More Dollar Doom!

[Shooterman]

IF THE DOLLAR WERE AN ANIMAL, IT MIGHT BE A LAMB…a fluffy, adorable little lamb…surrounded by a pack of wolves. The dollar is simply no match for the vicious influences that threaten to devour it — influences like a Federal Reserve that promises to combat every financial crisis with ample doses of additional credit.

Over the past year, I have spoken with numerous business and financial reporters in the U.S. and Canada. These reporters range from employees of small-town newspapers to my much larger hometown chronicle, the Pittsburgh Post-Gazette. I have spoken with representatives of industry trade publications like Oil & Gas Journal, as well as reporters from the Vancouver Sun, Canada’s The Globe & Mail, the Los Angeles Times, the Associated Press and the Dow Jones Newswires. In addition to the print media, I have also been interviewed on many different radio programs.

Part of a recent interview with an Orlando, Florida radio station focused on the immense losses announced by Merrill Lynch and Citigroup, and the departures of the top managers of both firms. Merrill wrote down over $8 billion of bad financial paper, leading to a quarterly loss of nearly $3 billion. And Citigroup has massive losses that may be in the vicinity of $13 billion or more. These are mind-boggling numbers, yet my view is that we are just seeing the tip of a few icebergs.

It seems that over the past few years, much of the financial industry loaded up on bad debt instruments. I will not even dignify this rotten paper by calling it some sort of “investment,” because there was and is essentially nothing to back it up. There are entire portfolios filled with subprime loans, initiated via “no documentation” loans against over-appraised buildings on the far side of the railroad tracks. In other words, these are worthless loans that will never see a dime of repayment. In many cases, these loans are evidence of economic crimes.

When the banks and investment houses acquired these bad books of business, the risk models that they used were pure guesswork. In the real world, engineering has made complicated structures like bridges and skyscrapers safer over time. But the so-called modern “financial engineering” has done nothing of the sort in the economic world. It all goes to show that just because the human mind can come up with an idea, it does not mean that people should act on it, let alone back it with their funds.

At this point, it is all but impossible to value much of what the financial houses have on their books. So the write-downs are just beginning. I believe that there are greater losses lurking in the shadows for both Merrill and Citigroup, and for many other banks and investment houses around the world. Several well-known banks in Germany, for example, are on the brink of disastrous write-downs. It is just a matter of time before these losses become public.

While on the air in Orlando, the interviewer and I cracked a few jokes about how Merrill Lynch’s Stan O’Neal is receiving a $160 million severance package for departing in the wake of his troubled tenure. This huge sum is surely far more than he deserves. After all, Mr. O’Neal took some big paydays over the past few years when things looked good at Merrill and he was firing 26,000 people to juice up the bottom line. So why does he get the big bucks again, on the way out the door, now that his ship has hit the rocks? Good question.

Then the interviewer asked what I anticipate for the U.S. economy and how the individual investor should protect himself from the coming turmoil. My reply was that I believe that the U.S. dollar is in a long state of decline. This is going to be an ongoing tragedy because so many people in the U.S. and around the world will be caught in the riptide as the value of the dollar washes away.

Do you remember when you would walk into a store and the owner might have the first dollar he ever earned in a frame, hanging on the wall behind the counter? People were proud of their money and trusted it as a long-term store of value. Not any more. Yet most people in the U.S. know only the dollar and understand only the dollar and their savings and investments are almost entirely in the dollar. So what happens when the value of the dollar just disintegrates? It is painful to think of the hardship that is coming down the road.

No one really knows how the decline of the dollar will play out. There is no modern precedent for what is about to occur as the world’s reserve currency evaporates in value.

Literally billions of people rely upon the U.S. dollar as the economic rock that holds up the foundations of the world economy. Yet that rock is turning into loose sand. How does one save, let alone invest, in a world where the value of the dollar is in irreversible decline? A declining dollar is the same as the destruction of capital.

My advice is to load up on gold and other precious metals and mining shares in companies that control real ore in the ground. While you are at it, also go for the companies that own or control real energy reserves, such as oil and gas, coal, uranium and renewable energy systems.

As if on cue, last month, the British newspaper The Independent launched a story with these words:

“A new phase in the credit crunch, one of ‘$1 trillion losses,’ seems to be dawning. The crisis at Citigroup and renewed doubts about some of the world’s leading banks disquieted stock markets on both sides of the Atlantic recently, with the fractious mood set to continue.”

So there are a trillion dollars of losses yet to be booked…and a company the size of Citigroup does not have the capital to manage itself as an ongoing entity…and the prices for gold and oil are skyrocketing as the value of the dollar declines.

My advice is to protect yourselves, dear readers. There are wolves at the door.

Until we meet again,
Byron W. King

More Dollar Doom

[pepe]

Hmmmmmmmmmmmm.....................

Today Merrill Lynch downgrades Wachovia, BoA, and Citi .............. to sell........

while it slashes its own wrists.

Is this going to repeat?

[BrianK]

Shooterman or Pepe I'm fairly certain were seniors and are civilians. I know what affects me & my buying power and what the effect of a weaker dollar means to me when it comes to paying for the necessities of life. Everything from food to medical care is something that comes directly out of my pocket.

When I was in the Navy, medical was covered 100%. Lower prices at the base exchange & commissary were part of what made my pay at that time something we could live on fairly decently. I don't know if that is true now so I can't comment on that.

Given that people serving now may of may not be career. I don't know the extent of their pay & benefits or if it is seen as adequate or not. Either way how does the info in the article translate into something that will eventually affect them?

[pepe]

More Gasoline on the Fire

This week’s announcement by the Fed that it will create a new mechanism to provide funding for credit challenged banks has been lauded by Wall Street as an innovative approach to solving the credit crisis. In truth, it is really just the same response the Fed has had for all problems great and small: crank up the printing presses, shower money on the problem, and hope that financial pain can be obscured by the balm of inflation. Both the Fed and Washington politicians are completely clueless regarding the ill effects of the plan, and are simply acting in desperation to keep a ticking time bomb from exploding before the next election.

The Fed and other foreign central banks will provide this liquidity by auctioning low interest rate loans to holders of U.S. mortgaged-backed securities. The loans will be made under the same terms currently in use at the Fed’s “discount window”, with the added benefits of even lower interest rates and anonymity (borrowers wish to avoid the public stigma that comes from utilizing the discount window). Since the loans can be collateralized by mortgage-backed securities, the Fed will be on the hook should these loans not be repaid. In other words, the losses will simply be monetized, or more precisely socialized, as they are passed to the public in the form of inflation.

To get a sense of the losses that potentially await the public, in a recent transaction, E-Trade Financial liquidated its entire portfolio of subprime mortgaged-backed securities for a mere 27 cents on the dollar!

The hope that this additional credit will somehow alleviate the problems in the U.S. housing market is extremely naïve. Virtually none of this newly created credit will find its way back into the domestic mortgage market. With our real estate prices still too high, the gathering potential for lenders to be forced to assume liability for “unsophisticated” borrowers, the added uncertainty regarding mortgage terms, and the persistent weakness in the U.S. dollar, such loans will be far too risky for most foreign lenders to consider. Instead, these banks will take this cheap Fed money and invest it in higher yielding assets overseas. Off-loading risky U.S. mortgages to the Fed in exchange for cheap loans that can be used to finance better yielding foreign investments could well develop into the next carry-trade of choice.

The real losers will be ordinary Americans, who do not get the benefit of the newly created money, but merely suffer the consequences of rising domestic prices and a falling standard of living. With this new plan, the Fed is laying its cards on the table and its hand is a loser. If mortgage losses are socialized through inflation, this new cure will be even worse for the economy than the “housing bubble disease” the Fed infected us with in the first place.

Now that the Fed has upped the inflation ante it’s time to press our bets on gold. About two weeks ago Goldman Sachs predicted that shorting gold will be the best trade of 2008. Call me cynical, but knowing Goldman Sachs, my hunch is this shrewd investment bank, recently criticized for shorting the very subprime loans it was touting to its customers, may be perusing a similar strategy with gold. Perhaps Goldman has a current short position it needs to cover or wants to buy a lot more gold, but needs to convince others to sell it to them.

Maybe Goldman will be right after all. Shorting gold could turn out to be the best trade of 2008, but not for those who short it, but for Goldman Sachs as it takes the other side of the trades. Recent moves by Paulson and Bernanke virtually guarantee that gold will rise. It’s good to be the king.

Euro Pacific Capital

[jonathan_ddr]

At least you have not had a run on a bank yet.
Jon