The Next Phase, Buy Gold Today, Greenspan and Gross Forecasts, Nasty Jobs Report, and More!

by Addison Wiggin & Ian Mathias

  • The next phase of the credit crunch… The 5 surfs the sea change in this week’s market madness
  • Greenspan and Gross on what it’ll take to prevent a sell-off of “historic proportions”
  • Know your TAFs and TSLFs… signs of the times revealed in the Fed’s mysterious lending facilities
  • American employment scene goes from bad to worse… details of today’s nasty jobs report
  • A historical reason to buy gold today, and a chart to prove it

  For all the selling “yin,” there was no “yang” yesterday.

Welcome to a whole new phase of the credit crisis. You might call it — deflation.

U.S. equities fell yesterday. Most by a lot. The Dow, S&P 500 and Nasdaq all plunged about 3% in a sure and steady sell-off.

What’s interesting today is not the scale of the latest decline, but its mannerisms. As the commodity and energy players continue to retreat, no “hot” sector has taken their place. According to traders on Wall Street yesterday, there is no good reason to buy… anything.

No flight to resources or energy. No rush to “recession-proof” sectors like health care and consumer staples. No push to oversold financials or housing. Even gold buyers have lost their appetites.

  What’s more, there really wasn’t much terrible news yesterday, or this week, for that matter. Yeah, we’ve seen some lousy retail and auto sales data. But everyone saw that coming. Ditto with the Fed’s Beige Book and ADP’s employment report. There’s nothing new with the delightfully scandalous financials. Nothing on the housing front.

  “Assets are still being liquidated,” explains Bill Gross in his latest monthly missive, “but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning.

“There may be a Jim Cramer bull market somewhere, but it’s primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices.”

And who will this benevolent buyer be? Who will step and in show the world that U.S. stocks are a still a safe place for your money? Ugh… this isn’t what we wanted to hear:

“If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury — not only to Freddie and Fannie, but to Mom and Pop on Main Street, USA, via subsidized home loans issued by the FHA and other government institutions.”

  "We need laws that specify and limit the conditions for bailouts,” opined Alan Greenspan yesterday.

He just so happened to write a new epilogue for the paperback edition of his memoir, and to clear those shelves, he proposed “laws that authorize the Treasury to use taxpayer money to counter systemic financial breakdowns transparently and directly, rather than circuitously through the central bank, as was done during the blowup of Bear Stearns.”

Greenspan continued, saying the U.S. has "abandoned the notion that we should leave crises to be resolved solely by the marketplace" and is worried that the Fed has become “a wondrous new font of seemingly costless federal funding — a magical piggy bank."

  We’re seeing some interesting behavior between the Fed and desperate banks and brokerages . At the discount window, banks kept up their nonstop borrowing this week, averaging around $18.9 billion every day. Brokerages, who just this year were allowed to visit “the window,” didn’t take out a single loan.

But in the Fed’s TSLF yesterday, a lending facility where Bernanke exchanges illiquid asset-backed securities for U.S. Treasuries, the Fed was overwhelmed with brokerage interest. Investment banks asked for over $45 billion in these collateral loans. The Fed could part with only $25 billion.

And since we still seem to be the only media outlet that cares, the TAF and TSLF auctions have now given out roughly $1.8 trillion in loans since December. Ugh.

  As Gross and Greenspan look for Uncle Sam’s helping hand, we’re keeping an eye on the Dow. For the week, the index is down over 4% — and falling this morning. Thus, the Dow has snapped August’s gentle uptrend and is plunging toward a new credit crisis low.

10,962 is the magic number, about 200 points away.

  One last nugget of proof that the tides are changing on Wall Street: Options trading volume fell 10% in August, year over year. That’s the first monthly decline in volume since the tech bust.

(We can’t take responsibility for that one… we launched a new value-priced options service called Easy Money Options this summer. For volatile times in a lousy economy, an inexpensive options service seemed like good medicine. Check it out here .)

  The U.S. employment scene just went from bad to worse , announced the Labor Department today. Their monthly jobs report showed a greater-than-expected decline of 84,000 jobs in August.

What’s more — what you’ll read in tomorrow’s paper — the headline unemployment rate shot up to 6.1%. Such is the highest monthly unemployment rate since 2003.

So August goes down, in government books, anyway, as the eighth consecutive month of net job losses. The U.S. economy has never endured a string of losses like that without later declaring a technical recession. The guv’ment also quietly revised June and July numbers. Proof that this report is worth its weight in sand, June jobs losses were doubled, to over 100,000.

  As we mentioned above, there is no “flight to quality” in the gold market this week. Despite the U.S. stock market’s steady decline, gold has been struggling to hold onto the $800 level all week. You can get an ounce for $796 as we write

  “Gold is scarce. Fiat money is abundant,” says one of our Aussie investing contacts, Al Robinson . “That’ll become very obvious soon. The failure of Fannie Mae and Freddie Mac is pushing Bernanke and the U.S. Fed closer to a wholesale dollar-printing scenario. But you might not have to wait that long for gold to react.

“Demand from the Indian jewelry market hits its stride around this time of year. Or at least, that’s been the case every year for the last six years. Since 2002, gold investors have gotten a 10% Christmas present. Ten percent, on average.

“Last year, the September-December surge was 24%. Following that, Indian jewelers and worried investors helped take gold to its highest peak ever. The fundamentals of the gold market haven’t changed much in a year. And the price is where we left it at the end of last year, $800.”

  Oil and gas are weaker today, too. Barrels of oil have slid to $106 a pop. The average price at the pump here in the U.S. is down again, to $3.67.

  It’s much of the same in currency markets today. The dollar continues to rally, and was given a bit of a kick in the pants by ECB President Trichet yesterday. Traders focused on his continued concern over eurozone inflation, and at $1.42 today, the euro has since fallen 3 full cents from Thursday’s high. The British pound kept up with its downtrend versus the dollar, down to $1.76 this morning.

And the yen… we remain pretty impressed with the Japanese currency. So impressed we’re starting to feel skeptical. Despite a literal absence of Nipponese government leadership and the strongest dollar rally in years, the yen is even stronger today than it was all week. $1 will score you 106 yen today.

  “Regarding comments on Singapore,” writes a reader responding to yesterday’s reader mail, “it is easy to ‘get it right’ in a totalitarian state that does not tolerate any legitimate opposition. As long as you are dancing to the government iTunes, everything is peace and love. Raise your voice in opposition and you’ll find out very fast how ‘ideal’ Singapore really is.

“Please withhold my name, as I live in the area.”

  “Why the heck is this getting Uncle Sam’s knickers all up in knots?” asks a Canadian reader, this one referring to the U.S.’ pending battle with China’s “illegal” fixing of steel prices.
 
“The U.S. has been doing the very same with its heavy subsidization of wheat farmers for a zillion years, much to the detriment of Canadian exporters. And also look at the protective measures for forestry products. Even though we have a supposed ‘Free Trade Agreement,’ it seems that whenever the American forestry companies see a threat to their inferior production, they immediately lobby Congress and have a duty imposed on Canadian imports. This levy has been declared illegal by the World Trade Organization each and every time the matter has been brought to court, and to add insult to injury, these same duties, amounting to millions of dollars, have been handed over to the American producers to increase their ability to compete with their more efficient Canadian brothers. Shame on China for doing the same thing.”

  “Before reading your newsletter,” writes a reader, this one making us blush, “and some of the other great books you guys offer, like The Demise of the Dollar, I was a complacent citizen of I.O.U.S.A. In a rather short time, you have educated me on the rancorous policies put into action by our ignorant elected representatives. I have always been aware that the fundamental downfall of any free nation is that once its people know that they can give themselves money via the government, it’s only a matter of time until that government fails. Once people start putting their problems on the backs of their fellow countrymen because they were seduced by debt and material greed, it’s only a matter of time.

“Thank you for reminding me of this and alerting me to the fact that this is what our elected officials are doing right now. I beg you to release your movie, I.O.U.S.A., to the masses. Despite my views on the government and monetary policies as rather draconian currently, I still have faith that we can turn this country around and put it back on track. However, drastic actions must be made for these drastic times.”

Enjoy your weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Chris Mayer’s latest “royalty program”… for 50% off? It’s true, and available only to 5 Min. readers. Get the details, here.

rspertzel

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