Financial Intelligence
John Browne
moneynews
Counting the Cost of the Fed Rate Cut
Today, September 20, the Telegraph.co.uk ran a headline, “Fears of dollar collapse as Saudis take fright.”
Some may say, “Well, Saudi Arabia is over there and so they take fright; so what?"
Well, according to the Telegraph article, Saudi Arabia has an estimated $800 billion in its “Future Generation Fund” alone, outside its national reserves and other accounts. Its neighboring Arab Gulf states hold an estimated $3,500 billion under management!
This is some 4.4 times the U.S. dollar reserves held by China!
Saudi Arabia is a long proven ally of the United States. It is also viewed as a leader within the Arab world, especially in matters of oil and money. In other words, where Saudi Arabia goes, other Arab Gulf states tend to follow.
As we suggested two days ago on September 18, the stock markets rose for a short time, fed on the ‘morphine’ of the recent Fed rate cut.
Incidently, we feel the rate cut was “forced” upon an unwilling Fed by the specter not of mere recession and public outcry, but of “panic”! We feel that the New York Times photograph of that morning, showing depositors participating in a U.S. subprime mortgage-triggered bank run in England engendered a fear that such a panic could spread a contagious financial panic around the world.
It was an extremely serious situation, calling for action by the Fed, to restore vital morale. Even the Bank of England did a U-turn!
On Tuesday, we headlined this capitulation by our Fed, and we also warned that, “All Americans will suffer” for it.
Now, this is not to say that the Fed cut was fundamentally wrong, but that there is a cost — a cost to be paid by every man woman and child in America through the dramatic depreciation of the dollars we receive in our pay or our private household allowances and investments.
At the time of writing this commentary, a Congressman raised this very point in questioning our Fed Chairman. Ben Bernanke answered in the briefest and “wriggling” manner.
We feel very sorry for Ben Bernanke because he inherited our government’s “Great Inflation Lie”, the reckless liquidity boom and the massive waste of money of taxpayers’ money on Iraq, that we believe lie at the essential root of our current acute economic problem. We fully understand his great difficulty in giving a forthright answer.
Well, despite all this, the stock markets did indeed roar for a day at least, possibly two. Now, at the time of writing, this roar has fallen to more of a whimper as reality sets in.
We believe the reality is that healthy stock markets rise in response to rising corporate profits, not interest rates cuts, particularly in the face of recession and falling profits.
We also believe that the only “cheap” stocks are those that are about to rise, not fall.
The fact is that our economy has been in contraction for several months. We believe we are now heading fast into recession.
It follows that we feel stock markets are “expensive”, not “cheap”.
Sadly, the coming recession is likely to be made far worse by the contagion (reaching abroad, including England) and unwinding of the subprime mortgage and resulting housing crisis — the sad result of the greed, deception and recklessness of Wall Street.
Tuesday’s cut in Fed rates will primarily affect the cost of money to banks and prime borrowers, not to financially-strapped mortgage borrowers.
We all know that, at this moment, credit is being “re-priced” in financial markets. The cost of subprime borrowing is likely to rise several points above prime, negating most, if not all of Tuesday’s Fed cut and possible further cuts, up to 2 to 3 percentage points, which would bring the cost of prime money to below the rate of inflation.
The re-pricing of credit is not being done just here in our country. As the chart below, compiled by my colleague David Frazier, shows: the net purchases of our U.S. Treasury bonds and notes, plunged from a positive of some $ 30 billion in June to a negative of some $9 billion in July. We expect worse to show when figures are published for August and September.
This means that to encourage foreigners to resume financing our debt, interest rates will have to rise, not fall, as currently anticipated by the stock markets.
As a result, we believe the current stock market “whimper” is likely to prove the forerunner to a massive stock market decline, later this year, possibly as early as October.
But the cost of a stock market fall will be felt only by “some” of our fellow citizens.
A collapse in our currency will affect “all” of us.
Today, we see the adverse effects of the Fed cut, showing clearly in the increased dollar costs of “food” commodities, oil and gold.
Talking of gold, Carmelle Lawlor, of the Metal Bulletin of London, has posted an item entitled, “Why Bank of England’s Gold Has Lost Its Shine.”
Apparently a sizable amount of gold bullion shipped to England from the United States, in the 1960’s and 70’s, was “coin melt” (melted down coins that contain base elements to make them more resilient to handling) of only 91 percent purity, rather than the 99 percent purity demanded by the London Bullion Market.
As we have reported many times before, it is well-known that our government has persuaded a group of central banks to help “de-monetize” gold by constantly distorting the gold price to the downside by selling gold under the so-called Central Bankers Gold Agreement (CBGA). This was done to make citizens less aware of the “government robbery” being carried out by the depreciation of their currencies.
At this point, a well known e-bay advertisement comes to mind. It is carried by CNBC and others. With its punch line of “down on the floor”, it depicts a robbery of customers by their bank staff!
It reflects our titles of articles of both Tuesday and today. We are all, every single one of us, being robbed by our central bank, by the hourly depreciation of our dollar.
We turn briefly to another aspect of central bank robbery. Earlier this year, England’s now-Prime Minister Gordon Brown took major political flack, almost threatening his bid for the Premiership, for selling 400 tonnes of Great Britain’s 700 tonnes of gold reserves (under the CBGA) at a price level about a half that of today.
If the British people wake up to the fact that some of their remaining 300 tonnes is “undeliverable” they could become very angry. It would be anger that may well lead to contagion—gold contagion! Talk about panic and a rapid rise in the price of gold to the $ 2,000, $3,000 or even higher level!
What should our conservative readers do? Firstly, don’t panic and get drawn into “sucker” rallies of stocks and long-term bonds.
Secondly, stay steady and coolly continue, as we have long recommended, accumulating: cash (currently yielding just over 5 percent); short-term Treasuries (now down to about 4 percent yield); agricultural commodities (up about 16 percent in ’07); and gold (up about 16 percent in ’07). Not bad returns for a conservative, low turn-over portfolio!
Our more aggressive readers may entertain the idea of investments in exchange-traded funds (ETFs) that are short the stock markets.