Bonds made a DRAMATIC move today increasing in value (decreasing in interest rate) with the 10 Year Treasury falling 0.26% – and I consider this irrational exuberance – even though bonds are mostly rational.  To show you the effect this is having – the 30 Year Fixed mortgage rate is now 6.04%, and the 2 Year Treasury Note fell BELOW 1% for the FIRST TIME EVER.  Here’s another FIRST TIME event to take note of – another real signal of the deflation taking place.

The Dollar strengthened slightly in line with the stock market fall.  

Gold strengthened because it’s time to strengthen – ending up $13 today.  Gold is bucking the trend today by strengthening when the trend is for it to weaken when stocks fall dramatically to new lows.  I read this as gold showing its strength in the face of adversity.

Oil (and gasoline) continued their death spiral downward with oil FALLING BELOW $50/barrel today.  Wholesale gasoline at the refinery is now just above $1/gallon – and it will break the $1 barrier bringing your pump prices down a whole lot more.  I purchased gasoline at $1.99/gallon today, and expect the price to fall another 40 or 50 cents.

GMAC has applied to become a bank – so they can get some of that bailout money the Treasury is handing out to each and everyone with his/her hand out.  GMAC, to its credit, is trying to rein in its bad lending practices by limiting car loans to people with great FICO scores; but, do the American people want GMAC bailed out?  Is this an end run around NOT bailing out the Big 3 Auto Industries (especially GM)???

The Swiss dropped their key lending rate by 1% today.   1% is a massive move that even our FED hasn’t done for many decades.  Maybe the Swiss see something worse coming onto the world’s economy than we see.  Should someone ask them???

Here is a good one that came in – “The Great Deflation”

Can you improve on that?

Bonds got hit a little more after the last two days of being beaten up fiercely.

The Dollar rallied to a near term high for the Euro, but not the Yen which remains strong.

Gold fell again today and is now a reasonable buy price.

Oil and gasoline were the BIG movers today.  Oil is now below $80/barrel, and falling.  Gasoline is so cheap that I want to run out and buy it all up – except it’s not cheap at the pump yet.  It’s coming down at the pump, but not nearly as fast as in the futures market.

The FED and the Treasury has pumped about $1.5Trillion into banks over the past year.  The FED and Treasury just printed this money with IOU’s (called Treasury Notes) and this is a PERFECT example of INFLATION.  Compare these two numbers, and you will come to the conclusion using this very GROSS calculation that DEFLATION is greater than INFLATION.

This is the best lesson that I can teach you regarding what’s really happening in the US markets – and world markets too – right now.  Deflation is on the move, and is rampant.  

Deflation results in less money (or credit as everyone calls it today in the news), and less money results in reduced investment – and this means the US economy is about to come to a HALT.  This is what the economists see happening, and that’s why they are using the “R” – Recession – word.  I think it could be safe to use the “D” – Depression – word.

We are paying the price for the massive “bubbles” that have burst.  Those bubbles were caused by the money coming into the US economy (the current account) and its being multiplied by the banking system – after being deposited in a bank, that bank can lend out about 10 times as much money.

Our system is flawed, and the result is now happening.  It took over 60 years for these problems to bubble up to the surface – pun intended.

No one is talking about the markets, bankruptcies, jobless rates, GDP, you name it, in these terms.  You are in a perfect position to understand that this deflation is happening, and why.  It was inevitable.  Now think about what you can do about in your own world.  Cash is king in a deflation/depression.  You will see some terrific buys coming up in the near future —- be prepared to take advantage of them.  Remember to get a dynamite cash flow when you invest – that’s called “value investing” and it’s what smart people will do.

Morgan Stanley and Goldman Sachs had their shares slashed this week, as the “short sellers” came out in force to make some money.  These two were logical targets.  Short selling is now allowed by the SEC – as they have dropped their ban on naked shorts.  (Does that make sense to you???  Not to me either.)  So, these guys might be discussed by the FED this weekend.  Morgan Stanley is getting a $9B purchase of their shares by Mitsubishi, and those two parties will be talking about it this weekend too.  As long as this $9B deal sticks together, Morgan Stanley should be okay.  Goldman Sachs is the strongest of the bunch and should be okay – and Paulson used to work for them before – so what’s the problem??

Here’s the real issue.  Lehman Bros bonds are being valued, and this value came in at 8.625 cents on the dollar.  Keep that number in mind for the value of “toxic securities” as its the first number I’ve ever seen.  Lehman purchased insurance (called CDS or Credit Default Swaps) and the companies that issued the CDS must now pony up for the value of those bonds.  The total amount of these bonds is $4.92B and this is a small number (I can’t believe I just said that) relative to what the FED and Treasury are doing right now.  So, coming up with this kind of money should be possible, and the markets think it will happen smoothly.  But will it?  I don’t know.  Who is on the hook for the various CDS obligations?  Do they have sufficient cash to pay off?  Will they have to sell some of their assets to pay off?  The answer to these questions should be interesting, and if anything goes wrong – this week will look like a great week compared to coming weeks.

It’s been a long week, and this has been a long article.  As Bugs Bunny always said “That’s All Folks.”

Gold and the Euro continued their march upward, but only a little.

Oil and gasoline fell off, big time, with stock market pundits hoping this would turn the market around, and pull the entire US economy out of its slump – what poor thinking that is!!!!

US Consumer inflation (the CPI) will be reported tomorrow, and is currently reported at 4%.

Worldwide inflation is a problem.  50 countries currently have double digit inflation rates (over 10%).  Two of the most notable nations are Russia (15% inflation) and India (11% inflation).  China, on the other hand, appears to have inflation under control at 7.7% and decreasing.

So, US inflation at the “official” 4% number doesn’t look so bad, does it???  On the surface, it looks okay.  It also says that the US Dollar SHOULD be increasing in value against these 50 countries IF these inflation numbers are true.  Exchange rates move based on the relative difference between inflation rates of the two nations involved.  In other words, if the US has low inflation, and Russia has high inflation, you would expect the Dollar to increase in value against the ruble.  In fact, just the opposite is happening.  What that tells me is that inflation rates are NOT an absolute science, as measured by their host country, and in fact, are “fudged” for political outcomes.