I didn’t want to find myself in this position.

Hank Paulson looks awful. He’s sweating, uncomfortable, and clearly would rather not be where he is. He looks like he has a gun to his head. Maybe he does… judging from his choice of words-”quickly,” “action is needed,” “strongly urge”-something dire is about to happen.

Indeed, Paulson’s got himself into a real fix. In July he asked Congress for a blank check-a “bazooka” as he called it-to potentially bailout Fannie and Freddie. At the time, his argument was that if the market perceived him as having this “bazooka” he wouldn’t have to use it.

Well, Hank DID have to use the bazooka… the bazooka didn’t do anything… and now Hank is back asking for a nuclear warhead. And this time he wants it without any judicial review or oversight.

Rather than delving into the actual testimony of the various officials, I’d rather focus on the subtext or real message they were trying to communicate without doing so explicitly. That message is the following…

We have lost control.

For decades the market has operated under the notion that the Federal Reserve would be able to solve its problems by controlling the money supply should things turn for the worse. We are now finding out that assumption was blatantly false. The Fed and the Treasury have done everything they can-including several actions that are not in their charters-to strengthen the financial markets.

All of their efforts have failed.

We are now at a CRITICAL point. Even if Congress DOES grant the regulators the $700 billion in funds they’ve requested, it won’t necessarily re-instate confidence in the credit, bond or stock markets. The trust is gone. And investors are panicking.

According to the New York Post money market funds were hit with $500 billion in sell orders last Thursday. The Post wrote that the Fed’s pumping of $105 billion was “just enough to keep key institutional accounts from following through on the sell orders…”

To give you an idea of the seriousness of this statement, consider that collectively money market funds control over $3 trillion. So $500 billion in sell orders represents nearly 15% of this market trying to liquidate at once. We were literally on the brink of a full blown systemic collapse.

Investors are now trying to find safety anywhere they can. It’s proving difficult. Last week the yields on Treasuries fell to their lowest levels since the Great Depression. At one point, investors were willing to lend to the US government for a paltry 0.4% in interest-they were essentially lending their money for free, just to insure that the principal was safe.

However, the interventions-particularly the proposed $700 billion-are not exactly dollar positive. Every bailout the US engages in means more debt on the US balance sheet and more money printing. Small wonder that yesterday the dollar posted its biggest single day decline since the Euro was introduced.

And then there’s gold…

Gold has staged an incredible turnaround as investors turn to value and safety again. There are even rumors that foreign central banks are buying. Hank Paulson might not like the position he’s in… but gold investors are loving it.

Best Regards,
Graham Summers

http://www.globalstockmonitor.com

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