Vigilant Investor

It didn’t take long: We publish our comments yesterday — that the Fed’s hand would be forced to add liquidity despite its tightening last week prior to the .50% rate cut.

Well, the Fed release updated figures demonstrating that the spigot is open — money supply was up over $20 billion for the week.

Meanwhile, inflation indicator Gold is trading at over $743, Oil over $83. And here’s what’s been happening to the dollar.

Are you planning around this? How are you measuring your returns on investment? You might want to consider as much!

“Some economists argued that inflation may have helped Germany by stimulating the building of capital plant and the rationalization of industry. But much of this investment proved to have no value except in the dream world of inflation. Most of the inflation combinations fell apart after stabilization. On the whole, much energy and wealth was wasted in unproductive channels–speculation, paperwork and unprofitable equipment. The working capital of industry was largely dissipated, making that much harder the eventual process of economic rebuilding and rationalization.”– The Nightmare of German Inflation

As you read, the Fed and the world’s banking systems are working overtime in an attempt to support asset values that were ginned up with what amounts to nothing more than Ponzi finance. Thanks to great flood of liquidity earlier this decade, fractional reserve fuel stores were filled and used to bid up asset prices — such as housing and equities. As those asset prices went up, those assets were pledged as collateral against other assets, whose price went up. Assets whose prices were bid up further in the cycle were then repackaged as derivative asset backed debt, which when assigned with overzealous investment -grade ratings as high as AAA, were presumed to be synonymous with liquidity (e.g. redeemable upon demand as cash), and pledged further and further against other assets and debts.

Continue Reading »

“Representative Barney Frank, the Massachusetts Democrat who chairs the panel, said in an e-mailed statement he was “pleased” with the cut. Frank called on Sept. 7 for a “meaningful” easing. Still, he said yesterday he was “surprised” the Fed continued to note concern about inflation.”

That sort of naivety displayed by Barney Frank is precisely what Vigilant Investors can and should plan around — as if official CPI really tells the full tale of inflation!

Here’s Al being interviewed by Comedy Central’s John Stewart. Stewart asks some tough questions about the economy, free markets, and how the Fed’s actions push activity some ways and away from others.

Greenspan glosses over Stewart’s questions by defending the Fed in near classic Keynesian terms: (I paraphrase) The animal spirits of the fallible population need to be regulated and managed by the Fed, and without such regulation, the economies of the world would have serious problems. When things go well, they get out of control, and when things slow down, left to their own devices, they’ll overreact as well. Greenspan also reiterates the fallacy that is Keynes’ paradox of thrift, that when people become fearful they back off spending activity and the economy is sent into a downward spiral. Hence the Fed must save the people from themselves — a reality that vigilant investors might want to plan around.

Continue Reading »

Those looking to protect themselves from massive currency inflations that are required to keep asset and credit bubbles afloat (a method that itself has limits before it theoretically collapses under the weight of its own fiction) were hit with a surprise announcement today: Alberta Panel Recommends Higher Oil, Gas Royalties

Notes Bloomberg’s Ian McKinnon:
Continue Reading »

Looks like the Saudis are backing off support of the dollar by refusing the match the Fed Funds rate cuts — a major break given the oil rich nation deals with massive amounts of petro dollars. Recent dollar declines have telegraphed impending issues, and as suspected, the liquidity injections and now the Fed Funds rate cut have sent a message to major dollar holders that serious inflation is in the air.

“This is a very dangerous situation for the dollar,” said Hans Redeker, currency chief at BNP Paribas.

“Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States,” he said.

Continues a piece by Ambrose Evans-Pritchard :

Continue Reading »

Interest rate pro, James Grant, who is among the few who predicted accurately that the credit markets would be in for dire problems well in advance of the current mess, has a WSJ review of Greenspan’s new biography, “The Age of Turbulence“.    We’ve not yet read the book ourselves, so we can’t fully comment other than to say that Grant has been reliable on interest rates and economic observations for many years now, and has shown a good deal of character in remaining steady despite his opinions causing mainstreamers to throw flack his way for being such a wet blanket on the credit bubble party.

We can, however, agree with Grant’s non book-specific implied conclusions about Greenspan and all central bankers:  In the end, they are nothing more than price fixers and central planners, and given the disruptions and massive dislocations invariably caused by fixing the price and supply of credit and money, probably deserve less respect than any other bureaucrat assigned such a role.

Its been pointed out by many an expert that the Fed doesn’t set the market, it only reacts to it attempting to keep things in line when it comes to rates. However, in the end, the markets determine what rates will be.  As such, for many on Wall Street who pay attention to this, it comes as no surprise that the real Fed Funds Rate cut was actually below the advertised 0.50 % — and has actually been below the old 5.25% for the better part of a month now.

We found the following chart from John William’s group worth looking at as you grapple with the implications of the Fed Funds recent rate cut.

No doubt, based on the going market rate, a drop to 4.75% is an easing… but the chart reveals the Fed has not been effectively defending its stated 5.25% rate since early August.

Which reminds us: Understand the difference between real returns and nominal returns, and not just vs. CPI, but rather in terms of tangible goods and commodities. That’s how you measure real inflation in a fudged government statistic world.

Kudos to John Williams — his private client material is a worthy investment.

We’re big fans of Dr. Marc Faber’s economic analysis. You can watch him from earlier today over at Bloomberg. Pay attention to all of his comments. Note Faber’s comment that a .50% rate cut would be suicidal. Folks, a few hours after his interview, we got a 50 bp rate cut. If you don’t understand to logic of Faber’s comments, brush up on it before it is too late.

Jim Rogers also had some serious warnings (during his interview also this a.m. on Bloomberg TV) about the role of the Fed and the consequences of a rate cut instead of a rate increase. He questions the sanity of bailouts given the overall numbers, including that the equity markets are only down 5% from their highs. And, like us, he thinks the government’s numbers are terribly unreliable. The only area where he seems to fail to get it is that the Fed is privately owned by the same mega investment banks that have overextended themselves and are getting a bailout paid for through inflation (e.g. you and me and everyone else using the dollar!). Granted, he criticizes the bailouts on the immorality of it all, but what should any of us expect that they’d do?

Also, consider reading Ernharth Group’s white paper titled “Blindsided by Credit Excess” which explains why so many will continue to be blindsided by this all as they were in the recent months.

Folks — this is serious stuff. Please do not ignore.

Investors seem happier than customers as, in the wake of a bailout and over £4 billion being injected by the BOE, Northern Rock’s shares climbed — despite the fact that depositors continued to line up to get their deposits from the bank:

Pensioners Peter and Doria Watson, from Claygate, Surrey, said they did not trust the Government’s assurances. Mrs Watson said: ‘I want to draw my money from my savings account. It may not be much but it is a lot to me.

‘We are the generation that saved and only bought something if we could afford it. Today’s generation is one that borrows. I don’t know what we will do with the money yet but I don’t trust what the Government says. We were here yesterday but were told we had no chance of getting in, so we are back today and will wait as long as we have to.’

Joyce Hutton, from Southfields, South West London, said: ‘I was here yesterday but the queue was too large. I have another account and want to empty my savings into that. What the Government has said gives us more hope but there is still doubt and I am not taking any chances.’

Northern Rock had been particularly dependent on the shorter-term money markets for funding its mortgage related operations, and when credit dried up on that front following the collapse in the secondary mortgage financing market, it found itself terribly overextended and desperate for financing to maintain its solvency. At about that time, depositors of the bank caught on as news stories exposed the obvious fraud common to all modern banking: Northern Rock only retained a fraction of deposits on hand for those with checking accounts and other demand deposit accounts.

Mind you, a demand deposit is where the customer believes his money is always ready and available for withdrawal at a moments notice. Thats as opposed to a contractual term deposit, such as a CD, where the customer expects his money to be tied up for a specified term. And, so, also exposed in Northrock is the reality that modern banking is reliant on faith in a fiction. The only way customers can have their money all at once — to which they are contractually obligated — is if governments and their central banks print fresh bills to cover the shortfall created by the fraud.

Continue Reading »

The Washington Post has a decent article that explains how perversions that crop up on the back of credit expansion have a serious cost in human terms. A free lunch today must be paid for tomorrow, which is why you avoid being suckered by free lunches coming from anyone — the Fed and the Banking System included. Hence, as the Post article explains, folks who thought the sun was shining and operated as if such was the case are learning that this expansion was a ponzi-like fiction — except that innocent bystanders are getting sucked into the morass.

That is why we believe there is so much more to be unearthed in in this mess. For example, CNN Money is reporting that 700 homes will go to foreclosure auction next week in Detroit — one of the biggest ever. How will it turn out? Who knows, thought we’re not holding our breath for the governmentally ruined Motown.

Meanwhile, the foreclosure numbers were abysmal in August for California’s market. According to ForeclosureRadar, “9,477 properties - with a total loan value of $3.86 Billion dollars - were sold at auction statewide, marking a 10.4 percent increase over July’s total foreclosure sales. Speculator owned properties (i.e. non-owner occupied properties) accounted for $1.71 Billion dollars of that total and represented 44.3 percent, or 4199 of the properties sold at foreclosure auctions.” Over 90% of those homes were financed or refi’d in 2005 and 2006.

Continue Reading »

If you’ve not yet been paying attention, now is about time. Defying a tradition of arm’s-length and “insured deposit” protocol, the U.K. Chancellor of the Exchequer, Alistari Darling, said the U.K. government is ready to guarantee all deposits held with British mortgage lender, Northern Rock, if necessary. That’s because, after bluffing from the Bank of England’s (BoE) Mervyn King saying that there would be no bailout of Northern Rock, a bailout was nonetheless announced on Friday, September 14 as a depositor panic had hundreds lining up outside various Northern branches to remove deposits. Before you knew it, $ 2 billion had been withdrawn! Police were called in to break up the crowds lining up across the U.K., desperate to pull out their cash in what is nothing short of a classic bank panic. (Please click links for pictures that are no different than those of 1933, minus the black and white look, and the overcoats and hats, etc.)

Indeed, the BOE announcement failed to console depositors who — post announcement — continued to line up to get cash in hand. Mind you, their deposits are insured up to around 31,ooo pounds by the system, but faith apparently was lost with depositors rushing to line up this morning (September 17, 2007).

A run on the bank after an announced Central Bank (CB) bailout?!! You bet. But with the BoE having to step aside as the government stepped in signals a deeper tension than many are willing to concede. Politicians vs. the Banking Establishment?? Biting the very hand that feeds government deficits?
Continue Reading »

“The subprime mortgage crisis of 2007 is, in fact, a credit crisis - a worldwide disruption in lending and borrowing. It is only the latest in a long succession of such disturbances. Who’s to blame? The human race, first and foremost. Well-intended public policy, second. And Wall Street, third - if only for taking what generations of policymakers have so unwisely handed it.”

On Friday we posted a clip and links to James Grant’s statement from a Hearing of the House Financial Services Committee from last February 15, 2007. Quoted above is a recent editorial follow up from Grant published around the world.

Grant is no fool. Give it a read.

Don’t miss today’s episode of Vigilant Investor Live.

Today we’ll discuss:

• “Recession” Now a Mainstream Prediction
• Bank Runs in Britain!
• Economic Warning Signs all Around!
• Greenspan still in Denial
• Argentina on the Brink (Lessons for the U.S.!
• She’s Back! Hillary Care on the docket!

And more. Tune in. Talk. Chat. Etc.

“The Fed owes its public a forthright accounting of the risks it runs with the policy it pursues. I mean the risk that it picks the wrong interest rate, one that sets in motion a train of adverse events unimagined by the people who imposed the rate in the first place. In all things economic and financial, the Fed is a force for what it likes to call stability. But few things are so ultimately destabilizing as a belief that the world is in for a long spell of peace and quiet.The Fed, like a good physician, should first do no harm. And, like a good drug company, it should not withhold its warnings on side effects. In interest rates as in painkillers, the secondary reactions can be debilitating.”

That’s a clip of James Grant (of Grant’s Interest Rate Observer) testifying in front of the House Financial Services Committee in February earlier this year (2007).

Considering the turmoil unleashed on the credit markets and the implications it has to the economy as a whole, his warnings and observations are valuable even if in hindsight.