Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
How to Protect Your Site from Bots & Spam? - 20th Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 20th Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 20th Aug 19
The Gold Rush of 2019 - 20th Aug 19
How to Play Interest Rates in US Real Estate - 20th Aug 19
Stocks Likely to Breakout Instead of Gold - 20th Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 20th Aug 19
Holiday Nightmares - Your Caravan is Missing! - 20th Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Scared Money Heads for US Dollar and Treasuries

Currencies / US Dollar Sep 10, 2008 - 01:26 PM GMT

By: Adrian_Ash


Best Financial Markets Analysis Article"...So today we're back where we started, with a collapse in retail investments (then stocks, now housing) and the collapse of the very biggest institutional bets. The US administration's response...?"

EVIL DAYS indeed. Scared and scarred by losses in all other assets, the world's wealth suddenly wants to sit in the safety of US Dollars and US Treasury bonds.

Only low- and no-yielding cash need apply, in short. Yet these safe havens are also set for destruction. Because whatever rosette the White House wears after November, it simply cannot allow the value of money – and therefore of debt – to keep rising.

Maybe that's why Standard & Poor's felt it had to re-state its "AAA rating" on US sovereign bonds this weekend after the Treasury took Fannie Mae and Freddie Mac onto its balance-sheet – just like Bill Gross at Pimco, the world's biggest bond fund, demanded.

Either that, or the S&P team hope an appeal to irony might keep them out of the courts if the world's No.1 debtor itself finally turns "subprime" in future.

And perhaps that's why the cost of insuring US Treasury bonds against default – as measured by credit-default swaps (CDS), at least – has now tripled since April to a still-tiny but greater-than-Japanese-or-German level of 0.18% on the five-year note.

Paying 18¢ per $100 of bonds might look expensive after a true US default. Who would be left to cover your losses? But with the five-year yielding just 2.89% – while US inflation runs at 5.6% on the last official count – a few basis points clearly don't matter. Washington's ink is all global investors will buy.

"W eak growth, falling interest rates, lower commodity prices and a surging US Dollar are fundamentally changing the risk-reward picture in financial markets," says Jeffrey Palma at UBS .

In particular, "the unwinding of long commodity/short financial sector positions is a key development," he believes. "The link between these sectors has been broken."

Out on the broader stock market, Monday's "Frannie Bounce" was pretty much reversed by Tuesday's plunge on Wall Street and Wednesday's losses in Asia. Not even $200bn will buy much of a "relief rally" these days – and the Treasury's check-book could soon run empty if Lehman Brothers fails to close all the cash-raising deals it's so far, ummm, failed to close.

Its own little "debt deflation" must roll on regardless, meantime, dragging stocks and securitized debt prices lower as the City and Wall Street de-lever. America's fourth-largest bank ended last month with a gearing of assets-to-capital above 21 times. That ratio of assets to shareholder equity stood at 24:1 three months before, itself sharply lower from February's gearing of 31.7 times at Lehman Bros.

The wind's whistling through the commodity pits too, as investors flee hard assets for the musty clutches of Uncle Sam's greenbacks. Platinum and palladium prices have collapsed even faster than Gold after reports leaked out of China that new car sales fell by 10% last month.

Asia's largest stainless steel maker, Posco, is cutting its output for the third month running thanks to the collapse in demand. And not even the Hurricane Season is trying to support crude oil or orange juice futures this year.

"Currencies like the Australian and New Zealand Dollar are [therefore] suffering a huge double-whammy," writes Steven Barrow for Standard Bank in Johannesburg.

"Commodity prices are tumbling and the markets assessment of 'risk' is rising. These currencies have already been pummeled, but we see little hope of a significant recovery, especially against the [zero-yielding] Yen. The fact that both central banks are cutting rates as well is also worrisome for these currencies.

"Tonight we should see the Reserve Bank of New Zealand cut rates another 25-basis points, and there should be plenty more where this came from."

Who's to blame for this sudden death of the bull market in everything? Go back to the start and ask instead where that global bull market began.

"If we all join hands and go buy a new SUV, everything will be all right," said Dallas Fed governor Bob McTeer after 9/11. "What we dearly want is for Americans to spend like Americans – to do the patriotic thing and go out and spend," agreed Bill McDonough, head of the New York Fed in October '01.

Depression-era interest rates then followed, sparked by the risk of "Dot.Com Deflation" and given political force by the War on Terror. But reflation was always going to turn into inflation...which in turn would curb the pace of global expansion – if not destroy it – just when everyone was geared up on cheap money to double-up on those trend that looked never-ending.

Now today we're back where we started, with a collapse in retail investments (then stocks, now housing) and the collapse of big institutional bets – only instead of pockets like Enron and Worldcom, it's finance itself queuing up outside the courts.

"Ultimately," says Martin Wolf of the Financial Times , "if you want to rescue a very badly damaged financial sector, you need a credibly solvent government, and the US government is not in quite as strong a position as the Japanese government was [at the start of the 1990s].

"So this could go on for a long time," be now believes, "and we could find many difficulties on the way." Not least, says Wolf, "the government has now become officially and quite openly the principle guarantor of mortgage lending in the US economy...operating in the context of a falling housing market, with ever rising bad debt.

"This is not a situation in which one can expect the private sector to suddenly leap forward and take the government's place – particularly when the government is of course doing it on subsidized terms, because the risk is in fact being borne by the taxpayer.

"What private-sector institution can compete with this?" Wolf asks. And more crucially, perhaps, "the US is a very large net debtor to the rest of the world. It depends on foreign creditors to sustain the credit of both the private and the public sectors.

"If the United States were to lose the confidence of the rest of the world – and that was surely very important in making this decision just now – then it might be much more difficult to solve the problems of the financial sector as the Japanese tried to."

The comparison bears repeating, provided we remember that Japan was (and still is) a savings-rich nation with a surplus on its balance of payments. So after the failed 1996 rescue of Japan's zombie banks – costing more than $100 billion in public funds – the Obuchi Plan thought nothing of pumping another $500bn of taxpayers' money (some 12% of Japan's GDP) into trying to settle loan losses, bank recapitalizations and depositor protection only two years later.

Still the reflation failed to showed up, however, and even today the Nikkei stock index remains under-water from its 1989 top by more than two-thirds. Tokyo real estate has lost some 70% of its inflation-adjusted value. And for the last 13 years and more, Japanese savers have effectively made zero on their cash-in-the-bank as the government fought to reflate an economy that was all done with inflating.

Ready for the next US attempt to pump up what's busted? Still want to buy "safe-haven" T-bonds and Dollars...?

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 - 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