Vigilant Investor

“The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the “deficit spending” policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.

Yet no effusions of authors however brilliant and sophisticated can alter the perennial economic laws. They are and work and take care of themselves. Notwithstanding all the passionate fulminations of the spokesmen of governments, the inevitable consequences of inflationism and expansionism as depicted by the “orthodox” economists are coming to pass. And then, very late indeed, even simple people will discover that Keynes did not teach us how to perform the “miracle … of turning a stone into bread,” but the not at all miraculous procedure of eating the seed corn.”

Ludwig von Mises, “Lord Keynes and Say’s Law.“

Below are a few articles with clips we think are worth a read.  Absolutely not!  The worst is far from past, and below are a few reasons why. If you can only read one, read the last one listed — the one on deleveraging and banks.  Written by Mises scholar and Chief Economist of Mann Global, Frank Shostak, it reveals once again the Rosetta Stone for this economy, explaining why current policy makers are on an unfortunate path to compounding the problems rather than fixing them — as if things needed to get worse!

The Real Cost of a Full Freddie and Fannie Bailout

The real cost of the bailouts will easily exceed $1.3 trillion. In fact, the real cost is likely to range between $1.3 trillion to $1.6 trillion, and is not unlikely to reach $2.5 trillion.

U.S. Says Banks on `Problem List’ Rose 30% in Quarter

“The U.S. Federal Deposit Insurance Corp. said its “problem list” of banks increased 30 percent in the second quarter to the highest total in five years as more commercial real-estate loans were overdue.

The list had 117 banks as of June 30, up from 90 in the first quarter and the highest since mid-2003, the agency said today in its quarterly report without naming any institutions. FDIC-insured lenders reported net income of $4.96 billion, down 87 percent from $36.8 billion in the same quarter a year ago.”

Freddie, Fannie Failure Could Be World `Catastrophe

“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic…  If it is not the end of the world, it is the end of the current international financial system.”

Is Deleveraging Bad for the Economy?

Is it true that if every bank were to attempt to “fix” its balance sheet, the collective outcome would be disastrous for the real economy? On the contrary, by adjusting their balance sheet to true conditions, banks would lay the foundation for a sustained economic recovery. After all, by trimming their lending, banks by implication also curtail the expansion of credit “out of thin air.” As we have seen, it is this type of credit that weakens wealth generators and hence leads to economic impoverishment. Contrary to the proponents of the “paradox of deleveraging” we can only conclude that if every bank were to aim at fixing its balance sheet, in the process curtailing the expansion of credit “out of thin air,” this would lay the foundation for a healthy economic recovery.

We’ve been monitoring offline the unusual developments in the precious metals markets in recent weeks, particularly in respect to gold and silver. While prices have plummeted a good deal from their highs (gold into the $700s for the first time since blowing through them a while back on its way to over $1000 earlier this year), amid that fall the physical market is experiencing exceptional delays in actually getting metal delivered. Folks we know are having a heck of a time getting delivery of the metal in large amounts of small denominations. So, unless you want 400 ounce bars, you’re waiting 30 days plus!

Meanwhile, the story broke big-time this a.m. when, as we and others suspected it would be forced to, the U.S. Mint ended a 20 year tradition by suspending issuance of its Silver Eagle coin Noted the Treasury, “Due to the unprecedented demand…our inventories have been depleted.. We are therefore temporarily suspending all sales of these coins.”

So what gives with the price plummeting while the actual physical metal is in short supply? Well, primarily it is the paper market — futures and ETFs — that have experienced a sharp sell off as major investors rolled into action across both precious metals and commodity sectors. Paper traders don’t want physical delivery, and generally it’s pledged against 400 ounce bars, while many paper investors, you must remember, are not in the game for the fundamental reasons others might be who have expectations of growing inflation, dollar deterioration, and worsening economic structural problems. Momentum and technical investors simply look at the charts to determine what’s hot, then hop on the bandwagon and hope to get off at a higher level before the heard vacates ahead of them and prices drop.  And, they do so with lots of leverage. Combine that with record levels of shorts across the spectrum, well — after such a rapid rise in values over the prior 18-months, something had to give. And give it did. Continue Reading »

A little gallows humor for those who appreciate it: Another play on the movie Der Untergang (The Downfall). If only it didn’t ring so true to reality. Part II below. Continue Reading »

While we know nothing goes straight up forever and that there are always corrections in any fundamental trend that develops, ala the inflationary one (which = dollar weakness), we were slightly taken aback that July 15 ended up being the starting point for the correction in the trend.   Mind you, that was within days of the implied insolvency problems over at Freddi and Fannie, and the announced support coming from the Fed and Treasury (after all, they must work together to create that cash from somewhere since the U.S. Treasury is running massive deficits already…).

So who on earth suddenly finds the implied inflationary consequences of this, the run on IndyMac bank, the reality that the FDIC has well over 100 banks on its insolvency watch list, the fact that Merrill is using qausi-Enron accounting to keep toxic waste off the books via Level III accounting gimmicks (a type of asset for which the regulators have repeatedly delayed “clean up” regulations form going into effect since the consequences would be so severe), etc. etc…

Well, who on earth is thinking this is somehow a good thing for the dollar?  Why would this imply a deflation of the loss of value vs. tangible assets that can’t be printed so easily?  Why, as colleague James Turk asks, has the Dollar Index suddenly and mysteriously reversed course?

Well, the truth is now seeping out.   The powers that be have delayed data several weeks (we suspect to provide some cover given the dire straights they’re in), but now the truth is seeping out.  There’s been absolutely no contraction of money supply as some suspect (the M’s are marching along, onward and upward) and the Fed clearly didn’t raise rates as some of its leaders threatened in order to fight the “commodities bubble”.  Interest rates for 1-year savings still remain well below even the official CPI figure we’ve long ago discounted as a laughable gauge for inflation.

So what is it?   In the face of ever worsening news, in recent weeks we’ve seen massive central bank action in support of the dollar, with the U.S. at the epicenter by dumping euros and buying dollars from its own reserve accounts — with U.S. paper in the Fed’s coffers jumping $52 billion in three short weeks –a 38.4% annualized rate!  That’s up from a prior annualized rate ending July 16th of 17.3%.  That doubling is going to give your currency a bounce, even if short-term!

This may have bought some time, but that’s about all.  Feel free to buy on the back of that intervention and the bump its caused. It has triggered and overdue correction in commodity prices, energy, and taken the wind out of a precious metal rebound. But the fundamental trend remains in place.

But, the U.S. is in the midst of a massive insolvency crisis thanks to gargantuan government / Fed-induced misappropriation of the finite stores of capital in the United States.  The withdrawal from such large misallocations will be severe, but there’s little to be gained by denying the addict to cheap and easily invented money and credit that he’s not got a problem, or that all will be OK by simply shooting up with more of the same junk that got him in such a bad way.

If you need proof,  consider that July was another month of record foreclosures for California.  Likewise, so far in the line of credit shoes yet to drop, we’ve only seen the system attempting to work (write) off the massive (and still developing) losses from subprime market.  Yet to come to an economy near you are problems with:

• Near prime mortgages
• Prime mortgages
• Home equity loans
• Commercial loans
• Credit Cards
• Auto loans
• Student loans
• Muni bonds
• Corporate bonds
• Derivatives
  • CDOs
  • CDSs
  • Who knows what else lurks beneath???

No. There’s far too much yet to unwind, especially as the consumer continues to experience ever more stress as the economy slows:  Eight months of  falling employment, production, income, retail sales, and GDP (which keeps getting downward revisions…) will continue to take a toll.

Besides, while gas prices have dropped, a $3.85 national average still ain’t something to write home about!

Stay Vigilant and Think it through.

Yesterday I arrived at my desk to find the most recent issue of the Investment News, the standard bearer weekly paper for those in the business of helping others with investments.  Glancing across the front page, relegated to box on the lower left titled “Inside” (this issue), and under the subject “Newsmakers,” I see the following:

“Dr. Bear’s Diagnosis –  After Nouriel Roubini’s dire predictions came true, Wall Street stopped laughing and started to listen. Now he’s predicting the worst crisis since the Great Depression. Page 10.”

Needless to say, this same paper offered virtually no heads-up to the problems we’ve talked about here since our inception early in 2005 (and going back to 2002 among our clients), and like most any part of the news media, the coverage started only “post implosion” — when we started to get meaningful coverage on the subject from most all sources, and then mostly the same, standard summary stuff.   So, in our estimation, the fact that comparatively bearish Roubini is getting some mainstream coverage is a sign that the seriousness of the problem is reaching the masses in the broader investment community.  When that community finally starts to believe it’s all for real, that’s when we’ll see substantial shifts in the investment landscape — making what we’ve seen so far comparatively modest.

For those interested in hearing some of Roubini’s sound analysis, consider his video linked to the image above, where he suggests credit losses will bear close to $2 Trillion.  He explains why the recession is going to be deep and hard. And, listen to how those interviewing can’t seem to fathom what he’s saying.  They keep trying to defuse what he is saying.

Nonetheless, while Roubini can hit the nail on the head, he still wears a contemporary, neo-Keynesian economic cap .   Listen to the video, and you’ll hear a few gems that seem to expose, nonetheless, a fundamental misunderstanding regarding the cause of our problems, never mind that he’s summing up the likely consequences just around the bend very succinctly.

For example, he says policy makers won’t be printing money; they’ll be printing debt instead to fund the bailout.  Well, that’s muddling the issue, in my opinion.   Who will be buying the debt and with what money?  Absent printing cold cash for the bailout, the anchor of yet more debt being a go-to policy tool seems simply ridiculous.

Continue Reading »

We’ll, we’ve talked about it for years here on Vigilant Investor.   Your chief editor here has referred to it in annual reports to clients in his private consulting practice:  When honestly looked at the U.S. fiscal situation implies inevitable, long-term insolvency.

I don’t come to this conclusion lightly, although I’m reminded of it by reading that President Bush has signed the bill allowing for the Freddie and Fannie bailout to go forward, which includes the debt ceiling being raised to $10.62 trillion.  Yes, with a T.

Now, we’ve pointed out the sleight of hand that goes on with reporting deficits in the United States. This leads most of the sheep to accept at face value that the official federal deficit hovers around $200-300 billion each year.  Granted, that’s no song, but the reality is far higher when you actually account for all the obligations decades of Congressional profligacy has chained to the U.S. taxpayers’ backs.

The whole number is over $54 trillion - some $175,000 per living person in the United States — once you actually stop with the facade that the obligations of Social Security, Medicare and Medicaid are somehow not worthy of being included on the balance sheet.  Broken down to a net present value of future obligations figure, we’re talking an annual deficit number closer to $4.6 trillion, a gargantuan figure that keeps building each year politicians pretend it really does not  exist because doing so will only scare the electorate.  That’s because fixing the problem will require draconian cuts and tax increases; although tax increases of the levels required to make a difference won’t work since they’ll only strangle what little economic growth is going on at the moment, further reducing revenues.

But, alas!  When it comes to politicians, they do have another “out” that can maybe work for another election or two: inflation!  By inflation, I don’t mean rising prices, but rather the cause of the rising prices: increasing money supply.    This is the easiest way for politicians to pay down the promises they and their predecessors have made, and in case you have not yet noticed, it’s been coming to a gas pump and grocery check out near you for a number of years now.  Heck, when you can print money and your official department of statistics filled with lackeys looking to keep the guys controlling their salaries happy, we’ll…  This might explain why Social Security recipients received an unconscionable 2.7% raise for their 2008 payments when the price of eggs, milk, and flour are climbing at well over 10 times that pace!

Continue Reading »

Sober thinking from Jim Rogers. What’s most worrisome is how entrenched mainstream thinking is in the two journalists doing the interviews. While some might suggest that these two are just financial talking heads, their objections are straight from the standard list of most apologists of the fractional reserve financial system and the current spate of bailouts to “save the system from even worse.”

What a racket.

We appear to be crossing over the point where the general population is beginning to realize something serious is in fact going on.   Up until recently the worst of the credit crisis has been confined to Wall Street.  No doubt, the general population is aware that many who use subprime mortgages are defaulting, a problem that’s been spreading up market into the Alt-A market and beyond.   But the real implosions — the hedge funds getting wiped out, the failure of Bear Stearns and other large institutions heavily in the mortgage market — well, let it suffice to say that most folks have not been interrupted from their daily doses of “American Idol” and “Deal or No Deal.”

But as of late, you get the sense that it is beginning to sink in that no matter how many assurances from those on Wall Street, in Government, or at the Fed, these problems are not going anywhere.  It only took about seven years to sink in that something serious was changing.   Stubborn and ever-rising gas prices are at the epicenter, and with people finally looking at one another as food prices spike upwards 40% on their grocery shelves, folks are finally looking at one another and stating, “this is really serious — are these prices really are not ever going down?”  No, we answer.  Only up, and for a long while.

The real problem is now the news is getting very personal and quite serious.  Banking at the highest level, its been said, is nothing but a confidence game, and  while it is clear that confidence has been waning at the highest level (e.g. the credit lock up of the last 12 months), systematic confidence is beginning to slip at the consumer level.  In the last few days we’ve witnessed the demise of IndyMac Bank, the 2nd or 3rd largest bank failure (depending on the source) in U.S. history, and the insolvency rescue of the GSEs Freddie Mac and Fannie Mae.  And now the rumors begin to swirl on a system that, by design, allows banks to legally keep only a tiny fraction of depositors liquid cash ready for withdrawal by lending out over 9/10ths of that money to earn extra banking profits. This we politely call “fractional reserve banking.”  When the gig is up that the bank really has been playing with the money you thought they had on hand on your behalf, well… hello IndyMac, and hello taxpayer financed bailouts, which given the sorry and (long term) insolvent state of the U.S. economy, implies lots of money printing to cover the losses, which is another way of saying “hello more inflation!”

Here’s the news that should be getting your attention, much of which is beginning to break through to the formerly (and usually) indifferent folks that make up the majority of America.

• Paramount Pictures forced to suspend $450m financing
• Banks hit by fallout from the crisis at IndyMac
• Washington Mutual Says It’s `Well Capitalized’ After Share Slump
• Citigroup’s $1.1 Trillion of Mysterious Assets Shadows Earnings
• Citigroup reflects what’s ailing the industry
• Most U.S. Stocks Fall on Credit Concern; Zions, SunTrust Tumble
• Dollar Falls to Record Versus Euro; Credit Woes May Damp Growth
• Oil Rises Above $146 as Falling Dollar Boosts Crude’s Appeal
• Bagging Lunch: The Inflation Effect
• Mortgage Insurers Raise Bar
• U.S. Stocks Fall, Led by Biggest Drop in Financials Since 2000
• S&P data show surge in downgrades

Jim Rogers makes some excellent observations in this interview, worth listening to the end. Especially notice his comments about what the stupid, knee-jerk / populist plans in Congress to outlaw “commodities speculation.”   Rogers agrees with our assessment, that this is akin to telling people living in the United States — through their pensions and investment accounts — that they are forbidden from protecting themselves against government created inflation through reckless bailouts like what’s been announced with the Freddie and Fannie rescue plans.

Humor can make the best points. From the Onion today:

WASHINGTON—A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

“What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,” said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. “We are in a crisis, and that crisis demands an unviable short-term solution.”

It was the rumors of problems that took down Bear Stearns, we’re told. Unscrupulous short sellers betting the stock price would go down supposedly spread rumors about Bear not having enough cash. So, for those throwing daggers at the shorters, well… the above music clip is for you.

For the rest of us, blaming the short community is a lame excuse. The reality is that when a few rumors are sufficient to expose one of Wall Street’s most venerable investment banks / brokers, and then all those in the game suggest that “they really weren’t illiquid” — well, what are we to make of it? How liquid could they have been if they were shopping themselves around since last summer? How liquid could they be if they had only a fraction of the cash around to cover immediately callable obligations?

Welcome to Wall Street’s near 100 year obsession with the ruse that is fractional reserve banking, where only a small fraction of such obligations can be covered. In other words, the entire system knows nobody — Continue Reading »

Interesting music video lending the youth culture’s view of the economy…

Above is a link to a video interview on CNNMoney.com of our good friend, John Williams. It is nice to see John making rounds on more mainstream networks to get the word out. You may recall, we interviewed him on Vigilant Investor Live back in 2006 — an interview still as valid today as it was then.

“The impact of a failure of Fannie and Freddie, though technically insolvent, is beyond imagining, far greater than the bankruptcy of a Bear Stearns. For that reason alone, such an eventuality is unthinkable.  THE GOVERNMENT OWNS FANNIE MAE AND FREDDIE MAC, only shareholders don’t know it yet. That’s one wag’s assessment of the fate of the government sponsored enterprises that provide the lion’s share of mortgages of American homebuyers, and it may not be far from the truth.“

-Barrons, July 11, 2008