At Housing Panic there was a blog entry that talked about how bad the situation is, and how Goldman-Sachs is saying things are bad. I don’t trust Goldman Sachs further than I drop a ball without throwing. I have seen too many times when things that seemed biased (eg rating changes, etc). What bothers me are comments like the following:

In a grim assessment of the U.S. economy’s health, the investment bank said the Federal Reserve will have to cut its lending rate to banks by 1-1/2 percentage points to 3 percent in the next six to nine months to avert a recession.

So I see if you don’t cut interest rates by quite a bit then, well the world in America will come to an end. There will be a –recession–, oh woe is me. My question is if the cuts by the Fed accomplished anything, and I see that the long term rates are still up there.

30 Year Fixed: 6.750% (APR 6.901%). Payment per $1000 = $6.49.

30 Year Fixed with 10 Year Interest Only Payments: 6.875% (APR 7.026%). Payment per $1000 = $5.73.

5/1 ARM: 6.250% (APR 6.396%). Payment per $1000 = $6.16.

5/1 ARM Interest Only: 6.250% (APR 6.396%). Payment per $1000 = $5.21.

Before the Fed cut 75 Basis points (0.75%) the interest rates were.

30 Year Fixed: 7.250% (APR 7.402%).  Payment per $1000 = $6.82.

30 Year Fixed with interest only:  7.375% (APR 7.673%).  Payment per $1000 = $6.25.

5/1 ARM:  6.75% (APR 6.644%).  Payment per $1000 =  $5.84.

Do the math folks, the people who could not afford a mortgage before the cuts still can’t afford a mortgage because the reset will be too large. The reality is that people overdid it! So when the Fed cuts interest rates who does it help? The structured finance people who have their "testicles in a very tight vice." That is the real problem. After all why would CitiGroup sell a coupon at higher than junk bond levels?

This rhetoric coming out of Goldman-Sachs is the same rhetoric I heard when the Fed cut the interest rates for the first time in August. And look what that interest rate cut did. Who did it help? Did it help equities? Nope, not really. Did it help the dollar? Nope, not really. Did it cut the price of oil or commodities? Nope, not really. So who has these rate cuts helped? As a result of these rate cuts the USD dropped and from the recent gains it would seem that people are having confidence in the USD, right? Wrong, the currencies are being rigged, by buying from other countries.

For nearly two months, the Central Bank of Brazil was content to sit on the sidelines and watch its currency, the Real, appreciate rapidly against the Dollar.  Beginning on October 8, however, the Central Bank has intervened in forex markets every day as part of a targeted effort to depress the Real.  Its efforts have been relatively straightforward; rather than issue currency stabilization bonds, the Central Bank has opted to purchase massive quantities of Dollar-denominated assets in the open market, bringing its foreign exchange reserves to $168 Billion.  Moreover, its efforts have been largely successful, as the Real has fallen slightly against the Dollar during this period of intervention.  However, logic (and past experience) dictate that as soon as it stops intervening, the Real will resume its  previous (upward) course against the Dollar. Bloomberg News reports:

So how long can Brazil and any other central bank keep buying? How long? Folks this is a George Soros moment, and it could get worse.

In short, because oil contracts are settled in USD, the global demand for USD is held artificially high.  However, due primarily to the rapid decline of the Dollar, the members of OPEC are studying the feasibility of pricing oil in terms of a basket of currencies, rather than solely in terms of Dollars.

I talked about this basket pricing a couple of weeks back, and I tell you it will come. They just don’t want to talk too much about that now because fear of a too fast collapse of the USD. Though countries like Venezuela, and Iran I am sure will be pushing hard for this.

Some will argue that the recent investment by a sovereign fund will bring stability and confidence. OK, here is a question to you. How many smart governments exist? A sovereign fund is a fund managed by governments? So how many smart sovereign funds exist? When I say smart I mean governments that will not bow to lobbies, and will do the right thing for the people. If you said governments are dumb, and sovereign funds smart, you have a contradiction. If you said governments are smart, and sovereign funds are smart, then at least you are consistent, though I feel wrong. For example local governments in the Yukon and Norway have lost a bundle with "safe" mortgage assests.

I fear that the Fed might cut due to this rhetoric express and that the USD will go down the tubes. Last night Marc Faber talked on Squawk Outside the Box and it was a very interesting debate between him (a bear) and another chap who happens to be a bull. CNBC has not yet published that video, and I have found an earlier video on YouTube that sort of says the same things.

NOTE: In the YouTube comments people are mocking this guy, mainly because they have no clue who he is. He is a Swiss Buffett, who lives for the most part in the Far East. I have followed him for a while because I feel he is a realist. These days he is gloom, but I have seen the times when he was a bull.

In the Squawk Outside the Box debate his funniest comment was, "Yes, please the Fed should cut, and so should the ECB, and everyone else. In fact they should cut to zero. Then gold will go to a gazillion dollars and I will be a very happy man."