The Economy Guy

Stocks were down BIG again today.  It’s been quite a week.  The DOW is now down 1300 points from the recent high for the year.  

Bonds went sideways today, as did the Dollar which allowed the Euro to recover a little after the huge downdraft in the past week.  The really good news about the meltdown yesterday is that mortgage rates hit 4.5% for a 30 year fixed rate yesterday.  The lower bond interest rates means that mortgage will remain below 5% for awhile longer and that will help the housing market.

Oil and gasoline are at recent lows, and help with the future gasoline price we’re going to have to pay at the pump.  Let’s hope oil continues down below $70/barrel, and we might get a break.

Gold was the star for the week, ending up again today as people protect their money.  See the write-up on Gold below.

In the news today…..

Unemployment rate is 9.9% – That’s up 0.2% from the last calculation.  The broader measure of unemployment (U6) went to 17.1%.  (And, we know because the government has redefined how it measure unemployment that actually there are about 25% out of work).    The good news is that employers (and the government) have 290,000 new jobs in the US.  How can we have new jobs and higher unemployment?  Well, we are talking about the US Government produce statistics – and we know they are meant to confuse – so I don’t get too concerned about this anomalies.  

Stock Market Meltdown – yesterday….. What caused it?  Well, we don’t know yet, but here is what we know.  Somehow, for most of the morning the markets were orderly, and going down to about minus 300 points on the DOW.  Then the bottom fell out, and it recovered just as fast as it fell down.  Something caused it to start going down.  Then, automated trading kicked in with computers placing sell orders based on the level of the market.  Some shares went to zero.  Some of the big guy shares like Proctor and Gamble went down precipitously (in fact P&G might have been the share price that drove the DOW so low that automated trading kicked in).  Here are the key questions, and my comments:

1. How did it start going down?  We don’t know.  Could it have been an act or terror?  Maybe.  Could it have been a mistaken trade (Citigroup has been accused of this error)? Maybe.
2. What caused the market to continue going down?  Automated traded undoubtedly caused this to happen.  That means there are computer programs out there seriously following the market and automatically buying and selling shares.  This is a major threat to our stock markets.  We have replaced people with machines so there is no time for rational thought between trades – as there is on the floor of an exchange when people make the trades.
3. What stopped the fall, and caused it to go back up?  We don’t know.  It could have been an intervention by the exchanges themselves to safeguard the trading.  Makes sense.
   

There are some major lessons to learn here.  We MUST find out what caused the initial fall in prices that created the initiation of automated trading.  Automated trading must be restrained somehow to keep a complete meltdown from happening in the future.  And, let’s find out why and how the market turned around again – we might learn a lesson there too.  All in all, this was a blessing if we can learn the lessons presented.  However, yesterday’s event confirmed my suspicion that it is just plain dangerous to be investing in stocks (and possibly anything traded on an exchange.)

US Bank Exposure to Europe? - Yes, and it is $2.5 TRILLION.  Now, that’s a big number.  Of course, all of Europe isn’t going to default, is it?  But, our biggest 5 banks have that much exposure to European debt.  So hold onto your wallets.  Another bailout could be on the way when Europe hits the ropes.

Tonight’s Dinner Conversation…..

Gold.  Yesterday Gold went up when almost everything else in the world was going down.  Why?  Well here is what I think:

1. Gold is now considered a “safe haven” in an economically dangerous world.  People put their money in gold to protect the value.
2. Gold is considered a great place to put your money if you think the world is going into inflation.
3. Gold is now considered a good place to put your money if you think the world is going into deflation.  Kind of counterintuitive from #2, but people are buying gold for that reason, and many advisors are making this recommendation.
4. The world appears to be heading toward a MAJOR world debt crisis.  Greece is the point of the spear and the Greek riots create fear in the markets.
5. The Euro is under threat, and people holding Euros are fleeing that currency to protect their assets.
6. A little further out into the future, Spain, Portugal, , UK, Ireland and Italy could be following Greece into a debt crisis.
7. And, a little further out than that, the USA and many US states (think California plus 32 other states.  California is 4 times worse than Greece) could be on the brink of downgrades.  Some US cities will be going bankrupt in the near term future as political lack of will stops their balancing their budgets.
8. Europe had a liquidity crisis yesterday equivalent to the day before Lehman Bros collapsed in the US.
9. When you buy gold, you don’t have to worry about a counterparty default risk.  For example, if you bought a bond, you must worry if the company, or nation, issuing the bond will be able to pay back the principal and interest.
10. Gold is easy to sell – there is always a market for it.
11. The US will bail out all 33 states eventually, and this will be “quantitative easing” that will cause inflation.
12. Right now the Euro is driving gold up, later the Dollar will be seen for what it is, and the Dollar will cause gold to go up.
    

There continues lots of talk about changing the reserve currency structure of the world away from the US Dollar.  Some of those discussions create a basket of currencies as the new reserve currency, and include gold in that basket.  Why include gold?  To create confidence in the new monetary structure – as our current currencies  start to inflate away.

There is an international monetary conference being held by the Swiss Central Bank with the IMF in Geneva on May 11, and undoubtedly this topic will come up.

From your point of view, you must protect your monetary assets, and diversification is a great way to do it.  Gold is a very good thing to have in your basket of assets.

The best gold expert, Jim Sinclair, yesterday predicted that gold will be going to $1650 this year, and it is right on course.

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,380 (down 140)
10 Year Treasury Bond – 3.43% (up 0.03%)
Euro – $1.2722
Gold – $1210 (up $13)
Oil – $75.12 (down $2.04)
Gasoline – $2.13  (down $0.03)