9 November 2009
Just in case you wondered where the Federal Reserve's $1.5 trillion in (new) bailout funds are now going, here is the chart to sum it all up for you, courtesy of The Business Insider:
Note that we started 2007 with about $800 billion in traditional security holdings. That figure is now down to about $500 billion. Lending to financial institutions was big in late 2008 and early 2009 (up to $1.5 trillion), but that is now winding down. Providing liquidity (easy money) to credit markets is now also declining.
So what is up? Long term treasury purchases are the well-known "helicopter money." This is the money printed out of thin air to buy US bonds when nobody else in the global market wants them, also referred to euphemistically as "quantitative easing." The Fed has promised to keep a lid on this area of expenditure, as it makes the US look a little more like Zimbabwe, Weimar Germany or Rome in decline, and a little less like the proprietor of the global reserve currency.
But look at the full trillion dollars that is now in mortgage-backed securities. This is the taxpayer-funded bailout of the Wall Street speculators who thought they could keep slicing, dicing and repackaging worthless mortgage portfolios and charging commissions (and awarding themselves bonuses) with each slicing and dicing in a never-ending shell game (which of course ended when the music stopped playing).
American taxpayer dollars are now making those bonuses good while people with long-term disabilities and those reliant on company-funded employee and retiree pension and health plans find that their coverage has disappeared due to bankruptcies.
To wrap it up. The Fed is demonstrating that it is (1) willing to print money out of thin air, though only up to a point (about $200 billion so far, but we're not out of the woods yet), and (2) willing to rescue the reckless by bankrolling Wall Street bonuses while retired, sick and disabled people get left holding the (empty) bag.
Hmmm. Something to think about.By the way, don't blame this primarily on Wall Street greed (of which there is certainly no shortage). Look first to the policies of the US government and the Federal Reserve, who, according to
Ted Forstmann, are actively promoting the risk taking strategies which have culminated in financial disaster. Mr. Forstmann (quoted in the
Wall Street Journal) states, "They just throw money at the problem every time Wall Street gets in trouble. It starts out when they have a cold and it builds until the risk-taking leads to cancer."
If you want to know why mortgage-backed securities created so much trouble,
Chris Gasparino explains it well (again in the
Wall Street Journal):
"Easy money wasn't the only way government induced the bubble. The mortgage-bond market was the mechanism by which policy makers transformed home ownership into something that must be earned into something close to a civil right. The Community Reinvestment Act and projects by the Department of Housing and Urban Development, beginning in the Clinton years, couldn't have been accomplished without the mortgage bond—which allowed banks to offload the increasingly risky mortgages to Wall Street, which in turn securitized them into triple-A rated bonds thanks to compliant ratings agencies.
"The perversity of these efforts wasn't merely that bonds packed with subprime loans received such high ratings. It was also that by inducing home ownership, the government was itself making home ownership less affordable. Because families without the real economic means to repay traditional 30-year mortgages were getting them, housing prices grew to artificially high levels.
"This is where the real sin of Fannie Mae and Freddie Mac comes into play. Both were created by Congress to make housing affordable to the middle class. But when they began guaranteeing subprime loans, they actually began pricing out the working class from the market until the banking business responded with ways to make repayment of mortgages allegedly easier through adjustable rates loans that start off with low payments. But these loans, fully sanctioned by the government, were a ticking time bomb, as we're all now so painfully aware....
"With so much easy money, with the government always ready to ease their pain, Wall Street developed new and even more innovative ways to make money through risk-taking. The old mortgage bonds created by Messrs. Fink and Ranieri as simple securitized pools had morphed into the so-called collateralized debt obligations (CDOs), complex structures that allowed Wall Street banks as well as quasi-governmental agencies Fannie Mae and Freddie Mac to securitize ever riskier mortgages.
"Mr. (Stan) O'Neal (former CEO of Merrill Lynch), the man considered most responsible for Merrill's disastrous foray into risk-taking, told me in an interview last year that in the fall of 2007, when he saw that the firm's problems were insurmountable, he had a deal to sell Merrill to Bank of America for around $90 a share. But Merrill's board rejected it, believing he would be selling out cheaply. The CDOs would eventually recover, they argued, as the Fed pumped life into the markets.
"Likewise, nearly to the minute he was forced to file for bankruptcy, former Lehman CEO Dick Fuld believed the government wouldn't let Lehman die. After all, government largess had always been there in the past.
"All of which brings me back to Mr. Fortsmann's comment about policy makers helping turn a cold into cancer. What if the Fed hadn't eased Wall Street's pain in the late 1980s, and again after the 1994 bond-market collapse? What if policy makers in 1998 had allowed the markets to feel the consequences of risk—allowing LTCM to fail, and letting Lehman Brothers and possibly Merrill Lynch die as well?
"There would have been pain—lots of it—for Wall Street and even for Main Street, but a lot less than what we're experiencing today. Wall Street would have learned a valuable lesson: There are consequences to risk."
My insurance advice? Buy gold, and sleep well at night... for decades to come!P.S. Here's an important story. 10 states face looming budget disasters: Regarding problems in the US economy, everyone has been talking about the overbuilding and weakness in commercial real estate (definitely a problem). But there's now a bigger problem sneaking up on us from behind.
California is not the only state in trouble. It is, or soon may be, just as bad in nine other states - and they are important states.
Why are state financial problems a concern? Well, the US government can print money to its heart's content, and the crazy people around the world keep buying US dollars in the form of (a) payments in trade, and (b) government bonds. Guess what? States don't print money - or if they did, nobody would want it. So when California cuts spending by $20 billion per year and still sees 17% tax revenue shortfalls, that's a big problem.
Now we have 9 additional states in the same boat: "
Arizona,
Florida, Illinois, Michigan,
Nevada,
New Jersey,
Oregon,
Rhode Island and
Wisconsin join California as those most at risk of fiscal calamity, according to the report by the
Pew Center on the States."
Click
here for
Judy Lin's (AP) coverage of this very important story - still too far in the background for my taste. I think this is a very big problem.
_
Up until now, gold's price advance has been orderly. The upward moves, the levelling off, and the pullbacks, were all as expected.
Here is a chart of today's unexpectedly lively gold action:
I'm busy today. More later.
The observation that gold may remain a superior investment to the gold stocks has certainly held true since March 2008, in fact, from as long ago as November 2003 and May 2006. Bill Fleckenstein recently stated that gold stocks have been trading as if they are radioactive.
However, current developments are likely to boost the margins of the gold miners considerably. Thus, the fact that they have risen dramatically from depressed levels in October 2008 (at that time, they revisited levels last seen as long ago as June 2002) hardly means that they have climbed too far or too fast. We are just now surpassing strata in the HUI (the unhedged gold miners index) that were observed 2 years ago, when gold first challenged the $800 level.
It is true that gold mining companies have reported more than their share of bad news, even recently. But it's hard to argue that good news is not on the way with gold surpassing the $1100 level.
Here's a rule of thumb. Gold has not surpassed its February 2009 levels in most currencies (at which time the US dollar was considerably stronger).
Gold is certainly going to move to new highs in currencies other than the US dollar before the current run is through - and not just because the US dollar may bounce.
So is gold done yet? I don't think so. Here is Clive Maund's view:
Are the miners done their run? No, we have some ways to go in revaluing the gold miners as well. Here is P. Radomski's visual analysis of the HUI gold miners' index: 
With animal spirits in charge, gold is simply going to do what it wants to do... and gold mining stocks will be tugged along for the ride. 
Enjoy the ride. It might get a little bit wild!
Who knows? But Captain Hook might be onto something here.
Guess what?
We're not even close.
Click here to read more about gold's longer-term targets.
