Vigilant Investor

“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.

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…

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!

You know, we’re continually amazed as we witness an extremely interesting phenomena. Really amazed. Turn on any evening financial television show and you’ll hear the pundits demagogue on how Treasury Secretary Paulson must defend the Dollar. Bemused, we ask –“with what?” Today, Mr. Paulson accused the Chinese of unfair competition for not letting their currency appreciate. He also intimated that letting the Yuan strengthen would help stave off protectionist sentiment in the U.S.

The Chinese must be shaking in their boots! A debt addicted, debt laden, cheap foreign import dependent U.S. — much of who’s debt is financed by and cheap goods imported from the very same Chinese, effectively threatens said Chinese with protectionism if they don’t let their currency strengthen further. What?!

Common sense tells any rational person that the Chinese hold all the cards – are playing them well – and evidently intend to continue doing so. The Chinese have sat back silently and watched us bleed money (which we’ve had to borrow) — in Iraq. Just yesterday, they announced they will likely follow supermodel Gisele Bundchen – and begin to divest themselves of the rapidly depreciating Dollars they are awash in. Will they buy Gold? Silver? Agriculture? Oil? Corporations? We think all of the above – and more. China dumping Dollars is bad for the U.S. Soon the world will follow – and a nation addicted to debt will have to raise interest rates to continue to borrow. The last thing any person, business, or country severely in debt wants is the cost of their debt service rising.

And if the Yuan does strengthen dramatically, the cost of Chinese imports will rise correspondingly. What do you think that will do to the price of goods at Wal-Mart, Target, et al? How will paycheck-to-paycheck mainstream America handle that? We think not well.

An ancient Chinese curse states, “May you live in interesting times.” Well this is going to be interesting.

Protect yourself accordingly.

“And you can kiss it Goodbye!”
— Former Pittsburgh Pirates broadcaster, Bob Prince

The legendary Bob Prince would utter that call, as Pittsburgh Pirates hitters of a bygone era would knock ‘em out of the ballpark. Today, you can say the same thing about your U.S. Dollar.

After the drubbing the markets took at the end of last week – things seem unlikely to get better. To be honest – odds are they will get a lot worse. The well-established housing slump continues its nosedive. Job losses seem poised to mount. President Bush has directed the FHA to guarantee loans for delinquent borrowers (a massive bailout). Foreign ownership of U.S. government debt is dropping. Nobody knows what time bombs tick regarding mortgage-backed securities, as massive amounts of adjustable mortgages begin to reset.

And — what we have long warned about – is in no uncertain terms, coming to pass. The Dollar is getting crushed.

The Fed – along with U.S. policymakers are stuck between a rock and a hard place. The lowering of interest rates to re-stimulate the credit based American economy would certainly have an inflationary effect. A bailout of mortgage borrowers & lenders (via money printing) would also. Not only would a further acceleration in price increases be the result of such policies – so would the continued degradation of the value of American savings. Even more disconcerting is the potential that foreign lending to debt addicted America would continue to dry up at an extremely quick pace. (Why get paid back down the road with far more worthless Dollars)? Like all bad creditors – the U.S. may soon be required to pay a higher cost (interest rates) to continue borrowing. And that is never good for the bottom line.

So – will U.S. policy makers swallow the necessary bitter medicine? Will they let more hedge funds sink? Will they not bail out Wall Street. Will they let homeowners who got themselves into ridiculous, unrealistic mortgages either tighten their belts and cut spending in other areas – or become renters again? Will they let home values sink to more realistic levels? Will they watch the cleansing effects of a recession (caused by the artificial bubbles they created) take its course? Will they let the Dollar fundamentally strengthen?

Or will they try to take the easy, short-term solution way out – by greasing the wheels via the easing of credit and printing of money?

We predict the latter. But they are running out of rope.

Kiss that Dollar Goodbye!

Here’s a recent piece from Ron Paul, one of the few in Congress who actually understands what is transpiring in the credit markets and the complicity to it of Congress.  He is the only member of Congress and presidential candidate willing to stick his neck out by discussing the serious implications of the situation.

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August 20, 2007 Credit RiskAs markets went on a rollercoaster ride last week, our economy is coming close to a day of reckoning for loose credit policies being followed by the Federal Reserve Bank. Simply, foreign banks we have been relying on to buy our debt are waking up to the reality of much higher default rates than predicted, and many mortgage backed securities have been reduced to “junk” ratings. Wall Street fears the possibility of tightening credit and the tightening of America’s belts. Why, they say, “if Americans spend only what they can afford, think of the ripple effects throughout the economy!” This is the cry, as the call comes for the fed to cut rates and bail out companies in trouble.

More inflation is, however, never the answer to inflation.

The truth is that business involves risk, and businesses that miscalculate risk should be liquidated, so their assets can be reallocated to businesses that correctly judge risk and make profits. Instead, the Fed has injected $64 billion into the jittery markets, effectively amounting to a bailout that keeps these malinvestments afloat, but eventually they will become the undoing of our economy.

In addition to the negative reactions in financial markets, many Americans have taken on too much personal debt owing to exotic mortgage products and artificially low interest rates. Unfortunately, these families are now in the position of losing their homes in unprecedented numbers as the teaser rates expire and the real bills are coming due.

The real answers are, and always have been, found in the principles of the free market. Let the market set the interest rates. If we had been functioning under a true and transparent free market system, we would not be in the mess we are in today. Government, like the American household, needs to live within its means to get back on stable fiscal ground.

We’ve been headed in the wrong direction since 1971. This week marks the 36th anniversary of Nixon’s decision to close the gold window, which convinced me to seek public office to call attention to the runaway money train that would come in the aftermath of that decision. The temptation to print and spend money with impunity, like the temptation to max out lines of credit, is too strong to for government to resist. While Nixon brokered exclusivity deals with OPEC to prop up demand for the tidal wave of green pieces of paper the Fed pumped into the markets, the world is tiring of marching to the beat of our drum in order to secure their energy needs. The house of cards Nixon built is now on the verge of collapsing on our heads, and on our children’s heads.

As the dollar weakens, it becomes ever clearer that we need a return to sound, commodity-based money for a secure future. Money based on real value, not empty promises and secretive backroom machinations, is the way to get out of the current calamity without causing even bigger problems.

Dr. Ron Paul
Project Freedom

Well, well. That didn’t take long. As we’ve predicted all along – the cavalry has come to the “rescue.” This morning we learn that the Federal Reserve has bought $19 Billion of mortgage backed debt. The is flatly a bailout of reckless lending practices, Wall Street greed, and large hedge funds who have made a ton of money – and now don’t want to pay the piper for the inordinate risk they have taken.

Folks, that’s $19 Billion created with the flick of a button – injected into the financial system (and into the money supply). More importantly – this bailout has diluted your hard earned Dollars by the same $19 Billion.

If the trend continues – kiss the Dollar goodbye – and say hello to the $5.00 cup of coffee, gallon of gas, and carton of eggs.

World central banks are following suit. As we have always warned, the debasement of ALL paper money inevitably continues until it devolves to it’s true value — that of the paper it is printed on.

Amaranth’s trading “caused wild price swings and socked consumers with high prices,” said Sen. Carl Levin, D-Mich., chairman of the panel. “It’s one thing when speculators gamble with their own money; it’s another when they turn U.S. energy natural gas) markets into a lottery.”

So says a politician whose done his fair share of messing with the economy in so many ways.

For example, it is Senator Levin’s Congress that continues to allow (and benefits from) laws that have created a fiat fractional reserve banking system in the U.S.  That’s the same system that served to provide the credit from nothing that Amaranth used to mess with gas prices prices to such extremes.  After all, Amaranth didn’t fall apart with trades backed fully by investor principle.  No sir!  These were leveraged trades that backfired, leaving the fund with pennies on the dollar as Amaranth was exposed on the wrong side of a big bet on natural gas prices.

No doubt  Amaranth made serious mistakes, but such  speculation among traders is a natural element of any market that is attempting to allocate resources.  The Amaranths of the world would never have the ability to create such craziness without the use of leverage — leverage invented from nothing given the nature of fractional reserve banking.

But don’t expect the Carl Levine’s of the U.S.  Congress to cut off their own golden goose — The same system of printing money from nothing provides the U.S. Congress with ready cash to cover shortfalls when tax raising is not politically viable or when the market balks at buying up official U.S. debt at the right rate.

Amaranth is guilty of blowing it, and nothing more.  Mr. Levin and crew on the Potomac are guilty of dishonest monetary policy that is slowly strangling the U.S. economy.  Remember that at election time.

Is academia biased towards proving man made global warming AND government ordained solutions? This is something worth considering. We’ve certainly heard a lot about the scientist that received some funding from Exxon as spouting lies for Exxon because they pay him to do so, but should grants being handed out — OR NOT — based on if the research sets out with the purpose of justifying one side or the other without clearly looking at counter-evidence be under similar scrutiny? Just because it comes through academia does not mean that it does not have a funding bias.

• Global Warming: The Origin and Nature of the Alleged Scientific Consensus
• Lobbying & Law - Cold Cash and Global-Warming Research
• Climate of Fear: Global-warming alarmists intimidate dissenting scientists into silence.

Now, while what’s good for the goose is good for the gander, we’re not fans of discrediting an argument simply based on funding sources along. Either the evidence holds up or it does not. However, we should be aware that one side or the other will clearly appear to be the correct side if 95% of funding goes to supporting the specific outcome — simply because the massive lopsided volume alone will give it an appearance of overwhelming academic support.

When we are told 95% of scientists think global warming is man made and the government needs to act now, perhaps we ought to weigh that 95% figure more carefully? Moreover, it should be noted that a counter poll suggested the numbers are closer to 1) 40% agree man’s the problem and the state is the solution, 40% 2) think man’s a contributor among a host of others, but not enough evidence suggests a prudent government forced solution given the lack of evidence, and 3) 20% who don’t buy it’s man’s fault.

In our lead off post about global warming, we presented our concerns about those who stand to gain financially and politically by hopping on the global warming bandwagon — especially anything that involves giving more power to government to regulate and doll out mandates and spending to “solve the problem.” The problem is that many with ulterior motives are a strong part of the lobby for “the government’s gotta do something to stop it before we all die” side. Big business interests with solutions to manufactured problems are nothing new, as are big business interests with theoretical solutions to problems that could be solved by the free market without government. Then there are the one-worlders and socialists who like every ounce of liberty, freedom and wealth to be dolled out by central planners who know better than us all. Many of both groups actually believe in the idea of the “noble lie” (ala Plato & Strauss) to justify their higher order objectives since they believe most commoners are too dumb to understand the world, hence it is up to the self-anointed types to tell us lies for our own good.

At any rate, with a multitude of special interests — the Exxon’s of the world included — don’t buy either side without knowing whose interests are what and getting a better understanding of the big picture.

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NOTE: In the past we’ve been accused of presenting only one side of this debate — that we show only those who don’t buy global warming. This is true, but that’s because 99% of the rest of the media is showing the other side. See our opening on the subject for more behind why we’re continuing with this series. We don’t recommend taking one side or the other without personally looking into both sides. Accepting the pro or anti side at their word is dangerous.

China will invest $3 billion of its $ 1.2 trillion in reserves into the U.S. buyout-fund firm, Blackstone.

Stephen Schwarzman, Blackstone’s chief executive, called this all a “historic event that changes the paradigm in global capital flows”. You bet it does. This historic announcement is important on several fronts:

• Is this the start of the long awaited change where Bejing backs-off its torrid pace of “vendor finance” dollar accumulations, which have provided key support to the dollar and have enabled the depressed U.S. interest rate environment?
• Will this start a trend of central banks publicly entering the capital markets in order to diversify reserves? While it will certainly please the private equity dealmakers to play with more central bank liquidity, will it lead to the further politicization of asset pricing?

So far the IMF seems to think the first issue is a non-starter. Says Forbes:

Speaking at a press conference on the sidelines of a meeting of finance ministers from the Group of Eight leading industrialized nations, Rodrigo De Rato said he was not concerned about the impact China’s move could have on the U.S. dollar and U.S. Treasury bonds.

“It’s rational that emerging economies who have very high levels of reserves diversify their investments,” Rato said. “It has happened in other cases, and I don’t think we should consider that as extraordinary.”

“May you live in interesting times,” indeed.

The recent job growth numbers from the Bureau of Labor and Statistics came in at an anemic 88,000 for April, 2007. Given the statistical error in this non-farm payroll number is +/- 129,000, that figure is near indistinguishable from flat-zero or a contraction. Yet the market didn’t seem to care much — even in the wake of the previous week’s alarmingly tepid GDP estimate of 1.3%, the worst housing numbers in decades, abysmal auto sales - with the three major U.S. indexes up about 1.5% for the week.

If that has you scratching you head and worried, you’re not seeing half of it: What’s really alarming, is the behind-the-scenes fudging that goes on with employment numbers each spring through a little known manipulation called the Birth / Death Model, which assumed that a mind-boggling 317,000 jobs were added in April — the highest B/D model number used since April 2000 (the last number we had easily available). This number– 17% higher than one year ago, and up from 128,000 in March — in the face of an obviously slowing economy (confirmed by the aforementioned Commerce Department GDP estimate of 1.3%) is simply unbelievable.

Let’s give this assertion some perspective.

Continue Reading »

Recently we posted on global warming and the nuances and the appropriate role for man in response. We did so in response to the massive rush to legislate based on what we find to be suspect analysis of the problem, and even dicier — if not downright dangerous — proposals for solutions.

Consider this rebuttal to Al Gore’s highly popular “An inconvenient Truth”:

Part I

Part II

While supporters of the recent (last 12 months) barrage of global warming alarmism are quick to say that the scientific community is in complete agreement, and that anyone who disagrees must be in the pocket of big oil, to that we say “not so fast!” Never mind the liberal elite lobbying for Al Gore to receive a Nobel Peace Prize for his film, An Inconvenient Truth.

Its not that we don’t believe man has made an impact. It is that we are not entirely convinced that we have enough information to fully understand said impact, and for that matter, to fully understand the hows and whys behind the environmental adjustments we see.

As well, we are entirely against the reflexive reactions that are shouting down those who bring up a contrary view.

Continue Reading »

“Those who do not know history are doomed to repeat it.” Yes, that phrase is a cliche and overused. I’ve always liked Mark Twaine’s read on it: “History doesn’t repeat, but it sure does rhyme a lot.”

Whichever you prefer, we talk day in and day out here at Vigilant Investor and on our Podcast about the serious problems of the economy and, especially, the dollar. To understand what is in store for the dollar and how it has been made possible, you need to understand the context of the dollar in history. Most importantly, you must understand the present nature of banking and the private central banking cartel that manages the system, called the Federal Reserve.

The video above tells the story. I cannot stress how important the subject matter is for all to understand in the context of the vigilant investing of all things: your money, time, votes, family, business, etc, etc. Take 41 minutes out of your day and learn why.

Don’t have time to watch it now? Dowload it here, and upload it to your iPod for your next commute, run, plane ride, etc. There really is no excuse!

Stay Vigilant!