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I want You to Want Me

By Jon Nadler       Printer Friendly Version
Nov 6 2008 9:06AM

"Due to travel schedules we will return with the daily commentaries on Monday, November 10th"

Good Morning,

If there was anyone left out there who was not convinced that the threat of inflation has faded faster than Mrs. Palin's number of Google mentions, well, the Bank of England placed those doubts into a very deep and very cold cryogenic tank this morning. Issuing a stunning 1.5% interest rate cut, the BoE declared that the threat posed by the economic deterioration at home and abroad trumped any upward price pressures and then some. Thus, the central bank borrowed the entire arsenal of implements from "Saw V" and went on a slashing spree to rival that of the US Fed and anyone else in recent months. The Swiss National Bank and the ECB did not stay far behind, cutting rates by 1/2% themselves. Well, at least they were within the forecasted range. Today's rate-cut prize still goes to the BoE. Gordon Bennett!

Gold prices tried to reach for $750 this morning, while the US dollar was levitating near 85.00 on the index. However, following the rate-cut parade over in Europe, the greenback took off for higher altitudes, gaining 0.35, while crude oil sank $1.16 to $64.14. As a result, gold tempered its gains and was ahead by only $5 prior to the NY opening, and not much above $740 per ounce.

Today's focus will remain on the US dollar and, of course, on the Dow, following a nasty 622-point drop in the Nikkei overnight. That which was inexplicable in yesterday's rise in the Japanese index, was certainly explicable this morning (at least in part) by automaker Toyota's warning that is was slashing its annual earnings forecast by more than half. US car manufacturers are pleading for a commutation of their death sentence with President-elect Barack Obama. The PGM-group metals might have a hard time making progress in the wake of such news. Participants are also fretting about tomorrow's unemployment data.

New York spot bullion prices opened with a $2.5 gain, quoted at $739.60 and not looking very eager to get back to last month's highs at this point. It might still do it, but a lot hinges on currency markets here, and overseas. The fact remains that despite whatever ails the US dollar, that which ails the British and European common currency is applying a lot of lipstick on this green pig and making it look more desirable. The threat of a global recession appears to be mutating into stark reality, and commodities are responding with appropriate value readjustments.

We still do not buy into the declarations of the unequivocal resumption of the secular bull market in bullion. Certainly not when prices are proving such wishful thinking rather...wishful. Silver gave up early morning gains to open with an 8 cent advance, at $10.33 per ounce. Platinum was off by $8 at $851 and palladium rose $10 to $227 per ounce.

None of the above scenario in global economics has stopped the world of pessimistic pundits from producing dissertations on why the current regime of bailouts and rate cuts must result in some kind of a replay of the Weimar era. Visions of wheelbarrows full of worthless banknotes are being floated (not to mention the ubiquitous "Bennycopters" - still 'warming up' on the helipad, eh?) and abandoning the dollar ship remains the mantra to follow. Not just half-heartedly, mind you, but with complete 100% flight as the 'smartest' strategy. Well, never say 'never'  - but let's look at what 24/7 Wall's Doug McIntyre has to say about the matter. Will Uncle Sam file for Chapter 13? Chapter 11? Or will he start a new chapter altogether - one which restores the currency and the country to a state of health from earlier times? Will he manage to keep other nations and individuals wanting the greenback? What will it take to achieve this?

Uncle_samThere is not a man with a typewriter who can avoid writing about how much debt the US government has and how much more it will have to take on. Paulson's program will put $700 billion more on the "red" side of the ledger. The deficit for the federal government's fiscal year will be well in excess of $1 trillion. If tax income drops due to the recession, that number may turn out to be the hope of the damned.

The conclusion most people draw from all of that exhausting economic thinking is that the new president will not have any money to fix things and keep those things fixed that were already fixed over the last decade. No one needs a new headline. Just copy it from the next guy. "Obama's Hands Are Tied".

But, they are not idle hands. Whether citizens view him as a free-spending radical who just wants to drain the checking accounts of the rich or just another guy elected president during another crisis, some expensive problems will not go unaddressed.

Treasury already has its big chunk of capital and it has no reason to part with that. Banks will get some. Perhaps insurance companies. If credit card defaults and LBO failures keep going up, they will join a continuing drop in the housing market as a reason that $700 billion may not be enough.

The most admired analysts covering the car industry, The Center for Automotive Research, recently reported  that a collapse of the US auto world would kill three million jobs. That would take unemployment to 8% even if no one else in America lost a job. It would damage personal income by nearly $300 billion.

A walk around other large industries such as retail and airlines would yield equally dismal data. Without an unimaginable amount of money put into the private sector, the economy could go into a 2009 version of The Great Depression. The public is against that, but it is well to remember that a year ago most economists thought the US would avoid a recession. What 2008 has proved is that economists are no more accurate than the TV weatherman. They just get paid less.

On the back of an envelope, it is entirely possible to make the case that the federal government could ring up a $3 trillion deficit over the next two years. Since that has never been done before, it is impossible to predict the side-effects. Nausea and dizziness are probably listed on the label. And, if the arousal lasts more than four hours, call a doctor.

All of this deep factoring brings the analysis around to the question of whether the US government can raise the money to cover the big hole it is digging. The answer may be more simple than many people would guess.

If the Chinese, the Saudis, and others with a lot of extra capital, keep buying US debt, the amount that the Congress can write checks for is phenomenally large. If a global recession pushes China back into the dark ages, the proposition becomes more difficult by a factor of ten or so.

Only people in mental wards or on hallucinogens would suggest that the US government could default on a dollar of its debt, but no one ever believed that General Motors or AUG could go bankrupt. Borrowing has its limits, even if they are colossal to the extent that they cannot be imagined.

At some point Uncle Sam's extended hand will be cut off. Then the government will have to decide whether it can cover the note. There is no absolute guarantee that the answer is "yes."

Credit default swaps on US debt may just became a big business."

The $730-$775 range remains on track for the moment, while silver could stage a break for higher ground. PGMs are coming back from bargain-basement levels but will remain sharply focused on automotive news. Trading these niches with anything but discretionary funds remains ill-advised. There is a lot more dust left to clear before month-end.

Continuing jobless claims climbed to a quarter-century high and news that Citi and Goldman will be adding to those rolls, as they axe 12,000 jobs in the coming 12 months. Wall Street bonuses are projected to fall 20 to 50 percent, while some firms have cancelled holiday parties. Lehman's Mr. Fuld will exit stage-left, by year-end. No bonus, no severance.

A big thank you goes out to all our friends on the commodities desk at Bloomberg who took us on a tour of the high-tech wonderland that is their building in NY. Very impressive - surpassed only by the talent of its writers.

Best Regards,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.