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In The Name Of The Faber, Gross, And The Holy Roach

Ridicule is the tribute paid to the genius by the mediocrities.

-Oscar Wilde (Irish poet, novelist, dramatist, and critic. 1854-1900)

From Greg Barns of the Canberra Times (Australia) today:

Marc Faber, Bill Gross and Stephen Roach are household names in the world of investment, but little known to the general public. And all three predicted some years ago that we would end up where we are today.

Of course, we gave Faber, Gross and Roach air time, and their small band of followers are no doubt sitting pretty and ready to ride out these wild economic times, but the rest of us did what human beings always do when the sun is shining and we are relaxing. We refused, because we could not see it on the horizon, to believe that the storm clouds were gathering…

The forecasts by this trio of contrarians were not isolated. They continued to hammer the same theme over and over. But their voices were drowned out and their message was not what we wanted to hear. They were useful to the media as counterpoint voices swimmers against the prevailing tide and therefore good copy. But of necessity they were viewed as loners, or iconoclasts.

But now, with the cycle fully turned, their views have become orthodox. We are now realising that all along the crash was inevitable.

Paul Heaton, “Mermaids And Slaves” (2008)
YouTube Video Link

Source:

“Three wise men whose prophecies we ignored”
Greg Barns
Canberra Times (Australia), October 10, 2008

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From our sister blog Investorazzi.com this morning:

“Jeremy Grantham On Financial Crisis And Where To Next”

“We got so good at denial. The Fed was in denial, the Treasury was in denial, the bosses of Merrill Lynch and Lehman were in denial. And yet this crisis was the most widely heralded “surprise” in the history of finance - there were plenty of people warning that it was going to happen long before it did.”

Did Secretary Paulson Mislead President Bush On The Bailout?

Along with Fed Chairman Ben Bernanke, U.S. Treasury Secretary Henry Paulson has quickly become a household name in recent days. As one of President Bush’s top economic advisers, Paulson has helped spearhead the movement to rescue Wall Street and the financial system on behalf of Main Street and the U.S. economy. His efforts to date have resulted in the $700 billion bailout legislation that was signed into law by President Bush over the weekend. The bailout authorizes the Treasury Department to buy bad mortgages and other troubled securities associated with them from banks and other financial institutions. It is hoped that these purchases will allow credit to flow more freely throughout the financial system.

Earlier today, Dean Baker, an economist and co-director of the Washington, D.C.- based Center for Economic and Policy Research, questioned whether or not Secretary Paulson presented all the available options to the White House. He wrote in the Huffington Post:

According to the Washington Post, after the initial defeat of the bailout package in the House last Monday, Treasury Secretary Henry Paulson went to see President Bush in the White House. The Post reports that President Bush asked Paulson about “Plan B.” According to the Washington Post, Paulson told Bush “there is no Plan B.”

Of course this was not true. Paulson could have easily designed a bailout plan that was centered on the direct infusion of capital in the banking system, as was suggested by George Soros in a Financial Time column later in the week. Virtually every economist who has written on the bailout argued that a direct infusion of capital is a far more effective approach to dealing with the financial crisis than the approach outlined by Paulson.

Clearly Paulson had not invested a great deal of time in crafting the initial proposal he submitted to Congress since it was just three pages and few of the details of the plan had yet been decided. This means that Paulson easily could have switched gears and developed a plan along the lines advocated by economists.

Baker, who has been warning of an economic crisis for years now, added:

If the Post accurately described the meeting between Paulson and Bush (there is no source given for this account), then Secretary Paulson badly misled President Bush on the most important economic decision of his presidency.

Do you think it’s possible Hank Paulson may have had an ulterior motive when he allegedly told President Bush there was no other option available?

“If there is anything that a public servant hates to do it’s something for the public”

-Kin Hubbard (American humorist/writer. 1868-1930)

Source:

“Post Claims Paulson Misled Bush on Bailout”
Dean Baker
Huffington Post, October 6, 2008

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From our sister blog Investorazzi.com this afternoon:

“Even With Bailout, Jim Rogers Still Sees Major Economic Pain”

“The 29-year-olds on Wall Street and Bay Street have been driving Maseratis,” Rogers says. “That’s about to change. All these guys are going to have to learn to drive taxis.”

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Economy to get worse as government bailout fails? $150 a barrel crude oil next year? This picture just gets rosier every day. From our sister blog Investorazzi.com this morning:

“Boone Pickens: Crude Oil Price Will Reach $150 A Barrel In 2009”

According to Bloomberg this morning, T. Boone Pickens, Jr., told the National Press Club on Monday that he expects crude oil prices to hit $150 a barrel in 2009 as supply forecasts show a shortfall that will drive prices up.

“Marc Faber: U.S. Economy To Suffer As Bailout Won’t Work”

People rely on the people in Congress, at the Fed, at the Treasury, people that brought us into this trouble, to take us out of trouble. I don’t think they will succeed…

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From our sister blog Investorazzi.com this morning:

“Video: George Soros Says We Are Heading Into Financial Storm”

In some ways, we are still heading into the storm, rather than coming out of it.

“Jim Rogers: ‘A Few Totally Incompetent People’ Responsible For Wall Street Chaos”

Veteran investor Jim Rogers says he knows who’s responsible for the latest carnage on Wall Street…

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When two legendary investors speak, that means double the reading pleasure for you. From our sister blog Investorazzi.com this morning:

“Warren Buffett: Fannie, Freddie Bailout Could Cost Hundreds Of Billions Of Dollars”

“If housing falls off another 15 or 20%, they’re going to lose some real money” on the bailout. (The “they” means “the government,” which actually means, “you”). “It could get into the hundreds of billions,” he said. But “if housing is close to bottoming, they might not lose much money at all.”

“George Soros Predicts Worst Of U.S. Financial Crisis Still To Come”

“In an interview with French magazine ‘L’Express’, Mr Soros said he fears the worst of the US financial crisis is yet to come. Doubts over the solvency of financial institutions remain, hurting their ability to lend money to each other and to offer credit, he said.”

World’s Highest Paid Investment Adviser: U.S. Faces Hyperinflation Or Depression

I don’t think I’ve ever mentioned this, but I am extremely grateful to Peter Brimelow over at MarketWatch. Without his column, I wouldn’t have access to the insights of Harry Schultz, the highest paid investment consultant in the world. For those readers not familiar with Mr. Schultz, I talked about him back on December 13. From that post:

Have you ever heard of Harry Schultz? I sure have, and to this day I am still in absolute awe of the money this man earns. Mr. Schultz, publisher of the International Harry Schultz Letter, is the highest paid investment consultant in the world at $3,500 an hour (or $4,900 an hour if you require his services during the weekend).

Brimelow talked about Schultz’ latest U.S. economic forecast this past Monday on MarketWatch. He wrote:

Harry Schultz’ The International Harry Schultz Letter was posted last night right about the time the Fannie Mae-Freddie Mac bailout was reported. But Schultz anticipated it, writing sarcastically:

“Flash: As we go to press, the US Government reveals plan to take over Freddie Mac and Fannie Mae, the biggest bail-out by taxpayers in history. It also wipes out the shareholders! Sunday selected to avoid stock market action same day, just as bank closures are told after market close Friday. That tells you what shape markets are in when government and CEOs hide behind holidays.”

Schultz had earlier made his overview clear (I’m translating slightly from of his text-message style):

“Fed maneuver room approximately gone. Any $US injection big enough to avert a depression triggers runaway inflation. If not big enough: depression. US on knife-edge. Gold helps you either way.”

This apocalyptic vision is consistent with his earlier predictions, such as one I discussed in a February 18 post. Brimelow stated back then:

Schultz writes: “It’s a derivative crisis, stupid!… 9,000 U.S. banks failed in 1929-1932; look for new records… Hyper-inflation is a distinct possibility; stay awake!”

Among his more colorful recommendations: “Buy a few local non-rare gold coins of whatever country you are in for emergency/barter use, smallest denominations… Keep 6-12 months cash at home/office/ lawyer-doctor office. Pretend an emergency is coming, because it may be.”

…and from that December 13 post:

Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae.

Note the bailout prediction for Fannie Mae.

Fast forward to Schultz’s latest forecast. Brimelow wrote:

Schultz suggests just two alternative scenarios, both equally appalling:

“If Bush bails them all out, the die would be cast for inflation unseen in the West since 1923 Germany. If no bail: Hello, 1929.”

Gee, thanks.

Brimelow talked about what Schultz thought was going to happen next, and what those hoping to be one step ahead of the herd should do about it. He wrote:

In his latest issue, Schultz summarizes:

“Widespread stagflation will probably now build more inflation than stagnation, then gradually morph into more stagnation than inflation. Then, deflation takes over, and ultimately, depression. All this over next 9 years.”

“For the moment, seal off major wipe-out risks. Exit all money funds and currency time deposits, step up gold & oil positions, move into 1-2 year government bonds (non-US $) in First World nations. Swiss first choice. Think not of yield; think of an ark’s life preserver around your neck.”

Schultz, notes Brimelow, is currently negative on the U.S. stock market. But, the Swiss-based investment adviser predicts an upside target of $1,600 an ounce for gold as he believes its recent plummet in price is merely a correction.

Source:

“Unraveling according to schedule”
Peter Brimelow
MarketWatch, September 8, 2008

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From our sister blog Investorazzi.com this morning:

“Warren Buffett Worried About More U.S. Bank Failures?”

According to Reuters’ Sweta Singh this morning, billionaire investor Warren Buffett’s Berkshire Hathaway has told one of its units to stop insuring bank deposits above the amount guaranteed by the U.S. government.

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From our sister blog Investorazzi.com earlier today:

“Bill Gross: U.S. Government Must Ride To The Rescue”

“Common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions.”

Robert Shiller On Housing

Henry Blodget of Tech Ticker, a Yahoo! Finance production, interviewed Yale economics professor and MacroMarkets chief economist Robert Shiller earlier this afternoon. Blodget wrote in an accompanying post:

In part one of my one-on-one with Shiller, we discuss the grim outlook for U.S. housing, which he tackles in-depth in his new book The Subprime Solution.

Highlights of our first discussion include:

• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it’s not a stretch to think we might exceed that drop this time around.
• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).
• The current hopeful consensus — that house prices will bottom soon and then begin to recover — is most likely a dream. Housing markets don’t usually have “V-shaped” recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Shiller, who warned of the U.S. housing bust a year before it began, predicts that home prices in a typical city will decline another 10 percent.

Robert Shiller Interview
Tech Ticker Video Link

Sources:

Robert Shiller Interview
Yahoo! Finance (Tech Ticker), September 4, 2008

“U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says”
Henry Blodget
Yahoo! Finance (Tech Ticker), September 4, 2008

Vanguard Founder Warns Of Difficult Economic Times, Drawn-Out Credit Crisis

John Bogle, the founder and retired CEO of the Vanguard Group, appeared on Bloomberg Television earlier today from Valley Forge, Pennsylvania. Bogle warned of “difficult economic times that very clearly lie ahead.” He added:

We’re going into something, or are in the midst of something, you might call the great unraveling, of all that excess credit, all that low-quality credit, that built up to such enormous levels in, say, the previous decade. So, that’s going to take a long time to unravel.

Bloomberg’s Betty Liu asked Bogle how far along he thought we were in the credit crisis. Bogle, who is still active with the second largest fund family in the country, replied:

None of us really know. I’m certainly among those that don’t know. But I’d say a third of the way through would be more like it. I’d say we have several more years to go. And they’re not going to be fun years for any of us.

He also added that he expects more bank failures and more bailouts during this time. According to Bloomberg, there have been $509.6 billion in credit losses and asset write-downs since the beginning of 2007.

You can view the 7 minute 12 second interview here.

Source:

John Bogle Interview
Bloomberg, September 3, 2008

Morgan Stanley Asia Chair Warns We Are In Early Stages Of Downturn

Stephen Roach, Morgan Stanley Asia’s chairman, appeared on Bloomberg Television this morning. From their New York studio:

ROACH: I think we’re still on a near-recession trajectory. The second quarter was clearly stronger than most of us, including myself, expected.
BLOOMBERG: Do you buy that GDP report? The only reason I bring it up— a lot of folks over the weekend said that report was misleading.
ROACH: Well, look, the numbers are the numbers. There were a lot of rebates paid to consumers. And, once again, savings-short over-indebted consumers went out and bought another DVD player or flat-screen TV they didn’t need. But there’s going to be payback in the second half of this year. And I think consumption weakness in the U.S. is going to be the big macro story for America and the rest of the world in the second half of this year.

Roach, who while serving as Morgan Stanley’s chief economist back in 2004 warned the United States had no better than a 10 percent chance of avoiding an economic Armageddon, added:

There’s more to this macro event than just the credit market contagion itself. Maybe two-thirds of that is behind us. But the impacts on the real side of the U.S. economy and the real side of the global economy are in the very early stages. So the overall macro adjustment scenario, I think, is still in the fairly early stages…

We’re in the early stages of the downturn of the U.S. and global business cycle. And investors, especially in equities, have to be wary of being too optimistic on the earnings implications of what could be a long, and drawn out, multi-year adjustment, for the American consumer.

You can watch the 6 minute 40 second interview here.

Source:

Stephen Roach Interview
Bloomberg, September 2, 2008

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From our sister blog Investorazzi.com earlier today:

“Jim Rogers Lets Loose On CNBC”

(On Senators Obama and McCain)

Neither one of these guys understand what’s going on. They don’t understand currency markets, economies, they don’t understand the world. You know, both of them will cause us more problems than they’re going to solve. If you happen to be friends with whoever wins, sure, you’re going to have a better time in the next four years. But the rest of us, the 300 million Americans, are all going to be worse off in the next four years. In fact, the world will be worse off.