The transgender surgery of Goldman & Morgan
22nd September 2008
A weekend of wall-to-wall TV economic punditry failed to convince investors in various markets to adopt any particular course of action regarding their immediate or future investment strategies. The ramifications of the massive US government's financial system meltdown containment and cleanup plan have not yet been fully fathomed and may take some time to crystallize. This is as it ought to be, as the supply of surprises and developments keeps growing and is contributing to general confusion and investment paralysis.
The latest twist in the saga is the news that Goldman and Morgan will undergo transgender surgery and become bank holding companies. Any future Wall Street-mogul- in-the-making at various colleges might now wish to consider a career in financial supervision or maybe plain-vanilla accounting, as opposed to an investment banking dream-position complete with the million-dollar bonus, and the Aston-Martin in the driveway of the Hamptons' mansion.
The camps that are now declaring either hyper-inflation or severe contraction (depression) on the basis of what they understand this crisis to mean, ought to be reminded that we are but 72 hours into a brand-new game and that calling the final score is about as wise as placing one's entire wealth on a roulette basket bet on 00.
To wit, "The Plan" is just that; a blueprint subject to revision. To wit, "The Plan" has already been modified as of late last night, to include "troubled assets" of a non mortgage-related nature. To wit, "The Plan" involves buying and reselling the assets in question rather than sticking the taxpayer with the original retail costs.
Gold prices once again headed into directions that remain tentative. Following a drop to $865 overnight, bullion prices also saw highs of near $890. The US markets will now take center-stage and developments therein will define gold's immediate course a lot more than previous scene-sharing patterns with London and other trading centres. India will remain an important component in the short-term equation for prices as it prepares for the festival season.
Early reports are that the half-truths being propagated by gold extremists are once again only wishful thinking out loud. Reuters reports that: "Indian gold demand has almost vanished ahead of the peak festival season after a sharp spike in international prices late last week, prompting dealers and retailers to offer discounts." As last year, buyers might hold out for either price dips or the calendar running out before they go out shopping for the yellow metal.
New York spot dealings opened with a $6 gain this morning, quoted at $877 per ounce, but to be fair, one must also look at the active December contract which was showing a near 3% gain from last Friday's settlement. A hefty rally in crude oil (motivated more by optimism about future US demand in the wake of "The Plan" than by its possible inflationary impacts) to over $107 also supported gold. The US dollar was down, quoted at 77.33 on the index and at $1.457 against the euro.
Participants will likely hold out for official developments and the trading direction in the Dow before making large commitments in this market. News that "The Plan" now involves everyone in the G-7 taking measures similar to those of the US should have investors showing a more rational behavior in the near-future.
However, one cannot bet everything against a human psyche that still operates mainly on gut feelings and appears to find a lot of energy in mass behavior patterns. Silver gained 22 cents to $12.84 while platinum was up $35 to $1174 and palladium rose $11 to $243 per ounce..To better illustrate the polarization which currently defines the views of most market-watchers, we will leave you with quotes from the two or more dollar-view camps that have emerged since Friday, and are trying to drown each other out with vocal forecasts:
1. The Deflationists. "As details of Treasury Secretary Henry Paulson's plan to revive the U.S. financial system by pumping as much as $700 billion into the markets emerged Sept. 19, bond investor Michael Cheah was reminded of Japan. When that country's real estate bubble burst, leaving a trail of bad real estate loans, officials flooded the economy with cash only to see banks hoard the money instead of lending it out. The result has been a series of recessions and persistent deflation for more than a decade.
``Although the government tried to debase the yen by printing a lot of government bonds, the economy went into a standstill,'' said Cheah, an official at the Monetary Authority of Singapore from 1991 to 1999 who manages $2 billion at AIG SunAmerica Asset Management in Jersey City, New Jersey. ``The banks used the money to buy safety. I see a repeat happening here. The banks will use it to buy Treasuries.''
We might add out own take to the above, by noting that when Japan went into the deflation tunnel, the average household had nearly a quarter of a million (dollars' worth) of savings to see it through the contraction. Not quite the picture currently in the average US household...
2. The Inflationists. ``The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,'' said David Woo, London-based global head of foreign-exchange strategy at Barclays, the third- biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc."
3. The "Trouble-Now-Benefits-Later" Fence-sitters. "Although the dollar may suffer short-term, at least one analyst says the U.S. government's planned rescue will strengthen the currency before long. Paulson's proposals will return foreign-exchange markets to the trend of the past months, according to Adam Boyton, senior currency strategist at Frankfurt-based Deutsche Bank AG, the world's biggest currency- trading bank. Since the end of June, the Dollar Index has gained 7.2 percent. ``It's a positive plan that's ultimately good for the dollar,'' said New York-based Boyton. ``It reduces risk and volatility and gets the focus back on macroeconomic fundamentals, which suggest weakness throughout the rest of the globe next year, with returning strength in the U.S.''
Any wonder, then, that investors are mimicking headless chickens? With profuse apologies to Led Zeppelin:
Been dazed and confused for so long its not true,
Wanted only profit, never bargained for you.
Lots of people talk and few of them know,
Soul of the markets was created below. yeah!
Try to love you greenback, but you push me away.
Don't know where you're goin'
Only know just where you've been,
Been dazed and confused for so long, its not true,
Wanted only profit, never bargained for you.
Take it easy Paulson, let them say what they will.
Will your tongue wag so much when they send you the bill?
Marketwatch will live up to its true name today. So will other news agencies. Staying liquid and watching has untold benefits at the moment. Keep the 10% core gold position in place. Raise the allocation of long-term holdings by 5% on major dips. If losses are taken in other sectors, mobilize 5% on significant rallies. Do not take this as advice; they are merely prudent possible choices. Speculating and betting large at this juncture is to be done only if you have money to burn.
Source: Commodity Online