What's Bernanke's game plan?

The Federal Reserve moved aggressively for the second time in eight days to lower interest rates and signaled it was ready to do more as needed. But was is Ben Bernanke's game plan for the US economy? Agreed he and the Fed are worried about Recession, the housing market and the credit crunch but I can't help thinking all this short-term tinkering will only make things worse. About a year ago Bernanke was worried about the threat of high inflation in the economy but by cutting rates so aggressively he has opened the door for high inflation and the dollar to take another pounding against major currencies. My worry about Ben Bernanke is that he never seems to disappoint the markets, he always seems to cave in and bows to market pressures he is also treading a fine line and copying monetarists policies from the 1970's that caused havoc on economies and markets, time for Bernanke to "Man up" and not be Mr predictable. The reaction to the rate cuts were as expected dollar weakness and a rise in commodities but if the Fed are so aggressive to cut rates should inflation be a problem will they raise interest rates? Are they really worried about inflation well those countries holding large reserves in US dollars are probably weighing up when is the right time to dump dollars. For all Mr Bush's talk about the resilience of the US economy the basic fundamentals are not quite right, a weak currency $9 trillion dollars in debt, slow growth and rising unemployment all caused by years of bad economic policies and it will take years to put right by the new President.

Let's take a look at what's happening in the UK as house prices fall and mortgage approvals fall to a 13 year low. Bank of England figures show that 73,000 new mortgages were approved down from 117,000 in December 2006- a 37% drop. All this centres around just how much lenders are willing to risk as the credit crunch bites. As sub prime write downs hammer the banks balance sheets the assets (Houses) held by the banks are worth less as owners default and will hardly repay what they have outstanding. Many owners crippled by huge debt are struggling under increased energy prices, travel and food prices whilst salaries have failed to keep pace with rising costs inflation really 2.1% I think not. Meanwhile independent experts think the UK Govt will raise taxes to fund a £8bn shortfall you would think with the rising prices in Petrol and the amount they skimp off us tax payers they would have enough money in the kitty, surely the UK tax payer cannot take anymore?

Over the next couple of days the spot light will be on the Bond Issuers as rating agencies begin down grading their assets. MBIA and Ambac in particular will probably announce huge losses from exposure to residential mortgage-backed securities and collateralized debt obligations (CDOs)

More bad news emerged late Wednesday when Standard & Poor's downgraded hundreds of billions of dollars of sub prime mortgage-backed securities and CDOs. That was the largest number of ratings actions S&P has taken in the sub prime mortgage market so far, exceeding big downgrades in July.

Are we witnessing the unravelling of the Western Financial system? As we end the first month of 2008 I predicted that this year would be rough but I never expected so much so soon. Now is not the time to panic but we can already see we are in for a very difficult year.

Until next time...........

Why we are facing the biggest crisis since 1929

I have just come back from a trip to the United States I was in the state of Maryland (Baltimore). However not content on seeing consumer reaction to the problems in the US I also travelled to New Jersey and New York to see further proof that we live in two worlds.
World one is the daily hustle and bustle of Wall Street and the FTSE where stock and shares are traded and we continually get sound bites that all is OK this will just be a slight recession with recovery in a few months. World Two is where you and I live where we do daily battle with inflation high transport and energy costs and where food prices just keep rising. You see the financial experts and politicians just don't have a clue what is going on. On my recent trip I did notice most Americans are careful with money as the credit crunch bites. They are more concerned about the housing market, and high energy bills a severe winter will really test American resolve. More Americans are going to the cinema, buying and playing video games and ordering take out (Pizza, etc) you see they simply don't have it as most are saddled with high debt and are juggling car and house payments.

So what now for the Fed the US economy and us here in the UK? Well the 0.75% cut in US rates last week was Mr Bernanke bowing to market pressure the Federal reserve simply don't have the luxury of a Budget surplus or increased production capacity putting it mildly they are screwed. A Huge budget deficit currently around $9 trillion dollars, a weak dollar and inflation at 4.1% the highest in 17 years money men and markets have abandoned basic economic fundamentals. The Fed is willing to gamble with inflation and the possibility of deflationary pressures. The Fiscal policy of the Bush administration have now ordered a tax cut that will give the average family $800 but by time the IRS gets around to issuing the cheques we are looking at May/June 2008 probably to late for any impact on the economy. But hang on if the Federal Reserve decide to cut rates again on Jan 30th by .50 - or 0.75% percent points it would be reckless and open season on already weakened dollar. As I have mentioned above the US are only giving lip service to these major macroeconomic problems. They have been in denial for years as they have abandoned the basics of home keeping.

The US and UK have common problems large current account deficits and weak currencies they simply don't have the room for much tinkering with the economy. Mervyn King at the Bank Of England will have to carefully look at how he will order interest rate cuts that have already been factored in by the markets, my major concern is the lack of honesty by Gordon Brown as the UK battles a general slowdown and affects caused by the sub-prime crisis and the credit crunch. Is the inflation rate in the UK really at 2.1%? I suspect higher for these figures are open to government manipulation. Whilst the Fed is willing to gamble with inflation and probably order more rate cuts I think due to the nature of the English and ECB they will be more caution around rate cuts. The Bank of England will probably take into consideration its reputation and won't bow to retail and market pressure it's time for someone to stand up and take on the markets and all the money men.

The US has been exporting inflation for years and as these Sovereign Wealth Funds build up huge reserves of US dollars (currently £2,100bn) they watch as the US crumbles under a crippling debt pile picking and choosing where to invest with US banks being the benefactor of over $25bn of foreign funds to shore up damaged balance sheets.

It will get worse if the US and UK release monetary controls and flood the markets with dollars and pounds what this will lead to is higher inflation and more importantly the currencies losing value it will erode the value of these currencies for us as consumers. The dollar may be on it's last legs as the currency of value around the world for all the nay sayers who ridiculed Gold who is having the last laugh now? With basic economic principles simply not being followed it's time to bid farewell to the money men and markets and seriously consider where to put you hard earned savings.

Read more for yourself why we are facing the biggest crisis since 1929, you can do no wrong by buying a copy of" The Dollar Crisis" by Richard Duncan

More worries at Citigroup

Hello Readers,
9 days into 2008 and so much activity in the markets and the economy. Gold once again hits the highs closing tonight at a all time high of $881.50 an ounce this equates to about £448 if you have not gotten into gold what are you waiting for it's not that far off from $1,000 an ounce. I have been writing about gold for months and would urge you to adding some to your portfolio here's why:

Gold's long-term fundamentals leave little room for interpretation:

• Production supply problems have emerged, speculative demand is surging...
• Crude oil prices show no signs of cooling off...
• The US dollar is being bombarded, along with continued fear of inflation.

I could be looking at $1,000 per ounce of gold in the very near future.

Of course, profit-taking always remains a risk for the gold market in the $800 levels. However, keep in mind that most analysts on the street expected a significant profit-taking correction at $720 and $750 and again $780.

Gold, simply put, is under-valued, under-owned and under-appreciated. And it most assuredly is not well understood by most investors.

Now to Citigroup the United States biggest bank may be forced to writedown $16 billion in the fourth quarter and post a larger loss than previously estimated, Merrill Lynch analyst Guy Moszkowski said.

Moszkowski almost doubled his estimate for Citigroup’s loss to $1.43 a share, from 73 cents, in a note to clients on Tuesday. Moszkowski, the top-rated US bank analyst according to Institutional Investor magazine, maintained his ‘neutral’ rating on the New York-based bank.

Sanford C Bernstein and Goldman Sachs Group have also cut their estimates for Citigroup on concern the bank will mark down some of its $55 billion of subprime and collateralised debt obligation holdings. The US subprime-mortgage defaults have forced financial institutions to announce about $100 billion of asset writedowns and losses on bad loans.

I expect significant writedowns from Citigroup (Jan 15th Q4 announcement) and Merrill Lynch (Jan 18th)sad to announce that Merrill Lynch has already started redunancies at the company as the losses continue and the credit crunch continues.

Tomorrow all eyes are on the Bank of England as they decide whether to cut UK interest rates or hold them. With what has been a disappointing Christmas for retail sales the economy has slowed as consumers reign in spending but spare a thought for BOE officals for the decision won't be easy.The BOE will want to show it still is concerned about rising inflation bought on by high oil prices, rising food prices and just about most items going up in price. So who are calling for the cut in interest rates? Most retailers are just take a look at the sales figures for M&S in the 13 weeks to the end of December, M&S like for like sales in the UK slipped 2.2% shares sank 89p to 414.5p wiping £1.5bn from the company's market value. I beleive the BOE will hold rates tomorrow and until February before adding to December's cut.

The sad thing about the banks they don't always pass the rate cut on to mortgage holders they are not obliged to and some of them argue that the cost of their own borrowing on the money markets remain so high that they can't afford to slash standard variable mortgage rates.

The pound has also lost ground to the dollar and Euro as the prospects of lower interest rates and a slowing UK economy worries investors add to this the credit crunch and stricter lending by banks that affect mortgage and credit card applications that will lead to a slowdown and a fall in housing prices as embattled owners take on higher energy prices and general living costs, consumer led recession a possibility? Yes.............

Hello 2008

HAPPY NEW YEAR AND A PROSPEROUS 2008

Well here we are 4 days into 2008 and already we have oil at $100.09 a barrel, Gold at a record high of $869.10 and possibly going higher why what's going on? Well with turmoil in Kenya after dodgy elections, the death of Benazir Bhutto in Pakistan and sabotage in Nigeria around it's oil facilities investors are again heading for the safe haven of gold that has returned 31% over 2007, compared to 6.4% if you invested in the US stock market.

2008 promises to be a very interesting year with tight money (credit crunch), more fallouts from the sub-prime debacle, a US presendential election year, a slowing housing market, rising commodities the rise and rise of sovereign wealth funds, rising oil prices, high food costs, inflationary pressures and the real chance that the US will plunge into recession. I have general concerns for all of the above as many are trying to ignore the cold facts and spending money they don't have with no care for the consequences.

What we will see in 2008 is more bank writedowns amongst the major banks namely Merrill Lynch and Citigroup. Many banks are having to turn to Sovereign wealth funds for additional cash injections as the major source of cash tries up, many banks are still wary and are sitting on huge reserves despite the intervention of the central banks.

Both Merrill Lynch and Citigroup report Q4 figures in January so look out again sadly for huge bank writedowns expect anything between $6-10bn writedown for Lynch and a further $5-10bn for Citigroup.Dates for reporting are:

Citigroup 15-Jan US FY2007 Q4 Earnings

Merrill Lynch 18-Jan US FY2007 Q4 Earnings

Deutsche Bank AG 07-Feb DE Preliminary Final

Credit Suisse 12-Feb CH FY2007 Final Earnings

Expect the Federal Reserve to cut interest rates but they have a fine balancing act with the prospect of higher inflation for the US economy, the Bank of England are also under immense pressure to cut rates in the UK as figures from manufacturing and retail sales show a general slowdown in the UK economy coupled with this high oil and food prices, above inflation travel costs for season tickets and the real threat of high inflation currently at 2.1%

Oil prices will continue to rise despite OPEC probably agreeing to increase production, tensions around the globe, low US oil stocks and the chances of a frigid US winter will raise prices added to this demand from China and India.

So what about Gold, Silver and other metals? Yes they will rise many investors will look for a safe haven as the dollar has lost it's sheen and vigour. Gold has already hit a 27 year high trading above $850 a oz and many experts will tell you by year's end we could be looking at $1,000-$1,200 a oz. Silver and Platinum will also see gains due to demand from manufacturers and emerging economies it's never been a better time to invest in gold it's a good hedge against inflation and seen as a wealth creator so get in now.

Now to the presedential elections it will be close but whoever wins will have a major job to turn round a ailing economy, address issues around immigration, the Iraq war and a general concensus that the US is up for sale. With the problems surrounding the banks and liquidity sounds are already being made about the amount of foreign money buying american assets . Such is the power of these wealth funds estimated to be worth in excess of $12 trillion dollars they will become the drivers of asset prices in 2008 expect more dramatic bailouts this year who said macroeconomics isn't fun?

On closing is China a bubble waiting to burst?