Nov. 14 (Bloomberg) -- Gold rose the most in eight weeks on speculation that central banks will add more liquidity to unfreeze credit markets, spurring inflation and boosting the appeal of the precious metal. Silver and platinum also gained.

Federal Reserve Chairman Ben S. Bernanke said the U.S. and other countries are ready to take more action to boost lending. The dollar declined against a basket of six major currencies after dropping 0.6 percent yesterday. More liquidity will devalue currencies and stoke inflation, said Frank McGhee, the head dealer of Integrated Brokerage Services LLC in Chicago.

``Basically, the government needs and wants an inflationary spurt to turn this economy around,'' McGhee said. ``Gold is probably $100 to $150 too cheap, based on the amount of liquidity that's already been pumped into the system.''

Gold futures for December delivery rose $37.50, or 5.3 percent, to $742.50 an ounce on the Comex division of the New York Mercantile Exchange, the biggest gain for a most-active contract since Sept. 18. The metal is up 1.1 percent this week.

Silver futures for December delivery jumped 69 cents, or 7.8 percent, to $9.49 an ounce. The metal is down 4.7 percent this week.

Platinum futures for January delivery rose $32.10, or 3.9 percent, to $845.10 an ounce on the Nymex. Palladium for December delivery gained $2.70, or 1.3 percent, to $216.65 an ounce.

The Fed has cut its benchmark interest rate to 1 percent from 5.25 percent in September 2007 and provided more than $1 trillion in loans to financial institutions to help ease the worst credit crisis in seven decades.

The collapse of Lehman Brothers Holdings Inc. on Sept. 15 helped trigger passage of a $700 billion bailout plan by the U.S. Since then, gold traded as high as $936.30 on Oct. 10 and as low as $681 on Oct. 24.

`Awash With Dollars'

Gold may rise as the dollar begins to slide, said Walter Otstott, a senior broker at Dallas Commodity Co. in Dallas.

``Bargain hunters and investors are starting to appreciate gold for its diversification attributes,'' Otstott said.

``Fundamentally, the world is awash with dollars, and we should see the greenback resume its long-term downward trend.''. . .

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Money and Markets

November 13, 2008

If you think this weekend's G-20 meetings in Washington are only about designing short-term fixes to the financial system and regulatory reforms for banks, hedge funds, brokers, mortgage companies and investment banks ... think again.

Behind the scenes, a far more fundamental fix is being discussed — the possible revaluation of gold and the birth of an entirely new monetary system.

I've been studying this issue in great depth all my life. And given the speed at which the financial crisis is unfolding, I would be very surprised if what I'm about to tell you now is not on the G-20 table this weekend.

Furthermore, I believe the end result will make my $2,270 price target for gold look conservative, to say the least. You'll see why in a minute.

First, the G-20's motive for a new monetary system: It's driven by and based upon this very simple proposition ...

"If we can't print money fast enough to fend off another deflationary Great Depression, then let's change the value of the money."

I call it ...The G-20's Secret Debt Solution"

It would be a strategy designed to ease the burden of ALL debts — by simultaneously devaluing ALL currencies ... and re-inflating ALL asset prices.

That's what central banks and governments around the world are going to start talking about this weekend — a new financial order that includes new monetary units that helps to wipe clean the world's debt ledgers.

It won't be an easy deal to broker, since the U.S. is the world's largest debtor. But remember: Debts are now going bad all over the world. So everyone would benefit.

Fed Chairman Ben Bernanke ... Treasury Secretary Paulson ... President Bush ... President-elect Obama ... former Fed Chairman Paul Volcker ... Warren Buffett ... and central bankers and politicians all over the world agree a new monetary system is needed.

So they'll start hashing out the details to get the new financial architecture deployed as quickly as possible.

If you think I'm crazy or propagating some kind of conspiracy theory, then consider the historical precedent ...

To end the Great Depression in 1933 Franklin Roosevelt devalued the dollar via Executive Order #6102, confiscating gold and raising its price 69.3%, effectively kick starting asset reflation.

Only this time, it won't be just the U.S. that devalues its currency. The world is too interconnected. Instead, the world's leading countries will propose a simultaneous and universal currency devaluation.

This time, they will NOT confiscate gold. There would be riots all over the globe if they even mentioned the "C" word.

But they don't have to confiscate gold. Here's one scenario ...

They cease all gold sales and instead, raise the current official central bank price of gold from its booked value of $42.22 an ounce — to a price that monetizes a large enough portion of the world's outstanding debts.

That way, just like in 1933, the debts become a fraction of re-inflated asset prices (led higher by the gold price).

And this time, instead of staying with the dollar as a reserve currency, the G-20 issues three new monetary units of exchange, each with equal reserve status.

The three currencies will essentially be a new dollar, new euro, and a new pan-Asian currency. (The Chinese yuan may survive as a fourth currency, but it will be linked to a basket of the three new currencies.)

The new fiat monetary units would be worth less than the old ones. For instance, it could take 10 new units of money to buy 1 old dollar or euro.

New names would be given to the new currencies to help rid the world of the ghost of a system that failed. Additional regulations and programs would be designed and implemented to ease the transition to a new monetary system.

The International Monetary Fund (IMF) would implement the new financial system in conjunction with central banks and governments around the world.

Keep in mind that the IMF is already set up to handle the transition, and has had contingency plans allowing for it since the institution was formed in 1944.

Included in the design and transition to a new monetary system ...

A. A new fixed-rate currency regime. Immediately upon upping the price of gold and introducing the new currencies, a new fixed exchange rate system would be re-introduced. The floating exchange rate system would be tossed into the dust bin along with the old currencies.

This would kill any speculation about further devaluations in the currency markets, and drastically reduce market volatility.

B. To sell the program to savers and protect them from the currency devaluation, compensatory measures would be enacted. For instance, a one-time windfall tax-free deposit could be issued by governments directly to citizens' accounts, or, to employer-sponsored pensions, to IRAs, or Social Security accounts.

Income taxes may subsequently be raised to pay for the give-away, or a nominal global type of sales tax could be enacted to help pay for the new system and the compensatory measures.

C. Additional programs would be designed to protect lenders and creditors. Lenders stand a much higher chance of getting paid off under the new monetary system — but with a currency whose purchasing power would now be a fraction of what it was when the loans were originated.

So programs would have to be designed to help lenders offset the inflationary costs of their devalued loans, probably via the tax code.

Naturally, all this is a bit more complicated than I've spelled out above. But that gives you a big-picture outline of what the plan could look like. And I think major changes like these are going to be set in motion at this weekend's G-20 meetings in Washington.

Would they work?

Yes. They would help avoid a repeat of the deflationary Great Depression. But don't expect even a new monetary system to put the U.S. or the global economy back on track toward the high rates of real growth that we've seen over the last several years. That's simply not going to happen. Not for a while.

Instead, I'm talking about a massive asset price reflation, negative real economic growth in the U.S. and Europe — but continued real GDP gains in Asia.

The Big Question: What gold price would be legislated to reflate the U.S. and global economy?

I can't tell you what gold price the G-20 would ultimately agree to. But here's what they will be looking at ...

• To monetize 100% of the outstanding public and private sector debt in the U.S., the official government price of gold would have to be raised to about $53,000 per ounce.
  
  
• To monetize 50%, the price of gold would have to be raised to around $26,500 an ounce.
  
  
• To monetize 20% would require a gold price a hair over $10,600 an ounce.
  
  
• To monetize just 10%, gold would have to be priced just over $5,300 an ounce.

Those figures are just based on the U.S. debt structure and do not factor in global debts gone bad. But since the U.S. is the world's largest debtor and the epicenter of the crisis, the G-20 will likely base their final decision mostly on the U.S. debt structure.

So how much debt do I think would be monetized via an executive order that raises the official price of gold? What kind of currency devaluation would I expect as a result?

I would not be surprised to see the G-20 monetize at least 20% of the U.S. debt markets. THAT MEANS ...

• Gold would be priced at over $10,000 an ounce.
  
  
• Currencies would be devalued by a factor of at least 12 to 1, meaning it would take 12 new dollars or euros to equal 1 old dollar or euro.

The return of the Gold Standard?

"But Larry," you ask, "how could this be accomplished when we no longer have a gold standard? Further, are you advocating a gold standard?"

My answers:

First, you don't need a gold standard to accomplish a devaluation of currencies and revaluation of the monetary system.

By offering to pay over $10,000 an ounce for gold, central banks can effectively accomplish the same end goal — monetizing and reducing the burden of debts, via inflating asset prices in fiat money terms.

Naturally, hoards of gold investors will cash in their gold. The central banks will pile it up. At the same time, other hoards of investors will not sell their gold, even at $10,000 an ounce. But the actual movement of the gold will not matter. It is the psychological impact and the devaluation of paper currencies that matters.

Second, I do NOT advocate a fully convertible gold standard. Never have. There isn't enough gold in the world to make currencies convertible into gold. It would end up backfiring, restricting the supply of money and credit.

What should you do to prepare for these possibilities?

It's obvious: Make sure you own some core gold, as much as 25% of your investable funds.

Also, as I've noted in past Money and Markets issues, you will want to own key natural resource stocks, and even select blue-chip stocks that will participate in the reflation scheme.

About the Author:

With nearly three decades of experience in precious metals and natural resource markets, Larry Edelson has played a pivotal role in training Weiss Research staff and in guiding Weiss Research’s customers to prudent investments in these sectors.

His Real Wealth Report, Energy Windfall Trader and Resource Options Alert provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management. His team of technical analysts helps enhance the timing of investment recommendations with the aim of continually improving performance results for investors.

Mr. Edelson is also an accomplished analyst and writer, making substantial contributions to Weiss Research’s Safe Money Report and Money and Markets.

He holds a B.A. degree from Columbia University. Mr. Edelson got his start on Wall Street in 1978. By 1980, he had his own firm active in international brokerage, financial analysis and money management.

In the mid-1980s, Mr. Edelson was one of the largest gold traders in the world, responsible for as much as $1.4 billion in daily gold trading volume on the Comex in New York, in today’s dollars. Mr. Edelson also managed several multi-million-dollar natural resource and commodity-based private investment funds.

Widely respected throughout the financial industry for his forecasts, Mr. Edelson has successfully called nearly all the major turning points in the world’s macro-economic trends, including …

• The Stock Market Crash of 1987 and its subsequent rally to new highs by 1990.
  
• The 21-year bear market in precious metals.
  
• Major turning points in the currency markets, including the now multi-year-long decline in the dollar.
  
• The peak of the stock market bubble in 2000.
  
• The new bull market in natural resources that began in 2001.
  
• One of the only analysts in the world to correctly identify in 2004 the start of the major bull markets in Asian economies and stocks.
  

Frequently quoted in international press, including Forbes, Bloomberg, CBS MarketWatch and more, Mr. Edelson travels extensively through Asia each year, bringing his followers first-hand analysis and accounts of the vibrant emerging economies.

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Brazil's President Lula told his country in September, "People ask me about the [financial] crisis, and I answer, go ask Bush. It is his crisis, not mine."

Fifty days later, British Treasury Secretary Stephen Timms told a conference of G-20 nations gathered in Sao Paulo, Brazil: "We are in extraordinary times, the global economy is facing shocks which are wholly without precedent and we need a new approach. … It is a global crisis. It therefore requires an international response."

In other words, what goes around, comes around. Global schadenfreude toward a stupid and greedy United States and its subprime mortgage meltdown has rapidly become global concern about how to rescue the world from an all-encompassing financial disaster. Here's just a smattering of companies large and small that recently announced lowered outlooks for the year: Under Armour (NYSE: UA), News Corp. (NYSE: NWS), Starbucks (Nasdaq: SBUX), Vodafone (NYSE: VOD), Electronic Arts (Nasdaq: ERTS), ADP (NYSE: ADP), and Hormel (NYSE: HRL). (Yes, in these tough times, even the outlook for Spam is grim.)

And if that were not enough, the International Monetary Fund (IMF) recently lowered its outlook for the entire global economy.

One country's plan to step up
Against that backdrop, China announced a 4-trillion-yuan ($586 billion) stimulus package for its domestic economy this past Sunday. It plans to fund extensive infrastructure construction, aid poor farmers, and cut export taxes.

While China's plan has clear beneficiaries, and should help keep more laborers in their jobs and prop up domestic consumer spending, the most important (and underreported) aspect of the plan is how it will fundamentally change the economic relationship between the U.S. and China.

Here's how it was
One of the big debates over the past half-decade was whether China had reached a point in its economic development at which its internal economic gravity would allow it to "decouple" from the global economy. If so, it could continue along its fantastic growth trajectory, even as growth in the U.S. or Europe ceased or reversed.

That may sound like gobbledygook, but it's important. The U.S. has a $20 billion monthly trade deficit with China. It's funded by China's willingness to hold U.S. treasuries in its Central Bank (essentially, we're borrowing the money). China manages the arrangement by pegging its currency (the yuan) to the dollar at an artificially low rate, and by not worrying so much about certain niceties like environmental regulation and labor protection.

It's a mutually beneficial arrangement -- a weak yuan supports Chinese exporters, helping the country industrialize and quickly integrate rural migrants into its urban workforce, with the salutary effect of keeping inflation and potential political unrest low. For its part, the U.S. has gotten dirt cheap financing, by virtue of China parking more than a trillion dollars in U.S. government securities. That has supported the dollar and allowed the Federal Reserve to fuel consumer spending by keeping interest rates low.

China's stimulus package heralds the unwinding of this relationship.

Here's how it will be
This is why the decoupling argument matters. Many analysts have pointed to the thousands of factories that have shut down in China in these past few months as evidence that a slowdown in American spending will cause a depression in China -- potentially even leading to regime change. But in fact, our trade imbalance with China is artificially preserved by the aforementioned currency peg, and by the decision of China's state-run banks to make uneconomic loans to businesses it deemed worth propping up.

China has paid heavily for this relationship. Rather than invest its surplus cash in its own country, the Chinese poured money back into the U.S. to further spur our debt-fueled consumption. (Put less artfully, some poor Chinese guy in Shaanxi province was essentially helping you pay your mortgage.)

The announced stimulus package reverses that. Hundreds of billions of dollars that would have gone to propping up the greenback are now being reinvested in China, helping it to transition from its reliance on exports to a self-sustaining economy. So while China isn't yet decoupled from its export markets, this new spending plan will help it along that path.

China's huge currency reserves are about to be put to use, and while there will be some real and perhaps severe bumps along the way, the China that comes out on the other side will be a heck of a lot stronger, more independent, and more decoupled than the one we've seen up to now.

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By Bob Willis and Timothy R. Homan

Nov. 13 (Bloomberg) -- The global economic slowdown is deepening, according to reports today that showed the number of Americans collecting jobless benefits jumped to a 25-year high and U.S. exports plunged.

The number of U.S. workers receiving unemployment benefits climbed to 3.9 million in the week ended Nov. 1, the Labor Department said today in Washington. Commerce Department figures showed that U.S. imports dropped by the most on record in September, and exports also slid as demand for American-made aircraft and computers declined.

``We are in a world economic downturn, there is no question about it, and it's shaping up to be pretty significant,'' said David Resler, chief economist at Nomura Securities International in New York. In the U.S., ``it will be a very serious recession, rivaling the worst in the postwar period.''

The worst German recession in at least 12 years and shrinking economies in other parts of Europe and in Japan will hurt U.S. exports, while a lack of credit and rising unemployment will cause American consumers and businesses to keep retrenching. Even a second round of government stimulus will not promote a quick rebound, Resler said.

First-time claims for jobless benefits increased by 32,000 to 516,000 in the week ended Nov. 8, from 484,000 the week before, the Labor Department said. The median estimate of 40 economists in a Bloomberg News survey was for a reading of 480,000, compared with the originally reported 481,000 in the prior week.

Job Losses

Payroll losses at companies from Citigroup Inc. and Goldman Sachs Group Inc. to Ford Motor Co. and Circuit City Stores Inc., the consumer electronics chain that went bust this week, mean unemployment claims will probably rise further.

``When you start to see the downward pressure on wages as well as the credit crunch, that's only going to make consumers much more nervous,'' Linda Barrington, a labor economist at the New York-based Conference Board, said in a Bloomberg Television interview. ``The labor market is only reinforcing a very pessimistic picture.''

U.S. stocks drifted between gains and losses as investors snapped up energy shares trading at their cheapest valuation on record, overshadowing today's economic news. The Standard & Poor's 500 Stock Index was up 0.1 percent at 853.3 at 11:25 a.m. in New York. Benchmark 10-year Treasury note yields rose to 3.75 percent from 3.65 percent late yesterday.

Highest Since 1991

The labor market is weakening as the economy appears to be in its first downturn since 2001. The jobless rate rose to 6.5 percent in October, the highest since 1994, the government said last week.

Employers cut 240,000 jobs last month, for a total so far this year of 1.2 million jobs lost, while the total number of unemployed Americans jumped to 10.1 million, the highest level in a quarter century, according to last week's jobs report from the Labor Department.

A record decline in the cost of fuel helped the U.S. trade deficit narrow more than forecast in September, offsetting the impact of the drop in exports. The gap shrank 4.4 percent to $56.5 billion, the smallest in almost a year, from $59.1 billion in August, the Commerce Department said.

Excluding petroleum, the deficit widened as exports dropped 6 percent to $155.4 billion, led by a $3.3 billion slump in sales of commercial aircraft. Sales of fuel oil, drilling equipment, computers and food to foreign buyers also decreased.

The economy of the countries using the euro will shrink 0.5 percent in 2009 and Japan will drop 0.2 percent, according to revised growth forecasts by the International Monetary Fund this month. The German economy, Europe's largest, contracted 0.5 percent in the third quarter after falling 0.4 percent in the second quarter, the government announced today.

Exports to the European Union were the lowest since December.

Imports dropped by a record 5.6 percent to $211.9 billion. The cost of a barrel of crude oil fell to $107.58, a decline of $12.41 from the prior month that was the biggest ever. The number of barrels bought was the fewest in more than five years.

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Nov. 13 (Bloomberg) -- The U.S. budget deficit last month exceeded the shortfall for President George W. Bush's first full year in office, spurred by purchases of stakes in a group of the nation's largest banks.

The deficit in the first month of the 2009 fiscal year climbed to a record $237.2 billion, compared with a gap of $56.8 billion in October last year, the Treasury Department reported today in Washington. Revenue fell 7.5 percent, while spending soared 71 percent.

Treasury Secretary Henry Paulson spent $115 billion last month to buy shares in eight of the biggest U.S. banks as part of his $700 billion Troubled Asset Relief Program. Deteriorating credit conditions and the economic slump are straining the nation's finances and will leave President-elect Barack Obama with a deficit worse than the record $455 billion of last year.

``The federal deficit appears to have risen sharply relative to the year-ago level in October, mostly reflected TARP bank capital infusions,'' UBS economist Samuel Coffin wrote in a research note before the release of the report. ``Uncertainty over scoring for TARP and other items adds to the challenge in forecasting the fiscal year budget deficit, but we project a rise to $1.175 trillion.''

The October deficit was forecast to widen to $200 billion, according to the median of 32 estimates in a Bloomberg News survey of economists. Today's total exceeds the $232 billion gap predicted by the Congressional Budget Office on Nov. 10.

Corporate income tax receipts fell to $81 million in October, from $6 billion a year earlier, according to the Treasury.

Revenue Drops

Total revenue fell to $164.8 billion in October, compared with $178.2 billion a year ago, according to the Treasury report. Spending increased to $402 billion from $235 billion last year.

Outlays for the Social Security Administration rose by 13 percent from a year ago to $59.2 billion) from $52.6 billion, while Department of Defense spending rose 16 percent to $66.1 billion from $57 billion. Spending by the Department of Health and Human Services, which administers the Medicare and Medicaid health programs, totaled $76.5 billion, up 31 percent.

The Treasury this month said it will more than triple its planned debt sales this quarter to help finance this year's shortfall.

Borrowing needs are expected to rise to $550 billion in the three months to Dec. 31, compared with the $142 billion predicted in July. Bond trading firms predicted the shortfall may rise to $988 billion in 2009.

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Labor Data Show Pain Across Economy

By Sudeep Reddy, Kris Maher and Ilan Brat

President-elect Barack Obama, in his first major remarks since Election Day, called Friday for extended unemployment benefits and a "rescue plan for the middle class" as new employment figures signaled that the economic crunch is worsening.

Mr. Obama spoke hours after the Labor Department reported that the U.S. unemployment rate soared to a 14-year high in October, buttressing economists' warnings that the current downturn will rival the worst recessions since the end of World War II.

Mr. Obama said a fiscal-stimulus plan to support the economy was "long overdue" and said he wants a package "sooner rather than later." Lawmakers are considering a package of measures worth as much as $100 billion when Congress reconvenes later this month. "If it does not get done in the lame-duck session, it will be the first thing I get done as president of the United States," he said.

The unemployment rate spiked to 6.5% in October from 6.1%, the Labor Department said. Many forecasters expect joblessness to top 8% by the end of 2009. In a separate survey, nonfarm payrolls declined 240,000 in October. The earlier two months were revised down significantly, indicating the economy was well in decline before the credit crisis hit its worst point in September and October. The country has lost about 1.2 million jobs so far this year, notching more than half those losses in the past three months.

The jobs report showed pervasive weakness in the economy, with few sectors spared layoffs. The construction and manufacturing industries, which were hit early on in the downturn, saw job losses increase in October, while the retail, hospitality and professional-services sectors all announced sharp job cuts. The grim jobs data were followed by reports of quarterly losses at Ford Motor Co. and General Motors Corp.

"Problems are now broad based," Federal Reserve Bank of Atlanta President Dennis Lockhart said in a speech Friday. The U.S. economy "appeared to weaken dramatically" in September and October as "forces of contraction took hold in consumer spending, business investment, industrial production and foreign demand for U.S.-made goods."

The Dow Jones Industrial Average rose 2.9% Friday as investors largely shrugged off the surge in the U.S. jobless rate, anticipation of which had helped spark the market's 9.7% selloff on Wednesday and Thursday. That slide was essentially factored into the market when the unemployment figures were released.

Education, health services and energy-production-related mining were among the few major areas that added jobs. Government, traditionally a resilient sector, posted a job decline in the revised September figures and only modest growth in October. State and municipal governments are expected to cut more jobs in the coming year as tax revenue declines. . .

Unable to fight off the gloom about the economy, stock prices slid for a second straight day, producing the biggest two-day percentage drop since Oct. 19-20, 1987.

The Dow Jones Industrial Average tumbled 443.48 points, or 4.9%, to 8695.79. The two-day loss since the rally on Election Day is 929.49 points, equal to 9.7% -- which is the biggest in point terms in the 112-year history of the Dow.

The Dow has given back roughly two-thirds of its gains since hitting a 5½-year low on Oct. 27, when it closed at 8175.77. The blue chips are now just 520 points above that level, and off 34.4% for the year.

Traders said the selloff may have been driven in part by expectations that the October employment report due out Friday morning will come in much worse than expected. Economists have been predicting job losses would total about 200,000 for the month and the unemployment rate would rise to 6.3% from 6.1%.

The Labor Department reported Thursday morning that weekly unemployment claims rose to their highest level in 25 years.

Meanwhile, retailers reported worse-than-expected sales for October.

Reflecting that negative economic picture and the probability of reduced demand for energy, oil prices slid 6.9% to their lowest level since March 2007, a 14% decline in two days.

General Motors, which along with Ford motor is expected to report grim quarterly results Friday, was the biggest decliner among the Dow's 30 components, down nearly 14%.

Among other big losers were banks and brokerage firms. Wells Fargo lost more than 9% as the company readied a sale of stock to raise billions of dollars in new capital.

The Standard & Poor's 500-stock index fell 5.03% to 904.88, which combined with Wednesday's losses also was the biggest two-day percentage decline since Oct. 19-20, 1987. (In the case of both the Dow and the S&P, the Oct. 19-20, 1987, drop included the Black Monday crash and the advance the next day.)

Even buyers who find stocks attractive at recent levels see no reason to chase the market higher, traders said, and stepped aside after the bounce that began last week. "The market is sloppy," said Andrew Brooks, who heads up stock trading at T. Rowe Price Group. Trading volume has been relatively light.

As stocks fell, prices on short-term Treasurys gained, responding to the cut in interest rates by the U.K. and the European Central Bank. The rise in the price of the two-year Treasury note pushed the yield down to 1.308%, the lowest since June 13, 2003. The dollar gained on the euro.

Hedge funds likely remain active sellers of stocks as they contend with investor withdrawals. Many hedge funds have deadlines that require investors to submit withdrawal requests by Nov. 15.

Another negative for the market is selling by individual investors looking to capture losses for tax-planning purposes.

"It's not that people have capital gains to offset, it's that people want to stockpile losses against future gains," said Lawrence Glazer, a managing partner at Mayflower Advisors in Boston. That's especially true amid expectations that capital-gains rates could be headed higher with a new Congress and a new president.

"The story for November could be tax-loss selling," Mr. Glazer said.

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by Julia Werdigier

The Bank of England unexpectedly reduced its benchmark rate by 1.5 percentage points, its biggest rate reduction in more than a decade, and the European Central Bank lowered its interest rate as expected by half a percentage point to 3.25 percent.

The Bank of England cut was to 3 percent, the lowest level since 1954, surprising investors and economists who had predicted a cut of half a percentage point.

“Central banks don’t cut for free; they do so for very real economic risks,” said Philip Isherwood, a strategist at Dresdner Kleinwort in London. “We’re going back to the early 1980s when we also had coinciding recessions around the world.”

Both banks cut their rates by a half percentage point on Oct. 8 in a coordinated response with other central banks around the world as they tried to loosen credit markets.

“It gives an indication of how strong the central bankers think they must act now,” said Richard Hunter, a fund manager at Hargreaves Lansdown in London.

In comments after the rate decision, the president of the European Central Bank, Jean-Claude Trichet, would not rule out a future rate cut, saying the financial turmoil was likely to dampen demand “for a rather protracted period of time.”

At the same time, Mr. Trichet said, “Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009.”

He said that given all of the recent actions to ease the financial turmoil, it was important for everyone involved to “live up to their responsibilities,” singling out banks.

“We expect the banking sector to make its contribution to restore confidence,” he said. Despite infusions and financial guarantees from governments, banks have been reluctant to start lending again.

The Bank of England’s large cut shows the bank’s readiness to take drastic steps to cushion the effects of what is likely to become the worst downturn in 17 years as stock markets and house prices slump and consumer confidence drops while banks refrain from lending.

“The Bank of England’s historic decision to cut base rates by 150 basis points today is a measure of how sharply economic conditions have deteriorated since the summer,” said Stuart Thomson of Resolution Asset Management in Glasgow. “The rate cut was aggressive and necessary and we believe that base rates will fall further over the next two years as the economy flirts with deflation.”

Stock markets fell Thursday in Europe and Asia as investors feared the slowdown would hurt companies’ earnings. Some economists said the deteriorating outlook made Thursday’s cuts a necessity rather than a tool to cushion the blow for investors and consumers.

“Funding is still expensive so the effect of a rate cut on the economy will be diluted,” said Alan Clarke, an economist at BNP Paribas in London.

Britain’s government put pressure on banks to pass on the interest rate cuts to their customers and step up lending to small businesses, but its demands were met with resistance as interbank lending rates remained relatively high and banks were increasingly concerned about rising loan default rates.

European governments increased their aid packages for consumers this week as well. Germany’s cabinet passed a plan to spend 50 billion euros, or $64 billion, on tax breaks and infrastructure investments, and Spain, which has the European Union’s highest unemployment rate, is allowing unemployed homeowners to defer mortgage payments. The Italian government plans to announce its own bank bailout package next week.

The recent cuts by the European Central Bank are a stark contrast to just three months ago when it raised rates, saying inflation was a bigger threat than an economic slowdown. Since then, inflation slowed while the region’s manufacturing and service industries shrank and consumer confidence dropped to the lowest level in 15 years.

The region sharing the euro as a common currency may grow 0.1 percent, according to a European Commission forecast in November, while the British economy will shrink 1 percent next year, America will shrink 0.5 percent and Japan will contract 0.4 percent.

In Britain, a decline in factory production and a slump in service sector activity in September painted the grimmest economic picture since the last recession in the early 1990s, prompting some economists to suggest the Bank of England might have to reduce rates to zero.

British factory production fell 0.8 percent in September from August, a seventh consecutive decline, making it the longest uninterrupted drop in 28 years. The Chartered Institute of Purchasing and Supply’s index of services fell to 42.4, from 46 in September, the lowest level since the index started 12 years ago. Britain’s economy shrank 0.5 percent in the third quarter in what many economists predict to be a recession that may last as much as three years.

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One day after rallying as Americans went to the polls, stocks dropped amid more evidence that the economy is stumbling badly.

The Dow Jones Industrial Average, which had surged 305 points on Election Day, fell 486.01 points, or 5.1%, to 9139.27. The loss marked the biggest one-day loss for blue chips since Oct. 22 and lowest close since Oct. 29 after a week of relative optimism. The industrials are down 31% for the year.

With the election settled, traders focused on incoming economic reports, and the data were grim. A precursor to Friday's monthly nonfarm payrolls number issued on Wednesday showed the private sector shed 157,000 jobs last month, with deep declines in goods-producing industries. And the Institute of Supply Management said in a new report that the service sector contracted last month.

"The markets are getting back to focusing on more traditional economics," said Bill King, chief market strategist at M. Ramsey King Securities in Burr Ridge, Ill. "The textbook says that when you think things are getting worse, you sell stocks, sell the dollar, and buy bonds. That's what we're seeing today."

The S&P 500 fell 5.3% to 952.77. Financial stocks performed miserably, with the sector dropping 9.2% as a group amid steep declines for bellwethers such as Goldman Sachs Group, down 8%, Morgan Stanley, down 9.7%, and Citigroup, which dropped 14%.

The technology-focused Nasdaq Composite Index snapped a six-day winning streak, finishing down 5.5%, at 1681.64 despite a bounce for Yahoo, which climbed 4.3% amid renewed hope it will pursue a deal with Microsoft. Microsoft shares were off 6.2%. The S&P 500's tech sector declined 6.1%.

Veteran investors said Wednesday's decline also bore some of the hallmarks of recent waves of forced selling in which hedge funds and other big players raise cash to cover anticipated withdrawals by clients. Carl Icahn told investors he is putting $250 million into Icahn Capital's hedge funds ahead of an anticipated wave of redemptions before the end of the year.

Even relatively strong performers in the hedge fund world have recently seen cash-starved investors withdraw funds. Blue Mountain Capital Management, which is down only 2.4% this year compared with an average 20% loss across all funds, has seen its investors line up to withdraw at least 25% of the fund's assets by February, the Wall Street Journal reported this week.

Some analysts think that the widespread cash-out is overdone and that stocks won't move substantially higher until some of those funds return to the market.

"Most of the institutions have liquidated enough – maybe too much," said Craig Hodges, president and co-portfolio manager at Hodges Capital Management in Dallas. "There's a lot of cash on the sidelines, but no one is putting it to work."

Still, many investors remain concerned about the economy and the outlook for corporate earnings. Because of the lingering big-picture risks, Ben Pace, chief investment officer at Deutsche Bank Private Wealth Management in New York, said that his firm is continuing to steer clients toward fairly conservative investments, including municipal bonds, health-care stocks, and big-name U.S. companies instead of emerging-market stocks.

"We're not telling people to lighten their equity exposure, but if their overall weighting in equities has gotten low over the last month or so, we're not telling them to add to it, either," said Mr. Pace. "It's more a matter of re-allocating [or shuffling existing bets from one sector to another] to stay fairly defensive."

Credit markets showed more incremental improvement. The three-month dollar Libor rate fell to 2.50625%, the lowest this year, from Tuesday's 2.70625%. The rate has fallen consistently since peaking at 4.81875% on Oct. 10. The overnight rate dropped to 0.3225% from Tuesday's 0.375%, below the Federal Reserve's federal-funds target rate of 1.0%. Data Wednesday from the New York Fed put the effective fed-funds rate at a much lower 0.23%.

With the government facing unprecedented borrowing needs, the Treasury Department said Wednesday that it is reintroducing the three-year note and conducting additional 10-year note and 30-year-bond auctions. The Treasury said it will sell $55.00 billion of new securities in its quarterly refunding next week to refund $55 billion in maturing issues and to raise $100 million.

Treasury prices rose. The two-year note rose 2/32 to yield 1.356%. The benchmark 10-year note rose 4/32 to yield 3.708%. The 30-year bond rose 7/32 to yield 4.177%.

Crude-oil futures tumbled $5.23, or 7.4%, to $65.30 a barrel in New York following of the release of weekly energy inventory data showing a smaller rise than expected in U.S. crude stockpiles. Gold futures slipped $14.70 to $741.30 an ounce. The Dow Jones-AIG Index tumbled 3.2%.

The dollar weakened against the Japanese yen but managed gains against the euro and British pound. The U.S. Dollar Index, which measures the greenback's value against a basket of six overseas denominations, was flat.  

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By Pham-Duy Nguyen

Nov. 4 (Bloomberg) --  Gold futures rose the most in six weeks as the dollar declined against the euro, boosting the appeal of the precious metal as an alternative investment. Silver jumped almost 8 percent.

The euro climbed as much as 2.8 percent, rebounding from the lowest level against the dollar in a week. Last month, gold dropped 18 percent, the most in 28 years, as the dollar climbed 11 percent against the euro. The metal reached a record in March as the euro headed for an all-time high in July.

``It's all about the weaker the dollar with gold,'' said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago.

Gold futures for December delivery rose $33.70, or 4.6 percent, to $760.50 an ounce at 11:28 a.m. on the Comex division of the New York Mercantile Exchange. A close at that price would mark the biggest percentage gain for a most-active contract since Sept. 22.

Silver futures for December delivery rose 76.5 cents, or 7.9 percent, to $10.515 an ounce. Before today, the metal was down 35 percent this year, while gold dropped 13 percent.

The U.S. will have to borrow more money than other governments to bail out its financial system, sending the dollar lower against other currencies, McGhee said.

The U.S. said yesterday that fourth-quarter borrowing needs probably will grow to $550 billion from a prior estimate of $142 billion.

`Back to the 1970s'

``You have to look back to the 1970s to see a falling dollar and rising interest rates,'' McGhee said. ``At some point, investors will start seeing the impact of the bailout and government interventions. You'll have long-term interest rates rising and a falling dollar.''

Gold futures gained from 1977 to 1980, peaking on January 21, 1980, at $873. That record held until this year, when gold reached $1,033.90. The dollar fell against major currencies from 1977 to 1979.

Still, gold's gains may be limited as investors prefer the safety of the U.S. currency to other assets, analysts said.

``The level of deflation in this country is massive,'' said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. ``Trillions of dollars have gone up in smoke. The government can print money and it may not result in inflation because of the money that's been lost.''

Since the collapse of Lehman Brothers Holdings Inc. on Sept. 15, which helped trigger passage of a $700 billion bailout plan by the U.S., gold has traded as low as $681 on Oct. 24 to as high as $936.30 on Oct. 10.

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By Brian Blackstone and Maya Jackson Randall

WASHINGTON -- The Federal Reserve on Wednesday slashed interest rates to four-year lows, capping a dramatic policy turn in October as the U.S. confronts a severe financial crisis and almost-certain recession.

Fed officials even left the door open to additional rate cuts to below levels not seen in a half-century, putting rates on the once-unthinkable path towards zero.

The Federal Open Market Committee voted unanimously to lower the target federal funds rate at which banks lend to each other by 0.5 percentage point to 1%, its lowest since between June 2003 and June 2004. That outcome was universally expected by Wall Street economists in a Dow Jones Newswires survey.

The Fed also reduced the discount rate charged for direct loans to banks by 0.5 percentage point to 1.25%.

"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures," the FOMC said, while the financial crisis "is likely to exert additional restraint on spending." (Read the statement)

Though the fed funds rate was 1% as recently as 2004, few if any on Wall Street thought officials would revisit those levels again.

After all, the 2001 to 2003 easing campaign was seen by some, in hindsight, as an overreaction to the mild 2001 recession and overhyped deflation fears. Those cuts and the slow pace of tightening thereafter were criticized as the root cause of the ensuing U.S. housing bubble, the collapse of which is at the heart of the current economic storm.

But this time is different. Far from a mild downturn, the U.S. economy is poised to contract sharply. Economists expect third quarter gross domestic product figures, due for release Thursday, to show a 0.5% contraction, at an annual rate. The forecasting firm Macroeconomic Advisers expects an accelerated decline of 2.8% in the current quarter followed by another GDP dip in early 2009.

Meanwhile, the unemployment rate is expected to climb well above 7% in coming months from its current level of 6.1%. And inflation rates, though still quite elevated on an annual basis, should come down quickly in response to falling oil and gasoline prices.

"In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability," the Fed said.

As recently as the FOMC's last scheduled meeting, on Sept. 16, officials had warned that inflation remained a "significant" concern. But as the credit crunch claimed more victims and showed signs of spilling over to consumer and business spending, Fed officials on Oct. 8 -- in an unprecedented joint rate cut with other major central banks including the European Central Bank and Bank of England -- lowered official rates by 0.5 percentage points.

Those actions should promote growth over time, the Fed said, though "downside risks to growth remain."

Fed officials will monitor the economy and markets and "act as needed" to promote economic growth and price stability, the Fed said.

Also this month, the Fed announced a series of programs to help ailing short-term debt markets, particularly by easing corporations' access to loans they need to fund their daily operations. The market for those IOUs, or commercial paper, has suffered as money market funds -- the largest group of investors in the market -- remain spooked in wake of the collapse of Lehman Brothers. Some money funds had incurred significant losses from defaulted Lehman debt.

Under the Money Market Investment Funding Facility the Fed announced last week, the Fed will provide funding to help money market funds purchase certificates of deposits and commercial paper. And through its Commercial Paper Funding Facility, a complementary program that started Monday, companies such as American Express and General Electric can sell their three-month commercial paper to the Fed.

The Fed has also extended loans to banking organizations to purchase asset-backed commercial paper, started paying interest on banks' required and excess reserve balances and boosted the size of its Term Auction Facility auctions -- all in effort to encourage lending.

There are preliminary signs the Fed's backstop programs are working. A key lending rate, the London interbank offered rate, for instance, was lower Wednesday, extending a streak of consecutive daily declines over the past two weeks.

"The real story regarding the Federal Reserve is its various liquidity operations; the federal funds rate is second fiddle," said Miller Tabak bond strategist Tony Crescenzi in a research note before the FOMC decision.

Still, the fed funds rate remains a powerful tool given the new global nature of rate cuts. Until recently, the U.S. was largely alone in easing rates given that the root cause of the global downturn has been the bursting of the U.S. housing bubble.

And even if the Fed is entering the final phase of its 13-month fed funds easing cycle, other central banks may just be starting. China's central bank lowered rates Wednesday for the third time in two months, following an unexpected rate reduction on Monday by the Bank of Korea. Norway's central bank also lowered rates Wednesday.

The ECB and BOE are expected to cut interest rates further when those central banks meet next month.

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The Standard & Poor's 500 Index lost 3.5 percent, a smaller decline than European and Asian equities, even after futures on the U.S. measure fell so far that trading was curbed. The U.K.'s FTSE 100 Index sank 5 percent and the pound had the biggest drop versus the dollar since 1971 following a government report showing the economy shrank for the first time in sixteen years. South Korea's economy grew at the slowest pace in four years, driving the Kospi Index down 11 percent.

``There's a worldwide fear of a worldwide recession,'' said Michael Binger, Minneapolis-based fund manager at Thrivent Asset Management, which oversees about $70 billion. ``The concern has moved to being about which banks and companies will fail to which countries could fail, with Iceland and some of the smaller countries around the world being on life support.''

The MSCI World Index of developed markets declined 4.3 percent to 871.64. MSCI's emerging-markets benchmark fell 7.8 percent to 473.98, completing eight straight weeks of losses, the longest stretch since 1998. The MSCI index covering both regions slumped to the lowest since August 2003. Russia's Micex Stock Exchange halted trading until next week following today's 14 percent retreat.

$10 Trillion

More than $10 trillion has been erased from the market value of equities so far this month. That accounts for about one-third of the total value wiped off world equities this year. MSCI's measure tracking both developed and emerging markets is heading for the worst year on record, plunging 47 percent in 2008, amid $660 billion in global credit-related losses and the biggest financial crisis since the Great Depression.

The Chicago Board Options Exchange Volatility Index surged to 79.13, the highest in its 18-year history. The VIX measures the cost of using options as insurance against S&P 500 declines.

``We're getting very close to the emotional blow-off where everybody says, `I don't care; I want out,''' said E. Craig Coats Jr., who co-heads fixed income at Keefe, Bruyette & Woods Inc. in New York. ``Everybody seems to be saying `I want to be in cash or Treasuries.'''

More than 200 companies in the S&P 500 have reported quarterly results since the start of October, posting an average profit slump of 23 percent, according to Bloomberg data.

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