A PREDICTION THAT WILL CHANGE THE FACE OF INVESTMENT AND FINANCIAL MARKETS
We predict that due to the current major market turmoil, large independent investment banks will cease to exist in the United States of America.
ONE CHARACTERISTIC OF INVESTMENT BANKS IS THAT THEY OPERATE AT ABOUT 30 TO 1 LEVERAGE…COMMERCIAL BANKS OPERATE AT ABOUT 12 TO 1 LEVERAGE
For this reason and others, we predict that there will be no investment banks in a few years. Pressures from government will force them into the arms of commercial banks.
They may operate in name only within the commercial banks but the free wheeling activities of investment banks will be greatly curtailed.
The government does not want entities with that kind of leverage [30 to 1], especially those who are outside of the regulatory purview of the FEDERAL RESERVE. Investments banks are not regulated by the FED. Commercial banks are regulated by the FED.
HAVE YOU CHECKED THE SAFETY OR YOUR CUSTODIAN? HAVE YOU CAREFULLY READ THE LANGUAGE OF YOUR CUSTODIAN’S AGREEMENT WHICH GOVERNS THE DISPOSITION OF YOUR ASSETS IN THE CASE OF SERIOUS FIANACIAL PROBLEMS IN THE WORLD ECONOMY OR WITH THE CUSTODIAN ITSELF?
In our opinion, all investors and certainly all recipients of pensions or holders of IRA’s and other pension plans should check the financial stability of the custodians of the assets that they own. Equally important is the legal wording of your relationship with your custodian. Have your attorney look over the wording and make sure that the custodian is segregating your assets and will audit your assets annually to make sure that they are segregated from other clients and from the assets of the firm itself. We have spent money on attorneys who review the legal language in our custodial agreements as we believe it is essential knowledge.
We are money managers, not attorneys. Please have an attorney look over the legal language of your relationship with your custodian…you maybe surprised by what you find.
A FEW POINTS ABOUT THE RUNAWAY COST OF THE WAR IN IRAQ…AND HOW U.S. GOVERNMENT SPENDING PROGRAMS SELDOM (IF EVER) END
1. Defense Secretary Donald Rumsfeld’s original forecast of the cost of the war was $50 to $60 billion. The current estimate of the cost of the war by economist Joseph Stiglitz is… a whopping $3 trillion. Mr. Rumsfeld underestimated the cost by 98%. In other words the cost is estimated to be fifty times as great as his high end estimate.
2. The cost of the war to date for the average U.S. family stands at about $16,900.
3. The monthly cost of the war is about $12 billion, up from $3.3 billion in 2003.
4. Iraq’s oil exports in 2003 were about $5.1 billion. Iraq’s oil exports in 2007 were about $38.3 billion. Where is this money going? It would appear much of it was stolen.
5. There are 4.5 million Iraqis displaced from their homes as the civil war continues.
We are not taking a position for the war or against the war. I am just pointing out the side effects of government activities. This war is just one of the many runaway costs in the U.S. government. Have you ever noticed how no federal agency or program ever ends? The original purpose may end, yet the agency acquires a life of its own, and continues to operate (and spend money) long after its usefulness ends. THIS IS AN ECONOMIC MISTAKE AND THE U.S. IS NOW PAYING FOR ITS DECADES OF PROFLIGACY IN GOVERNMENT SPENDING.
MONEY SUPPLY GROWTH ACCELERATING…THIS MEANS HIGHER INFLATION IN THE FUTURE
According to Shadowstats.com Money Supply growth as measured by M3 (the broadest measure of money supply does a better job of indicating upcoming inflation) surged to an annualized +20.1% pace during the last two weeks. The M3 growth for the entire month of March is expected to be about 17.1%, which is up from February’s already blistering growth pace of +16.9%. Similarly, the narrower money supply measure, M2, is expected to grow at +7.2%; up from February’s +6.9%.
Shadowstats goes on to say that “The increasing signs of accelerating money growth remain coincident with the Fed’s increasing re-liquefaction of illiquid assets held with the financial system.”
This would indicate to us that deflation is unlikely.
FINANCIAL REGULATION OVERHAUL WAS ANNOUNCED TODAY
The U.S. Treasury Department announced today a sweeping proposal to change financial regulation in the United States, and for many U.S. based institutions which operate in the global banking, savings bank, insurance and investment banking worlds. Predictably, the Treasury Department suggested that all of the regulation be kept within its departments under the auspices of the Federal Reserve. The Fed has proven to be a timid and weak group of intellectuals with no penchant for regulation.
Clearly the SEC or some stronger group would be a better regulator, but that is a moot point for all of this is just for show. The proposals were generated to show that the current administration has its hands around the problems of the world banking crisis and is acting in a proactive manner. The proposals would need congressional approval and will take years to sort out. Many of the proposed reforms are needed both to improve regulation and to make U.S. organizations more competitive in world markets.
Obviously, a program is needed which allows for more rapid adjustment by financial supervisors, and not the slow, bureaucratic, reactionary supervision by politicians and legislators who often lack the highly sophisticated economic and financial knowledge needed in times of crisis.
We are finding some values in China and Hong Kong and a few others, where the markets have fallen quite a bit.
We continue to be excited by the opportunities in gold and silver.
Food prices are going to continue to rise worldwide over the longer term. Fertilizers and farm related stocks remain a favorite area. We were shocked and concerned to see rice prices spike way up last week. We may have predicted much higher food prices, but it is a huge tragedy that could lead to starvation in parts of the world.
Although the dollar has fallen a great deal we believe that the current behavior of the U.S. Government leads only to the conclusion that over the long term the dollar will fall further. Presently, central bankers around the world are trying to talk the dollar higher, but until the U.S. government begins to get their triple deficits in order the dollar is not likely to put on any meaningful rally.
The crisis may be spreading to the highly levered countries like Iceland, Turkey, and others. These countries have been using deficit financing and are now having a hard time funding their activities.
Thanks for listening.
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