Yes the bailout package is approved and that fact gives certainly comfort to many but I must say not to me. It does not matter if it would have been a blank check or not. It does not matter at all if the new plan seems to be more balanced than the previous one that was only to the benefit of the Wall Street guys and not at all for the average taxpayer. Well in fact there is not much difference between the old and the new plan. The only important difference is that the new plan is now sold as the plan that will protect the taxpayer, which of course is complete nonsense. However apart from a few small changes nothing really has changed at all. It still is a plan to bailout the fat Wall Street cats or Hanks friends.
Yes there would have been other solutions that might have worked (at least some of these solutions worked in past crisis as for example in Sweden) but the situation is so deep in a mess that I doubt that even those solutions would have worked well. The party was simply to long. Well in fact it was more an orgy than a party. It might have started as a party but in the last couple of months it really became more of a decadent orgy. Greed was the leading motive nothing else. This greed led to unsustainable excesses of leverage. Yes dear reader as mentioned before I am deeply worried. Yes I have seen it coming so I should not be that worried at all. Well what worries me is the fact that I believe we are just at the beginning of the crisis (yes the beginning and not close to the end as many pundits believe or want us make believe). I do believe that there is a lot more to come. With a lot I mean really a lot. We have not really reduced the excesses yet. Well you know one thing is to see certain things coming but it is a completely other thing having to realize that now we are there. What makes this reckoning more stressful is the fact that in my opinion we have only passed the first innings and even so we can already see and feel the terrible mess that this crisis produced so far.
Well dear reader history clearly shows that empires or economies using real sound money have done extremely well economically. Wealth and prosperity was achieved when real money such as gold or silver was used. Paper money experiments however resulted over time in enormous failures and crisis. The Romans did well as long as they did not corrupt the gold money standard.
Once they started to reduce the gold part in their gold coins and used any other cheap metals and this way started to debase their currency, the Roman Empire started its decent.
The Byzantine Empire lasted almost 1,000 years.
Guess why. Yes, you are right, because they used gold as money. Their “Solidus” basically became the currency of the world. Well unfortunately in the year 1034 to 1042, emperor Michael IV and later from 1081 to 1118 Alexius I Comnenus had huge debts to pay. In order to be able to pay they started to debase the gold money and this was at the same time the beginning of the end of the Byzantine Empire. An Empire that was very stable although it was surrounded by evil bloodthirsty kingdoms and warriors.
Gold as money was the factor that helped Europe to come out of the “dark ages”. First it was Florence that started with gold coinage in the year 1252. Later Venice followed. The gold money helped not only these 2 cities to become wealthy and prosperous but it helped as well all other cities that followed their example. Thanks to the gold standard trade was much easier and thus other places started to do well to. Switzerland being in the middle of Europe and having the most important trade routes going through did very well in these times and due to the new wealth was able to buy themselves free from slavery.
Gold was in fact an important factor why Europe developed to what Europe is today.
Well I should not forget to mention that the gold standard did help the Arabs too. Using gold as money certainly helped, amongst other reasons, the Arabs during the time of Mohamed started to become a great Empire with great knowledge and civilization.
Well on the other hand the experiments with paper money without gold backing did never really end well. John Laws experiment in France ended the same way as the actual experiment called US Dollar is ending, namely in a complete mess.
Why is that so? Well of course producing paper is much easier than producing gold. Paper can be produced as much as somebody likes and therefore can be inflated to extremes. As I mentioned once in one of my musings in order to get a billion of US Dollars one just has to cut a couple of trees make paper out of them print the papers with green and black ink and voila you have a billion of Dollars. Of course today it is much easier. Just add a couple of zeros on the computer screen.
Yes dear reader the experiment (or was it a well defined plan?) with the paper Dollar is in the end phase. Like John Laws experiment it will not end well.
How much time will we have? I do not know but to me it seems it is not much. As mentioned the whole thing could blow up anytime. I am convinced that the respective authorities know very well what could happen. It is in my opinion not a coincidence that the US is moving a battalion from the Middle East back to the US. My guess is that the authorities now very well what is to be expected.
Dear reader, although the media has not shown it, there were apparently many people protesting in New York. Apparently there were many protesters holding up placards saying “Jump”. My guess is that more of the same or worse is to be expected.
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Well dear reader on the net I came across the information that the FED has sent some kind of information to a certain financial institution telling them to get ready for a universal shut-down for a couple of days. Of course I can not confirm this information. It really sounds nonsense as it would be a huge mistake to close the banking system for some time. However if the actual situation could go out of control, such measure might make sense. In fact If I remember well it happened already either in 1907 or in the time of the great depression. Maybe we should expect a couple of newly introduced bank holidays.
Well as mentioned, such information can be correct or not. However when I hear that a Central European Government just ordered a company in the food business, storing part of this governments strategic food reserve, to double this particular reserve, I must say that there are a bit too many coincidences for my taste. I guess that the doubling of the reserve is not only with this particular company but in general terms. Why now? Do they expect some disruptions?
I mean having banks closed for a certain time has implications through the whole economy and certainly in the food production/distribution chain too.
We know already that credit is scarce. Without credit some business will not be able to stay alive. So disruption in any of the processes, including the food processing and delivering chain is possible.
So, dear reader, my recommendation this weeks is:
1. Keep up good faith. If it gets a bit more complicated don't lose faith. Better times will come although it might not always seem so.
2. Enjoy as much as possible your family, your friends and life in general terms. If you have some unsettled issues with somebody, try to settle it. Family, friends and good neighbours will become a lot more important than in the past.
3. Have some reserve stock ready. Be it cash or food, drinks or whatever your heart likes
From an investment point of view, I still believe that holding, Gold and Silver (including coins) makes sense. Cash I would hold in Swiss Francs. Again, be careful where you store your cash.
So before going to enjoy live, good friends, excellent food and wines, I’d like to give you a short overview of the past week. As usual let’s start with the overview from www.prudentbear.com
For the week, the Dow was hit for 7.3% (down 22.2% y-t-d), and the S&P500 was clobbered for 9.4% (down 25.1%). Economically-sensitive stocks were, again, pounded. The Morgan Stanley Cyclicals sank 14.2% (down 30.8%), and the Transports dropped 13.0% (down 9.5%). The Utilities fell 6.0% (down 23.6%), and the Morgan Stanley Consumer index lost 5.2% (down 13.6%). The broader market was under heavy selling pressure. The small cap Russell 2000 (down 19.1%) and the S&P400 Mid-Caps (12.1%) were both hit for 12.1%. The NASDAQ100 sank 12.0% (down 29.5%), the Morgan Stanley High Tech index dropped 13.1% (down 30.6%), and the Semiconductors were hit for 11.5% (down 30.2%). The Street.com Internet Index fell 11.1% (down 23.5%), and the NASDAQ Telecommunications index sank 12.3% (down 27.5%). The Biotechs dropped 8.7% (down 6.7%). The Broker/Dealers declined 9.3% (down 43.2%), and the Banks dipped 0.6% (down 17.1%). With Bullion sinking about $42, the HUI Gold index was crushed for 18.3% (down 34.2%).
Well the Bear has clearly taken over
Little known facts about the Great Depression:
From NowAndFutures.com,
Little known facts about the Great Depression
“. . . Traders who would formerly have taken the precaution of reducing their commitments just in case a reaction should set in, now feel confident that they can ride out any storm which may develop. But more particularly, the repeated demonstrations which the market has given of its ability to “come back” with renewed strength after a reaction has engendered a spirit of indifference to all the old time warnings. As to whether this attitude may not sometime itself become a danger signal, Wall Street is not agreed.”
-- New York Times, September 1, 1929
Black Thursday, when the Dow fell from 305.85 to a low of 272.32, and closed at 299.47 (note that it had closed on October 10th at 352.86)
-- October 24, 1929
Brokers Believe Worst Is Over and Recommend Buying of Real Bargains
Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.
-- New York Herald Tribune, October 27, 1929
Black Tuesday, when the Dow fell from 252.38 to a low of 212.33, and closed at 240.07.
-- October 29, 1929
After 1929
"Last Monday, all businessmen were shocked to read in their morning papers that the British pound sterling was no longer based on gold. The Tokyo Stock Exchange had announced that it would not open. Tokyo was followed by Bombay, Calcutta, Johannesburg, London, Berlin, Amsterdam, Copenhagen, Vienna, Oslo, Stockholm, Brussels and Athens. The Paris Bourse opened, but limited all trades to 5% of all holdings and no dealing in foreign exchange. Montreal’s Exchange opened similarly restricted. The New York Stock Exchange remained open, but as in dark November 1929, short selling was forbidden. In the artificial market thus created, stocks gyrated unsteadily, closed higher; bonds closed at lows for the year."
...
"So far during the Depression the Stock Exchange has moved against bears by the Questionnaire and the complete ban on shortsales which was imposed for two days when Great Britain suspended gold payments. The Questionnaire was used in the autumn of 1929 to learn the extent and personnel of the ‘bear party.’ President Richard Whitney (of NYSE) later revealed the short interest was at no time large during the days of great breaks. It was used again last May and members who were too aggressive in their tactics received sharp callings down. The Questionnaire in effect last week revealed every bear, whether he was short 10 shares or 10,000 for one hour or one month. It placed the Exchange in a position to act if it wished to, but did not deter ‘gentlemen’s agreement’ to refrain from taking short positions."
...
"In few nations nowadays is there a ‘free and open market.’ The Berlin Bourse closed from July 13 to September 3, opened with shortselling banned, then closed again. In Great Britain all trades were put on a cash basis which practically eliminated shortselling as did restrictions imposed on the French and Athenian Bourses. On the Paris Bourse a seller must deposit 40% margin, also 25% on the amount of the stock sold which makes bear activities a rich man’s privilege. One of the most dramatic events of the present crisis occurred in Amsterdam on September 21 when after a terrific slump in prices, all transactions were cancelled, the Exchange closed in status quo. Montreal and Toronto met the British crisis by banning shortsales and establishing ’minimum prices’ for securities, but both last week were open with no restrictions. The Tokyo Exchange has been closing and opening repeatedly during recent weeks. Tokyo stocks broke badly when the shares owned by interests who operate the Exchange collapsed.
(emphasis ours)
-- Time magazine, September 28, 1931 edition
"In 1928, there had been 491 US bank failures. In 1929, the figure had risen to 642. By 1930, as the collapse of the domestic real estate bubble began to take its toll, bank failures had risen to 1,345. In the wake of the British default, American "bank runs and failures increased spectacularly: 522 commercial banks with $471 million in deposits suspended during October 1931; 1,860 institutions with deposits of $1.45 billion closed between August 1931 and January 1, 1932. At the same time, holdings by the 19,000 banks still open dropped appreciably through hoarding and deterioration of their securities."
-- Susan Estabrook Kennedy, The Banking Crisis of 1933 (Lexington, Kentucky: University Press of Kentucky, 1973)
"It was now evident why the European crisis had been so long delayed. They had kited bills to A in order to pay B and their internal deficits. I don’t know that I have ever received a worse shock. The haunting prospect of wholesale bank failures and the necessity of saying not a word to the American people as to the cause and the danger, lest I precipitate runs on our banks, left me little sleep. The situation was no longer one of helping foreign countries to the indirect benefit of everybody. It was now a question of saving ourselves."
-- Memoirs of Herbert Hoover, U.S. President 1928-1932, about the 1931 world financial crisis
""Hoover again rose to the occasion, trying to arrive at some solution. Lending more money would not solve the problem. The vast, intricate entanglement of the foreign debt situation was a time bomb waiting to explode at any moment. Hoover’s proposal was to call a complete "standstill" among all banks everywhere, preventing anyone from calling upon German or Central European short-term obligations.
France still pressured for a $500 million loan to Germany. Hoover refused to go along with it. Mellon warned Hoover that if the U.S. did not go along with the plan the French intended to place all the blame on the United States, and he warned that he was playing into the hands of the French. Mellon strongly urged Hoover to accept the French proposal. Hoover lost his patience, as he put it, and informed Mellon that his "standstill" plan was being released to the press at that very moment. When the news came out, the London Conference was forced to accept Hoover’s proposal because the truth was at last coming out.
A group of New York bankers complained to the White House and warned that they would not comply with the standstill. They demanded that Hoover loan money to Germany so it could pay its debts which the bankers held. As Hoover wrote: "My nerves were perhaps overstrained when I replied that, if they (bankers) did not accept within twenty-four hours (his standstill proposal), I would expose their banking conduct to the American people." Needless to say, the bankers realized Hoover’s determination and his opinion that the taxpayer should not pay for the banker’s problems, which had been created by their eager solicitation of private citizens for foreign securities, and the bankers reluctantly backed off. Indeed, the actions of the banks and the Federal Reserve had bordered on the verge of treason as they acted as willing participants in what proved to be a game of musical chairs with the unsound foreign governmental debt instruments.
-- 1931, "The Greatest Bull Market In History", Martin Armstrong
Well dear reader, if any of the above might remind you to today's situation it must be pure coincidence. Is it really so?
and what might happen. Just change Farmers to Industrial companies
"There have been in some localities foolish alarms over the stability of our credit structure and considerable withdrawals of currency. In consequence, bankers in many other parts of the country in fear of such unreasoning demands of depositors have deemed it necessary to place their assets in such liquid form as to enable them to meet drains and runs. To do this they sell securities and restrict credit. The sale of securities demoralizes their price and jeopardizes other banks. The restriction on credit has grown greatly in the past few weeks. There are a multitude of complaints that farmers cannot secure loans for their livestock feeding or to carry their commodities until the markets improve. There are a multitude of complaints of business men that they cannot secure the usual credit to carry their operations on a normal basis and must discharge labor. There are complaints of manufacturers who use agricultural and other raw materials that they cannot secure credits beyond day to day needs with which to to lay in their customary seasonal supplies. The effect of this is to thrust back on the back of the farmer the load of carrying the nation's stocks. The whole cumulative effect is today to decrease prices of commodities and securities and to spread the relations of the debtor and the creditor."
-- Memoirs of Herbert Hoover, October 5, 1931 , pg. 87
Conclusion from http://www.nowandfutures.com
"A common feature of all these earlier troubles [panics such as 1907 and 1914] was that having happened they were over. The worst was reasonably recognizable as such.
The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning.
Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost.
The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a recorded 12,894,650 shares sold on 24 October; precisely the same number were bought.) The bargains then suffered a ruinous fall.
Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months.
The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable."
-- From The Great Crash of 1929 by John Kenneth Galbraith
show Kondratieff wave chart
About Derivatives
Well dear reader, I know you know it already. Yes there are enormous amounts of derivatives outstanding and yes this could blow up anytime and it is dangerous. Although I have warned before, I'd like to remind you that these risks will not disappear quickly. Following an article about the topic
$1 Quadrillion of Unregulated Debt At Core of Coming Derivatives Crisis
Despite all the blather and swearing-on-the-Bible pronunciamentos from establishment “pundits,” our house-of-cards financial system is not fundamentally sound.
Expect such indices as the Dow to tumble even much lower when the Pandora’s box of derivatives is fully opened.
Believe it or not, the Dow is still not far from its all-time peaks, with a lot further to fall. The depression is still in its early stages. We are looking at $1 quadrillion of unregulated debt, with much of it at risk. (And we used to think $1 trillion was a lot.)
These are literally inconceivable sums. Counting one dollar per second, it would take 32 million years to count to one quadrillion.
http://www.americanfreepress.net/html/coming_derivatives_crisis_150.html
Credit Default Swaps
Yes I know it is a topic I have written about a lot already. However I think that the info on the following link is worth reading it
http://money.cnn.com/2008/09/30/magazines/fortune/varchaver_derivatives_short.fortune/index.htm?postversion=2008093012
Well dear reader I truly believe that holding cash is a good idea. Nouriel Roubini mentioned this week that the short term cross border interbank credit lines which so far US banks granted their foreign counterparties are now particularly at risk. The estimation is that these lines are close to 1 trillion USD. What does that mean dear reader. Well it can mean that the bank through which you do your banking, payments and so on, your bank that so far granted your company a credit line, might be forced to cancel or reduce your line as the line your bank had with the US bank will be cancelled too.
That could furthermore mean that some banks with a rather small depositor basis might run into troubles soon.
We do already know that the crisis hit Europe too. Assuming that the same crisis will hit the whole world is possibly a correct assumption. Well although your bank has not bought these toxic waste papers from the US it does not automatically mean that the bank is safe. Without the credit lines from the US banks (most banks in Latin America for example have used such lines) the environment for these banks changes too.
Following an article about a similar topic. Small Businesses feeling the Chill
http://www.nytimes.com/2008/10/02/business/smallbusiness/02sbiz.html?_r=1&partner=rssyahoo&emc=rss&oref=slogin
General Overview
Ambrose Evans-Pritchard
The Telegraph, London
Monday, September 29, 2008
The Dutch-Belgian bank Fortis, Britain's Bradford and Bingley, and Iceland's Glitnir were all partially or fully nationalized after failing to roll over debts in the short-term money markets, while the French state pledged support for the Franco-Belgian lender Dexia after the share price collapsed on reports of a capital shortage.
"The European financial sector is on trial. We have to support our banks," said French President Nicolas Sarkozy. He has reportedly ordered the state investment arm Caisse Des Depots to shore up Dexia, even though the bank is based in Belgium.
Germany's Hypo Real Estate, a commercial property lender, was rescued with a E35 billion lifeline from a consortium of local banks. The lender has $560 billion in liabilities, almost as much as Lehman Brothers.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3104666/Banking-
crash-hits-Europe-as-ECB-loses-traction.html
Let's see and hear what Paulson has to comment re bailout. He does not seem that much at ease.
http://www.cbsnews.com/stories/2008/09/28/60minutes/main4483612.shtml
Business Intelligence: Marc Faber says US bailout won't stop recession, buy gold
"Any proposal to rescue the US financial system will fail to avert a recession said Marc Faber, the Swiss fund manager and Gloom Boom & Doom editor and publisher, now based in Thailand.
"A stock rally in the event that a package is approved will be temporary and should be used as 'an opportunity' to sell, said Faber.
http://www.bi-me.com/main.php?id=25070&t=1&c=35&cg=4&mset=1011
YouTube: Ron Paul - "You're going to destroy a worldwide economy"!
http://www.youtube.com/watch?v=wK2QjMydQpU
GE
Well dear reader in a recent musings I mentioned GE as another candidate that might feel the crisis. Last year GE profit was by more than 50% from is finance arm GE Capital. The following comment on Bloomberg mentions that GE,s Credit Default Swaps got more expensive which tells us that the market expects some troubles for GE.
Well dear reader, what does it say for the system when General Electric raises capital and pays 10% interest and gives up warrants? They are a AAA credit, right? Well 10% for an AAA credit?
and some more about GE
……said it has been able to sell corporate paper and fund operations without tapping bank lines, seeking to quash speculation that led to a surge in its credit default swaps and a slump in the stock.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aGw05ovoVo14&refer=home
Hedge Funds
Well dear reader the Lehman bankruptcy has wider effects than most observers have expected. Apart from the Credit Default Swaps parties, equity holders, debt holders and others that will lose substantial amounts, it seems that the Hedge Fund industry will suffer too. Why? Well many hedge funds have used Lehman as their Prime Broker. The assets these funds hold with Lehman are estimated to be between 50 to 70 billion USD. These assets are in the best case frozen but some are certainly lost. Although in the best case the assets are frozen, it will take months if not years combined with huge costs for lawyers and so on in order to unfreeze these assets. For those who have the time and the money the whole situation might look a bit better. However Hedge Funds do not have the time to wait. That will mean that many Hedge Funds will go out of business soon. Following a comment found on Bloomberg
http://www.bloomberg.com/apps/news?pid=20601087&sid=adjHB.7sfLDA&refer=home
Gold
James Turk
We Are in the Sixth Inning
As we begin this year's fourth quarter, it may be useful to step back from the trees and take a look at the forest. The big picture is shaping up pretty much as expected.
http://goldmoney.com/en/commentary.php
Investors start fresh gold rush
By Javier Blas
Financial Times, London
Wednesday, October 1, 2008
"Fiat money, in extremis, is accepted by nobody," Alan Greenspan, the former chairman of the US Federal Reserve, told lawmakers in Washington almost a decade ago. "Gold is always accepted," he added.
The "in extremis" scenario was for years only a possibility in the mind of die-hard gold bugs, but the financial crisis is leading regular investors -- from the ultra-rich to middle-class savers -- to believe that the environment in which Mr Greenspan said fiat money would be worthless is now around the corner…
http://www.ft.com/cms/s/0/9ce251de-8f37-11dd-946c-0000779fd18c.html?nclick_check=1
More about the same topic
The Financial Times
Wealthy investors hoard bullion
By Javier Blas in Kyoto
September 30 2008 19:00
Investors in gold are demanding "unprecedented" amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen.
Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.
"There is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career," said Jeremy Charles, chairman of the LBMA. "The gold refineries cannot produce enough bars."
The move comes as fears grow among investors over the losses at investment vehicles previously considered almost risk-free, such as money funds.
Philip Clewes-Garner, associate director of precious metals at HSBC, added that investors were not flying into gold simply because they saw it as a haven amid Wall Street’s woes. "It is a flight into gold because it is a physical asset," he said.
"Vault staff are also doing overtime," another banker at the LBMA meeting said, adding that investors in some countries were paying premiums of up to $25 an ounce above the London spot price to secure scarce gold bars.
Spot gold prices in London on Tuesday traded at about $900 an ounce, more than 25 per cent above the level before Lehman Brothers’ collapse. Although some traders said the rush into physical gold could boost prices, others cautioned that prices were depressing jewellery demand, capping any price gain. Industry executives said gold refineries and government mints were working at full throttle to keep up with investor demand, but acknowledged they were suffering from shortages, particularly on coins.
Johan Botha, a spokesman for the Rand Refinery in South Africa, which manufactures the Krugerrand, the world’s most popular gold coin, said the plant was now running at full capacity seven days a week. "Even so, now and then we have shortages," he said.
The Austrian mint, which manufactures the Vienna Philharmonic, a popular gold coin in Europe, said it had extended work to the weekends to accommodate soaring demand.
Last week, the US mint suspended the sale of its American Buffalo coin after it ran out of stocks.
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