Tuesday, September 18, 2007

The Fed Panics and Blinks

Ok, I'm gonna start gloating at the water cooler tomorrow, "Oh, Things aren't that bad", "I can't happen in the developed word and certainly not in the U.S.", "but it's the worlds reserve currency" yada, yada, yada, I've heard it all.
"Ha" I'll say "you're all wrong and I was right", Dumb asses!

It's been a couple of rough days since the middle of last week, we've seen the run on Northern Rock in the U.K. with a reported 4 billion dollars withdrawn by clients in the last two days of business despite BOE claims there was no problem and a bucket of liquidity added to the sector.

Added to Northern Rock's troubles are the trouncing stock values of other U.K. banks are taking. Apparently both Alliance & Leicester and Bradford & Bingley have seen their stock values battered in trading today and a sector wide bailout will be needed or there will be failures.

With the worsening housing situation, disappointing employment numbers and the backdrop of U.K. banking chaos, the Fed saw the blood in the water, panicked and cut interest rates by 50pts to 4.75% for the overnight rate and 5.25% for the discount rate. Needless to say the stock market bounced, metals which had be placid all day took off after the Fed annoucement and the Canadian Dollar was up 98.69 vs the greenback at the time of this writing. In fact, every major Currency with the exception of the Yen ran down the U.S. dollar today with the U.S. Dollar Index landing just a blip above 79.

Silver out performed gold a little and the silver gold ratio is closing finally.

Silver was up .20 and Gold was up a solid 7.30

The BOC must be worried about our relative dollar strength and will soon do something to appease exporters, so you can expect the BOC to loosen credit as well. While we have dollar strength buy metals because when the average U.S. citizen begins to seek safe havens like gold to escape currency death, no other fiat currency will keep up. If you are planning a U.S. trip do some part of your currency exchange now. While we will reach U.S. dollar parity this has been too much to fast and I would not be surprised to see some retrenchment before we hit par.

Canadian Banks are relatively safe compared to most of the world, however it would still be prudent to check your depositor insurance caps, move to more than one bank and stash 3-6 months of cash in a home safe or safety deposit box. Should we ever have a run on banks there is simply not enough printed money to cover deposits, most money now is 1s and 0s floating in the ether. Northern Rock's computers crashed during this weeks bank run which would have meant no tellers/ATMS/debit cards. How much cash to you carry day to day.

Future warning signs to watch.

U.K housing could be reaching it's peak

Spain's current account deficit is growing and unsustainable

The possibility China is dumping U.S. treasuries

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