World confidence in the financial markets has been badly shaken. There have been bank runs in Russia, U.K., U.S., and now Hong Kong (although Hong Kong is not really too much involved in mortgage backed securities and the heavy leverage insanity like in Europe and on Wall Street). Europe, Japan and the Anglo-Saxon world are in deep trouble and we should admit it to ourselves and take immediate action.
Rumor has it that when the Titanic first hit the iceberg, some passengers engaged in a snowball fight on the deck…clearly missing the message. Today is not so dissimilar. Many authorities, particularly politicians, seem to be blind to the simple reality. The reality is that the financial system is in grave danger. Instead of trying to cover up the problems and allowing their banking institutions to lie about their big problems, the authorities of every major country must act to recapitalize the banks of the world in order to keep the world economic system running.
Federal Reserve Chairman Ben Bernanke, whether you like him or not, is one of the world’s experts on the Great Depression of the 1930’s, and he understands the problem all too well. He called Treasury Secretary Paulson (who was afraid that a bailout plan would not be easy to get by Congress) and said we have to do it now before it is too late. Chairman Bernanke is correct.
The blame belongs to all politicians and the system of government that exists in the U.S. and Europe which allows powerful interests on the political right and on the political left to manipulate politics, and allow wrong behaviors to continue (sometimes for many years) when the miscreants happen to be big donors…and Fannie Mae, Freddy Mac, AIG, and Wall Street firms were big donors to both major political parties in the U.S.
In Europe, major financial institutions have used their political influence to avoid admitting the depth of their bad debt exposures. Two very large banks in Europe have leverage of about 50 to 1 or more. The debt they carry on their balance sheets is close to the sum of the GDP of their home countries.
In Japan, their banks have continued to be mismanaged…for nearly two decades. Only in emerging Asia, because of their focus on lending to foster their own growth, has the problem been less pronounced.
That being said, we are a global economy where investments and risks spread globally, so collapses in the U.S., Europe, and Japan will hurt Asia. Asia did not make as many bad loans but they bought the problem bonds in Fannie Mae, Freddie Mac and other western financial institutions.
Some time we will have a meeting and invite those who want to hear our views on how this developed. It will take a couple of hours to give a history of the federal government’s intervention in the housing market, the well-meaning housing for the poor legislation, the desire to make the world safe from terrorism, other well-meaning ideas, and how we arrived so close to an economic depression in the U.S. and Europe.
WE KNOW THAT PEOPLE ARE ANGRY WITH WALL STREET AND POLITICIANS
The complete story on how and why the crisis developed will eventually come to light. The public will see that there were many bad actors at all layers of the mortgage finance system that helped cause the problem. Some of these people will be arrested and will go to jail. In the meantime, may we suggest that we all support the Fed and Treasury Department’s plan to create liquidity in the system in the U.S…and urge the Europeans to undertake a similar program as soon as possible.
WHAT WE ARE DOING
In order to try to be conservative and protect the client assets, our clients’ portfolios are currently mostly in cash in U.S. T Bills, and a few have some short term foreign government bonds of countries with strong and conservative economic policies. We prefer to own Treasury bills and not hold large cash balances in money market funds during times of stress.
Another protective approach we have taken with our clients’ money is to have them own some gold mining shares and gold bullion shares in their portfolios, and we plan to buy more on dips. This should preserve the buying power of their money should the U.S. dollar depreciate.
The client portfolios may also own a few stocks, but in general we are very lightly invested. These allocations can change at any time without notification to our readers. For example, if world market psychology improves, we might make many more investments in China and in other areas which will benefit from the inevitable rise in inflation that these financial system bailouts will create over the long term.
Further, many of our clients have their accounts in the private banking department of major financial institutions, which are primary dealers in U.S. Government securities. The primary reason for this choice was the provisions in the custodial agreement that stipulate the bank will segregate the assets and not lend them to other customers or the bank, and that such segregation is audited. Our obvious objective is to avoid having client assets commingled with the banks or other customers and then being dragged down by the failure of another institution or another client.
If you have any questions about how we can help you in these troubled times, please do not hesitate to contact us.
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