And down the stretch we come!
Racing ahead on Friday was gold. The usually lead-footed yellow metal flew up US$14.80 in the futures market to close at US$808.50. Granted, the Aussie gold price is AU$876, still well below the AU$933 level it hit last year. But oh my, is a bigger move brewing in the gold market?
Gold’s catalyst on Friday was an impending sense of doom in US financial markets. “Forget what the Federal Reserve says about being neutral on policy and the news that the labour market grew at double the rate expected by economists in October,” writes Michael Mackenzie in the Financial Times. “What matters is the unwinding of the great credit trade. This is ensnaring more and more financial institutions and threatens to make life very difficult for policymakers as the risk of a dollar crisis looms.”
It seems to us the dollar’s been in crisis for about five years now. But maybe it’s become more acute lately. New lows on the greenback could equal US$1,000 gold. And it could happen faster than you can say “jingle bells”.
The unwinding of “the great credit trade” cost another Wall Street CEO his job this weekend. Citigroup’s (NYSE:C) CEO Tom Prince resigned Saturday after the company’s shares plunged on Friday and analysts warned the firm would lose another US$4 billion on its mortgage-related assets. No word on whether Prince will receive a US$164 million going away present like Stan O’Neal at Merrill Lynch. Ho! Ho! Ho! A lump of coal for every shareholder.
Do you get the sense that the credit crunch might have simply moved out of the headlines and onto the balance sheets of Wall Street firms in September and October? So far, Goldman Sachs (NYSE:GS) seems to be the only firm to have avoided serious losses. And even that looks fishy.
The New York Post’s John Crudele reports that, “The Securities & Exchange Commission is looking into whether Goldman Sachs cheated its way to enormous profits - even as the rest of the financial industry was suffering through a massive downturn.” Here come the lawyers, trying to catch up with yesterday’s fraud. But it’s today’s fraud that could trip the American market up and cause further selling in financial shares.
There is a growing sense that the banks and brokerages are still valuing mortgage-related assets according to their models and not according to the market price. That might not be a bad idea, considering the market price for subprime-backed debt is falling apart. The real question is whether the financial position of the world’s biggest brokerages and banks is worse than reported.
Quick, someone send out the inflation signal (a giant red arrow in the sky, pointing up). We must summon Ben Bernanke to the rescue again. His attempts to reflate the enormous credit bubble are failing. The good name and massive profits of Wall Street firms hang in the balance. Go, Ben, go! Cut, Ben, cut! Save the housing market! Save Wall Street! Save America!
The Fed will probably cut again. And maybe before the end of the year, if house prices and sales keep falling while foreclosures keep rising.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
