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Bill Cara’s Blog

Bill argues that the Geithner/Obama economic stimulus plan to co-opt the equity markets, while effective so far, is neither sustainable nor healthy. – Ilene

Bill Cara’s Blog for January 11, 2010

Courtesy of Bill Cara  

Gold Coin

Morning Call

Trading in the Gold market Friday and again this weekend was bizarre. We need to look into this situation closely.

With the release of the US December Jobs Report on Friday, the spin was that there was a negative surprise, which would lead to more Quantitative Easing, which in turn would lead to higher Gold prices. Gold popped for just a few minutes, and then sidetracked the rest of the day. So who made any money? Just as important, the November Jobs Report was revised stronger, which balanced out the reported December weakness. So it looked to me that the economic data was merely a cover for traders who wanted to distribute Gold.

Then on Saturday, Ambrose Evans-Pritchard, International Business Editor of the UK Telegraph in London, continued his hard hitting bearish reporting in an article entitled: America slides deeper into depression as Wall Street revels: (sub-head) December was the worst month for US unemployment since the Great Recession began.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/696263…

Immediately, the spin was that more Quantitative Easing would be needed, and when the Gold futures market opened on the weekend the opening tick was 1139 and the next at 1163, which was a greater than +2% move in a couple minutes. From that point forward through this morning, the Gold price has side-tracked, presently at about 1156.

At current prices, all the gold ever produced in the world, which Gold Bugs claim still exists, amounts to a valuation of $5 trillion, so that +2% move in less than 15 minutes has supposedly added about $200 billion. Wow. Not even the spending in D.C. can grow that fast.

Some time in the past year, I realized that capital markets had become something other than what they are designed for, which is a price discovery mechanism for assets based on economics. Regrettably, since the central banks of the world have caused their balance sheets to balloon during 2009, which is well illustrated in the graph I show in this weekend’s Week In Review, the global financial system is now based on hot air, not real assets in the economic sense.

On the balance sheet of a corporation, if liabilities double, there must be an equal increase in the assets, whether those assets represent book value of something that has economic value or simply goodwill. Given that central banks are laws unto themselves, apparently, what we are now dealing with is goodwill. The more it grows, obviously the more the Gold price is going to grow.

So, it was in this WIR I posited that Gold, which recently was priced in three-digit US Dollars, and is now in four digits, could soon be in five digits, i.e., over $10,000 per ounce. I am troubled by this because it means that securities analysis is no longer a matter taught by the likes of Graham and Dodd, but now just a study of money flow. Depending on central bank easing or tightening, then, equity market prices will rise or fall.

Elevated view of a book burning on a metal surface

In the article this weekend by the Telegraph’s Evans-Pritchard, he concludes with the effective line, “The stock market has become a lagging indicator. Tear up the textbooks.”

Exactly, I thought; but in my mind, do so because truly it is different this time – but hopefully for one time only. Blame that on the strategists behind the Fed Hedge Fund and other so-called Sovereign Wealth Funds.

You see; I believe that the singular thrust of the Geithner/Obama economic stimulus plan in the past year has been to co-opt the equity market by talking up rising share prices as coming from the heartbeat of America rather than what it really is, a phenomenal push from the Fed Bank of New York FOMC trading desk armed with a couple trillion dollar expansion of the Fed balance sheet.

I think it’s time we need to get real. Otherwise, pretty soon, we’ll have $10,000 Gold, tiny little million dollar houses with out of sight property taxes, million dollar salaries to be able to afford that $100 cup of coffee, twenty percent interest rates, and so forth.

Do we really want to live in a world where control of our lives is held by the monetary authorities?

Yes, I am concerned about all of this. I yearn to a return of traditional investment analysis instead of what I will now have to do, which is to spend my day reviewing quantitative analysis studies – a bunch of numbers that have no relevance to the people who work in these corporations, the products they make or services they render, their income, spending and saving, and so forth. No relevance at all.

We can’t keep doing this. It’s not healthy for society.

 


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