WE ARE WATCHING THE BIGGEST PANIC IN GLOBAL FINANCIAL MARKETS THAT HAS OCCURRED IN MY 65 YEARS OF LIFE AND 50 YEARS OF STOCK, BOND AND COMMODITIES INVESTING
It’s Saint Patrick’s Day weekend…old Saint Patrick would probably be fascinated to see all the rich and worldly people running around in a panic.
Yesterday, J.P. Morgan and the U.S. Federal Reserve began a credit lifeline to Bear Stearns. This is a long and complicated story, but we will attempt to summarize. Bear Stearns had a run, much like the bank runs of the late 19th and early 20th centuries. It had something to do with Bear Stearns itself, but not as much as you would think if you were an average fairly sophisticated citizen with some understanding of how the financial markets work. I believe that most financial professionals may not completely understand what is happening. The lifeline and financing was done not to protect Bear Stearns alone but to protect the entire global banking system.
Bear Stearns is a PRIMARY DEALER IN US GOVERNMENT BONDS. THIS IS A VERY SMALL AND VERY IMPORTANT CLUB. They also have been a leader in the business of prime brokerage, and in the field of trade settlement and clearing, two very profitable, mostly fee based businesses that have been the envy of many other financial institutions. These have been their cash cows and very attractive businesses that have long been sought by other buyers.
Although quite large, Bear Stearns is the smallest of the top U.S. government bond dealers so if someone wants to attack the system they will attack the smallest of the truly powerful bond houses. Bear Stearns, like all major bond dealers and traders, also trades in mortgage bonds and derivatives and this is where the problems arose. Bear Stearns CEO said on Wednesday March 12, 2008 that the company is well capitalized and that the balance sheet is strong. I believe he was telling the truth. However, they are not immune to a run on the bank, and neither is any other major bank or investment bank in the world.
BEAR STEARNS, AS A PRIMARY DEALER, CANNOT BE ALLOWED TO FAIL WITHOUT UNDERMIINING THE CONFIDENCE IN THE U.S. AND THE WORLD FINANCIAL SYSTEM.
Yesterday, Bear Stearns was protected from failing to meet its commitments to counterparties because, to let a primary dealer fail, would mean a run on every major banking and investment banking institution in the developed world…and would almost certainly lead to a massive global depression in our considered and firm opinion.
These events seem to be validating the opinions that Jim Sinclair and I have been propounding on these pages for a long time.
NO MAJOR U.S. BANKING INSTITUITON WILL BE ALLOWED TO FAIL TO MEET ITS COMMITMENTS TO DEPOSITORS AND CONTERPARTIES. To do so would be an admission of defeat by the governmental agencies and institutions that exist to prevent events like the Great Depression of the 1930’s.
CENTRAL BANKS EVERYWHERE HAVE NO OPTION BUT TO REFLATE AND SUPPLY LIQUIDITY TO THE WORLD FINANCIALSYSTEM. FURTHER, THEY HAVE BEEN DOING THAT SINCE THE CRISIS BECAME OBVIOUS ABOUT SIX MONTHS AGO.
All of the themes that I said had to be fulfilled to solve the problem are not yet finalized, but the U.S. Congress is working to create an agency to buy bad loans and the U.S. Fed has been doing it for months now. Some countries have been slower than others to recognize the problem. But now all of them do, and they will make haste with liquidity, government bail out programs for banks, bank nationalizations if necessary, government aid to mortgage holders and many other programs designed to get the problem behind us as soon as possible and to buy votes in the process.
WHAT LIES AHEAD?
THE SHORT ANSWER TO WHAT THE FUTURE HOLDS IS MORE INFLATION, HIGHER GOLD PRICES, HIGHER COMMODITY PRICES AND A LOT LOWER PRICES FOR BONDS.
If you review the statements by Jim and by myself in the past several years all of the events currently taking place have been predicted and explained.
Thanks for listening
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