“Why don’t somebody print the truth about our present economic condition? We spent years of wild buying on credit, everything under the sun, whether we needed it or not, and now we are having to pay for it, howling like a pet coon. This would be a great world to dance in if we didn’t have to pay the fiddler.”
– QUOTE BY WILL ROGERS
The world has accumulated a great deal of debt, and it will take a long time for the savings rate to get to the point where debt can be managed. Rather than implement rational solutions to the debt bomb, we think politicians will dither and financial manipulators will continue to try to make money in the current crisis, therefore we expect there will be many more asset bubbles in coming years.
A few reasons why we say this:
1. Money supply growth is out of control, everywhere. Often this is due to pressure on central bank by politicians.
2. The velocity of money is starting to increase after a period of decline, in part due to the resurgence of the shadow banking system.
3. The problems that have caused the present crisis (unregulated derivatives) are still continuing to be manufactured because they are very profitable to the manufacturers. Derivatives expand the shadow banking system, which further expands the supply of money and credit, thus adding more fuel to the bubble creating machine.
When derivative manufacturers are confronted with the fact that they are sowing the seeds of another bubble…and then another disaster, their refrain is that “it will be different this time.” Amazingly, people can be made to believe that stuff!
Politicians and central bankers worldwide are expanding the money supply at astounding rates, and the eventual outcome that we can see is inflation. We recommend that our readers invest accordingly. We own oil shares, natural gas shares, gold and silver stocks, agriculture related investments, strong non-U.S. currencies and foreign stocks from fast growing countries [China, India, and other emerging markets]. We are currently getting a pullback in these markets, and we want to use these corrections to add to our positions at $60 a barrel for oil we will get particularly bullish.
Last week, the CEO of Bank of America was on television in front of Congressional leaders testifying under oath about conversations he had with the Federal Reserve Chairman and the U.S. Treasury Secretary before Bank of America had completed its purchase of the ailing investment bank, Merrill Lynch. To put it politely, the reason for airing it publicly was to gather data in order to prosecute someone. The U.S. Congress is comprised mostly of lawyers. They may be terrible at financial and economic decision-making, but they know how to prosecute someone.
IS IT POLITICS, OR AN ATTACK ON THE FEDERAL RESERVE?
1. Was it politics, driven by a desire of the U.S. Congress to make the banks look bad?
2. Was it a desire of the Congressional Democrats to attack the Republican holdovers, Dr. Ben Bernanke and the Republican former Secretary of the Treasury Henry Paulson?
Or, more frightening…
3. Was it a shot across the bow of the entire Federal Reserve Board by the current administration?
Or was it all 3?
Number 1 would be typical. The U.S. Congress who is highly culpable in this crisis wants to shift blame elsewhere. Number 2 is very probable. Democrats want to take any opportunity to smack down Republicans and shift blame for the economic meltdown to the Republicans [in our opinion, both parties deserve blame]. Number 3 is the frightening alternative.
Today, the Obama administration is expected to unveil their new plan for financial regulation. After it is unveiled, we will be able to comment more.
Details Set for Remake of Financial Regulations
Wall Street Journal-June 15, 2009
By: Damian Paletta
WASHINGTON — President Barack Obama is expected Wednesday to propose the most sweeping reorganization of financial-market supervision since the 1930s, a revamp that would touch almost every corner of banking from how mortgages are underwritten to the way exotic financial instruments are traded.
At the center of the plan, which administration officials are referring to as a "white paper," is a move to remake powers of the Federal Reserve to oversee the biggest financial players, give the government the power to unwind and break up systemically important companies — much like the Federal Deposit Insurance Corp. does with failed banks — and create a new regulator for consumer-oriented financial products, according to people involved in the process.
The plan stops short of the complete consolidation of power that some lawmakers have advocated. For example, it will allow several agencies to continue supervising banks. It also won’t place specific limits on the size or scope of financial institutions, but it will make it much harder for large companies to be so overleveraged that they threaten the broader economy.
What if Congress and the Obama administration are looking for more Fed buying of government bonds, known as Quantitative Easing? Thus far, the U.S. Federal Reserve and its board of Governors have resisted and board members have stated that no more Quantitative Easing is necessary.
THE ADMINISTRATION AND CONGRESS ARE IN A TIGHT SPOT
Congress and the Obama administration need to sell trillions of dollars of U.S. Government bonds to finance the current and expected deficits.
[a.] They do not want to cut spending. Too many constituents enjoy the handouts.
[b.] They do not want to raise taxes, as it might cause the economy to collapse even more. However, they have a multi-trillion dollar problem this year, next year, and in the foreseeable future….Bond sales must be made. China, Brazil, Russia and other potential bond buyers have been saying that they are concerned about U.S. deficits and U.S. anti-business rhetoric. For many years, the U.S. has sold smaller amounts of bonds to foreign governments. Currently, foreign governments can be expected to take a much smaller part of the large quantities that need to be sold in the foreseeable future.
The government needs do either a. or b…or more probably will do c. What is c?
[c.] More Quantitative Easing; a type of printing money where the Treasury sells bonds to the Federal Reserve. Quantitative Easing is admitting that no one else in the world will buy the bonds needed to finance our spending without a big increase in interest rates. The U.S. Federal Reserve buying treasury bonds temporarily solves the problem of how to finance the deficit while keeping interest rates low…thus helping the administration with a very big political problem.
THE FEDERAL RESERVE GOVERNORS ARE ECONOMISTS
Some of the Federal Reserve Governors are Democrats and some are Republicans…BUT ALL ARE ECONOMISTS.
They know well the pitfalls of financing government largesse by the technique of printing money. They have seen how the same actions that Congress wants to pressure them into have historically destroyed many economies. We are certain that they do not want to go down in history as the people who sowed the seeds of destruction of the U.S. financial system.
The integrity and independence of the Federal Reserve must be preserved from the politicians’ desire to give too many gifts to potential voters, if the U.S. and world are to grow and prosper in coming decades. Ben Bernanke is up for re-appointment or replacement in January. We believe that if he is not re-appointed, the U.S. dollar will fall and interest rates in the U.S. will eventually rise more rapidly, and rise higher than they would otherwise.
In any case, we anticipate that interest rates must rise.
Thank you for listening.
These articles are for informational purposes only and are not intended to be a solicitation, offering or recommendation of any security. Guild Investment Management does not represent that the securities, products, or services discussed in this web site are suitable or appropriate for all investors. Any market analysis constitutes an opinion that may not be correct. Readers must make their own independent investment decisions.
The information in this article is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject Guild Investment Management to any registration requirement within such jurisdiction or country.
Any opinions expressed herein, are subject to change without notice. In addition, there are many market, currency, economic, political, business, technological and other risks that are beyond our control. We make reasonable efforts to provide accurate content in these articles; however, some content and some of the assumptions, formulas, algorithms and other data that impact the content may be inaccurate, outdated, or otherwise inappropriate. In addition, we may have conflicts of interest with respect to any investments mentioned. Our principals and our clients may hold positions in investments mentioned on the site or we may take positions contrary to investments mentioned.
Guild’s current and past market commentaries are protected by copyright. Apart from any use permitted under the Copyright Act, you must not copy, frame, modify, transmit or distribute the market commentaries, without seeking the prior consent of Guild.