Markets Routed as Fed tries to hose down Fire

So JPMorgan picks up Bear Stearns for $2…..yes $2…not $20 as on Friday. The fed cuts the discount rate 0.25% which actually is neither here nor there.

The markets rallied initially on some short covering but the market is now in full blown meltdown.

Even Goldman Sachs has reported a write down. Only $3bln which is chump change for them but it shows how this contagion is spreading far and wide.

This is like a game of dominoes now and the central bankers globally need to pull every trick out of the bag to prevent a complete collapse in global banking stocks and general equities.

I would imagine there will be some concerted intervention either in currency markets or in the interest rate markets. This isn’t just a US problem because it will start spreading soon.

This is a very serious situation.

Currency Intervention: Next on the Fed’s Agenda

With the Dow already 250 points off the recent bounce and the $ hitting new lows against the Yen, Sfr and Euro, the time has come for the Fed to look at the $. Today even the President was moved to make some comments about strong dollar policy and importing energy inflation through a weak dollar.

The problem the Fed has is that the $ could really collapse here. $Yen is current at 101.15, a 13 year low give or take. That was when I was actually quoting the currency pair myself. Actually it has been down at these levels a few times but briefly. For the Japanese this is not helpful at all with exporters penciling in 113 for 2008. But the psychological effect of the $ breaking 100 against the Yen and 1.00 against the Sfr may well bring some serious fallout. The $ may well be booted into oblivion by all those on currency pegs to the $ who are certainly wondering whether or not to abandon them.

The question is whether intervention would do any good. Well it might and that may be all that is needed. There isn’t any good news for the US right now but then again its been one way traffic for 6 months now and for most of the last few years for the $. Is there any good reason to see it lower other than a complete disengagement by the market of the $.

The knock on effect in all markets could send the whole US financial system over the edge. A quick 5% appreciation in the $ against the majors as well as Aus, Cad and Nz would certainly help take the edge off the current situation. It may not save the $ in the long run but it would buy some breathing space over the next few months.

Will they do it? Well if they don’t you’d better hold on to your hats as carry trades get unwound.

National Security: $ on the verge of a nervous breakdown

It reads like a Tom Clancy plotline: The Senate Select Committee On Intelligence gets briefed on the national security implications of a collapse in the $. Suddenly there is a realisation that the US is very exposed not just economically but politically. Those who have read “Debt of Honour” will be familiar with the plot which involves a crashing of the US financial system using a coordinated attack on the $ and the Treasury market. Alas this is now not fiction but real time.

The $ is being abandoned wholesale and the US intelligence service is right to be focusing on what this could mean for national security just as the Pentagon did when they commissioned a report on the security implications of climate change back in 2004.

With Gold heading towards $1000/oz, Oil above $100/bl, the $ in freefall and the financial system in a mess, one could be forgiven for thinking that things couldn’t get much worse. Well stock prices still have plenty of room to fall and probably another 10-15% is about right. Property will continue to sag also.

But the main problem is the US getting the big fat raspberry from the rest of the world. It’s stretched militarily, politically it’s pretty much lost all credibility and now economically its kaputski, as its Russian pals would say.

Who caused this mess? Well according to some it was Sir Alan. No not Alan Sugar of Asmtrad and Spurs fame but Alan Greenspan. This little piece on his actions in 1987 paints an interesting picture.

Let’s hope someone with half a brain is in charge back in Washington otherwise this could get very messy.

Paper $ or Solid Gold?

Tough choice eh…..well not for jewelry lovers. The gold bugs have been enjoying the ride up in the price of gold as well as making fun of Gordon Brown who unloaded a huge brick of the UK gold reserves back in 2001 much to the chagrin of UK taxpayers.

But with the $ swift decline into obscurity the fans of something more solid than the US Treasurer’s signature on a piece of paper are clamoring fro the return of the Gold Standard as a way of preserving the value of paper and controlling the impulse of bankers to keep printing the stuff.

Well yes that does seem to be a problem. I’ve touched on this before when looking at how the Bank of England experienced several runs just after it was formed. Why? Because they printed way more paper than they had in reserves of gold. So gold or no gold, there is nothing to stop authorities or private banks printing paper or more accurately filling up spreadsheets with lots of numbers.

I’m ambivalent on this gold business. Storage issues, never mind the horrendous process of digging the stuff out of the ground, present problems as do the ability to carry it safely but really its a confidence thing.

Readers of this blog should hopefully know by now that money is an artificial construct. We can make it anyway we like. It’s created into existence in some form in order that we can exchange goods, services and labour in an efficient manner.

It is subject to the laws of supply and demand like any other product or service.

William Rees-Mogg makes some interesting points about it here but the reality is still the same gold or no gold. We must control the supply of money. 1:1 exchange for gold is a way to do that but its so last century. Surely we can come up with a smarter way of doing it.

My favoured approach is for a central monetary authority to issue interest free new money into the system directly. that supply of money (the only supply) could be controlled on an annual basis responding to set limits, constraints and changes in demand, population etc.

Goodbye interest, goodbye inflation and goodbye financial markets as we know them.

Gold bugs or not, we have to do something about the current system before it blows up and makes the 1930s depression look like an afternoon tea party.

Global Recesson or Rebalancing?

With all the doom and gloom in the US right now it would be easy to fall back on the old maxim “when the us sneezes the rest of the world catches a cold”. Not so anymore. There is good reason to see a rebalancing of economic fortune and the shift is potentially seismic.

The BRIC crew are doing very well compared to their older relatives, the U.S, U.K and Europe. Yes they have all experienced a similar asset bubble in equities but for different reasons. They have huge upside potential. They also have a less developed banking system which may have saved them from the sub-prime fall out.

There is also the interesting move by the Iranian Oil Bourse to price in Iranian Rials rather than US $ and then to state that the Rouble may be the preferred currency. Sorry?

The Rouble…..surely some mistake. Once a fashionable wallpaper accessory and now a petro-currency. Politics aside it does make sense to have a range of currencies available at the global level. This will create tensions but also prevents one country having power over all others.

This is a real wake up call for the US. With their military stretched across the Middle East and their financial system in disarray, the US is in a precarious position. Like the playground bully who finally loses his power it is suddenly looking very frail.

The End of the $?

Following on from my post on the Amero I came across this article which explores the fallout for the $ from the current financial crisis. The hard question the Chinese, Russians, Arabs and other holders of $ must be asking themselves is what to do with them.

Well I think we’ve been seeing the answer in action for some time now. Buy overseas assets not paper. In other words buy into industries, land, property but not continue to finance the US deficit by buying US treasury stock.

We’re starting to see the Arabs and Chinese buying up assets in many sectors, especially finance and resources. Makes sense doesn’t it?

Nothing confirms this more than the Abu Dhabi Investment Authority buying 5% of Citbank for $7.5bln…….structured as a convertible loan paying 11%….now that is a junk rate.

What a deal for the Arabs. And the irony of having to bail out a huge US financial behemoth.

No doubt there has been plenty of sucking wind going on in Washington and Wall Street.

It’s a simple game from here on in. It’s called “Show me the Money”.