No doubt, there are quite a few problems behind why oil has jumped above $128 a barrel. Never mind hooey arguments about greedy oil companies that resonate with the economic illiterates among the loudmouth media and the complaining voters.
“Our problem in America gets solved when we aggressively go for domestic exploration. Our problem in America gets solved if we expand our refining capacity, promote nuclear energy and continue our strategy for the advancing of alternative energies as well as conservation,” he said.
“One interesting thing about American politics these days is those who are screaming the loudest for increased production from Saudi Arabia are the very same people who are fighting the fiercest against domestic exploration, against the development of nuclear power and against expanding refining capacity.”
This, said Bush, after noting that Saudi output really is not the ultimate solution to the U.S. price problem. Mind you, many in the U.S. Congress are wagging their fingers at the Saudis — like candidate Hillary Clinton — for not increasing their production significantly enough to alleviate U.S. price pressures, as if the world should rotate around the U.S. dilemma. The same folks giving grief to the Saudis are the same ones who refuse to allow the U.S. to develop its own energy resources as Bush notes above.
Not that the Republicans have been any great movement as of late to get anything done themselves, with R candidate John McCaine having been a pivotal vote in the Senate preventing the development of Alaskan reserves. Indeed, the U.S. has not built a new refinery in three decades, and refuses to allow development of both oil and clean burning coal, not to mention nuclear reactors. Even environmentalists are preventing air windmills, much to the happiness of those with fancy homes on the coasts who loath having their million dollar views ruined by windmill farms harvesting the constant ocean breezes.
Hypocrisy aside, we’re not hearing one of the core causes for skyrocketing energy costs: plain old fashioned inflation. And by “inflation”, we don’t mean the modern misuse of the word to describe the consequences of inflation — rising prices –, but rather the actual cause of the rising prices: climbing money supply. The world is now awash with dollars thanks to a steady thirty years of the Fed and the U.S. banking system creating dollar after dollar with its fractional reserve, fiat privilege.
Looking at the money supply graph, you can see that the various measures of U.S. dollars have been on a steady rise since the 1980s, and especially ramped up in the 1990s. Most were lulled to sleep about the ugly effects of inflation due to two factors, both of which served as siren songs for the unsuspecting public and the herd of sheep hitting their record bonuses on Wall Street:
Inflating nice asset prices like stocks, bonds, and houses
Exported inflation dollars bought cheap goods made abroad, a honeymoon that lasted until the last few years, when foreign nations were flush to the gills with dollars and ready to part with them to buy things that were not so easily printed and common — and very essential, like energy!
“The Federal Reserve as other central banks is obviously taking onto its balance sheet a lot of mortgages these days.” “Well, the creators of the Federal Reserve system would be rolling over in their graves if they knew the Federal Reserve is buying mortgages.”
– Former Federal Reserve Chariman Paul Volcker
Whether or not the creators of the Fed would be rolling over in their graves is debatable in our opinion. Like Andrew Jackson — we believe central bankers have always been dangerous, incompetent meddlers. We feel the Fed should never have been created — and and that it continues to prove itself as bungling as any other central planning committee. But we digress…. That said, the former chairman’s grave concern over the central bank taking on billions of not so hot private debt is quite valid.
Beyond the blatant example of the Fed’s $30 Billion bailout of Bear Stearns — we now see Senator Christopher Dodd proposing the creation of an FHA program to insure refinanced mortgages following partial forgiveness of the loans by lenders. OK, let’s think about this. In an environment where U.S. foreclosures have risen 65% over the past year — and private banks/lenders are preferring to seize homes rather than renegotiate with already defaulting borrowers — the Federal Government is going to step in with money it does not have (but will be all to happy to print) — to back already bad debt.
Also, earlier this month, the Fed agreed to accept securities backed by student loans pledged as collateral for Treasuries the central bank would in turn lend to Wall Street Investment Banks. Let’s analyze that deal. Investors had become far less willing to finance student loan debt at pre-existing prices — due to liquidity issues, the economy, and the fact that consumers (including students) are hurting — and are therefore higher credit risks. The cost to finance such loans would have to naturally go up. Wall Street investment banks (you know, the ones who paid themselves billions in record bonuses over the past year) were less willing to hold onto securities they owned backed by this type of debt. However, if they tried to sell it — they would sell it for a loss. No worry, the Fed would lend/swap them Treasuries for the riskier (and worth far less) student loan backed securities.
Effectively, you have the government, or quasi government institutions backing substandard debt with money it will have to print. That spells one thing — accelerating inflation — and the always accompanying confiscation of private savings. And we’re not talking the low single digit inflation figure the government “calculates” (and bases Social Security payment increases on). We’re talking about the inflation you see in the supermarket ($4 for a handful of blueberries anybody?) — and at the gas pump.
When we hear the Treasury Secretary, or the Chairman of the Fed talk tough on inflation and defending the Dollar — we just smile. When we hear political candidates blaming oil companies and “speculators” for rising prices — we smile again.
We think the next 3-5 years will be quite interesting.
“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.
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.
We’ve continually warned about the bailout addicted U.S. Another voice of clarity and reason all along has been Bill Fleckenstein. As usual, he nails it in his latest commentary, “Catering to the Bailout Nation.” BTW, Bill’s recently released book Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve – is definitely worth a read! We wonder — has anyone ever been un-knighted? Can they do that?
Any reasonable person knows that bailouts beget more (and larger) bailouts. Like a drunk having another drink, it’s just going to make the hangover (and resulting inflation) even worse.
Also, ask yourself this one – why are big Wall Street banks getting bailed out (with taxpayer money) – when the 5 largest recently paid themselves 39 $Billion in bonuses?
Think long and hard about the answer to that one – because you are paying for it – in overt taxes, and the great hidden tax – accelerating real inflation.
With today’s 75 basis point rate cut – we see continued evidence as to whom the Fed really serves. As we have long said, it’s not you and I – it’s the Big Wall Street Banks. The “Big Rip-Off” of your savings continues. Jon Markman gets right down to it…
“How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn, insure the debt of the state of California, the world’s sixth-largest economy? How could an investor in California’s municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation’s largest state with its obvious ongoing taxing authority?”
That’s from a Financial Times opinion piece written by Bill Gross. (Read it while you can for free at Yahoo; the links never last all that long…) Gross makes a good point about the myth that had been the monoline insurers — Ambac, MBIA, and a few others — who provided their ratings to the bonds they guaranteed.
You’d have to live under a rock these days (at least if you’ve been paying attention) to not have heard about how they’ve all been hit by guaranteeing mortgaged backed securities and CDOs squared, etc., and that they’ve simply not got the capital that’ll be required to cover the losses. Moreover, as we’ve reported for weeks, MBIA has been raising capital at junk bond rates, making their own AAA ratings from S&P and Moody’s a joke. (The same can be said for Ambac. At least ACA was dropped appropriately to the junk level it is.) MBIA this past week printed up another 82 million shares of stock for those willing to throw the company $1 billion as they scramble to keep their AAA rating. MBIA’s stock has plummeted by 80% since last October, and were down 10% alone on the news that shares would be diluted.
If we said it once, we’ve said it a thousand times: Inflation ain’t the price of things going up. Its the consequence of printing too many dollars and expanding too much credit out of thin air, which is all the Fed has ever done since its creation. Hence, while many can’t figure out why, we’ve predicted this for several years now:
The Labor Department reported that wholesale inflation was up 6.3 percent for all of 2007, reflecting a huge increase for the year in various types of energy costs ranging from gasoline to home heating oil.
Meanwhile, retail sales fell by 0.4 percent in December, the worst showing in six months, the Commerce Department reported. Consumer confidence has plunged, reflecting the worsening housing slump and a lingering credit crisis.
Sure enough, the trade deficit gave the impression that we could enjoy the modern alchemy of printing money out of thin air while having prices drop. Well, that was during the honeymoon period of deficit inflation. As the fantasy gives way to reality, all those dollars circulating around the globe are being exchanged at an ever increasing pace for things that can’t be printed so effortless as they are. Folks also wake up to the reality that money supply expansion is being implicated in the housing bubble and subsequent collapse. And so the dollar is slowly repudiated for what it is: a worthless piece of paper backed by excessive amounts of debt that can only be paid if more pieces of these paper are printed to enables it.
And so, America — having paved over her factories for mega mall parking lots and golf course communities — has begun to sell herself to the world so she can pay her bills. As Patrick Buchanan so aptly observed of the United States’ self-indulgence and reckless leadership, “We are prodigal sons, and the day of reckoning approaches.”
I wish the story weren’t so dire for so many. But it doesn’t have to be. Perhaps the cheapest import you can get for China right now is a tiny bit of historic philosophy, which aptly translates to “chaos is opportunity.” And boy is there ever large doses of both at the moment.
Moody’s lowered its rating on commercial paper issued by the Orion Finance structured investment vehicle, or SIV, to “Not Prime” on Nov. 30, saying its net asset value is inconsistent with Orion’s former Prime-1 rating. Montana owns $50 million of the paper. Moody’s put another $105 billion of SIVs on review for a possible downgrade, of which Montana holds $80 million and Connecticut holds $300 million, records show.
Connecticut’s Short-Term Investment Fund, which invests cash for state agencies and municipalities, is holding $300 million in debt issued by SIVs that may be downgraded by Moody’s. The state’s $5.8 billion fund held notes issued by SIVs affiliated with Citigroup as of Sept. 30: Beta Finance, Dorada Finance and Five Finance, according to its most recent quarterly report.
Connecticut also holds $100 million in defaulted SIV notes issued by Cheyne Finance.
Meanwhile, in Montana, they contemplate another problem:
(Senator Dave) Lewis, a member of the Legislative Audit Committee in Montana, questioned whether the state board’s policy of allowing pool participants to remove their money at full value, which concentrates the risk among those with money still entrusted to the pool. The majority of the money in the pool belongs to state agencies.
“I think we may need a special session of the state Legislature,” he said.
The market sure is cruel on its insistence that mispriced assets be rationally valued to clear the air. And it is just more pressure to get these assets marked to reality vs. marked to fantasy or political convenience.
Of course, the alternative is to flood more cash into the system so that these assets appear to be 100 cents on the dollar. But that’s a solution with a heavy price of its own.
In today’s New York Times, Ben Stein writes an article pointing out that Goldman Sachs has sold $ billions in Collateralized Mortgage Obligations (C.M.O.’s) — including during a period where current Treasury Secretary Hank Paulson led the firm. In his piece, Mr. Stein also mentions that while Goldman was selling C.M.O.’s – it was also shorting them through index sales.
We don’t agree with Mr. Stein’s belief that the Fed will be able to save the lending day with injections of liquidity – because (among other reasons) we believe the resulting inflation will be painful and destructive. Also, after raising the “Spock Eyebrow” over the nexus between Treasury and one major investment bank – perhaps he should cast the same discerning gaze towards the Fed and it’s true loyalties.
That said, his article certainly poses quite interesting and intelligent questions — which should make any rational person think long and hard. An interesting read, indeed!
From the “This can’t be good” department, we report that Europe has been forced to suspend trading in the $2.8 trillion mortgage debt markets in an attempt to halt the unfolding calamity in the credit markets. Reports Bloomberg,
“We are in a deteriorating situation,” Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, said in a telephone interview. “A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.”
Clearly the problems are extremely severe when the better approach to pricing these securities at market is to simply force the market’s head firmly into the sand.
Suddenly it appears Western nations fear eating from the menu they recommended for Asian banks during their cirisis in the late 1990s, when the advice was to simply allow the dust to settle, as painful as that may be, so people can get back to work and move on.
Our long–term readers know we have continually cautioned about serious economic consequences to come. Not because we’re “doom and gloomers” – but because we feel the best way to take advantage of the truth – is to first acknowledge it. Our opinion has been that when these truths gain increasing acceptance – the full brunt of their effect will soon to be felt. While those in the mainstream conventional camp have long been in denial over unpleasant, troublesome, displeasing economic facts (i.e. the truth) – things are beginning to change.
We feel the consequences of unhealthy, dysfunctional economic policies will, for the uninformed – and those in stubborn denial – have sadly devastating effects. One being their savings & purchasing power inflated into oblivion. However, for those who acknowledge the truth – and act appropriately — this is a time of incredible opportunity.
The window is closing. The boat is pulling away. There is still time. Are you prepared?
“Silver and gold, silver and gold
Everyone wishes for silver and gold
How do you measure its worth?
Just by the pleasure it gives here on earth!”
– Yukon Cornelius from “Rudolph the Red Nosed Reindeer”
Ah memories…Good old Yukon Cornelius from the classic, “Rudolph.” He certainly was a man who understood the value of real money. You’d also think he was reading current headlines.
Today we learn that GM posted a $39 Billion quarterly loss. Does this surprise us? Is George Bush going to win an eloquence contest? We’ve been warning about it for years. What else could an objective person expect from an industry, which for the better part of this decade has been accelerating purchases, which would normally take place in the future — via excessively low interest rates. Well — the future is now! You eat your seed corn – you’re going to go hungry down the road – maybe for a while. We smell lower interest rates – and an increased money supply (more inflation).
We also learn that several of the biggest and well known Wall Street banks and brokerage firms may be in MAJOR financial trouble. These firms — who took sub-prime mortgages — sliced, diced, and packaged large amounts of them into bonds, which they sold – and large amounts, which, they kept — are getting shellacked as mortgage defaults accelerate dramatically. While major losses are being announced – no one really knows how much a significant portion of this underlying sub-prime debt is really worth. Losses are estimated to end up in the hundreds of BILLIONS. We smell a major bailout – and an increased money supply (more inflation).
If that isn’t enough – today the Chinese announced they are getting ready to diversify out of the Dollar due to it’s continued plummet in value (hint, hint — due to inflation). Can’t blame them the Chinese – we think the Dollar – like all paper money — is going significantly lower against all things. It will be interesting to see what they buy. We think we have a pretty good idea.
Yes, that Giselle Bundchen is not just another pretty face. The supermodel is no longer accepting payment in Dollars. The Dollar is losing its status as the world’s reserve currency. However, since the rest of the world is also significantly inflating their currencies – we think Giselle will soon be heeding the sage advice of Yukon Cornelius. She’ll then be getting paid in real money.
Well, we’ve warned about what’s now going down for a long time. The other shoe is dropping right through the floor — and it’s a Clodhopper!
Just this week we’ve learned from the National Association of Realtors that the number of Americans signing up to buy previously owned homes in August dropped 6.5 percent from July. Over the past year, pending home sales are down over 20%. We also learn from Moody’s that the most recently created (2007) sub-prime mortgage backed bonds contain loans growing delinquent at literally a record pace. But wait — the reckless, loose money caused fiasco is hardly contained to the U.S! Moody’s also reports that loan delinquencies in Spain could grow 15 times by the close of 2008!
We’ve said it before, and we’ll say it again. You can’t borrow your way to prosperity. There is a yin to every yang. What goes up must come down. Every action has an equivalent reaction.
As things become critical in an era where the “pundits” seem to make everything so illogically complicated — we encourage you to find consultants who believe they understand the basic laws of financial physics.
