexplicable in yesterday's rise in
the Japanese index, was certainly explicable
this morning (at least in part) by automaker
Toyota's warning that is was slashing its annual
earnings forecast by more than half. US car
manufacturers are pleading for a commutation of
their death sentence with President-elect Barack
Obama. The PGM-group metals might have a hard
time making progress in the wake of such news.
Participants are also fretting about tomorrow's
New York spot bullion prices opened with a $2.5
gain, quoted at $739.60 and not looking very
eager to get back to last month's highs at this
point. It might still do it, but a lot hinges on
currency markets here, and overseas. The fact
remains that despite whatever ails the US
dollar, that which ails the British and European
common currency is applying a lot of lipstick on
this green pig and making it look more
desirable. The threat of a global recession
appears to be mutating into stark reality, and
commodities are responding with appropriate
We still do not buy into the declarations of the
unequivocal resumption of the secular bull
market in bullion. Certainly not when prices are
proving such wishful thinking rather...wishful.
Silver gave up early morning gains to open with
an 8 cent advance, at $10.33 per ounce. Platinum
was off by $8 at $851 and palladium rose $10 to
$227 per ounce.
None of the above scenario in global economics
has stopped the world of pessimistic pundits
from producing dissertations on why the current
regime of bailouts and rate cuts must result in
some kind of a replay of the Weimar era. Visions
of wheelbarrows full of worthless banknotes are
being floated (not to mention the ubiquitous "Bennycopters"
- still 'warming up' on the helipad, eh?) and
abandoning the dollar ship remains the mantra to
follow. Not just half-heartedly, mind you, but
with complete 100% flight as the 'smartest'
strategy. Well, never say 'never' - but let's
look at what 24/7 Wall Street.com's Doug
McIntyre has to say about the matter. Will Uncle
Sam file for Chapter 13? Chapter 11? Or will he
start a new chapter altogether - one which
restores the currency and the country to a state
of health from earlier times? Will he manage to
keep other nations and individuals wanting the
greenback? What will it take to achieve this?
There is not a man with a typewriter who can
avoid writing about how much debt the US
government has and how much more it will have to
take on. Paulson's program will put $700 billion
more on the "red" side of the ledger. The
deficit for the federal government's fiscal year
will be well in excess of $1 trillion. If tax
income drops due to the recession, that number
may turn out to be the hope of the damned.
The conclusion most people draw from all of that
exhausting economic thinking is that the new
president will not have any money to fix things
and keep those things fixed that were already
fixed over the last decade. No one needs a new
headline. Just copy it from the next guy. "Obama's
Hands Are Tied".
But, they are not idle hands. Whether citizens
view him as a free-spending radical who just
wants to drain the checking accounts of the rich
or just another guy elected president during
another crisis, some expensive problems will not
Treasury already has its big chunk of capital
and it has no reason to part with that. Banks
will get some. Perhaps insurance companies. If
credit card defaults and LBO failures keep going
up, they will join a continuing drop in the
housing market as a reason that $700 billion may
not be enough.
The most admired analysts covering the car
industry, The Center for Automotive Research,
recently reported that a collapse of the US auto
world would kill three million jobs. That would
take unemployment to 8% even if no one else in
America lost a job. It would damage personal
income by nearly $300 billion.
A walk around other large industries such as
retail and airlines would yield equally dismal
data. Without an unimaginable amount of money
put into the private sector, the economy could
go into a 2009 version of The Great Depression.
The public is against that, but it is well to
remember that a year ago most economists thought
the US would avoid a recession. What 2008 has
proved is that economists are no more accurate
than the TV weatherman. They just get paid less.
On the back of an envelope, it is entirely
possible to make the case that the federal
government could ring up a $3 trillion deficit
over the next two years. Since that has never
been done before, it is impossible to predict
the side-effects. Nausea and dizziness are
probably listed on the label. And, if the
arousal lasts more than four hours, call a
All of this deep factoring brings the analysis
around to the question of whether the US
government can raise the money to cover the big
hole it is digging. The answer may be more
simple than many people would guess.
If the Chinese, the Saudis, and others with a
lot of extra capital, keep buying US debt, the
amount that the Congress can write checks for is
phenomenally large. If a global recession pushes
China back into the dark ages, the proposition
becomes more difficult by a factor of ten or so.
Only people in mental wards or on hallucinogens
would suggest that the US government could
default on a dollar of its debt, but no one ever
believed that General Motors or AUG could go
bankrupt. Borrowing has its limits, even if they
are colossal to the extent that they cannot be
At some point Uncle Sam's extended hand will be
cut off. Then the government will have to decide
whether it can cover the note. There is no
absolute guarantee that the answer is "yes."
Credit default swaps on US debt may just became
a big business."
The $730-$775 range remains on track for the
moment, while silver could stage a break for
higher ground. PGMs are coming back from
bargain-basement levels but will remain sharply
focused on automotive news. Trading these niches
with anything but discretionary funds remains
ill-advised. There is a lot more dust left to
clear before month-end.
Continuing jobless claims climbed to a
quarter-century high and news that Citi and
Goldman will be adding to those rolls, as they
axe 12,000 jobs in the coming 12 months. Wall
Street bonuses are projected to fall 20 to 50
percent, while some firms have cancelled holiday
parties. Lehman's Mr. Fuld will exit stage-left,
by year-end. No bonus, no severance.
A big thank you goes out to all our friends on
the commodities desk at Bloomberg who took us on
a tour of the high-tech wonderland that is their
building in NY. Very impressive - surpassed only
by the talent of its writers.