Week Ending 12/14/07
Commentary (a short snippet from the full report)
On Wednesday of last week, 12/12/07, central banks from Europe and North America unveiled a new plan to help alleviate the stress in the credit markets by increasing cash available to the banking system.
The Bank of England, the European Central Bank, the Swiss National Bank, the Bank of Canada, and the U.S. Federal Reserve, all joined forces to inject liquidity into the money market - to the tune of $64 billion dollars.
The Federal Reserve was the leader of the pack, creating a new temporary credit auction to facilitate the exchange of cash for a broad range of collateral held by the banks. This is nothing more than a euphemism for various types of mortgages and other related securities, all of which are tied to the housing market. Recently they have been exposed as toxic waste.
Two auctions of $20 billion will be made in December, and two more in January. The Swiss National Bank and the European Central Bank agreed to swap arrangements with the Federal Reserve to auction $24 billion in U.S. dollar funds to banks in Europe.
The size of the January auctions has not yet been determined, which means that the total could be above the $64 billion pledged so far.
Most disconcerting was the statement by the Fed that it is considering making these auctions permanent, as opposed to temporary. Fed speak being what it is, God only knows what the Fed has in mind. Is it referring to a permanent mechanism to be used whenever it deems necessary; or in a worse case scenario, could it mean that the funds are the same as permanent open market operations that do not have to be repaid to the Fed, as do repurchase agreements?
If the latter ends up being the case, this will indicate that the Fed is very concerned about the state of the credit markets, as such transactions amount to direct monetization of debt of any kind - helicopter money if you will.
Libor rates were up from last month. In the U.S. this past week, short term rates fell, but long term rates rose.
The market perceives future inflationary pressures to be building, causing them to demand more interest to compensate for the additional risk.
One month Libor rates are presently 5.00%, up from last month's 4.66%. Three month Libor rates are presently 4.97%, up from last month's 4.88%.
The 3-month maturity is the most important, as it competes directly with U.S. 3-month (90 day T-Bill) rates. The difference between the two rates is referred to as the TED spread.
Not only are both rates up from prior months, but the shorter term rate is higher than the longer term rate. This shows stress and reluctance to borrow by players in the money markets.
The TED spread closed at 2.10 percentage points. Earlier in the week it had been as high as 2.21 points. This too reveals underlying stress in the credit markets and an increase in risk aversion.
In other words, although the Fed lowered short term rates, credit spreads in the global money markets remain tight. The short term cost of borrowing has been reduced, but the willingness of the banks to borrow has not responded in kind. It has actually decreased. Banks are afraid of something looming in the shadows. There is no trust.
The problem in the money markets is not, however, limited to a lack of liquidity. There are liquidity problems, but there are far worse ills.
There is also systemic risk of the solvency of the entire system. This has to do with fractional reserve lending, as practiced by today's banks via a 100% paper fiat monetary system.
If 5% of all depositors went to the banks at the same time and wanted to withdraw their money, they would find that there is no money on deposit in aggregate. Our money supply is nothing more than computer entries in cyberspace, on the ledger - 21st century style.
In a paper fiat system, money and credit our created by the very act of lending. It is conjured up out of nothing.
The only thing that keeps our monetary system working is faith, and the belief that 5% of the people will never go to their bank and demand their money at the same time.
The ability to raise cash on short notice is referred to as liquidity. The Fed can provide liquidity on a short term basis. If, however, an old fashioned run on the banks occurs, the Fed will not be able to come up with the cash supposedly on deposit.
This is because of fractional reserve lending. The money just isn't there, except for a very small fraction or percentage of it (about 3%). This is the amount the banks have on reserve/deposit/demand.
The scary part of the credit crunch is that the solvency of the banking system is actually being questioned. Providing short term funds to meet withdrawals is no big deal. That is what the Fed does. They are the lender of last resort. But this can only be done in isolated instances, here and there when needed.
The Fed can not possibly accommodate all obligations, from every bank, at the same time, at least not without setting off hyperinflation, which would result from the tsunami of new money and credit creation.
Prices and rates would soar in response, as they did in Weimar Germany, and other nations that have experienced hyperinflation.
Fractional reserve banking is predicated on a myth: the false belief that our money is in the banks, on deposit, and that whenever we want it, all we have to do is to go to the bank and withdraw it. This is not the case.
This is true for only a very small portion of deposits, less than 5%. This is not true for 10, 20, or 50% of all deposits, let alone the total amount in aggregate.
There is not enough printed money to fulfill any significant amount of these obligations or promises.
Once the reserves on deposit (3%) are depleted - the gig is up.
If a bank cannot fulfill its financial and monetary contracts, it is bankrupt, unless another bank steps in and bails it out.
When the entire banking system is bankrupt, who steps in to bail it out?
This is the systemic risk that a few lone wolves in the wilderness have been warning about for years. Its eerie song becomes more audible with every passing day.
New schemes to cover up a mortally wounded paper tiger appear to rise from the ashes every week. The public's confidence in the Fed is on the wane, and our currency is fast approaching its twilight years.
Mr. Paulson's freezing of interest rates on adjustable rate mortgages is another such gimmick. Contract law is no longer based on the rule of law according to the courts, but by the rule and decree of a dictator. This is not how free market work. This is direct intervention 21st century style.
Royal prerogatives are alive and well. Individual freedoms are disappearing daily, and with them any semblance of a free market, which has become a mere shadow of its former self.
The new book, Honest Money, coming out in January, goes into these subjects in greater detail.
Gold was down -2.20 to close the week out at 798.00 (-0.27%). The intra-day low for the week was 792.30 and the intra-day high was 822.80.
For the past two weeks the price of gold has hovered right above or below its lower trend line. It has not yet broken down below it enough, nor bounced off it high enough, to give a clear signal as to its short term direction. It is presently consolidating.
Silver was down -0.52 to close the week out at 13.98 (-3.60%). This was a significant drop.
Last week's report stated that most of the indicators on the silver chart were suggesting more downside action was coming, and so it did.
Price is still below its horizontal support line TURNED resistance.
Histograms are receding from positive territory back towards zero, suggesting more downside action may be coming.
MACD is still slowing rolling over, but has not yet put in a negative cross over to the downside.
The 65 ema provides strong support at 13.02. There is a considerable support zone between 13.98 and 13.03.
The Hui Index lost 25.19 points this past week and closed at 386.87 (-6.11%). This was a sizable loss.
In last week's report it was stated that many of the indicators were hinting at more downside action, especially the MACD, which appeared ready to make a negative cross over.
This past week MACD did make a negative cross over. Histograms have also entered negative territory.
Price is sitting on the middle Bollinger band, which if it does not hold as support, would suggest the lower band may be tested (307.66).
RSI is still above the 50 level, which is constructive if it holds.
Below is the weekly Hui chart with the Fibonacci retracement levels overlaid. So far the correction has been according to standard operating procedure and is healthy for a sustainability bull market.
Along these Moprec bottoms the gld/hui ratio is at or close to BUY the HUI signal. The reversal almost never fails, the strength of the move, however, is unknown. This suggests a tradable rally may be at hand.
The above chart is from a good friend. Thanks Alex.
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