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Bond Market News

Posted On: 2006-12-04
Length: 14:22

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Hello, this is Johannes Ernharth, you're listening to Vigilant Investor daily. Glad you all could tune on in and also this is my co-host Stephan, hey Stephan how are you doing today? I see you on there, oh heavens...are you there Stephan, I see that you're on...In any event we're going to do a quick market wrap here while Stephan gets his connection sorted out, and in the meantime, we'll be chatting with him in a little while. So today the Dow Jones Industrial was up just a touch about three quarters of a percent and the Dow seems to be recovering from it's doldrums and problems that it had early last week on the news that the dollar had slid as dramatically as it had, and it's still down 1.1 percent from its high in the year but up for the [year] entirely 15.8 percent. We also have the S&P 500 up about 0.89 percent, it's up on the year about 0.09 from its high, so it's making new high there, we also have the Nasdaq up a bit 1.46 percent today, and it's up 21 percent for the year. So all said and done the conventional markets are not doing badly this year if you're indexing. But we take a look at some of the other things, the big theme here still remains as far as I'm concerned and as far as my co-host Stephan is concerned the dollar, what's going to happen with the dollar? The dollar was a little stronger today, but we have to really look at the big picture, the dollar hit a low verses the euro two years ago. That was a dollar thirty-five to the euro. We've cranked it back up to a buck thirty two [...] the euro which tells us that the dollar is weakening, something that we've warned about for a long while that it was only a matter of time before the dollar would start weakening further given the eroding economic situation in the U.S. as well as the overwhelming trade deficit that continues and the federal deficit which isn't happening generally the federal deficit just keeps climbing and climbing, we've been able to refinance a lot of the old deficit or old debt at lower amounts but eventually that's going to catch up with us as well. The big question is when is the rest of the world going to say hey no more debt in U.S. dollars at 50 year low interest rates. And when that begins happening, it will be interesting to see what happens. But just to keep things in perspective, the dollar is now trading at two dollars per pound, or just close to it which is a record high for the exchange for the dollar and the British pound sterling. So, again watch the dollar, that's the real thing where you know, keep in mind when you're dealing with anything denominated in dollar assets relative to what? Gold today trading above 650 dollars again, and it's still down from its high earlier in the year by about 11 percent but for the year, gold is still up about 31, 32 percent, which is a heck of a run, and it's something that we would expect to continue given the structure problems and the money supply problems in the U.S. And the other big news I think we need to monitoring for this week going forward is that Bloomberg is reporting that interest rate futures are suggesting that traders out there who do this kind of trading on expectations of what the federal bank is going to do, what the Federal Reserve is going to do, and they expect that near 100 percent, the trading has hit that traders expect that the Fed will begin reducing the Fed funds rate in order to help boost the economy from it's current slowing. And they're expecting that by March it will be targeted down to 5 percent. And that's of course in the face of lots of comments by Bernanke, Greenspan and Chicago Fed president Moscow the past week and days would suggest that we are facing a bigger threat from inflation and again we were talking about just last Friday inflationary recession maybe even hyper-inflationary, stagflationary recession , we'll have to see what happens, but that is not a good situation to be in facing kind of a [...] situation for the Federal Reserve. So it will be interesting to see what goes on because that of course will affect the dollar and so forth. Stephan I see that you are on. Are you with us now?

Stephan: Yes I am Johannes.

Excellent, any comments for today's news?

Stephan: I think you are right on the money with again your comment to the dilemma, the Fed faces right now with the rising inflation due to the expanding money supply and yet the need to most likely lower interest rates to make more credit easier to access to keep this credit based, credit stimulated economy going. What you saw today, also, and that's a real dilemma. But what you saw today were stocks rising largely due to some take over and merger activity taking place. Bank of New York and Mellon Financial merged and they've agreed to create the world's largest custodian of investment assets. That's of particular interest to us as Pittsburghers, Mellon is expanding further in some of the services that they offer and bringing jobs to the Pittsburgh region, which is quite important to us. But a lot of the activity that you're seeing out there is basically due to increased financial activity and not due to increased manufacturing and those types of things. So, it's a flurry of activity and it's a little bit of a bump to the market but we've been through cycles like this before, and what we are really interested in, and I think what really matters is what will happen ultimately to the dollar? And what will happen to interest rates? And what additional economic figures are we going to see this month going through the end of the year?

Right, interesting thing was also that the bond market seems to be fairly, we'll it's inverted, [...] yield curve being inverted. And the fact, there's a lot of strength in the bond market, it seems like investors are you know, were going from last month, have taken all the 30, the 10, the 5, the 2, all rates are down and you know strength of the bond market you know, a heck of a rally here. And you know the real issue there is it doesn't seem to be people are terribly worried about bonds or maybe people are getting a little more conservative relative to equities and what are they doing with that, and where's that buying power coming from and why...but the you know, other thing of course is that the yield curve is still inverted. We're looking at the 30 year is higher than both the 10 and the 5, which is what you'd expect but well below the 6 month and the 3 month and [...] have the 5 year and the 10 year below the 2 year, and that's you know, getting a little bit less inverted than it was last week, but still that's historically been the recessionary indicator. And you know I think you know going forward I mean I would not be surprised to see more recessionary indicators coming in the coming weeks as the year wraps up and then once the, towards the end of the year, it wouldn't surprise me to see the markets up actually as the market tends to do that sort of holiday cheer rally and then also is a good bonus rally for people whose bonuses depend on the market being up as well.

Stephan: What I think what's really important to focus on Johannes, and you hit on it earlier in the show here today is the fact that gold and silver are remaining quite resilient from a price standpoint. Gold is still 651 and change, silver is at 14 and change an ounce and this is in the face of some decent equity market uptakes. And we know some of this is tied into the currency but you know what's important to remember for all our listeners out there, because you are retail investors. The retail investors are not being advised typically to buy gold and silver. Now there are certain things that we do in our practice which is separate from this radio show, but the majority, the vast majority if not every retail investor out there, whether they're going for a discount broker on their own or whether they're working with a traditional conventionally oriented broker is not getting advised to buy gold and silver. So what's happening out there Johannes, as we always say is that the smart money is involved in these metals. And these are not just people just purely hedging the currency, we believe that there are people that are more intelligent than that or [...] and they are looking at the mid to long range picture and the inherent strength of, we say, we posit that silver and gold's inherent strength is a bigger predictor of the dollar than the dollar is a predictor of silver and gold.

Especially in the environment where the cycle appears to be breaking down from where it has been. From 82 to 2000 gold was clearly out of favor, there were other dominating trends but the broader long term cycle, which is a destructive force against the dollar, it's basically been dollar abuse, a lot of inflation and by inflation we mean the traditional form of the word, which is printing more and more dollars. But when you do that you eventually have to face the ramifications of it. And what people don't understand often times is that inflation does not just move smoothly across all items simultaneously and evenly, it vents in different directions and different times and of course, you know something will seem idle for a long time and then all the sudden it begins catching some attention, and people also need to keep in perspective that things like commodities, things like precious metals or the dramatically more thinly traded than say the equity and bond markets, which are you know multiples of trillions of dollars where as when you're dealing with just gold and silver for example you're talking about a miniscule fraction of that. Interestingly today, I'm reading this off of the wires, China's gold consumption may rise 17 percent, that's being, of course it's from the mining weekly, which of course is going to be a little bit self promoting. But, China's the third biggest consumer of gold and they're expecting at least 350 metric tons this year up from 300 in 2005 only to increase the demand for [bollion] as an investment and that's within China. So that's according to China Gold Association Chair Chang Fumen. Now that's a little bit of inter industry news but you know, you've got to take that with a little bit of a grain of salt that they're going to be increasing their... well, put it this way, we also know that their central bank has been talking about diversifying out of the dollar and gold is one of their target assets and there's a lot of speculation about whether gold will eventually be backing the Chinese currency [...] and that you know of course that's speculation because not many central banks like to be curtailed relative to their ability to inflate because it is a social tool. You need to keep that in mind that inflation merely is wealth redistribution from the current holders of the currency and it's printed out of thin air and the only value it gets is at the expense of everybody else, it doesn't show up that immediately, and it's you know it's divided up among so many tens of millions of people that people don't feel it immediately but the early users of that currency, their wealth is coming out of everybody's pockets collectively. So it wouldn't surprise me if a collectivist environment like China would not necessarily want to go fully whole hagen to more of a private restraint kind of an approach with gold backing their currency. But inevitably you know, you just can't inflate, and inflate and inflate and I think that the dollar's trouble that's lying ahead is also lying for a lot of other currencies and again, I always stress the dollar relative to what is going to be important. Dollar denominated assets relative to what is going to be important.

Stephan: Absolutely, absolutely. And again, gold and silver, where they're going that is a driver we feel more of the dollar than the dollar is of gold and silver, even though conventionally you'll hear that that strength or the weakness of the dollar has everything to do with where the price of gold or the price of silver is going. But we really look at gold and silver being bought by quote, "the smart money," government institutions, what have you, that is [...] you're right but that is a bigger, let's call it the sharp money. Because that is a bigger indicator, the dollar being the world currency still for how much longer we don't know but as the price of gold goes up, and there's a divestment from dollars that is a big indicator of where the dollar is going to go. Absolutely.

Sure, there's no doubt about it. It will be interesting also to see what's going to happen in the U.S. with the change in the administration, losing its Congress, the Republicans are going out and Democrats are coming in. And it will be interesting in the turn of the year as they are officially in charge to see what's going to be happening relative to you know, various things that are being proposed already. And we don't have the time to get into it today but we'll definitely be talking about it in the future. And also keep in mind listeners you can always call in to our show during Wednesdays for our broader discussion. We are going to have a lot more discussion, maybe fewer interviews going forward definitely shorter interviews. But we have an hour long show every Wednesday night to elaborate on what we talk about day to day here on the daily Vigilant Investor episode, and that's every Wednesday night, 9PM, you can tune in Eastern Time. And you can find out more information at vigilantinvestor.com and the shoe is on Talk Shoe, go to Talk Shoe early and make sure to download the Talk Shoe interface as well you can get your own PIN number to dial on in and you can be on the line with us and we'll get more conversations going there as well as also, you can use their chat interface, which is pretty neat where questions can be asked and users can be talking in the background as they're listening to the interviews. And it's a very popular feature for a lot of people who are using [...] Make sure to tune in, every Wednesday night, and of course daily at 4:15 PM eastern time. Anything else you want to add before we wrap up for the day Stephan?

Stephan: I think that will be it, Johannes.

Good enough, we'll talk to you all tomorrow at the market close 4:15 PM. This is Johannes Ernharth and Stephan Ernharth, Vigilant Investor daily, take care.

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