Agora Financial’s Rude Awakening

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• Global markets rally as the government PR machine kicks into overdrive,
• Cramer calls the bottom…and other reasons to worry,
• I-n-f-l-a-t-i-o-n, I-n-f-l-a-t-i-o-n, I-n-f-l-a-t-i-o-n, and more…

Joel Bowman, reporting from Paris, France…

First up, let’s take a look at the numbers:

The Dow rose yesterday, piling another 183 points on top of Tuesday’s 266-point rally. The Industrials Index now sits on 11,583.69…or about where we were in September…of 2006.

Markets across the globe also celebrated with Japan’s Nikkei, China’s Heng Seng and the Aussie S&P/ASX 200 all finishing the day in positive territory. In Europe, Germany’s Dax 30 climbed almost one percent and in London, the FTSE 100 moved nearly half a percent higher.

The world’s grease dipped slightly in early trading today and hovers around $126 per barrel, a long way off its all time high of $147.

Net income of Exxon Mobil, the world’s largest oil company rose 14 percent to $11.7 billion from $10.3 billion a year earlier. This was a smaller increase than analysts expected as production dropped the most in at least a decade, according to Bloomberg news.

European giant, Shell, also posted a rise in profit, up 33% for the quarter.

Gold, meanwhile, got clobbered. Appetite for the yellow metal receded as Wall Street rejoiced over positive earnings reports from the oil majors and Motorola and Altria Group Inc., the largest U.S. tobacco company. An ounce of the under-celebrated dollar hedge recovered to around $917 early this morning, up from $910.

So, is it time to spark up the stogies yet?

“Rejoice! Rejoice!” writes one wry Rude reader, tongue firmly in cheek. “I just heard Jim Cramer declare a bottom of the market, and welcome back ‘Mr. Bull’ on his Mad Money show today, 07/30/08.
 
“I guess we don’t have to worry any more about all the scary stuff still going on since Cramer knows…”.

Not so fast, Jack…or Jim. 

The skeptical investor will rightly feel a tad anxious celebrating the beginning of the end of the market slump just yet. He will interpret, for starters, the Fannie Mae and Freddie Mac debacle as cause for concern, not reason to rejoice. And he will be in good, if not popular, company.

Private companies tasked with handling the government’s dirty work, Adam Smith once remarked, “in the long run proved, universally, either burdensome or useless.” 

The universe has changed plenty since Adam Smith’s days, except for those pesky fundamentals, which remain as intact as the day he penned his masterwork, The Wealth of Nations. Undermining the value of a nation’s currency, for example, remains just as malevolent a practice as it always
has.

At the very least, the reasonable investor will do well to ask what is buoying this latest rally. Is it sustainable, sound and practical, he will wonder?

In the column that follows, Adrian Ash of BullionVault asks just that. Read on as he takes a closer look at the cheerleading chants emanating from the government’s press machines. Please enjoy the read and send any comments to us at the address below…

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Curing US Inflation, Zimbabwe Style
By Adrian Ash of BullionVault

You’d be forgiven for thinking they planned it together last night.

Four out of the top nine headlines on Yahoo’s financial homepage today came straight from the press departments of the US authorities.

§ Fed Extends Emergency Loan Program for Wall Street
§ Bush Signs Housing Bill to Provide Mortgage Relief
§ Government Announces Plans to Borrow $27 Billion
§ SEC Extends Restrictions on Short-Selling

Throw in Congress locking evil speculators out of the oil markets, and investors can’t argue with such massed intervention by Washington’s finest PR teams.

So sell commodities, buy financial stocks. Stay in your house, and stay away from those lines at the bank. It’s the American way, as approved by the White House in July 2008.

Hence the No.1 headline to top them all – “Jobs Data, Fed Plan Keep Stocks in Rally Mode”. Coupled with the apparently bullish ADP payrolls report (which saw large US companies shed 32,000 staff while manufacturing employment fell for the 23rd month in a row) the promise of tax-payers’ largesse helped push the Dow to a one-week high, a mere 20% off its top of October last year.

But the cost? Wednesday’s “big four” press releases are hard to price. But cash savers, wage earners, retirees and government-bond owners alike would be right to fear some kind of “dilution” as Wall Street calls it when shareholder value gets washed away by emergency cash raisings.

Take the Securities & Exchange Commission for starters. The SEC is already set to chew its way through almost $1 billion in fiscal-year 2008, almost three times its budget of a decade ago. To help cover that bill – along with the rest of its $171bn deficit for the June-Sept. quarter – the Treasury will sell an extra $27 billion in new 10-year and 30-year bonds next week.

And next year, of course, the Treasury will have to float a record $482bn in tax-promised debt.

Emergency loans to Wall Street meantime – plus mortgage relief to 400,000 home-buyers – won’t come cheap either. For every dollar of debt now outstanding, a fair chunk of change will be added after today’s state-sponsored largesse.

Technically, that spells i-n-f-l-a-t-i-o-n of the currency. And yet, for today, you can Buy Gold at a little over $900 per ounce. That might soon come to look like the sale of the century if Washington’s PR teams don’t take a vacation.

First up, the Federal Reserve. Today it raised its line of credit at the European Central Bank (ECB) by 10%, taking it to $55bn. More crucially, the Fed’s now offering US investment and commercial banks some $75 billion in four-week loans – plus $25bn in 12-week loans – at alternate auctions to be held every two weeks until the end of next January.

(It’s also doing its damnedest to revive the world’s taste for alphabet soup, replacing the MBS, ABS, CDS and CPDOs of yesteryear’s financial bubble with today’s PDCF, TSLF and TAF of ongoing aid.)

The Fed’s loans aren’t quite open-ended, you’ll note – even if they are set to reach a rolling total of $300bn three months from now. They’re only made “in light of continued fragile circumstances in financial markets,” explains the Fed. And just as soon as the credit markets cease being “unusual and exigent”, the big investment houses will have to make their own arrangements without Ben Bernanke’s check-book.

Out-weighing the Fed five-fold and then some, however, comes the Treasury’s support for refinancing home-loans. “By CNBC’s count,” reports the Wall Street Journal, “the federal government has already made roughly $1.4 trillion available to refinance mortgage debt since the housing meltdown began.

“That makes this week’s bill, which adds another $300 billion to the pot, seem a mite anticlimactic.”

Still, every little bit helps, right? And at least that $300bn will be lent – alongside the Fed’s extra $300bn in revolving loans – at way below the current inflation rate. No point trying to foist new debt on the world if the cost of borrowing is higher than zero!

That’s why, here at BullionVault, we don’t expect a hike in the Fed Funds rate anytime soon. Which is why, for the near term and longer, we remain bullish on Gold.

Anyone hoping to defend their savings and wealth might also want to consider the “dilution” now hitting cash owners. It will prove similar in practice – if not greater in impact by a magnitude of size and then some – to the dilution that’s already hit or threatening stockholders in Washington Mutual, Citigroup, UBS, Merrill Lynch and Royal Bank of Scotland here in London.

Whatever your money’s worth now, it will have to compete with very many more dollars – and soon – when you come to spend it. Again, that spells i-n-f-l-a-t-i-o-n. Rising prices will be the visible cost of less purchasing power.

The long-term solution? Absent Paul Volcker, beating inflation just requires nimble thinking, as this press release proved today:

“With effect from the 1st of August, 2008, all monetary valuations have been re-denominated by a factor of 1:10,000,000,000 – which effectively means the removal of ten (10) zeroes from all monetary values;

“What this means is that $10,000,000,000 (ten billion dollars) therefore will translate to $1 (one revalued dollar) with effect from August 1, 2008.”

Who can achieve such monetary magic? The Reserve Bank of Zimbabwe did on Wednesday. Fixing inflation is easy, you see – even in a country where the runaway money supply means calculators and ATMs can no longer cope with the billions and trillions needed to handle the simplest transactions. The price of eggs rose by 60% between Monday and Tuesday. The maximum banking withdrawal will not cover the price of a single bread roll.

But just knock off ten zeroes, and who’s to complain?

[Joel's Note: Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

To learn more about how Adrian and the team at BullionVault can help you start protecting your endangered dollars today, click here.

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[Rude Endnote: We’ve tried to find some lyrics to sing along with the tune of monetary chaos in Zimbabwe. This morning we came across the following from 80s rockers, The Eurythmics. 

“I was born an original sinner.
I was born from original sin.
And if I had a dollar bill for all the things I’ve done,
I’d have a mountain of money piled up to my chin.”

Not bad. Perhaps you have something better? Hey, you’ve gotta smile through it all, right?

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com