Him That Hath Has Less Than He Thought
London, England
Friday, October 10, 2008
---------------------
*** The day of reckoning is upon us...we hope you took our advice and sold stocks on rallies and gold on dips...
*** The U.S. Treasury is following Britain’s example and nationalizing the banks...the Great Credit Contraction gets worse...
*** Big Al is getting beaten up by the press...financial weapons of mass destruction...and more cheery thoughts and insights to take you into the weekend!
--- Special Offer ---
Stock Market Bomb Shelter
There have been a lot of shocking events in the market lately. But trust us...it ain’t over.
Which means there is still time to protect yourself from the fallout. Click here
to find out how.
---------------------
We are thinking about retiring. Taking up cattle ranching maybe. Or maybe becoming a hermit.
Those are the kind of thoughts that must have passed through millions of minds yesterday.
“The Reckoning...” the New York Times
is calling it.
Yesterday, the Dow dropped another 678 points. Today, is fell below 8000 for the first time since 2003. Dow 5000 – here we come!
Yes, our ‘Trade of the Decade’ is working like a charm. While the Dow collapses, gold goes up! And from the looks of it, will continue to go up...
But we can’t take any pleasure in it.
“Our business is offering people financial advice,” explained a colleague. “When the market goes down like this, people just lose interest. Nobody wants financial advice. They just want out.”
Now, everyone seems to want out.
And so...the reckoning falls on The Daily Reckoning
too...and everyone looks to his own: “How will I afford to pay for the vacation home we bought last year?” “What if I lose my job?” Well, at least I’m not the only one!”
At least, we hope our Dear Readers are safe and sound. Did you pay attention to our “crash alert” flag? Did you sell stocks on rallies, like we suggested? Did you buy gold on dips?
We hope so. That’s about all you can do.
What about bonds? Yes, U.S. Treasury bonds have been rising too. As the crisis deepens, they will probably rise more. But where’s the margin of safety? Put your money into a three-month T-bill and you get almost zero interest. True, you won’t lose any money in nominal terms. When the moment comes for the U.S. government to pay you back, you can be sure the money will be there. But, eventually...and maybe it is still a couple of years away...that money will go bad. (More below...)
Today’s news tells us that the Treasury is getting ready to follow the British example – by nationalizing the banks.
The U.K. approach, explained colleague Andrew Vaughn, “provides Tier 1 capital and a requirement, not a mere hope, that banks will lend. The package specifically precludes the possibility of a bank taking the money, and then just hoarding.
“Yesterday’s interest rate cuts around the globe were a watershed moment,” Andrew continues, “because they were coordinated. It gives markets the signal that action by the authorities in one country is no longer simply going to cause capital flight elsewhere. Without interest rate cuts outside of the U.K., yesterday’s U.K. events would have caused a fall in the pound – the bailout package because of the surge in government borrowing associated with it, and the interest rate cut because of the resulting interest rate differential (the pound would otherwise have become lower yielding relative to other currencies).”
Yes dear reader, it is the new world order. Governments now work together. They’re all going to take over the banking business – to one degree or another. They’re all going to guarantee deposits. They’re all going keep the wheels of finance turning. Hoorah for government! Guvmint is no longer the problem; it’s the solution. And not just one government...but all the world’s governments working in harmony to make a better, safer world.
Or, as David Brooks summed it up in a NY TIMES
editorial...what we all need is “leadership.” Hail to the chief!
But wait. Aren’t these the same chiefs who have been regulating, controlling, meddling, intervening, rescuing, and leading mankind since civilization first appeared on the banks of the Tigris? Well, yes. But according to the prevailing sentiment, our leaders took a break after the Reagan/Thatcher revolutions. They went into exile...loafed...worked on their tans...and got fully rested. And now, it’s time to call them back to service. Bring back the old aristocracy of bureaucracy. Let them do what they do best – make an even bigger mess of things.
So far, the more the authorities fix things, the more they don’t work. Prices are going down to where they want to go – despite the efforts of the regulators.
But what’s ahead? No one knows, of course. But it looks to us as though there is more credit contraction where this came from. The boom ran its course. The bubble ran its course. Now, it’s the bust that will run its course.
And the authorities will do what they do too. Look for more intervention. More government spending. More takeovers. More controls. More bodies dragged through the streets.
The feds will continue to try to reflate the bubble. But there are a thousand leaks already...and more holes seem to be popping open every day. Every time a family is pinched by tighter credit or lower revenues, it closes its wallet...cuts spending...and further reduces the air pressure. Every business that sees its revenues falling... Every banker that checks his balance sheet and realizes he has to call in loans... Every investor who looks at his positions and panics...
All of them gasp together...
...and the Great Credit Contraction gets worse.
*** But let’s turn to happier subjects. Finally, Alan Greenspan is getting beaten up in the press.
More than any other man – living or dead – Alan Greenspan bears the blame for the intensity of the current financial crisis. Booms and busts are inevitable, but the former Fed chief made this one much worse than it should have been. This he accomplished by acts of omission as well as acts of commission.
As to the commission, he almost single-handedly caused the great real estate bubble by lending money far below the inflation rate. The housing market is extremely sensitive to changes in interest rates; Greenspan’s “emergency” low rates hit it like a shot of whiskey on an empty stomach. Within months, bulldozers were scraping new roads...and thousands of nail guns made the suburbs sound like a battle zone.
But it was the omission that the New York Times
thought was important:
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient,” said “the maestro” in 2004.
Greenspan was talking about derivatives – the complex financial instruments that are now blowing up in accounts all over the world.
The NYT
:
“George Soros, the prominent financier, avoids using the financial contracts known as derivatives ‘because we don’t really understand how they work.’ Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential ‘hydrogen bombs.’
And Warren E. Buffett presciently observed five years ago that derivatives were ‘financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.’
“One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. ‘What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,’ Mr. Greenspan told the Senate Banking Committee in 2003. ‘We think it would be a mistake’ to more deeply regulate the contracts, he added.
“The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.
“If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.”
*** Will the synchronized rate cuts solve the problems in the international financial system? Our correspondent in Buenos Aires wants to know.
“Developed economies spent the last decades criticizing decisions made by developing economies in the midst of crisis,” notes Horacio Pozzo. “Today, the world’s leading countries take the same measures without considering the consequences...”
And here we return to the scene of a crime that has not yet been committed. An explanation: all sovereign governments have the power to steal. They do it openly – through taxation. They also do it clandestinely – by means of inflation. Each country controls its own money (with the exception of the countries of Europe, who have decided...perhaps temporarily...to use a common currency). Since this paper money can be created at negligible cost to the creator, countries are tempted to create more of it than they should – especially in times of war or financial crisis. Historically, what has kept this from happening was that the paper currency was tied to gold. More recently, currencies are tied to the dollar. And since countries trade with one another, a sin by one country – printing too much money – is punished by the others. They mark down its money.
But now, all the world’s major countries are conferring, colluding, and conspiring. They’re all going to do the same thing. They’re all going to take over their banking systems, support their financial industries, bail out important businesses and rescue their citizens from their own mistakes. Where will they get the money for all this? Will they borrow it from each other? Don’t be silly; they will print it.
More below...
--- Special Offer ---
Turning Copper into Gold
With the steady decline of the stock market, not too mention the U.S. dollar, now is the best time to own something that of real substantial value – gold.
And right now, you can actually get this precious metal for a huge bargain. Keep reading here
.
|
Back to newsletter list
