Vigilant Investor

“I think we were really on the verge of a financial collapse of unbelievable proportions that we haven’t seen since the 1930’s.”
– Former U.S. Treasury Secretary Paul O’Neill describing the Bear Stearns bailout in an April 16, 2008 interview on Bloomberg

Read that quote again by Paul O’Neill – because, yep folks, that’s really where things stand. Our financial system effectively patched together by an inflationary, money printing band-aid. And, as the real estate markets in England, along with those in Spain, Ireland, et al. continue to melt down, we maintain our belief that the whole fiasco is far from over. (Our regular readers know we said the same when conventional pundits said the worst was over in 2007).

The interesting thing about economics is that people have been conditioned to believe in the charade that it is a mysterious, complex, science – and to be successful at understanding it, explaining it to the great unwashed, and at running large portfolios – one must be a superior mathematician educated at the most prestigious of universities. As we watch the same geniuses educated at said universities – some of whom had supposedly developed mathematical models which had eradicated risk – continue to drive hedge funds (and at least one major Wall Street brokerage firm) valued in the $ billions straight over the cliff – we say – “oh really?”

We instead choose to take Harry Truman’s quote — “There is nothing new in the world but the history you do not know” – to heart when we look at economics. History is in fact the study of human behavior – of what has worked, and what has failed. To ignore historical facts one must be either arrogant, a fool – or an arrogant fool. So, as Sir Alan Greenspan and his knights at the Fed Round Table repeatedly cut rates earlier this decade – we warned that the unfolding scenario looked a whole lot like Japan in the 1980’s and 90’s! A Stock market bubble, followed by a stock market crash – and subsequent economic pain. Then came massive interest rate cuts to supposedly “stimulate” – which instead caused a real estate bubble – followed by a real estate collapse, and a severe, prolonged recession.

Sound familiar?

What next? We see the bailouts continuing — simply because the alternative is the severe and necessary corrective pain to clean out the mess and get prices of all things back in line. And what politician, Wall Street banker, investor, or voter wants to deal with that reality? And bailouts spell inflation. Not the fudged low-ball inflation that’s used to calculate Social Security payment increases or “official” economic growth. We’re talking about real inflation. The rapidly rising kind you are seeing at the supermarket and the gas pump on a daily basis. As these inflationary bailouts continue – look for prices of all things tangible to increase dramatically.

Commodities bubble? We think not – because bubbles require excessive stockpiles/inventory/supply – and we don’t see that at all – in anything. And we see inflationary (money printing/bailout) policies accelerating.

Oil at $125 in the near future anyone? $5 Dollar gas at the end of the year? Food prices continuing through the roof? It would not surprise us at all.

The consequences of the massive credit bubble that’s now unwinding were inevitable. (Don’t buy the Wall Street and policy maker excuse that nobody saw it coming. We were early among those saying this would blow up in the face of Wall Street and the Fed, and threaten the entire economy.)

And so the consequences are continuing to unfold, the market is at a loss as to what the real prices of certain assets are in relationship to one another.  Meanwhile, with all the money flooding into overpriced financial assets, it’d appear that resource development was largely forgotten outside of politics catering to the environmental movement, which has merely created vast supply shortages in the face of rising demand.   Especially note the curbs on exports of commodities and the rationing.

What are you doing to adjust?

1. IMF Says Credit Losses May Reach $945 Billion, Warns of `Serious’ Crisis
2. Rice Jumps to Record on Philippine Imports, Curbs on Exports
3. Oil prices approach record heights
4. Gas Prices Slip From Record, but Could Reach $4 a Gallon This Spring, the Government Said
5. WaMu gets $7 billion infusion, cuts jobs, sees loss
6. Fed Auctions Another $50 Billion to Cash-Strapped Banks in Battle Against Credit Squeeze
7. Citigroup, Wells Fargo May Loan Less After Downgrades
8. Pending Home Sales Hit Lowest level in Index History in February
9. Fed Officials Worried About Recession (Gee… thanks for the heads up!)
10. Asian Inflation Begins to Sting U.S. Shoppers
11. Big US student loan guarantor files for bankruptcy
12. IMF to sell 12.5% of gold stake, worth more than $13 billion
13. IMF Forecasts $945 Billion in Losses Stemming From U.S. Mortgage Turmoil
14. LBO Freeze Slashes First-Quarter Banking Fees to Securities Firms by 75%
15. A buck that can’t be passed

Rogers speaks the truth. Recall, Rogers was the original thinker behind the Quantum Fund (which made George Soros) back in the 1970s. He was right then, and he’s right now. Of course, he’ll be ignored and the free market will continue to get blamed for the problems created by the price fixers and central planners, and the latter group will promise more solutions to those problems that will only make the situation worse.

How do you navigate this situation? Why, with vigilance and proper planning, of course! Think it through.

When your dealing with an addict, you don’t trust their word when they say they’re going in the right direction when they won’t even admit they have an addiction problem.

That’s the problem with our financial system. Consumers are addicted to credit and money supply expansion policies. Wall Street enjoys the comfy ability to profit from deals financed with money minted out of thin air. The banking system enjoys being able to profit from loaning and deal-making with the money you think is there in the bank, ready for withdrawal when you want it. (No doubt, those banks really love their 10% fractional reserve requirement and having the Fed a the ready bail them out with fresh cash when the de-facto embezzlement is revealed when depositors actually decide to withdraw their supposedly liquid money all at once, as amid bubble-bursting environments they’re wont to do.) And, of course, Washington D.C. loves having a secretive, privately held central bank finance its shortfalls. What politician won’t practically sell the sun, moon, and stars to win an election, to hell with the future generations that will suffer when the tab for said free lunch comes due? Just print the difference, and let some other sucker figure it out down the road.

And that’s the problem. Down the road is arriving leaving us with no good options. And, so, above we have Glen Beck and Ron Paul soberly discussing the issue the other primary candidates pretend doesn’t exist because the only realistic solutions are too controversial to assure victory among the masses of voters, who most assuredly have made it clear they much prefer having their ears anoint with yet even more impossible to promises delivered in language soaked in honey. As such, Ron Paul and Glen beck will be dismissed as they are always, although we’ll admit it is a good sign that at least Glen Beck is catching on.

Nonetheless, the addicts out there– voters included — consider Ron Paul to be among the Tinfoil Hat Wearing Crowd (a title which yours truly has been labeled a few times). So the system continues to conjure up more ways of getting our addict more of the junk he craves, and the Fed — the dealer who has steadily and stealthily pilfered over 95% of the dollars value since its creation in 1913 — stands ready to give the addict his fix.

The addict, no doubt, loves the party — the good times of the high. But even more desperately, the addict wants to avoid the pain of cleaning up his act and enduring the awful reality that is withdrawal. Addicts will sell themselves into prostitution, and worse, to avoid cleaning up. And so, too, our actors in our economy resist reality — choosing instead to prop up asset prices based in fiction — houses, condos, irrationally priced securities –, and systems rooted in fleecing dollar holders and those on fixed incomes for the benefit of the few. Addiction is a bitch.

But we all know, feeding an addiction is not the path to restoring health, and unfortunately our addicted economy is long in the tooth in juicing itself up into artificial cycle-highs and juicing up more in warding off cycle-lows. No doubt our addict economy has swooned a few times; recently it almost fell over during the 2000-2002 fiasco, but for the good fortune of Alan Greenspan standing on the corner telling everyone that he had the good stuff that would make everything OK.

And so the next bubble crashes — a big one — rife with dislocations so massive one wonders if this time the addict will be forced to face reality… or if he’ll make it through another bubble with another fix. If he gets back up to his old ways, I’d not be betting on his good fortune lasting long.

What of the Fed? Congress? The people? The cry for another fix has been heard loud and clear. Its just a waiting game now.

 Leave it to the British to hit the economy with such a bold declaration.  Granted, in the United States all policy makers are very fond of saying something to the effect that this situation and the subsequent policy reactions  are the most drastic since World War II.  World War II?  We think this is a polite way of saying “since the Great Depression,” while hoping folks won’t go all panicky on the situation as they load their bunkers and prepare for the worst.

Granted, contemplating the concept of “bunker” has been more or less what Vigilant Investor has been doing since April 2005 — which by the way, today marks our 3rd anniversary since going full bore on the internet. Prior to that we published to our client base only as the Ernharth Wealth Report discussing the emerging Great Credit Bubble with issues dating back to 2001.

But what of this Great Depression talk the British press had jumped on?  Let’s take a look.

We knew things were bad on Wall Street, but on Main Street it may be worse. Startling official statistics show that as a new economic recession stalks the United States, a record number of Americans will shortly be depending on food stamps just to feed themselves and their families.

Well… Of course this is an issue, but what’s new about food stamps?   So, it would look as if this alarming headline really does not address the issue of Depresssion and Unemployment in a more relevant fashion other than to lament for the poor … so we will address this issue briefly.  Is another Great Depression a reality?   Let’s start from where this article begins: with the unemployed — a figure that hit 25% during the 1930s.

America has slowly been subsidizing an underclass for decades.   One wouldn’t know this is happening using the official unemployment figures because,  as we’ve reported over the years, the unemployment stats published by the government have been so politicized that the chronically “not working” are simply removed from the official figures, categorized instead as discouraged workers.  Those folks are  not unemployed, since unemployed, you see, implies someone is actually looking for a job.  So, if you’re not looking for a job, you can’t be unemployed.  So you must be something else.  Discouraged perhaps?  Discouraged it is!

The last real figures calculated using older methods like those used during the depression put U.S. unemployment (meaning those capable of working and not) closer to 13% vs. the official number running dramatically lower.  And that does not account for the only employer with long term growth strength in the U.S. — the government, which has also done a slight of hand by hiring otherwise unemployed folks in various welfare to work schemes — reminiscent in its own way to FDR’s give a man any job routine.

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