Tune Out the Noise and Get Safe

By: | Tue, Oct 7, 2008
Print Email

Congress made official what was probably already in the bag from the beginning in passing the pork filled bail out of those entities that took on outrageous moral hazard at the expense of those who didn't. But it is done and it was politically expedient, although not to the tax paying public. Banks and financial companies however, received the first installment on what is a costly and ill-fated welfare package.

But there is a bigger issue at play and that is panic. This week we observed what could well have been official panic at the highest levels of government and its finance distribution arm, Wall Street. In other words, it is very likely that they did not just run a scam of the taxpayer to capitalize on or 'screw' the little guy. They panicked because the system is falling apart and all they know is the system. The system has created Washington"s ability to do business with varied powerful interests and if the system crumbles, so too does policy makers' ability to do "business".

Why do I think this tragic bill is born of genuine official panic? Here are two charts that show just how bad things are getting.

On a one minute chart of the EFT proxies GLD for gold and UUP for the US Dollar, we note that the rush toward liquidity was on again yesterday (10/3) and that meant the continued scramble for Dollars (official money) and gold (store of value trading as money) as the policy band aid failed to inspire confidence. The Dollar/gold correlation, while I don"t necessarily expect the two to trade in tandem consistently, does illustrate that the Euro mania was nothing more than just another hot game for hopped up players like hedge funds and FOREX jocks. The next macro chart is of real concern.

Above we see the 1 month Libor chart as it correlates to the 3 month T-bill rate (IRX) since the 2001 recession. What is wrong with this picture? I will tell you what is wrong with it; in previous cycles such as the 2001 recession, as the IRX has dropped to re-liquefy the system, the LIBOR or London Interbank Offered Rate has dutifully risen, which meant rates got more accommodative. Likewise, as the Fed underwent its most recent pretense toward tightening, the LIBOR declined as it was "supposed" to. Even in the latest cycle LIBOR was in alignment as liquidity was needed - until the chop and hard down of 2008 when it did not respond favorably to the mechanics that would normally increase liquidity. LIBOR went the other way. The Dollar and gold spend some time in alignment. This is panic in a broken system.

Although I am a gold stock trader and more recently, a gold stock investor (for better and lately, worse), the purpose of this first segment of the official commercial launch of Notes From the Rabbit Hole - and let me insert a quick WELCOME and THANK YOU to subscribers - is as the title states, to implore readers who have not yet done so to get to safety first. Investment and/or speculation can come after you have buttoned down the basics. I will define these basics as being in cash and the safest cash alternatives - which you will see illustrated in the safety oriented capital preservation/investment portfolio below - and for protection against the global forces of inflation now being mainlined into the system, gold. Although I look forward to looking at other positive investment themes I expect we will talk a lot about safety for the foreseeable future because with the severe strain in global financial systems, this is not going to be a quick one and done process.

Updated 10/7/08 Pre-market: Markets have become more deeply over sold across all time frames amid pervasive fear and volatility. A rally is likely soon. But in my view, safety and risk management never go out of style and can in fact provide a sound platform for investment and speculation. "Safety first!"

The above is an excerpt from the most recent Notes From the Rabbit Hole, a new weekly letter intended to provide a balance between grounded, safety-oriented financial analysis and positive investment themes.



All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com