BEST OF BILL BUCKLER

October 1, 2008

The Fracturing Of The US Money Market:

US money market fund assets dropped by a record $US 169.03 Billion in the week ended September 17 as jittery investors pulled money out. The Fed and the Treasury deployed additional tens of billions of Dollars to prevent an investor panic and flight from the nation's money market mutual funds. These funds had a total of $US 3.45 TRILLION in assets at the start of the previous week. In fact, these money market fund withdrawals were the next best thing to an accelerating bank run. While these money market funds are not banks, they underpin the market in commercial debt paper. This is the short-term market for US businesses of all sizes which use this market to gain short-term funds for the goods which are moving down their production lines towards final completion and sale. A drain on US money market funds as investors pulled their money out would quickly have deprived the US commercial paper market of the funds it needs to keep US manufacturing and industry going. The Fed promptly opened unlimited lines of credit to US commercial banks, stepping into the breach and supplying the funds to US businesses which the contracting money market funds were failing to supply.

In A Deflation - CASH Is KING:

The cash drain on money market funds was so bad that some funds had run short and were forced to inform their investors that from now on, they could only get 97 cents on the Dollar. Other funds either limited redemptions or stopped them altogether. Other funds dumped commercial paper onto the market, trying to raise cash for redemptions and in the process, causing interest rates to soar upwards to such heights that even GM backed off from trying to sell any of its own paper. The Fed stated that it will extend loans to banks to purchase "high quality" asset-backed commercial paper from money market funds. The Fed will also buy short-term discount notes issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks from Wall Street dealers. Neither program has a limit, the Fed's taps are wide open! The $US 700 Billion, the headline figure on the government's attempts to stem the credit crisis, hits $US 1.3 TRILLION when one includes all the loans and new investments and new programs committed to by the Federal Reserve and Treasury so far this year…..

The Mayor Of New York REALLY Said This:

"The next cause for concern in the battered US economy is whether there will be buyers abroad for the nation's billions in debt." That is a quote from New York Mayor Michael Bloomberg.

Mr. Bloomberg is the first American political leader of some standing to come forward in public to make it clear that the real global issue is the SOLVENCY of the US Treasury. No buyers of debt - no solvency!…..

The Chinese state media is loudly blaming the US for unleashing new financial "weapons of mass destruction" and sparking a global market "tsunami". They are also blaming American funds for pulling their financial investments out of China with no prior notice, leaving Chinese financial houses and commercial banks scrambling to meet these American calls for payment. In the Chinese outlook where personal relationships often exceed commercial factors in importance, that is rude and bordering on insulting. It is rude because an advance notice of withdrawal of funds would have left the Chinese party with time to prepare for it. It is insulting because this lack of warning can cause the Chinese counter party to be embarrassed before his or her peers. Over the past two weeks, these sudden American actions to recall their funds from China have outraged the Chinese.

China Is Back-Stopping The Exit Of US Funds:

Asian nervousness has coincided with heavy selling by Americans of their holdings of stocks and bonds in foreign markets. It's a question of everyone, Americans and Asians alike, bringing their money home.

The Chinese government has authorised the $US 250 Billion sovereign wealth fund, China Investment Corp, via one of its holding companies, Central Huijin, to increase its stakes in three of China's biggest banks. These are the Industrial & Commercial Bank of China, Bank of China and China Construction Bank. This move will increase the capital positions of these banks and make them more internationally creditworthy. Further in the background, stories are circulating that some (unnamed) Chinese banks found it necessary to go out and borrow to have the cash in hand to meet the outflow of US funds.

The Crash In US Prestige:

The Chinese yellow press is scathing about the antics on Wall Street and in Washington. At the same time, they are hilarious. "The Last Communists Found On Wall Street" blared one headline. The article continued by noting that having lost their people's money, the "Wall Street Communists" now wanted the people to pay it back. The broader fact is that the standing of the US has crashed in Chinese eyes and there will be great obstacles in the way of China continuing to send their funds to the US.

Ó 2008 – The Privateer

http://www.the-privateer.com

capt@the-privateer.com

(reproduced with permission)

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