Vigilant Investor

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.

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.

“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.

Volcker went on to warn that recent intervention by the Fed in securities markets might compromise it’s independence. He went on to say that the Fed’s inability to contain inflation will create a 1970’s like scenario. Again, he’s right there. We’ll also add, it’s too late Paul — the nationalization of the US private debt has begun. When politicians, who’s outlook is only as far as the next election — get involved, the trend will only accelerate. So to will corresponding inflation and Dollar degradation.

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.

 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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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…

A list of articles worth perusing to grasp the depth of our problems:

• Fed takes boldest action since the Depression to rescue US mortgage industry
• Fears That Bear Stearns’s Downfall May Spread
• Another Source of Quick Cash Dries Up
• Jim Rogers Says Fed Support of Bear Stearns `Outrageous’: Video
• U.S. 3-month bill yield seen lowest in 50 years
• Gold hits $1,010 on flight from paper currencies
• Foreign investors veto Fed rescue
• Wall Street asks who will follow Bear Stearns
• Bear Stearns takeover sparks fresh financials rout
• Dollar Doomsayers Draw Signs From Bernanke Rate Cuts
• Fed Takes New Steps to Ease Crisis:Cuts Lending Rate to Financial Institutions to 3.25 Percent
• Wall Street waits for the next domino to fall
• Luxuries are cheap, necessities are expensive
• Debt Reckoning: U.S. Receives a Margin Call
• U.S. Fed Cuts Discount Rate, Says Securities Firms May Borrow
• Houses are left behind to pay car, credit bills
• CDS sector weighs Bear Stearns backlash

“…but wanting to have their ears tickled, they will accumulate for themselves teachers in accordance to their own desires”.
– II Timothy 4:3

Glen Beck’s observation on all the hate mail he receives when he would talk about the bad things going on in the economy in 2007 are valid. For better or worse, folks don’t like a wet blanket at the party telling them that there’s going to be substantial consequences in the hangover (or worse) department from all the excesses. No, when it comes to bubbles, people would rather party on until they crash.

Here we are nearly 6 months after this excellent Glen Beck interview with Michael Panzer and Peter Schiff, and a majority still can’t contemplate how severe the situation is. The interview is as relevant today as it was in September of 2007. The part about U.S. economy vulnerability is crucial, especially when you consider the threats of, say, Chavez in Venezuela to cut off shipments of Oil to the U.S.

Stunning jump in foreclosures

Foreclosures and default notices skyrocketed to record peaks in California and the Bay Area in the fourth quarter of 2007, according to a report released Tuesday. The information was a fresh reminder that the slumping real estate market is continuing to have a serious impact on homeowners, particularly those with risky subprime mortgages. enders repossessed 31,676 residences in California in the October-November-December period, according to DataQuick Information Systems, a La Jolla research firm. That was a dramatic 421.2 percent increase from 6,078 in the year-ago quarter.

Unhappy home buyer, feeling misled on price, sues agent

Marty Ummel believes she paid too much for her house. So do millions of other people who bought at the peak of the housing boom. What makes Ummel different is that she is suing her agent, saying it was all his fault. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.

Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.

“When your house appreciates $100,000 in the first six months, you’re not quite as concerned that maybe the valuation was $25,000 or $50,000 off,” said Clifford Horner of the law firm Horner & Singer. “But when your house goes down, you ask: ‘Who might have led me astray here?’ “

Cramer was blindsided like every other popular analyst, but to his credit he’s now calling BS when he sees it.

Host Question: How come AMBAC still has a AAA rating?

Cramer: Because the truth is too painful.

You can hear his comments and rants about the rampant “fiction” on Wall Street in this CNBC round table. He’s talking about fiction that includes the ratings agencies like Moody’s. It should blow you away not because Cramer is a blowhard, but because in this case he’s finally catching up.
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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:

Wholesale Prices Rise in 2007 by 6.3 Percent, Largest Amount in 26 Years

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.

Are you confidently making the most of it?