How to Make Sound Policy Decisions

The next two days are going to be very cool around here. Mid 60's and windy. Here comes the fall.

Update on Stomach Stocks
I opened positions in both Hormel Foods (HRL) and Campbells Soup Co. (CPB) today. I mentioned my reasoning in yesterdays column.

Repudiation of Financial Engineering Begins at Home?
Today Market Ticker ran a YouTube Video posted by a woman that had had her limit of the outrageous banking practices on display even after getting saved by the US taxpayer. Well worth the 4 minutes:

While the woman gets her Kens mixed up a bit (Ken Lay and Ken Lewis of BAC) she makes plenty of sense.

The banks right now have access to the lowest cost capital in recorded human history. At the same time they are charging the highest rates possible and resorting to tricks and fraud to jack rates up even higher. This happened to my wife very recently as well, no late payment just a higher rate for reasons never made clear to her (she paid off and closed the account).

The problem I see right now is that there is no place to turn. All the banks are playing the same game, so you are going to get gouged no matter what. The woman in the video claims she is going to stop paying her balance unless her terms for repayment are met. While I admire her courage, I in no way advise such a course. Sadly for maybe 80% of all credit users they have no idea that they are getting slammed and have no idea or ability to live without revolving credit. If you are reading this site you will not need any pointers on matters of personal finance and keeping away from this kind of thing.

Do I think anything will come of this "movement". Perhaps on the fringes, but of course nothing ever really changes when you cannot get anyone to listen.

How to Make Sound Policy Decisions
I never cover the FED Beige Book Report as no where in the world does there exist a more qualitative mumble of terms and sentiment that cannot be measured and thus cannot have any meaning. Traders seem to use it as a playable moment. I think the scariest thing about this report is that it may actually influence monetary policy.

This one time I will cover some of the language behind the report so any interested can see just how absurd the whole thing is.

To start off, most watchers of this metric will only grab a headline summary and never read the report at all. From Yahoo Finance today:
Fed survey shows US recession may be over
Wow! That sounds great! How good are things progressing? From the article:

WASHINGTON (AP) -- Economic activity is stabilizing or improving in the vast majority of the country, according to a new government survey, adding to evidence that the worst recession since the 1930s is over. The Federal Reserve's snapshot of economic conditions backs predictions by Fed Chairman Ben Bernanke and most other analysts that the economy has started to grow again in the current quarter.

There you have it. The snapshot seems pretty good. Anything to be wary of in the article?:

In the survey released Wednesday, all but one of the Fed's 12 regions indicated that economic activity was "stable," showed "signs of stabilization" or had "firmed." The one exception was the St. Louis region, which continued to report that the pace of decline in economic activity appeared to be "moderating."

Hold on a moment. I am not sure that "stable" or "signs of stabilization" after a crash is quite "recovery" or "growth".

That is the summary headline. What about the real thing?

From the Beige Book Report:

Reports from the 12 Federal Reserve Districts indicate that economic activity continued to stabilize in July and August. Relative to the last report, Dallas indicated that economic activity had firmed, while Boston, Cleveland, Philadelphia, Richmond, and San Francisco mentioned signs of improvement. Atlanta, Chicago, Kansas City, Minneapolis, and New York generally described economic activity as stable or showing signs of stabilization; St. Louis remarked that the pace of decline appeared to be moderating. Most Districts noted that the outlook for economic activity among their business contacts remained cautiously positive.

It seems those interviewed by the FED have been well schooled in the whole "second derivative" reporting structure. I am glad some areas mentioned some signs of improvement.

How about a word count comparison? Should things really be getting better, terms that denote such a thing should be used more often. Let's count them up!

Firm, Firmed, or Firming: 2
Improve, Improving, or Improvement: 6
Pickup: 3

For such a strong report, one that implies the end of the greatest recession since the 1930', that language seems a bit flaccid.

How about some nasty words?

Weak, Weaker, or Weakening: 15
Soft, Softer, or Softening: 6
Decline, Declined, or Declining: 14

Final Tally:
Good Words = 11
Bad Words = 35

Granted this is a very unscientific look at the Beige Book Report, but the report itself is not scientific to begin with.

The FED has been on a victory lap world tour touting how amazing a job they did in saving the world. The technical recession may be over by whatever criteria are used, but clearly the economy at the root is in serious trouble.

The bulls would have you believe that at the March lows all stocks were priced as if everything was going to zero and we were all going to live in caves going forward. Would the S&P 500 really be at 666 if the world ended? Who knows, it is a significant number.

I would submit the March lows had priced in a bigger than usual recession along with an overextended consumer that had years of pulling back to do, not the end of the world. Now the market is pricing in an end to the recession and a return to wild spending by the consumer. That, or wild spending by the government to takes the place of the consumer.

There is no use trying to play fundamentals or covering hard data. Only a massive smack to head will disavow those of the bullish bent of their recovery playbook. I would say DOW 9000 and S&P 500 at 900 are hard bottoms that will not be crossed to the downside until and unless something major happens to shake the complacent off their perch. I was fond of saying in late 2007 that people could not pretend forever. Indeed they could not. But it seems they cannot accept reality for any stretch of time either.

Have a good night.

Thinking With Your Stomach

It was a long day after the 3 day holiday weekend. Just two days to go until the NFL season kicks off, so that is some relief.

Thinking With Your Stomach
While many readers may find it very hard to believe, I was looking around the markets over the weekend for an investment idea that was not related to precious metals! No, I am not kidding.

On principle I will not trade anything related to real estate or the financials. This of course leaves many things off the table. I figured I would go to real basics, and this is what I am looking at right now.

I am seeing a very weak "recovery" (if it even qualifies as such) led mainly by US government spending and not structural strength in the real economy. The report on consumer credit for July (biggest contraction in history) should have put a scare in the bullish crowd, but it did not. A stingy consumer is one part of my thesis, the other is the coming cold weather season. Sprinkle is a little flu season and I arrived at a couple of ideas for a new position.

The first candidate is Hormel Foods (HRL). The maker of SPAM and Dinty Moore brand beef stew is a low budget heart meal maker. I admit I wanted to get in this stock a while back, but I never got around to it. HRL has surprised to the upside over the past few months, and not by cost cutting alone. There is real growth here. The one year chart:

HRL shows good support at $35 and extremely solid support at $30. The stock closed at about $37 and change today.

The second candidate is Campbell Soup Co. (CPB). Chicken noodle soup is sure to lead the way as the weather turns colder, and if a nervous public is Swine Flu scared, I can imagine plenty of warm soup meals spooned up over the Fall and Winter months. Campbells has over the years expanded their soup menu tremendously, so they have plenty to choose from. The one year chart:

CPB has good support at $28 and a great floor at $25. CPB closed today at about $32.30.

What I am looking at here is two criteria:
-Lower cost alternative food items
-Seasonal factors adding demand

Just as candy makers go up before Halloween, I think warm comfort food may have a place this year more so than others due to the lower cost component.

This of course is NOT INVESTMENT advice. I am sharing an idea that I rolled around in my head over the weekend and I am looking to enter smallish positions this week. The best way to lose money is to listen to me, so you have been warned!
Full Disclosure: No position in HRL or CPB as of writing, but looking to enter a position.

Repudiation of US Financial Engineering Follow Up
On August 26, 2009 I wrote the section Repudiation of US Financial Engineering and I wanted to add a few more notes.

I discussed how foreign debt holders were abandoning agency (read mortgage debt) paper in large numbers. Today the Washington Post (hat tip to The Mess that Greenspan Made) ran a story with the following headline:
Mortgage Market Bound by Major US Role
The story tells the tale of how the US government is now the only player in the mortgage game, with about 90% of all new loans being funded or guaranteed by the US taxpayer. It seems the world has had enough of our mortgage games.

Add to this the almost daily news deluge detailing ways around the dollar as reserve currency and it seems the US is in the dog house the world over. From today:
UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’
Dollar Threat: China Selling Yuan Bonds For The First Time

I am still unclear about how the actions of foreign debt holders fit together. Right now it seems they are serious about returning the more exotic creations of the credit bubble back to the US doorstep, yet at the same time they seem perfectly willing to buy treasury bonds which allows the US to cover those very debts. It is a puzzling picture to be sure.

Have a good night.

Sunday Random Items

I had a bit of extra time this Sunday afternoon, so I thought I would do a small post of interesting items that are non financial in nature.

Crazy Video
I am not sure if this video is even real, and the fact that the title of the clip is "F-18 Hornet Extremely Low Fly By" when the jet in the clip looks like a Harrier does not help the real case. Anyways, I still found this pretty wild:


Who Needs Defense Anyway?
Today news came that the New England Patriots traded away star defensive end Richard Seymour to the Oakland Raiders for a 2011 first round draft pick. I am puzzled at this move. Seymour is one of the last "old school" Patriots. I understand his contract is up after this season and he will probably want crazy money, but that could have waited until the next off season. The Patriots are not exactly known for their generation of quarterback pressure over the last few years, and this will not help.

Tim Graham of ESPN has a much more positive take on the deal than mine, but I still think this move is a bad one for reasons of locker room moral. Oh well, who needs defense anyway, right?

Funny Site
Modeled along the lines of sites like LOL Cats, and LOL FED, the blog FailBlog is a very funny stop on the Internet. This one from today shows what not to do when trying to sell your home (NOTE: You will have to click on the pic to see the whole thing):

see more Fail Blog
That is just so wrong!

Mexican Centavos
I am not a coin collector, but I really do love old Mexican 50 centavos coins. There is something about holding a coin from the 1800's and knowing that is must have moved all over Mexico and the United States. You can almost feel the history with these things. Here is a picture of one:
Front

Back

Pretty cool!

That's about it. Enjoy the weekend and leave anything interesting in the comments.

Have a good night.

Questions and Answers

Once again it is Friday, and a 3 day weekend as a bonus! I trust all will enjoy he holiday weekend. Fall is upon us, but that is the way of things (Yoda: Twilight is upon me, and soon, night must fall. That is the way of things. The way of the Force.)

Questions and Answers
With so much going on the past couple of days, I thought I would try a new format for this post where I either answer a question posed from the web world, ask a question I have and leave it open for answers, or some combination of the two.

Question: Why was there a 58.1% expectation of a rate hike by the December 2009 FED meeting?
Answer: I have no idea, I have stated a rate hike will be first seen not before 2011. The going expectation right now, 1.5%. Welcome to reality fools.

Question: Why is Paul Krugman so annoying?
Answer: There are many answers, but the two best are that 1) he is a political hack that bends his economic thinking to fit a liberal agenda even when the data is against it, and 2) he makes no sense. Case in point from his latest blog post:

The purpose of stimulus
Just a brief reminder. Industrial production is now rising; so, probably, is real GDP. Given the way the official business cycle dating committee dates recessions, this probably means that the recession — again, as officially defined — is over.
But unemployment is still very high and rising. As Calculated Risk points out, long-term unemployment — which is the most destructive in human terms — is at its highest level recorded since the Depression.
And the purpose of stimulus is, first and foremost, to mitigate unemployment. The fact that the economy may be technically in recovery is irrelevant.

First we needed stimulus to fill the "demand gap". Now that the economy is technically getting better (maybe) Krugman wants stimulus to target employment, because economic growth is irrelevant. Ok. So if unemployment was at 2% but GDP was shrinking at a 5% clip, would Krugman still want stimulus?

Question: Why have Fannie Mae and Freddie Mac stocks gone up so much when they are both worthless?
Answer: To avoid delisting.


Question: If no mortgages were written for 6 months, would the world end?
Answer: I am interested in any answers!

Question: Car sales up, but for how long?
Answer: Not long, wait until you see October sales.

Question: Is expanding FHA backed loans to people with no down payment in an effort to continue lending money for homes for the sake of lending a good idea?
Answer: Hells no.

Question: Why would anyone flee the dollar, which is backed by faith in the US government, and run to paper treasury bills, backed by the same?
Answer: ???????

Question: Why is Lil Kim so hot?
Answer: I dunno, but that restraining order she took out on me was a bit much I think.

Question: How come stocks are not just priced on time every quarter based upon final earnings numbers instead of moving all over the place all the time without a clue?
Answer: Because there would be no way to game the system and separate people from their money.

Question: How come the New England Patriots secondary has been so bad for 4 years?
Answer: I finally figured this one out! Bill Bellicheck defenses are geared to making a quarterback make a quick read and a strong throw based on alignments. Over the years, quarterbacks have become so good (even mediocre QB's are far better than even the very good QB's of 10 years ago) so they really are not as confused anymore and they have the arm strength as well. Maybe we can change things up? Please Bill!

Question: Why does Economic Disconnect love gold and silver?
Answer: Because they are shiny. I am a fan of aluminum foil as well.

Question: How come CEO's are not paid in milkbone biscuits? (via my wife)
Answer: Because they are not Pug dogs.

Question: Why is there so much emphasis on "saving enough for retirement"?Answer: This one is a puzzler, at least to me. I fail to see the point of having all this money saved up when I hit age 65 (hopefully!). I mean, what am I going to do at 65 plus? Scale a mountain? Buy a corvette and drive fast? Go to Vegas and have fun, you know, Vegas style? You are risking a myocardial infarction all the way! Money is to be used. While I think having enough for later in life is important, there is no reason to wait until you are too old to do much to have a pile of cash. What do you need at age 70 anyway? A one bedroom apartment and those cup-o-noodles. Not exactly high maintenance.

Question: Will the US system (economic, political, etc) ever get better?
Answer: Not when 50% of the population does not vote, and 90% of the ones that do vote have no critical thinking skills.

Feel free to add answers or new questions in the comments section.

Friday Night Entertainment
Enough work for one week, it is time to relax and have some fun!

Kitten in the Works
My best friend in the world for most of my young adult life was my cat. She was with me through it all, thick and thin, for over 8 years (my mom had her before that). When my cat died two years ago, a part of me died as well. She really was my little darling.

I think the time may be right for another little princess. I am looking for a kitten as of now, and I have my heart set on a Scottish Fold Ear cat. Here is a picture of how cute they are:

Let's hope the dog will understand!

Film Clips
Loyal reader Watchtower pointed out this simply amazing clip form the Miami Vice show. In this episode the cops have a sting set up on an assassin, who happens to be played by Jim Zubiena a world renowned marksman. Even though a cop has the drop on him, watch at the 1:45 mark on to see how fast this guy can draw his backup weapon:

Unbelievable.

On the same line, that Miami Vice episode was a Michael Mann directed piece. Mann is on of my favorite directors. One of his films which did not get enough credit was "Collateral" with Tom Cruise. The film has many memorable dialogue scenes (the jazz singer exchange was creepy) punctuated by terrible violence. In this clip Vincent (Tom Cruise) retrieves his stolen suitcase:


The film "Raising Arizona" is one of my favorites, yet not many people have seen it. Hilarious and full of depth, it is a treat. Enjoy the dream sequence of the biker from hell:


Rock Blogging
Back as always by popular demand (well, my own demand anyway) here is the music!

A band that was formed by Randy Rhoads, Quiet Riot, had a few hits in the 80's. Can anyone forget "Cum on Fell the Noise"?:


My favorite The Cult song is "Sweet Soul Sister" and it rocks:


The singer/songwriter Jewel has long been a favorite of mine. While her vocals may not be all time list quality, I think she has no equal for raw emotion that bleeds out into her singing. I found a live peformance of "Wicked Games" that just makes you hurt listening to it with the feelings behind the words:


A song to listen to on the way back from any vacation is John Denver's classic "Back Home Again":


From the obscure file; how about a Christian heavy metal band? Impossible? I submit the group Stryper. While I am not much interested in religion, I do love great bass lines, great voclas, and thunder drums. Great line: "It's been said money talks, if so what does it say?":


Last Call, time to close the show.

We will close things out with a Jimi Hendrix song. With so many to choose from, it can be hard, but I pick "The Wind Cries Mary" for the timeless guitar work, cryptic lyrics (the traffic lights, they turn blue tomorrow), and just plain awesomeness (is that a word?):


Have a good night.

Thursday Items for Discussion

The New England Patriots have their final preseason game tonight and will not play any starters. I will check it out anyway to see who might be making the team. NFL opening day is only about a week away! The only thing about Fall that I like. I do plan on a Friday night entertainment post, so get your requests in.

Your Economic Policy Makers at Work
One of the first rules of leadership is to maintain a united front. You may well be totally wrong about an action, but there should be outward agreement on said action to be taken seriously. While certainly our own Federal Reserve has been wrong about plenty of things, it seems they are unable to maintain a united front while doing them.

Here is a perfect example of the bipolar nature of public comments by FED participants.

From August 22, 2009:
Fed official: rates to be kept low past upturn

JACKSON HOLE, Wyoming (Reuters) - Financial markets have not fully understood that the U.S. Federal Reserve's pledge to keep interest rates exceptionally low for an extended period means they will stay low beyond when officials normally would raise them, a top Fed official said on Friday.
"I don't think markets have really digested what that means," St Louis Fed President James Bullard said in an interview.
The Fed's strategy is aimed at promoting a future rise in inflation, which should provide an immediate boost in activity in anticipation of a future boom, but that hasn't happened, Bullard said.
The St. Louis Fed official's comments suggest the Fed will be in no hurry to raise rates when signs of an economic rebound take firmer hold and that the central bank will be willing to tolerate higher levels of inflation over the short term as it nurses the ailing economy back to health.

From September 3, 2009:
Fed President: Be Prepared For Aggressive Rate Hikes

Once we're back to growth, the Fed could be forced to hike rates rather quickly as per Philly Fed President Richard Plosser. This could feasibly happen as early as 2010;
"Our exit strategy is really quite simple: we have to begin to pull back from our extraordinary programs, we have to begin to shrink our balance sheet, otherwise we will feel inflation in the months and years ahead,"
"And that may mean raising interest rates very rapidly, at least as aggressively as we cut interest rates, if the time is right."

I think Bullard tells it like it is and Plosser is telling it as foreign creditors would like to hear it. Perhaps they can set up a friendly wager between them on when rates my rise.

Quote of the Year Candidate
A submission for quote of the year comes from The Big Picture author Barry Ritholtz in an interview for the NJ Star Ledger:

"But if you want to save the banking system, you don’t care about individual banks. The best example of that is Japan in 1989. They had zombie banks around for 10, 15 years. They didn't put any of their banks out of their misery, and they had a decade-long recession.

The idea of saying Citigroup is insolvent was unthinkable to them. They were a sacred cow. If the sacred cow gets mad cow disease, you’ve got to put it down. The problem with bailouts in general is when an industry or company goes bankrupt it typically means that there is a structural flaw in the setup of that company."

Mad Cow banks! Instant classic.

The Automatic Earth Makes it Simple
Sometimes I can be drawn into debates about monetary policy views (Austrian vs Keynesian), or about budget deficits (good or bad). Sometimes you have to boil things down and get to the common sense truth of it all, and nobody is better than Ilargi of The Automatic Earth. From today's missive (read the whole thing):

"You can't rise up from a recession or depression by shifting money around that you don't have in the first place. You'll have to take some sort of natural resources and add value to them though hard work and craftsmanship. And if you put it that way, it becomes glaringly clear how far America, as a society, is from being able to pull off anything of the kind. Against that backdrop, the idea of money as an abstract notion capable of miracles looks mighty tempting to a nation of 300 million obese burgerflippers."

A bit harsh, but hits the bulls eye. We rely on financial innovation and ever expanding credit to function as an economy, not real output of real goods.

Gold and Silver Observations
As I remarked last post, I would prefer gold and silver do their thing without so much attention. That said, I found at least 3 times the stories related to gold out today than yesterday which was a high news volume day by itself!

The most interesting news item (there were about 10 great technical indicator posts that I found great as well) was this small snippet about Hong Kong wanting to become a King Kong of bullion storage for Asia:
Hong Kong recalls gold reserves, touts high-security vault
In a challenge to London, Asian states invited to store bullion closer to home

It seems Asia would like to keep their gold a bit closer to home, as well as handle ETF's based on the gold (oh no!!). Let's hope London has the gold in their possession, otherwise they may have to go out and buy tons of the stuff on the open market to return to Hong Kong, which would push the price up. We have no indication of anything of the sort of course (except rising gold).

My only worry is this tidbit:

"The 3,660-square-foot depository, located at the city's main Chek Lap Kok Airport, will serve as a "storage facility for local and overseas government institutions," according to the government statement."

I would refer Hong Kong to the film "Goodfellas" as we all know all the big heists came from ripping off the airport!

All kidding aside, I was amazed at the reaction among more mainstream press over the past two days. When the S&P 500 goes up 10% in a week they argue the market MUST be pricing in some thing or another. They think the market is never wrong, never irrational. Upside movement is proof of the move up in and of itself. They ask no questions. Compare that with gold moving up 10% in a week and they want documented proof, supported by at least 17 fundamental indicators and published scientific papers, as to why in the world gold would be making such a move. It is really funny to see this happen.

My thoughts on today's action:
-Gold closed right near the highs of the day, which was strong. The mythical $1000 barrier looms large and in charge, and I was a little put off by the pause so close to that level. There is almost a physical barrier there. Still, a solid two days.
-Silver, my personal favorite, blew past $16 and closed over that level for the day. This is far more bullish in my view for silver.

Tomorrow's jobs number is going to clarify things quite a bit. A worse than expected number and we will see if the metals rise was a bet on a weaker economy. A better than expected number will be even more revealing in my opinion because it offer two possibilities:
-metals dive, the bet on a weaker economy is abandoned
-metals hold or climb, there is something else afoot

I can offer no predictions, but I think gold and silver have great appeal going forward.
Full disclosure: I own gold, silver, and miners of both metals so I am biased.

Have a good night.

Golden Avalanche

I had a LONG day at work then I had to remove the air conditioners from the windows because it is doubtful any hot temperatures are coming back and I wanted to turn the heat on. Yes, it is that cold here overnight already! Suffice to say, I am short on time, so just a couple of quick hits.

Home Prices in the UK: Already on the Way Back Up?
I have enough on my hands trying to follow issues in the United States, never mind other countries. Thankfully, there is always somebody with an eye of things all over the world. I stumbled across the following article that amazed me, as I repeatedly hear how much worse off Europe is than the United States when it comes to things financial.

From the blog UK Bubble:
The House Price Guarantee

It is painful admission, but UK house prices are beginning to recover. In fact, the monthly increases look very much like those recorded during the bubble years. If present trends continue, then within about 15 months, the UK housing market will have recaptured all the losses recorded since October 2007.

That line really hit me as impossible, but going on:

The bubble might be back, but its return is due to the implicit guarantee that the Bank of England and the Treasury have put in place as a response to the financial crisis. The government has given home owners now have an implicit insurance policy that the taxpayer will make up any losses on property speculation. It was a guarantee that was easily granted, and will prove virtually impossible to remove.

What? No Exit strategy like our own FED has for such things?:

It is tempting to think that within a few years time, that another financial crisis, similar to the recent one will take place, with its dramatic bank failures and dropping asset prices. However, I see another scenario. The UK will drift into an extended period of increased government intervention, stagnant growth, and asset inflation. The state and the financial system are welded together, the interests of finance dominating the policy stance of the government.

In reality, neither the Bank of England nor the Treasury have any clue how to disentangle the financial system from the taxpayer. They have no idea how to remove the tangled web of guarantees, liquidity support and capital injections.

Since they don't have an effective exit strategy, the support will continue indefinitely. Just watch what happens next to house prices.

Now I am not going to offer a commentary on UK house prices here. I am highlighting this article because yoy could easily swap "US" for "UK" in every single section above without editing.

I firmly believe we are in deflation right now. Where I differ with many is that see governments the world over asset price obsessed and hell bent on inflation in assets. Can we have inflation in home prices, health care, and the stock market and still print a benign CPI? Of course we can, it has been so over the last decade, no problem there.

As more fake fiat money is printed to support asset prices, all fiat money will lose real credibility and value. What this may mean going forward is the topic of the next section.

Golden Avalanche
With the above phenomena in mind, Mish Shedlock has a must read article on Gold today which attacks many notions about gold prices that will surely test the gold bugs thinking (excerpts):
So What's Behind Moves in Gold?

Gold collapsed from over $850 to just above $250 during one of the biggest expansionary periods in history. That is the reality and the charts show it perfectly well. Thus the statement "all of gold's gains were in expansions" is very misleading, at best.

Please see the article for all the charts, they are great and there are too many to excerpt. More:

What's Behind Moves In Gold?
1) What was behind gold's move in the Great Depression?
2) What was behind gold soaring to $850 in the 80's?
3) What is behind gold collapsing to $250?
4) What is behind gold soaring again now?
Clearly it is not expansion or contraction driving the price of gold, but rather something else. That "something else" is credit issues.
The great depression sported a massive contraction in credit. Gold rose by force when Roosevelt confiscated, and re-pegged it. Nixon taking the US off the gold standard was also a massive credit event. The difference is that gold, allowed to float, soared.

From the $850 high, gold then plunged to $250 even though there was inflation every step of the way. What happened? Credit fears collapsed. Psychology changed (more on psychology and attitudes below). Moreover, gold's reaction to Long Term Capital Management (LTCM) was a big yawn suggesting that the crisis would be contained.

In general, Gold, like Fiat money does poorly when economic conditions are generally rosy, credit worries are non-existent, and interest rates are falling. In simple terms, cash (and gold) are trash, and assets are where you want to be. Free to float, gold is apt to do worse as Prechter notes.

In 2002 when Greenspan stepped on the gas to fight deflation. Gold started reacting in advance to the pending credit event, an event that blew sky high in 2008. Gold's reaction now suggests the crisis is still not over.

In the early 30's even before Roosevelt stole the citizens' gold, it value in relative terms soared, just as one would expect.

This go around, gold sunk in the initial credit collapse as leverage everywhere was forcibly repudiated. Unlike other commodities however, gold quickly regained its composure, as I surmised.

I think Mish really nails things here. Gold is at its best when doubts about credit (and debt) quality are strong. Gold can do poorly in inflation, if money is seen as sound, because other assets will outpace gold in price escalation.

I am a huge fan of gold and silver because I see the world (see the UK piece above) trying desperately to support asset prices by money creation. To me this is defacto devaluation. This may or may not be the technical definition, but it is how I best see it. I think a time is coming when UK and US home prices are supported by central bank agency debt buying done with printed money. I think creditors are not going to want to hold currencies that carry an open ended commitment to printing. I think a move towards gold (and a much lesser degree, silver) will become a major safety net for currencies gone wild.

Of course, most readers know I think along these lines, and in full disclosure I own gold, silver, and some metal miners so one could say I have a horse or two in this race.

After that lead in, I am going to offer some market observations that may not seem to jibe with everything I just wrote, but bear with me.

Today gold kissed an area that I have clearly marked for a breakout, $980. Gold closed a touch below that level. I had silver at $15 for a breakout and it clearly passed that today. So what's my problem?

Gold and silver do their best work when they can work quietly. If too much attention is payed to the metals, things tend to ease off. Call it central bank dumping (Greenspan was a huge gold price watcher), conspiracy, or whatever. The mythical $1000 an ounce mark for gold has taken on a life of its own it seems. With that in mind, here is a sample of articles (in addition to the Mish one) I picked out just TODAY ALONE!:
Guest Post: Yves On Gold Panic via Zero Hedge

Protecting Your Wealth in Volatile Markets (Hennecke)

Hennecke stressed that investors should go for physical forms of gold and other precious metals rather than "paper gold investment scheme where there isn't full backing, where the metal might be leased out or used for derivatives. That's crucial because there is 80 times more paper gold in the market than actual
physical metal in existence in the planet."

via Jesses' Cafe

And even a usual chart based shorter of Gold, Slope of Hope, pens this entry:
Getting on the Gold Train

Fundamentally I am a firm believer in gold and silver and I am looking to add all the time. In light of all the attention the metals are getting right now, I would say odds of more room to the upside will be limited.

What we need right is for credit to lose quality again (think commercial real estate) and for some kind of a market correction (long overdue) to occur. Then all eyes will be elsewhere and the real move in gold and silver will take place.

Of course, this may be the moment in time when metals begin take their rightful place as an asset allocation across the investment public. Should that ever occur, picking a spot within a few dollars is not going to make any difference. None at all.

Have a good night.

The Thin Veneer of Confidence

It was 50 degrees this morning. I am shocked at how fast the fall seems to be rolling in. Traffic was much higher as well due to schools opening up this week.

The Thin Veneer of Confidence
I would like to lead off by saying it was almost surreal to see a down day in the markets. I guess I am just conditioned for a positive close, so the when the indices closed about at the lows I was shocked.

That said, I have already seen some of the more bearish types high fiving and getting excited about a new downturn. I would agree fundamentally, but this market is still flying on hope. Be careful here one and all.

What was most interesting to me about today is two items that served to peel back the thin veneer of confidence that has been the mission objective of policy makers since the beginning of the crisis.

Car Sales Numbers
The "Cash for Clunkers" program no doubt was able to borrow car demand from the future and burn it this summer. Expectations varied from 13.3 million to 15.5 million light vehicle sales (Zero Hedge has estimates, real number, and a projection). While the August reported number of 13.7 million beat the low end of consensus estimates, it is my opinion that the street was looking for a print over 14 million. They did not get it.

If US buyers cannot be lured into taking on a huge car loan when handed a few free dollars, this does not bode well for a consumer spending rebound in the near term. The low number also calls into question the supposed ability of the government to "stimulate" the economy. I think today's report is going to damage confidence going forward.

Banking Problem Rumors
The more revealing event of the day was a rumor that some large bank may be facing serious issues, and possibly a failure. I will not recount the various players mentioned (they ranged form some big US banks, to some smaller firms, and all the way to Europe for candidates) as it is not important at all. What is important is that after all of the support programs by the FED and Treasury, banking stocks that have doubled or even more in price, calming words all around, and excess reserves made available from the FED, the mere mention of a bank failure had the following response today:

Which bank is it? It could be anyone so lets sell them all.

It could be anyone.

Not quite the response those propping up the banks would have wanted.

I think this is a key point and it speaks to the serious disconnect the markets have been showing from reality.

When you take the lower than really estimated car sales number and a investment public ready to pull the trigger on a bank failure rumor in 5 minutes it would seem confidence has either been damaged or never really existed to begin with.

Today I was thinking of Bernanke's recent "We saved the world" speech. I would argue they were successful at changing the subject from bank liabilities and loan losses meaning practical insolvency to speculation on just how the government would bail out the system. The core issue never went away, it was just ignored while observers tried to see just how far the FED/Treasury would go to support banks. After unprecedented support programs (and the bending of some laws) the banking sector does not seem more insulated from problems, it was just that nobody bothered to ask for a while.

Again, I see a market that goes higher from here, but today we had a glimpse of what can happen if the confidence game takes a hit.

Have a good night.