There's Got to be a Morning After...

By Jon Nadler Sep 30 2008 9:08AM www.kitco.com

Good Morning,

A tumultuous night during which the Nikkei average dropped 483 points, was followed by some signs that a modicum of stability may be returning to global markets. Japanese stocks fell in sympathy with the brutal free-fall in New York, as if to say "we feel your pain - we've been there a long time ago..." A Franco-Belgian bank, Dexia, was the latest recipient of a life preserver over in Europe - a $9.2 billion dollar flotation vest, and assurances that the European banking system is still sound. Yes, sound enough for Monsieur Sarkozy to convene a summit of all French banking and insurance heads at the Elysee later today. Makes for a tinny and hollow 'sound. Well, at least there will be no partisan infighting about socializing failing banks - this is La France, after all, non?

It turns out that Monday's global markets were almost correct on the rescue bill, judging by their early morning declines. Almost. Trouble is, the markets only felt that the crisis rescue bill - as written - would not quite be the sough-after cure for the frozen credit and overpriced housing markets. Little did they know that the bill was never going to see the light of day, and that it was going to die early, and of unnatural causes, falling at the feet of bickering Republicans and Democrats before it ever made it out of Congress. In a nutshell, Main Street USA told Wall Street to drop dead. Drop, it did. And then some. 777 points by the close. Try to put some lipstick on that one.

A capsize of Poseidon proportions highlighted the biggest-ever drop in the Dow, an $11.50+ cratering in crude oil, and a complete meltdown in all commodities (but gold) on global slowdown fears, all contributed to a hyper-chaotic day in the markets. Gold acquitted itself quite honorably and stepped into its safe-haven combat boots as the lone standout in precious metals. Next up, the probability that currency markets will see an intervention, and that regulatory agencies step into the mess and eithe guarantee assets or take a giant blowtorch to the frozen credit markets with measures other than those that were built into the failed rescue package.

Yesterday was a day of panic, and panics usually does not yield very sustainable moves, let alone pretty results (see stocks) in the short-term. To wit, gold was off $21 at the start of today's session in New York, trading at $882 an ounce. Early action looked to be the mirror image of yesterday's patterns. Gold dropped while oil rose. The consistency in declines was still reserved to white metals. Silver lost 16 cents to $12.92 while platinum shed $38 more to reach $1022 and palladium fell $9 to 204. Gold ought not to have given up its nice gains from Monday, and it ought to have retained its momentum and continued higher on the back of yesterday's gains. Why? There is still plenty of fear to go around until such time as some kind of revised package is born and offered for consideration -say, before the weekend. In the interim, the Jewish New Year will postpone any such events by at least a day or two.

Stabilization means safer havens. Safer havens mean a lessened need for safe-haven holdings. All of which mean that today's early declines in the sole precious metal to survive and prosper during yesterday's financial cyclone (if we ever see the word "tsunami" being used again, we will stage a revolt) are fairly justified. The one asset that no one thought would be the recipient of all of this attention - the US dollar - is bouncing along at 78.20 on the index and rejecting the rumours of its demise - rumours that were quite exaggerated. Does this mean that all is well? Certainly not. Does it mean that we will somehow get through this and manage to still ? Very likely.

There is fear and loathing all over Main Street, Wall Street, and Capitol Hill but there are also those who are calling this tempest one of teapot-sized magnitude. Irwin Kellner at Marketwatch chimes in and tries to inject a dose of sobering caffeine into the drama that the media wasted no time in assigning scary superlatives to:

" We are nowhere near a depression, so let's stop talking ourselves into one.

Spiro Agnew's words of the Nixon era ring true today. The politicians, pundits and, yes, the press, are nattering nabobs of negativism. For example, in recent weeks, the broadcast and the print media have filed stories replete with scare words. You don't even have to look at the tabloids to see what I mean.

The front page of the New York Times recently described what it called "chaos" in the financial markets.

Not to be outdone, most of the first section of The Wall Street Journal one day last week was devoted to articles describing the "spreading crisis" in our economy.

And both newspapers have run stories using the word "depression" more times than I care to count.

Now, don't get me wrong, I am not saying things aren't serious out there, but another Great Depression? I don't think so.

If you look at the data, you will see more differences than similarities between the 1930s and today:

• In the crash of 1929 the Dow Jones industrials plunged 40% in two months; this time around it has taken a year to fall 22%.
• The jobless rate jumped to 25% by 1933; it is little more than 6% today.
• The gross domestic product shrank by 25% during the early 1930s; it is up over 3% during the past year.
• Consumer prices fell by about 30% from 1929 to 1933; and the last time I looked they were still rising.
• Home prices dropped more than 30% during the Depression vs. about 16% today.
• Some 40% of all mortgages were delinquent by 1934 compared with 4% today.
• In the 1930s, more than 9,000 banks failed compared with fewer than 20 over the past couple of years.

Remember also it was policy errors, not the stock market crash, that caused the Great Depression:

• Instead of increasing the money supply, the Federal Reserve of that era reduced it by one-third.
• Instead of lowering taxes, Herbert Hoover raised them.
• And to channel whatever demand was left into U.S.-made goods, the government enacted the Smoot-Hawley Tariff Act to keep out foreign products; this only provoked our trading partners to do the same.

Add to this today's automatic stabilizers such as unemployment insurance and Social Security, the FDIC to insure bank deposits and circuit breakers to keep stocks from falling too quickly, and you can see why this is not a depression in any way shape or form.

While I am at it, I would like to take issue with the almost ubiquitous use of the word "bailout" to describe the government's rescue package.

Folks, this is not a bailout of anyone, not Wall Street, not Main Street, and certainly not the so-called "fat cats." It's an infusion of liquidity, designed to unclog the financial markets. In doing so, it will benefit everyone, business and consumers alike.

Also, the $700 billion bandied about will not be immediately handed over to the Treasury secretary; he will simply have a line of credit, similar to what the typical business might have.

Finally, this package may not even cost $700 billion. For that matter, it may wind up costing nothing. It all depends on the price the government pays for these distressed assets and what it winds up selling them for."

A survey of gold gurus over in Kyoto at the LBMA summit reveals that most of them expect only modest gains from the yellow metal in the coming year. While allowing for one more spike in prices related to a possible worsening of the already bad crisis we are living through, those surveyed saw gold at about an average of $958 per ounce, fourteen months from now. In addition, they linked any such values being achieved and maintained on scared investors running to the gold umbrella. Without them in the picture, gold would have to contend with surging scrap supplies and evaporating fabrication demand - not a formula that makes for four-digit price tags. Quick, someone send these folks some hate e-mail for being 'bearish.' What do they know? They are only gold gurus.

Happy New Year. Who knows what 5769 might bring. We wish for good health and capital preservation for everyone.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal