Charts in the Babson Style for 13 October 2008

A technical bounce is overdue at this point, and we are likely going to get it today on Monday.

Getting long stocks here is only for short term traders.

Long Term DJIA Adjusted for Inflation - Quo Vademus?

Updated forecast from Steve Williams at CyclePro.

Keep in mind that these figures are adjusted for inflation.

Another way to look at this is through the Dow-Gold ratio. Our own forecast is that this measure reverts to the longer term support level of 3.66. Whether this is at Dow 3,660 or 36,660 will help to answer the question: inflation or deflation?

A return to 1.9 for a period of time is also possible.

Austrian Public in a Quiet Rush to Gold

If you are going to seek safety, seek it early while you can still get there.

Remember the lessons of history.

""There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence."
Charles De Gaulle

Austria witnesses new gold rush
By Bethany Bell
BBC News, Vienna

There's a new gold rush.

The financial crisis is prompting people to look for safer forms of investment than stocks and shares.

The interest in gold coins is so great that many of the world's major mints are struggling to keep up with demand, including the Austrian Mint, which produces the Vienna Philharmonic - one of the best-selling bullion coins worldwide.

Sales of Vienna Philharmonic gold coins have gone up by more than 230% since last year.

Kerry Tattersall, the director of marketing at the mint, says production has gone into overdrive.

"We are running at present something like three shifts on all of the machines, on the presses, producing both gold and the silver bullion coins.

"We've actually got delays in delivering orders in silver. With gold, we are just about keeping pace, but it is a bit of a struggle."

In September alone, the mint sold 100,000 ounces in gold coins - in normal times it would take three to four months to sell that much.

Mr Tattersall says people are looking for security.

"We are seeing a lot of panic buying at the moment. People are losing confidence in the economy - whether that is justified or unjustified is a matter of opinion. But we are seeing a lot of people looking for a safe haven."

King's ransom

In the mint, chunks of gold are melted down in a fiery furnace. Then a stream of molten metal is formed into a thin strip of gold, out of which the blank coins are cut. Later the blanks are struck with the design of violins and musical instruments.

The Austrian mint, in the heart of Vienna, was founded more than 800 years ago to make coins out of the silver ransom paid for King Richard the Lionheart, who was taken prisoner in Austria on his way home from the Crusades.

It is a sign of the importance people have attached to precious metals over the centuries.

But there is no such thing as a completely safe investment.

Gold, like all commodities, is vulnerable to fluctuations in price.

Prices tumbled in 1999 when Gordon Brown announced a decision to sell off some of the Bank of England's gold reserves.

Robert Stoeffele, an analyst at Austria's Erste Bank, says until recently there was less interest in gold as an investment.

"We forgot the appeal of gold in the last 28 years because we had a bear market in gold. But within the last few years we have seen a huge fundamental bull market for gold.

"Gold is like a thermometer for the financial markets. I'd say we've got fever," he said.

Life savings

But rising demand for gold is not just a phenomenon of global finance.

Ordinary Austrians, shocked by the precipitous falls in their own stock market - which was suspended this week for the first time ever - are also looking for a more solid store of wealth.

The shop at the Austrian Mint usually specialises in selling collectors' coins. But these days, a number of customers are buying bullion there - in bulk.

I saw one middle-aged couple handing over thousands of euros in cash, in exchange for dozens of 1oz Vienna Philharmonic gold coins.

A little later, a Viennese pensioner took a thick wad of 500-euro notes out of her handbag, and gave it to the sales assistant. He sold her a large gold bar, which looked as though it weighed a kilo.

"I have taken one piece of gold," she told me.

"You see, I am old, and I have earned money all my life and now I have the money in the bank and I am afraid of the financial situation, that it will disappear. Gold is safe, I think."

LIBOR is in Backwardation and Significantly Divergent from Effective Fed Funds

LIBOR has ceased to function as a reliable benchmark suitable for commercial and residential loans in terms of US dollars.

It is in backwardation with an inverted yield curve, and has significantly diverged from the Effective Fed Funds rate.

This is most likely because of the Eurodollar 'short squeeze,' as shown by the record TED spread, and the inappropriately small sample size of LIBOR reporting banks.

This is all a symptom of the greater issue of the US dollar, which is no longer suitable as the reserve currency for global central banking.

The Federal Reserve is no longer able manage the dollar to simulate the stability of an external standard, given their decision to ignore nominal money supply growth. Their current mandate instead focuses them on purely domestic economic metrics that may be inappropriate for the changing state and requirements of exogenous economic systems, unless those systems are willing to subordinate their fiscal and monetary discretion.


What is LIBOR?

The London InterBank Offered Rate, or LIBOR, is the average interest rate charged when banks in the London interbank market borrow unsecured funds from each other.

There are different LIBOR rates for numerous currencies, including U.S. dollars.

The world banking system has adopted the LIBOR as a benchmark for short-term, interbank loans.

The LIBOR rates are now internationally recognized indices used for pricing many types of consumer and corporate loans, debt instruments and debt securities across the globe, and is the reference for many loans including the vast majority of Interest-Only Loans in The United States.

LIBOR rates are fixed every UK business day by the British Bankers' Association BBA.

The Fed Funds Target Rate, America's benchmark interest rate, and the U.S. Prime Rate are managed by America's central bank: the Federal Reserve.

The LIBOR rates, however, are fixed by a relatively small group of large private international banks themselves

The Bank of America
JP Morgan Chase
Citibank, NA
Bank of Tokyo-Mitsubishi UFJ Ltd
Barclays Bank plc
Credit Suisse
Deutsche Bank AG
HBOS
HSBC
Lloyds TSB Bank plc
Rabobank
Royal Bank of Canada
The Norinchukin Bank
The Royal Bank of Scotland Group
UBS AG
West LB AG


Is LIBOR a stable benchmark of short term money rates?

There is a case to be made that LIBOR is an inappropriate reference to be used for commercial short term rates because it is subject to distortions given the relatively selective sample size of the reporting banks. One or two troubled banks can significantly impact average LIBOR.

The spreads between the highest and lowest quoted rates in an efficient measure should be narrow and convergent. Recently the spreads among the LIBOR quoting banks have become shockingly wide, reflecting the non-competitive nature of the short term interbank loans given the massive intervention by the central banks as they flood the markets with loans designed to recapitalize the banking system.




Here is the detail of the composition of the 3 Month LIBOR. One might expect this to be a scorecard of default risk amongst the reporting banks from the perspective of their peers.





How does LIBOR compare to a short term rate measure such as Effective Fed Funds?

There has been a strong correlation between the Effective Funds Rate and LIBOR dollar rate as one might expect.



However, recently there is a growing divergence between LIBOR $US rates and the Effective Fed Funds Rate. This is a symptom of distress in the banking system and shows the inappropriate character of LIBOR for use as a benchmark for the commercial and residential loans markets.




And perhaps most surprisingly, the LIBOR dollar rate curve is now inverted.


How can LIBOR be Inverted when the Effective Fed Funds Rate is steepening?

This is most likely a symptom of fear of risk of capital return in interbank lending. It may also be a sign that the current eurodollar short squeeze is expected to dissipate, as it will as the capital markets revert to the means and efficient operation.



One might also pointedly ask what the G7 will be doing to address the distortions being introduced into the European banking system by the US dollar and its shortages due to the precipitous deterioration of US dollar debt assets held by European banks, as the solution for this seems to be eluding the bureaucrats in Brussels.

As a hint, the US dollar, like LIBOR, is being used inappropriately and the basis for international trade must change to a more stable measure.