Vigilant Investor

To understand how to best navigate our economic problem, you have to figure out just how we got here, and, to some degree, who the players are with sufficient clout to get things moving there way. Two articles linked below are solid references in that effort.

From James Grant in the Weekend WSJ:

The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed’s crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn’t the nation’s small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as “triple-A.” Yet it’s the savers who took a pay cut — and the savers who, today, in the heat of a presidential election year, are holding their tongues.

Possibly, there aren’t enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people’s money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people’s wrath?

Fears that central banks around the world are planning a crackdown on rising inflation saw bond and futures markets move sharply on Tuesday, with a series of interest rate rises now priced into markets in the US, the eurozone and the UK.

The shift came after Ben Bernanke, the Federal Reserve chairman, warned of growing inflationary pressures, bolstering the view that all the world’s leading central bankers are on high alert.

That’s from a FT.com article titled Markets brace for inflation crackdown.

We find the “fear the Fed” (and other CBs) when it comes to inflation a touch hard to buy into, and here’s why:

Inflation at this point is well baked into the global system, and the U.S. dollar is at the epicenter, all nations have been quite egregious at boosting their money supply.  You remember money supply, don’t you?  That old statistic most economists and fundamental analysts found useless after all declared inflation dead thanks to Alan Greenspan?  So useless, when the Fed decided to cease its calculation of M3 in early 2003, the collective yawn was deafening to those devotees of classical economics.

For the Fed to actually reel in inflation — quite literally over $100 billion accumulating in foreign reserves each month as foreign central banks relying on U.S. consumption continue to defend the dollar, compounded by $ trillion foreign reserves — they’d have to take extreme money tightening measures.  However, at the same time they’re dealing with the Wall Street shell game they sanctioned.   Wall Street banks and brokerages firms, and many hedge funds, all gorged on assets backed by overpriced things — houses, condos, cars, commercial and retail development, the consumer’s capacity pay off unsecured debt , you name it,  all floated into the stratosphere .

Now, as we’re all privy to through the mainstream news reports of the last 18 months, the prices for those real things are beginning to buckle, and that’s bad news because they were securitized into tons of Wall Street debt related instruments.  Now, that wouldn’t bed such a huge problem but for the fact that the aforementioned institutional investors borrowed upwards of 10 to 20 times their initial capital in order to get excess returns on their investment strategies.  Indeed, as easy (freshly printed) money flooded into subprime mortgages, for example, their rates of return were depressed.   But most analysts and economists, and even the ratings agencies guiding the investment strategies of these investors gave the green light on risk.  What would have otherwise been a boring rate of return was suddenly quite attractive by borrowing 10-20 times the initial collateral.

And therein lies the Fed’s dilemma.  Continue Reading »

Well, it looks as if we’re coming out of the calm before the more serious part of the mega economic storm we’ve predicted over the past few years.

We’ve heard a couple of analogies related to the economic crisis as it was over the past few months following the Herculean bailout of Bear Stearns by the Fed.  Indeed, the calm lulled many an expert (many of the same ones who were blindsided by the problems in the first place) to sound an “all clear” that the worst had passed.  For many of those, it was not the first time they called a bottom since last Summer when it grew clear there was a more serious problem that was not to be simply contained in the subprimes as most predicted.

As for this little respite of recent months, some called it the eye of the storm — Not bad.  But we are gravitating to the squall-line analogy.  Those are the broad wisps of clouds that push forth in advance of a hurricane.   When the early squall lines hit, you get intermediate breaks that would suggest to someone not in possession of a barometer or sattelite imagery that the worst has passed.   Yet, plain as day, the meat of the storm lies dead ahead.

That is where we stand today regarding this economic crisis.  The meat of the storm is now readying to make landfall. Batten down the hatches.

And, just for effect, here’s a weather report:  (Our comments italicized between headlines)

Federal Reserve blames high energy, food prices for a weak economy heading into summer

Uhh.. Maybe they should look in the mirro. And who is responsible for printing all the money that has reduced the dollar’s purchasing power?  The Fed!

Fed’s Kohn says inflation pshychology higher

Neo-keynesian meddlers at the Fed and in most of academia always worry about people catching on to inflation being baked into the system, so they spend a great deal of the time engaged in a confidence game.  Gigs up, though, on this one. Inflatino is out of the bag for the simple reason that the Fed has increased the money supply by well over 5X since 1980.  It was only temporarily vented into fun asset prices, like stocks, bonds, and real estate, and that was so long as the massive capacity in emerging markets kept making the gadgets we buy cheaper and cheaper.  But those dollars are out there, now.

Oil soars as high as $138 a barrel as dollar falls and Energy Department reports supply drop

Oh, you don’t say!  Looks like our warnings about Peak oil smacking hard into rising demand and far too many dollars have come true!

Why It’s Worse Than You Think

You know when Newsweek is on the bandwagon, its for real!

US sees a shadow of the Bundesbank

Wall St falls led by financials

London banks, builders and retailers savaged

“We should privatize the sanctions against Iran by launching a worldwide divestment campaign.“

–Senator John McCain, the Republican nominee for the presidency.

Military and economic Sabre rattling is the order of the day.  As if prices are not already distorted enough, the thought of another war in Iran should concern all vigilant investors!

• EU mulls asset freeze for Iranian banks
• Oil prices rebound on supply concerns, growing global demand and Middle East tensions
• Bush prods allies for tougher stance on Iran
• Arabs shocked by Obama speech stating Jerusalem “undivided capital of Israel“
• ‘Unavoidable’ attack on Iran looms, says Israeli minister
• Iran blasts Mofaz remark, warns of ‘painful’ response if Israel attack
• Olmert Hints U.S. Action on Iran Nukes is Near

On the issue of war with Iran, consider Jimb Lobe’s observations on its possibility.  Also, consider Llew Rockwell’s piece on the relationship between War and Inflation.

Do we have an opinion on should there be a war with Iran, or no war? Indeed, we do, but that does not matter. What matters is that readers consider what each alternative means to them in how they handle there own affairs.

Ok… So the author of this piece uses a little rhetoric to make his point. Our only issue of disagreement is that we believe there’s also a Peak Oil problem. In other words, the Federal Reserve Note “dollar” is dropping rapidly — true enough. But Boone Pickens is correct — supply is a problem as well. Between the two, we have a real mess.

Here’s a link to an interview we did on Vigilant Investor Live in 2006 with The Creature from Jekyll Island author, G. Edward Griffin.

Now that we’ve seen the collapse get into high gear over the last ten months, its time to revisit the great game that goes on in Wall Street after every bubble bursts — its called the Bailout Game, and you and I have been seeing lots of that since Bear Stearns’ hedge funds blew up in July of 2007.

Understanding the historic relationship between the Fed and its member banks / big Wall Street banking is essential in figuring out what’s transpiring as we speak.

That liberal (Maixine Waters) is all about wrecking the U.S. economy. Goes to show how politicians act like spoiled little children, and with very little understanding of economics.

Needless to say, if Maxine has her way, we may as well get into the rickshaw business.