The Spacious Sound Of Nothing

http://www.zerohedge.com/news/spacious-sound-nothing

Liquidity provided must be paid back and if the banks and nations that receive it do not provide structural changes, reduce their deficits, decrease their borrowings then, ultimately, the gods of chaos are unleashed. At this point it is no longer the interest that is paid but the return of capital that must be paid that becomes the number one issue. Liquidity has its price and I submit to you today that the time is fast approaching when a world awash in liquidity overwhelms the barriers and the dike is breached. The applause of today may become the tears of tomorrow if the current course continues.

Prepare for Lehmans re-run, Bank official warns

http://www.telegraph.co.uk/finance/economics/9342810/Prepare-for-Lehmans-re-run-Bank-official-warns.html

While You Were Sleeping, Central Banks Flooded The World In Liquidity

http://www.zerohedge.com/news/while-you-were-sleeping-central-banks-flooded-world-liquidity

G7 Says "Central Banks Ready To Provide Liquidity As Required"

The G-7 is ginning up the printing presses.


http://www.zerohedge.com/news/g7-issues-communique-tackling-slowdown-supporting-banks-says-central-banks-ready-provide-liquid

Prepare for More Money Printing: Analyst

Thanks to Dick again for finding this snippet.  I agree central banks (including the Fed) will have to continue easy monetary policy as far as the eye can see, but the timing of the next round of liquidity is debatable.  Without the sugar high of quantitative easing, the markets (and the financial system) would collapse.  At what pain point is the Fed willing to accept before resuming QE?  As with many things, timing is everything.

http://www.cnbc.com/id/43233866

Dr. Fat Finger

Rumors are being spread that some trader entered the wrong dollar amount, triggering an avalanche of computer-driven algorithm sell orders. Liquidity dried up, and high-frequency trading caused the market meltdown. Bids disappeared, providing no support for plummeting prices.

Personally, I don't buy the "fat finger" theory. Markets are skittish, and any exogenous event can trigger a sell-off, whether it's Greek sovereign debt, or the collapse of the Euro.

SkyNet Defense System now activated!



http://www.youtube.com/watch?v=35Io50Dw2tY

Bart Chilton on position limits

https://research.tdwaterhouse.ca/research/public/Markets/CommoditiesNews?documentKey=1314-N23256396-1

The rhetoric from Bart Chilton is positive, but we'll see if CFTC Chairman Gary Gensler concurs.

Total debt to GDP

As long as US total debt is high relative to GDP, the Fed will have to keep priming the liquidity pump. That can only be bullish for precious metals.

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlYg50ZYURl5uBGe1zoye_zAs3NSbhFecrTGnpwQ9eJb8vtwxd4U2grq6sTDYNKq8qVZRzLAawKjGL1OjsZG4u-6y0wCkY9xgF5CAJ8aRT5vZlESqV_klL-1D5AakBLHvZP16ZSmJSU0F_/s1600-h/TCMDGDPR.JPG

Safe havens

The USDollar has been a safe haven asset since the Bretton-Woods agreement in 1945. To many, it still is, when all other assets decline in value in a risk-adverse investment environment. Don't be fooled by Wall Street's head fakes. The US government's finances are stuck between a hard place and a rock. We are not out of the woods--not even close.

Consider precious metals as a haven. Gold and silver got clocked today, much like every other asset. This is a knee jerk reaction as panic selling kicks in during a liquidity crunch. Cooler heads will re-discover gold and silver are historically reliable stores of value. Precious metals were the first to recover in the 2008 liquidity crisis. They'll be the first to recover in the future. Stay the course. Accumulate on dips, if you can. Go watch a movie, and stop watching the daily fluctuations. Because one day, when the debt crisis turns into a currency crisis, your purchasing power will still be protected.

Two good articles:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ay7aVAKL6qYw

http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=97226&sn=Detail&pid=1

See disclaimers on the sidebar.

Disclosure: long gold and silver mining shares.

Money market redemptions

Everybody assumes the funds in their money market accounts are liquid--easily accessible with a click of mouse or keystroke. It's a convenient and safe place to park your cash, earning a small rate of return. In fact, it is treated as cash by most depositors and investors.

In the event of a financial crisis, that assumption is no longer true. Read on and be aware.

http://www.zerohedge.com/article/suspending-money-market-redemptions-now-legel-sec-approves-new-money-market-regulation-4-1-v

Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC's just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: "We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares."

The $1.8 trillion question

Quick--what does the acronym "ABCPMMFLF" stand for? In a banking world gone mad, when opaqueness trumps clarity, and complexity usurps simplicity, deception becomes masked by confusion.

http://www.bloomberg.com/apps/news?sid=aAmfkLEyMPYM&pid=20601109

By the way, so there's no misunderstanding, it stands for: "Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility." Here is proof from the Fed's own website:

http://www.federalreserve.gov/monetarypolicy/abcpmmmf.htm

Government agencies have a real love affair with the alphabet soup when they want to confuse the public--or hide the fact that they are buying toxic bank assets on behalf of the American taxpayer.

IMF joining the liquidity party

The International Monetary Fund is now flooding global markets with liquidity, issuing Special Drawing Rights (SDR), which is basically a basket of the USDollar, the Euro, the Japanese Yen, and the Pound Sterling currencies. Due to liquidity exhaustion by the Fed, the IMF is now stepping up in its role as the international central bank, injecting SDR's into the global financial system. Is this inflationary? You decide.



Near the end of the interview, Rickards sums up well the disdain for gold from central bankers:

"The problem is: when you own gold, you're fighting every central bank in the world. Central banks hate gold, because it limits their ability to print money. But the market is the market; the market will do what it wants. Even the central banks are not bigger than the market."

The gold put option

The European Central Bank (ECB) extended the cap on gold sales, only this time limiting sales to 400 metric tons, instead of the current limit of 500 tons.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a5S1sSNJDGvc

This is bullish for the price of gold, as central banks cannot indiscriminately dump gold into the market, causing the price of gold to sink. By my own deduction, the first 5-year cap instituted 10 years ago catalyzed the impressive run up in the price of gold. In that time span, gold has almost quadrupled in price, while equities have languished in negative territory. Reality is setting in--central bankers can print currencies ad nauseum in an effort to stimulate their domestic economies, but they cannot print gold. Gold has to be mined, and it is only being added to existing world supplies by 0.5% per year. By contrast, central bankers are increasing the money supply by double digits.

This is a direct consequence of easy money policies enacted by central banks worldwide, including the Federal Reserve. With money supply increases come price inflation of real assets--including precious metals.

Using back-of-the-envelope calculations, we can establish a floor for the price of gold. Last year's panic selling of all liquid assets to honor hedge fund redemptions depressed pricing of all asset classes--including gold and gold ETF's, which are liquid. The 2008 bottom was $660/ounce. Factor in a 20% reduction in potential gold sales from ECB sales, and we arrive at an adjusted bottom of $825. Thus, that is an effective put option for the price of gold.

Should we experience another liquidity crisis when stock markets tank, and commodity prices also plummet, if the price of gold approaches $825 (gold currently hovers at $960), I would accumulate more gold-related assets. Gold is a prudent hedge against monetary inflation with no counter-party risk, as it has been accepted as a monetary store of value for centuries.

I don't believe gold will correct to that level--if anything, it will elevate its price, as the threat of selling pressure has largely been removed.

Another bullish indicator for gold is the increased interest in gold purchases by Chinese and Russian sovereign funds, as they diversify away from USDollar-denominated securities, mainly Treasuries. Monetary inflation debases the dollar, causing their holdings in reserve accounts to sink in value. Exporters no longer wish to be paid in devalued USDollars.

Despite rhetoric from Fed Chairman Bernanke and Treasury Secretary Geithner that the US advocates a strong dollar policy, their actions are contrary to their claims. Sovereign fund managers and foreign finance ministers already know that is a lie. Unfortunately, American consumers will be the last to figure it out, as their purchasing power and standard of living become progressively diminished.

Money management

Money management to me is positioning your assets so they are poised to appreciate, but having enough liquidity to pounce when opportunities arise. You need bullets in your rifle to hunt your prey.

When markets rise and my asset values do accordingly, I get increasingly nervous. I am nervous by nature when it comes to finances, and I also have a bargain-shopping mentality. Perhaps that's why I don't mind it when markets drop--they represent buying opportunities. That's just my personality make-up.

The current rally in equities and commodities is a head fake to me, but strong enough to appreciate 40% so far from March lows, and irrational enough to extend another 20% potentially. So even though I believe this is a short-covering rally wrapped inside a secular bear market, I won't be shorting it--I won't get in the way and will let it run its course.

Instead, I pulled some profits off the table, leaving the majority in play for more profits--in case I am wrong on an impending correction. The higher the market goes, the more I'll pull off the table. Just like I will average in (buy) while the market tumbles, I will average out (sell) when it rises. I'll never be 100% invested, and I'll never be 0% invested. You don't want to get caught 100% long when the market tanks, but you don't want to completely miss a huge rally either. Meanwhile, I also am writing covered calls to generate income while I stay in the market. This will limit my upside if called away, but I'd still be up triple digits on my entry points and I keep the options premiums no matter what. Not bad. If the market corrects as I expect it to, I have some dry powder to go bottom-fishing.

In a raging bull market, your best returns result from being fully invested. But in a declining market, being 100% long leaves you no recourse but to sell into that declining market. Liquidity is king in those instances. So I will never be fully invested, no matter how bullish I am. And I am certainly not bullish today--at least not on equities.

Commodities--that's another story. With the dollar continuing to be flogged in the FOREX, the energy sector, metals, and soft commodities have all soared. This plays right into my thesis of the Fed reflating the economy with dollars in order to stave off another Great Depression. I think Bernanke will be successful by his criteria, but looking around the corner, this monetary explosion will result in inflation--the commodities markets are telling us that--all we have to do is listen to them. By the way, an exploding money supply is also why I believe equities may have more room to run north, but structurally, our economy is so broken I can't see a sustainable rally in equities.

I will stay mostly long my core inflation holdings: gold and silver mining shares, oil companies, natural gas drillers and pipelines, and commodities. The only equities I'm long on are specialized biotech companies which fluctuate somewhat independently of economic cycles, as they are pivotal event-driven, based on FDA approval. I use the qualifier "somewhat independently" because the financing environment is still very difficult, and markets have a low tolerance for risk. Unless the road to FDA approval is paved with certainty, microcap biotech companies have to be resourceful in order to fund their clinical trials. So far, the biotech companies I have invested in have shown promise, and some have even paid off financially already. A year from now, hopefully all of them will be in the green.

Until then, I stand firmly grounded in my thesis that paper money is becoming increasingly cheap, and owning hard assets will be the best hedge against debased currencies worldwide, including the US Dollar.

If you must...

If you must gamble (and yes, investing in stocks is a gamble, and something I don't recommend to clients since most are unfit investors) my next call is buying water stocks. Living without oil will be a struggle, but we will survive future oil crises. But living without water will lead to death. Not only do we need it to hydrate ourselves, but we also need water for our crops, and almost every product we consume. For instance, It takes thousands of gallons of water just to make one pair of jeans. It obviously takes a lot more water to manufacture autos, semiconductors, toasters, etc. I'm not at liberty to recommend specific stocks (for legal and other reasons), but you can do your own research on that. Just tread carefully, and only invest if you can afford to lose some or all of your investment. Hence, for most people whose net worth is under $5 million, I do recommend applying Missed Fortune strategies developed by Doug Andrew. It's a safe, conservative strategy to provide liquidity, safety of principle, and earn a competitive, tax-advantaged rate of return.

Bailout or Re-liquefication?

Well, it looks like Wachovia did fold like a deck of cards, altho technically, they didn't fall into insolvency. Tell their shareholders that, as they got "acquired" for $1 a share by Citigroup; they might as well be bankrupt, according to shareholders. The silver lining is that financial behemoths like Citigroup, JP Morgan, and Bank of America are grabbing market share, and should survivie and perhaps thrive going forward. Keep your money in these big money centers--Wells Fargo has managed to keep their high credit rating as well. Among investment bankers, Goldman Sachs is the gold standard, and could be an acquisition target itself. I wouldn't touch anything else among financial stocks.

Bailout or re-liquefication? It's the latter--we need liquidity to resuscitate the economy, much like a dehydrated patient needs liquids, even if it's done intravenously. Congress doesn't get it, and I'm afraid many of our citizens don't either. Anyone looking to get a loan will too, when the bank turns them down--or if the bank itself collapses.

This financial crisis was caused by risk mis-managment, poor due diligence, sloppy underwriting, and lack of oversight--not de-regulation. Go after the culprits, and certainly don't pay executives golden parachutes--but inject some liquidity. This world economy needs capital, for it to flow again. The alternative is a return to the stone age.

Speaking of draught, the last time I passed by the San Luis Reservoir between the 101 and I-5, it looked like a backyard pond--the water levels were almost depleted. With oil prices up ten-fold, with stock markets and real estate values plummeting, are we going to have a water crisis also?

Bailout or No Bailout?

I'm from the school of let 'em die. If you and I make poor investment decisions, we have to suffer the consequences. These executives applied far too much leverage, took on way too much risk, and after plundering their firms, they get golden parachutes. Where's the accountability factor?

I'm all for the founders of Google earnings billions because they have created a lot of value for consumers, business, shareholders, and employees. But when executives run their firms to the ground, they should not profit from said disasters, whether their firms get bailed out or not. A meritocracy rewards those who add value, not those who detract from it.

As much as I hate that the taxpayers bear the brunt of rescuing an AIG, I reluctantly agree they should probably be bailed out, because if they implode, the cascading illiquidity would essentially freeze up markets worldwide, as the sovereign funds, hedge funds, pension funds, mutual funds, private equity firms, and every financial institution would suffer a loss of confidence in the US financial markets, which would bring about a dark age analogous to the Great Depression. No one wins in that scenario, save the few bottom fishers with cash and balls to step up and play in the deep end of the pool.

But make no mistake: the intended recipients of these bail outs are the big institutions--not necessarily the common man, altho we all are in the same boat.

Having said that, there is a downside to this massive injection of liquidty--re-inflation. Interest rates should be favorable short-term, but when oil approaches $150 a barrel, when gold flirts with $1500/oz, the Fed will have no choice but to raise rates. Again, the lesser of two evils, but still an evil...Eventually, the economic shocks worldwide and the domestic slowdown will eventually dampen demand and cost of living increases, but until then, gold seems more stable than the US Dollar.

You know the world is turned upside down when there is more concern about the USD than the Brazilian currency, Russia has a flat tax, and the US has the 2nd highest tax brackets in the western world. Our leaders have forgotten what has made this country (and California) great.