Gold, Equities and Alphabet Soup

February 13th, 2009
0238 hrs

GOLD & THE CREDIT CRISIS

The Bretton Woods system of monetary management
established the rules for commercial and
financial relationships among the world's industrial
states in the mid 20th century. In 1971, President
Nixon unilaterally cancelled the Bretton Woods
system, thereby stopping the direct convertibility
of the US dollar into gold.

In 1929, Roosevelt illegally confiscated gold and also
devalued the US dollar. This led to a strengthening of
gold prices.

Of late, Gold has been rallying alongwith the US dollar.
It is a surefire sign of a serious credit dislocation ie,.
the world's banking system is insolvent.

DO NOT BE FOOLED into what global upside ramifications
may come forth by the stunts that the people in Washington
DC are pulling on you. The price action of gold and the
US dollar is telling all of us that a HUGE credit event
is going to be upon us. It will not be constrained to the US
but in the Eurozone area and the far east as well.

In the note dated Jan 6th (www.alvinjamur.blogspot.com),
my friend Vivin Oberoi noted that a broad based failure of
commodity markets to rally was a sign that all is not OK.
Vivin also noted that a combination of de-leveraging, carry
trade unwinding and imploding growth would keep the Yen/USD
on an uptrend. There is ample evidence here that this is
indeed happening to the T.

EQUITY MARKETS & FALSE HOPES

When I was back in school, I was told by other traders I
knew that it was imperative to pay attention to what the
market did between 2:45pm and 4:15pm. At around 3:15pm
yesterday afternoon, the DOW started to rally and converted
a 200 point deficit to a deficit of just 6 points all
because of talk of a "Mortgage Alteration" plan that was
apparently being constructed.

I am as humanistic as anybody else but I resent having to
pay for people that have not been careful about going over
their heads in spending. The last credit card bill that I
paid late was over 15 years ago. I've been a responsible
consumer and now the US government is penalizing millions
like me - for being responsible with credit and living
within means. It is actions like these that start the demise
of nations.

PLAN, WHAT PLAN?

The Congressional Budget Office (CBO) predicts that over the
next three years there will be a gap of $2.9 Trillion between
what the economy could produce and what it will actually
produce. The $800 odd Billion that the administration plans
to use to stimulate will simply not be enough.

What on earth is a "Private-Public" partnership anyway? Perhaps,
once the details do become known we'll all realize that its
another fancy term concocted to mean that the public will bail
out the private.

Every economist I've spoken to keeps harping that the current
approach (continued from the previous administration with more
urgency) is very reminiscent of what transpired in Japan in the
90s. To rejog memories - the Japanese government came up with
fiscal expansion that was not enough to kick start a recovery,
promoted and buttressed banks so that they could be reluctant
to fess up their losses (talk of abandoning Mark to Market is
just one such action being bandied about in DC).

CREDIT EXCESSES HAVE NOT BEEN WRUNG OUT

On October 29th, 2008, I opined the following and I will simply
just repeat what I wrote.

"Credit excesses have not been wrung out of the system. All we've
done by the machinations of the TAF, PDCF, TSLF, CPFF, MMIFF,
ABCPMMMFLF....er, Yes, I mean the "TAF, PDCF, TSLF, CPFF,
MMIFF, ABCPMMMFLF" is to shift the problems onto the public
balance sheets by risking taxpayer money. These stunts will sooner
or later lead to a revolt in the fixed income markets and will
likely lead to a currency devaluation. We will be a banana republic."

Amen.

- aLV