Vigilant Investor

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.

“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.

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…

You know everyone is thinking it – so there, we asked it!

In an era where the world’s most famous supermodel insists on being paid in Euros (not Dollars), and rap stars flash Euros vs. Greenbacks – it’s a logical question. Especially when you consider that Gold/Silver backs NO government currency on the planet, and that as the U.S. continues to export inflation by printing/degrading the Dollar – foreign nations will follow suit to protect their exports, etc. In other words – ALL paper money is becoming more worthless by the day.

As OPEC nations meet, they discuss among other things, skyrocketing production costs. We also learn sentiment exists that OPEC has lost the ability to lower prices by increasing output. How can this be? Sure, demand has increased dramatically over the decade. However, we think the primary reason is that prices have a long way to go to accurately reflect the massive (and continuing) increase in the global money supply. In other words “real inflation” – not the bogus, rigged figures central bankers use.

Hey, say what you will – rap stars and supermodels are up on the latest trends. As soon as they catch on – they just won’t be wearing their bling – they’ll be getting paid in it. Either that, or they’ll be converting whatever “paper” they are getting paid in as fast as they can into Gold and Silver. It doesn’t take a genius to figure out what widespread behavior like that will do to the price of the precious metals.

As always – opportunity knocks!

Today we learn that the Fed has again made another temporary liquidity injection to qualify as the largest since the times around 9/11 in order to provide grease for the still shrinking U.S. commercial paper market. The amount, $47.25 billion, was to defend the federal funds target of 4.50% that had traded as high as 4.81% earlier in the day — and was largely attributed to $40.5 billion of rollovers in “maturing operations.”

Now, if you’re like most folks, much of what that means — well, it may as well be in Greek. Moreover, what lies beneath the surface is opaque and functionally down the rabbit hole that even pros have a hard time making sense of what actually has been going on. After all, is that not largely what we can deduce from the lock-up of the credit markets?

Some might suggest FAS 157 — the new accounting rule that makes it harder for banks to hide market values of hard to value securities through mark to model valuations — might be a little painful, but will also finally restore some clarity to the system. We encourage readers to catch up on the changes: No doubt it will provide clarity, although we believe the recent large write-offs from major players are only the tip of the iceberg on institutions coming clean.

Now, while the difference between what FAS 157s Level 1, 2, and 3 assets actually mean in real terms is still quite Greek (and yet to be valued), we can’t help but remind readers that the fundamental problem of this highly public fiasco that started in the mortgage back securities markets really are a distraction from the actual problem that will eventually be exposed. Continue Reading »

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.

“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.

Nothing like a little throwback media, but don’t let the format distract you from the crucial subject matter. Circulate this sucker — for your kids and less-informed friends and family.

The latest data released today shows that the New York Fed’s Factory Index stays near a two-year low, Japan’s export stocks rise, and China’s economy grew at a 10% rate last quarter. American retail sales are up, and the savings rate lingers around zero. All the while, total U.S. Credit Market Debt is at an all time high.

Translated – Americans are either spending all the money they earn (or can borrow) – and it does not look like they are buying many things made in the U.S.

The U.S. Homebuilder Confidence Index falls to the lowest level of this already terrible year, and U.S. homes going into foreclosure have doubled compared to the first quarter last year.

Translated — People who build homes aren’t feeling too good about their business prospects. They shouldn’t – since the housing backlog is about to increase as lenders are forced to put more homes back on the market which they have foreclosed on – while at the same time they tighten their lending standards.

Gold breaks through $690, Silver $14 an oz. Both precious metals (i.e. real money) – look to break key price levels. Oil stays resiliently above $60. Prices in the supermarket and at the gas pumps are increasing steadily – and picking up pace. The Fed is concerned about the economy slowing – yet per the recently released minutes from its Open Market Committee meeting, perhaps more worried about rising prices.

Translation: Unlike the classic Mullet Hairstyle (Kentucky Waterfall, Tennessee Top-Hat, or Hockey Hair — depending on your preference) – which is all “business up front and party in the back” – the massive amount of credit infused into the economy is just the opposite. As a nation, we’ve had the “party up front” running up the tab — but now we are forced to confront the rising prices and other serious consequences, which are part of the “business in the back.”

More key economic data to come this week – and of course, we’ll be happy to tie it all together for you in simple, plain English

Listen to our live Streamcast today from 3:30 - 4:30 p.m. We’ll be covering:

• Sub-prime implosion update: why it will not be contained
• Municipalities are facing headwinds on assessments and accounting requirements
• The NYT, income gaps and REAL solutions to the problem (vs. social redistribution)
• Why Bill Gates and Warrent Buffet are Wrong on Taxes!

Don’t forget to subscribe to our podcast. Listen at your convenience. Use iTunes and your iPod (or other MP3 Players)

Here’s a great interview of Congressman Ron Paul being interviewed by Al Korelin a few weeks back. Without question, Paul is head and shoulders above his compatriots in Congress in his understanding of the laws of economic gravity, and the economic history of the U.S. It’s a great interview running just over 20 minutes.

Perhaps the most jaw dropping revelation is that some of his colleagues on the House Banking Committee still believe the dollar is backed by gold!!??!

….uhh…

…eh-hem….

….And there are so many out there who think our federal fiscal problems are not an issue in the long run.

How can the people running Congress’ financial legislation oversight not even understand such a basic fact? If they don’t know that, how can they know even the most elementary nuances of economics?

Did I happen to mention Ron Paul is running for President? We have just crossed The Rubicon. We have a fight on our hands to turn back, but there’s no doubt in this author’s mind that it is our last chance.

Don’t miss our weekly live netcast radio show and podcast recording. Every Friday, 3:30 p.m. ET. Click the link button below for our hostsite, TalkShoe.com, which will provide more information on past and future episodes, as well as download subscriptions!

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See you Friday!

That’s right. Tonight’s 9:00 p.m. (ET / NYT) show is our final Wednesday nighttime show. Starting next week, we’re moving to Friday’s at 3:20 p.m. (or so) for our hour-long version of V.I. Live.

In the meantime, there’s still tonight’s show! We’ll be discussing recent development, the market and economic environment, as well as history and politics. Listen, chat, call in and participate! As always, for the details click on our Talkshoe link below. Arrive early to download the Talkshoe chat interface.

As for next week’s hour program, tune in Friday, December 22, at 3:20 p.m. ET (-5 GMT), live around the world! That is, of course, if you’re not already in your car driving to your relatives for Christmas. If that’s the case, make sure to subscribe to our podcast via iTunes where the show downloads automatically. That includes both our weekly show and our daily 15 minute updates. Downloads are usually available 60-90 minutes after show time. Just plop us on your iPod every a.m.

While consensus experts are getting surprised left and right by this week’s very weak numbers, we at Vigilant Investor were not, in the least.

Yesterday it was announced that in October the economy grew faster than forecast, at a 2.2%, but still at the slowest pace for the year. This was revised adjustment from the Commerce Department, who was expecting 1.6%, but upped the number based on increasing inventories. The slew of information for the week has been hardly glowing. U.S. New home sales fell 3.2%, their largest ever contraction. Meanwhile, durable goods orders declined by an abysmal 8.3%, the most since July 2000. This is leading many analysts to suggest that Fed rate cuts are all the more likely, especially if those numbers don’t improve soon. Adding insult to injury, the Chicago Purchasing Managers’ Index (PMI), a leading gauge of businesses activity, surprised consensus analysts dropping to 49.9 from 53.5 in October. Below 50 signals a recession. Some predict layoffs are in the future if the PMI slumps further.

Meanwhile, retailer sales in November were growing slower than expected as analysts dropped their forecast with Wal-Mart as the retailer for Middle-America again lowered its expectations and announced its worst monthly performance in 10 years.

The dollar showed continued weakness, slumping further — a long term trend we should all expect to continue, especially when measured against hard assets vs. other currencies that are often printed out of thin air to maintain trade parity against the U.S. dollar.

Proof is in hard asset prices, with Oil rising above $63 in today’s trading, while gold marched to a 12 week high trading above $650, up over $40 for November alone, and over 30% for the year.

Mainstream finance folks will continue to view us as Cassandra’s. We think the proof is in what is unfolding. Will this be the final unwinding of the Credit bubble, or will policy makers engineer another round of liquidity stimulation to ward off the inevitable for one more cycle? We don’t know, but act as if all is just fine at your own risk.

Remain Vigilant!