John Paulson Says Double-Digit Inflation is Coming

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.   

As average U.S. gas prices head toward $4.00 a gallon, billionaire hedge fund operator John Paulson recently told a standing room only crowd at New York’s University Club that double-digit inflation is about to rear its ugly head. Paulson assumes that the Fed will continue to engage in its inflation-creating behavior.

John Paulson is famous for making a killing on shorting subprime bonds before their collapse. Most of Wall Street was bullish at the time and Fed Chair Ben Bernanke famously declared that he didn't see subprime mortgages causing any problem. The market completely fell apart weeks after Bernanke spoke.

The Paulson Bernanke dynamic is now back in play with predictions of inflation. Bernanke doesn't see it now and doesn't anticipate it. In an interview with ABC News done around the same time that Paulson gave his talk, Bernanke stated "We haven't quite yet got to the point where we can be completely confident that we're on a track to full recovery," and he continued that the central bank would take no options off the table to further stimulate the economy.  The interviewer didn't ask Bernanke the obvious question of whether or not the need for further Fed stimulus after four years indicates that the previous efforts have been a failure.

Paulson's presumption that the Fed will continue to feed inflation forces is completely supported by Bernanke's actions and statements. The Fed Chair further blamed rising oil and U.S. gasoline prices on geopolitical tensions. Prior to the mid-2000s though, geopolitical tensions only raised the price of oil to $40 a barrel. This time it's well over $100 a barrel. Money printing accounts for the price difference, but you'll never hear that from the Fed's money-printer-in-chief. And this is to expected. No government in inflation's 2000 year history has ever taken full responsibility for causing it.

Governments also have a history of finagling with the inflation numbers as well. This seems to be a universal practice once some form of indexation takes place (adjusting prices for inflation). The U.S. introduced indexation for social security and tax brackets in the 1970s. Starting it the 1980s, a number of statistical "improvements" were introduced in how the inflation rate was calculated. Interestingly, all of these "improvements" lowered the reported rate.

When it comes to inflation predictions, investors have a choice between John Paulson, who has made billions from his knowledge of how markets works, and Ben Bernanke, who has repeatedly shown he is oblivious to their dangers (remember how he let Lehman Brothers go under and this almost led to the complete collapse of the global financial system?). If you are betting on Bernanke, you are betting against history repeating itself. Money-printing has always led to massive inflation in the past. Apparently, John Paulson knows this.


Disclosure: None


Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Nova Gold, the Gold Market and the Euro

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Canadian gold miner NovaGold Resources (NG) raised around $100 million on Tuesday, March 9th after selling 18.2 million shares of common stock at $5.50 each. Despite the dilution from this sale and another scheduled sale of 13.6 million shares for $5.51 on March 11th, the stock rallied 9%, closing at $6.88. Together the two sales will increase the outstanding shares of NovaGold by 17%.

The purchasers of Tuesday's stock offering were funds managed by Paulson & Co. Thursday's sales will be to George Soros' Quantum Fund. Both are renowned investors, bullish on gold, and bearish on the euro. The average investor would have trouble realizing that Soros is bullish on gold because of mainstream media reports misrepresenting his outlook. The press reported that Soros stated the gold was in the ultimate bubble, instead of would be in the ultimate bubble because of governments engaging in excess spending and  money printing globally. Bubbles are where investors make the most money, as long as they can control their greed and sell around the top. Successful investors understand this. Unsuccessful investors like to blame the market, instead of how they interact with the market.

The bullishness of Paulson and Soros is even more interesting because of their funds large bets against the euro. The price of gold and the value of the euro tend to move together. The crisis in Greece caused a sharp drop in the euro and is still holding it down. Gold sold down with the euro, although traditionally gold has been a safe haven during crisis periods. It didn't hold up during Credit Crisis selling in the fall of 2008 either, although it closed up on the year. Gold is currently in a sideways trading pattern and the big January and February buying season in China and India is over. Gold prices tend to be weak in the spring because of lower retail demand for the metal. The technical patterns on the chart indicate its price is trendless at the moment.

Ultimately, the value of NovaGold is dependent on the price of gold. NovaGold is sitting on some very huge untapped mineral deposits of gold, silver and copper. For those who think the price of gold will rise sharply in the future, these deposits are like money in the bank that is paying a very high interest rate. Apparently Paulson and Soros are of this opinion based on their actions. In the short-term, NG stock may be highly volatile however. Sharp up and down moves are common. There is also strong long-term resistance around the 7.00 level that was established in 2004, 2005, 2007, and 2008. Yesterday was the third time in recent months that the stock approached this key price. Breaking and staying above it will be a technically significant event.

Investors should remember that gold is in a long-term (secular) bull market that began in 2001. This doesn't mean that prices go up everyday. There will be pauses and dips. You make your money by buying on the dips.


Disclosure: Have held positions in Novagold and gold several times

NEXT: The Economy's House of Cards

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Recovery? Don't Bank on It

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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As of Friday, 98 U.S. banks have failed this year and the FDIC Deposit Insurance fund is on the brink of insolvency. The fund now covers only 0.22% of U.S. bank deposits, whereas a 1.15% minimum is mandated by law. At the end of second quarter 416 banks were on the FDIC's troubled list (this number should be updated in about another month), so the steady drip of money leaking out of the fund could turn into a torrent. Commercial loan defaults are the current crisis hitting the system and this problem has just begun. While you may be surprised that this could be happening after Fed Chair Ben Bernanke has repeatedly told us that the banking system was saved last year, a government report released today indicated that the public had been lied to about just this very subject.

A special inspector general investigating the handling of the bank rescue program TARP in the fall of 2008 found that then Treasury Secretary Paulson and other officials falsely claimed that the first 9 institutions getting funds were sound. Paulson specifically stated, "These are healthy institutions ...". At the time, Merrill Lynch was actually collapsing. Citibank and Bank of America subsequently required significant additional funds to stay afloat. The report was criticized by Assistant Treasury Secretary Herbert Allison Jr., who now heads the bailout program for the government. Allison maintains that any critique of the announcements made a year ago should take into consideration the unprecedented circumstances facing financial regulators at the time. In other words, the government feels that it is justified in blatantly lying to the public if a crisis is taking place. Let me repeat that: the government feels that it is justified in blatantly lying to the public if a crisis is taking place. Let me follow that up by pointing out that there is both a credit and economic crisis still taking place.

The FDIC itself has given us more than enough reason to think the U.S. banking system has not actually been rescued. Other than the domino like collapse of smaller and midsized banks that is now occuring, the FDIC's figures state that in aggregate U.S banks lost $3.7 billion in the second quarter, even though almost every large U.S. bank reported major profits. Of course the major banks have received massive injections of government aid, while the smaller banks have not. This is a move afoot to try to inject TARP funds into smaller banks to prevent defaults on a mass scale.

At the risk of sounding like a broken record, what is taking place in the U.S. now is very similar to what took place in Japan in the 1990s. Japan had a banking system dominated by a small number of large institutions. The first 9 recipients of TARP funds controlled 75% of the assets in the U.S. banking system. In both cases, banks were allowed to become so large that a failure of even one of them endangered the entire financial system. Japan has propped up its banking system for two decades now and the cost has been an economy unable to grow unless there is government stimulus. Personally, I am waiting to see what the U.S. government is going to do to rev up the economy next quarter now that the Cash for Clunkers program has expired.

NEXT: Gold! Record High Knocking on Heaven's Door

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Gold is in Eastern Capitalism

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The head of China's State Administration of Foreign Exchange stated last night that China's gold reserves were 1054 metric tons, up substantially from previously reported levels. Purchasing gold, along with a whole host of commodities including oil and copper, seems to be China's strategy for getting rid of some of its almost $2 trillion worth of foreign reserve holdings (about half of which are in U.S. dollars). In separate news, a report by Deutsche Bank now predicts that China's GDP will be bigger than the U.S. GDP by the early 2020's. Based on recent reports of U.S. government chicanery in the manipulation of the financial system, capitalism seems to be disappearing in the U.S while it's on the increase in Communist China.

I have long predicted that the Chinese would be increasing their gold reserves, which are paltry compared to the current size of their economy. China also needs to diminish its foreign exchange holdings before the paper that its holding seriously devalues. These efforts have only just begun. Despite buying gold and stockpiling commodities, China's foreign reserves were up slightly to $1.954 trillion at the end of Q1 2009 from $1.946 trillion at the end of Q4 2008. In order to actually diminish its paper holdings, China is going to have to ramp up gold and commodity purchases substantially from recent levels. The implications are bullish for the commodity markets to say the least. China is not the only economy with small gold reserves and large foreign exchange holdings either, the Gulf Oil states fit this description as well. They also have good reason to be buying gold.

As China rises because it is becoming more capitalistic, the U.S. economy is heading down because of it is becoming less so. For anyone who doubts that the U.S. is turning into an authoritarian socialist state where the government calls the shots and no free is left in free enterprise, I suggest you read recent reports about the Bank of America and Merrill Lynch merger. It was arranged by Fed Chair Bernanke and Treasury Secretary Paulson (both Republicans and appointed by a supposedly conservative Republican president). When Bank of America CEO Ken Lewis tried to back out of the deal when he realized it could take his company down, Bernanke and Paulson told Lewis he and the board of Bank of America would be removed if he didn't go along with what the government wanted (recall that the CEO of General Motors was recently ousted and think about the implications for a moment). Lewis also claims Bernanke and Paulson directed him to lie to Bank of America shareholders, who remained uninformed about the actual state of things when they had to vote to approve the Merrill takeover. The government which is supposed to protect shareholders has obviously become one of their biggest enemies. We have pointed this out a number of times in this blog. Unlike the press, which is reporting this story now, the New York Investing meetup has been warning about this for over a year and a half.

Given the current state of affairs, no one should be surprised that China will over take the U.S. economically in as little as 10 years or so - at least based on official government figures. Keep in mind that the U.S. has overstated its GDP for many years and China may have been understating its GDP during its rapid growth phase. Investors needs to keep an eye to the East as economic power shifts there. The U.S. is now at a similar point historically that Great Britain was after World War I. Britain's world dominance was on the wane, while the more rough and tumble capitalistic U.S. was on the rise. Instead of facing this reality and making changes, the British engaged in denial and this assured their fall. The U.S is doing the same thing right now.

NEXT: Buy When There's Flu in the Streets

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

It's Amateur Night at the U.S. Treasury

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Markets hate uncertainty and the U.S. Treasury delivered it in spades yesterday. Several days ago, the Obabma administration floated the idea of a good bank/bad bank policy, where the U.S. government would buy up most of the toxic assets on bank balance sheets in order to get them out of the system. This was essentially the original concept for TARP before Paulson turned it into a direct corporate welfare program for Wall Street. The Street of course loved the idea of more bailout money to clean up their mistakes. In the long awaited for announcement by Treasury Secretary Geithner (who formerly ran the New York Fed and who is an admitted tax cheat) on Tuesday, suddenly a whole new approach was announced. The market, not liking surprises, had an almost crash level drop.

Media coverage blamed the stock sell off on the government's new plan - and for once I agree with the media. A number of articles had comments describing Treasury's new plan as 'muddled' and 'short on details', both of which are accurate descriptions. Essentially, the centerpiece of the plan is that the government will team up with the private sector to buy up to $1 trillion in toxic assets from financial firms (the big-money private sector buyers will get their purchases underwritten by the government, in what seems to be a riskless investment). A separate lending program would be expanded to as much as $1 trillion from $200 billion for consumers and businesses. Add up all the money involved (and it won't be enough by the way) to the $800 billion plus Stimulus Plan passed yesterday and the U.S. government is allocating between $2 to $3 trillion in new expenditures. Just think inflation and devaluation of the dollar.

Having read the speech that Geithner gave yesterday, I would say there is little hope that the current administration's economic team will be any more effective than the previous administration's. Geithner himself has been part of creating the current economic mess that we are in and sees the solution as pursuing the same failed financial policies that have lead to it. One of his comments that were particularly outrageous was that the Credit Crisis we are now in is only obvious in hindsight and could not have been predicted (even though probably hundreds of government throughout history have engaged in similar economic policies with similar results). At another point, Geithner stated that historically 40% of loans have been securitized (bundled into bonds and then sold and traded) and this needs to be continued. Where this 40% figure came from is beyond me, although of course it depends on the definition of 'historically' (Geithner's historical perspective may extend to only the beginning of last week based on these two comments). Securitization is what has led to our current problems, so of course we should continue to take the poison that is killing us. Not surprisingly, Wall Street makes a lot of its money from securitization.

While there is a lot of uncertainty in the government's handling of the Credit Crisis, there are some things which an investor can have great confidence in. The continued creation of money out of thin air to get the U.S. economy out of the economic pit it has fallen into is going to create a lot of inflation and a dollar that isn't worth the paper it's printed on. While the government's actions may fail for their intended purpose, they will be successful in creating this even bigger economic problem down the road.

NEXT: Market Doesn't Believe Retail Sales Report

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

East Meets West, The Triumph of Communo-Capitalism

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

China lowered its interest rates last night for the fourth time since September. It's not yet close to zero interest rates like the U.S. and Japan, but will be be continuing to approach that level next year as will Great Britain. In China the government directly owns the banks and meddles in banking policy. While in the U.S. and Britain, it would be more appropriate to say that the banks own the government, or at least the central bank, and can directly meddle in the government policy that impacts them. In the end is there that much difference? The result is a financial system rife with corruption that engages in economically absurd behavior, which the government then has to bail out.

Final figures for third quarter GDP have just been released for the U.K. and the U.S. According to the official figures (take these with a big grain of salt and assume the reality is worse), the U.K. economy declined by 0.6% and the U.S. economy by 0.5% annualized last quarter. In the U.K. this is the biggest decline since the recession of the early 90s and in response the central bank has dropped interest rates to the lowest level since 1951. For the fourth quarter, a decline around 1.0% is expected in the U.K, while in the U.S. the consensus forecast is the economy will fall off a cliff with at least a 6.0% annualized drop - something worthy of a depression. As a reminder, both Federal Reserve chair Ben Bernanke and Treasury Secretary Paulson testified to congress in September that if the $700 billion Wall Street welfare bill, better known as TARP, wasn't passed, the U.S would face a severe recession. At the time, New York Investing said a severe recession was inevitable no matter what.

TARP is an example of fiscal profligacy, and while it is one of the worst examples, it is by no means the only one. Supporting all of the government's spending is the Fed's out of control money printing, which even mainstream economists are now starting to mention (better late than never I guess). Charts from the St. Louis Fed that New York Investing first showed in October are now getting some press attention. One of these charts, the U.S. Monetary Base shows an 86% increase during 2008, but around a 1000% increase annualized in the last 3 months. Another chart, Adjusted Reserves, shows this indicator exploding from $100 billion to $700 billion since mid-September. These charts (and around a dozen others) are so damaging that I am expecting they the numbers will either be 'adjusted' in the future or the Fed will stop making them available altogether as it did with M3 a few years ago.

While deflation is the headline issue today (based on very little reality), some economists are starting to point out that the Fed and the rest of the world's money printing central banks are going to have a lot of trouble draining all of this liquidity once there is economic recovery. History indicates that this indeed does not happen, but a hyperinflationary spiral is much more likely. This is just starting to dawn on some mainstream economists (but by no means all). The New York Investing meetup laid out this scenario in its September 2007 (yes, 2007) meeting -and so far events seem to be unfolding as predicted.

NEXT: Changes in Wall Street Firms That Led to the Credit Crisis

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bailouts: It's Not Just Banks, It's Not Just the U.S.

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs
http://www.youtube.com/watch?v=UQieE8Ryvk0

While Ireland had to inject more capital into its major banks this morning to keep their financial system afloat (Ireland has a bigger subprime mortgage problem than the U.S.), today's bailout news concerns mostly non-financial institutions. Mega memory chip maker Infineon's mostly owned subsidiary Qimonda received government assistance so it could keep operating. Tata Motors had to inject money into its Jaguar Land Rover unit and is looking for bailout money from the UK. On our side of the pond, commercial property developers are requesting bailout money from the federal government. As for the bailout money that the U.S. has already provided to failing financial institutions, a just released AP survey finds many banks don't know where the money went.

The need for a bailout of a memory chip maker in Europe should come as no surprise. This industry has suffered from chronic overcapacity for years. Started in the U.S., the Japanese then dominated the business and they were followed by the South Koreans (and you should assume that China will be the major player sometime in the future). The German state of Saxony, a Portuguese bank and Infineon itself injected money into Qimonda. This is an attempt to save jobs in Saxony and Portugal of course. More money will be needed to keep this uneconomical operation going.

Uneconomical operation would be a good watchword for Jaguar Land Rover as well. Indian car company, Tata Motors, acquired Jaguar from Ford in March (what a brilliant purchase that was) and according to reports has pumped hundreds of millions of working capital into the company. It is now injecting 'tens of millions' to keep Jaguar operating and is looking to the U.K. government for bailout money to save the jobs of British auto workers. President Bush after all has just grudgingly provided U.S. auto makers with minimal bailout money to tide them over to the beginning of next year (when another bailout will be needed). How the inefficient auto producers can survive when even the best operations are struggling - Toyota announced its first loss since World War II last night - is a good question.

Trying to get in on the bailout gravy train, U.S. commercial property developers have sent a letter to Henry Paulson requesting assistance. The industry wants to be included in the government loan program created to prop up the the market for student loans, car loans, and credit card debt. The letter warns of a dire collapse in the commercial real estate market. Indeed this is likely to happen. Why the developers should be saved from their own greed and stupidity is not clear however. Perhaps the need to cancel their country club memberships and sell their private jets would just be too burdensome.

As for the money that has been spent so far in the 700 billion Wall Street welfare program known as TARP, the AP sent out a request to the banks that were recipients of the funds so far and asked them what they did with them. Some banks didn't know, none provided any answers. Should we be surprised? Congress attached nearly no strings on the $700 billion bailout in October and the Treasury Department, which doles out the money, never asked banks how it would be spent. Our stalwart representatives on Capitol Hill did summon bank executives last month and implored them to lend the money — not to hoard it or spend it on corporate bonuses, junkets or to buy other banks. But AP admits that there is no process in place to make sure that's happening and there are no consequences for banks who don't comply. New York Investing said all of this would happen before the bailout bill passed. Please see the videos listed at the top of this blog.

NEXT: East Meets West, The Trimuph of Communo-Capitalism

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Geithner's appointment to Treasury - a Golden Opportunity

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The market turnaround last Friday afternoon was reported by the financial media as resulting from the announcement that the head of the New York Fed, Timothy Geithner, would be appointed by President elect Obama as his Treasury Secretary. It would indeed be reasonable for Wall Street to cheer Geithner's appointment and the future team of takover Timothy and bailout Benny. It sent a very clear message that the new administration's policies will be to rescue any and every company needing it. While stocks rallied sharply on this news, the inflation hedges gold and silver rallied even more - and for good reason.

Geithner was the mastermind behind the AIG and Bear Stearns deals. In the case of AIG the company was nationalized by paying 10 times the market price for the U.S. taxpayer's share (if this had been a private deal he would have been sued for malfeasance). Bear Stearns was valued well below market value as a gift to JP Morgan Chase (which has a seat on the New York Fed Board of Directors by the way). Taxpayers just got to guarantee Bear's toxic loans and were left holding the bag. While most news media reported that Geithner was in favor of bailing out Lehman Brothers, this was apparently not the case. People who were on the scene at the negotiations claim otherwise. It is now widely acknowledged that allowing Lehman to fail is what has led to the market turmoil in the last two months. The PR campaign to build up Geithner obviously felt it important to rewrite history and in doing so made it clear that a universal U.S. government bailout policy was in our future.

Despite the momentary trouble that the automakers are having in Washington on getting in on the government gravy train and the failure to bail out Lehman (somewhat similar to the failure of the Fed to bail out the Bank of the United States in 1930, which had disastrous consequences), short of complete nationalization, the U.S. government couldn't do much more to support financial firms other than pump even more money into them (this will indeed be happening). Over the weekend the government guaranteed the most worthless one-sixth of Citigroup's assets. Today, the Fed announced a $600 billion program to support the mortgage market, $100 billion for Fannie Mae and Freddie Mac (two other financial black holes for government money) and $500 billion to purchase mortgage backed securities. Additionally, the Fed will lend up to $200 billion to the holders of securities backed by various types of consumer loans. So that's another $800 billion just for today. The total in the last year is way into the many trillions and you many assume most if not all of that is freshly printed money.

The implications of these moves have not gone unnoticed in the markets. Inflation sensitive silver rallied more than any stock index on both Friday and Monday. Gold, which has not been terribly damaged in the sell off during the last two months, and beaten down oil also had good rallies. The charts for gold and silver are much healthier looking than those for the major stock indices. Sustainable rallies are possible for both, while stocks look like they will need to do more work to get to that point.

NEXT: A Black (Plague) Friday for Retail

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Citi That Should be Put to Sleep

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

A constant refrain that has been heard from the New York Investing meetup since the Credit Crisis began is "there is no such thing as one bailout for an insolvent financial institution". If there was a poster for credit crisis relief, Citibank's picture would be on it with words underneath, "Can you bail me out? We accept funds from Arab sheiks, sovereign wealth funds, foreign banks, the Federal Reserve, the U.S. Treasury, the FDIC, and any welfare program for banks the government can invent - and we take food stamps". As with the daily crashes in the stock market,the bailouts for Citibank have become so common it's easy to lose track of them. From the end of 2007 into the spring of 2008 there were five different bailouts five months in a row. The Fed has pumped substantial amounts into the bank through its various lending facilities. Citi got the biggest chunk of funds from the TARP bill just recently. The 'success' of these efforts came to fruition last week when Citi (C) stock went into a death spiral losing 60% of its value to close at $3.77 (it was over $55 last year).

But not to worry, the U.S. government brain trust that has come up with one ineffective failed program after another to handle the credit crisis put together a bailout package for Citi over the weekend. If they are lucky, this one will work for more than just weeks, but will stabilize things for months before the next rescue package is needed (consider this to be the optimistic scenario). Citi will get another immediate cash infusion of $20 billion from TARP funds. Treasury and the FDIC will guarantee against the "possibility of unusually large losses" on up to $306 billion of risky (a code word for worthless) loans and securities backed by residential and commercial mortgages (please note that commercial mortgages are now collapsing). Citi will assume the first $29 billion in losses on this risky pool of assets. Beyond that amount, the government would absorb 90 percent of the remaining losses, and Citi 10 percent. Money from TARP and funds from the FDIC would cover the government's portion of potential losses (this is deposit insurance money). The Federal Reserve would finance the remaining assets with a loan to Citigroup of freshly printed dollars.

So that this bailout doesn't look like the handout that it is, the U.S. government is getting $7 billion in preferred shares of Citigroup. In addition, Citi will issue warrants to the U.S. Treasury and the FDIC for approximately 254 million shares of the company's common stock (4.5% of the total) at a strike price of $10.61. It is of course possible the Citi stock could hit this level, especially if the U.S. government provides at least $10.61 of funding per share. Citigroup is also barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years (it makes no sense that it should be allowed to pay any dividends, since they are being funded by the U.S. taxpayer). Citi has to additionally take steps to help distressed homeowners.

New York Investing has repeatedly said in its talks in the last year that Citi is too big to fail and the government will bail it out no matter how big a financial black hole it is. This sentiment was echoed in press coverage of the most recent bailout effort with financial commentators saying things such as"If they didn't help, the damage would be beyond imagination" and "It would create chaos [if there hadn't been a bailout]". We have also discussed how Japan followed similar policies with it banks in the 1990s and 2000s. During that time, the Japanese economy has been unable to recover and the stock market has sold off for 18 years. U.S. policy makers will have to come up with a different approach than the one used by the Japanese if they want to avoid this scenario in the U.S. So far, they haven't.

NEXT: Geithner's Appointment to Treasury, A Golden Opportunity

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

T & A and the GS-20 Summit

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Last Wednesday Treasury Secretary Paulson announced the T&A would be taken out of TARP (the Wall Street bailout bill passed in early October). The raison d'etre given by the Bush administration to congress for passing TARP was that only by purchasing troubled assets on bank balance sheets could banks be freed up to lend again and get the economy going. After the legislation was passed, congressional leadership from both parties announced with great fanfare how they were saving the American economy with this program. The ink was barely dry on the bill however, before Paulson announced that preferred stock was going to be purchased in troubled financial institutions instead. While the first $250 billion will still be earmarked for that purpose, Paulson has now decided that the remaining funds should be used to support financial markets that supply credit for credit card debt, auto loans and student loans. Of course next week, there might be a better way to save the American economy and the six week old program could be changed even again. If all this looks like no one in Washington has the slightest idea what they are doing, it's because they don't.

This is not to say that the new ideas for TARP are not an improvement on the original provisions of the bill which were essentially a form of welfare for Wall Street. Unlike welfare for the poor though, welfare for the rich comes with fewer limitations. While TARP has a provision for 'restriction' of bonuses, it doesn't eliminate them, nor does it force companies that can't continue to exist without government support to pay their executives salaries that top government officials would get. Nevertheless, over the weekend seven top Goldman Sachs (Paulson's old firm) managers graciously renounced their bonuses for 2008. Why they would have been getting bonuses when the company's stock has fallen 70% in the last twelve months is not exactly clear. CEO Lloyd Blankfein received a Wall Street record $68 million bonus last year when he was making the decisions that lead to this year's disastrous performance.

Like everything else in the contemporary economy, lack of effective ideas for handling the credit crisis is global as well. The GS-20 meeting of world leaders this weekend in Washington produced mostly a commitment to free trade and further monetary and fiscal stimulus (in other words governments throughout the world are going to print more paper money which will be backed by nothing other than their leaders hot air). British PM Gordon Brown, who decided to sell half of Britain's gold at the bottom of the market in 1999 and has presided over a worse subprime crisis than in the U.S., led the charge for increased stimulus measures. Other ideas bandied about included multinational supervision for global banks, more oversight for credit rating agencies and regulation for hedge funds. These useful suggestions didn't get much beyond the bandying stage however. Essentially anything concrete was put off until the next meeting in April. The do-nothing summit was immediately declared a success by President Bush.

Shortly thereafter, Japan announced a second quarter of negative GDP confirming it was in recession as the euro zone did last Friday. Since this was not exactly surprising news, Asian markets were little changed overnight, even despite the drop in the U.S. on Friday. The out of the blue rally in American markets last Thursday faded almost as quickly as it arriveed with the Dow down 3.8% and the Nasdaq down 5.0%. Technically speaking this was another crash day on the Nasdaq, but as I have said many times, no one pays attention anymore to just a 5% or 6% drop - and that includes world leaders.

NEXT: Trojan Horse of Earnings Surprises

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

AIG - Bailing Out the Bailout... Again

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The New York Investing meetup has repeatedly said in its meetings that there is no such thing as one bailout for an insolvent financial company. If Fed Chair Bernanke or Treasury Secretary Paulson belonged to the group they might have realized that Dow stock AIG was likely to turn into the bailout black hole of taxpayer funding that it has become. AIG is now on its third government bailout in less than two months. In mid-September, it had originally requested a loan of $40 billion from the Fed which was turned down. Days later the Fed bought 80% of the company for $85 billion. (see our September 17th blog entry: The People's Republic of the U.S. - the AIG Bailout). The government had to throw in an additional $38 billion in October to keep the company afloat. AIG then reported a $24.5 billion loss, 80% owned by the American taxpayer, for the third quarter in early November and this necessitated the bailout to be totally restructured.

After the initial bailout, the federal government issued assurances that its actions had stabilized AIG - and indeed it did for a whole few weeks (the approximate see ahead time for the visionaries that currently run the U.S. Treasury department and Federal Reserve). Unfortunately, the way the government stabilized AIG helped destabilize the market. This occurred because there seems to have been a high interest attached to AIG's government funding, which was treated as a loan even though it involved the purchase of common stock. While this apparently makes no sense whatsoever, we are dealing with the government here so don't expect the ordinary rules of financial logic to apply. This high interest rate forced AIG to dump a lot of securities on to the market in late September and early October helping to exacerbate the post-Lehman bankruptcy meltdown that took place during that time.

In the $150 billion AIG bailout part 3, the amount of funding from the Fed will be reduced to $60 billion and the interest rate on this loan will be lowered as well. An additional $40 billion will come from TARP, aka the Wall Street welfare bill, for the purchase of preferred shares in AIG. The Treasury for once correctly stated that this would not increase the government's ownership in AIG, although Treasury has previously indicated that preferred stock, which is a perpetual loan, represented ownership rights in a company. Paulson has also indicated that funds from TARP would only go to 'healthy companies', not failing companies such as AIG (this of course begs the question of why a 'healthy company' would need government assistance). The government will also be funding a $20 billion dollar buy back of residential mortgage securities that AIG insures and $30 billion dollars for the purchase of collateralized debt obligations (CDOs) for 5o cents on the dollar. It is CDO exposure that has financially ruined the company.

AIG has taken $100 billion or so in write downs so far. Its exposure to insurance for fixed-income investments fell from $441 billion to $372 billion after the governments first injection of $85 billion. Based on these figures, my guess is the the upper limit for bailing out the company is somewhere around $400 billion. Assuming of course they can cut down on using taxpayer funds for spa treatments for their executives and the one-million dollar a month payments they are making to former management who's decisions helped destroy the company.

NEXT: U.S. Market Tests Low as Global Recession Predicted

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dr. Evil and Mini Me Loot the U.S. Treasury

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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On Monday, U.S Treasury Secretary Henry Paulson and his look-alike Interim Assistant Secretary for Financial Stability, Neel Kashkari (both originally from Goldman Sachs and participants in helping to create the credit crisis) came up with a plan to stabilize U.S banks without nationalizing them. The U.S. will be saved from socialism by pilfering its treasury and giving the money to the U.S. banks and brokers that are considered 'too big to fail' the many teetering regional banks will have to wait and if still in business, might get a share of the government's succor sometime in the future). Pilfering was their intent, along with helping out their other well-placed friends from the beginning (Kashkari drafted the Treasury department's three-page constitutionally questionable, unworkable, and politically inept power grab that was the original Wall Street bailout bill). Interestingly, every major American news outlet seems to have missed the real story about what is taking place.

The story universally reported by the U.S. media, frequently in blaring headlines, was that the government was going to distribute funds to banks in exchange for ownership stakes. No such thing is occurring. In reality, the Treasury is injecting liquidity by buying preferred stock. Preferred stock is loan in perpetuity, it does not represent any ownership rights in a company. Preferred stock is supposed to pay interest (if it doesn't, like all other permanent loans it's a gift). No interest rate was cited in the Treasury announcements, although anything less than the 10% that Warren Buffett got on his recently purchased preferred from Goldman Sachs (along with warrants) or Mitsubishi got on its purchase of Morgan Stanley preferred (backed by a U.S. guarantee), is a government subsidy. No major media source seems to have pointed this out. Instead, they all reported that if rescue plan works, the U.S. taxpayer will benefit because these preferred shares will be sold for a profit. Since preferred share prices fluctuate with interest rates and not the fortunes of a company (as long as it's a viable enterprise), they would go down, not up, if higher interest rates result from the government's inflationary policies. No common share price increases, as happens when a company does better, will benefit preferred share holders. It is of course almost 100% certain the government also overpaid substantially for this preferred stock as well (in the case of AIG, the U.S. government paid ten times the market price for the equity it purchased). The U.S. taxpayer is going to lose somewhere between a little and everything on this deal. There is no chance is will be profitable.

This looting of the treasury is also not going to be terribly effective either. With it, the government has officially established a 'too big to fail' policy. Only big banks intitally get any money. These include J.P. Morgan Chase, Bank of America, Citigroup., Wells Fargo, Bank of New York, State Street, Merrill Lynch, Morgan Stanley and Goldman Sachs Group Inc. Citigroup, Wells Fargo, and JP Morgan will get $25 billion each (even though it doesn't appear that JP Morgan, nor Wells Fargo are in trouble and need the money). Another $25 billion will be split between Bank of America, and Merrill Lynch, which are merging. Goldman Sachs and Morgan Stanley will each get $10 billion, while State Street Bank and Bank of New York (which also doesn't appear to need the money) will get roughly $3 billion each.

This latest move by the Treasury will not only help to continue to put another major dent in the U.S. government's stretched finances, but is helping to create a dangerous concentration of banking power. For 200 years, U.S. policy has promoted a large number of small banks, but now we will be getting a small number of large banks. The thinking behind America's historical approach to banking was to prevent the concentration of too much economic power in too few hands, which could threaten the capitalist and democratic systems. Based on what is happening now, these fears were obviously well justified.

NEXT:

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Unlimited Liquidity Today, Unlimited Inflation Tomorrow

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. Federal Reserve, the ECB, and the central banks of England and Switzerland agreed over the weekend to "provide unlimited U.S. dollar funds to financial institutions" to support inter-bank lending. The Euro-zone will also guarantee bank debt until the end of 2009 and will assist its countries in buying preferred shares in failing banks in order to help recapitalize them. As this agreement was being worked out, Britain nationalized three of its major banks to prevent their failures. Meanwhile, the United States has altered the focus of its Wall Street bailout plan to concentrate on the purchase of non-voting bank shares and it looks like the American taxpayer won't be getting any equity in return (as the bill supposedly guaranteed).

The Euro-zone is essentially following the lead of Great Britain (the country that sold half of its gold in 1999 at the market bottom and which has a worse housing crisis than even the United States). Britain is now injecting $438 billion in loans to its banking sector - a sum that is proportionately much larger than the $700 billion U.S. bailout, but probably still not nearly enough. Its three bank nationalizations this weekend include the Royal Bank of Scotland (on the New York Investing meetup's likely bank failure list in September) where the taxpayers will get a majority 60% stake. Lloyds TSB and HBS were also merged by the government, which then bought a 40% ownership position in the new combined bank.

As the British banking system is being rapidly nationalized, the U.S. seems to be backing away from this socialist model. Instead of buying bad debt with the Wall Street bailout money, it now appears that preferred stock will be purchased (although media reports in this regard are garbled to say the least). Preferred stock is non-voting and represents no ownership rights in a company. It is merely a loan in perpetuity. Europe in general seems to be trying to adopt this approach as well. If there is any profit made on the government's money pumping (and there always is), none of it will be going to the respective taxpayers of any country that handles the banking crisis this way.

Where all the money is going to come from to pay for the 'unlimited' liquidity injections into the collapsing American/European financial system has not been stated. It is highly unlikely that it will dropping from the sky attached to a big balloon. Printing more money is the only possible option. This makes the inflation hedges gold and silver even better investment possibilities going forward. Amazingly they are both at particularly low prices - at least in the futures markets. While both had severe sell offs in the U.S. markets on Friday (sell offs for gold and silver that take place only in U.S trading have happened many times), anecdotal reports indicate that people were rushing coin shops and bullion dealers to purchase them.

NEXT: Stock Market Rallies Like It's 1932

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Short Selling Democracy - Senate Ressurects Bailout Bill

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs

http://www.youtube.com/watch?v=UQieE8Ryvk0

Late on Wednesday evening the Senate passed their own version of the Wall Street rescue package by a margin of 74 to 25 . Unlike the House the Representatives where all of the members are up for election this year, only a third of U.S. senators have to face the voters next month. It was therefore easier for them to ignore an irate populace opposed to this legislation and instead follow the lead of their major campaign donors who have paid them the big bucks for their assistance in looting the U.S. treasury.

In order to make the bill more sellable, a small bone or two was thrown to the little guy. A number of tax breaks amounting to a few cents for the populace for every dollar for Wall Street were thrown in to the mix to help buy off some key congressional votes in the house. The provisions have nothing to do with fixing the financial system of course. They include disaster aid for Texas, Louisiana and the Midwest (as if congress wouldn't vote for this otherwise), aid for rural school programs, and tax breaks for people who live in states without state income taxes. Some fixing of the AMT (alternative minium tax), keeping it from affecting several million middle income earners, was also thrown into the bill. Many of the House members that voted against the bailout bill the first time would like these provisions. Only a little over a dozen or so need to change their votes. If they are willing to do so for a few cents on the dollar, their votes obviously come pretty cheap.

Also added to the Senate bill was a provision to raise FDIC insurance on bank deposits to $250,000 per person (already the limit for IRAs in banks). While this may be a good idea, this provision could wind up to be extremely costly to the government. Bank failures will eventually drain the FDIC insurance fund (this would have happened already because of the failures of Washington Mutual and Wachovia, but the banks taking them over are paying off the funds the FDIC would have had to pay, then writing off an equivalent amount of bad loans, and will be reimbursed by that amount through the bailout plan). The government is going to wind up paying $250,000 per account for a large number of depositors of failed banks one way or the other in the future (instead of $100,000). Needless to say, the senate bill doesn't assume these future costs will exist.

The Senate bill is just another confirmation that our representatives in Washington see no limits whatsoever are needed on government spending. They take a break-the-bank expenditure bill and try to pass it be adding more expenditures (the likely amount not adequately reflected in the proposed costs). While the U.S. is not the first government in history to engage in such profligate behavior, the powers that be seem to think it can be the first in history to avoid destructive inflation or even hyperinflation as a consequence of doing so. Just in case reality rears its ugly head at some point, you just might want to pick up some gold and silver.

NEXT: No Assurance in Insurance; Wachovia's Deal is Not a Deal

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

A Bridge Loan to Nowhere - the Wall Street Bailout Plan

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs

http://www.youtube.com/watch?v=UQieE8Ryvk0

As I write this the U.S. House of Representatives has just defeated the Wall Street bailout plan.

On Sunday, the final details of the bill emerged from the fetid backrooms of the nations capital. After intense negotiations congress and the administration managed to put together the costliest and least effective piece of legislation ever to emerge from Washington D.C. The Emergency Economic Stabilization Act of 2008 was supposed to free up the credit markets and get banks lending again. Yet there were no provisions, no mechanism, and no requirements in the bill that would have made this happen. In exchange for their $700 billion dollars, American taxpayers were guaranteed nothing - and they were likely to have received it in abundance.

Even if the bill had had some means in it to revitalize the U.S. banking system, this still would not have happened. The simple reason for this is that the bailout was much too small to have had any significant impact. At no point in the verbose discussions and pontifications in the congressional hearings did anyone specify approximately how large the problem was that this bill was trying to address. I personally had no problem of finding an estimate of $13 trillion of bad loans (which I think is much too low). The Treasury, the Fed and the congressional research staff either couldn't determine this number or didn't want to discuss it publicly. If they had, the absurdity of this latest government endeavor to deal with the credit crisis and its real intent as just a give away to big Wall Street banks would have become immediately obvious.

To make the bailout more palatable, the cost tag was divided into three parts: $250 billion immediately, $100 billion additional at the discretion of the president, and another $350 billion unless congress decided to rescind it (fat chance of that ever happening). The Treasury secretary, not exactly someone known for his good judgment and lack of corruption, still would have had wide leeway in deciding who got the money. Inexplicably, loans up to March 14, 2008 were eligible for government purchase, even though the credit crisis was front page news starting in late July 2007. Why wasn't that the cut off date set for eligible funding?

According to government press releases, the plan was supposed to prevent the big money from profiting big time from the bailout. In reality, the bill insured that this would happen. The bill specifically made banks that acquired assets in a merger or takeover (this includes JP Morgan, Bank America, and Citibank so far) eligible to dump the bad assets they acquired on the taxpayer. This provision was also a de facto bailout for the FDIC, which would itself be bankrupt as of today because of the failure of Wachovia, if it didn't exist.

The taxpayers were supposedly protected in the bill because the government would get some ownership rights in companies that had their bad debts purchased. Rights in a company that fails - and most if not all of these companies will fail - are of course worthless. If after five years the government is facing a loss in the program, the president was required to 'submit a plan'. How submitting a plan would magically restore lost money from out of business companies was not detailed in the bill description.

What about caps on the $50 million dollar paydays for Wall Street executives? The bill created some 'tax restriction' on earnings above $500,000 and imposed some 'limits' on golden parachutes. What those 'tax restrictions' or 'limits' were, seemed somewhat vague. Executives that received huge bonuses in the past were not required to return any of the money before a company received bailout funds from the taxpayer, even if those bonuses had been obtained under false premises.

What direct benefits and new protections would the people paying for the bailout get? The average investor, pension holders, homeowners, people on Main Street in general, those who suffered because of the bad decisions of Wall Street companies weren't to benefit from the government's largess at all - they were only supposed to pay for it.

NEXT: The First Stock Market Crash of 2008

Daryl Montgomery

Organizer, New York Investing meetup

http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Ron Paul on the Wall Street Bailout Plan - Part 2

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Today's Blog: Congressman Ron Paul's insights on the proposed Wall Street bailout

Washington's current approach to today's credit crisis is the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years [late 1920s], all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the [1930s] depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose (calls to the capitol have been running up to 100 to 1 against the bailout). The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

NEXT: Three Bank Monty - Monday's Global Bank Failures

Daryl Montgomery

Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Pinnochio's Reflection in Washington's Crystal Ball

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video related to this posting:

Dire warnings of a bleak economic future for the American economy have been prognosticated by Fed Chair Ben Bernanke, Treasury Secretary Hank Paulson and President Bush in the last few days - unless of course their proposed emergency Wall Street bailout plan is passed immediately by the U.S. congress. These statements represent a complete turnaround of what the three of them have been saying during the last year and as recently as a couple of weeks ago. This immediately raises the question of whether they were lying then or are they lying now? To be fair, it is possible that Bernanke, Paulson and Bush have not purposefully been lying, but they just don't have the slightest idea of what's going on. Regardless of whether their behavior can be explained by dishonesty or incompetence, they have assured us that if we just follow their lead now, everything will be OK.

The consistent message from the economic triumvirate this week has been that a recession will be taking place in the future along with increased unemployment, home foreclosures, and bank failures unless congress gives $700 billion to the big Wall Street banks. In his testimony on Tuesday, Ben Bernanke bluntly warned of this scenario. He followed up with, "the financial markets are in quite fragile condition and I think absent a plan they will get worse". In his testimony, Paulson suggested that the fallout from the credit crisis would hit almost everyone in the pocketbook unless forceful action was taken.

President Bush in his speech on Wednesday night echoed Bernanke and Paulson's concerns and while requesting the biggest corporate bailout in U.S history made the following obviously insincere statements:

1. "I'm a strong believer in free enterprise ..."
2. "I believe companies that make bad decisions should be allowed to go out of business."
3. "This rescue effort is not aimed at preserving any individual, company or industry."

Like Bernanke, Bush was also worried about the stock market going down and specifically stated that without the bailout, "the stock market could drop even more". But he assured the nation there was no need to worry if his recommended actions were taken because "the plan is big enough to solve a serious problem" and "we expect much, if not all, of the tax dollars we invest will be repaid". If you believe that, I have a bridge in Brooklyn that I would like to sell you.

The reality is that $700 billion is not going to be able to deal with an estimated $13 trillion in toxic debt and that only the most worthless of this debt will be transferred to the government in this bailout. There is no chance whatsoever for the taxpayers getting their money back. Furthermore, the U.S. is already in a recession and the government has been jiggling the figures to hide it and that recession is going to get worse along with unemployment, home foreclosures and bank failures regardless of what bailout package is passed by congress. And you may assume that Bernanke, Paulson, and Bush know perfectly well that this is what's going to happen.

NEXT: This Weeks Largest Bank Failure in U.S. History

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Pump up the Market, Pump up Inflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video related to this posting:

If you examine the press coverage about the government bailouts of banks, brokers, insurance companies, Fannie Mae, Freddie Mac and now the first major system wide bailout ($700 billion to handle $13 trillion in toxic bonds somehow just doesn't seem enough), you will see little coverage of any possible consequences. Just as always, there will be no free lunch even though you aren't hearing it from the media. Lunch in fact will not only not be free, but its price will be skyrocketing.

While it is possible for governments to manipulate markets in the short-term, it is not possible in the long term. Markets will always return to their equilibrium points eventually. Blatant government interference in the U.S. stock market began last August when the Fed announced a reduction in the discount rate one hour before the futures expired, causing a dramatic reversal in their prices and wiping out the profits of the shorts. Last Friday, just before options expiration, the SEC just out and out banned shorting (of financial stocks) and then the Treasury announced a massive bailout for financial companies. If you look back you will see major Fed and/or Treasury actions around options expirations during the market meltdown in January, the Bear Stearns bailout in March and the Fannie and Freddie bailout in July (and there is other activity during other expiration dates as well).

While manipulation results in the biggest bang for the U.S. buck during an options expiration, the impact has lasted at most two months and usually not even that long. Over time, even though the government's market interference has become more desperate and more extreme, the effects are nevertheless becoming more transitory. The short-selling ban and announcement of the biggest government gift in history to financial companies rallied the Dow 369 points and the Nasdaq 75 points on Friday. The Dow then fell 373 points and the Nasdaq 95 points on Monday completely wiping out Friday's gains. The market was still off the bottom though because the big rally began Thursday, the afternoon before this major news came out. Of course, only the most cynical would think that this news was leaked to the big Wall Street players so they could take advantage of it at the expense of the small investor.

While the U.S. government on one hand is busy trying to support the collapsing floor of the stock market, it is blowing off the roof in the commodity markets related to inflation. The biggest one-day rallies ever had already taken place in gold and silver last Wednesday with gold up over 11% and silver up over 14%. Oil though put them to shame Monday when it was up $25 a barrel (or 24%) at one point . . It closed up 16.37 or 16% on the day (even more amazing than it seems since the easily manipulated U.S. dollar was also rallying). The price then fell on Tuesday after the September contract had settled and the October contract became the front month. Commodities simply do not go up these amounts in one day, but it's happening right before our eyes. While the government has done everything possible to juice up the stock market, there are reasons to believe that it has done the opposite with gold, silver, and oil, or at the very least turned a blind eye to manipulations by the big players to drive down prices in these markets. Gold, silver and oil though will have to return to their equilibrium points just like stocks. They are gushing upwards because the inflation pressure cooker, filled with government bailouts and seemingly limitless money pumping, looks like it's about to explode.

NEXT: Buffet Sacks Goldman

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Panic in the Money Markets

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video related to this posting:

On Wednesday Sept 17th, the Primary Money Market Fund froze redemptions. A run on the fund had reduced its assets from $63 billion the previous Friday to $23 billion by the close on Tuesday. Word had gotten out that the fund held $785 million in short-term Lehman debt that was going to be written down to zero. The Primary Fund was managed by The Reserve, the first company to create money market funds in the early 1970s and was one of the oldest of all funds. It was also the first in money market fund history to break the buck for retail investors. While one other money market fund, the Community Bankers U.S. Gov't Money Market Fund, broke the buck in 1994 by paying out only 96 cents on the dollar, this only affected institutional clients. Once it opened again, the Primary Fund planned on returning 97 cents on the dollar.

The previous week had witnessed $80 billion in withdrawals from the $3.5 trillion total in the U.S. money fund market. While this may not seem to be a lot, it was the biggest week for withdrawals since money market funds began. On Monday, troubled bank Wachovia announced that it would pump money into three Evergreen funds to prevent them from breaking the buck, following 20 fund companies that had had to take similar measures in the previous thirteen months. Then on Wednesday, system wide money market withdrawals ballooned to $89 billion in a single day or 2.5% of total deposits (20 times the usual rate). The next day Putnam announced it was closing its $12 billion Prime Money Market Fund because of "significant redemption pressure".

This blow up in money markets, like every other facet of the current credit crisis, was apparently not anticipated by the Federal Reserve or the U.S. Treasury. However, once the problem became obvious to even an intellectually challenged five year old, they both did act swiftly, albeit perhaps not legally, to counteract it. On Friday, the Fed announced plans to inject liquidity into money market funds by extending nonrecourse loans (this means taxpayers get stuck paying off the debt if it goes bad) to banks to finance their purchases of asset-backed commercial paper from money-market managers who face redemption pressures. For its part, the U.S. Treasury announced it had established a money market guaranty program lasting one year for up to $50 billion. The assets would come from the Exchange Stabilization Fund and represented its entire holdings. This U.S. government entity was created in 1934 to conduct interventions in foreign exchange markets. The use of this fund for its intended purpose requires the consent of the president, but not congressional approval. Of course, bailing out domestic money market funds had nothing to do with its intended purpose.

This was not the first time that extra legal or questionably legal measures have been used by the U.S. government to deal with the credit crisis, and it is highly unlikely that it will be the last.Once this threshold has been crossed, it can't be determined how far a government will go with its "emergency measures". When all the power centers of a country agree that it is OK to break the law, there are no longer any of the checks and balances in the system that ordinarily limit government action. But why get bogged down with legal niceties? As long as the U.S. doesn't need to maintain a functional economy or keep the country a desirable destination for desperately needed foreign capital, this cornerstone of all successful economies can be ignored.

NEXT: Bailing Out Henry Paulson - and Wall Street Too

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Central Bank Liquidity Tsunami Returns

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video related to this posting:

After Lehman declared bankruptcy on the Monday the 15th, Merrill Lynch had to be taken over by Bank America and AIG was nearing its end, the market was looking for a rate cut from the Fed during its Tuesday meeting. The Fed and Treasury had conditioned the market to expect bailouts for financial firms and then failed to deliver when they didn't rescue Lehman and grant AIG its initial loan request of $40 billion. The Fed failed to deliver again when it didn't cut the funds rate. This seeming policy reversal, refusing to support failing financial firms with loan guarantees and the stock market with rate cuts, not surprisingly started a huge market sell off.

The Fed started pumping money into the financial system at the rate of $70 billion a day on Monday and Tuesday. While this was well above normal, it was by no means adequate for the financial crisis that was unfolding. Not only did the Dow go down 45o points and gold go up $90 on Wednesday, but the bond market indicated a panic flight to quality. For a brief time, interest rates on 1-month T-bills became negative. The rates on 3-month T-bills remained barely positive at 0.2%, the lowest level since 1954. The TED spread a measure of financial system stability, or lack thereof, hit the level it reached during the crash of 1987.

The Fed's apparent obliviousness to the magnitude of the situation was truly mind boggling, but not inconsistent with Bernanke's previous missteps - after all he didn't expect the subprime crisis would have any serious impact on the market as of June 2007, if not later. After the market route on Wednesday, along with Morgan Stanley acting as if it was about to go under, the Fed decided to flood the world financial system with liquidity. It supplied a line of credit of as much as $247 billion to the ECB, Bank of England, Bank of Japan, the Swiss National Bank and the Bank of Canada. These banks in turn added their own funds and a gusher of money poured forth from every central bank spigot available. As one observer noted, the central banks were essentially providing unlimited liquidity to world financial markets. Not surprisingly, stock markets reacted positively everywhere with big rallies, with the Dow being up 410 points and the Nasdaq up 100 points on Thursday.

Euphoria from liquidity injections usually lasts only a short time, unless the underlying problems get fixed. In this case, the problems may be even worse than the market realized. The Fed's delayed reaction to the market turmoil and its initial cold shoulder to AIG may not have been voluntary, it may have had no choice. On Wednesday, the Fed asked the U.S. Treasury to raise money on its behalf by selling bonds and by Thursday it had received $160 billion from this operation. The Fed has never made this request from the Treasury before. While the official explanation for doing so was to help with its cash management, this is highly unlikely. More plausible is that the Fed itself has run out of money and is being secretly bailed out. Events that took place Thursday evening lent further credence to this belief.

NEXT: The Free Market Goes Under

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.