Observations In Present Time Forecasting Dim Future

There's a great degree of anxiety over the health of the US and world economies, and for good reason. Countries are experiencing contractions in trade that they have heretofore never before seen, such as Japan's 40% drop in exports and the mounting stockpiles of cars, trucks and other vehicles in US storage lots.

As expected, disruptions in the business cycle are everywhere, and Wall Street insiders are reeling from the pressure while putting on a game face as companies and their CEOs get set to face the music when 2nd quarter earnings are reported.

Meanwhile, beneath the veneer of stocks, bonds and assets, the banking crisis has not gone away, but has been merely submerged by the government and the compliant financial media.

James Grant, editor of Grant’s Interest Rate Observer recently said, “If the Fed examiners were set upon the Fed’s own documents - unlabeled documents - to pass judgment on the Fed’s capacity to survive the difficulties it faces in credit, it would shut this institution down. The Fed is undercapitalized in a way that Citicorp is undercapitalized.”

When I saw Grant's quotes, it reminded me of something I actually pondered a few months back, actually, January 23, 2009, in a post entitled Who Flipped the Switch? and, Is the Fed Busted?

Well, I guess we have our answer now. Thank you, Mr. Grant.

Actually, the plight of the Federal Reserve, though inexorably tied to that of the US government and eventually you and me, continues to deteriorate. There are only so many bad assets you can carry on your books before you start stinking up the place all by yourself. Confidence in the unofficial US central bank (a private institution, mind you) has fallen to new lows and congress, finally, reluctantly, is refusing to broaden its powers. Having the federal government and the Federal Reserve at loggerheads might actually be beneficial. Neither can point fingers for fiscal irresponsibility, for both are guilty. Should push actually come to shove, the government can simply legislate the Fed out of existence. That day may be coming sooner than anyone dares think. (Not a few people have suggested that severing ties to the Fed should have happened years ago.)

Bank of America is probably still insolvent, as is Citigroup (recently removed from the Dow Jones Industrials), JP Morgan Chase and Wells Fargo. After the next public stimulus, there will be another round of bank refinancing, as the last $700 billion will have proven to have fallen just a little - like $2.5 trillion - short of the mark.

Dow 8,178.41, +14.81 (0.18%)
NASDAQ 1,747.17, +1.00 (0.06%)
S&P 500 879.56, -1.47 (0.17%)
NYSE Composite 5,624.57, -30.07 (0.53%)

The various indices finished in mixed fashion once again, a fashion that's become a trend over the past three weeks. Overall, though, stocks were lower as declining issues far outpaced advancers, 4258-2118 (2:1) and new lows raced past new highs, 102-28, the largest margin in that metric in over a month. Volume was higher than recent days, indicating that stealth selling was being undertaken in a big way. Brokerages were likely unloading losers and ridding themselves of excess shares bought as window dressing at the close of the last quarter.

NYSE Volume 1,437,925,000
NASDAQ Volume 2,497,659,000

There is little doubt that investors are expecting the worst from the coming earnings seasons and have taken profits in a wide swath of securities. A major sell-off - something on the magnitude of 300-400 points on the Dow - could occur at any time while upside potential appears to be severely limited. Whatever the news or the government has been saying about the economy improving, Wall Street isn't buying it, and neither should the American public. The so-called "second shoe" is about to drop.

Even though stocks were spared somewhat during Wednesday's session, the economic currents have not been misread by commodity traders. Oil fell for the sixth straight session, losing $2.79, to close at $60.14, after US stockpiles were more robust than expected and an OPEC report suggested that production levels and therefore, the price of crude could be under pressure until 2013 due to a prolonged business downturn.

Gold fell by $19.80, to $909.30, getting precariously close to the $900 level, when most of the "gold bugs" have been screaming that gold will soar over $1000. That scenario looks to be more and more unlikely each passing day, as deflation continues to tighten its grip. Gold usually rises on fears of inflation, but in times like this, reacts like any other asset or commodity. If there's slack demand, there cannot be a rise in price. The same goes for silver, which lost another 37 cents on the day, closing at $12.85. Expect the metals to retrace prices from earlier this year or from last fall. For silver that would be $8.80-$11.60. For gold the range is from $712 to $880. If commodities as a whole continue to deteriorate along with world economies, expect gold and silver to decline along with them. Deflation is an all-inclusive club.