Saturday, November 1, 2008

Red October

In October we see a chaotic whirlwind of financial news; though all of it though, we also see a fairly clear signal of the strength of the dollar, despite economic turmoil domestic and abroad.

We see the passage of the $700B bailout bill—followed almost immediately with a sudden plunge of the DJIA to the low 8000 range, with a struggling recovery in to the 9000s at month’s close. (Even in the low 9000s it is about 1000 points below the prior trend line dropping at 3000 points per year.) We see reason to wonder if those $700B are really going to trickle down to main street, as promised, since bad mortgages were not off-loaded from banks as planned, but rather big banks were forced to sell preferred stock to the Treasury Department, and plan to use the money mainly to acquire smaller, struggling banks. In other words, we see a huge move toward centralization of U.S. banks around the Fed and the Treasury Department.

I’ve also caught wind that the “Hope for Homeowners Act,” passed in August, is struggling if not failing. I’m not going to repeat the low numbers I’ve heard for revised mortgages under the legislation because they must be inaccurate.

In October we see a massive printing campaign of U.S. dollars, where since mid-September the base money supply has increased by half. This would be bad news to anybody with a savings account, were it not for much stronger deflationary forces in play. Even this huge injection of cash is small compared to the magnitude of credit loses. There seems to be a general demand for hard cash world-wide that the printing is a response to.

We see no end to liquidity measures from the Fed such that I’ve stopped adding it up. There is practically unlimited capacity for borrowing in the system, sponsored by the Fed, and the taxpayer. Such measures are having no effect other than possibly to be preventing total collapse. Just because one has a credit line doesn’t mean anyone is using it. We’ve reached a point where we cannot manage our credit problems anymore with more credit.

In October, we see significant declines of all investment classes against the U.S. dollar: stocks, commodities, real estate, foreign currency, metals, have all fallen in price. This is all far from over but the strength of the dollar at this point supports the underlying premise of this blog: that the value of cash is inversely proportional to credit in the system; in other words, as credit collapses, cash will strengthen.

A common sentiment when I started this blog—that the U.S. dollar is about to tank because our general economy is in trouble—has proven inaccurate.

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