GOLDILOCKS! THE BEARS ARE COMING HOME
(UNCOMMON COMMON SENSE)
Berenanke's hands are tied, he cannot lower rates for fear of a
You can lead a horse to water, but you
can't make him drink. The worst FEAR
is that the inevitable Debt Collapse that I have been warning you all about is
about to take place and it works something like this: On the way up, the FED
deposits $100 in the Banking system which is then able to lend up to (assuming
a 10% reserve requirement) $1,000, thus creating $900 out of thin air (all the
while creating an illusion that real money was being created). Now here comes the problem: Eventually
something happens that wakes everyone up to the illusion that the Emperor Has
No Clothes. When a borrower defaults on $100, it is the same as the FED taking
back their initial $100 thus forcing the Banking system to call in $900 worth
of loans. The money supply has now shrunk by $1,000, not just by the $100
default. This is highly simplified, but do you get it. During an upswing, a
default is rare and any shortfall in Bank reserves is made up by the FED.
However, the last 20 year build-up of “out of thin air creation of money and
credit” is about to come home to roost. It will shake the world’s financial
system to its core. And you can bet that you have only seen the beginning of
the Sub-Prime debacle as it will spread as house prices drop by 30 to 50% over
the next 3 to 5 years. If you want to know what an overblown real estate bubble
burst looks like, just take a look at
THE
BIG PICTURE
If
you want to understand what is really going on, you must remember to always
keep the big picture in mind. If Junk Bonds suddenly have NO BIDS, it does not
mean that they have no value, it just means that there is no market at the
present time. But there are margin calls and they have to be met so they sell
whatever they can (anything that is liquid) in an attempt to stay solvent. Once
the margin calls begin to hit, much more is sold than is initially required
because everyone knows that the flood gates are now open and all excess money
finds its way to Treasuries, hence the decline in rates. I've warned you more than a year ago that the FED
has lost control of the money supply.
THERE
IS A TIME AND
.
When
there is a shortage of money in the system and the economy is mired in
recession (which has always been caused by the FED tightening the money supply
by raising Interest Rates) that is the time to lower interest rates and
increase the money supply. However, lowering rates when not only our banking
system but the whole world’s is awash in money is not the solution. With our
currency on the verge of collapse and the economy growing at a near record pace
after five consecutive years of expansion, now is certainly not the time to
lower interest rates because it will only make matters worse. It will tank the
US $ and because of the tightened lending standards, injecting liquidity into
the banking system which is already awash in excess reserves, will no longer
increase the money supply, but the defaulting debt will shrink it.
SHOULD
THE FED CUT THE DISCOUNT RATE?
Short
Term Interest Rates are already as much as 75 basis points below the Discount
Rate, so cutting rates will accomplish absolutely nothing positive. In fact, it could cause a lot of harm as it will
signal to the world that the FED is worried about the Economy and as you all
know, perception is everything. Just because Wall Street wants a rate cute,
that doesn’t mean it’s the right thing to do. They are just grasping at straws
because they know that the Bubble has burst and, as has always been the case, they
have been caught with their pants down.
CAN
THE FED BAILOUT THE SUB-PRIME VICTIMS?
LTCM
: To understand both the Sub-Prime and mortgage crisis by comparing the
solution to what Greenspan did with LTCM, we must first analyze what the
problem with LTCM was. LTCM was just one company run by a couple of Math and Financial
geniuses who forgot about the NATURAL Laws of Limits and Liquidity. They got
caught owning a position in Treasuries that was so huge and so highly leveraged
that it became illiquid. So, when the market went against them and they were
called for margin, they could not come up with the margin nor could they
liquidate. Greenspan came to the rescue by forcing the major brokerages to buy
them out while lending the company enough money to meet its margin calls. The
FED forced the brokerages involved in the bailout to make a fortune even though
they acted against their better judgment at the time. Had LTCM been a Bank, the
Fed could have lent them the money to meet their short term liquidity crisis,
which is exactly what the FED was set up to do from the start. Two things that
must be kept in mind: They were buying US Treasuries (not junk bonds) and it
was only ONE Hedge Fund. The whole problem was less than one tenth the size of
the sub-prime debacle. I had warned you all in my letter titled DENIAL ( March
4) that the virus will be spreading not only to Alt-A1 mortgages, but to the rest
of the world’s over leveraged financial system as well, especially the buyout
and takeover craze.
HAS
“IT” BEGUN?
What is IT? and
When will “IT” happen?
“IT” is a major financial melt down followed by an
economic contraction. “IT” is sudden and sharp downward financial spiral that
takes everything down with it. “IT” will be started by a catalyst, a spark that
will get everybody’s attention. But “IT” is already built into the system by 20
years of accumulated excess credit creation, just lying, there like a pile of
oily rags, just waiting for spontaneous combustion or a match or a spark to
ignite “IT”.
Some of the candidates for the catalyst include the
following:
1) Crash of the Dollar
2) Stock Market Crash
3) Derivative meltdown at a major bank
4) Nuclear terrorist attack
5) Major terrorist attack on the
6) Major Corporate Debt Default
7) Major Municipal or State Default
8) Foreign Dumping or perhaps simply a refusal by our
major creditors to continue buying US Treasuries
9) A major takeover fall through because of the
inability to get financing
10) And last but far from least, A Blow-up of the
Sub- Prime Mortgage Market
This an excerpt
from my February 2007 Letter.
There is no question that the oily rags have begun to
simmer and it’s only a matter of time before they burst into a major
conflagration.
CAN ANYTHING BE DONE TO STOP “IT” FROM BURSTING INTO
FLAMES?
The die has been cast, but that doesn’t mean that Berenanke won’t try. The Greenspan put worked before, maybe
it’s time for a Berenanke put. NOW IS A DIFFERENT TIME AND A DIFFERENT
PLACE. Cutting interest rates and injecting more reserves into an already
bloated system may work for a day or two, maybe even a month or two, but at
best it can only delay the inevitable.
HISTORY REPEATS
If you go back and review the actions of the
Government during the 30’s to halt the Depression, you will discover an eerie
similarity between then and the Bills that are working their way through
Congress now. A Recession will bring about protectionist policies and an end to
any free trade talks (Smooth Holly).
Increased Union strength, increased taxes, Government
manipulation of the economy and CARBON CREDITS, which in reality will be the
biggest hidden tax increase combined with the most shackles on industry that
the world has ever seen will result in turning a needed recession to re-balance
the economy, into a world-wide Depression (along the lines of the 30’s). I wrote
about this more than two years ago when I called for history to repeat by
electing Hillary to become the FDR of the 21st Century
IS THERE ANYTHING THAT CAN BE DONE?
Not unless you believe that we can change History from
repeating and thus change our destiny. But you can act now to protect yourself.
First of all, if we are lucky and my analysis is correct; we have a good chance
for a short term reversal with the Market breaking out to new all time highs.
The Berenanke put will be perceived has having worked
and bullish sentiment will skyrocket. SELL into this last rally and go short,
especially the financials. Can you just imagine all the lawsuits that will be
flying around as the blame game comes to the forefront? What a great time to be a Wall Street trial
lawyer.
And last but far from least, BUY GOLD on any weakness.
Although I don’t think the correction in Gold is over, it’s possible that
financial conditions will shorten its consolidation. My maximum downside target
is $520, which would mark the end of Wave II and start a WAVE III explosion with
an objective of $1,000 points plus. BUT, I firmly believe that Gold’s
correction will be truncated both as to time and price. So continue to buy
weakness until Gold breaks above $730. If you’re not fully invested by then,
just back up the truck and load up.
GOOD LUCK AND GOD BLESS August 4, 2007
Aubie Baltin CFA.
CTA. CFP. PhD.
561-840-9767