Who’s Been Goosing Goldilocks?

The Myth Of Free Markets

"The power of myth is extraordinary. Correctly applied, the ignorant will believe themselves enlightened and slaves will believe themselves free."

When credit markets began to unravel in the summer of 2007, central bankers and economists were surprised. In retrospect, they should not have been. Warnings of a speculative bubble were issued as soon as cheap credit began distorting housing prices in 2003. Denial, however, always trumps reason in the presence of profits—or ulterior motive in the case of Greenspan.

So it was in the 1920s in the US, in the 1980s in Japan, in the 1990s in the US and it will be so again in the 2000s in the US—all large speculative bubbles ending in collapse; but this time, like in the 1930s, the collapse will affect the entire world, for another global depression may be in the offing.

Credit, like steroids, is a potent tool and is now the prime mover of financial markets in New York, London, Tokyo, Hong Kong, etc. The interest rate of central banks measures the flow of liquidity in the form of credit that credit-addicted global markets depend on and crave; but credit like steroids, with continued usage will destroy the body it once helped—Parcus nex, sic economic death, is the next stage in our deadly dance with debt.

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Pushing on a String?

WHAT THE FED GIVETH, the banks taketh away.

Just days after the U.S. central bank completed its unprecedented 125-basis point easing in its key policy rates, its quarterly survey of bank lending officers showed they had become much more stringent in their extension of credit.

That's key because people and businesses don't borrow from the Federal Reserve, so how much credit the central bank provides, and at what price, affects the private economy only indirectly. It takes a banker or other lender to make that loan to pay for a house or a piece of capital equipment. Indeed, the Fed acknowledged as much when it slashed rates last week, noting that financial conditions had tightenened.

Even as the Fed has made the raw material for those loans cheaper, bank lending officers indicate a far warier attitude toward making new loans, especially -- surprise! -- "nontraditional mortgages." Some 85% of loan officers responding to the quarterly survey they tightened lending standards for this category, which includes subprime.

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FMM Comment: My post yesterday, The Big Credit Squeeze, also refers

Financial Setbacks

By Bill Bonner

"There is no magic to Free Enterprise. It is the best way to create wealth, but it does not prevent people from making mistakes. Capitalism offers people a chance to make money. But it also offers them a chance to make fools of themselves."

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Commodity Conundrum

by David Petch


The following article was presented on Saturday, December 15th, 2007 for the benefit of subscribers.

Inflationary cycles are always manifested towards the end with rises in commodity prices that become equivalent to a black hole where money gravitates. Increasing the supply of money is the very definition of inflation, with rising prices being a symptom. Interest rate cycles tend to last 20-30 years starting from a decline to a base, followed by peak. Central banks use interest rates as the brakes of an economy and is the primary tool used under fiat currencies. Central Banks could stop printing money, but that would lead to a deflationary collapse, which is not a desirable outcome...so inflation it is. After interest rates rise to cool things on a Cycle Degree, periods of declining interest rates occur which will often see a decline in prices. Money is still being printed in the background, so the general overall theme is inflation, albeit maybe 1-2% instead of 15-20% near the end of the cycle. As economies begin growing with lower interest rates a credit economy emerges where companies and people essentially leverage their ability to purchase goods and pay it back later (a totally different concept than "Pay if Forward").

Towards the end of the credit cycle, inflation begins to grow due to expansion of the money supply and credit (due in part to the fractional reserve system used by banks). Rising interest rates eventually makes borrowing expensive, thereby quashing demand for things and causes scaling back in consumption sectors of the economy. During this phase, there is an increase in the amount of money circling the globe to try and find somewhere to park into something "tangible". Gold and silver and are often viewed as "tangible" items once the economy shifts from a credit economy to a "necessity economy" (paying only for the essentials such as heat, food, fuel for transportation etc.).

Supply and demand dynamics generally see commodity prices rise during the terminal portions of inflation cycles and decline during subsequent periods of disinflation. Once disinflation kicks in, commodity prices historically decline to near or below operational costs, which cause many companies to collapse. Once demand begins to outstrip supply, commodity prices begin to turn around.


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Ron Paul Beats McCain in Maine Caucus, Primed to Win Over 1/3 of State Delegates

From www.ronpaul2008.com

In the race for delegates, Ron Paul appears to closely trail Romney for first place

FOR IMMEDIATE RELEASE
February 4, 2008

ARLINGTON, VIRGINIA – While most reports about this past weekend’s Maine Caucus focused on the purely symbolic presidential preference poll, in the meaningful race to secure delegates to the state convention Ron Paul is primed to finish second with likely 35 percent of the total delegates.

Delegates to the Republican National Convention in Minneapolis are elected by the state delegates. Internal results from 10 of 16 counties, including the largest cities of Portland, South Portland, Lewiston, Auburn, Augusta, Waterville, Bangor, and Brewer, show Ron Paul picking up 215 of 608 State Convention delegates so far reported, or 35%.

“Ron Paul’s strong second place finish in Maine, in which he beat John McCain, is proof that this race is far from over,” said Ron Paul campaign manager Lew Moore. “We’ll continue to battle for every delegate in this wide-open race for the Republican nomination.”

In the presidential preference poll, with 70 percent reporting, Ron Paul is in third place just two percentage points behind John McCain. However, the Maine preference poll is purely a beauty contest, and in the actual election of state delegates the so-called “frontrunner” McCain is far behind Ron Paul.

Ron Paul's Greatest Speech?

Before the US House of Representatives, September 19, 1984

Mr. Speaker, I shall be soon leaving the House and have asked for this special order to make a few comments regarding the problems our nation faces and the actions needed to correct them. Having been honored by the 22nd District of Texas to represent them for four terms, I have grown to appreciate the greatness of this institution. I only wish the actions performed by the Congress in recent years could match the historic importance of this body.

Thousands of men and women have come and gone here in our country's history, and except for the few, most go unnoticed and remain nameless in the pages of history, as I am sure I will be. The few who are remembered are those who were able to grab the reins of power and, for the most part, use that power to the detriment of the nation. We must remember that achieving power is never the goal sought by a truly free society. Dissipation of power is the objective of those who love liberty. Others, tragically, will be remembered in a negative way for personal scandals. Yet those individuals whose shortcomings prompted the taking of bribes or involvement in illicit sexual activities, have caused no more harm to society than those who used "legitimate" power to infringe upon individual liberty and expand the size of government. Morally the two are closely related. The acceptance of a bribe is a horrible act indeed for a public servant, but reducing liberty is an outrageous act that causes suffering for generations to come.

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Hear No Evil, Speak No Evil, See no Evil - Just Cut the Cable

Something weird is going on here. First, two communication cables were cut which got me thinking that Something Smells Fishy Here.

Now, a total of four cables have been cut, IN A WEEK!!!

Is somebody, with a pre-emptive motive, trying to cut off the Middle-East from the rest of the world???

FX Insights Trade Team Update

By FX Insights Moderator,

Sorry for the delay in getting today's update posted... was a crazy day with meetings and such.

As far as the EUR/USD is conerned, we had an extremely boring day... tight ranges, no decent price action... once again the Dow stumbled, which didn't help matters.

So I'm going to use today's update to cover a few things that are on my mind in regards to the market and the EUR/USD... some food for thought stuff...

One question that is on many trader's mind is why we're not seeing a lot of volatility or decent price action the past week... there are a few factors contributing to the market being seduced into a lull...

Lets start with risk aversion... banks, hedge funds, institutions, wealth managers, and traders are simply not taking on risk under current market conditions. With all the uncertainties of a U.S. recession, global recession, slow growth coupled with rising inflation, central bank fears, tightened credit markets, shaky equities, an unstable employment sector, and a cautious consumer sector, those big money players are playing things ultra tight and conservative.

Prime example -- the carrytrade... the carrytrade is off the table for now. Once this extreme risk aversion set in, that opened the door for pairs like the EUR/JPY, USD/JPY, and GBP/JPY to drop hundreds, if not thousands of pips... the yen has strengthened tremendously while the market is in extreme risk management mode and fear mode... it won't be this way forever, but for now, expect those once brave risk takers to play it safe.

So how does this season of risk aversion effect the EUR/USD? Quite simple... for the big money players it's not an attractive buy while at the same time it's not an attractive short... with the banks being on lockdown and the institutions dealthy afraid of taking more losses, buying the euro at 1.4800-1.4900 is not going to happen... the alternative would be to buy the dollar, and with the dollar remaining fundamentally weak and the prospect of the Fed cutting rates further, who seriously would buy the dollar right now?

The market is in desperate need of not just a good, but a safe reason to either buy the EUR/USD or short the EUR/USD. The central banks are not helping matters either... both the Fed and the ECB is keeping the heavy EUR/USD bears in hibernation for now... with the Fed in a rate cut cycle and with the ECB remaining hawkish on rates and price stability, euro bears are not going to push the EUR/USD down, they really can't at this point.

Fundamentally, the U.S. economy has shown little signs of life. In the Eurozone the coming economic slowdown has yet to begin, which is another factor why we're just floating in a tight range...

Hopefully this sheds some light on why the market is behaving the way it's been behaving the past week or so...

EUR/USD trading:

I believe the market is also in a holding-pattern as we wait for Thursday's ECB rate decision, and more importantly, Trichet's press conference...

Early tomorrow morning we have key PMI and retail sales data out of Germany and the Eurozone... PMI may come in above forecasts while retail sales could possibly dissapoint, regardless, I don't expect this to have any major market moving effects...

Later in the morning we get very important ISM Non Manufacturing data, which I believe we should see come in USD+... whether or not the market decides to make any big moves is not something I'm looking at, but I'll certainly be prepared for...

As far as trading goes, I remain euro long -- cautiously long -- this means unless we get a signal I and I feel comfortable, I am in no way, shape, or form adding any euro longs at these levels... all of my longs are below the 4750 level and I'll keep it that way for now... any moves above the 1.4900 level would be an area I'd like to add a euro short, should price allow...

I do have some key downside/updside levels:

Downside key levels --

4801
4783
4752
4738
4708

Upside key levels --

4852
4878
4893
4920
4954

Lastly, in today's Q and A session we talked about the Team doing more live trade calls in the chat... I'm going to do a post on exactly what and how this will work...

Posted below is a chart from two calls we made last night and early this morning, just to give you an idea:

Click on Image

That's all for now... we'll see ya in the chat!

-FX Insights