Today, let’s think about this some more. Not everyone will necessarily be affected by this market, but what’s behind it could be an opportunity for us all.
You see, what the big rally in treasury bonds signifies is that rather than take the risk of buying shares at cheap valuations and with big dividend yields, investors would prefer to lock in a guaranteed return – even if it’s virtually zero. Basically, investors are giving up on yield and value in return for the perceived safety of lending to the government for a tiny return. Meanwhile, this is great for the American government. They are able to borrow very cheaply, in order to spend their way out of recession.
And it’s only going to happen more and more once the changeover in the White House happens in January. The problem – or opportunity for the canny investor – is that all this cannot be good news for the dollar. And it’s only going to get worse. Forex traders have made a lot of money pushing down the pound in 2008. But it could be that all the action is going to focus on the greenback in 2009. Let’s try to understand this.
In the last quarter, $530 billion of government debt was issued. It’s estimated that there will be a further $550 billion this quarter. But when President-elect Obama comes to power, then these numbers will look like peanuts.
Basically, Obama plans to save the world. His aim is to yank America – and therefore the rest of the world – from the jaws of recession and to get growth back on the agenda. That’s fine – we could all do with that. We’ve had enough of recession already.
It’s just that in order to achieve this admirable objective, Obama needs to start spending. So, he’s planning a huge economic stimulus package, focusing on building roads and other infrastructure projects, making government buildings energy-efficient, adopting environmentally friendly technologies and building and renovating schools.
And the cost of the planned splurge seems to be creeping up to ever higher levels. Just a few weeks ago, $500 billion was the number put on it. Then it crept up to $700 billion. Today, I read that one of Obama’s advisers has said it’s more likely to hit the $850 billion mark. In fact, The Washington Times reports that the president-elect’s economic-recovery plan could cost as much as $1 trillion over two years.
How’s Obama going to pay for all of this? Well, you’ve read about this already, I’m sure – it’s been labeled quantitative easing. It’s what governments do to try to boost demand once they run out room to cut interest rates. What will happen is that the Federal Reserve will bring cash into the market by buying up large quantities of securities – government debt, mortgages, commercial loans, even stocks – from banks’ balance sheets, giving them plenty of new money to lend. You can think of it as being like flooding the market with dollars.
As with anything, when you get a sudden huge increase in supply, it can lead to a fall in price. But there’s another reason I think the dollar is headed for a fall…
Back in July this year, the US dollar index - which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona – bottomed out and entered a confirmed uptrend.
Scared money flew into dollars as it’s traditionally seen as a rock-solid currency. People trust the dollar. But after rallying some 20%, it’s run out of steam. And now that the Fed has slashed interest rates effectively to zero, the dollar has lost its appeal.
Yesterday, the U.S. dollar index officially broke through the uptrend line – and through the index’s 50-day moving average. And to be honest, it’s difficult to see where the next support level rests… or where the next bit of dollar-positive news will come from. The question is how to play it. The pound has been rallying a little against the buck recently. But I certainly wouldn’t be comfortable betting on that trend continuing. Our economy is in an even worse state than America’s.
Meanwhile, the eurozone will not be able to escape this ongoing financial crisis either. There’s possibly some short-term mileage in the euro going up, just because of the interest rate differential. Money tends to chase yield – and the euro is paying 2.5% versus virtually zero for the dollar.
But as a long-term bet on the falling price of the dollar – and the real possibility of further financial shocks to come – it’s seriously worth looking at gold.
Best regards,
Frank Hemsley
Don’t be fooled by the surprise “spike” in high street sales
BY FRANK HEMSLEY
Apparently, everything’s alright on the high street. We’re buying more, says the Office of National Statistics, reported on the BBC.
Well, we should take that with a large pinch of salt.
OK, you can see that the latest grey bar on the chart, which is for November sales, is in positive territory. That’s impressive and actually against expectations. Consensus analyst forecasts had been for a month on month fall in sales. But, as the red year-on-year line shows, the trend in sales is still down.
And when you consider that most retailers have been offering substantial discounts to try to lure customers off the street, it’s slightly misleading.
What happens when we get to January and find that shoppers are already shopped out? Suddenly, we’ll find that the normally highly dependable “January effect” - where shoppers rush out to snap up bargains - won’t be there to bail out the retailers. At least not to the same degree as most years.
Look for further casualties on the high street in 2009.
The Daily Reckoning – What’s happening on Wall Street now
BY BILL BONNER
Free Bernie Madoff!
Going... going... Gono..!
And more!
The press… investors... regulators... they’re all howling for Bernie Madoff’s head. Of course, we wouldn’t mind if they lynched him. Still, he’s a hero to us. He’s the Rod Blogojevich of money – showing us how the system really works. He’s opened a window on the financial world... giving us all a remarkable and vivid lesson... in investing... in pyramid schemes... in the markets.... and Wall Street.
As a result of such eye-opening instruction, Bernie Madoff will save more investors more money than the SEC ever will.
They’ll think twice before giving money to friends to invest for them... They raise their eyebrows and their doubts when someone promises them consistent high rates of returns.
The feds are charging Madoff with running a $50 billion Ponzi scheme. Charles Ponzi took money from investors and then used their money to pay out profits to earlier investors. As long as the new money kept coming into the system, it worked like a charm.
So what’s the difference between Madoff’s ponzi scheme and the scheme run by Wall Street... in which all the investment houses, the rating agencies, the mortgage companies, Fannie Mae, Freddie Mac and the regulators themselves were complicit? As long as new money was coming into the system, who complained?
We’ll get back to that in a minute.
First, let’s look at what is happening on Wall Street now…
To read today’s Daily Reckoning in full, click here.
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