Vigilant Investor

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!

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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

Well, hello another shoe dropping:

“The federal government took control of Pasadena-based IndyMac Bank on Friday in what regulators called the second-largest bank failure in U.S. history.

Citing a massive run on deposits, regulators shut its main branch three hours early, leaving customers stunned and upset. One woman leaned on the locked doors, pleading with an employee inside: “Please, please, I want to take out a portion.” All she could do was read a two-page notice taped to the door.“

• IndyMac Bank seized by federal regulators
• IndyMac Seized by U.S. Regulators Amid Cash Crunch
• Regulator to run IndyMac while buyer sought

“Depositors have been withdrawing cash at an elevated pace since late June, when Schumer questioned IndyMac’s ability to survive the housing crisis.

In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts, the OTS said.

“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process,” he said.”

Yep!  Another bank is exposed for simply not having close to enough to back up its obligations. Really, this is a problem shared by any and all banks in the global charade that is fiat banking. Fiat banking is really just one gargantuan confidence game hoping that only a small fraction of people who have been lured to deposit assets on a “demand” basis (meaning, they can walk on in at any time and expect their assets to be ready for withdrawal, like your checking / ATM account) will actually exercise this right. The truth is that the bankers have those assets tied up in other money making opportunities that may or may not be liquid — so they can earn extra profits!

At the moment, what??, having pledged much of those demand deposit assets on all sorts of asset backed securities, like subprime Mortgage pools backed by collapsing home and real estate values,… well, let it suffice to say IndyMac will, in our estimation, not be the last to drop.

And how will the Feds make them solvent?  Helicopters?  C-130s as was just suggested by a reader?   Whatever the case, expect lots of printing to cover the shortfalls.

Serious problems, dear readers. Very serious.

As we suspected, rumors are that plans are being finalized for Freddie and Fannie to get their taxpayer (read: “inflationary”) bailouts. To think that these organizations were incapable of providing clean accounting a few years ago. Then, as the abyss grew more clearly defined last fall, they were suddenly supposed to be our economic saviors, of course at the urging of our present “not letting this sucker collapse before my election day in 2008″ crop of politicians. Meanwhile, Bernanke is in the grab-bag and willing to try anything in desperation, poor sun-of-a-gun.

Anyone blindsided by this news simply hasn’t been paying attention. Well, to the correct analysts, at least.

As we warned long ago, these institutions would be in trouble — you cannot defy economic gravity indefinitely. Of course, helicopter Ben Bernanke is left with no choice but to bail out his Wall Street buddies, lest we forget the Fed is privately owned by Wall Street’s biggest interests. That spells inflation, never mind all the tough talk. Raising rates and fighting inflation will only hasten the collapse of such over-obligated (implied insolvent) institutions holding lots of asset backed investments whose assets are plummeting in value.

This is the film, “The Rollover,” that David Morgan was discussing in a prior post. While this sort of scenario is unlikely, our economy is walking on the razor’s edge — too much debt and money supply expansion has created severe problems still on partially cleared from the economy, with most being artificially propped by the Fed and the Treasury — likely along with the secretive plunge protection team.

We’ve monitored David Morgan for years. He’s been as right about the economic situation as we’ve been since our start in April 2005. Give it a watch.