The Confidence Game, Round Two.

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"Blacktober" continued to unfold in an ominous manner as the new week got underway. Many markets acted as if the US bailout package vote had never taken place last Friday. Back in early February of 2007 (seems like an eternity ago), I wrote that the apparent end of the yen carry-trade would "alter the global financial landscape for years to come." Little did I know what degree of 'alteration' this new phase in the financial would usher in. We opened the week with global stock markets in major freefalls, the strongest US dollar in over a year, oil prices in the high 80's, and gold still only barely surpassing the highs it recorded in 1980. Perhaps if we give it another green light to run for $925 given these conditions...(oh well, it did not take the advice last week...).

The era of cheap money (or at the very least of cheap yen) to play in markets with, is now decidedly over. Traders and investors alike looking for a sign - any sign - that a particular asset or asset class is offering even a modicum of safety or capital preservation. All of the key elements required for a prolonged period of falling prices are now in place - it is now only a question of duration and depth.

Deleveraging has, and will have taken an enormous toll on all kinds of price tags when it is all said and done. Commodities, for example, have now suffered their worst decline in 50 years. Limit-down moves have battered base metals markets in Shanghai overnight. Should bank, homeowner, or insurer rescues, bailouts, and assorted interest rate cuts fail to provide the much-needed dose of confidence, everyone is probably looking at the biggest "fall sale" in 80 years.

Indeed, the belated $700 billion economic rescue package appears to have been received with little (if any) confidence among those whose actions count the most. Lenders are not any more inclined to lend today than they were last week. Borrowers are being turned down, even if they can demonstrate having been responsible and steady wage earners. Investors (as banks) are fleeing to cash in droves. Expectations by some economists are best left unquoted. Santa Claus is preparing for a December outing that may require only Rudolph in the harness. Red nose flashing, and all.

Gold prices opened at $860 an ounce in New York this morning, adding a quick $25 to Friday's closing spot values. By 3 pm this afternoon, they were at or near $854 - or about 1% lower than where they started, after having made a run to the $875 resistance level. Dow-watching was about as pleasant as the aftermath of a gladiatorial fight. The kind that involves lions as the opponent. The index pierced the $10K level with ease. At one point, the bloodbath was 800 points deep. The 845 level remains pivotal and the risk remains to the downside as priorities shift in this run of the market's rapids.

A coordinated central bank interest rate cut campaign may now be the next option in the offing at this stage of the game; as the rescue package turns out not to have offered that which was hoped for: calm and confidence. Then again, there is always the option of a bank and market "holiday" - should conditions decay sufficiently. Silver gave up its gains of the day and fell back to $11.00 an ounce. Noble metals recovered some (but not much) lost ground, with platinum rising $7 to $969 and palladium showed no change at $195 per ounce.

Indeed, there are several tools left in the Fed's shed as it attempts to right this listing ship. One of them, a power tool known as 'paying interest on reserves.' - might be employed in lieu of a rate cut in coming days.

" In an early morning statement, the Fed said it would double the size of its emergency loan program to banks to a potential $900 billion by the end of the year. The announcement came as the central bank announced that it will begin to pay interest on bank reserves. This will give the Fed "greater scope" to address conditions in credit market, the central bank said.

Paying interest on reserves would give the Fed more power to implement monetary policy.

Paying interest would attract excess bank reserves to the Fed, giving the central bank more firepower. Currently, banks deposit only the minimum reserve required.

Paying interest on bank reserves would allow the Fed to enlarge the asset size of its balance sheet without pushing the funds rate to zero, explained Robert Brusca, chief economist at FAO Economics. The interest rate paid on bank reserves would effectively serve as the floor on the funds rate.

So if the Fed paid 1.75% interest on reserves, the effective federal funds rate couldn't go below 1.75%. Fed researchers believe monetary policy would be much more effective with this approach, because the Fed could more directly control the most liquid asset in the economy and would no longer have to worry that policy could become impotent as the target rate approaches zero.

The Treasury announced steps to clarify to the market how it plans to coordinate the massive borrowing needs that will be required to fund the new emergency mortgage financing plan approved by Congress last week. Treasury said it will make adjustments to its auction calendar by increasing the size of bill and note auctions and continuing to issue cash management bills, some of longer-duration. In addition, the department said it was considering bringing back the three-year note in November and taking other steps.

The Fed and Treasury said that they are consulting with market participants on ways to support term unsecured funding markets.

"Together these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit," the Fed said.

"The Federal Reserve stands ready to take additional measures as necessary to foster liquid money market conditions," the statement said. The Fed will increase the size of its term auction facility auctions to $150 billion beginning later Monday.

Anthony Ryan, the acting under secretary for domestic finance, went on television to stress that top-level officials are working rapidly to implement the mortgage rescue plan hatched by Treasury Secretary Henry Paulson.

"We're moving as quickly as we can," Ryan said in an interview on CNBC. But Marc Chandler, currency analyst with Brown Brothers Harriman, said he was worried that the markets were moving much more rapidly than regulators and that Washington's efforts ultimately may be too small to stem the crisis."

Well, things could be worse. It has been revealed today that one in four mammals is in danger of extinction. Although humans were not (yet) included on the list, they are apparently trying real hard to be included.

Happy Survival.