Just watch Mr. Bear blow the market froth off...

The Feds keen on Extending TARPS

This week, we’ve had our eye on gold... and the dollar.

As the dollar rises, gold goes down.

This is not the way we thought it would happen. We expected a crack in the stock market first.

But you never know. And we’ll take what we can get. Gold is correcting; that’s what we were waiting for.

Well, we don’t really know what is happening. Stocks rose yesterday – with the Dow up 68 points. So far, no sign of the rout we’re expecting. We’ll leave our tattered Crash Alert flag flying anyway... just in case.

Gold rose $5 yesterday. Was that all there was to it? Was that the dip you’re supposed to buy?

We wish we could tell you. As far as we can tell, this is the part of the market that is “noise” and not much more. Gold is a very good bet for the long term. Because it is a bet against Bernanke & Co. Look at it this way: where would your rather put your money... on the brains and integrity of America’s central bankers... or on a dumb metal? We’ll take the metal!

Just look at what the Bernanke team does. Listen to what they say. They have no idea what they are doing... yet, they are doing a lot of it. They more than doubled US monetary base in less than 18 months. They’ve bought hundreds of billions worth of the banks dodgy loans. They’ve threatened to drop money from helicopters rather than permit the economy to correct its mistakes.

We’ll take gold, thank you very much... and wait to see what happens next.

Markets are closer to living things than to inanimate objects.

They have hearts, souls and a sense of humour.

They don’t merely react to circumstances.

They create circumstances.

And then they react to them.

And then they give a good laugh.

That’s why Modern Portfolio Theory and the Efficient Market Hypothesis are such folderol. They expect markets to act like rubber balls or iron filings. They expect them to behave like objects, rather than like human beings.

Anthropogenic Global Warming is probably a hollow conceit.

Anthropogenic Market Warming, on the other hand, is a certainty.

Put out enough hot money... mix with boundless delusions... and that is what you get.

Anthropogenic Global Warming, or AGW, is what climate scientists call the hypothesis that human behaviour is causing the world to heat up.

Anthropogenic means ‘caused by humans’. Supposedly, humans release carbon dioxide that creates a greenhouse effect, raising temperatures. That’s what the scientists claim.

The trouble is there aren’t really any climate scientists and nobody really knows what is going on.

Real science requires an ability to reproduce results and disprove an assertion.

If there’s no way to prove that a hypothesis isn’t so, it’s not really science.

It’s just guesswork.

Nobody can prove much of anything related to the earth’s climate.

You can’t do a controlled experiment.

All you have is cogitation and conjecture.

Markets are the same way.

Nobody knows for sure why anything happens.

But we do know that humans play a central role in market behaviour and that what they think matters. That’s why you can’t measure risk by looking back on past behaviour. Investors didn’t think the same things then.

In the ‘90s, investors began to believe that stocks always outperformed bonds and that the US stock market was the safest, surest bet on the planet. This gave them an almost unlimited faith in Wall Street, in equities and in the future. Stocks soared.

Then what happened? In the next decade, US stocks underperformed bonds and were the world’s worst-performing major equity market.

Now that’s a sense of humour!

And now what do investors believe?

They think we are in a recovery.

They don’t expect it to be very robust.

They may be mad at the authorities for giving so much money to the bankers, but they have confidence that the situation is under control. US bonds are still the world’s best credits, in their eyes.

And stocks are still almost as good as money in the bank. Sure, they may take a hit... but they always bounce back.

The bear has his work cut out for him.

He must demolish these confident, inherently bullish attitudes.

He gave investors a fright in ’08-’09. As near as we can tell, he succeeded in chasing consumers out of the park.

With no source of finance or increased income, consumers have been forced to cut back. They have no choice. Fashion often follows necessity; conspicuous consumption is giving way to frugality.

But investors – particularly speculators – are still believers. The feds couldn’t juice up consumer spending... but they wasted no time putting the asset markets into the blender.

Speculators enjoy real short-term lending rates below zero... and the fruit of TARP.

And now comes word that the feds are going to extend TARP until October 2010... and use unspent funds in other stimulating ways.

No wonder the markets are so frothy!

Just watch. Mr. Bear is going to blow the froth off. That’s his job.

Gold for sterling investors…

London analyst, Tim Price reports: “Foreign exchange strategist Daniel Jordan has recently included commentary on gold as part of his market reviews.

“This is logical – gold, as a monetary metal, is the pre-eminent ‘alternative currency’. With gold having dropped from $1,205 to a low of $1,137 at the start of this week, he says he would now be closing his short positions.

Recommendation is to keep buying on weakness, or to take a pound-cost averaging approach, by investing in gold on a regular basis, every month or quarter, subject to your cash availability.

This will tend to smooth out some of the more volatile periods and should, on average, lower your entry cost into the metal, whether you buy a bullion exchange-traded fund (ETF) or a fund of gold equities such as the Blackrock Gold and General Fund.

“I still think gold and silver will serve investors well during this period of extraordinary financial uncertainty – both as ways to diversify your portfolio, and as currency hedges for British investors. The alternative is to try to work out which of the major currencies is a better bet than sterling – and I’m not sure that any of them are particularly compelling…”

The poor bankers. Now Paul Volcker is giving them hell.

Volcker was the last central banker in America to have any real integrity.

He saw what needed to be done and he did it. He hiked up rates and brought consumer price inflation under control. Thus began the bull market in bonds that continues to this day... 29 years later.

Volcker saved the dollar... and saved the US economy from a worse bout of stagflation.

Circumstances are very different today.

Now, our central bankers are trying to weaken the dollar.

They see it as a way to escape debt and get out of a depression.

This is, by the way, the depression caused by their own loose-money credit policies. Under the influence of artificially low interest rates, people borrowed too much.

Then, they had to cut back... creating today’s depression.

Bernanke and company think they can hold off a correction forever – by increasing the amount of cash and credit available.

How does that work, again?

People have too much debt... so you give them more, right?

Investors and businessmen made too many mistakes... so you enable them to keep making them, right? The bankers lent too much money to too many people who couldn’t pay it back, so you insist that they offer more credit, right?

Everyone is mad at bankers. Not us, of course. We pet underdogs. We champion lost causes. We stand by diehards.

As far as we’re concerned, the bankers stole their money fair and square.

But the poor English bankers aren’t getting away with it. The sourpuss government of Gordon Brown just hit them with a 50% super-tax on their bonuses. Boo hoo.

And here’s Paul Volcker, as reported in the Telegraph, telling them to wise up:

“T he former US Federal Reserve chairman told an audience that included some of the world’s most senior financiers that their industry’s ‘single most important’ contribution in the last 25 years has been automatic telling machines, which he said had at least proved ‘useful’.

“Echoing FSA chairman Lord Turner’s comments that banks are ‘socially useless’, Mr. Volcker told delegates who had been discussing how to rebuild the financial system to ‘wake up’.

He said credit default swaps and collateralized debt obligations had taken the economy ‘right to the brink of disaster’ and added that the economy had grown at ‘greater rates of speed’ during the 1960s without such products.

“When one stunned audience member suggested that Mr. Volcker did not really mean bond markets and securitizations had contributed ‘nothing at all’, he replied: ‘

You can innovate as much as you like, but do it within a structure that doesn’t put the whole economy at risk.’

“He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and ‘proprietary trading should be pushed out of investment banks and to hedge funds where they belong’."