Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Tightening Money - US Interest Rate Cut Not a Done Deal

Interest-Rates / US Interest Rates Sep 15, 2007 - 03:24 AM GMT

By: Brian_Bloom

Interest-Rates

Its one thing for the Central Bank to “liquefy” the commercial banks, it's another for the commercial banks to on-lend their cash.

Right now, the commercial banks are so nervous about what is unknown regarding the depth of the sub-prime mortgage debacle that they are not even lending to each other. That's why the Libor rate (London Interbank Offer Rate) has spiked.


For the moment that's not really a problem, because banks which are short of cash can turn to the Central Bank and, paradoxically, borrow at a lower rate. But this places a huge strain on the system from an administrative perspective. It can't continue indefinitely.

The problem is that it's been three weeks, and no one really knows how deep the sub-prime mortgage problems reach. The core issue is the extent of the derivatives which hang off this particular (sub-prime mortgage) market.

The following chart was reproduced from the internet – courtesy theFinancials.com

Libor Rate (GBP) - 18-August 2006 – 18 th August 2007  

(Source: http://www.thefinancials.com/syndicated/demo/DEM_LIBOR_Majors_3m.html# )

© theFinancials.com

But dislocation within the sub-prime market did not only cause a spike in interbank lending rates. It also caused a spike in volatility in the markets in general, as can be seen from the following two charts – courtesy Bigcharts.com

Whilst the high volatility in the Industrial market has waned the price has not yet recovered to where it was prior to the volatility.

By contrast, the $XAU is now back to where it was.

Perhaps more importantly, even though the $XAU has recovered, it is not yet in a bull market relative to Bullion – as can be seen from the following chart, courtesy stockcharts.com

Also of relevance is the fact that the Commodities Index seems to be struggling to break up, as can be seen from the chart below:

To those who think in terms of the various relationships between “dependent” variables and “independent” variables, some questions are being begged:

  1. If gold shares are leveraged relative to gold (ie every additional one dollar in gold price falls straight to the bottom line of the gold mine's P&L), and the market is expecting the gold price to rise, why is the $XAU not outperforming the gold price?
  2. If the interbank market is placing a risk premium on cash, what do we think will happen if the US Federal Reserve Board flies in the face of this “demand for financial discipline” and it proceeds to drop the rate that it is prepared to lend to commercial banks?
  3. If the market is expecting a cut in US interest rates – which will very likely lead to a softening US Dollar, (which will likely lead to inflation in US$ denominated commodity prices) why is the commodities index struggling to break up?

Let's have a closer look at the US Dollar chart (courtesy stockcharts.com)

Hmm. The US Dollar is very weak, but there are technical indications that the breaks below the falling wedge may have been false breaks.

From a distance, we see the US Dollar is resting on 14 year support (chart courtesy Decisionpoint.com)

The primary problem with a falling US Dollar – which enthusiastic amateurs are calling for – is that it has the capacity to destroy the US economy, because:

  1. The US is the highest consumer (per capita) of oil in the world
  2. Oil is priced in US Dollars. If the Dollar falls, the price of oil in dollars will rise
  3. 60% of all transport within the US is oil dependent
  4. 66% of the US 's GDP is consumer driven
  5. The US Consumer is already bending under the strain of mortgages – many of which are low entry variable rate mortgages which are coming up for renewal at higher rates. If, on top of higher mortgage payments, the US consumer has to pay significantly higher prices for gasoline, the probability of a recession is high.

Conclusion

The US Federal Reserve is facing a serious dilemma. If it cuts rates, it will be flying in the face of the discipline which the professional market is now demanding, and this is likely to put serious pressure on the US Dollar.

If it raises rates, it may cause a dislocation in the “core” mortgage markets.

The “safest” course of action will be to hold rates where they are.

Unfortunately, the markets seem to be expecting a rate cut of between 0.25% and 0.5%, as can be seen from the chart of the 30 year bond yield below which has fallen from roughly 5.25% to 4.75% (the five and ten year yields have fallen by greater amounts).

Overall Conclusion

We appear to have reached a point in history where the Fed has to show who is boss, or lose control.

This analyst finds it very difficult to accept that the Fed will just roll over and bail out Private Enterprise from the consequences of its stupid decisions. That is why I sold out of my gold and silver shares (For the time being. I am still a long term bull).

However there is always the possibility that Chairman Bernanke is just a figurehead puppet – clay in the hands of the politicians and lobby groups. If this turns out to be the case, then the Fed will cut interest rates as per the general markets expectation, and the gold price will skyrocket upwards.

The relative strength chart of the gold shares:gold price is telling us that the Fed will not cut interest rates this time around.

Can this RS chart be wrong? Of course it could. No one has a monopoly on brains. If it was that easy to call the direction of the markets, we would all be rich. If you want “certainty” then investing in the markets is not for you.

By Brian Bloom
www.beyondneanderthal.com

Since 1987, when Brian Bloom became involved in the Venture Capital Industry, he has been constantly on the lookout for alternative energy technologies to replace fossil fuels. He has recently completed the manuscript of a novel entitled Beyond Neanderthal which he is targeting to publish within six to nine months.

The novel has been drafted on three levels: As a vehicle for communication it tells the light hearted, romantic story of four heroes in search of alternative energy technologies which can fully replace Neanderthal Fire. On that level, its storyline and language have been crafted to be understood and enjoyed by everyone with a high school education.  The second level of the novel explores the intricacies of the processes involved and stimulates thinking about their development. None of the three new energy technologies which it introduces is yet on commercial radar. Gold, the element , (Au) will power one of them. On the third level, it examines why these technologies have not yet been commercialized. The answer: We've got our priorities wrong.

Beyond Neanderthal also provides a roughly quantified strategic plan to commercialise at least two of these technologies within a decade – across the planet.  In context of our incorrect priorities, this cannot be achieved by Private Enterprise. Tragically, Governments will not act unless there is pressure from voters. It is therefore necessary to generate a juggernaut tidal wave of that pressure. The cost will be ‘peppercorn' relative to what is being currently considered by some Governments. Together, these three technologies have the power to lift humanity to a new level of evolution. Within a decade, Carbon emissions will plummet but, as you will discover, they are an irrelevancy. Please register your interest to acquire a copy of this novel at www.beyondneanderthal.com . Please also inform all your friends and associates. The more people who read the novel, the greater will be the pressure for Governments to act.

Brian Bloom Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules