Thursday, October 6, 2011

October 2008

This is a good time to look back at facts and ignore opinion editorials and media spin.  The simple facts are plainly in view.

The over leveraging of the American home generated unheard-of profits for banks participating in the process.  Initially, a Fannie Mae guaranteed loan with no qualifications was issued.  That loan was sold to a money center bank.  That bank packaged the loan with other loans of varying quality.  That package of loans had a small percentage of quality paper in it but was rated AAA based on a formula.  Then the package of loans was sold to a large investor or pension fund.  Then the bank that sold the packaged or loans bought insurance against the failure of that same package.  AIG wrote these insurance policies.  When Hank Greenberg would not allow the AIG Financial Products division to grow beyond a sensible size he and the company were indicted by Elliot Spitzer.  The charges on the company were dropped once he resigned but he remained in question.  The Financial Products division was allowed to write excessively large amounts of risk insurance on the falsely rated mortgage pools.  Goldman Sachs, Societe Generale, Deutsche Bank, Merrill, UBS and others were the purchasers of these insurance policies.

If the average citizen engaged in this type of behavior state insurance commissioners would be aggressively pursuing fraud indictments on all parties involved.  In this case several of the named groups above are voting stock owners of the federal reserve and taking a loss on those transactions is just not an option.  Instead the public was convinced that if they did not get paid on those illegal bets the world would end and the economy would stop functioning.

So, we have increased the balance sheet of the federal reserve by more than 3x during this time.  Also, we have taken the federal debt to $14,860,000,000,000.  The US is currently running deficits of nearly $1,500,000,000,000 per year.  Simply put, we are liable for excess spending of $5,000 for every man woman and child in the nation.  That is after the actual treasury revenue is spent.

Let's have a look at what has happened to major indices in the wake of this series of decisions.
OK this looks great.  If you held a share of the S&P for three years you have achieved a 0% return.  If you held one ounce of gold you have seen an 85% increase in your holding.

Readers, for just a moment cut though the clutter of the press and popular culture in order to observe the facts.  The banks who received 100% payouts on the insurance contracts written on failed products that they designed and sold have been made whole.  They have been nursed back to life and are flush with cash.  The owners of homes involved in these illicit transactions are in some cases losing everything.

This time it is the federal government that is in question.  The banks control the actions of the federal government.  In the case above the profits of the banks were privatized and the losses were socialized.  Some will ask why this matters?  The average American sees the federal coffers as an endless supply of free credit but it is not.  This interest free period will be over at some time and the bills will arrive in the mailbox.  They are not going to the mailbox of Goldman Sachs or Societe Generale, they will come to your home.

Currently the dollar and the bonds of the US are being treated as a safe haven.  Consider what will happen once the nation is expected to begin repaying these debts?  How can the society grow under the current conditions?  Without growth there will only be one way to cover these debts and that is printing.

Assets that are immune to the effects of printing should be considered.  Also, don't think for one second that holders of assets are going to avoid the bill for these handouts.  Prepare accordingly.

Tuesday, October 4, 2011

Burning The Furniture......

The austerity imposed on Germany by the Treaty of Versailles following World War I created the conditions for an unmanageable monetary hyperinflation and eventually Hitler's rise to power.  During this time the wealthy sold valuable artwork and antiques for any price just to survive.  The poor had little options and even resorted to burning their furniture for heat.  Crippling asset deflation was followed by out of control monetary hyperinflation.  This violent series of conditions led to the backing of a populist dictator as average people were left with nothing else to believe in.

We have written at length on the weakening dollar which was in a firm downtrend from June 2010 until 9-1-2011.  Please consider this chart of our dollar index tracking fund:
Notice that the dollar touched upper resistance in the first week of June 2010 and began an orderly fall that lasted until 9-1-11.  Since 9-1-11 the dollar has been strengthening against other currencies mainly the euro and franc.  Now, consider this chart of the euro and notice the inverse behavior as it relates to what you have seen in the dollar chart:
Clearly, central planners are embarking on coordinated currency devaluations.  They take turns as they try to maintain order while defrauding holders of currency.

How does this effect Americans?

Well, if you hold assets in dollar terms be prepared to feel tremendous pain until the fed initiates QE3.  That could come soon or could take a while.  Once a path of quantitative easing was chosen all other solutions were nullified.  Some readers are not comfortable with that statement but they are advised to "keep dreaming."  Sovereign economies with banker controlled electronic money supplies, which are the liability of unknowing citizens, do not operate like a small business.  Cutbacks and austerity only cause tremendous pain for the society while those in control act to relieve themselves from suffering and economic accountability.

We find it nearly impossible to trade in this environment.  Being in place for the macro trend yet lightening up when the G20 finance ministers meet in Europe for the weekend to determine who is next to devalue is nearly impossible.

Physical metal and unleveraged hard assets remain the only sensible positions.  While it is completely contrary to the major trend and certain long term outcome, holding dollars is profitable until they have completed the euro liquidity expansion.  Part of the reason that this direction is so hard to accept is that dollar money funds have incredible levels of exposure to the European condition.

People, cities, states, banks and sovereign nations remain over-leveraged and under-capitalized.  This cycle of coordinated devaluation and strategic printing for the benefit of connected bankers will continue until the modern currency system implodes.  If you don't like what we are saying feel free to trade as if we are wrong.