Investors around the globe flee risky assets; see little hope in Fed’s Operation Twister

Madison Ruppert, Contributing Writer
Activist Post

The volatility of the credit market, especially in Europe, has implications beyond what one might think. Traders are now blaming the credit crisis for sharp drops in commodities including gold, silver and tin today as people worldwide flee potentially risky assets.

One perceived upside to this is a much-needed strengthening of the dollar, according to some.

Soozhana Choi, the head of commodity research in Asia at the Singapore branch of Deutsche Bank, told Reuters that “The dollar has strengthened in all of this and everyone is de-risking and putting money into the dollar because of the deteriorating economic outlook”.

Reuters also mentions that people are fleeing the volatility of the commodity markets, including U.S. silver which saw a loss today of more than 6% down to $34.32, in favor of the “perceived safety of Treasuries.”

Industrial silver saw losses as well with spot silver prices dropping to a price unseen since early July of $34.22 or over 4% before rising a bit to $35.25.

Gold was not spared in the drop either. U.S. gold lost more than 1% to $1,722.30 an ounce but finished at $1,746.20. This could signal the sharpest weekly loss for U.S. gold prices since May of this year, which is interesting given all of the hype gold and silver have received in this economic crisis.

Spot gold felt to a record low for this month of $1,719.80 an ounce, representing a loss of 0.9% but before the day was over the spot price recovered to $1,742.90.

Other commodities suffered even more today with base metals getting hit hardest by the global selloff. London saw tin prices drop a staggering 14%.

Asian stocks and emerging market currencies both saw losses as well.

One might see the rising dollar as a boon to America, but one must also consider that it is based largely on the hopes that the American economy will be a safe haven for investors amid uncertain markets.

Unfortunately, this might not be realistic after looking at Bernanke’s planned economic fix.

Many are highly skeptical of the private Federal Reserve’s ability to do anything to the long-term high rate of unemployment suffered by Americans.

A professor of economics at Trinity College in Connecticut, Mark Setterfield, told Reuters that, “We went to 9 percent unemployment quite quickly, and we basically have been stuck there. There has to be the concern that that type of hysteresis effect is going to add insult to injury.”

In this case, Setterfield is referring to the appropriation of a physics term which describes when what should be a temporary effect becomes permanent even when the trigger of the effect has been removed. Here he is saying that the American job market has fallen into a vicious cycle which does not respond to demand and joblessness becomes stagnant.

If this is indeed what we are seeing, it doesn’t look like the Federal Reserve is going to be able to do anything about it.

After the Federal Reserve’s declaration of a new $400 billion plan which will shift the Fed’s $2.85 trillion finances more towards long-term securities in order to counterweight “significant downside risks”, Reuters conducted a poll that returned grim results.

According to the poll, Wall Street is only projecting a 15% chance of the Fed’s latest scheme providing a real boost to the American economy.

The stock market hasn’t reacted to the plan well either as stocks saw a 3% drop on Thursday among the Fed’s economic outlook and clear global economic fears.

The Federal Reserve cannot even manage to provide a projection for how their new plan will affect the economy, if it positively affects it at all.

They said that it is “difficult to estimate precisely” how their newest scheme, known as “Operation Twister” will work out.

Chief economist at OSK-DMG, Thomas Lam, projected less than .5% added growth with Goldman Sachs projecting a slightly higher benefit.

The Federal Reserve Chairman Benjamin Bernanke said high unemployment was one of their most major concerns but has yet to offer any solutions and Operation Twister offers nothing other than low interest rates in hopes that more Americans will take on more debt.

Some are saying that Bernanke and the Fed have nothing left to offer in terms of assistance to our economy. The chief economist at JPMorgan, Michael Feroli, told Reuters, “Monetary policy’s toothpaste tube is rolled up to the very end, and Bernanke is squeezing it with both hands, but there’s just not much left in there.”

This statement mirrors the sentiment coming from the IMF while they, yet again, cut their growth forecasts for the American and European economies.

The growing consensus seems to be that something needs to be done and fast, while shifting the blame from monetary institutions to lawmakers as if they control the economy.

I don’t think anyone out there thinks that we can continue on exactly as we have before and hope everything turns around suddenly; this is just unrealistic.

However, no one seems to be capable of giving concrete, workable solutions that we can begin to implement, especially when it comes to resolving the perpetually high rate of unemployment we are suffering.