Agora Financial’s Rude Awakening

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Laguna Beach, California

• Time to run with the gold bulls – here’s how,
• Presidential elections in the doghouse…for some,
• An invisible bounce on Wall Street and plenty more…

Eric Fry, reporting from Laguna Beach, California…

Three-syllable names are in; two-syllable names are out…at least in Iowa.
Huckabee and Obama defeated Romney and Clinton in the nation’s first
popularity contest of the 2008 political campaign.

Politics is not our beat here at the Rude Awakening, but we enjoy watching
underdogs win…almost as much as we enjoy watching top-dogs lose. We also
relish the unexpected. Now that the underdogs from the two leading political
parties have defeated their respective top-dogs, it’s not easy to tell one
dog from the other. And that means that we should probably expect more of the
unexpected as the campaign buses roll through New Hampshire, South Carolina
and Florida.

On Wall Street, meanwhile, one-syllable names are all the rage – names like
Gold and Oil. Gold edged closer to a new all-time high yesterday, while oil
continued to hover near $100 a barrel. The stock market, for its part,
managed to avoid falling flat on its face again. But no one would mistake the
Dow’s 12-point gain for strength and stability.

The Dow looks about as strong and stable as Hillary Clinton’s lead in the
national polls. Indeed, we would not be surprised to see the fortunes of the
Dow and Senator Clinton track a similar course during 2008. But we are not
yet prepared to count out the Dow for ALL of 2008.

If the Dow is to recover from its ignominious start this year, financial
stocks will play a leading role. And if the financial stocks are to play a
leading role, the asset-backed commercial paper (ABCP) market will play an
essential supporting role. The ABCP market, as we have explained in several
previous editions of the Rude Awakening, is the market that provides short-
term financing to the folks who issue mortgages, credit cards and other types
of loans. (For a bit of background on the ABCP market, take a peek at the
October 26, 2007 edition of the Rude Awakening: SIV-Positive)

As long as the ABCP market provides financing, lenders like Countrywide
Financial can issue new mortgages. But when the ABCP market seizes up, so
does mortgage lending. (And that’s just the beginning of the problem). Since
early August, the ABCP market has been withering away. For 20 consecutive
weeks the volume of ABCP outstanding has contracted, as more than $300
billion of short-term financing disappeared.

But last week, a funny thing happened. Investors returned to the ABCP market.

“Commercial paper backed by mortgages, credit-card loans and other assets
rose $26.3 billion to a seasonally adjusted $773.8 billion for the week ended
Jan. 2,” Bloomberg News reported yesterday. “The 3.5 percent increase, the
biggest gain in at least seven years, snapped a 20-week losing streak that
began as losses from subprime mortgages caused a retreat from all but the
safest government debt.”

The uptick is good news, but don’t break out the Dom Perignon. “Andre’s Cold
Duck” would be more appropriate. The Bloomberg News story highlights the
“seasonally adjusted” gain of $26.3 billion. But the non-seasonally adjusted
ABCP market grew by only $8.3 billion last week. The nearby chart depicts
last week’s nearly invisible bounce.

Nevertheless, a bounce is a bounce, even if the bounce is $8 billion instead
of $26 billion. And this particular bounce is the very first one since
August. So just maybe, real-world investors are returning to the CP market.
In which case, finance companies might finally procure some of the capital
they desperately need. And if no new crisis comes along, the finance
companies might start making a little money again.

Therefore, to reiterate what we mention in the Dec. 21 edition of the Rude
Awakening, A Seductive Temptation, “Financial stocks may not yet be a
resounding “Buy,” but they have probably become a less resounding ‘Sell’…
We would not dare to suggest that the credit crisis has passed…But we would
suggest that we may have reached the end of the beginning of the crisis.”

Buying finance stocks, therefore, feels like a machismo, contrarian
speculation – as likely to fail as to succeed, but brimming with cocktail
party potential. Buying gold stocks, on the other hand, feels like nothing
more than a prudent investment. Maybe even an excellent investment for folks
who rather toast than boast at cocktail parties.

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————————————————

The Anti-Investment
By Adrian Ash

Gold is the anti-everything-else. So we should probably pay attention when
the ultimate “anti-investment” charges to new three-decade highs. Gold is
clearly signaling more trouble ahead for the rest of the world’s investment
markets – starting with the very value of money itself. That’s the nagging
doubt that drove Gold Prices higher every year between 2001 and 2007. Here at
BullionVault, we think it will take more than a bounce in the Dollar to
reverse gold’s seven-year bull market, too.

All the Dollar-doom cover stories in magazines like The Economist and
Newsweek only add to the case for a contrarian play right now. Everyone
agrees the Dollar looks sure to keep falling, even the policy wonks of the
world’s central banks.

So maybe it’s time for a surprise. Spanking the world’s central bankers – and
sucker-punching private investors, now busy gearing up on the forex markets –
a turnaround in the US currency might just coincide with a genuine political
crisis in the 13-nation Eurozone, too.

But “with Bernanke at the Fed and Paulson at the Treasury, and a Euro that
could face some problems (a break-up, some believe) because of badly
deteriorating economic conditions in Italy, Spain, Portugal, and Greece,” as
Marc Faber writes in the latest edition of his Gloom, Boom & Doom report,
“precious metals are likely to outperform financial assets for some years to
come.”

Indeed, whatever comes in the Presidential race – and no matter what happens
to inflation in the cost of living, now running at multi-decade highs in
Europe and China, despite their surging currencies – the real driver of
gold’s seven-year bull market looks to be the New Year’s one racing
certainty.

Governments and central banks the world over will refuse in 2008 to protect
cash savers and bond buyers. They’ll cut or hold interest rates in the
forlorn hope of helping debtors instead, destroying the buying power of all
official money.

Yes, gold might fail to rise as a result. But that would prove a heart-
stopping shock, far more surprising than the most likely “shock” – that gold
keeps on rising even if the US Dollar stops falling against other government
currencies.

Just take a look at how the Gold Market got here today. The new record highs
hit on 2 Jan. 2008 came for nearly everyone Buying Gold on the last trading
day of 2007, no matter whether they bought in US Dollars, the Euro, British
Pounds, Swiss Francs…Canadian, Aussie or New Zealand Dollars…Indian
Rupees or South African Rand…Thai Baht or Chinese Remnimbi.

Proof positive that a falling currency isn’t necessary for Gold Prices to
rise. Need more? Gold gained 31% last year for British investors – its eighth
annual gain on the run – even as the Pound itself hit a two-decade top versus
the Dollar. The European single currency gained nearly one-fifth versus the
US currency last year, but the Gold Price in Euros also rose, gaining more
than 21%. (That also disproves the common belief that gold and the Euro move
in sync.)

Indeed, the price of gold measured against the world’s five most important
currencies – the US Dollar, Euros, Yen, Pound Sterling and Canadian Dollar –
has now gained more than 150% since the start of this decade. Real rates of
interest, on the other hand, have trended sharply lower, falling across the
world even as oil-driven inflation – itself stoked by excessively easy money
policy – has begun to roar.

“Japanese equities are out of favor and so, as a contrarian play for 2008,
are among my top picks,” says Marc Faber in the Gloom, Boom & Doom report.
Funnily enough, “aside from Japanese equities, a contrarian play would be to
buy the US Dollar,” he goes on.

“Sentiment and headlines are so universally negative that at least a short-
term rally should get underway shortly. The only problem I have with being
positive about the Dollar is that, whereas people are universally bearish
about the Dollar, they are also universally still long a gargantuan quantity
of dollars!”

As for Dollar alternatives, on the other hand, “among commodities and
currencies my preferred asset remains physical gold held outside the United
States, for the simple reason that – depression or inflation – it is very
likely to outperform financial assets.

“For gold, I believe the best is yet to come!” concludes Faber. Whereas
Dollar rally or not, we believe here at BullionVault, the currency markets
will prove just a suck of ever-shrinking real worth.

Only Japanese investors still hold a currency today worth more against gold
than at some point in the past. And the irony there is so tasty, Burger King
should offer it on the Whopper.

Near-zero interest rates failed to kick-start the Japanese economy for 18
years after its real-estate and financial bubbles popped. Tinkering with
target rates of less than 1% since 1995, the Bank of Japan still hasn’t
worked any magic by trying to destroy the value of the currency it prints.

Yet it’s the Japanese lesson of the early 1990s that’s now pushing the US
Fed, Bank of England, ECB in Frankfurt and pretty much every other developed-
world central bank to offer up more money via cheap interest rates as a way
of defending the current financial bubble from collapse.

How come? Mistaking more money for more wealth whenever they look at Japan,
central bankers now have this error scratched onto their corneas. “The
failure to end deflation [meaning falling prices, wages and real estate
values] in Japan does not necessarily reflect any technical infeasibility of
achieving that goal,” announced Ben Bernanke in a speech of Nov. 2002.
Blaming instead a “structural” need to restore Japanese banks and
corporations to solvency – an eerie forecast, perhaps, of the huge short-term
liquidity injections co-ordinated by the Fed, ECB, Bank of Canada and Bank of
England right now – he added that:

“I do not view the Japanese experience as evidence against the general
conclusion that US policymakers have the tools they need to prevent, and, if
necessary, to cure a deflationary recession in the United States.”

Put that another way, as Bernanke himself did in 2004, an “excessively
cautious monetary policy did play a role in [Japan's] lost decade…because
it did not do all that it could have done to arrest and reverse the
deflation.”

Excessively cautious monetary policy? The Bank of Japan took interest rates
for cash savers below 0.2%…and it’s left them there for the last 13 years.
The only Japanese citizens to benefit so far have been investors choosing to
Buy Gold.

Nearly two decades after the Japanese offered the world a lesson in what can
happen when excess credit and financial innovation turn first to bubble and
then bust, average wages are still falling, down another 2.1% in November.
Household spending fell 0.6%, whilst industrial production dropped by
1.6%…and the cost of living rose by 0.4%.

All this in a currency that stubbornly refuses to sink, meantime, despite the
Bank of Japan’s best efforts to destroy the very money that it prints.

[Joel's Note: Adrian Ash has been tirelessly penning golden scribes for us
here at the Rude Awakening since he joined BullionVault as head of research.
A steadfast goldbug, Ash has been advising readers in these very pages to get
in on the gold bull and, to their credit, some readers have made a good stack
by following his advice. If you would like to know about Adrian’s research
and the products his BullionVault outfit offer investors, follow this link.

BullionVault Research – Running With The Gold Bulls

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———————————————-

Rude Endnote: That spells another week us here at the Rude Awakening. We hope
you enjoyed your New Year’s Eve, had a safe and merry Christmas and read a
gem or two in our best of series. Next week we’ll be returning to our
uninterrupted routine of market insight and Rude-foolery. Until then, be on
the lookout for your 5-Minute Forecast, arriving shortly.

Cheers,

Joel Bowman
Rude Awakening