Saturday, October 4, 2008

Helicopter Ben Loads the B-52's

The first inflation bill has officially passed. While we wait for the government to burn through this first round of money, we can now watch the Fed's next move. What I would expect next is both "liquidity injections" and even additional rate cuts.

I would not be surprised to see a synchronized worldwide rate cut from all the central banks. I have been talking about the Fed's money printing all month and the final numbers have been released. Brace yourself. The chart below shows the Fed's balance sheet. It increased from $900 Billion to $1.5 Trillion in a SINGLE MONTH.





The next chart shows the percentage increase to the Fed's balance sheet in comparison to previous increases from Greenspan. Incredible.







The United States government and the Treasury have declared war on our currency. They received a call from California this weekend asking them for $9 Billion because the state is broke and no one will buy their bonds. This is just the first state, there will be more. They will all be rescued. The auto companies will be rescued, the airlines will be rescued, and the American public will be rescued. If the stock market starts to fall the Fed will probably start to buy stocks. Does that seem absurd? There is already a program in place to do this. If home prices continue to fall they will start to buy empty homes.

When Americans wake up in the morning they will have just as many dollars in their bank account as they had the day before. Their homes will have a high dollar value and their 401K accounts will have a high dollar value. They will have been "rescued" by the government.

Unfortunately, those dollars will have no value.

http://www.spiegel.de/international/business/0,1518,581923,00.html
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Friday, October 3, 2008

The Bail Outs Have Begun

I don't have time this evening to go into detail on everything that has happened the past few days so I'm going to let two people who are much smarter than I explain it with articles that they wrote today.

Before you read the first one, I want to expand on the last sentence in the fifth paragraph down. It says, "But if the government pays prices that fairly factors in likely defaults, it will bankrupt the very institutions it is trying to bail out." This is important and needs to be elaborated on. If the government were to pay anything close to going market rates for these investments, other banks would have to mark similar assets they have on their balance sheets down to that price. This of course would then make it clear that they are all currently insolvent, and a new string of bankruptcies would ensue. This alone will force the government to greatly overpay for these assets. (By the government I mean you and I, it is our money they are throwing away)

http://www.financialsense.com/fsu/editorials/schiff/2008/1003.html

The second article discusses an even more important point. Foreign concerns over United States assets. Like I've been saying for a while, once the foreigners even slow down buying our worthless debt the game is over. The government's last option at that point will be to print all the money needed to cover the losses and we will be moments away from hyperinflation. There has not been any indication thus far that they would hesitate in doing this. The middle class will be annihilated as their dollars only value will be the paper they're printed on.

I want to expand on something in this second article as well. In the second paragraph he states, "credit default swap (CDS) spreads for financial institutions are rising to extreme levels as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market."
This is important to understand as well, and if you haven't read my explanation on what credit default swaps are, it's a few articles below and will help you understand what's happening.

What he means by that is that while the short selling ban is protecting the financial stocks right now, it is creating huge distortions and problems in the market at the next level. Here's why: When a financial company protects debt with CDS insurance they have ways to counter their losses if a company starts to falter. The most popular way, and what has been used in the previous weeks, has been to short the companies stocks to help offset the losses they will have to pay out to the bond holders. This is called arbitrage, and it is part of what keeps the markets running fluidly. But now, when the companies start to falter, these companies are not allowed to short the firms and make that money to offset the losses. This is going to cause tremendous pain in the derivatives market which will have catastrophic effects on the global credit markets.

When the government started their "short ban" they said it was to protect these firms from predatory hedge funds. The hedge funds are just a small portion of the shorts. The majority is coming from the derivatives market from this arbitrage. If the short ban is not lifted soon you're going to see some explosions in this secondary market that will bring a real financial crisis.

http://www.forbes.com/2008/10/01/goldman-morgan-run-oped-cx_nr_1002roubini_print.html

Tuesday, September 30, 2008

The Last Man Standing

I was shocked yesterday when I heard the news that the politicians decided not to issue the "inflation bailout bill." What's funny about the situation is that not issuing the bill is actually the best thing for our country in the long run. If they did not issue the bill and protect the market with printed dollars, the stock market would crash, real estate prices would fall, and many people would lose their jobs. We would have a severe recession. The dollar would start its natural decline and the Fed would have to greatly raise rates to protect it and entice investors to put their money into our currency. This would cause Americans to stop spending and start saving and it would force us to rebuild the manufacturing in our country so we can once again be a real world wide trading partner. It would be a horrible few years for many Americans and after the system had been cleansed we could start rebuilding the country as something we could be proud of.

I would be my life, however, that no politician would EVER ask an American to sacrifice for the greater good of our country. It will NEVER, EVER happen. I believe this inflation Bill will eventually get passed. But let's imagine for a second that it doesn't. What is plan B to keep our bubble economy inflated longer and keep the problem building for the future? It is located right across the street from the politicians in a building called The Federal Reserve.

If the Bill did not get passed the spotlight would now be turned fully toward the last man standing, Helicopter Benjamin Bernanke, to destroy our country once and for all. Right now there is a massive deflationary threat. Home prices are falling fast. The stock market is very close to going into its final stage of free fall. As people are starting to feel the atmosphere change, they are even thinking about doing the worst thing our leaders have told us an American can do: Save money. This would be very deflationary as well.

Bernanke knows this and he stands ready to do what I've been telling you he would do since he took his position a few years ago. He is going to print money like nothing you could possibly imagine, and he is going to dump it from helicopters. Greenspan tried a more mild version of this in the 90's and it blew up the stock market bubble. As that bubble began to burst in the early part of this decade, he did it again but accidentally created an even bigger real estate bubble. That bubble is currently trying to correct along with the still inflated real estate market. Bernanke will provide "liquidity"(inflation) to the system that will make the previous two look like a warm up. It will be the grand finale of the fireworks display, and it will be truly remarkable.

His masterpiece will be the equivalent of dropping an Atom bomb on the American economy. This money will not find it's way back into the real estate market or the stock market. It will only increase the cost of living for every American and began to inflate the final super bubble. The Grandaddy of them all: The commodities bubble. All commodities will explode upward in price, but the prize of the group will be gold and silver.

Keep your eye on the headlines for something called "liquidity injections." This means inflation. During the stock market crash on Monday, headlines streamed across the screen as people were shocked at the hard stance the government had decided to take. What everyone missed was the small headline that read, "Bernanke injects $630 Billion into market." That's right, $630 Billion on Monday ALONE. Banks were slamming the Fed's discount window this morning borrowing at a unbelievable rates. Americans will look one way at Washington fight over the bail out, while the other direction Helicopter Ben will be robbing them of their life savings.

Sunday, September 28, 2008

A Larger Crisis Looms

The real estate office that I work at was very quiet this weekend. I work in Charlotte, which is probably the top big city real estate market in the country right now. It's surprising when things are as slow as they were the past few days. Ironically, it is not the housing market that was keeping people from visiting, it's the fact that Charlotte has been out of gas for the past two weeks. Since the storm hit there have been major delays in getting trucks to our local gas stations. All the stations are empty, and when a trucker does come to fill one up there are long lines at that station and the gas is usually gone in a matter of hours.

This is only a temporary problem and it's only a problem in this surrounding area. I expect them to have everything back to normal in the next week or so. But it's been interesting to experience a world without gas for a short period of time. It's allowed the people in this area to peer into the future for what life will be like in America as we look toward the real crisis that's approaching this country.

By this point I hope I've made it clear and easy to understand that we are in a severe credit/financial crisis. I also hope that I've explained that this credit crisis is just beginning. This $700 Billion is just a warm up for the money that's going to be needed to keep our entire financial system from shutting down. Next year you will be hearing most about Credit Default Swap counter party risk and a new mortgage term called Option ARMS. These are the most toxic of the mortgages that were issued during the subprime years and their resets are going to slam into the financial sector all of 2009 and 2010.

Around this time next year we will be feeling the credit crisis' most destructive impact on our economy. We will be in a severe recession while the financial system continues to survive on life support from the inflation created from the Fed and the Treasury. However, while the words "Bail Out" are the front page news today, there will be an even more pressing headline in the papers; "Oil Crisis." This crisis will make the current credit problems look like a walk in the park.

Remember our oil problem? You may have forgotten about it being talked about over the summer. I guess everyone has figured the problem has been fixed because oil pulled back temporarily as it has during this entire bull market. From its rise a few years back from $20 to $147 you have heard every reason; The War, The Hurricanes, The Dollar, and most recently and my favorite; The Speculators. The entire ride up, oil has been a "bubble waiting to burst," and every pull back along the way we've heard that the bubble has finally burst. Unfortunately, the reason for the rise in the price of oil is based on supply and demand and there is no answer for that problem. There is no printing press that the Fed has that can print oil.

You've heard on the news the past few weeks that oil's fall in price is because of "demand destruction." Unfortunately again, this is completely wrong. While there has been demand destruction in our country, the global demand will rise by 1% this year and is projected to rise by over 1% next year even with higher prices taken into account. The rest of the world is more than making up for the United States using less oil, and that will continue into the future at an even faster rate.

Oil supply is falling. Supply is not how much oil is actually under the ground, supply is the amount of oil that we can get out of the ground and use. We have the opportunity to focus on additional drilling, but the leaders of our country don't think that is something important to focus on. It takes years to get oil out of the ground from the start of production. If we focused fully on this problem right now we would still be facing a major crisis.

Trust me, there is going to be an entire global economy hungry for oil in the next few years and there will not be enough for everyone. Prices are going much, much higher. $150 per barrel is going to be dirt cheap by the year 2011. We should cross over $200 a barrel in the next 24 months and when we do it will only be a stepping stone on the way to $300, and then $400. Of course when people talk about this now it sounds ridiculous. Just like people talking about the devastating effects of derivatives a year ago.

The oil crisis is going to hit this country next year at the worst possible time. There is going to be rationing for gas over the next few years. People without fuel efficient cars that live far away from work may be out of gas by Thursday and will not be able to go to work on Friday. Our economy is based on consumption, which is based on the never ending supply of credit, which is fueled by oil; the lifeblood of the economy.

What opportunities will come from this? Energy companies and their stocks, which have been killed the past two months, are going to see unbelievable price appreciation and profits.