The Room - 10/03/2008

Dear Readers,

We're no longer in Kansas, Dorothy.

At this point, the world's financial markets are in the firm grasp of a massive tornado. Our vision is blurred with fast-moving images of abandoned houses, crumbling banks, pontificating politicians, alien-looking Treasury secretaries on one knee, and suicide stock and commodities charts.

When the whole mess crashes back on terra firma, the landscape will look considerably different.

But, what?

We remain convinced that the result, with the unavoidable time lag, will be inflation on an epic, global scale. But if history provides one lesson in rich abundance, it is that the future is unpredictable.

Who is to say that the government of these United States -- and of similarly indebted and in-trouble countries "over there" -- aren't too late to the game? Or that even $700 billion, or a trillion... or...?... will not prove to be too little, too late?

In such an environment, the only thing we can say with any degree of certainty, as we do in the current edition of The Casey Report, is "take cover." Loosely defined, that's the technical term for grabbing guns, gold, and cash, and ducking below the edge of the trench until the cloud of flying projectiles passes by.

Guns?

That's the advice of none other than Barton Biggs, Merrill Lynch's legendary global investment strategist, as reported in Bloomberg and forwarded by subscriber and correspondent Ed T...

    Barton Biggs has some offbeat advice for the rich: Insure yourself against war and disaster by buying a remote farm or ranch and stocking it with "seed, fertilizer, canned food, wine, medicine, clothes, etc."

    The "etc." must mean guns.

    A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage," he writes in his new book, "Wealth, War and Wisdom."

Given that Barton's book was released this January, one can only wonder what he knew, and when, about what's now unfolding. Whatever it was, he was one of only a very small handful of Wall Streeters to offer a candid assessment – rather than one of the bought-and-paid-for variety – of the potential for a true disaster striking the heart of the economy.

But that was then, and this is now.

And now it is a time for serious reflection on just how serious things are, and, as important, what you might do to further prepare.

For the rest of this issue, I am going to fly pretty fast and low, a necessity given the sheer volume of input coming across the screens.

As musical accompaniment as I start off, I'm listening to a suitably hard-pounding, new song with an end-of-the-world theme, They Say by Scars on Broadway. If you are one of those with more pacific musical sensibilities, you may wish to pass on this week's selection; it's hard rock at its best (or worst, depending on your POV.)

Let's kick things off with breaking news from Bud Conrad, our own chief economist and workaholic without peer...

Do You Know How the Fed Is Managing Your Money?

By Bud Conrad

While the world concentrates on the drama surrounding the Treasury's request for a multi-year $700 billion bailout, the latest iteration starting with an installment of $250 billion, they are missing a far more important move to debase our dollar being undertaken the Fed. Specifically, in the two weeks ending October 1, 2008, the Fed added another $502 billion of new liquidity to the banking system. This infusion of over half a trillion dollars is extremely important as it is dollar debasement writ large. And yet, almost no mention of it is being made by politicians and the media alike.

THe Fed Added $502B in Last 2 Weeks!

The Fed is planning to do even more: on September 29 it made the following announcement:

    Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmark's Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously.

http://www.federalreserve.gov/newsevents/press/monetary/20080929a.htm

As a result of those moves, 1) the TAF will rise to $300 billion from the existing $150 billion; 2) two times the $150 billion will add another $300 billion over the year-end. The swaps had already been issued at the amazing level of $290 billion, and I am just amazed that they plan to provide $620 billion.

The Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF) was announced September 19, which allows money market funds to borrow at low rates to provide liquidity to the asset-backed commercial paper market.

In total, these programs don't seem to have worked. Despite the massive liquidity intervention with promises of more, the fear assigned to second-tier commercial paper remains high, with the rate staying at the extreme level of the last two weeks:

Rate Stayed High Despite Massive Liquidity

The conclusion is that while the Congress and public are fiercely debating the $700 billion Paulson plan to turn the U.S. Government into a giant investment bank, buying toxic waste with the proceeds of Treasury borrowing, the Fed is already massively pouring gasoline on the fire with its multi-pronged paradigm shift from lender of last resort for commercial banks, to market manipulator and guarantor of a wide range of financial institutions. This can only lead to dollar debasement and loss of trust in the U.S. financial system.

Call Us Utopians... or Free Marketers

    [Ed. Note: I began writing this early on the morning of Friday, October 3. As I was finishing up the edition, the House of Representatives passed the bailout bill. As I write, someone is, literally, hot-footing it over to the White House for signature... just in case anyone changes their minds. While that may make this discussion seem a bit out of date, simply file it away to drag out after the Treasury has burned through the latest round of cash and has returned to the trough for more. Our position won't have changed.]

As I write, the U.S. House of Representatives is, once again, preparing to vote on Paulson's bailout (more on that topic momentarily from our new man on the scene, Don Grove). In that we've received a number of emails asking what our position is on the bailout, I thought I'd set it down in writing.

First and foremost, we are of the opinion that the government should stop meddling in the markets. Instead, it should step aside and let the banks and other institutions fail. The housing bubble has to be resolved by prices falling to a point where buyers find them attractive. It won't be solved by competing with private lenders or declaring moratoriums on home foreclosure. In other words, the government should avoid, at all costs, the default mode of meddling, especially by using its fiat monetary powers to inflate the country out of this long-coming crisis.

Of course, the outcome might be that this downturn would be particularly deep – thanks to the scale of the market dislocations created by the "good works" of government, egged on by its many parasitical toadies from the last 50 years or so. But it wouldn't necessarily need to be prolonged, because people will know where they stand, and quickly.

But that position presupposes that the government would simultaneously take other actions to encourage wealth building, like lightening the tax load on everyone, reducing barriers to entry for businesses, fairly dramatically cutting size of government, and reducing the expensive business of empire building/maintenance (along with the wars that engenders). And, to assure that things never again run out of control, the Fed would be dismantled and the nation put back on a gold standard.

In short, if the nation is going to benefit from the medicine we would propose, then a paradigm shift in the standard operating procedure for the country is required. Fortunately, our "leaders" don't need to look very hard for a working model: a quick perusal of the very same principles that gave the United States the unprecedented economic kick-start that moved it from subsistence farming to the world's most powerful economy in just a bit over 100 years will do fine.

As none of that is going to happen, however, the following are far more likely scenarios, in my personal opinion:

Scenario A. The bailout passes, but only with everyone involved promising to increase regulation in order to avoid it happening again... and raising taxes to boot, based on a flawed rationale that this will help pay for the cost. Meanwhile, behind the scenes, the Fed and FDIC continue to bail out like crazy. Obama gets elected and announces a New Deal (he'll come up with a phrase that evokes the same idea, but spun just different enough to be claimed as his own), and then the size of the government really ramps up. Inflation rages.

Scenario B. The bailout fails, the markets get slammed, the meltdown accelerates until the point that the increasingly desperate government passes Plan B, the net cost being more or less identical to Scenario A. Meanwhile, behind the scenes, the Fed and FDIC continue to bail out like crazy. Obama gets elected and announces a New Deal, and then the government really ramps up. Inflation rages.

So, when you come right down to it, our position is correctly called utopian, or even delusional... because the odds of a voting majority of Americans waking up to the true nature of the problem and resolving themselves to taking their medicine, good and hard, and swearing off the government teat for good, are unlikely in the extreme.

Instead, to quote a succinct email I received yesterday from my dear partner and resident guru Doug Casey...

    "Cockamamie schemes will proliferate from all quarters. The only solution is liquidation, total deregulation, and cutting back the government massively. But there's no way that's going to happen. The only question is which combination of harebrained schemes the government will embrace."

The Arabs have a saying that is quite apropos, "The dogs bark, but the caravan moves on."

This caravan is inexorably on its way to an inflationary catastrophe. Done barking, the dogs turn back to their calculations on ways to invest to take advantage.

    [Ed. Note: Post-bailout approval, I think Donald's article below is still relevant as it looks at some of the more onerous provisions of the new bill. Another member of the Casey team just wrote in with the following message... "Bailout approved. Good-bye USA... Hello USSA, United Socialist State of America."]

Oink! Oink! For Shame!

By Don Grove, Casey Research Washington D.C. Correspondent

Have you been concerned about the BAILOUT? Like me, you may have completely misunderstood what this is about. Fortunately, our senators have set us straight with a 442-page tome that only a bureaucrat could love. We've come a long way from the modest 3-page draft statute that Hank Paulson brought to the Hill on September 20. This is pork barrel politics at its finest.

You may have thought this was just about bailing out banks. Like me, you may be surprised to learn what that entails. Among other things, it's about arrows – yes, arrows.

Not just any arrows. We're talking about favored tax treatment for "wooden arrows designed for use by children." Now for those who would protest that this important provision is just too costly during this time of global economic crisis, don't worry. The senators have sensibly clarified that the favored arrows are only those having a "shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine." See HR 1424 § 503 (attached and linked so you can search the PDF and find this comforting language for yourself). Obviously that leaves one very important question unanswered: How big are they? Well, "5/16 of an inch or less in diameter."

Is that all it takes to bail out a bank? Certainly not. It takes wool; yes, wool. I will admit that as I reveled in the House defeat of HR 3997 Monday, I had completely overlooked the critical importance of wool to the economic well-being of every American. Of course we're talking specifically about "fabrics of worsted wool" and "yarn of combed wool." HR 1424 § 325. It's also about rum, health care, economic development in American Samoa, bicycle commuters, Indians, recycling, and oil spills.

It was clear to the Senate that the House got it wrong. What can you expect from that unruly crowd? Unfortunately, Article I, § 7, clause 1 of the Constitution requires that "All Bills for raising Revenue shall originate in the House of Representatives." Bummer! What's the Senate to do – just stand by? Not! Fortunately, that same clause continues, "but the Senate may propose or concur with Amendments as on other Bills."

Now it just so happens that a handy little piece of legislation had already passed in the House, been sent over to the Senate for its approval, and had been languishing on the Senate's legislative calendar since March: HR 1424, the Paul Wellstone Mental Health and Addiction Equity Act of 2007. Perfect. Everyone is in favor of mental health and against addiction. Let's roll it out and load it up. In one busy day, this obscure 45-page bill designed "to require equity in the provision of mental health and substance-related disorder benefits under group health plans" was magically transformed into an $800 billion vehicle to save the world – with something in it for everyone – and for only $100 billion more than the House bailout bill. Such a deal.

In times of great crisis, Rome would select a magister populi who answered to no one and was empowered to take whatever steps were necessary to alleviate the crisis. In his original September 20 bailout plan, Hank Paulson proposed that "ecisions by the [Treasury] Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Hey, Paulson's a smart guy. Letting him work out the details would have kept it simple – too simple. Instead, we now have a bailout plan that Congress can be proud of, and the secretary has been properly reined in, as has, hopefully, his yet unnamed successor.

We were assured that American taxpayers would probably get their money back and might even show a profit on this exercise. Meanwhile, just to be on the safe side, Paulson built in a little room to maneuver. His draft would have raised the national debt limit by providing "that Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000." The Senate, in its infinite wisdom, left that very important part of Paulson's proposal completely intact. See HR 1424 § 122. I think it's fair to say that the United States Government is technically incapable of saving (on our behalf or otherwise) or of ultimately paying off its debts. The statutory debt ceiling now stands at $10.615 trillion. See http://www.treasurydirect.gov/govt/charts/charts_debt.htm. Sounds to me like we will never see our $800 billion again.

Always the optimist.

Regards, Don

The Big Debate

I wouldn't be a very good correspondent if I didn't at least mention the much-anticipated vice-presidential debate last night.

Despite my skeptical comments about Sarah Palin last week, I assumed she would do well in the debate. And, speaking strictly as an observer of the art of debate, she did. Whoever coached her did a masterful job, as she gets full marks as a student of same, starting out in fine form with the well-delivered line "May I call you Joe?" (He should have answered, "Sure, if I can call you Sarah?", punctuated with a smile and a wink.)

But was there actually anything important to be gained from the experience of watching the two candidates swap half-truths, exaggerations and outright lies? Maybe...

  1. Biden is a card-carrying socialist. Now, I don't mean that as an insult, per se, but rather as what seems to me a statement of fact. The body of his comments and clear vitriol against "free markets," capitalists, loose regulations... coupled with his constant drumming for more regulation, tax increases, and a multitude of perfect-world programs, confirmed his view that the fate of the world and everything in it is best coddled, coerced, and otherwise shepherded along by Big Brother. Listen, we live under majority rule. If the majority really want the fingers of the government in every pie, and if you believe the polls, they do... then who am I to argue?
  2. Palin is a true believer. A mind that is trained from youth to unquestioned acceptance of the fantastical (an apt description, I believe, of those raised under the circumstance of extreme religiosity) is a mind trained to believe just about anything. It came across loud and clear that Governor Palin is a true believer, as is her running mate. If our unfortunate current president labors under one psychological challenge more than any other, it is his certainty. And once certain, he lets nothing and no one stand in the way. I fear that the same would be in store, should McPalin get elected. While I continue to favor the economic policies of the McCain/Palin team, the thought of this pair of mavericks, by gosh, unleashed on the world is enough to send me looking for a thick slab of cement to hide behind.

George Washington, Thomas Jefferson, where are you when we need you most? They certainly won't be on the ballot come November 3.

World on the Edge

There has been much commentary about the current financial fiasco being an "American" problem, usually followed by the tossing of a few bricks at the greedy capitalists. While there is no question that Wall Street's ever-creative financial engineers did a smack-up job of investment alchemy, turning pigs' ears into (exploding) silk purses, that doesn't let the rest of the world off the hook for loading up on the stuff by the container load before taking the time to actually understand what they were buying, or the risks involved.

The phrase caveat emptor is more than just two high-sounding words. One assumes that by the time one achieves a certain elevated station with a major banking institution, whether in New York or Dublin, one understands concepts such as due diligence and risk/reward ratios. As hard as it is to believe, many of the foreign banks are even more leveraged up than the much-maligned U.S. banks.

In an article earlier this week, Marc Faber quoted at length from a study by the Centre for European Policy Studies in which the author, one Daniel Gross, points out that Germany's Deutsche Bank has a leverage ratio of 50:1 and is in debt to the tune of two trillion euros, an amount equal to about 80% of the GDP of Germany. And Barclays, with a leverage ratio of 60, has liabilities of 1.3 trillion pounds, an amount equal to the GDP of the UK.

This week Fortis Bank (leverage ratio 33, liabilities equal to 3X the GDP of its home country of Belgium) was nationalized.

And the German government had to cobble together a bank bailout amounting to 35 billion euros, the largest ever in that country.

As discussed in the September 1 edition of The Casey Report, there's an increasing chance that the European Union will not be able to withstand the storm now breaking over it. On that topic, I highly recommend reading the following Oct 2 article by Ambrose Evans-Pritchard in the Telegraph. You can read it by clicking here.

In Faber's article, he also points to another closely watched index related to the global economic situation, the Baltic Dry Index, which tracks the price of shipping. That is used to gauge the level of global trade (a rising index indicates robust demand for cargo shipping and thus economic growth). Well, the index looks like the trajectory of Wily E. Coyote falling off a cliff.

Clearly, the slowdown is global and spreading. The truth of that can be seen in falling commodity prices. At this point, we are advocating staying clear of most commodities, other than gold and selective energy stocks. The former because of its increasing importance as money, and the latter because supply pressure and geopolitics put a floor under the energy sector somewhere near here (more on that momentarily).

No question, the trading herd is now rigging for a serious global downturn. In time, as the inflation that is being baked into the cake every day now makes itself known, the commodities sector, as a whole, will regain its upward momentum... but for now, outside of gold and energy, the best bet is the safe bet of standing aside.

As the commodities move into a position of being extremely oversold, which seems ever more likely, a spectacular contrarian opportunity will be created. But that opportunity is still a ways out.

More on the Global Situation

This week, the Irish government announced they are going to stand behind 100% of bank deposits in that nation. This set off a inflow of money as depositors in other European countries sought the safe harbor offered by that unprecedented guarantee. Reacting quickly, the Greek government, under some added pressure thanks to bank runs in two major cities, followed suit. If you believe observers of the European banking scene, this is only the beginning.
    "The whole of Europe will have to do same thing, otherwise Europe will have a split banking system," said Hans Redeker, currency chief at BNP Paribas. British banks are already facing a haemorrhage of deposits to Irish banks that now enjoy the AAA sovereign rating of the Irish state.

Meanwhile, back in the U.S., the current bailout legislation includes a provision that raises FDIC coverage to $250,000. Enough, we expect, to keep the boobus from lining up at the doors of the nation's banks, empty gym bags at hand.

Problem solved? Well, not quite. To quote from Bud Conrad's dissection of the latest developments in the crisis and its implications in the October 1 edition of The Casey Report...

    Almost imminently, we expect to see the broader banking system coming under serious pressure, the result being that hundreds of commercial banks could be declared insolvent and require bailing out by the FDIC. Just this morning, yet another major U.S. bank, Wachovia, failed. The banking crisis is far from over.

    That's a further problem, because the FDIC has just $40 billion in reserve to provide coverage on $4.3 trillion of deposits. That's a penny for each dollar. To put things in clearer perspective, consider that the failure of IndyMac Bank alone wiped $8.9 billion off the FDIC's reserve. Clearly, the cost of bailing out the depositors of hundreds of failed banks will quickly deplete remaining FDIC reserves.

    Bringing the matter full circle, the reserves of the FDIC are invested in (drum roll, please...) U.S. Treasuries! So the FDIC will have to sell off Treasuries to obtain the money to refund depositors. That adds to the demand for credit, at a time when credit is scarce. And what happens if, say, 10% of the $4.3 trillion deposits needed to be covered, a distinct possibility given the scope of the crisis? Simple math shows that the government would have to find another $430 billion to bail out the FDIC. While there may be some debate around the current bailout of the big banks that sank themselves with toxic waste, there will be no debate when it comes to bailing out depositors.

Meanwhile, back in Europe, the powers-that-be are thrashing about trying to figure out how to actually manage the widening banking crisis there – this week, a plan for a $400 billion fund was raised and shot down – given that there is no central monetary authority with the power to actually create the funds in the same way the U.S. Treasury can.

Does that mean the U.S. is better prepared to deal with the crisis and will come out of the tailspin sooner?

If I had to vote, I'd vote yes... because as challenged as the U.S. is just now, the U.S. is not burdened with the sort of employee-for-life regulations that cling on to the backs of companies in so many other countries. In the case of Europe, the overburden of EU regulations makes things even worse. While those regulations might feel good to the populace in good times, they are going to become crushing as things grow worse.

China? As I have mentioned on many occasions, the leadership of that country is in a do-or-die (literally) situation when it comes to maintaining strong growth in their economy. Events don't allow time just now to cogitate on how that important country will deal with the slowdown or what effect growing unrest might have on the willingness of its citizenry to own renminbi versus, say, gold. (At least until it's banned, again.) This is an analysis we'll try to turn to in the near future.

Finally, on the topic of global affairs, subscriber and correspondent Steve Hanke, who is also a Forbes columnist, emailed yesterday that, as of last Friday, annualized inflation in Zimbabwe reached 531 billion percent.

So, things could always be worse.

    [Ed. Note: Any of our Zimbabwean subscribers care to provide an example of how you go about doing your daily business with 531 billion percent inflation, we'd love to hear about it – and share it with the readers of this weekly missive. Send along your thoughts to david@caseyresearch.com.]

An Interesting Perspective on European Energy

Yesterday, Marin Katusa, the relentless head of our Energy Division and managing editor of Casey Energy Opportunities sent across the following data points. I found them pretty eye-opening and thought you might, too.

Russia literally has a stranglehold on European gas. Below is a list of the percentage of the gas European countries get from Russia's Gazprom monopoly:

Slovakia, Finland and Macedonia 100%

Bulgaria 96%

Serbia 87%

Greece 82%

Czech Republic 79%

Austria 74%

Turkey and Slovenia 64%

Hungary 54%

While those are some of the biggest-percentage buyers of Russian gas, even if you expand the analysis to all the countries in Europe, the total is still over 25%. Now, check this out...

    MOSCOW, Oct 1 (Reuters) - Russia's gas export monopoly Gazprom said on Wednesday its export gas price for Europe has reached an all-time high of over $500 per 1,000 cubic metres.

    "As of today we can say that the price growth dynamic has surpassed Gazprom's expectations, and the price for the gas supplied by Gazprom to Europe exceeded $500 in October," Gazprom's statement quoted chief executive Alexei Miller as saying.

Putin is a genius.

We are continuing to look for ways to play this situation.

    [Ed. Note: If you are interested in the long-term potential of rising energy prices, give Casey Energy Opportunities a 3-month, risk-free trial run. Learn more here.]

Blarney Barney

Over the last little while, I have had to grit my teeth while listening to the politicians pointing fingers at the free market for the mess we find ourselves in.

A few items I came across on that topic pertaining to the views of House Finance Chairperson Barney Frank: "The private sector got us into this mess," Frank said, "the government has to get us out of it. We do want to do it carefully."

And this from an article on Frank's views from the top of the year.

    To explain the mortgage crisis that became a global credit crisis, US Rep. Barney Frank (D-Mass.) started by putting the blame on the party politics of Ronald Reagan. Instead of borrowers, brokers, financial markets, or even the Federal Reserve Bank, the current chair of the House Committee on Financial Services went back twenty years to the former president's philosophy of government.

    "Reagan's central idea," said Frank, "was ‘Government is not the answer to our problems—government is the problem.' His philosophy is why we're here today."

To which I answer by reprinting something I wrote in the September 21, 2007 edition of this column...

    Economics 101 for Politicians

    Earlier this week, I heard an interview with Barney Frank, a politician of some duration and standing in the U.S. Congress, on the topic of changing the FHA home loan program to be softer on lenders in this time of tightening purse strings. For those of you unfamiliar with the FHA, it stands for Federal Housing Administration. It's a holdover from the New Deal legislation passed after the Great Depression, and it's unique in that it has managed heretofore to avoid being sucked into the subprime quagmire, largely by virtue of actually maintaining something akin to responsible lending practices.

    What struck me most about Barney's many strident comments – and struck me sufficiently hard that I found myself muttering aloud in the privacy of my vehicle, much in the same way that a vagabond pushing a shopping cart full of cardboard might do in public – was when he dipped into the topic of the rates being charged by the FHA to poor-credit borrowers looking for a loan.

    I must paraphrase here, because I don't want to listen to the man's voice again, but his understanding of the ways of the world are summed up in words almost exactly like these.

    "The FHA is too conservative in its lending, it is charging higher rates than available from private institutions. My GAWD, man, that's just wrong! We are the government!!!" he fumed and sputtered.

    When challenged by the interviewer that perhaps individuals with poor credit histories should be required to pay a touch more in the way of an interest rate, he pontificated, begrudgingly, along the following theme.

    "Okay, so if someone with poor credit takes a loan and the FHA does charge them more, and they then make their payments on time for three years, we should give them a refund on the excess rates they were charged for being a poor credit risk in the first place. After all, after three years, they would have shown themselves to be good credit risks, so why shouldn't they get a refund?"

    It was at that point I unleashed my howl and started the aforementioned muttering.

    If a person with his hands on the reins of power is so ignorant on the very basics of how lending (should) work, then any proposed "fixes" are doomed from the get-go. While I probably don't need to point out the flaw in Mister Barney's logic, I will, just because his ignorance needs exposing to as many of his voting public as possible, starting with you.

    The reason the FHA has stayed out of trouble is because (a) they have been more restrictive on whom they lend to, and (b) they apply a higher rate to those with marginal credit histories. By applying a high rate for past crimes against creditors to a broader portfolio of poor credit risks, they assure themselves the extra revenue to cover the inevitable losses.

    If an individual with a spotty track record of showing up at the repayment window decides to stick to the straight and narrow, then good for them... they will be rewarded with positive notations in their personal credit history. However, as the odds are 100% that a certain percentage of the borrowers will revert to their former practices and spend the mortgage money on beer, the extra interest charged to the whole will be needed to help cover those losses. To refund the bad-credit-gone-good folks, the difference would leave only the exposure to the bad, assuring a smoldering hole in the FHA's balance sheet.

    As much as we are loathe to snap a rigid hand to the brow in the direction of any government agency, we will at least give a nod to the FHA for avoiding the current credit mess. We will simultaneously give Frank and his meddling ilk a dismissive wave. "We are the government!" indeed.

    The essence of what you actually are, Mr. Frank, is an ignorant tick sucking off the life blood of taxpayers.

    That, approximately, is what I muttered aloud to myself in the privacy of my car. Can a shopping cart be far away?

Miscellany

  • Reckoning day for derivatives? According to the Financial Times, some significant percentage of the $54 trillion in derivatives contracts outstanding, those on now defaulted derivatives linked to Fannie Mae, Freddie Mac, Lehman Brothers and WaMu, have to be settled in October. Think the financial problems are over? Think again. Read the article here.
  • Gold demand soaring. Also in the FT, which I consider best of the mainstream financial journals (and which is now available on Kindle), was an article entitled "Wealthy investors drain supplies of gold by hoarding bullion bars." You can, and should, read it here.
    • Similarly, Germany's Spiegel reports "A Run on Precious Metals." You can read about it here.
    • And the Guardian of England carried an article this week titled "There's gold in them thar' shops." Read it here...
  • New phyles starting up. Brian in Chattanooga, TN, and Philip in Ann Arbor, MI, are both ready to host phyles. Drop us a note at phyle@caseyresearch.com and we'll get you set up if you are interested in attending.

And that, dear, patient readers, is that for this week. There was so much more I wanted to cover, and will next week... but time has slipped away. As I sign off, I see that the DJIA is up a flaccid 121 points, not very impressive given the passage of the bailout. What, I wonder, will the government do when next week, or the week after maybe, the U.S. stock market takes another header for 500 points? Stay tuned. Meanwhile, gold is at $826, down considerably over the past week.

Like when a tsunami sucks the water away from the shore just before hitting, we're in a transition period. I'm not worried about where gold is going next. I wish I could say the same about the world.

Until next week, thank you for reading, and for being a subscriber.

Sincerely,

sig

David Galland

Managing Director

Casey Research, LLC.





Posted 10-03-2008 9:53 AM by David Galland