Quotes of September 2008

Ty Andros, Tedbits

The greatest transfer of wealth from those that store their wealth in paper to those that don't is unfolding. ALL markets will have to price in the reality that the G7 in general and the financial and banking industries in particular (there are exceptions to this) are INSOLVENT. Rather than default through the normal process they will default through the printing press.

Ted Butler, Investment Rarities

This week I received an e-mail from a Swiss money manager, a friend and trusted source. He informed me that a very large and conservative Swiss bank had informed a number of their clients that they would no longer be offered paper gold or silver certificates in the bank’s name. It seems the bank had previously granted the accounts because it was able to protect itself against an upside move with a derivatives contract with another financial institution. Due to the financial turmoil, the bank was no longer comfortable with the counterparty risk from the other financial institution. Instead, the Swiss bank informed its clients, all paper transactions had to be converted to physical or physical ETF positions (There are Swiss ETFs for gold and silver). My friend informed me that other Swiss banks were likely to follow this bank’s lead.

In essence, the banks that issued such certificates were short the metal, and taking an enormous risk in the event of a sharp price rise. Because they had been issued for decades, the cumulative amount of the short position in silver amounted to, perhaps, billions of ounces. This was a short position separate and distinct from the massive COMEX short position.

That the large and conservative Swiss bank is seeking to reduce or eliminate its short exposure to silver at this time makes sense. The bank has seen that silver prices can move sharply higher and that counterparty guarantees can vanish in an instant. It is sensible and practical that it would take such actions now, after silver prices moved sharply lower.

The resultant move by former paper owners of silver into real metal is destined to put additional pressure on the existing supplies of metal. It is hard to imagine a more critical time for this to occur than now. Every indication is one of tightness in the physical silver supply. The potential creation of a brand new source of silver physical demand could be profound.

Richard Daughty, the Mogambo Guru

I can tell you EXACTLY what is going to happen 'after taking all relevant factors into account', because what is going to happen is the same thing that ALWAYS happens when an idiot government starts creating, or allows to be created, excess money and credit, which is that the money in question will expand and expand, and end up with zero purchasing power while gold, when priced in a currency that has no purchasing power, soars to infinite levels when priced in that currency, and that is what has always happened, anyway, and that is why I am 100% sure, dead-bang sure, no-doubt-about-it sure, can't-miss sure that it will happen again! Betting with gold against a fiat currency in the hands of politicians is the biggest no-brainer on the planet! Whee! This investing stuff is easy!

John Embry, Sprott Asset Management

I don’t understand why the majors aren't acquiring because I've never seen anything like the discrepancy in value between the big cap stocks and the small stuff. Many interesting smaller companies are trading for a song; whereas, Agnico-Eagle and Goldcorp and Kinross are aggressively valued.

The Gold Report: Some of the juniors have lost 80%.

John Embry: If you had told me we'd see this kind of carnage in the juniors while gold was still north of $800, I would have said impossible. One of the reasons is that investors are giving up and gold funds, ours included, are under redemption pressure. This creates forced selling with insufficient buying and that leads to the most depressed prices since this cycle began in 2000.

TGR: How long can this go on?

JE: I don’t know but I’ve got some that actually are selling below the cash on their balance sheets.

Ambrose Evans-Prichard, Telegraph UK

An entire generation of American policy-makers - Clinton, Bush, Rubin, Greenspan, and the Congressional leadership of both parties - has come perilously close to ruining a great nation. The creation of the credit bubble was one of the most disgraceful episodes of economic government in western history.

Nothing can justify it. There is no parallel to the Spain of Phillip II, who ruined his empire to pursue the religious cause of Counter-Reformation, or to the bankruptcy of the British Empire combating fascism. It occurred because America abandoned all restraint and gave license to consumer hedonism.

Antal Fekete, Gold Standard University

The role of gold in the monetary system is anchored in the U.S. Constitution. The Founding Fathers were no fools. They knew exactly what they were talking about when they insisted on a blanket denial of power for the government to monetize its own debt, or any debt for that matter. They knew perfectly well that a metallic monetary standard is the only effective prophylactic that can deny that power. The fact that the U.S. government never considered proposing an amendment to the Constitution to legalize fiat money is a telltale. Policy-makers could not muster the necessary moral courage to face counter-arguments in an open debate. Irredeemable currency has no integrity: the issuer is given privileges with no countervailing responsibilities. He is granted unlimited power in a republic based on the principle of limited and enumerated powers. The principle of checks and balances is thrown to the winds. These features are all alien to the spirit of the Constitution, not just to its letter.

James Grant, Grant’s Interest Rate Observer

Which failing financial institution will the administration pluck from the flames of crisis? Which will it let roast? Which market, or investment technique, will the regulators bless? Which — in a capricious change of the rules — will it condemn or outlaw? Just how shall the Treasury secretary spend the $700 billion he’s begging for? Viewed from Wall Street, the administration’s recent actions appear erratic enough. Seen from the perch of a foreign investor, they must look very much like “political risk,” a phrase we Americans usually associate with so-called emerging markets, not with our own very developed one.

Kurt Kasun, Greenfaucet

We are now on the brink of a collapse in confidence that brings the whole world financial system to its knees. Each market intervening action is becoming more extraordinary. The rallies which pull the suckers in following the intervening actions are becoming more brief and less powerful. I expect this one to be no different. This sequence has now become a broken record. Markets threaten to take out technical support levels and the government comes to the rescue. Armageddon is avoided until another day and a relief rally ensues on the belief that the government has fixed the problem and a new bull market can begin. After all, this is how investors have been conditioned over the last three decades.

I can’t wait to see what they have up their sleeves for the next debacle. Ed Sullivan would say “we are in for a really big show.” They better think up something fast because they are up against a multi-decade extended market that is now headed down after just having reached a major double top.

Nicholas von Hoffman, The Nation

Instead of rounding up the escaped felons from their Wall Street dens and re-imposing law and order, Paulson and Federal Reserve Chairman Ben Bernanke have been running to the scenes of the crimes committed by the escapees to attend to the wounded and cart off the dead. All fine and noble, but in their ill-considered attempts to help they are creating anarchy. They are making various state capitalist precedents which have no pattern or direction but will open us up to the depredations of every business lobby and special-interest group. Soon Paulson and company are going to have to deal with a desperate automobile industry pleading for a $25 billion loan. Once upon a time the car companies were too big to fail. They are now so shrunken they are merely too important to fail. When they get their money, another chaotic step into state capitalism will have been taken.

France has operated under a form of state capitalism since before its revolution. It is carried out with a modicum of planning and self-discipline. When the French state invests in a company, it has a plausible rationale for what it is doing. The United States has none. Without realizing it, we are ripping holes in our free-market system and filling them with a jumble of ineffectual expedients. The Freddie and Fannie takeover will not take care of our problems. It will not hold back the night.

Eric Janszen, iTulip

Politicians forget that a short seller is a buyer albeit at a lower price. Take him away and in a market panic there are no buyers at all. A market can in theory then fall to zero. You've been warned.

At this point in the race between the disinflationary impact of recession and debt deflation and the inflationary impact of moving all manner of worthless assets onto the Fed’s and Federal Government’s balance sheets, disinflation may be winning. At some point before the zero bound is reached, never mind the point of actual deflation (negative inflation rate such as -2%), if the US experience is like any other net debtor's in history a currency accident will occur as global financial markets realize that the US position as a safe haven relative to its trade partners has reversed. A rapid, self-reinforcing process of capital flight and dollar depreciation will begin.

Ron Paul, Texas Congressman

Can sound money give you financial security? There is something very comforting in knowing that what you earn today will retain its purchasing power in the years to come. Indeed, the same silver dime that bought a loaf of bread in the 1960's can still buy a loaf of bread with its precious metal content - which is worth about $1.00 today. An ounce of gold has always been about evenly exchangeable for a finely tailored men's suit, which these days is roughly $800. And in these days of fluctuating gas prices, when priced in gold, oil has been stable. Meanwhile, since the creation of the Federal Reserve, the fiat dollar has lost 94% of its purchasing power. The erosion of purchasing power rapidly accelerated when it was completely uncoupled from gold in 1971. This sort of fluctuation in the medium of exchange creates a lot of uncertainty in the marketplace and necessitates that you either take extraordinary defensive maneuvers, or face financial ruin.

The bailout package that is about to be rammed down Congress' throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess! There goes your country.

Stephen Roach, Morgan Stanley

"The American consumer is toast, done, finished."

Nouriel Roubini, RGE Monitor

The US has performed the greatest nationalization in the history of humanity. By nationalizing Fannie and Freddie the US has increased its public assets by almost $6 trillion and has increased its public debt/liabilities by another $6 trillion. The US has also turned itself into the largest government-owned hedge fund in the world: by injecting a likely $200 billion of capital into Fannie and Freddie and taking on almost $6 trillion of liabilities of such GSEs the US has also undertaken the biggest and most levered LBO (“leveraged buy-out”) in human history that has a debt to equity ratio of 30 ($6,000 billion of debt against $200 billion of equity).

So Comrades Bush, Paulson and Bernanke (as originally nicknamed by Willem Buiter) have now turned the USA into the USSRA (the United Socialist State Republic of America). Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill of $300 billion.

Llewellyn H. Rockwell, Jr., LewRockwell.com

Let us address this claim that not bailing out the system, and not nationalizing the mortgage market, would lead to a financial meltdown on the level of the Great Depression. It makes no sense to warn that we will repeat the past if we fail to do the things that actually made the past as bad as it was. The truth is exactly the opposite: to avoid another Depression-length downturn, we need to avoid the mistakes of the past, among which were the policies that attempted to keep failing firms and industries afloat in difficult economic times.

What should have happened in 1929 is precisely what should happen now. The government should completely remove itself from the course of action and let the market reevaluate resource values. That means bankruptcies, yes. That means bank closures, yes. But these are part of the capitalistic system. They are part of the free-market economy. What is regrettable is not the readjustment process, but that the process was ever made necessary by the preceding interventions.

Richard Russell, Dow Theory Letter

Question --Russell, would you talk a bit more about your preference for gold coins in one's possession vs. GLD, which you term "paper gold" and SLV, which you call "paper silver."

Answer -- Yes, as I see it the authorities are doing whatever they want. I'm more inclined to hold actual gold coins. The SEC now disallows shorting in 799 financial equities, an amazing turn of events. Now with central banks all over the world releasing vast quantities of fiat money, it's entirely possible that gold will embark on a major rise. If this happens, it will throw suspicion on all fiat currency which is the last thing the central banks want. Under these conditions, it would not surprise me for the Fed and the SEC to halt all trading in gold, and the easiest place to monitor such an edict would be GLD. In 1933 the government ordered in all gold held by the US population. I can't see that happening, but I can see all trading halted. This would throw gold into the black market and make it very difficult to price or sell your gold. In France, people are forbidden to take any gold out of the country. Remember, gold is the enemy of fiat paper, and in that there is a story. Rising gold throws suspicion on ALL fiat and central bank issued currency.

Peter Schiff, EuroPacific Capital

Of course the biggest collateral damage caused by Paulson’s bazooka is the large hole ripped through the already tattered U.S. Constitution. If the government can do this, does anyone believe there is anything it cannot do? In effect the Federal government now has absolute power to corrupt absolutely.

…While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put “significant amounts of taxpayer dollars on the line,” they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.

Mike Shedlock, Mish’s Global Economic Trend Analysis

Paulson: "If you have a bazooka in your pocket, and people know you have a bazooka, you may never have to take it out."

Mish: "It seems to me Paulson took out his bazooka, fired it, and shot Fannie Mae in the arse. After Fannie Mae blew sky high, Paulson was adamant not to fire another shot."

Martin Weiss, Money and Markets

Yes, the Fed can inject hundreds of billions into the banking system. But if banks don't lend, the money goes nowhere. Sure, the Treasury can inject up to $200 billion of capital into Fannie and Freddie. But if their mortgage portfolio is full of holes, all that new capital goes down the drain. And of course, the U.S. government has vast resources. But if the $49 trillion mountain of U.S. debts and the $180 trillion pile-up of U.S. derivatives are beginning to crumble, all those resources don't amount to more than a band-aid and a prayer.

Christopher Whalen, Institutional Risk Analyst

The demise of the GSEs and now the monoline investment banks, those dealers not affiliated with a commercial bank, may be considered the appetizer and soup courses of this dismal meal.

By telling Americans that their deposits were insured by the federal government, Washington desensitized generations of Americans to risk from bank failures. Now that risk is apparent and menacing to many Americans with deposits above the $100,000 FDIC insurance cap, as reflected by the user traffic on the IRA web site. Not only have we seen the search requests on our site over the past six months shift from large, publicly traded banks to smaller private banks, but the volume of search requests on our demonstration tools has risen five-fold and continues to rise. We interpret the changes in traffic patterns on the IRA web site as growing evidence of a slowly but steadily building retail bank panic. Older Americans particularly are running scared, pulling funds out of still solvent and safe institutions for fear of losing their retirement nest eggs.

John Robino