“Gray Friday” Sinks Markets, More “Signs of the Times” from China, Bear Stearns Gets a Bailout, Dollar Woes, and More!

by Addison Wiggin & Ian Mathias

  • “Gray Friday” honors 1987… why markets chose Friday to shed 2.5%
  • Bear pens a deal with China
  • A startling sign of the times… proof that China has overtaken power within the global economy
  • Gold gets thrown out with the bathwater… why the long-term outlook remains bullish
  • Demise of the dollar: New lows get no mention from G-7… our panel weighs in on the greenback’s fate
  • Plus: “You must be a liberal,” says a reader… and The 5 responds

History rarely repeats, but it often rhymes… if only by degrees.

Domestic markets plunged on Friday, the 20th anniversary of the 1987 crash. They came nowhere near “Black Monday’s” 22% free fall, but the Dow, Nasdaq and S&P 500 all lost over 2.5% — about a tenth of the crash’s havoc.

Why now? We saw enough bad news last week to make Hugo Chavez look like a good president. New housing starts were down 10.5%, builder confidence reached an all-time low, oil crested $90 a barrel the dollar index reached a historic low, Wall Street’s biggest investment banks announced billions in bad mortgage write-downs… Bank of America, JP Morgan Chase and Citigroup all revealed lousy third quarters.

Some ask, “Why 2.5%?” We ask why not 5%?

Wachovia got in line on Friday and announced its investment banking arm will lose $1.3 billion, too. “Money” is evaporating from these banks’ coffers faster than fire retardant in Malibu this morning.

The loss accounted for a 10% decline in third-quarter profits for the bank. But Wachovia wasn’t Friday’s only loser… of those companies reporting earnings, about 25% were below expectations.

If there was a “last straw” for traders, dismal earnings may as well have been it.

Friday’s sell-off marked the end of one of the worst weeks this year for U.S. markets. The Dow and S&P both fell about 4% in the past five trading days. You’d have to go back to the end of July’s dark days to find a steeper fall.

Bear Stearns finalized a deal this morning with Chinese bank Citic Securities. The two banks agreed to take a $1 billion stake in each other. BS will get its billion in much need cash, while Citic will receive securities that it will eventually convert into a 6% stake in the troubled i-bank. Citic was also granted the right to purchase an additional 3.9% of Bear stock at a later time.

A reader sent in this chart and thought you might like to see it:

We’re big on “signs of the times” lately. Here’s another: Of the world’s biggest companies, eight of the top 20 are Chinese, the most of any country.

In 2002, Bill Bonner and I wrote a book about mutating bubbles called Financial Reckoning Day. In it, we examined on the eerie similarities between the Japanese bubble in the late 1980s and what had just happened in the U.S. markets through 2000-2001. We came to these conclusions: The U.S. stock market bubble was about to mutate into a housing and consumption bubble in the U.S. and that China was likely to be the next destination for the world’s capital. The chart below shows in bas-relief how evident this migration has been:


Kudos to The N.Y. Times
for compiling the data

Since 1999, the U.S. has lost 50% of its spaces on the top 20 list and about a third of its global market cap.

Compared to their total absence on the same list in 1989 and 1999, China’s growth appears all the more incredible. Companies like PetroChina, China Mobile and Bank of China are well within striking range of the top three positions. The mutation is happening faster than we expected. Post your comments here.

“Market hypesters and tipsters now are zeroing in on the next FOMC meeting,” says John Williams in his latest Shadowstats.com alert. “A split in consensus — whether or not the Fed will ease on Oct. 31 — is in play, with more than the usual nonsense being tossed around.

“For example, new claims for unemployment insurance rose from 309,000 in the week ended Oct. 6, to 337,000, in the week ended Oct. 13. The big gain was hyped as a sign of recession and imminent Fed easing.

“Anyone who follows those numbers knows that the change in any given week is meaningless, and that big changes are likely in weeks containing holidays, because the Department of Labor cannot properly seasonally adjust for such a circumstance. The Oct. 13 week included Columbus Day, when a number of state unemployment offices were closed.”

For more on next week’s Fed meeting, stay tuned… should provide some high drama.

46% of all Americans say they believe the U.S. economy is already in a recession, at least according to a recent CNN poll. When black people are singled out, that number jumps to 69%.

Foreign markets caught the selling fever overnight and this morning. If there’s a benchmark index in the black out there… we can’t seem to find it. Here’s a quick rundown of the most notable carnage:

  • Japan’s Nikkei 225, down 2.24%
  • South Korea KOSPI, sank 3.6%
  • Hong Kong Hang Seng, plummeted 3.7%
  • Shanghai Composite, 2.5% in the red
  • Australia ASX 100, dropped 1.9%
  • France CAC, reduced by 1.5%
  • German DAX, shrunk 1.1%
  • U.K. FTSE 100, lost 1.3%

In light of these sell-offs, you might expect gold to “go to the moon,” as our friend Doug Casey likes to say. On Friday, it looked like it might, shooting to a new 27-year high of $768. This morning in Asia, however, gold sold all the way back down to $750.

“Gold got clobbered when the stock market caved,” comments our gold man Ed Bugos. “That correlation is stubborn. We gotta shake it. Until then, prices could pull all the way back to $725 support before grinding higher.

“That said, the fundamentals keep falling into place though for a big move higher.”

“There are many factors pushing gold higher, and perhaps most importantly of all, gold remains cheap,” comments James Turk of goldmoney.com. “It is one of the few commodities that has not yet made a new record high.

“While the $825.50 previous peak in gold may appear intimidating, we have to recognize that that price was recorded in 1980 dollars, which had 1980 purchasing power. There have been 27 years of inflation since then. Adjusting for the loss of dollar purchasing power over those 27 years, gold today would need to reach $2,206 — and counting.”

Ready for Gold $2,000?

The dollar lost a little more of that purchasing power Friday. The dollar index fell another 0.32%, to 77.3… yet another all-time low.

Of the index’s six components, the euro has been grabbing the most headlines. It recorded a new high above $1.43 this weekend. And looks headed for $1.45. We remember suggesting in a book in 2005 that the euro would approach $1.50 before the decade was out… and for that, we were called a “gloom and doomer”… a “conspiracy nut”… readers even questioned our patriotism. What’s the old expression about shooting the messenger? You should or shouldn’t…

We’re discussing revisions of The Demise of the Dollar with our publisher as we speak. The record lows may have changed since we wrote the book, but the premise remains the same:

We were expecting the dollar to be among the hot topics at the G-7 meeting this weekend in Washington, D.C., of all places, but apparently, the subject never came up.

“G-7 was basically was a nonevent this weekend,” writes EverBank’s Chuck Butler. “There was no call for dollar strength… There was no call for yen strength… There was only the same old verbiage about the Chinese currency being weak. To me — and it looks like the traders of the world agree — the G-7’s lack of a Hula-Hoop for strengthening the dollar has given traders the green light to sell!”

“The sovereign nations of the world at the G-7 meeting,” comments Free Market Investor Christopher Hancock, “are in a race to the bottom, so to speak… a race to become, well, in a sense, worthless.

The reason: “Currency depreciation makes domestic goods less expensive to foreign buyers. Consequently, a perceived re-emergence in a nation’s domestic manufacturing may take place, as foreigners demand cheap ‘Made in the Most Worthless Currency’ widgets.

“It’s a win-win for Washington. Washington’s charitable handouts (debts) buy the bridges that buy the votes. Those charitable handouts (debts) also undermine the dollar-denominated debt. Wall Street loves it, too. The municipal underwriting business takes off. Banks now repackage municipal debt like mortgage debt. The fees keep rolling. Seven-figure bonus days are here once again.

“However, this game has one or two setbacks:

“First, higher spending sans higher taxes works only when foreigners demand our debt. But that may not be the case much longer. The Chinese have eased their appetite for American IOUs.

“Second, more debt means we print more money. More M3 means more inflation. You haven’t noticed the effect yet because Chinese imports have delayed the hangover. But the days of importing Chinese deflation are coming to an end, as well.

“While the dollar keeps falling, your assets should remain invested in businesses that derive revenues in sound foreign currencies. When those dividends get converted back into U.S. dollars, you should have more discretionary spending to buy blueberries, handbags and iPods.”

The Free Market Investor

“Your comments and those of your correspondents re Social Security reveal that none of you lived during the Great Depression,” writes a reader, who presumably did, “or have the slightest idea what hardships there were then or why Social Security was instituted.

“‘That “means testing” is on its way — but only after the “greatest generation” has had its way with Social Security… as it has had with everything else’ — This comment from your correspondent was a gratuitous, undeserved slap at the generation that survived the Depression and fought World War II.

“There’s plenty of evidence that S.S. is not in trouble per Irwin Kellner, economist at Hofstra and chief economist at MarketWatch and North Shore Bank, and from others. Warren Buffett thinks some minor adjustments are necessary and praises S.S. as being the best program that’s been instituted for keeping people out of poverty. Your correspondent is among the two-bit pikers who like to feel superior by bashing programs for those poorer.”

“You must be a liberal,” responds another reader. “It’s hard to hide your anti-Bush feelings.”

We had suggested President Bush had an easier time defending an… ahem… unpopular war and redefining torture than tackling the entitlement programs.

The 5 responds:
We are a liberal… and a conservative… and a moderate…and a Pisces… and overweight… we drink too much… so what? That’s just the problem. We’re facing an insurmountable financial obligation to a group of retiring baby boomers, and all you dinosaurs want to do is call each other names…or ignore the problem because it’s not your checkbook they’re after.

The question in Washington today is not whether “they” ought to be spending money or not… it’s only a squabble about who gets to spend more on what. Both sides of the issue are totally inflexible, and idiots like us in the middle don’t stand a chance. We’re much more inclined to agree with a third reader, who writes:

“On a philosophical level,” writes another “it has always chapped my ass to no end that lawmakers can make laws to which they are exempt. Social Security is the most glaring example, but any such occurrence — or even attempt — should be so inherently UN-American that the mere suggestion should be cause for public tarring and feathering.”

Amen,

Addison Wiggin
The 5 Min. Forecast

P.S. By the way, we just want remind you that you have a little more than 24 hours to enlist in our 6 month free trial of Options Hotline. To learn more about this offer, along with editor Steve Sarnoffs 600% profit guarantee, click here.

P.P.S. Did you know that the slogan written on DC license plates is “Taxation without Representation”? It’s one thing to practice it… but do they have to be proud of it too?

rspertzel

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