Tony Lepage

I would be lying if I said that the 75 basis point rate cut by the Federal Reserve didn’t catch me by surprise. It's quite obvious I was surprised because I was certain enough to call for a big drop in US stock markets yesterday (see previous post). I figured Q1 would be a negative quarter only to have the markets boosted by rate cuts. I didn’t expect the rate to be dropped to hard and so fast.

I happened to be walking through the PATH (Toronto's underground network of malls and walkways) and stumbled upon Scotia Bank's investment screens. There were people gathering around and the headline described the TSX tumbling 500 points in just 20 minutes into the day. Anyone who knows me can probably imagine how much adrenaline started to pump through me at this point. I figured this was the end game. If there was an olympic speed walking qualifier that day, I might have won.

I did not expect a cut today, a day when an official meeting did not take place. The last time they cut the rates between meetings was in 2001 to stave off the recession we should have had back then. The last time they cut interest rates by three-quarter percent was in August of 1982.

Of course, cutting the interest rate this drastically would have a positive effect on the stock market. But, the interesting thing is the market still closed down 1%.

What should be noted is that this rate cut completely highlights the gravity of the situation. Again, I underestimated how quick Bernanke would be to cut the rate. Although, this IS a man who wrote his thesis on the 1930s and concluded that quick, easy money would have solved the problem. He has since become known as Helicopter Ben because he mentioned printing money and dropping it out of helicopters would not be out of consideration if he needed to get money into consumer’s hands. I guess he'll get his chance to try his theories.

Now we see G. W. Bush offering immediate tax rebates of 700-1,600 USD to needing American citizens. All the related announcements last week weren’t enough for investors on Monday, and markets around the world started to tumble. Those announcements spooked much of the intelligent money.

A few of the economist I subscribe to were wondering if the fed would be able to print enough money to stave off a crisis. The issue is whether we see the endgame as a contraction of the money supply (loans being called in) or an expansion of the money supply (anything to stimulate the economy for one more year, month, day). I think they can rest assured that Mr. Ben Bernanke will try his very best to completely destroy the value of the USD. He'll be printing money as long as there are enough trees (or cotton).

With that in mind, be sure that Gold will easily double from here, and will likely trade over $1000 within 6 months.

Examining the value of the USD to gold we see an increasing pace.

1913 USD worth 1/20 of 1 ounce of gold (Federal Reserve Act)
1930 USD worth 1/32 of 1 ounce of gold (Breton Woods and confiscation of US citizens' gold)
1970 USD worth 1/65 of 1 ounce of gold (Abandonment of Bretton Woods)
2000 USD worth 1/375 of 1 ounce of gold
2008 USD worth 1/910 of 1 ounce of gold

Things are REALLY getting messy. I've picked up the pace on buying gold. I’ll be visiting Costco, and saving up for layoffs (2009).

Have a great day :)