GRASPING AT STRAWS
GRASPING AT STRAWS
We
are currently in the early stages of the most serious financial crisis since
1929. Not only is there great danger lurking in the ever larger and increasing shadows,
but the potential surprises are not even recognized, let alone being discussed nor
is anyone trying to do anything about them.
ELEVEN MONTHS OF OVERHANG
If
you think that I am exaggerating the danger, I haven’t even scratched the
surface. It has already been admitted that we currently have an 11 month overhang
of unsold homes and that is before the bulk of the ARM mortgage resetting hits.
The more logical number really stands between, a three to
five year over supply of homes. With our generic population growth at
barely 1%, can the flood of illegal and legal immigrants absorb this massive
oversupply with a simple ¼ or even ½ point cut in interest rates? Who is
kidding whom?
IS THERE A SOLUTION?
Sure
there is, but it certainly isn’t the one that is being bandied about. Since history repeats, it’s about time we
learn something from the past before the s__t hits
the fan. During the Savings and Loan crisis, we were fortunate enough to have
hired Bill Seidman to solve our problem. He promptly liquidated all the insolvent
institutions instead of creating SIV’s to extend the
problem into the future. He then cleared the massive real estate overhang by
liquidating and auctioning off all the defaulted properties as quickly as
possible at whatever the market would pay. He let the Free Market work and
turned what most thought would be a TRILLION DOLLAR hit to the taxpayers into a
moderate $157 billion loss, with nary a dent to the dollar or the economy and
without destroying the Constitution. So far, the FED’s
½ point followed closely by an additional ¼ point managed only a 1 ½ day rally
and contributed mightily to tanking the US Dollar. Get wise Ben and show some
guts and tell all those know nothing Media and Wall Street talking heads what’s
what. Also, warn our idiot politicians that the breaking of the contracts between
mortgagees and the mortgage holders will destroy our country by turning it from
one that is ruled by law into one that is ruled by the mob.
BIGGER DANGERS THAN SUB-PRIME
Just
one example is the $50 trillion that’s trillion with a (T) of outstanding unregulated Derivatives, which makes the Portfolio Insurance
Debacle of 1987 fame seem like chump change in comparison. So far, Warren
Buffet is the only person of stature to have noticed it when he said, ”that it was a disaster just waiting to happen.”
Citi
Corp has an estimated $20 trillion on its books (I’m not sure if it’s accounted
for either on or off the books a la ENRON ) which is
over 200 times its total capital. A measly 5% loss would wipe out Citi’s capital 10 times over. Does anyone really believe
that an injection of $7.5 billion at 11% and convertible to boot,
now makes Citi a good buy? Did you ever wonder why Citi
did not offer that exact same deal to its existing shareholders? Could it be
that if they did, Citi would have had to file a
prospectus fully disclosing what dire straights they are really in? Do you
think that they might be worried about Sarbanes Oxley? And I always thought
that smoking dope was illegal. Anyway, it’s about time a couple of Arab Sheiks get
their comeuppance.
IS CITI TOO BIG TO FAIL?
The SIV’s
that they have set up are clearly in big trouble. When a company the size of Citi
borrows short term and invests in long term assets, it’s supposed to have a
plan for when one of its investments goes bad and not just wine about
disorderly markets. But their problem is that more than just one of their bets
has the serious probability of collapsing. Should Citi
fail, you can rest assured that they will not be the only one and the
ramifications will be felt worldwide and endanger the world’s financial system.
So the FED and the Treasury will do everything in their power to avoid that
disaster, but will it be enough? I hope so, but I for one will be staying short the major banks
and brokers.
$950 BILLION CREDIT CARD DEBT
Another
problem which may not seem so big yet may be just as dangerous,
is the $950 billion, and rising rapidly, Credit Card Debt. For the last ten
years or so, people have been refinancing their homes and in most cases, lowering
their payments and paying off their credit card debt. In doing so, they even
got a bonus. Their non-deductible credit card interest suddenly became tax
deductible and so they received an ever increasing Income Tax rebate. Hey, what
could be better than that? But low and behold, all good things must eventually
come to an end. For the past year or so, more and more people were using their
credit cards to pay their mortgages. And the credit card default rates are
rising sharply. For the banks, this problem is much worse than a mortgage default.
When there is a default on a mortgage all is not lost, the homes still have
value and the banks can still determine what value to place on the homes that
they now have on their books. But when a person defaults on his credit card,
all is lost and the banks must take a complete write-off, reducing their
capital base by the total amount of the default. And that really hurts.
SIMPLE MINDS: SIMPLE SOLUTIONS
There
are no simple solutions that work and yet the financial media, Wall Street and
the politicians are all grasping at the straw of cutting interest rates as
their simple Quick Fix. Bernanke knows better or at
least he should - but does he have the guts to stand up to all that pressure?
When I taught economics, what they now call Conundrums used to be called Vicious
Circles. Depreciating the Dollar; helps exports on one hand, but you then ramp
up inflation and destroy the economy on the other hand. There is no such thing
as a WIN WIN, all around easy solution.
Almost
everyone refuses to learn the lessons of the past. For example, Japan after its
crash in 1990, has lowered its rates to near zero, but that hasn’t worked.
Their economy and real estate markets have been mired in recession/depression
for more than 17 years. Does anyone think that they labor under a different set
of economic principles than we do? Why does anyone think that doing more of
what got us into trouble in the first place (Easy Credit, Excessively Low
Interest Rates and Printing Money) will solve the problem? Is that not the
definition of insanity?
A RESUMPTION OF THE BULL MARKET, OR ?
Happy
days are here again. We have had our 10% correction and the market is now ready
to roll, or is it? The Media and Wall Street touts .are twisting and turning
every piece of economic news in their attempt to convince us that the market is
cheap, while they either, ignore, oversimplify or twist any negative news into obscurity.
I have outlined for you as long as a year ago that the real estate and mortgage
markets were a disaster just waiting to happen and that it would take at least
10 or maybe as much as 15 years before they can right themselves. So far, all
news leaking out only goes to reinforce my original suppositions. We are
heading for a crash at least as bad as 1973–1974 and if the Government,
Congress and the FED are not careful, we can be in for a 1930’s type
depression.
The
sub-prime, although a major problem, is minor in relation to the worldwide
credit crunch that the central bankers have already injected $100 trillion in
their attempt to ward off an international financial collapse. Why do you think gold has increased more than
$200/ounce if we have no inflation as is claimed? Sounds serious to me, but the
media has attempted to paper over the problem by ignoring it.
I
have been warning you as far back as September that after the Market makes a new
high, it will then go back and retest its August lows: After which the market
will once again attempt to make one more new high into December or early
January 2008. However this last rally, which will be a very thin suck in rally,
will be too dangerous to trade. Keep your powder dry and wait for the sentiment
figures to confirm that the Market has finally topped out. I am looking for a
minimum 30% to as much as a 50% Bear Market; so if you get in 5% or even 10%
after the Market has finally peaked you will still be in great position to make
a lot of money.
BULLS
MAKE MONEY, BEARS MAKE MONEY AND PIGS, WELL THEY GET SLAUGHTERED
GOLD
Gold
is behaving almost exactly as expected and called for in all of my past
letters. We have just had an almost perfect Elliott Wave 37.5 % or $75 hoped
for correction of an almost straight up $200 Wave 3 run. What more could you
ask for? I hope you are all not looking a gift horse in the mouth. Gold stocks
will go up with Gold Bullion and even though I own both Gold
and Silver Bullion as well as Gold and Silver stocks, I do NOT do enough independent research on Silver or on Gold and Silver
stocks to recommend any in good conscience, so please don’t ask.
ELLIOTT WAVE: In my opinion, we are now completing Wave 4 of Wave
III, with Wave 5 yet to come which should then bring us to a $1,000+. Is that
enough information as to what I think you should be doing or do I have to spell
it out?
GOOD LUCK AND GOD BLESS
AUBIE BALTIN CFA. CTA. CFP. PhD.
561-840-9767
The above information
has been gleaned from information that I believe to be reliable but is not
guaranteed by me. The information provided is strictly for educational purposes
only and is not meant to be treated as investment advice.
.