Thursday, January 15, 2009

What's another $825 billion?

As we near the inauguration at the end of this month, a wave of change is certainly coming to the United States of America. Unprecedented levels of debt is one thing, but it seems like they are at least taking the bulls by the horn. 

All this bodes quite well for gold, regardless of what the short term market may think.

Reflecting back on the last little while, the Commodity Exchange disparity still exists - no default happened on the fateful December 29, 2008 as so many experts have called it. 

CNBC discusses this back in October. This is another lesson in taking external opinions with a grain of salt. While the price disparity still exists - it occurs with another commodity that most people buy far more often - oil. 

At the local gas station in Canada we are seeing $0.85+ a liter, all the while crude is trading at a historic low of $35/barrel (or about $0.35/liter)...anything glaringly obvious here? If you thought the local gold shop running out of bullion and selling an ounce for $850 or about $50 above the trading price - it's less than 10% premium. Not quite so bad now is it?

Crude prices fall below $35 for the first time this year on weak economic data

    NEW YORK (AP) -- Oil prices tumbled below $35 a barrel Thursday as new employment claims rose and government reports show that unused gas and oil inventories continue to build.

    Light, sweet crude for February delivery fell $2.35 to $34.93 a barrel Thursday on the New York Mercantile Exchange. At one point prices fell to $34.65.

    Prices have fallen 27 percent in just a week and may hit new five year lows, analysts said.

    "It was very predictable that January was going to be ugly, but I'm not sure if anyone thought it would be this ugly," said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.

    Kloza said trucking companies have seen an huge drop in business as orders dry up, just one example of how demand for energy has fallen away.

    OPEC lowered its energy demand forecast for 2009, with investors already shrugging off production cuts of 4.2 million barrels a day by member countries. The Organization of Petroleum Exporting Countries said in its January report that it expects world demand for crude will fall 180,000 barrels per day in 2009, compared with the previous year.

    In other news, Democrats unveiled the next round of stimulus package - to be honest it seems more tailored to the public so let's hope that will bring some confidence back into the equity markets - I see tax rate cuts, individual benefits, and no mysterious bailout for toy arrow companies... I'll keep my fingers crossed.

    WASHINGTON (AP) -- House Democrats are circulating an $825 billion economic stimulus measure that emphasizes health care, education and highway construction as well as tax cuts for individuals and businesses.

    A summary of the measure shows spending totaling roughly $550 billion and tax cuts of $275 billion, although the totals are expected to shift considerably as Congress works on the bill.

    Democratic leaders plan to unveil the legislation later today. The Associated Press obtained a copy in advance.

    Democratic leaders have pledged to have a bill ready for President-elect Barack Obama to sign by mid-February.

    Wednesday, January 7, 2009

    The US Dollar Collapse

    The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

    Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

    The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

    Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

    He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

    Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

    "The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

    He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.

    Sunday, January 4, 2009

    Happy New Years! Is 2009 going to be a year of recovery?

    The first few trading days of 2009 is commencing in hours, can it follow up the decent rebound of the last few days of 2008?

    WASHINGTON (Reuters) - The U.S. economy slipped into recession in December 2007, the nation's business cycle arbiter declared on Monday, and the downturn could be the worst since World War Two.

    The National Bureau of Economic Research said its business cycle dating committee members met by conference call on Friday and concluded that the economic expansion that started in November 2001 had ended. The previous period of economic expansion, which ended in 2001, lasted 10 years.

    The current recession, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression, behind only the 16-month slumps of the mid-1970s and early 1980s.

    "I think that we've got a ways to go, that this is going to be probably a deep and long recession," Jeffrey Frankel, a Harvard University economist who sits on the NBER's committee, told CNBC television. "It could be the worst post-War recession. We don't know yet."

    The NBER does not define a recession as two consecutive quarters of decline in real gross domestic product, as is the rule of thumb in many countries. Instead, it looks for a decline in economic activity, spread across the economy and lasting more than a few months.

    I have my doubts, and rightfully so. According to US, recession has been in effect for about 12 months so far. Here are some factual numbers from NBER (The National Bureau of Economic Research ) again.

    Not counting the Great Depression of 1929, we're essentially half way through this mess. The next longest recession is 24 months! Slight optimism yet, worst case scenario we have another 11 months and a bit of overall market deteriorations to go.

    Best case scenario, things correct in 4 months in time for April and rosy markets again. Given the US economic figures of late though, it's difficult to imagine that.

    With that said, all this points to higher resources prices. Good things come to those who wait. Happy New Years, may we all look forward to a much more prosperous 2009. Thanks for reading and visit often!

    The National Bureau of Economic Research — the widely acknowledged arbiter of recessions — announced today that a recession began in December 2007. That means the downturn is now a year old, and no one thinks it’s on the verge of ending.

    Here are the longest recessions of the last century:

    1929-33: 43 months 1910-12: 24 months 1913-14: 23 months 1920-21: 18 months 1973-75: 16 months 1980-81: 16 months

    Economists have been forecasting that the current recession will likely end sometime in the spring (which is, presumably, when some of the new stimulus money will start to be spent). If they’re right, this recession will be roughly as long as the 1973-75 recession and the 1980-81 recession, both of which were 16 months. To find a longer one than that, you have to go back to the Depression.

    Remember, too, that forecasters have been far too optimistic over the past year. At some point, that will change. But for now, the best bet seems to be that this recession will last for more than 16 months.