On Tuesday January 22nd, with global markets tanking and DOW futures set to open down 500 plus points, Ben Bernanke once again blinked, caving in to an unknown “bogeyman” that turned out to be Jerome Kerviel, a junior level trader at French bank, Societe General.
Bernanke delivered an emergency stop-gap rate cut of .75 basis points, but the markets weren’t happy with that, and Ben Bernanke doing his finest impression of Edward Scissorhands – caved in once again, and gave the markets another .50 basis points at the Fed’s regularly scheduled meeting last Wednesday.
So much for standing alongside U.S. Treasury Secretary Hank Paulsen just months ago and talking tough about the U.S.’s “strong dollar” policy. And so much for talking tough about fighting topline inflation.
Inflation be damned when there’s Wall Street bankers to be bailed out!
All the market has to do is call, and Edward Scissorhands will cause rates to fall.
So what does gold think about our new Fed Chariman, Mr. Bernanke?
Well, they say a picture is often worth a thousands words, and this one is no exception.
So why would Bernanke cut rates 125 basis points over the span of just 7 trading days, with Oil climbing towards $100 and Gold towards $1,000?
First of all, because the collapse of the housing bubble and subprime mortgage paper is only just the beginning of the derivatives meltdown that is spreading like the ebola virus through global markets.
Swiss banking giant UBS stunned markets last week with it’s third round of subprime writedowns – that now total a staggering $18.4 billion dollars.
And now the bond insurers are in meltdown, needing an estimated $200 Billion Dollars of capital infusions just for the industry to maintain their AAA credit rating. Barclay’s just issued a report on the bond insurance crisis, stating that over banks hold over $800 billion in bonds and would incur losses on the ratings downgrades that would require additional capital infusions of $143 billion dollars.
By the time this recapitalization of U.S. banks is done, OPEC and Asian souvereign wealth funds will control the U.S. banking system.
This is not the same as when the Japanese were buying up trophy property and gold courses in the 1980’s. We have just transfered control and influence over our financial system (and fiscal policy) to foreigners.
This is an unprecedented and historic transfer of wealth.
Wall Street has extracted obscene pay levels and bonuses while gutting the infrastructure of the U.S. financial system that is now being sold off piece-meal to our creditors.
And do not for a minute – buy into these temporary relief rallies in the U.S. market, because the credit contagion is not over. Quie the contrary – as it’s just getting started.
Lying dead ahead is the securitized credit card, and auto loan paper to worry about, just as the U.S. economy stands poised to rollover into a deep recesion. And then there is the next shoe to drop — commercial real estate.
This recession is occuring during a housing collapse and when the U.S. consumer with his “0” savings rate – has nothing to fall back upon – except a pile of debt. And banks now battered by mountains of worthless subprime paper, will find rising deliquencies in auto and credit card loans and a potential collapse of yet another bubble in commercial real estate.
Bernanke by slashing rates and injecting liquidity, is placing a huge bet that a slowing U.S. economy will ease inflation pressures, and that oil and commodity prices will ease.
But, given the proposed $150 billion dollar U.S. stimulus package that’s a cinch to pass both houses – I’d suggest that traders take a look at what gold did off the last stimulus package proposed after the Gulf Coast Hurricanes of 2005:
Now I know gold traders expected more of a rally off of Bernanke’s double rate cuts. But, you have to acknowledge that much of the recent move to new all time highs in both gold and gold stocks, along with oil’s run to $100 dollars – was in expectation of these cuts.
I believe that gold will build a brief and solid base here and is set to explode through triple digits as Bernanke will undoubtedly deliver yet another cut that the market is now pricing in.
This past Friday, traders bid up base metal companies like BHP and RTP, who have greatly lagged the gold plays into Bernanke’s rate cuts. I believe that gold and gold stocks will build a solid base over the next few weeks, and then will explode to new highs as the Bush stimulus package becomes reality, and as Edward Scissorhands is called on once again to cut rates and appease market angst. So hold on tight and get ready to enjoy an incredible ride.