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The Week Of Financial Crisis

Now that it’s Monday morning, when I look back at the financial chaos that took place last week, one term in particular comes to mind…

“Hell in a handbasket”

And Dr. Prieur du Plessis, the chairman and principal holder of South African-based Plexus Asset Management, best summed up the week of financial crisis in Market Oracle (UK) yesterday when he wrote:

Whew – what a wild week! Global stock markets and commodities tumbled, whereas government bonds and the US dollar surged amid mounting fears that the ongoing turmoil in financial markets was foreshadowing a hard landing for the US and Europe.

The first-ever trillion-dollar loss (as measured by the Dow Jones Willshire 5000 Index) on Wall Street came on Monday in the wake of the US House of Representatives failing to gather enough votes to pass the $700 billion bank rescue package. Globally, more than $1.7 trillion got wiped off the MSCI World Index.

Considering the entire history of the Dow Jones Industrial Average since 1896, Monday’s decline of 777 points ranked as the largest points decline in history (see post “Fear Grips Global Markets”). However, and let’s be thankful for small mercies, the percentage decrease of 6.98% was still significantly less than 1987’s 22.61% decline.

Although the Senate’s passing of the bailout plan on Wednesday brought temporary relief, the reversal on Friday of the House’s earlier decision brought more volatility. In classic “buy on the rumor, sell on the news” fashion, the Dow Jones Industrial Index rallied by 3.0% leading up to the vote, but then sold off by a massive 486 points (4.5%) to end 1.5% down on the day and 7.3% lower on the week.

Already, this week is off to a bang-up start. As I type this, the Dow is off over 400 points this morning, while in Europe, the pan-European Dow Jones Stoxx 600 index posted its biggest one-day percentage loss ever on Monday (according to preliminary data). The index fell 7.6% to 241.57, surpassing the 6.21% fall recorded back on September 11, 2001.

Source:

“Fear Grips Stock Markets as Economies Tip Into Recession”
Prieur du Plessis
Market Oracle (UK), October 5, 2008

Why Gold Will Prevail

This afternoon, I listened to the most recent broadcast of the “Financial Sense Newshour” when guest John Williams of “Shadow Government Statistics” fame made the following statement about the recent activity surrounding gold:

I can’t prove that intervention took place in the gold market. But you sure can make a very strong circumstantial evidence case for it, especially considering that the system was on the brink and they were trying to contain the panic. One way to do it is to discourage the owning of gold. And that’s been a traditional sore point for central banks and governments over time. It’s usually when gold is soaring it’s a good sign that they’ve been doing a bad job. And I think a lot of what happened with that, not only the selling of the gold, but the buying of the dollar, was very much orchestrated, very much supported with heavy intervention. Again, the underlying fundamentals haven’t change a bit. If anything, they’ve gotten worse. And the fundamentals for the dollar couldn’t be more negative. And the fundamentals for gold couldn’t be more positive. And those fundamentals, will in the end, dominate the markets. And, irrespective of whatever intervention, games-playing, jawboning, whatever’s done, in the end the gold price will prevail on the upside. And, unfortunately, for most of us living in the United States, the dollar is going to come under very heavy selling pressure.

Source:

“Other Voices with John Williams, Shadow Government Statistics”
Third Hour
Financial Sense Newshour, September 20, 2008

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Ron Paul On The Proposed Government Bailout

U.S. News & World Report Associate Editor Luke Mullins got the chance to speak with political maverick and one-time candidate for POTUS, Congressman Ron Paul, about the government’s proposed massive intervention in the U.S. financial system. From his piece, “Ron Paul: This Bailout Won’t Be The Last”:

I recently chatted with Rep. Ron Paul (R-Texas) about the gigantic financial bailout that the government is preparing to undertake.

Some excerpts from the interview:

What’s your take on this huge financial bailout?
“It’s more of the same. More debt and more inflation and more pressure on the dollar. Ultimately, although the markets are responding very favorably at the moment, I think it is going to be devastating to the dollar and to our financial situation in this country.”

Dr. Paul sees some nasty stuff coming down the road. So do I.

You can read the rest of Mullins’ interview with the Texas congressman here.

U.S. Economy Headed Towards Doom And Gloom?

This morning I came across two pieces which were notable in that they painted a gloomy picture for the U.S. economy going forward. Jonathan Burton of MarketWatch talked about TCW Group’s Jeffrey Gundlach’s economic outlook, and wrote:

An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation’s top financial institutions.

Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning.

“This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund . “This is no market for old-school thinking.”

Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022.

“If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said.

Burton talked about Gundlach’s credentials for making such statements. He wrote:

As a forecaster, Gundlach didn’t just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end.

The MarketWatch reporter noted:

Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said…

Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said…

The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.

Said Gundlach: “None of us have ever seen this, and it’s no market for old men, but risk aversion is the order of the day.”

Someone else who sees massive problems ahead for the American economy is Harvard economic professor and former chief economist of the International Monetary Fund Kenneth Rogoff. He wrote on the Financial Times (UK) website last night:

Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.

In other words, $1 to $2 trillion. Rogoff continued:

True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible…

The Ivy League professor talked about the potential fallout from allocating so much money to deal with the escalating financial crisis. He wrote:

It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.

Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.

Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

A new banana republic?

Sources:

“The worst is yet to come”
Jonathan Burton
MarketWatch, September 18, 2008

“America will need a $1,000bn bail-out”
Kenneth Rogoff
Financial Times (UK), September 17, 2008

U.S., Europe Headed Towards Another Depression?

For some, warnings of a U.S. economic slowdown go beyond a recession. From the CNBC website this morning:

The end result of the global economic slowdown may be the U.S. announcing national bankruptcy as the government cannot afford the bailouts that it promised and the market will not bail out the government, Martin Hennecke, senior manager of private clients at Hong Kong-based Tyche, told CNBC on Thursday.

“We expect a depression in the United States. We expect a depression, very possibly, also in Europe,” Hennecke said on “Worldwide Exchange.”

Hennecke, who previously worked as an investment adviser at Hong Kong’s Bridgewater Ltd. and is a frequent guest on CNBC and Bloomberg Television, explained:

The estimated $300 billion cost of the Fannie/Freddie bailout will probably be considered as a loss that the government will have to take, therefore passing it on to taxpayers, he explained.

“We already have $3 trillion of debt, as far as the U.S. government is concerned. These debt figures across the U.S. economy are rising very sharply.”

When the government can no longer pass the United States’ “immense debt” on to taxpayers, it will turn to the holders of U.S. dollars, leading to the eventual downfall of the currency, Hennecke said.

“Definitely, it (the dollar) is not a safe place to be invested in, as real inflation is closer to 10 or 11 percent than the actual inflation numbers given by the U.S. government,” Hennecke said on “Worldwide Exchange”.

“Better than Charmin?”

Source:

“Bailouts Will Push US into Depression: Manager”
CNBC, September 11, 2008

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Goldman Sachs Predicts Oil Will Reach $149 A Barrel By Year End

Just when almost everyone was proclaiming the energy “bubble” had popped, global investment bank and securities firm Goldman Sachs comes along and rains on the parade. According to a Reuters piece earlier today:

Goldman Sachs reiterated on Wednesday its year-end price forecast of $149 a barrel for U.S. crude oil, and said strong fundamentals were a more important factor than a strengthening dollar.

U.S. crude oil prices hit an all-time high of $147.27 a barrel back on July 11.

The price forecast came in a research note dated August 19. Reuters reported:

“Although the recent correlation in dollar and oil prices is clear, it is important to emphasize that each of these assets are driven by multiple, varying factors… Put differently, there is more to oil than the U.S. dollar and vice versa,” the Goldman Sachs energy team said in the note…

Goldman Sachs said that despite the recent negative correlation between the U.S. dollar and oil prices, there was “very little correlation between oil prices and the U.S. dollar over the longer term.”

The Manhattan-based financial services firm said that it sees the crude oil market supported in the short-term by limited OECD oil stocks, a possible recovery in U.S. oil demand, near 10% growth in Chinese oil demand year-on-year in July, and a drop in non-OPEC production.

Reuters also noted that:

Earlier this year, Goldman Sachs equity analyst Arjun Murti predicted oil prices would spike to between $150-$200 before the end of 2009 due to his view of rising global demand and faltering supply.

The forecast for $149 oil comes at the same time a Reuters/Zogby poll was released showing most Americans think the worst is over for prices at the pump. From a different Reuters piece today:

Most Americans think that the worst of the fuel price spike that pushed gasoline above $4 per gallon has passed… according to a Reuters/Zogby poll released Wednesday…

The poll of 1,089 likely voters found that just under 13 percent thought gasoline prices would rise a lot between now and the end of the year. About one quarter thought prices would rise a little, while 18 percent said they would stay about the same.

Sources:

“Goldman Stands By Forecast of $149 For Oil”
Reuters, August 20, 2008

“Optimism About Oil, But Not Housing in Poll”
Reuters, August 20, 2008

Wall Street Takes A Vacation (From Reality)

From the Wall Street Journal’s MarketBeat Blog this afternoon:

With the Federal Reserve meeting out of the way, along with most of the important earnings reports, many participants are ready to take a bit of time for vacation, and they leave with a smile on their face after the dollar rebounded, oil prices slumped, and the Dow industrials put together a 300-point rally to close out the week. All major indexes gained at least 2%, led by the chipmakers, banks, retailers and cyclical stocks.

The following saying by Mark Twain comes to mind:

All you need in this life is ignorance and confidence; then success is sure.

Enjoy your time off, Wall Streeters. Methinks there will be hell to pay in future days.

Talking Heads, “Road To Nowhere” (1985)
YouTube Video Link

Source:

“Four at Four: No Worries”
David Gaffen
Wall Street Journal (MarketBeat Blog), August 8, 2008

The Next Great Depression

Taking it down a few notches today, I enjoyed a nice cigar from the Dominican Republic this afternoon out on my balcony here in the Windy City. Kind of bummed out that one of my suppliers raised their prices, though. Too bad. I almost pulled a JFK and ordered a stockpile of cigars last year after Washington Democrats were looking to increase the tax cap from a nickel per cigar to $10 a stick— or 20,413%. Unbelievable. By the way, never heard of the JFK cigar story? Well, if you have time, I highly recommend you watch the following video (a little over 3 minutes long) of Pierre Salinger, JFK’s secretary, telling the story (and other cigar-related ones)…

YouTube Video Link

While puffing away, I got the chance to listen to a portion of last weekend’s “Financial Sense Newshour” broadcast. Jim Puplava and John Loeffler have been talking about a financial crisis window for a while now, which they expect to take place between 2009 and 2012. Puplava and Loeffler had this to say last weekend:

JOHN: So looking forward, say, 12 to 24 months, we would say, given where we’re going, we can probably look towards higher gold and metals prices; there will be another money crisis – another currency crisis – and all it would seem like they’re [Congress] doing right now is staving off the day of reckoning. Let’s face it, we said that 2008, that’s the ramp up to 2009 to 2012 – it’s accelerated a little more than I thought it would be and it’s a little more violent than I thought it would be, but nevertheless we’re still on that; and somewhere in that window, all of this stuff begins to fall apart and you can’t tell what’s going to trigger it, but it will go.

JIM: It’s going to trigger. And I think that the thing that’s scaring the heck out of them [Congress] is all of this is starting to unfold – whether it’s $4 gasoline at the pumps, headline inflation with foods, banks going under, stock market manipulation – all of this – and they’re desperately just trying to buy time to get elected because you’ve got 535 people in Congress who are worried about keeping their jobs. And what I think is going to happen is as this worsens the country is going to lurch very hard to the left in the November election (we’re going to get into this in the next segment) and then as a result of the policies that are going to put us in place, that is going to give us our great depression that I anticipate.

By 2010, the United States is going to be in a major depression.

And then, what is going to happen is we’re going to lurch – almost do a 180 degree turn – and lurch very hard to the right as one disaster after another unfolds upon the country.

Great cigar, not so great forecast…

Source:

Financial Sense Newshour
3rd Hour, Part 2
FinancialSense.com, July 19, 2008

Washington’s Bear Hunt

From all the action coming out of the nation’s capital today, you’d almost think the various government entities in Washington coordinated efforts against the oil, dollar, and housing bears. Almost.

First, it was crude oil. Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” to scare off oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices. Doh!

Next, dollar bears were targeted. Reuters reported:

The dollar rallied Tuesday, after a Federal Reserve official suggested that U.S. rates may have to rise to stem inflation and a top Treasury official repeated that a strong currency is in the interest of the country.

Treasury Secretary Henry Paulson reiterated on Tuesday that a strong dollar is important to U.S. interests and the underlying strength of the economy, as well as policies aimed at shoring up confidence, would be reflected in currency markets. At the same time, Philadelphia Fed President Charles Plosser said rising inflation could force the Fed to start raising interest rates even before labor and financial markets recover.

Gold for August delivery dropped $15.20 to end at $948.50 an ounce on the New York Mercantile Exchange.

Rising interest rates? Strong dollar policy? Looks a lot like jawboning to me. But don’t take my word for it. On July 15, Reuters ran a piece about legendary investor George Soros. From the interview:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said. However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession. Soros said.

“Therefore, his options are limited — he is boxed in.”

And how many times have we heard about this supposed “strong dollar policy” of ours? Actions speak louder than words, right? Back on March 17, Soros’ former partner, Jim Rogers, said during a Bloomberg Television interview:

Now, please, do we even bother reporting that anymore? Poor Hank Paulson, had a reasonable education, and a reasonably-good career, head of Goldman Sachs, now he goes around the world making a fool out of himself. Goes around saying we want a strong dollar, the next day he goes to China and says we want a weak dollar, and then he goes to Japan and says we want a weak dollar. I mean, you have to feel sorry for the guy. At least, I do.

Finally, it was housing naysayers who fell under the gun. From the CNBC website this afternoon:

Treasury Secretary Henry Paulson said America’s housing market could turn a corner and begin recovering within months, but it will take longer to resolve all housing-related problems.

“Obviously, it will go on beyond months with some of the issues in the housing market, but I believe we can get to the point within months where we turn the corner on housing,” Paulson said in a televised interview with Fox Business Network.

Sound familiar to anyone? From my post “Paulson Weighs In On Housing” from July 2, 2007:

Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage sector. The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.” Beyond subprime mortgage woes, Paulson declared that the financial markets looked sound. He said, “Markets are volatile. I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

DJIA down 1,933 points since then, S&P 500 down 243 points, global credit crunch, $453 billion of write-downs, Bear Stearns, IndyMac, Fannie Mae, Freddie Mac… surprise!

Sources:

“Dollar Jumps on Paulson, Plosser Comments”
Reuters, July 22, 2008

“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Paulson: Housing Market Could Turn Corner Soon”
CNBC, July 22, 2008

Weekend Videos

Just got back to blogging late Friday evening. Had to entertain my relatives from Canada who are in. Like the Irish a couple of weeks ago, they shopped liked it was Christmas in July to take advantage of the weaker dollar. I know one thing for sure. Foreigners sure love our “strong dollar” policy…

“Oil Crisis”
Becky Quick
CNBC, July 18, 2008

From the CNBC website:

The House may vote on releasing oil from the strategic petroleum reserve, with Senate Majority Leader Harry Reid and CNBC’s Becky Quick.

You can view the 3 minute 18 second video here.

Note to Congress- there is no quick-fix for the energy crisis. I’m starting to consider donating funds to Jim Puplava’s proposed program, “No Congressman Left Behind.”

Apparently, it’s a non-issue now anyway, seeing that after oil prices suffered their biggest weekly drop ever, Yahoo! Finance asks tonight, “So is it time to declare the energy bubble popped?” By the way, the Associated Press is reporting that terrorists are trying to enter the United States with European Union passports. Good thing Congress wants to deplete oil stockpiles meant for a national emergency. Like a major terrorist attack, for example. If you think 9/11 was a one-off event, I have a bridge that spans the East River out in NYC that I can sell you for a really good price…

“Is government clueless about economy”
Jim Jubak
MSN Money, July 18, 2008

From the MSN Money website:

Washington is talking us into a deeper crisis. Neither the President nor Congress gets it: When you owe as much as the US does, keeping your overseas creditors happy is the most important thing, says Jim Jubak.

You can view the 4 minute 7 second video here.

Jubak said in the segment:

The Saudi government has gone into serious discussions about taking its currency off the dollar peg.

“Christmas In July”
The Dandy Warhols, “Little Drummer Boy” (1995)
YouTube Video Link

How Irish Tourists Saved The U.S. Economy

“There’s someone I want you to meet this weekend,” my girlfriend told me in June. Her relatives were coming in from Ireland for a family reunion in Chicago. “He’s travelling with his wife and her sisters. Maybe you guys could hang out and talk some football [soccer].” I met Connor that Friday night at the Water Tower Place in Chicago (from what I could understand, he wasn’t married, yet he did travel with a young lady and her sisters). While the conversation revolved mostly around the “beautiful game” and my plans for the “Great Escape” the next day to watch some of Euro 2008, he happened to mention that since he’d been in United States, he and the “Walsh girls,” as they came to be known by reunion participants, had shopped, shopped, and shopped some more. It seemed that every time I asked about Connor’s whereabouts, “he and the Walsh girls went shopping” was the response I got. On Sunday, the reunion shifted to Arlington Park Racetrack for thoroughbred racing. I saw the Irishman at the start of the day after he had just won a race, but didn’t see him later on. More shopping, perhaps? In the days that followed, my girlfriend joked to her sister that the Walsh girls single-handedly saved the U.S. economy. She also mentioned that she felt bad for Connor, as did I, as he was forced to endure the seemingly-endless spending sprees at the Chicagoland malls. However, this remorse was short-lived when her sister informed her that Connor bought just as much stuff as the Walsh girls did.

Robin Sparkles, “Let’s Go To The Mall”
YouTube Video Link

Anyway, I read a blog post by CNN’s Jack Cafferty earlier today that reminded me of our “economic rescue” by these visiting tourists from the Emerald Isle. Cafferty provides commentary and insight for CNN’s political program “The Situation Room.” He wrote:

The U.S. dollar just isn’t what it used to be. In fact, the dollar has been declining in value for 6 years now against other major currencies.

And, if you look around, it’s hard not to see the signs: hordes of vacationing Europeans are picking up bargains in the U.S., while Americans traveling overseas are hit hard with sticker shock. Canadians now flock here for shopping bargains, instead of the opposite. A Belgian company is attempting a hostile takeover of Anheuser-Busch, the largest brewer in the U.S. If the takeover goes through, it might be the first of many foreign takeovers of American companies.

While everything made in the U.S. is so much cheaper to foreigners, Americans are paying more for imported goods, while most are also grappling with rising food and energy costs. Since oil is bought and sold in dollars, the devalued dollar makes gasoline that much more expensive for Americans.

Some even suggest the continued decline of the dollar could one day lead to it being replaced by the Euro as the so-called “primary reserve” currency. There are stores right here in New York that now accept euros as payment.

Meanwhile, the message from Washington doesn’t seem to change much. President Bush has often talked about his support for a “strong dollar”, just last week saying “We’re strong-dollar people in this administration.” Really, Mr. President? You have presided over the most precipitous drop in the value of our currency in our nation’s history.

Source:

“Concern about sharp decline of dollar?”
Jack Cafferty
CNNPolitics.com, July 2, 2008

Peter Schiff TV Appearances

Peter Schiff, author of the book Crash Proof: How to Profit from the Coming Economic Collapse, appeared on FOX News Saturday morning and CNBC Tuesday morning. Schiff told viewers of “Fox Bulls & Bears” that the downturn in the U.S. economy goes beyond a “slowdown.” He warned:

We’re already in a severe recession, and it’s going to get a lot worse.

Commenting on the poor performance of the U.S. stock market lately, the president of Connecticut-based Euro Pacific Capital said:

This is a bear market. We’ve been in a bear market since 2000. The market’s going a lot lower, not only in nominal terms, but in real terms.

Later on in the show, Schiff gave a timeframe for how long he thought the bear market would last. He told viewers:

We are in a secular bear market. It’s been going on for 8 years. It’s going to go on for another 5 to 10 years.

As to where investors may want to look at putting their money, the host of the weekly radio program “Wall Street Unspun” said:

It’s [oil] probably going up to $150…

And, you know, trying to catch a falling knife in the financials? They have a long way to go down. I wouldn’t touch them…

Look at gold. You want to see a good chart, look at commodities. Look at foreign currencies.

At the conclusion of the show, Schiff predicted:

Well, this week Bernanke said the economy was going to improve and inflation was going to moderate. He was wrong on both counts. The economy is going to get a lot worse. Inflation is going to get worse. And you’ve got to get out of the dollar. It’s going to fall at least another 10%.

FOX News Appearance
YouTube Video Link

On Tuesday morning, Peter Schiff appeared on CNBC’s “Squawk Box,” and responded when asked who was responsible for the financial mess the United States has found itself in by saying:

Well, first of all, it’s the government, and when I say the government, I also mean the Federal Reserve, that has artificially kept interest rates much too low in this country, and in so doing, they’ve encouraged a culture of consumption, of borrowing to buy things. In America, we borrow to buy houses, to buy cars, to send our kids to school, to remodel our houses, to take vacations. And what we’re seeing right now is the fact that we can’t pay any of this money back. And the lenders are cutting us off, and this whole bubble economy that we have is now deflating. But it never would have existed if we had honest money. If we were on a gold standard and we had higher interest rates, we would have been saving, we would have been producing, and we wouldn’t be in this mess.

Schiff shared his views about how to avoid a financial armageddon. He said:

We need to raise interest rates dramatically. What’s that going to do? It’s probably going to bankrupt most of the financials. It’s going to bankrupt a lot companies. We’re going to have to go through a big retrenchment because we basically spent ourselves into bankruptcy. But we can’t keep trying to reflate the bubble. That’s what the Fed is doing. That’s what the stimulus is trying to do. They’re trying to get us to spend more money. That’s the problem. We’ve spent too much. So, we’re going to have to live through a severe recession. If we keep fighting it, all we’re going to have is higher inflation, higher oil prices, higher commodity prices, and eventually, we’re going to get something far worse than just a severe recession. We could have hyperinflation and a complete destruction of our currency.

You can access the 7 minute 16 second CNBC segment here.

Sources:

“Fox Bulls & Bears”
FOXNews, June 28, 2008

“Squawk Box”
CNBC, July 1, 2008

FDIC Ads: Should We Be Worried?

Leafing through the June 30 issue of Time magazine, I stumbled upon an advertisement from the Federal Deposit Insurance Corporation, or FDIC…

For those readers not familiar with the FDIC, their mission, according to their website, is to preserve and promote public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

Now, the FDIC says the ads were meant to commemorate the seventy-fifth anniversary of its creation as an “independent agency” of the U.S. government. However, some suspect there may be an ulterior motive for the ad program. Keep in mind that back on February 26, I discussed in a post how the fourth quarter of 2007 was the worst bank and thrift performance since the fourth quarter of 1991, whereas the FDIC classified 76 banks as “problem” institutions for the quarter (up from 65 a quarter earlier). In addition, it was revealed that the FDIC was looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

Additional justification for the FDIC to roll out a “reassurance campaign” appeared in the following months. On June 5, John Poirier of Reuters talked about an appearance by Federal Deposit Insurance Corporation Chairman Sheila Bair on Capitol Hill, and wrote:

An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, Bair told a Senate Banking Committee hearing on the state of the banking industry.

“There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past,” Bair said. “Uncertainties in today’s economic environment continue to pose significant challenges for the banking industry, households, and bank regulators.”

So far this year, four small U.S. banks with deposits insured by the FDIC have failed, up from three in 2007. The agency last week boosted its list of troubled banks to 90, which have a combined $26 billion in assets.

Ironically, the FDIC ad I came across featured a photo of the $100,000 Series 1934 Gold Certificate featuring the portrait of President Wilson, the largest denomination of currency ever printed by the Bureau of Engraving and Printing. Nothing more comforting than seeing the words “insuring” and “protecting” next to the image of a U.S. gold certificate with the phrase “one hundred thousand dollars in gold payable to bearer on demand as authorized by law.” Too bad those dollars sitting in banks across the United States haven’t been backed by the precious metal since 1971, when President Nixon abandoned the Bretton Woods Agreement and effectively took the U.S. off the gold standard. As the U.S Treasury says on its website:

Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything.

Oh, Tricky Dick, what another fine mess you’ve gotten us into…

Source:

“UPDATE 1-Bigger U.S. bank failures may be coming – FDIC”
John Poirier
Reuters, June 5, 2008

Gold, Greenbacks, And Government Intervention

I remember reading a rather significant article by MarketWatch’s Peter Brimelow last fall. As someone who follows precious metals religiously, I had already been aware of the claims made by groups such as the Gold Anti-Trust Action Committee, or GATA, that the price of gold is being manipulated. However, on October 18, 2007, Brimelow let “the cat out of the bag,” so to speak, for the readers of that particular Dow Jones website. Brimelow wrote:

Nevertheless, for the longer term, the gold bug faction lead by Bill Murphy’s LeMetropole Cafe Website is cockahoop. It has long argued that the metal’s price has been repressed by what it calls “The Gold Cartel” an alliance between the official sector (central banks, the U.S. Treasury) and chosen instruments (key investment banks and co-opted bullion dealers and others) to create a financial assets boom.

Reason for rejoicing: The discovery by James Turk of the Freemarket Gold & Money Report that, as Turk puts it: “the U.S. Treasury quietly made a subtle change to its weekly reports of the U.S. International Reserve Position, which includes the U.S. Gold Reserve. This change was first made May 14… It says the U.S. Gold Reserve is 261.499 million ounces and importantly, that the gold is now reported ‘INCLUDING GOLD DEPOSITS AND, IF APPROPRIATE, GOLD SWAPPED’ (emphasis added).

This description provides clear evidence that the U.S. Gold Reserve is in play. Gold has been removed from U.S. Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price-capping efforts. Gold placed on deposit gets loaned out by these bullion banks, and then sold into the spot market to try capping the gold price.”

Intervention, pure and simple as that. No, manipulation. Which, by the way, isn’t as conspiratorial as it sounds. Brimelow pointed out:

It may seem like an arcane point. But I remember when the idea that central banks were systematically selling gold at all was dismissed as crankishness. Yet it’s now universally acknowledged.

And why would Uncle Sam want to cap the gold price? The MarketWatch columnist wrote:

Turk’s conclusion: “This new evidence provided in the U.S. Treasury report as well as the rising gold price itself suggest to me that we are now witnessing the last scramble by the gold cartel to cap the gold price. It is a vain attempt by them, acting under the instructions of the U.S. Treasury, to make the world think the dollar is worthy of being the world’s reserve currency when in fact everyone knows that it is not. In short, the wheel has fallen off the truck. The dollar is heading for a train wreck. Use whatever metaphor you want, but the message is clear - the dollar is in serious trouble…

Fast forward to the present day. According to MarketWatch’s Laura Mandaro tonight, currency traders now suspect that American and European finance officials engaged in some “arm-twisting” at last month’s G7 meeting in an attempt to provide support to the U.S. dollar. Mandaro wrote:

Gains of 2% to 5% in the U.S. dollar from a key low point last month, combined with recent press statements from anonymous senior finance officials, have fostered suspicions that the group of industrialized nations backed up their public statements with some backdoor negotiations.

Madaro referred to an analysis of euro and dollar trades by Greg Anderson, head of foreign exchange strategy at ABN AMRO, which suggested “the U.S. and Europe may have pressured central banks from the BRIC countries– Brazil, Russia, India and China– and sovereign-wealth funds to temporarily stop converting 20% to 40% of their newly accumulated U.S. dollar-holdings to the euro.”

This pressure, along with signs that the European economy is struggling, could help explain why the greenback has stabilized. Mandaro suggested that analysts now suspect finance officials, especially from the United States, changed tactics around the time of the G7 meetings. The MarketWatch reporter wrote:

The Treasury Department, while officially supporting a strong dollar policy, had been content to see the dollar slide since it helps U.S. exports, analysts said. That laissez-faire approach seems to have changed in the last two months, as the U.S. government has seen the weak dollar help push up oil, agricultural and other commodity prices to record highs.

Disturbingly, some are making claims of direct government intervention in the market. However, Mandaro noted:

But many currency analysts say such a direct intervention is unlikely.

For one, the United States’ foreign exchange reserves are relatively small at about $75 billion, making dollar buy-backs little more than symbolic.

And the G7 statement, at least at the time, didn’t suggest a direct intervention was round the corner. The last time the U.S. dollar experienced a coordinated currency intervention, when European monetary authorities in September 2000 convinced other G7 members to support the then-depressed euro, the policy statement specifically mentioned the euro. This most recent time, the statement just mentioned exchange rates in general.

The United States doesn’t usually intervene: From August 1995 through December 2006, the United States only intervened twice in the foreign exchange markets.

“Last time.” “Doesn’t usually.” And what’s to say government intervention isn’t occurring this time around?

So much for the notion of “free markets.”

Sources:

“Gold bugs: ‘We told you so…’”
Peter Brimelow
MarketWatch, October 18, 2007

“Dollar rally, leaks put fresh focus on G7 meetings”
Laura Mandaro
MarketWatch, May 15, 2008