Posts Tagged ‘Dubai’

Bailouts, Bailouts Everywhere

Gold has officially broken through $1,200.

All it took was the hope of a bailout of the world’s most extravagant real estate bust – Dubai. Well, not entirely.

Japan also promised it would inject another $114 billion into its economy by offering banks cheap short-term loans. It’s also expanding the type of collateral it receives.

Bailouts are happening all around the world. It’s the new “in” thing to do. Think about it: Nearly every major credit catastrophe has been delayed by a big bailout. Only Iceland and Lehman slipped through the cracks. And now the talking heads use those two stories to convince everybody that a bailout is the best option.

So moving forward I don’t see an end to the bailout bonanza.

You also shouldn’t forget about what money printing means for Japan. It could begin another Yen carry trade. A Yen carry trade plus a Dollar carry trade would allow for a massive bubble to blow. The ending wouldn’t be pretty.

But who knows, maybe the Feds will figure out another way to keep the Ponzi scheme going…

With cheap money pouring into the economy by means of the Yen and Dollar, it’s hard to envision the uptrend breaking. But I still feel that by early next year we could see prices 10-20% lower than they are today.

In the short-term, a break above 10,500 in the Dow Jones would signal more gains ahead. As of right now, though, the Dow isn’t able to settle above that level, which will keep me away from getting into any short-term long positions.

As for gold, I’m not a buyer at these levels. I tend to stay away from any asset that’s gone parabolic (like gold). I loved gold at $1,050. But over $1,200 is hard to swallow, especially with no other significant corrections.

Dubai, what Dubai?

Dubai blow up – what Dubai blow up?

That’s certainly how the US markets reacted on Monday after digesting news that Dubai was likely to default on some of its $80 billion in debt. It’s probably what we should have expected. After all, the UAE, which has a half trillion-wealth fund, will likely cover Dubai’s indebted butts.

In response to the news, all three indexes started the day in the red, but eventually swung back to gain about a third of a percent.

It’s a celebration of the bail out. Which in reality is nothing more than a celebration of inflation.

Maybe that’s why the dollar continued to drop overnight and gold hit nearly $1,200 an ounce.

It’s becoming more and more clear that governments around the world are doing what they can to avoid bad debts from going bad. Deflation simply can’t persist in such an environment. Eventually we need debts to be allowed to go bad, or we will likely get some inflation.

Ben Bernanke and crew is already preparing to raise rates. On Monday the Fed announced that they would begin testing their “exit strategy”. Of course, the Fed tried to soothe the market into believing that inflation isn’t a concern. But we know better than to believe what comes out of their mouth.

Making the problem worse is the fact that the Fed may need to monetize debt in order to finance next year’s deficits.

Porter Stansberry reckons that next year the U.S. will need to refinance $2 trillion in debt. And that’s on top of the $1.5 trillion deficit that’s expected. In other words, $3.5 trillion needs to be raised in 12 months.

That’s $291 billion every single month. From Porter…

Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they’re not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None owns even 1% of its total reserves in gold.

All of this is going to lead to a severe devaluation of the U.S. dollar… Which I expect to happen within 18 months.

At this point, the trend is still up. The Dow is close to breaking its previous 52-week high. If it does so tomorrow then 11,000 is in the cross hairs. After 11,000 i seriously doubt the market will push any higher.

If I were you, i’d avoid getting into any longer-term positions at these prices. I have a feeling we’ll have a 10-20% discount early next year.