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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Fed Liquidity Intervention in Recognition of Credit Crisis

Stock-Markets / Credit Crunch Dec 20, 2007 - 09:28 AM GMT

By: David_Vaughn

Stock-Markets Well, Christmas is just around the corner. Bet your kids are excited if you still have little ones around the house. On top of Christmas the world is coming unhinged but really nothing more exciting. Let me get something clear right up front concerning last weeks article. Number one I was not “Bush Bashing.” Heck, I voted for the man. My point in the article was the inevitability of a coming crisis in Iran . Enough said on that. Let's get back to Christmas.

Our US Central Bank is providing a nice gift for those institutions experiencing a dire need for cash now. I don't think many realize the significance of this event. What the Fed is doing is admitting and acknowledging that the world's financial markets are in deep doo doo.

“Fed has plan for easing credit woe” “The Federal Reserve, struggling to ease a severe nationwide credit crunch, announced a novel approach yesterday to injecting money into the banking system. The Fed said it would conduct two auctions next week at which banks can bid for up to $40 billion in government loans. The winning banks then will have that money available to bolster their own reserves. It marked the Fed's biggest concentrated effort to inject liquidity into the banking system since the Sept. 11, 2001 , terrorist attacks.” The Philadelphia Inquirer

This is not a small thing. The US Fed is providing a line of credit of 40 billion US dollars. I've got news for you folks. Unfortunately, 40 billion is not what it used to be. The derivative markets alone contain trillions of dollars that are at risk today. No one really knows the full extent of the damage that is yet to be unleashed but 40 billion really is equivalent to the little Dutch boy sticking his finger in the leaking dam. The Fed needs a lot bigger finger, but one the size they need is not available.

“The hope is that the extra money will spur increased lending by the banks - thus combating a serious credit crunch that has made loans harder to obtain for many businesses and consumers. Without borrowed money, most businesses cannot buy new equipment and expand their plants, and consumers often delay or scrap plans to make major purchases.” Associated Press

Where is this new 40 billion coming from? No problem acquiring the money. Our government simply prints new dollars. The world economy is busting at the scenes and most people are walking around dumb as sheep.

“The US subprime mortgage crisis has hit banks and stock markets worldwide, revealing just how fragile the money network is.” Spigel

A good soldier is made and not born. And so it goes for the financial system we have today. Because of inappropriate and ignorant policy decisions we now have a severe credit crisis encompassing the entire civilized world. Our Federal Reserve can be blamed for the mess we find ourselves in today.

“Hi David, My first experience is to wish you and your family all the best for the holidays and the upcoming new year.” “We have out Christmas lights up around the outside of the house this year - all LEDs.  Imagine this, David - 120 boxes of lights - 6000 bulbs (by comparison, the Rockefeller Center Christmas tree has 30,000 bulbs…” “Oh, and my parents still have the coffeepot that you describe.  It made the most delicious coffee, too - fresh coffee oils would be floating on top of the poured beverage - the smell should be bottled).” Warmest regards, G. I. L.

For every crisis these past twenty years the answer has always been more of the same. And that is to extend easier credit. Now we are witnessing the fruits of this policy.

I've tried to grasp the magnitude of this present financial crisis and I can't. I believe only those administers in the highest reigns of power comprehend what an economic mess this subprime fiasco has created. And how far will it spread? What is its capacity for growth and expansion? Today we have literally trillions of dollars and foreign currencies playing the derivatives games and many of these derivative funds are collapsing as we speak. Lower rates and cheaper dollars lead the way.

“…investors took a closer look at the Fed's agreement with the European Central Bank and the central banks of England , Canada and Switzerland to combat what it described as elevated pressures in the credit markets.” USA Today

Are you one investor who is also taking a look? Might even take two looks. Might even think about taking out insurance on that savings account also. Gold is a form of insurance. As the world market even now stumbles gold is staying well north of 700 an ounce and hovering around 800 an ounce. You snooze you lose.

Raise the rate and we price ourselves out of the market. We have painted ourselves in a corner and the paint continues to be wet and it refuses to dry. But again this is what gold is all about.

NEW YORK ( -- Wholesale prices saw their biggest jump in 34 years in November, according to a government inflation reading Thursday that came in much higher than forecast due to a record spike in energy prices.” c

What we are experiencing right now is what is called the “wall of worry.” It basically refers to the apathy people feel in the midst of a true bull market. People stop believing. In the early 1980s there were those who believed the stock market would never rise again. And it did and has made many millionaires these past twenty five or so years. And the climbing stock market then had to climb a wall of worry as so many continued to sit on the sidelines watching a few wise investors getting rich. And so with the gold market today. But where we are headed long term is what we consider in our equations. And equations and sound mathematical principals do not lie. And what are those mathematical principals we are seeing played out today?

“Derivatives traded on exchanges surged 27 percent to a record $681 trillion in the third quarter, the biggest increase in three years, the Bank for International Settlements said.” ``The turbulence in financial markets led to the busiest trading on record,'' BIS analysts Ryan Stever, Christian Upper and Goetz von Peter wrote in the report.” ``Equity investors are using derivatives more aggressively…” Bloomberg

A huge derivatives market beginning to crumble. And folks, that is bad, very bad. Our crisis today is a deteriorating financial system and no one is taking concern enough at the minimum to establish insurance within their portfolio.

“This is it. If you have not already made preparations, then now prepare to defend yourselves! The 3rd quarter BIS report on global derivatives was just released and the results are shocking to say the least. The report shows derivatives traded globally were up $145 trillion (+27.1%) in just THREE months to $681 Trillion. Since September 30, 2006 derivatives are up $216 trillion (+46.5%).” JSM

But there is insurance you can establish within your portfolio that will rise when regular equities collectively suffer

“For those of you that did not have gold on your radar, the trailing five-year average annual return for precious metals funds is 35.08%. That sounds like a pretty good investment to me when the objective is to make money.” “…I don't really care which asset classes are making money. My goal is to ride the long-term winners and cut back on the long-term losers based on all the fundamental and technical information that is available.” Ciovacco Capital Management

And you don't want to keep your life's savings tied 100% in your company's 401 K single stock.

“The financial bloodbath at Enron left behind plenty of stark lessons about how a highflying company can implode. One of them was this: Don't load up on your company's stock in your 401(k) retirement account. At Enron, many workers who did were wiped out.” USA Today

And the fact remains that over the past five years patient investors have made money investing in gold.

“If we use gold as an example, an investor who had a small exposure to gold (even as low as 1%) would have been one of the first to notice and profit from the gains in early 2001.” “It is human nature to defend the asset classes that are in your portfolio and dismiss the ones that are not. How many people told themselves “gold is not a good investment” as it moved higher while they remained on the sidelines.” Ciovacco Capital Management

It's not too late to invest in gold related equities to take advantage of its wealth preserving attributes. We are living in the last days of cheap resources and commodities. Recognizing these facts Gold Letter, Inc. reviews undervalued gold and other resource stocks under valued and poised to rise in this time of increased demand for resources. Gold will only continue to escalate in value. Take a look at our newsletter and witness our overall performance. GL charts are computer generated and updated every hour while markets are open.

Click here to review Gold Letter

Email me if you have the time.

By David Vaughn
Gold Letter, Inc.

© Copyright 2007, Gold Letter Inc.

“The Worldwatch Institute, an organization that focuses on environmental, social and economic trends, says the current rate of global demand for resources is unsustainable.”  

The publisher and its affiliates, officers, directors and owner may actively trade in investments discussed in this newsletter. They may have positions in the securities recommended and may increase or decrease such positions without notice. The publisher is not a registered investment advisor. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment-related advice. The news and editorial viewpoints, and other information on the investments discussed herein are obtained from sources deemed reliable, but their accuracy is not guaranteed. © Copyright 2007, Gold Letter Inc.

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