What A Week
Stocks were amazing today setting a record swing for one day – up to down range of about 1000 points, but ending down only 128 points. This is the biggest one week loss for the stock market ever. We are seeing history before our eyes.
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.
In the news today….
The G7 are pondering whether or not they can work together around the world, and come up with a coordinated plan with the FED to save the economies of the world. There could be some announcements this weekend.
DEFLATION vs. INFLATION…..
The US stock markets have lost 42% of their value in the past year – that when they peaked. This equates to $8.3Trillion. Think about this number for a second. This is the amount of money that has gone to “money heaven” in the last year. The overwhelming majority of this money did NOT come out of the stock market by selling the stocks. The overwhelming majority just decreased in value. This is a PERFECT example of DEFLATION.
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.
What about this weekend…..
It’s the weekend again, and that’s when the FED works hard to solve all the problems in the US economy – that’s when the markets are closed – as if any FED action could make the markets worse.
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.”
Here are Today’s numbers:
Dow Jones 30 Industrial – 8451 (down 128 points)
10 Year Treasury Bond – 3.86% (up 0.03%)
Euro – $1.3394
Gold – $859 (down $28) – a buy opportunity
Oil – $77.70 (down $8.89)
Gasoline – $1.81 (down $0.22)
