It could be said that wise counsel never grows out-dated, and many of the topics discussed in WCM's Bullion Market Insights are really timeless in scope.  Observations have been made on the Macro-environment in many instances, a perspective that can only change significantly over long periods of time.

January 20, 2007:  Big Surprises In Store This Year.


You have to admit that once Greenspan cranked up the liquidity machine in 2002 and beyond, things got pretty complacent in Investment Land.  The "Goldilocks Economy" was a phrase that rolled off virtually everyone's lips to include the corner shoeshine boy and the broken-English cabbie.  After stock market gains for 4 years straight from 2003 through last year, 2006, equity chasers ...... I mean, "investors", certainly have that deer-in-the-headlights look to them as they consider leaving their chips on the table in January, 2007, with the hopes and prayers that the "house" won't take all of their 4-year counter-trend winnings.  Ah, hope springs eternal in the hearts of men (and women!).  Whether their stock portfolios are higher or lower than March, 2000, I would wager the later ..... still and to a significant degree, but it is hard to break old habits; especially habits of making easy money in stocks that went virtually uninterrupted for the preceding 20-year period.  Whether or not the secular trend of positive stock gains is long overdue for a prolonged reversal to negative annual returns is seldom poised amongst these spoiled participants, but it will be before 2007 is over.

I know I sure am a cheery fellow, but I think 2007 will be a historic year of out of the blue SURPRISES.  Now they will not be surprises to you or me, since we are discussing them beforehand, but they will be sidewinder punches for the vast majority of investors and Americans.  Now if I could detail the exact timing and catalysts to these financial/economic shocks, I would be able to change my name to Nostradamus, Jr., but I think I can get close enough to the particulars of the events to make them recognizable when they occur.  The entire list may not occur in 2007 alone, but may spill over into 2008, but I don't get penalized for being right or wrong in these communications, kind of like a Wall Street economist.

Now, some of these predictions are going to be repetitive vis a vis my former ranting as 2006 wound down, but it never hurts to review them incessantly in case their probability eventually sinks into the cranial regions of the COMPLACENT out there.  So grab a beverage and here we go:


1.  Interest Rates Will Not Behave As Expected.

This is one of my favorite predictions or surprises, since it is common knowledge that when an economy enters a recession, interest rates actually decline due to the lack of borrowing demand with lessening economic activity.  Be assured, however, that there will be plenty of money available (liquidity more than ample since money creation is still very high and a 5.25% Fed Funds Rate ain't breaking anyone's back), but it will be like pushing on a string for the Federal Reserve since not many debt-gorged players are going to be very interested in going much further into debt.  And for the simple reason that until the Fed begins to pay borrowers for taking their minions' money with negative nominal interest rates, the debt service ability of most U.S. borrowers has hit the proverbial brick wall of No More, I Am Full.  

Graph is courtesy of Paul Kasriel

Now, this chart by Paul Kasriel of Northern Trust fame is so telling that I just had to reuse it this month.  The pronounced retracement of household borrowing in 2006 was a reversal that is very significant for the surprises that I see in store for 2007.  This chart confirms that we are well on our way to a retracement in profligate borrowing by Americans to a pay-down, get liquid, and stay-away-from-the-malls attitude for the remainder of 2007.  Christmas sales were the first, well-publicized indication that this trend had begun.  Without the Home Equity ATM to draw on, Americans are in somewhat of a cashflow bind to pay down existing debt, much less take on new debt; income growth, unless you are one of the privileged Goldman-Sach Gang is tepid at best for most Americans, just ask them.  And with nightly news reports of a sinking auto and housing industry in the U.S. as of 01/01/07, only a brain-dead consumer would stay on a debt binge.  The smell of recession is firmly in the air, and remember, most Americans do not pay a lot of attention to BLS statistics, and thank God that they don't because they are total garbage!  The little spurts we are getting here and there in this economic stat or that is merely the last throes of a dying fish on a hot deck.  You cannot have two major industries in recession already without the rest of the U.S. economy following suit.  Housing has represented at least 1% to 1.5% of annual GDP growth since 2002, and that contributor has gone negative on a year-to-year basis.  Has never happened and we are not in any great fiscal or financial shape as a nation OR AS A POPULACE to be able to do it this time around.
 
However, when you are dealing with a Debt-Burdened Economy such as the U.S. today with a domestic currency progressively weakening in global markets, you cannot use the common assumptions of yore.  Americans are not just consumers of debt, another staple to our voracious appetite for living large, but we are necessarily world-class SELLERS of debt to those around the globe with export-generated U.S. Dollars to spend.  And American Sovereign Debt is one of our biggest exports to the rest of the world, probably THE BIGGEST EXPORT, par none.  So while domestic demand for assimilating more debt at the consumer level will subside in 2007, I argue that the global appetite for assimilating more U.S. Debt instruments will subside also in 2007.  Debt demand at the U.S. consumer level will decline in parallel with global demand for U.S. Treasuries and Corporate Debt.  Why the latter international reduction in U.S. debt demand, and still you say that interest rates will stay firm instead of declining, if not increase in 2007???!!!

THE STINKING, SINKING U.S. DOLLAR IS WHY RATES WILL STAY FIRM TO INCREASE IN 2007.

I know I am not the only Sage Swami Guru to come up with this analysis for the landscape ahead, but it is counterintuitive that an economy with sinking domestic final demand would experience firm interest rates or even increasing interest rates.  As the Dollar continues in its bear market slide in 2007 (Dollar Index to 80, here we come), more and more foreign Central Banks will shift currency reserves away from Dollars and toward Euros, Yen, Swiss Francs, and Gold.  Now I said this would happen years ago regarding a total reversal in Central Bank gold sales for them to actually go on the Buy side, but the order I have shown these non-Dollar reserve assets is the exact order in which Central Banks are concentrating their reserve shifts.  The Japanese Yen is only taking precedent over the Swiss Franc because of the size of the underlying economies and currency market liquidity, but this is not an outright vote on the stability and prospects of Japan.  One has to question if all of the bad debt bodies in Japan have floated to the surface, and been dealt with so I am not convinced that Japan is the most fiscally and financially sound country on the planet.  They never took the harsh medicine that is required to totally emerge from a Debt Collapse and Depression.  And they are a nation of savers, not spenders like the U.S.A.; can you imagine our fate in the years ahead with a humongous external debt and not a surplus in sight.  Eventually, Swiss Francs will take precedent as the Swiss begrudgingly buy back all and more of that gold that they sold.

The 10-year Treasury Note yield has already begun to show this reality since December as foreign lenders curtail U.S. debt purchases, and we are now at 4.8% when we had been as low as 4.3% this past summer.  This is a key reversal in intermediate interest rates.  Now this is still cheap money, especially when actual inflation is running at 5% to 6% plus in the real world, 2.5% for 2006 from the BLS being total LaLaLand BS.  So we still have negative real interest rates in the U.S., hardly the stuff of tight monetary policy after 17 piddley increases in the Fed Funds Rate!  Now will America's need for financing its Federal Deficit and Trade Deficit subside in 2007 as fast as the economy subsides?  Methinks not.  Tax revenues have peaked for Uncle Sam as have corporate profits in this cycle, and the Federal Deficit with external military costs ballooning in 2007 is not going to be a pretty sight.  Let's see, Revenue Down, Costs Up.  Golly, that means the Deficit is UP!  So how does a debt addict get another fix?

BY KEEPING THE PRICE OF HIS OFFERINGS, VIA INTEREST RATES, ATTRACTIVE VIS A VIS THE REST OF THE WORLD.  THERE IS NO ROOM UNDER GOD'S BLUE SKY FOR THE FEDERAL RESERVE TO CUT INTEREST RATES IN 2007.  THERE IS NO ROOM UNDER GOD'S BLUE SKY FOR THE FEDERAL RESERVE TO CUT INTEREST RATES IN 2007.  THERE IS NO ROOM UNDER GOD'S BLUE SKY FOR THE FEDERAL RESERVE TO CUT INTEREST RATES IN 2007.  (my emphasis)

And if we have a geo-political shock in the oilfields in 2007 which has a greater than 50% probability with everyone and his uncle trying to blow each other up in the Middle East with three Civil Wars underway in Iraq, Lebanon, and Palestine, the Fed may have no choice but to raise rates slightly in 2007.  Money will still be plentiful, you can count on it.  It will just cost a little bit more, but still be cheap by historical standards and likely below the real-life rate of inflation for the majority of the year.  Since the rest of the world's Central Bankers outside of the Fed are still intent on attempting to put a lid on domestic inflation, the Fed will continue to be in competition as to the ultimate interest rate advantage that one currency carries over another.  The European Union, Japan, and Switzerland have a long way to go in monetary tightening to attempt to present themselves as inflation-fighters to the rest of the world.  So let the games begin.

Central Bankers around the world, however, are talking out of both sides of their mouths regarding their intentions to keep a lid on inflation.  They are going to increase the COST OF MONEY in this exercise, but certainly they have not nor are going to restrain the SUPPLY OF MONEY!  Hence, expect inflationary pressures to stay around much longer during this economic downturn ahead, and gold & silver to be direct beneficiaries to this smokescreen monetary activity.  In fact, this Stagflation cycle could turn into an historic Inflationary cycle even as global economic activity starts to ebb.  This excess liquidity in excess of economic growth potential has to find its way somewhere, AND TANGIBLE, NOT FINANCIAL ASSETS, WILL BE THE VENUE OF CHOICE AS 2007 PROGRESSES.  A lack of confidence will spread over financial assets as one accident after the other occurs in the years ahead.

If you have been paying attention of late, most Federal Reserve governors have been telegraphing their intentions for 2007 regarding interest rates:  Inflation is more the risk to the stability of the economy than what risk historically-still-low interest rates can pose to economic growth.  Of course, we all know that American consumers and governments are just laden with mountains of debt so even a small increase in rates can upset the applecart, but the Fed will choose to defend the Currency of the Realm, in its typical half-hearted fashion of meager adjustments.  And why this choice at this inopportune time with the 2002-on pillar of the economy, Real Estate, already collapsing?  

WITH BABY BOOMERS STARTING TO RETIRE AND CORPORATE REMITTANCES TO WASHINGTON STARTING TO EBB AS WE ENTER A RECESSION, THE FED WILL CHOOSE TO KEEP THE FOREIGN TELLERS' WINDOWS OPEN TO KEEP MONEY FLOWING INTO GOVERNMENT COFFERS THROUGH INCESSANT AND ACCELERATED BORROWINGS IN THE YEARS TO COME.

We are broke, we have just not admitted it to ourselves, yet the rest of the world already knows it.  AND THE REST OF THE WORLD, IF THEY ARE TO CONTINUE TO LEND TO US EVEN IN REDUCED QUANTITIES, IS GOING TO DEMAND A HIGHER RISK PREMIUM TO DO SO VIA HIGHER INTEREST RATES FOR U.S. DEBT INSTRUMENTS.  This is Econ 101 also.


2.  Because Of #1 Above, A Major Financial Accident Will Happen.

Okay, this is not a newsflash either for any of you that read anything but the Wall Street Journal or watch a brain-dead Financial News Network.  Since I spent so much allotted ink developing the firm-to-increased interest rate prognostication for 2007, I will not elaborate greatly on this second surprise as I have done so to some length in the past.

One or two large financial institutions and from 3 to 4 large hedge funds will either become insolvent or require some form of Federal assistance in 2007.  The "too big to fail" axiom is unlikely to go away with a Federal Reserve, Treasury, and Federal Government that seems to have no problems with financing anything under the sun; so expect more Government bailouts in the year and years immediately ahead as the Bernanke Printing Press goes into overdrive.  I previously thought the well was dry for this sort of activity, but the irresponsible monetary and fiscal policies of the last 5 years have proven to me that U.S. MONEY CREATION KNOWS NO BOUNDS.  And understanding how power is concentrated and exercised in this country, you can rest assured that the privileged insiders with direct access to decision-makers are going to be able to prevail, especially with a hotly contested general election coming up in 2008.  Campaign contributions have bought power in this country from Day One.  Fannie Mae is already on its way to bankruptcy, and of course, many sub-prime mortgage lenders are going belly-up and destined to do so.  But this is not the obvious subset of financial institutions that I am talking about here.

i am talking about the major financial institutions of this country that have chosen to play the interest rate swap derivative game too long and too big.  JP Morgan-Chase, goldman-sachs, wachovia, bank of america ....... all come within this category of being greatly exposed to being on the wrong side of the interest rate bet.  the absolute numbers are in the trillions, no joke.  A rumbling sound can already be heard.

Once again, I have covered this topic before ad nauseum, but suffice it to say that 2007 is finally going to reveal the fragility of the U.S. financial system built upon a Credit Creation Machine (CCM as in ICBM) that is little understood and extremely vulnerable to surprises.  And a CCM of a magnitude that the world has never seen.


3.  Because Of #1 and #2 Above, The Precious Metals Will Soar.

This will not be a consolidation year for Gold and Silver.  Investors' loss of confidence in our leaders and the "perceived-if-not-actual" loss of stability within our financial system will finally come into play in 2007 based on just the two surprises that I have discussed herein.  There will be more surprises in 2007 that I will discuss as the year unfolds, hopefully before they occur.  Granted, oil, copper, and other economically sensitive commodities have already gone through substantial corrections from the heady levels of late 2006, but always remember that Gold and Silver are not just commodities. 

GOLD AND SILVER ARE REAL MONEY, AND HISTORICAL SUBSTITUTES FOR THE FIAT MONEY THAT MAN HAS CREATED SINCE RECORDED TIME.  AND FIAT MONEY HAS A HISTORY OF COLLAPSING, ONE CURRENCY AFTER THE OTHER THROUGH RECORDED TIME.  Investors will flee increasingly to these money-alternatives as the Dollar continues its bear market in 2007 and a series of unsettling, confidence-rattling SURPRISES hit the airwaves.  Investors will prove to be very reactionary in 2007, at home and abroad.

I know that I have sounded like Chicken Little over the years, but I have been right more than I have been wrong (bull markets in gold and silver predicted in 1998!), and it is all about the odds when investing and attempting to preserve financial wealth.  This is going to be one HellOfA Year, 2007.  Inflation could even subside in the latter part of 2007 due to waning economic activity, but don't count on it with the growth of internal demand in China, India, and Asia, and don't count on it to matter that much to the Federal Reserve.  Credit is the lifeblood of the American economy and financial system.  Without willing domestic and foreign lenders who will have to be bribed with higher interest rates, WE ARE DOOMED TO DEPRESSION AND DEFLATION IN A MASSIVE DEBT REPUDIATION AND COLLAPSE A LA 1990 JAPANESE STYLE BUT WITHOUT SURPLUSES, ONLY MAMMOTH DEFICITS. 

Okay, laugh that it can't happen here.  It is already happening in the mortgage sector and is spreading to other sectors.  But did you buy Gold when it was less than $300 per ounce, and Silver under $7???  Many of my clients did. 

SURPRISE, SURPRISE, SURPRISE AS GOMER PYLE USED TO SAY.


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February 21, 2007:  Bernanke's Pushing-On-A String Economy.


It was a toss up this month as to what topic to discuss with my legions of loyal readers, "Surprises On 2007 Inflation" or the "Pushing-On-A-String Economy" I see in store for the new cheerleader at the Federal Reserve, Ben Bernanke.  Since we just had a higher-than-expected inflation number via the Cockeyed Pricing Indicator, a.k.a., CPI, print today, the inflation discussion would be quite timely, but I will wait a little longer before expounding on why the major components of any price index are going to be under pressure throughout the majority of 2007.  In one sentence, I could say that monetary inflation due to continued worldwide central banks' overly loose policies in addition to non-bank liquidity also still surging at tsunami heights are two sufficient reasons in themselves.  I know I write rather long sentences, and my English teachers are twitching mightily when they proofread my work, but I only put a period in a sentence when my mind has a synapse pause.  But I want everyone coming back each month in Anticipation of Immense Educational Absorption (AIEA), so I will hold off until I can spend the time to analyze the components of reported inflation and put a number on where I think the most critical ones will go this year.  As I have said on these pages over recent months, expect the economy to go into recession this year, and despite this fact, year-over-year changes in critical prices will continue to be in the overall 6% to 7% range in the real world of consumers, not politicized bureaucrats. 

WE ARE ON THE CUSP OF A LOSS OF CONFIDENCE.  I think the vote is already in concerning confidence in the overall economy ebbing, but this key ingredient to economic health for any country, CONFIDENCE, is at an historic crossroads.  Now, I am not referring to any popular survey data, though I fully support the University of Michigan methodology, because to not do so would mean a higher monetary bequest to them from my estate when I go to the Happy Writing Grounds.  It is almost like an alignment of the planets as we move through 2007, because the meteorite named, "Financial Reality", is screaming toward Earth with an initial impact zone right on the United States.  Now I am a Patriot, don't get me wrong, but we as a nation have been engaged in some very questionable activities for some time now (and I am not referring to our Foreign Policies or Military Actions!).  But the liquidity-driven, cheap-money cycle started by Greenspan in 2002 ( and basically continued to this date as we really have negative interest rates overall that are well below the real rate of inflation of 8% to 10% as my nimble digits fly across the keyboard ) has finally run out of poor and poorer credits to purchase any and all goods and services.  Enough is enough, and this Sage has been forecasting the end of the Post-WWII world since 1997, but a 10-year fudge-factor window is good enough for economists and forecasters.  I have it right and right now.

HOW WAS I TO KNOW THAT THE GREATEST CREDIT AND DEBT EXPLOSION IN THE HISTORY OF MANKIND WOULD OCCUR IN THE LAST 5 YEARS!!!

Did I mention that Gold and Silver have zoomed upward today with the news of persistent inflation in a sagging U.S. economy, that engine of spending for the rest of the world?  With Gold over $680 per ounce and Silver besting $14.35 intra-day, we will see last year's highs possibly within the next 60 days.  SOMETHING IS AFOOT, as my British ancestors would say.  Speaking of the British, their phased withdrawal from Iraq now puts the USA into the role of Davy Crockett at the Alamo, but I suspect with a much better outcome for the U.S.; don't know how the Alamo will fare, i.e., Iraq.  This is like an Ally's Vote of No-Confidence in the current U.S. mission, has increased the potential for a continued decline in the positive perception of the United States around the world, and has precipitated a massive move into the ANTI-DOLLAR called Gold.  Since the Dollar Index barely hiccupped today, these were non-Dollar denominated funds that surged into Gold.  Euros into Gold, Swiss Francs into Gold, Japanese Yen into Gold, Russian Rubles into Gold, Middle Eastern Whatevers into Gold, Chinese Yuan into Gold.  Our Foreign Owners will save the Dollar Exit for another day.  They know that the Dollar is headed south in a big way, and bought some additional insurance today.  Persistent inflation in lockstep with declining financial, economic, and political stability for a currency is never a recipe for strength.  It is a recipe for significant weakness.

Remember the fabled counting of the number of angels on the head of a pin.  Today's version would be the counting of the number of financial analysts that forecast Federal Reserve easing in 2007.  Now with that nasty statistic called INFLATION not willing to go in the "right" direction of "down", no matter how much the input numbers are massaged, the likelihood of a Fed easing of a single basis point goes down in direct proportion.  The economy is going to tank, it is already in progress.  The U.S. auto industry is firing on only 2 cylinders and the U.S. housing industry has just discovered that its unsold structures and undeveloped land are located on the Giant Sinkhole of Satiated Demand and Excessive Speculation.  And the payment of taxes in April, 2007, will not be the only unpleasant event that occurs some 54 days from now.  The printing of a preliminary GDP number that is so close to negative as to be statistically "negative" will come to a movie screen near you.  Now remember what the Sage forecast back in October, 2006, when the rest of you were busily shopping for Halloween costumes and decorations:  U.S. Economy Officially Declared in Recession by July, 2007 (October 18, 2007).  

We are right on track to hitting this timeframe, which appeared somewhat aggressive to even yours truly back then, but now appears to be right on target as economic data prints more depressed than even I imagined at this juncture into 2007.  The Spring pop in real estate is now cancelled, as this lack of confidence worm squirms its way into the doubts of everyday American Consumers.  When the house next door to you takes in tenants just to pay the mortgage and the one beyond that goes into foreclosure and your HOA charges a special assessment because 10% of homeowners are delinquent on their annual dues, WELL, THIS DOES NOT GIVE YOU THE CONFIDENCE TO GO BUY ANOTHER HOUSE OR BUILD AN ADDITION TO THE CURRENT ONE OR EVEN BUY THAT THIRD SUV.  If I were a psychologist I could quote some learned researcher in this field of human behavior, but when there are bombs going off all around you (metaphorically, since we have not retreated from Iraq), you dig the deepest foxhole that you can.  And the foxhole that Americans are going to dig in 2007 will be called that virtue of yore, long-forgotten ............... (drum roll please or pass the eggroll) ..................... SAVINGS!  Americans are going to retrench in 2007, because the events around them will shake their CONFIDENCE to the extent that to not do so would suggest a financial suicidal tendency.  Even though many Americans chose not to watch the Nightly News, there will be enough discussions at the office water cooler or over the clothesline (nah!) to disperse the news about how bad things really are on the economic front.  Stay tuned.

Since my noggin is bursting with ideas right now, here are some other Confidence Shakers for 2007:

1.)  Persistent political battles regarding the direction of the country and its domestic and foreign policies with virtually no resolution of same.
2.)  Acceleration of major employer layoffs and facility closings as wage demands increase along with healthcare costs domestically.
3.)  More revelations of fraud, embezzlement, and violations of securities laws by officers of publicly traded companies.
4.)  Increases in import prices as Dollar devaluation resumes in earnest, WalMart has to pass price increases on to consumers.
5.)  Surge in mortgage delinquencies, foreclosures, and supply of unsold homes on the market with resultant second-year hit in prices of 10% plus in most markets.
6.)  Persistently high gasoline and energy prices as a risk premium of interruption is built back into these commodities due to smoldering Middle East unrest and civil war.
7.)  The necessity for State and Local governments to increase taxes in order to plug gapping fiscal gaps.
8.)  Continued demise of the American automobile industry with one major player approaching insolvency by year-end.
9.)  Continued surge in drug, physician, and hospital costs to consumers within a healthcare system that is basically out of control and soon to be taxed even further with Baby Boomer retirements.
10.)  Loss of the Home ATM as a source of supplemental cashflow as lenders tighten standards, home values decline below outstanding mortgages, and interest rates stay stubbornly firm.
11.)  Increased water shortages across the nation as weather patterns mutate and lack of resource management for decades comes home to roost.

Whew!  Even I feel a little depressed after writing that!

And this confidence shaking laundry list gets us nicely back to this month's theme of Pushing on A String.  This expression relates directly to the Federal Reserve's efforts to re-inflate an economy that is deflating by loosening the spigots of monetary policy primarily through reductions in interest rates.  And the analogy is so graphic to suggest that Sir Bennie Bernanke (we will go ahead and knight him now since he will seek refuge in England before all is said and done!) is at the end of a very long, U.S. Economy/Consumer String and that there is no "rigidity" in the string (also known as Overall Demand and the Ability or Confidence to take on more debt).  So no matter how much Bernanke pushes with monetary ease, the net result is zero movement on the recipient's part.  The Consumer does not react because he or she does not have the Ability or Confidence to take on new debt which is what lower interest rates are intended to produce.  An the Economy, hence, does not improve because the U.S. consumer is the driving force behind it and does not have the incremental spending power or desire to spur economic growth.

So for those of you still throwing ill-spent money at the stock market, or those buying a beach-front vacation home that Al Gore tells us will be flooded by Global Warming by Spring of '08, or those of you still failing to buy precious metals at your favorite bullion dealer, DON'T LOOK FOR THE FEDERAL RESERVE TO RIDE TO YOUR RESCUE IN 2007.  AND IF BENNIE B. SPURS HIS INTEREST-RATE-REDUCTION STEED TO SALLY FORTH, IT WILL BE THE CHARGE OF THE LIGHT BRIGADE!  Monetary policy will not save the U.S. economy, consumer, or financial system in 2007.  A loss of confidence on the part of the American consumer will guarantee this forecast.

And what will be the upcoming event that will place the first worm in the subject's noggin?  The persistent and widespread failures, in a Cascading Insolvency Waterfall (CIW) reminiscent of the Southeast Asian Domino Theory of 1967, of one risk-addicted financial institution failing after the other.  Because, have you not heard?!!!  There is virtually no risk in making low document loans without income verification to prospective homeowners with dubious credit histories, no prior home ownership, and no savings in the bank to make a down-payment or weather 3 months of unemployment.  The Lending Company Collapse of 2007 (LCC07) is a giant financial meteorite that has entered the earth's atmosphere and is screaming to earth.  And it will be a direct hit upon the financial system of the U.S. all the way to the largest commercial banks that will leave a crater that we will not crawl out of for a decade or two.  The shock wave will shake Consumer Confidence to the bone as our fourth major banking crisis since World War II spreads in an expanding circle to the far reaches of the land, leaving no one untouched.  And the U.S. Dollar's status as reserve currency of the world will shatter in the ensuing financial earthquakes to follow.  IT IS ALL ABOUT CONFIDENCE.  IT ALWAYS HAS BEEN.


the prices of Gold and Silver are going to surprise everyone in the months and quarters ahead.  Because the landscape is going to surprise everyone also!  Imagine all of the craters on the moon.



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March 5, 2007, SNIPPET:  HeHeHe, Imprudent Speculators Get Whacked.


Why is it that every time that I think about "excessive risk", the name of Sir Alan Greenspan comes to mind?!!  Sir Alan's nickname could well be, "The Father of Excessive Risk" because this over-rated central banker created a mindset in global finance that no matter how much you screwed up in taking an excessively risky position, the U.S. Federal Reserve was there to turn on the monetary spigot to re-liquefy the system.  Starting on the Shanghai Index last week, risk-blind speculators have begun to see what happens to those who buy the theory of the "Greenspan Put".  Uncle Treasury or Uncle Fed cannot be in all markets at the same time, and as a bureaucracy, many more speculators will have to go splat on the global pavement before any kind of net, a.k.a. Monetary Helicopter of Emergency Liquidity (Monetary HEL), can be put out to at least break their falls.

Now since Sir Alan wants Spielberg to do an autobiographic movie about him as a action figure, he came out with a prescient prediction about a week ago about a "Possible But Not Probable Recession" in Second Half, 2007.  A PBNP Recession for all of you new to American economic forecasting is a recession that is definitely going to happen, but it is couched in Greenspan Double-Speak (GDS) that will keep Sir Alan's speaking engagements forthcoming at Bill Clinton rates.  Nobody wants to book a party-pooper.  But since Greenspan has seldom made an accurate prediction in his entire economic-forecasting lifetime, and Spielberg told him he would have to have at least ONE accurate forecast in the last 30 years, GREENSPAN MADE THE NO BRAINER.  It is kind of funny, HeHeHeHaw, that the guy so adroit at propping up financial markets while illustrious Chairman of the Fed was one of the very guys who was partially blamed for the March Madness Meltdown of 2007 last week.  My hosting service has confirmed that Greenspan has been caught visiting "Bullion Market Insights", but we will not sue him for breach of copyright laws in stealing the Sage's 2007 Recession Forecast.  I think an aged Tom Hanks would make great casting in the upcoming, "The Maestro Plays A Sour Note".

Ah, in the God-like privileges of High Finance, it is somewhat reassuring that Justice Does Prevail and the Financial Cowboys of the New Millennium are not only getting thrown from their horses, but trampled into the dust.  Us common folk that do not own 5 million-dollar-plus houses in Greenwich, CT, and vacation in the Hamptons are secretly rejoicing in the Domino Failures of Imprudent Risk-takers even as we adjust our Pampers watching the various price tickers.  But even though those of you still expecting Financial Nirvana from stocks are likely in the negative column Year-To-Date, YOU will still be the unprivileged sap picking up the tab when the fruits of the Greenspan Put continue being harvested as rotting pulps fallen to earth.  YOU will experience the ravages of higher U.S. inflation as a result of this decade's long exercise in imprudent leveraging and risk-taking.  YOU will inevitably pay the tab for a bankrupt U.S. of A in the not-too-distant future.  Unless, of course, you buy the Insurance of the Ages, GOLD AND SILVER, to counter what these speculators have done to YOU.

Now we also know that the Yen Carry Trade is finally beginning to unwind.  The Bank of Japan has seen the mobs of angry Japanese passbook savers swirling daily around its offices, tired of almost 20 years of minuscule interest rates on their earnings.  Plus, with the Japanese almost single-handedly putting the U.S. auto industry out of business (with not-insignificant assistance from excessive compensation packages for all at the U.S. Big Three coupled with dismal market research and design and QC/manufacturing), the Weak Yen Era has probably run its course since the float is so huge the Bank of Japan may no longer be able to jawbone and intervene to keep the Yen cheap.  And with more signs of glacial recovery from Japan's Two-Decade long depression, the BOJ may not feel the need to subsidize their export industry to the extent it has in the past.  BOY OH BOY, what a 1/4 point increase up to a whopping 0.5000000% can do to a supposedly risk-free trade of borrowing in super-cheap Yen and buying other assets at higher yields with the proceeds!!!

These up-to-now Financial Rocket Scientists who could enjoy at one time a 450 point spread on investing their extremely low-cost Yen borrowings in U.S. Treasuries yielding 4.5% are now being crunched from both sides of the equation.  Their borrowing costs are going up, the spread is shrinking, and the cost to obtain Yen to close the trade is going up.  The Japanese currency appreciated a whopping, whopping 4.5% just last week which meant that most of these overpaid, under-experienced Wall Street types were being put unceremoniously into a significant loss position in just 5 trading days.  In order to unwind their carry-trade positions, AND THEY ARE DOING SO EN MASSE SINCE IT DOES LOOK LIKE THE JIG IS UP IN THIS "NO-BRAINER", they would have to pay 4.5% more in U.S. Dollars to repay their Yen borrowings.  From what I can tell, we are talking about Tens of Trillions of Dollars of exposure, and that is a lot of moola trying to exit a position in a panic-shortened period of time.  While U.S. Treasuries have gone up in price over the last week due to massive, yet unguided, "Flight to Safety" buying, they can sell their bonds at a slight profit to generate Dollars to be used to buy Yen to repay their Carry-Trade debt.  BUT THE APPRECIATION OF THE YEN IS PUTTING THEIR MANSIONS ON THE VIRTUAL AUCTION BLOCK.  Need another reason to expect the Dollar to decline in 2007?!  Selling Dollars to buy Yen to unwind more and more of the Yen Carry-Trade is going to knock the stuffing's out of the Greenback on global currency markets.

AND WHAT BENEFITS WHEN THE DOLLAR GETS SOLD BIG TIME???  GOLD AND SILVER.

Oh, the Bank of Japan, U.S. Treasury, and Federal Reserve will pull every rabbit out of the hat to attempt to make the liquidation an orderly one, like last week was "orderly", but the die has been cast.  AND DO YOU THINK THAT BEN BERNANKE STILL HAS AN INTEREST RATE CUT UP HIS SLEEVE IN 2007 AT A TIME WHEN THE DOLLAR NEEDS EVERY BASIS POINT IT CAN OFFER TO NOW SCARED DOLLAR INVESTORS?!!!  Methinks not.

Now, you ask the Sage:  "Why did the ultimate safe havens in a time of financial crisis go down???"  Because there are a lot of hot-money chasers like hedge funds that were long the metals (that were on their way to intermediate highs!) that needed to raise cash in order to plug many a dike in other markets.  I don't buy the argument that in just one week's time the entire world of risk-takers have gotten religion and find any asset that can fluctuate more than 3% in a day as "Too Risky For Me".  Has anyone ever seen a bad day in the bond market?!!  Bonds are hardly a safe place to go to avoid "risk" in the form of volatility.  Not to mention the credit risk now present in United States Treasuries under the guarantee of a virtual Financial Banana Republic.  But old habits die hard, and for some demented reason, intermediate-term Treasuries are advertised as a Safe Haven in Financially Turbulent Times.  Note the use of the word, "advertised".  Ever heard of "false advertising"?!  If U.S. interest rates have to increase as U.S. dollar-denominated assets are sold by global investors due to declining American economic prospects and diminishing CONFIDENCE in our stability (fiscal, economic, and financial system stability!), bonds will decline in price.  Some "safe haven"!!!

Did the Shanghai 9% decline on February 28th start this whole ADJUSTMENT PERIOD FOR RISK RE-ASSESSMENT?  Say that one 5 times quickly while standing on one foot!  Yes and No.  See, I could run for office with that kind of answer.  The global financial markets were already RE-ASSESSING specific market's risks as Gold and Silver were headed to new multi-decade highs.  There was a true flight to safety in the precious metals already well in progress until the black-box traders on the COMEX had to meet margin calls in their currency- and debt-market positions.  And these boys are known to leverage themselves up to their eyeballs (or J.P. Morgans eyeballs!), so once non-precious-metals positions started heading South, it was a self-fulfilling trend in any market that would cop a bid.  The implosion of the U.S. mortgage market with subsequent sub-prime, ALT-A, and Jumbo Loan lenders coughing up financial hairballs on a daily basis was causing any investor with a pulse to pause and take some chips off the table by selling down financial market positions.  Regardless of the cheerleading from Bernanke and Paulson regarding how "robust" the U.S. economy IS, citizens know how bad things really are in their own backyards.  Now we hear that more and more banks have purchased lots of mortgage paper that may be only that, PAPER, subject to ballooning delinquencies, defaults, and foreclosures that will only get worse in the quarters ahead along with the sinking U.S. economy.  Emerging market debt, Junk Bond debt, and Municipal debt are all going to be RE-ASSESSED in the days and weeks ahead.  That means more yield required to find a sucker, I mean buyer, and God only knows how many Interest-Rate Swaps are going to implode in the associated derivatives markets.  How many derivative have imploded in the last week???  THE FINANCIAL ACCIDENTS ARE HAPPENING AS PREDICTED.

THE FUNDAMENTALS FOR OWNING GOLD AND SILVER HAVE JUST IMPROVED SIGNIFICANTLY AND YOU ARE ABLE TO BUY MORE AT A BETTER PRICE.

See www.shadowstats.com

HeHeHeHoorah.  When gigantic sections of the world's global financial and currency markets are experiencing THE GIANT RE-PRICING MECHANISM OF RISK RE-ASSESSMENT, also known as WATERFALL DECLINES, what better time to increase your insurance policy against financial loss.  I might just drive to the Hamptons this weekend and pick out which mansion I will be able to buy with my Gold and Silver holdings in 2010.  A snowball rolling down a hill gathers both mass and velocity as it progresses.  Welcome to the Ides of March.  BUY A GOLDEN SNOW SHOVEL WHILE THEY ARE ON SALE.  We can still have a blizzard in March, in fact, I just saw something falling out of the sky.  Oh, it was just a stockbroker.

Let's see ...... LOSS OF CONFIDENCE LEADS TO RISK RE-ASSESSMENT OR IS IT RISK RE-ASSESSMENT LEADS TO LOSS OF CONFIDENCE.  Either way, this is not Dorothy's Kansas, Toto!  

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April 18, 2007:  US. DEVALUES THE DOLLAR, GOLD GOES TO NEW HIGH.


WHAT DO YOU MEAN YOU DID NOT GET THE MEMO?!!

There was no official announcement from the U.S. Treasury or the White House, but, ipso facto, as my legal beagles like to say, the U.S. Government has propagated a covert (or even overt some would say) campaign to systemically and progressively DEVALUE THE U.S. DOLLAR.  So get out your Banana Republic flags and send them to the top of the mast!  This policy is also known in the Currency Trade as BEGGAR THY NEIGHBOR, which means that you use increasingly cheaper Dollars to pay your tab with your trading partners and service your surging external debt.  Politically, you get the benefit of attempting to bolster your export trade industries, without putting on too many protective tariffs or quotas with competing countries.  So China Bashing will become less popular with vote-hungry politicians as we just devalue the total debt that we owe China and pay them interest with cheaper and cheaper Dollars.  As a government, you look less mean-spirited.  But whether there is ever an official announcement for the CURRENT DOLLAR DEVALUATION, which likely will never come since the vaunted Reserve Status would go instantly out the window, or just an unspoken U.S. policy of currency neglect, the end result is the same:  THE U.S. DOLLAR IS IN THE PROCESS OF BEING DEVALUED ON THE WORLD CURRENCY MARKETS.


I.  Thank you Congress and Current Administration.

Since these two branches of Federal Government did not get the memo either, the OTHER MEMO THAT WE ARE TECHNICALLY BROKE, BANKRUPT, UNDERWATER FISCALLY, then we will not be too hard on them.  When $24 Billion is tacked on to a military spending bill and President Bush is finally pulling out the veto pen after over six years at the helm, you know that the Keepers of the Public Coffers are guarding the prosperity of the nation with Persistent Fiscal Largess (PFL).  There is another memo coming out soon, THE U.S. IS IN RECESSION, TAX REVENUES ARE GOING TO SLUMP, but let's not spoil the atmosphere of living in a Goldilocks Economy where the resiliency of the American consumer to spend through any level of unemployment, home equity evaporation, and record personal debt levels is the envy of the civilized world.  Not only can we Americans take the beach and beat the crapola out of our enemies, we know how to beat the crap out of the financial futures for our own current future citizens.  I guess we are ambidextrous in that respect!

It is a guaranteed forecast, a.k.a., a CERTAINTY, that both Congress and the Administration will not institute any fiscal-spending-restraint measures in a timely and sufficient fashion to prevent the U.S. Dollar from sinking further and further on the world currency markets.  With a Presidential election coming up in 2008 and the media already thick with daily/hourly news on the declared candidates (please pass the barff bag!), it is very unlikely that any necessary reduction in Federal spending will occur any time soon.  And fiscal policy is usually loose during a recession, not restrictive.

As a member of the Baby Boom generation, I know that the burden of Social Security and Medicare will be so onerous by the time I decide to attempt to collect benefits in some 13 years, that it is also guaranteed that full benefits will be pushed out future regarding recipient retirement age AND an actual cut in monthly benefits is also highly likely.  Taxes will have to be raised on the poor working stiffs forced to support a top-heavy entitlement system, and there is only so much blood you can get out of a turnip without an angry mob forming outside the Capitol.  Ah, the political concept of, "Promise Today, Paid Never".

So we step back and salute our Federal Fiscal Managers who will assist in the eventual inability of the United States to meet its entitlement obligations to a degree that smacks of DEFAULT.  Our foreign lenders know these truths to be self-evident, and have begun to adjust their purchases of U.S. assets, especially Treasuries, accordingly.  Can you say Buyers' Strike?!  Can you say, "Higher Interest Rates?!".  How are Foreign Lenders (a.k.a., Foreign Treasury Buyers) going to get paid if a country cannot even honor the purportedly inviolate obligations it has to its own citizens as mandated by Law.
(Soup kitchens will be a great place to work in the 2010's cause at least you will get free meals.)


II.  Thank you Sir Alan Greenspan and the Current Federal Reserve.

The result of irresponsible Monetary Policy since 1998 is HIGHER INFLATION IN THE U.S.  All of us with a pulse that actually purchase goods and services in the real world know that U.S. inflation is not less than 3% on a year-over-year basis.  THE REAL RATE OF INFLATION IN THE UNITED STATES IS 8% TO 10%.  It is indeed a shocking realization that our own Government would lie to us in an alleged Democracy of the People, but years and years of excessive monetary creation through the Federal Reserve System to avert one financial catastrophe after the other, not to mention excessively loose lending standards during this same period, has resulted in a confluence of factors merging to push consumer prices higher.  We now have the classic situation of too much money chasing too few goods & services, the classic definition of inflation.  Inflate the money supply for a sufficient number of years with 10% plus annual growth rates, and you cannot be surprised to see 10% inflation in the Real Inflation Rate at the consumer level.

The Greenspan Put, where excessive risk-taking in financial markets and obtuse financial instruments were actually encouraged to the extreme, has now become the Bernanke Put where the markets are frequently soothed by the Fed that all is well with both the economic and financial systems.  That interest rates will not be increased suddenly without ample warnings on MSNBC or CNN, and that the Fed under Bernanke does not want any financial types playing on the railroad tracks of speculation to get hurt, much less bring down the system.  LOTS OF LUCK, BENNIE BOY!  History is strewn with examples of government officials trying to support or manipulate massive markets that they themselves don't fully understand.  But pronouncements of a totally resilient U.S. economy, contained inflation, contained foreclosure levels, and alleged confidence that the Fed can actually influence longer term U.S. interest rates in a global marketplace do nothing but keep the citizen out in the open way too long before the Storm hits.  The Bernanke Fed, as was the Greenspan Fed, is a Tornado Siren that never sounds.  Pretty useful, huh?!

U.S. interest rates are not going down any time soon.  Even with more and more signs of actual economic retracement in the U.S. economy, the Fed is faced with rising interest rates by competing currencies at a time when U.S. rates do not even compensate holders for the local rate of inflation.  THIS IS A MAJOR DISAPPOINTMENT THAT STOCK INVESTORS HAVE NOT COME TO RECOGNIZE.  Of course, I would bet real money that either Goldman-Sachs or JP Morgan-Chase are active in intra-day futures buying or selective Dow component buying to keep the RETAIL suckers at the roulette wheel.  In time, this dirty secret will come out, but 2007 will not be a period of declining U.S. interest rates.  With just about every major currency country increasing rates to put a lid on their own domestic inflation surges, to include the Japanese begrudgingly so, the Fed cannot actively be seen as cutting the legs out from under the Dollar by entering a campaign of rate reductions.  If they will not actually increase interest rates to attempt to save the DOOMED DOLLAR, then they must employ the practice of Benign Neglect and look the other way while the Greenback slides and inflation stays stubbornly high due to the New World Order.

The fact that we import at least 35% of our domestic consumption from such emerging powers as China and India has created a world awash in U.S. Dollars that is constantly looking for a roost.  This new-found wealth overseas has allowed both China and India to improve their standards of living to the extent that they are now major consumers of raw materials and commodities.  Oil, platinum, nickel, iron, copper, phosphorus, steel, concrete, fiberglass all come to mind as many of their individual prices have set new world records in the last year.  THIS GLOBAL DEMAND-PUSH INFLATION IS NOT GOING TO SUBSIDE IN 2007 AND PROBABLY NOT EVEN DURING MOST OF 2008.

Oil is a prime example.  It is inevitable that the supply of oil to the West is going to be interrupted at some point in the not-too-distant future by geopolitical events.  The despotic leaders of most Muslim nations are under tremendous internal political pressure to punish Western countries for their war against terrorism.  This war is often presented via anti-Western, anti-American media sources as a WAR AGAINST ISLAM, and the only weapon these oil-rich countries really have is their Black Gold.  Whether it be an actual terrorist act or a reduction in Western shipments of oil by changes in the political outlook of Middle Eastern countries, the result will be the same.  Higher oil prices at a time of declining U.S. economic activity for most developed Western countries.  The tides are changing swiftly on the geopolitical shores.

One of the key ingredients to the determination of value in a country's currency is the level of inflation existing in that country at any moment.  The world is not full of fools just lending money blindly to a country (unless they are Sub-Prime Lenders!), using its domestic currency to do so, regardless of the real rate of return after inflation adjustment on those investments.

THE RECOGNITION THAT U.S. INFLATION IS 2 TO 3 TIMES THE OFFICIAL SUB-THREE PERCENT RATE IS REFLECTED IN THE CURRENT PRICE OF THE DOLLAR TODAY AND EACH DAY FORWARD.  The U.S. Federal Reserve has been the biggest protagonist in the re-emergence of American Inflation over the last 9 years the world has ever seen.  By encouraging and providing the means by which consumers could leverage themselves to record levels, the Federal Reserve has created demand that otherwise would not have existed and America has continued to pull in bought-with-debt goods from overseas at staggering levels.


III.  Thank you Instant-Gratification American Consumer.

There is certainly enough blame to go around for the in-progress devaluation of the U.S. Dollar, so I will try not to leave any culprit without Due Credit.  I am going to leave the financial types on Wall Street & Broad out of this finger-pointing for now, although they will certainly have their day in the sunlight in the not-too-distant future as to how they have separated Millions of Dollars from American retail investors for decades.

If Americans, as a group, were not such gluttons for credit, and had a proclivity to save (that four-letter word!) like the Japanese, there would not have been such an expansion of the money supply as created under a Fractional Reserve banking system.  This last argument may be hard to prove, and since I am running out of allocated time for this missive, I will wind it up here.  Record levels of mortgage debt and installment credit do not speak well of a country's financial stability because a bankrupt/financially strapped populace will put pressure on its government to JUST PRINT MONEY TO SOLVE THE PROBLEM.  No one forced American Consumers at gunpoint to take on IMPRUDENT LEVELS OF DEBT OVER THE LAST 5 YEARS.  Granted, the Federal Reserve served as the Pusher in this Greek tragedy, but the Consumer was the undeniable Addict.  If Ultra-Loose Monetary Policy (ULMP) had not found a ready borrower during this time period in Record Numbers and in Record Amounts, I would be writing about how the Fed had been "pushing on a string" to keep the economy afloat post stock market collapse in 2000.  But the American Consumer was there at the borrowing window, thinking that Cheap Money is easier to amortize to a zero balance than more expensive money.  Principal is principal, and a lot of it outstanding has begun to sink the American economy, especially in light of stagnant or sinking inflation-adjusted income gains.

There is also a psychology in this Country that has developed since WWII that it is the function of Government to attempt to be all things to all people.  Based upon the humongous size of our outstanding entitlement liabilities in America today, we have tended toward a Socialistic Society since F.D.R.'s New Deal.  And be it known, it was not the New Deal that brought us out of the Great Depression of 1929, but the record setting spending for the World War II mobilization.  When I hear Congress Persons talking about spending Billions of Dollars to bail out Sub-Prime borrowers that got themselves into trouble with steeply stepped variable rate mortgages, the very kind of instrument encouraged by Sir Alan Greenspan, I get literally nauseous.  ARE WE ALL ADULTS HERE OR ARE WE CHILDREN OF THE STATE?!!!!  If you can go out and get a driver's license to operate probably the most dangerous killing machine yet known to man, the Automobile, then you must be a very responsible person as viewed by the State.  This viewpoint that an American, hopefully one that is here legally, is entitled to be assisted in every manner imaginable is one of the reasons that Americans themselves are responsible for the debasement of their own currency.  Americans want too much, and they are not willing to obtain it with their own efforts; they no longer, as a group, have the patience to work hard and save.  Politicians, slimy as they are, are only reacting to the demands of the electorate.  So take a bow, American Consumer, for your implicit and explicit demands upon your Government to the extent that we are now on the road to fiscal bankruptcy.  And speeding down the Road of Dollar Devaluation.  I hear a lynch mob outside the door trying to get in!  Better go load the hardware.

But always remember, it is YOUR CONGRESS, YOUR PRESIDENT, YOUR FEDERAL RESERVE, AND YOUR SPENDING HABITS & EXCESSIVE DEMANDS that are directly or indirectly responsible for the Devaluation of the U.S. Dollar.  IT IS, AFTER ALL, YOUR CURRENCY OF THE REALM.  So what are you going to do about it?  While we can't throw all the bums out at the same time, we can do it in a purposeful, gradual manner.  If you put your head in the sand, and say, "What can I do about it?", "I only have one vote!", you have really missed the point of these free epistles over the last 8 years.  Take the easiest action you can first, and that is to protect yourself financially from the ruin that is going to come from a DOLLAR COLLAPSE.  You can fill in the dots as to what I am going to suggest next.  THERE IS ONLY ONE HARD CURRENCY THAT HAS WITHSTOOD THE COLLAPSE OF ALL CURRENCIES, AND THAT IS GOLD.


$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$


In 2007 alone, on a weighted-index basis where the Euro represents the major component within the index (46%), the U.S. Dollar has lost 7% of its value.  Gold, conversely is UP a mere 8% plus since the beginning of the year.  DO YOU THINK THERE IS AN INVERSE RELATIONSHIP?!!!

Gold, and its joined-at-the-hip sister, Silver, (both monetary reserve metals, just check your history books) are going to soar to new highs in the next several months.  Buy the metal, not the paper.  Both the Gold ETF and the Silver ETF are severely compromised means of attempting to parallel the bullion markets.  AND IT IS QUITE PROBABLE, READ THE PROSPECTUSES AND FILING DOCUMENTS WITH THE S.E.C., THAT THEY DO NOT PHYSICALLY HOLD THE GOLD AND SILVER THAT SAY THEY DO IN PUBLIC REPORTS.  

Paper is paper, merely a promise to pay at a later date when a physical shortage may exist in either or both metals making it impossible for these ETF's to provide physical gold or silver that they did not have in the first place.  I am now convinced that they are full of paper contracts for bullion to an extent sufficient to compromise the integrity of the Funds in fulfilling mass redemptions.  In particular, I have never seen such weasel wording of a prospectus as exists in the Silver ETF, SLV.  CAVEAT EMPTOR.

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May 17, 2007:  Buying Opportunity of the Year.


Geeze, we just can't get past $700 per ounce on Gold, the Golden Bull Market must be dead!  Precious Metals investors have all of the conviction of a 2008 Presidential Candidate.  I have told everyone who cared to listen that protecting one's financial well-being in the years ahead was not going to be a cakewalk.  One can expect and should expect, many bumps in the Yellow Brick Road to this lofty, yet attainable goal of relative financial safety with precious metals investments.

I try not to be too technical in my discussions of the bullion markets, since every black box program out there is looking at the same technical chart patterns, oscillators, and statistical data.  But if I am correct, we have been down in the $655 region for gold off of interim highs some 3 times now, and I think we just went through our last, false start higher.  Meaning, when the dust settles over the next several weeks or even days, we will spurt ahead like none of this indecisive trading ever happened.  This is how markets shake the weak hands out, and get them to either totally capitulate or force them to buy back in at much higher prices after selling in panic toward the recent lows.  Just be a long-term investor in this asset class, and these weekly/ monthly squiggles will do nothing to shake your conviction or success in a decade's or two-decade's long bull market in the precious metals.

If you look at the Big Picture of the current economic and financial landscape, you will see that an exceptionally favorable period for owning precious metals is developing over and above what has developed since 2001.  Let's go through the laundry list:


1.  U.S. and Global Inflation Rates are probably still accelerating.

It is not only the absolute level of inflation that is important to both Gold and Silver, but the direction of change and the rate at which that change is occurring.  While 8% to 10% Real World inflation is the reality for those of us who eat and use energy in our daily lives, there is no evidence whatsoever that suggests that Common Proletariat Inflation (CPI), for us men and women on the street, is subsiding in any meaningful fashion.  Quite the opposite.

I went to the gasoline station, most of which will have to hire armed guards pretty soon to prevent gasoline heists, and filled up my two 5-gallon red plastic containers for Summer '07 lawn mowing.   I had to brace myself as I almost fainted at the final tally.  Almost $29 to Keep Up With The Jones this year, but have started neighborhood pilot program using goats with Pampers to keep the neighborhood trimmed.  Have not figured out where to house the 4-legged mowing machines during off-periods, but my local politician's lawn may do just fine.

We are in for a big surprise this Summer and Fall as gasoline prices and monthly electricity bills continue to put a crimp on consumers' ability and willingness to spend on other goods and services.  Dusting off my Sage Crystal Ball (SCB) that I purchased at Woolworth's a long time ago, I see gasoline at $3.85 on a national level before Labor Day.  And I see electricity bills, adjusting for equivalent btu usage over last year, easily up 15% over Summer, 2006.  If there is a terrorist disruption of oil supplies in the Middle East sooner, just move that date up and make $4.35 gasoline the target.

And I saw a farmer from California (pronounced Cal-EE-forn-ya if you are the Governator) telling the nation that consumers could expect higher prices in the months ahead for avocadoes, almonds, lettuce, tomatoes, green beans, and other CA produce NOT BECAUSE OF RAGING BRUSH FIRES, NOT BECAUSE OF MORE EXPENSIVE AND SCARCER IRRIGATION WATER, NOT BECAUSE OF HIGHER FUEL COSTS, NOT BECAUSE OF THE SIBERIAN BLIGHT WORM, but get this ........ BECAUSE OF A SHORTAGE OF UNSKILLED, SUPER-CHEAP ILLEGAL FARM WORKERS.  Holy Moly, you mean to tell me that Immigration Services is doing its job and beginning to contain the flood of illegals across our basically unprotected southern border?!!!

Now before you start sending me hate mail about how this is the Land of the Free and the Mixing Pot of the World, I just want to remind you that my grandparents were Czech immigrants who came through Ellis Island in 1921, legally, with just what they could carry onboard a ship.  And it was not a very dignified process, I can assure you, but since my Great Grandfather sold his chocolate factory outside of Prague to finance the journey, they did not travel in steerage as we had all imagined for decades.

Why have laws if we can find excuses to allow certain groups, even if they are from one of the most corrupt and economically stratified societies on earth, NOT TO HAVE TO OBEY ALL OF THE LAWS OF THE LAND.  Okay, if you have Statutory Neglect, then change the fricking laws to reflect social reality, but enforce the laws as they are written.   Without enforcement of existing laws, we are headed for anarchy.  Enough said.  Needless to say I will not be running for President next year and Sage has rotten tomato shields (rts) up.

Anywho, food prices are going up also because of a growing shortage of underpaid, underprivileged, scared-to-death of ICE unskilled workers from You Know Where.  One more arrow in the Inflation Surge Quiver (ISQ).

See Food & Energy do have an impact on the ability of consumers to spend.

Another reason that we will have an acceleration in the rate of inflation, even at the cooked bls cpi level, is because of all of the money created by central banks over the last 7 years trying to find a place to go.  so the die is cast.  expect 12% real inflation by summer of 2008, A 20% TO 50% INCREASE FROM TODAY'S ALREADY HIGH LEVELS.  I die laughing in the aisles when I see persona like Bernanke get on the airways and have the audacity to lie to the American public about how inflation is tame and inflation is moderating.  But I have learned how to aim an RPG while laughing.

The U.S. Dollar sinking into the setting sun will add to this consumer inflation as imported goods become more and more expensive with a continual degradation in our purchasing power overseas; Americans are still hooke on imports and it will be a while before stiff prices spoil their appetites.  And a slowing, recessionary U.S. economy will not enjoy the release of price pressures normally seen during the advanced stages of an economic retrenchment because too much of total World GDP is in developing nations today that are literally booming as the USA hits a big air pocket.  So it is a good two more years of accelerating, historically high inflation before the U.S. meltdown drags the rest of the world down with it.


2.  The Wall of Worry Is Rock-Solid for the Golden Bull.


No one could accurately portray the gold or silver market in the U.S. as wildly bullish at the moment.  There is plenty of capitulating Longs, I see in it my Purchase Order/ Buyback volumes.  Many investors have made stellar profits in both gold and silver over the last 5 years, and are more than willing to convert some of those astute gains into .......... depreciating Dollars.  If you look at the premium to melt value of the 715 troy ounces of pure silver in a typical bag of 90% Junk Silver, it is currently negative by almost a full percentage point.  That means, dust off the Econ 101 textbook, that there is junk silver coming out of distributors' ears with recent selling by many holders of the last 10 to 20 years.  One spouse told the other spouse that they were tired of dusting it every week and having company tripping over it, so out the door it went.  A gender neutral observation these days!  American Eagle Gold bullion coin sales from the U.S. Mint are another indicator that sales are down from the ebullient Spring of 2006.  A necessary consolidation period for any bull market, but just that, a temporary respite from a surging bovine.

Just read today that Spain has been dis-hoarding some 80 to 100 tonnes of gold over the last several months to attempt to replenish sagging exchange reserves.  But with all of that gold coming onto the world market, how come we are just stuck in a 10% trading range and not pressured much lower to the $550 level?!!  Because no matter how many Exchequer Browns there are out there, selling at what will prove to be very imprudent price levels to the detriment of their sovereign treasuries, there are buyers lining up around the globe to take the heavy lode off their hands.  Saudi Arabia, Dubai, S. Korea, Indonesia, India, China, are just the most public nations in admitting to buying gold to diversify their national reserves out of the U.S. Dollar.  But multiply government purchases by multiples of same to come to the realization that many individual investors around the globe are happily buying gold as Americans on the Comex whack it each and every morning after the open.  Talk about a predictable price pattern!  International buyers love a sale as much as Americans do.

But U.S. investors are just a subset of total global demand for precious metals.  We are not long-term investors in many respects, tending to convert one asset for another less worthy asset at the first sign of a profit in the former.  It seems like appreciated assets literally burn a hole in our pockets.  Maybe we are so competitive, particularly amongst ourselves, that we need the self-congratulations of announcing what we made in this or that asset at the next well-lubricated social event on the calendar.  Don't know for sure, but many Americans have the bad habit of selling near an interim low, instead of near an interim high.  Probably an international fault that one, but we do seem to have a shorter attention span than many global investors who have seen their countries' currencies turn literally to mush in a matter of years.  The Dollar is mush and is getting mushier by the hour.

Touted as leading indicators for the underlying bullion, gold and silver mining stocks are languishing in their own trading ranges.  At the first sign of a problem or a missed earnings number or the scent of possible dilution with the 3rd equity offering in the last 3 days, they are thrown out with the bath water.  Did you know that toddlers in the olden days were the last to use the treasured bath water which was so murky by their turns that you almost couldn't see the baby in it???  Hence, the expression, "Don't throw the baby out with the bath water".  Just so you got some knowledge out of this month's epistle AND THERE WILL BE A QUIZ!  But back to precious metals equities, they are getting the begeebee's beaten out of them, so no sign of over- optimism there!  Just another sentiment indicator, not a recommendation to buy paper.

Buy when there is blood in the street, and sell when the shoeshine boy is giving you investment advice.  It takes total conviction and intestinal fortitude to dive into the pool when so many are crying, "shark", and are trying frantically to get out.  Grab your shark repellent and dive in!


3.  Ben Bernanke Don't Know What To Do About Rates.


Bernanke is frozen like a man doing a high-wire act that just caught a 40 mph gust of wind.  He can teeter right, and metaphorically RAISE RATES TO SHOW THE WORLD HE IS A HAWKISH INFLATION FIGHTER.  Or he can teeter left, and metaphorically LOWER RATES TO COME TO THE RESCUE OF THE ECONOMY KNOCKED SILLY BY THE HOUSING BUST.  Gosh, it is like we GoldBugs elected this guy, it couldn't get any better.

The result that has the greatest possibility of occurring vis a vis the U.S. Federal Reserve, are you ready for this ......... DO NO HARM AND DO ABSOLUTELY NUTHIN.  Yikes, why didn't I think of that unique solution to a very complex problem that will affect that Nation for years to come?!!!!!!!!

So while Nero fiddles, I mean Ben fiddles, racking up speaking engagement points that he can turn into hard cash when he retires (or gets run out of town, whichever comes first!), the fundamentals for owning Gold and Silver just get better and better.  Here is why:

a.)  5.25% Fed Funds won't do anything to put a lid on inflation because you will need a 10% to 15% rate to put the skids on the eventual effects of 7 years of excessive money creation, not only domestically, but internationally.  I would say rates would have to reach the rate of growth in money supply in many countries to put a lid on persistent price pressures in the global system.  And for those of you who actually buy stuff in our economy, you know that this current interest rate does not even compensate you for the ravages of inflation.  Rates have to match or exceed the inflation rate to put a lid on inflation, just ask Paul Volcker how he did it in 1981.  The best asset over the centuries for maintaining purchasing power against insidious inflation is that four-letter word, GOLD.

b.)  U.S. interest rates maintaining the status quo, i.e., not being raised or lowered, will do nothing to stabilize the U.S. Dollar which is an Ask looking for a Bid.  Overseas interest rates will continue to outpace the Dollar on an inflation-adjusted basis, providing positive real rates of return on sovereign debt that will continue to provide a flow of Dollars being converted into the higher yielding currencies.  The Dollar's demise is almost guaranteed in the years ahead for this and a plethora of reasons expounded upon herein ad nauseum.  Not coming to the rescue of the Dollar by actually raising rates is as bullish as it gets for Gold, the Anti-Dollar of currencies.

c.)  The failure of the Fed to respond to a rapidly declining U.S. economy by lowering rates to attempt to encourage consumer spending via additional debt accumulation will put strains on the U.S. financial system not generally perceived at this junction.  It is not just the sub-prime mortgage sector that is at risk here, but many of the major financial institutions of the land that made the rocket-scientist decisions to greatly increase real estate lending during the hay days of the housing and commercial real estate boom in 2004 and 2005.  Real estate loans as a percentage of total bank assets have never been higher in the history of this country.

Were the Fed to lower rates during the recession we are already in, it is unlikely that many Americans would have the desire or the ability to take on more debt at this time.  Call it a buyers' strike, but with the layoffs exploding throughout the U.S. auto industry, a virtual collapse of real estate sales volumes and its associated support industries, a war on terrorism that could return to our shores at any time, oil prices that make commuting to work a costly endeavor, and multiple home foreclosures right in your own neighborhood, it is hard to imagine that sufficient confidence will be there at a Fed Funds Rate of 4.00% or lower.  THE LOSS OF CONFIDENCE PART OF THE CYCLE IS HERE.  Can't go to 1% a la Sir Greenspan because a Dollar Collapse would be the immediate and irreversible result, especially with a real inflation rate of 8% plus.  A world of growing uncertainty and investor/consumer concern is a world perfect for Gold and Silver.

Note how we are at Over twice the 1930 level of credit market debt!  So how is Fed loosening of credit's price through lower interest rates going to save the U.S. economy???  This growth in Debt started to level off in the 1990's, but Big Al really got things going again by 2000/2001.  It will be a Pushing On A String economy for Bernanke!


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In closing, probably the best risk/reward quotient exists today for initiating or adding to precious metals positions.  While recent market activities, to include the schizophrenic hedge fund bullion trading and fruitless Central Bank gold sales to cap gold at $700, make it difficult to embrace the near-term prospects for Gold and Silver, it is times like these where the risk is actually lower than you may perceive.  And the reason that risk is lower is the fact that the Fundamentals for the precious metals are on a moon-shot higher.  JUST WATCH AS THE METALS REFLECT THIS GROWING REALITY.  Happy trails to you, until we meet again.  (stage instruction) As the Sage disappears over the horizon on his trusty Burro named Siegfried.



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June 12, 2007:  Bonds Creating Golden Launchpad.


Would someone please get a message to Bill Gross at PIMCO that he needs to fire the recently hired Alan Greenspan as an advisor and hire the Sage at $100 Million per half-year compensation!  Payable in gold only in a Swiss account, please, don't give me no devaluing Dollars!  The Bond Bull Market of the last 27 years has come to a fiery end, JUST AS THE SAGE PREDICTED AT THE END OF 2006.  Now I don't like to gloat but very few guru's at any rung on the compensation ladder predicted some 6 months ago that interest rates were going higher in 2007.  You see, instead of spending inordinate amounts of time trying to decorate the summer mansion in the Hamptons, the Sage takes 30 years of financial and investing experience, and actually comes up with correct forecasts.  Not always, just most of the time, which is what counts in the long run.  Okay, I am dismounting from my High Horse, and coming back to terra firma.

And before any of you Precious Metals Investors (PMI's) or Wannabe's get panicked by tales of higher interest rates being bad for Gold and Silver, come back from the ledge.  Were U.S. interest rates, adjusted for rampaging inflation in the 8% plus zone in real life, actually providing a REAL RATE OF RETURN to yield-hungry investors, both Foreign and Domestic, then this argument may have some validity, BUT NOT AT THIS NANOSECOND IN HISTORY.  Real rates, those obtained by acquiring U.S. Dollars first, are NEGATIVE in U.S. debt instruments unless one is buying the paper of a Subprime Lender, and of course, you will be papering the outhouse walls with that stuff in a few months.  Bonds at 5.2% are no competition to either Gold or Silver.  Bonds at 6.2% (my year-end forecast?) are no competition to either Gold or Silver.  Bonds at 7.2% are no competition to either Gold or Silver.  You get the point.  It would truly take 10-year Treasury yields north of 10% for money to flow into these promises to pay in lieu of either gold or silver in the quarters and years ahead and at a real rate after inflation of only a couple of percentage points, not much competition at that.

Bonds have been known to default.  The U.S. Government is already defaulting on its sovereign debt by allowing the Dollar to head toward zero on a purchasing parity basis.  Gold and Silver have never defaulted, because they are hard, tangible assets that are coveted and accepted as payment around the world and have been so for a couple of thousand years now.  They are backed fully by their intrinsic values that are established virtually every waking moment of the work-day.  You must buy U.S. Dollars to purchase U.S. Debt, but you can purchase Gold and Silver in any currency some 23-hours per day at virtually any place around the world.  And the fact that Gold and Silver can be denominated in any currency known to man, makes them the ultimate currencies that have excellent liquidity and fungibility in all major and minor financial markets around the world.  And since these precious metals are traded around the world around the clock, don't think for a minute that the Comex will have the last word in daily price setting as bond yields head higher.  Watch pre-Comex opening prices and post-Comex closing prices in the months ahead!  THE MANIPULATIVE GRIP OF THE COMEX ON BOTH GOLD AND SILVER PRICES IS COMING TO AN END.  I have said this before and it could never be more true.  Another Sage prediction that is worth much more money per hour than a Greenspan shot-in-the-dark prognostication.

THE WORLD HAS FINALLY AWAKENED TO THE SINKING VALUE OF DOLLAR-DENOMINATED DEBT, AND THEY EITHER WANT NONE OF IT, MUCH LESS OF IT, OR A LITTLE OF IT AT MUCH HIGHER INTEREST RATES.

Now Spain can sell all of its gold reserves to generate still depleting foreign currency reserves (buying too many castanets from Jersey?), but foreign buyers have stepped up to the plate and basically put a floor under the gold price.  U.S. investors, in net, have been sellers during recent swoons, a very bullish contrarian indicator, also known as the Pampers Indicator (PI).  Interesting how the British Central Banker that sold a good bit of Britain's gold reserves toward a 27-year low around $255 per ounce is going to be their new Prime Minister, but politicians were born with dancing shoes on, just ask Hillary.  Once again, supporting the argument for mega-compensation for the Sage, I predicted years ago that Precious Metals Investors (PMI's) were going to be shocked when Central Banks stopped selling gold and went on the buy side.  China, India, Russia, many Middle Eastern countries, Indonesia, to name a few, are quietly and significantly increasing their gold reserves in lieu of Dollars while Spain becomes the Exchequer of Poor Timing, 2007.  Gold sales from Central Banks are all noise and little substance anyway, because the metal is going from fickle, politically-influenced hands to long-term, very strong hands.  Nothing could be better for a sustained bull market in gold.

Higher interest rates guarantee that the current recession in housing and homebuilding is not going to be one of short duration and shallow severity.  We have seen nothing yet as to mortgage defaults, foreclosures, and bankruptcies of major lenders, both prime and subprime, both money center and local.  The demise of bond prices in favor of higher interest rates as a bribe for foreigners to take our never-ending debt is putting more and more stress on an already stretched financial system as many homeowners and financial speculators alike are caught on the wrong side of this interest rate trend ..... WHICH IS UP.  So it is both the so-called "dumb money" AND so-called "smart money" that is getting caught with their predictions down, not to mention their pants and bank accounts.  Hence, the title for this month's Dewdrops of Wisdom, "Bonds Creating Golden Launchpad".  The reverse of the 27-year reduction in interest rates and rallying bond prices is extremely favorable for both gold and silver.  The disruptions to economic growth, financial systems, currencies, AND OVERALL CONFIDENCE will be monumental, mark the Sage's Words (SW)!

Any short-term rally in the U.S. Dollar is merely an opportunity for more Central Banks and foreign investors to UNLOAD GREENBACKS.  In bear markets, you sell the rallies, and there has to be some outside advisors to the Central Bankers, especially those who are at the head of the class in diversifying out of the Dollar sooner rather than later.  Any pressure put on the Gold and Silver bullion markets by a near-term rally in the Dollar will be capped as to severity and time duration by the Billions and Billions of Dollar hoards that are begging to be reduced in size by increasingly unhappy Dollar Holders.  So don't get fooled by the recent Dead-Cat Bounce in the Dollar.  As we sink further and further into recession in the U.S. this year, the Treasury will have no choice but to float more U.S. Debt in Dollars on top of a SURGING SEA OF U.S. DEBT swilling around the world.  You don't throw more water to a drowning man!

As intermediate U.S. interest rates head toward 6% during 2007, and the Fed has to possibly tighten to play catch-up and reassert its Inflation Fighter Of First Resort status (IFOFR), let's see what alternative investment markets are going to attempt to provide competition to gold and silver as superb long-term investments:

1.  Stock Market, U.S. in particular:  Nope, just began a decades-long New BEAR Market (another Sage prediction worth $200 Million per annum!)

2.  Money Market Accounts:  NOPE, still yielding a negative Real Rate of Return of almost MINUS FOUR PERCENT!!! (i.e. -4.0%, not + ).

3.  Residential or Commercial Real Estate:  Nope, Nope, Nope, how do you even make money in commercial real estate during a recession in progress with rising vacancy rates/downward pressure on rents AND rising operating costs of property taxes, maintenance, and interest-related carrying costs.

4.  Stock Markets, Foreign & Emerging:  Nope, if you think Wall Street is a wild and crazy place, which it unquestionably has become, just be sitting in Chinese or Brazilian stocks when the inevitable correction/bear phase begins and there is no liquidity or floor traders to handle your Offer to Sell.  Stay tuned momentum players, and do adjust your Pampers.  6% down in a day is child's play for these markets.

5.  U.S. and Foreign Debt Instruments:  Nope and Nope, because rates are going higher on a global basis, not just in the U.S., to quell speculative froth in asset markets (unlike the U.S. Fed's approach to markets!) AND INFLATION HAS YET TO PEAK ON ANY CONTINENT!!!  Very bad choice, but don't tell PIMCO's Board that I said this because I still want Alan's job there for $200 Million per year.  Kilogram gold bars deposited in Geneva will be just fine.



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Money goes where it is treated best.  Over the last 5 years, both gold and silver have beaten virtually all liquid assets, bar none.  Now say after me, "We have just been going through a consolidation period in both gold and silver, washing out the weak hands, and the foundation has been laid for much higher prices".  You can say this in English, Spanish, French, Chinese, or Russian, and it holds true universally.  As an American, if you do not get a "buy signal" until the old high around $850 (or even the magic $700), your Chinese counterpart gets to buy more metal at today's lower prices for a longer period of time.  How do you say, "Thank You Very Much, Weak-Kneed Yankee!" in Chinese?!!!  Crowd behavior amongst American precious metals investors/watchers is manic depressive right now.  Don't buy until this or that resistance level is taken out as espoused by any guy who has to sell advice via a newsletter for a living (since his trading account is in arrears).  If he or she was a first-rate bullion trader, he or she wouldn't tell you nothing about when to buy or sell.


(Stage Direction):  Sage being carried off to the Town Pub by a congratulatory crowd of cheering Gold and Silver Investors while Pampers are being tossed into the air like graduation hats.

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June 29, 2007, FLASH:  Bernanke Playing Chicken with U.S. Dollar Value.


A U.S. Federal Reserve put on hold by a prolonged period of excessively loose monetary policy in the New Millennium is an ineffective Central Bank and actually, a dangerous one.  Watch the U.S. Dollar in the days and weeks immediately ahead.  Without even a paltry quarter-point increase in the Fed Funds rate as of 6/28/07, stuck at 5.25% for over a year now while the rest of the world's MORE RESPONSIBLE CENTRAL BANKS STEADILY INCREASE INTEREST RATES TO QUELL FINANCIAL MARKET SPECULATION AND PUT A LID ON INFLATIONARY EXPECTATIONS,  the U.S. Federal Reserve under Bernanke DOES ABSOLUTELY NOTHING TO DEFEND THE CURRENCY OF THE REALM.  And currency markets trade on expectations as much as anything else, and the expectation is that a wimpy U.S. Fed is going to sit on its hands in the months ahead while the Dollar sinks below the horizon.

This inaction, maintaining the status quo, will prove to be a huge strategic mistake by the U.S. Fed.  As I have said on these pages, there is much more than the current housing-dependent economic cycle at risk in the current global currency environment.  Reserve currency status is at risk, and a literal surge in interest rates is almost guaranteed now as the Fed will have to belatedly defend the Dollar in 2007 and 2008.  The 80 level on the U.S. Dollar Index is within the crosshairs of informed currency traders, and we are headed there and below in a heartbeat.  The Trillions of Dollars of U.S. Debt sloshing around the world needs to be in steady hands, but a paltry 5% interest rate in an 8% global inflation atmosphere is not going to endear the Greenback to nervous foreign holders any longer.  A strike of higher rates upon the U.S. economy is inevitable since the U.S. is no longer master of its own monetary policy, but must bow to the wishes of its foreign lenders.  We are not strong enough either economically, fiscally, or financially to say no to our part owners, the holders of massive amounts of U.S. Treasury Debt around the world.  A debt saturated country is never in the drivers seat for long if the wheels on the chariot are starting to come off!

The Fed cannot miss the significance of a steeping yield curve, as rates in longer maturities soar well above the Fed's 5.25%, which classically embodies higher inflationary expectations with time AND foreigners demanding higher rates to hold U.S. Debt longer in time.  The U.S. has benefited greatly by cheap goods from overseas during the last 2 decades, but now the entire world is gripped with surging energy and food prices just as the U.S. growth engine spits a spark plug called the housing industry.  It had already spit a spark plug called the auto industry.  (Thank you, Ford, for providing us with this analogy based on your F-150 spark plug spitting engines!  Now that is an innovative design, but hardly entertaining to the owners.)  Steepening yield curves always provide an opportunity for central bankers to just say that they are moving to match market rates when they finally raise interest rates to fulfill one goal or the other, in this case the salvation of a Dollar destined to see levels that put it into the extinction category.  AT A MINIMUM, A MUCH-REDUCED STATUS CATEGORY!!

There is much more at stake for the United States in defending the Dollar's status than any severe recession that will eventually be countered by Government programs similar to the CCC during the Great Depression.  Once foreigners realize that the U.S. is determined to devalue its outstanding debt and debt servicing costs with cheaper and cheaper Dollars either through Dollar-printing or malevolent neglect of the Dollar's value through Bernanke's Play-Chicken strategy, the Dollar will go down like a rock and you will need a wheelbarrow of them to buy a loaf of bread.  A loaf which now costs close to $3 to put on the table!!!  When will it be $30 for a loaf, literally "baked DOUGH".

The U.S. housing market is already beset with so many negative factors (sinking disposable incomes, tightening lending standards, scared buyers, rising mortgage rates, surging oversupply, declining prices, Chinese fund buyers, mass deportations of illegals, just seeing if you were still awake!) that another 1/2 point in Fed Funds tomorrow will have little effect except on the Variable Rate Mortgage crowd, which is going to see higher default rates regardless of the interest-rate situation due to individually shaky financial positions well before this trend took hold.  AND WATCH THEIR LENDERS AND EVEN MIS-GUIDED UNCLE SAM COME TO THEIR RESCUES AS THE HOUSING FORECLOSURES SET NEW ALL-TIME RECORDS IN THE MONTHS AHEAD.  If you own a home, stay put unless you feel your neighborhood is going to erupt into civil strife with foreclosed homeowners acting out or the new, lovely tenants that the lender found down at the trailer park or soup kitchen or off a park bench, trashing the neighborhood.  I think we all are going to see some of this to varying degrees, regardless of how good your neighborhood is today.  I personally am already seeing it in my neighborhood, but as an Army Brat I have moved 28 times in my life, and my feet are tired, not to mention my back.  Plus, new home builders still have not gotten total religion on home pricing which is undoubtedly still some 20% to 30% above market.  Why overpay for an exit-strategy house when you are going to take it on the chin also in your existing home's sale???  Lock & Load.

Since this is just a Sage "Flash", I will wind it up here, but Bernanke is going to lose in the game of Interest Rate Chicken.  As long as we have wars to spend on as a nation (and Radical Islam is going to guarantee this for the next decade), I guess our economy won't get too bad (World War II brought us out of the Great Depression, not the New Deal by Roosevelt), but great financial and personal pain is ahead for the majority of woefully unprepared Americans.  It's really a shame that we have not had smarter and less self-indulging Government officials that have had years to keep this situation from ever developing.  Oh well.  I know my Gold and Silver are going to do just fine as the only true mediums of exchange that no government can debase with its irresponsible actions.

(stage instruction)  The Sage puts a gold bar under his feet to improve his posture while whaling at the keyboard.  And reaches to answer the phone from another dip-buying client.

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July 24, 2007:  The Budding Credit Crunch & Debt Collapse.


It took me a few days to build up the venom necessary to expound on this installment, but I think I have enough poisonous fluids flowing within me to do the topic justice.  I just want to start out by thanking Ben Bernanke and Treasury Secretary Paulson of late for placating our ill-founded fears, us Dumbo Consumers, about stifling inflation and the eventual magnitude and extent of fall-out from the Sub-Prime Mortgage Debacle.  Gosh, where is the Pinocchio effect when you need it most.  If the proboscis of appointed officials actually grew in size in proportion to the degree of distortion of the truth that was coming out of their duplicitous mouths, then the American audience they so play to would have a chance of getting out of the way of the Financial Avalanche that is coming down the mountain.  But NO.  These gents have learned to keep a straight face to the camera as they lie their butts off about the State of the Union.  Bernanke is not as good a liar as Greenspan was, but he will learn.  They all do in order to keep their powerful jobs.  In fact, Bernanke was noted to have been very nervous and sweaty in front of the lens of late, which implies, but does not guarantee, that this guy MIGHT HAVE A MODICUM OF CONSCIENCE under his expensive suits.  But history is very good at recording the Morsels of Mis-Information coming from Government Officials, and I am sure many bankrupt American citizens will be sending him a revealing CD or two in the years ahead.

If you listen carefully enough, you can almost hear the Noose of Tightening Credit beginning to strangle an economy totally addicted to free flowing money and credit in order to muster even 1% of GDP.  Groundhogs in my neighborhood are no longer getting mortgages to buy over-priced AND over-appraised houses.  It would be funny if not so ruinous for the Nation that bankers, lenders, and financial intermediaries make the same mistakes cycle after cycle:  LENDING MORE AND MORE MONEY TO LESS AND LESS QUALIFIED BORROWERS LATER AND LATER IN AN ECONOMIC/CREDIT CYCLE.  The Submerging Sub-Prime Liar's Loans of No Income/Asset Documentation are sinking faster than a Presidential candidate's prospects at a televised debate.  Many adults over the age of 21 could have told you this was going to happen, but somehow "This Time Was Different" and foreclosures could be avoided by additional, last-minute rescue loans that could keep the lender out of the real estate ownership/landlord business .  Granted, some of these foreclosure candidates are being thrown a temporary lifeline of re-structured loans, but the sinking values of the collateral on same make this approach less and less tenable.  Where is the incentive for a Bad Credit Borrower to keep bailing water in a house that is already underwater vis a vis market value versus what he/she owes?  Sure he or she or they need a roof over their heads, but there appears to be more than adequate rentals available in most metropolitan areas; AND doubling and tripling up in dwellings will be more commonplace than I care to observe.  All of the slim equity that these ill-advised borrowers ever had in the property was vaporized months ago, so they would have to bring cash to any potential sale of same.  Cash that they do not have as evidenced by their falling behind on their payments in the first place.  And cash that they definitely do not have as their Variable Rates adjust as much as 2 Percentage Points from the origination rate, adding some $400 per month of House Carrying Costs.  Basically another car payments without wheels.  Mailing in the keys will prove to be the best alternative for many of these pre-foreclosure homeowners, while debt restructuring will just postpone the inevitable day of eviction for most.

I don't mean to sound unfeeling on this issue, but the 2001 to 2005 Real Estate Bubble was one for the record books.  Now the turkeys are coming home to roost and where better for them to land than in the portfolios of highly-leveraged Hedgefunds.  I do remember Alan Greenspan extolling the virtues of Creative Finance on one or more of his not-infrequent public utterances.  One would have thought the man was paid by the word (unfortunately, HE NOW IS!!!).  Something about how risk arbitrage, debt derivatives, and financial engineering were making the world a better (MORE LIQUID!) place by offsetting risk to more players and, BEHOLD, THERE IS MORE PIE FOR EVERYONE!  He even went so far as to say this slicing and dicing of credits was making it possible for the little guy to move into a McMansion even when the wheels on the little guy's jalopy where falling off in the paved driveway.  I have that CD somewhere, Alan.  What golf course or university podium should I mail it to?

So now we are finding that the true values of $100's of Billions of Collateralized Debt Obligations (CDO's) are really very close to ZERO and NOT $100's of BILLIONS as collectively stated on their now poorer clients' quarterly statements.  MARK THAT GARBAGE TO MARKET, BOYS.  Everyone else in the world of U.S. accounting standards has to, so why should you privileged Hamptons Boys be an exception???!!!  The latest figure is that $500 Billion or Half-A-Trillion Dollars is going to disappear, and I have the feeling that the number will be in the $TRILLIONS before all is said and done.  Two Bear Stearns Hedge Funds have already been vaporized and there are many more to follow.  If you think this over-leveraged mess is going to be contained, I have just one word for you:  CONTAGION.

Since this junk-by-any-definition was originally rated AAA by the rating agencies of Moody's, Fitch, and Standard & Poors based upon overly optimistic, totally-unrealistic assumptions as to default rates by mortgage borrower credit, many institutions, pension funds, and municipalities may no longer hold this toxic waste as it has sunk to the CCC level in a heartbeat.  The rush to exit these never-fairly-valued assets is epic in nature, but THERE ARE NO BUYERS BECAUSE RISK AVERSION AND RISK ASSESSMENT HAVE RE-APPEARED ON THE FINANCIAL LANDSCAPE.  It usually takes a seismic event such as this CDO Meltdown to wake a compressed-credit-spread market up, and this has been a duuzzy.  So many a balance sheet across the land is going to experience a MARK-TO-MARKET SHRINKAGE that will be in the Trillions of Dollars, eventually, and all of the debt originators from the mortgage brokers to the investment bankers to the loan syndicators are going to be flooded with lawsuits relating to their failure to perform adequate due diligence and egregious misrepresentation of the asset that they sold down the food chain.  I am not exaggerating as to the magnitude and scope of this initial crack in the Greenspan Credit Efficiency Machine he so praised as he created the liquidity necessary to expand the debt markets to beforehand unheard of dimensions. 

Please Make Note:  Many foreigners are "fortunate" enough to have bought into this "Turning-a-Junk-Credit-into-Investment-Grade-Fool's-Gold" scam, AND THEIR AVERSION TO DOLLAR-DENOMINATED ASSETS IS ONLY GOING TO ACCELERATE AS A RESULT OF THIS TRANSGRESSION BY AMERICA'S GREEDY DEBT ORIGINATORS.


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Editor's Note (moi):  The Dollar broke firmly below the 80 support level today by some 30 basis points, and while we have a Save-The-Greenback counter-rally this morning to 80.36, I would label this a Dead-Cat-Bounce since the Aversion to U.S. Debt Instruments is still unfolding and a Foreign Buyers' Strike is forming out the window of Debt U.S.A.  While we could have a brief rally in the Dollar to try to defend this well-publicized critical support level of 80, thanks I am sure to the Exchange Stabilization Fund headed by Treasury Secretary Paulson, there is not enough tea in China available to this fund to change the bearish trend for the Dollar in any significant way for any significant period of time.  The bullion manipulators slammed both gold and silver yesterday and this morning (July 25th, this is a two-day masterpiece!), but it could have also been those getting hammered in the stock market getting out of some long gold and silver positions to get liquid and meet margin calls, etc.  We are sitting on a rocket right now in the Precious Metals, the fuse has been lit, and we are just in the phase of breaking the pull of earth's gravity.

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I have mentioned the high probability of a DEBT COLLAPSE based on the extremes to which credit has been extended in the U.S. since 2001 and the incorrect pricing of that debt in the marketplace as risk premiums for the riskiest borrowings HAVE NEVER COMPENSATED THE BUYER OF THAT DEBT FOR THE HISTORIC RISK THAT THE BORROWERS' CREDIT HAS NORMALLY POSSESSED.  While Bear Stearns is the first highly-publicized recipient of the fruits of ill-founded credit extension, the shareholders of the two high-risk hedge funds are out the whole enchilada.  Since the world of hedge funds is not a transparent one, about as transparent as the real data about the State of the U.S. Economy, it will take time before the total extent of the CDO Meltdown is known to the financial markets, the public, and even the insiders on Wall Street and HedgefundVille.  You can be assured that either the Federal Reserve and/or the U.S. Treasury are already attempting to do Damage Assessment and Contagion Control, but we may never know this as a citizenry, investor or not, since much is done behind our backs with our very own tax dollars.  The old excuse of, "It is a matter of National Security", for keeping the citizenry in the dark on relevant investment asset problems pertinent to their financial well-beings, will once again re-emerge when the eventual Congressional Investigation unveils the goings-on in about ten years.  But any asset valuation problem in the Trillions of Dollars will have a marked effect upon Investor Confidence in the Financial System that creates massive quantities of complicated debt instruments without proper due diligence, without proper pricing via risk, and without proper disclosure or overt misrepresentation of the collateral behind the debt.

Not only Domestic Investor Confidence, but that ever-so-critical-to-fund-our-never-ending-deficits Foreign Investor Confidence.  THE DOLLAR'S FATE IS SEALED AND EXPEDITED BY THE CDO MELTDOWN.

There are other Creative Finance debt instruments floating around in the financial sphere such as Collaterialized Loan Obligations (CLO's), but there are many very astute financial writers on the internet that can educate you in the exposures that exist in those instruments as well.  Suffice it to say that we are on the cusp of a Giant Re-Pricing of Risk in the financial markets around the world.  While the Long Term Capital Management debacle in 1998 was contained by the New York Federal Reserve circling the wagons with the key New York investment banks, any attempt to subsidize any financial entity today at risk of insolvency due to evaporating asset balances will be met with other problems in other markets.  The key and huge multi-Trillion-Dollar-per-day currency markets come to mind.  Any monetarization by U.S. agencies, the Fed or the Treasury or both, of this budding Debt Collapse will result in an acceleration of the devaluation of the U.S. Dollar at a time when confidence and preference for U.S. debt instruments, in particular, are already waning.  The LTCM problem was in the Billions of Dollars.  The current CDO Meltdown along with other failing-collateral Debt Derivatives is surely in the Trillions of Dollars in magnitude.  WE DO NOT HAVE ALL OF THE TEA IN CHINA CAUSE THE CHINESE HAVE MOST OF THE DOLLARS.  Creating Dollars out of thin air will only exacerbate the lack of confidence in U.S. creditworthiness.

I thought I would wake you up with a very scary graphic, the ARM Reset Schedule going out from January, 2007 some 73 months or over the next 6 plus years of Mortgage Hell.  You can see from this schedule, courtesy of Credit-Suisse, that while the Sub-Prime portion of Adjustable Rate Mortgage resets will peak at about $35 BILLION in late 2007, as we head toward 2009 and 2010, 2011 ..... Option ARM's, Agency ARM's, and Alt-A ARM's will represent a greater problem than Sub-Prime ARM's.  And these are the better credits to begin with, but if my forecast of a severe recession/depression that we are just at the beginning of in July, 2007 (have been in technical recession since April, 2006 from my calculations!) persisting for the next 5 plus years, then even these better credits will be compromised in outsized numbers.  I strongly feel that re-financing is not going to be a viable option for the majority of pre-foreclosure households.  Once again, if the lender forgives a portion of the debt, say the amount needed to adjust to the new, grossly reduced appraisal value of some 20% off the loan outstanding, then that is some $50,000 off the average home loan originated in 2005 and 2006.  And don't think for a minute that 20% represents a small portion of residential depreciation from the August, 2005 pricing peak!  I know this number first hand in one of the strongest real estate markets in the country, the Washington D.C. metropolitan area.  TALK ABOUT DEBT COLLAPSE.  A 10% debt write-down would be $25,000, so multiple this by hundreds of thousands of at-risk borrowers, home occupiers (not owners by any stretch!), and you are talking some real money here.

So the problem with the underlying collateral and the creditworthiness of the borrower, the increasingly cash-short U.S. homeowner whether Sub-Prime or Primo, is going to deteriorate in the months and years ahead.  This debt derivative time bomb is exploding in slow-motion and like a Neutron Bomb, is vaporizing the inhabitants of the structures, but leaving the structures intact in an increasingly glutted Vacant-Home-For-Sale market.  We have only experienced the first shock wave of the Greenspan Home Mortgage Debt Collapse.  And as interest rates increase due to the Buyers' Strike by foreign buyers of U.S. Treasury, Corporate, and Derivative Debt due to a reassessment of inherent risk in the underlying borrowers' credit standings and pledged collaterals, the ability of even the most creditworthy home buyer or owner to get a mortgage becomes progressively more impaired.  Not to mention the income/asset side of the potential borrowers' ledger with a fomenting recession and imminent peak in the U.S. stock market.  Lenders of course, true to their nature as a more greedy than prudent lot, are just now beginning to eliminate the No Doc/Low Doc loan entirely, but the cow is already out of the barn and frolicking in the fields, stomping the corn that is supposed to be used for Ethanol instead of tortilla's in Mexico!  Did you know that Sugar Beets were a much more energy efficient means of producing ethanol, but don't tell the grain trading pits. 

So from tightening of home mortgage lending standards, comes tightening of corporate lending standards (corporations have taken on debt since 2002 to buyback stock to keep the Bear Market Rally going!), and the increasing failure of leveraged-buyout equity deals to get financing because previously eager institutions are beginning to see that the Emperor Has No Clothes!  Actually, they are recognizing that many highly-leveraged Mergers & Acquisitions that have taken place in the last 12 months were financed at insufficient interest rates in comparison to the diminishing financial conditions of the beggars at the borrowing windows.  And with way too much total debt to service with way to little earnings potential to service same.  NOW, without more and more M&A to keep the Dow above 13,000, where will we be???  How about 8,000.  So the Credit Crunch and that giant sucking sound that Ross Perot heard at one time about NAFTA are becoming one and the same.  AS EASILY AS THE EXCESS CREDIT AND LIQUIDITY TIDE ROLLED IN, IT IS NOW STARTING TO ROLL OUT TO SEA.  Taking many an investment banker without a floatation device adrift with fewer and fewer deals that will actually go to market and close.  What will happen to the value of real estate in the Hamptons, my my my.

Okay, I have run out of venom at this point, my fingers are tired, and hopefully, YOU GET THE POINT.  The Debt Derivative Time Bomb that such astute investors as Warren Buffet, George Soros, and John Templeton warned about for almost a decade now is finally denoting.  There are many people I could thank for this calamity, but I have run out of pixels.  Suffice it to say that the Debt Collapse we are in the process of witnessing will be historic in proportion, globally extensive in scope, and surprisingly long in duration.  Don't forget that there are Billion of Dollars of Agency Paper from Fannie and Freddie ALL OVER THE WORLD that will eventually be called into question in this same Greenspan Mortgage Meltdown; what was sold as Investment Grade or Prime will not escape the deterioration in U.S. homeowners' ability to service their bulging debts or in the sinking values of U.S. home collateral.  

Gold and Silver are in the process of breaking out to new multi-decade highs.  I still think we have a shot at exceeding the old $850 high in Gold and $17 per ounce for Silver if not by the end of the year, then early in 2008.  TO BE COMPLACENT IN THIS ENVIRONMENT IS TO BE UNINFORMED.  TO BE UNINFORMED IS TO BE FINANCIALLY COMPROMISED IN THE NEXT DECADE.


(stage instruction)  The Sage adds a few more Golden and Silvery Bricks to his Financial Meltdown Bomb Shelter, realizing that Wall Street et. al. has produced and detonated a Very Dirty Bomb within our borders well before any Islamic Extremist had a chance to.  Your choice.  The Enemy from Within or from Without?  Try defending against both!


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August 13, 2007, SNIPPET:  The New Bernanke Put On A Global Scale / Re-Inflation in Overdrive.


First I want to congratulate all of the overpaid financial professionals out there who have greatly assisted the global financial systems and economies in bringing about one of the greatest and soon-to-be most decimating financial disasters of all time.  From grossly paid Hedgefund managers, to slimy mortgage brokers, to greedy commercial bankers, to all the JP Morgan-Chase, Goldman-Sachs haughty investment bankers and derivative brokers, to the mentally-challenged Central Bankers of the world who never made a payroll in their lives and have little first-hand knowledge of the financial workings of even a Mom & Pop grocery store ....... hats off to you, Gents and Gals.  Be it known that it is my fervent desire that a good many of you will be modestly clothed in orange jump suits in the years ahead, or, at a minimum, wallowing in tandem with the shivering masses in the ashes of the financial meltdown that you have created.  That is both my hope and desire, but in the overtly corrupt world we live it, pigs have a greater chance of flying than those close to the Levers of Power ever suffering the same fate as the poorer accountholders, dumb borrowers, naive shareholders, and unsuspecting citizens who they have pushed to AND OVER the Precipice of Financial Ruin (PFR).  Since history is replete with examples of felonious wrongdoers skipping off with bags of ill-gotten gains AND retained freedom, I will just try to give credit where credit is due (and $Trillions of it is going to disappear overnight!); I labor in the faint hope that Justice Does Prevail and the perpetrators are made to suffer as have those that had the misfortune to listen to their Siren Calls of Easy Money, Outsized Profits, or No-Money-Down Homeownership.

Ah, what an interesting week last week was.  Out of the right side of his mouth, Fed Chair Bernanke insisted that he was a true inflation hawk and that his Central Bank would never bail out the financial sector that had found itself overleveraged with evaporating collateral and unmarketable securities.  THEN, out of the left side of his mouth, Benny Boy opens the floodgates of Federal Reserve liquidity injections to do the very thing that the right side of his mouth just said he would not do.  Got to love the guy.  He has the makings of a fine Financial Politician, aka U.S. Federal Reserve Chairman, who can do totally opposite actions vis a vis the financial markets simultaneous without filling his suit with guilt-ridden perspiration.  Since Benny had read somewhere in his Wall Street Journals that the Greenspan Put was really a very, very bad thing for a Central Banker to do, eliminating the consequences of poor financial decision-making and excessive risk-taking from the landscape of highly-leveraged financial-market debt creation, he wanted us all to know he would not make the same disastrous mistake his predecessor had.  I think we should name him, "Greenspan Junior", just based on last week's Billions of Dollars of daily liquidity injections TO ATTEMPT TO PREVENT THE GLOBAL FINANCIAL SYSTEM FROM FREEZING UP.

I am not going to put figures on paper or screen as to the amounts that each panicked Central Bank poured into the money markets last week, through system repo's and whatever, partly because I am sure there were equally staggering $Billions that got shoved into the system that none of us will ever know about as Members of the Mushroom Class (kept in the dark and fed mucho stinkola).  But when the European Central Bank puts an additional $130 Billion of funds into their amalgamated financial system in a single day, you know there is Big, Big Trouble in River City.  The global credit markets are basically freezing up, where borrowers will not borrow, lenders are afraid to lend, and bids are not forthcoming on O-T-C derivatives such as CDO's, except for maybe a Central Banker bringing in totally unmarketable junk to keep one of the inside elite financial organizations from going illiquid or insolvent.  I cringe to think that the U.S. Federal Reserve is using newly-created Taxpayer Dollars to bail out the Hamptons Boys on collapsed, debt derivatives at a time when money supplies around the globe are growing at 2 to 3 times GDP rates, inflation is persistently higher, and the U.S. Government is basically broke.  THE AMOUNT OF LIQUIDITY BEING PUMPED INTO THE WORLD'S FINANCIAL SYSTEM IS TOTALLY UNPRECEDENTED!!! 

What does all of this mean for you and I as taxpayers, Dollar-holders, investors, and Bullion Bulls???

This is the Weimar Government of Post WWI Germany INFLATING THE HELL OUT OF THEIR FINANCIAL SYSTEM TO KEEP THE SYSTEM AFLOAT.  This injection last week, again today, and probably for many days and weeks to follow means, ASSETS OF MOST STRIPES ARE GOING TO RISE SUBSTANTIALLY IN THE NEXT SEVERAL YEARS BECAUSE THIS IS MONEY CREATION THAT CANNOT BE WITHDRAWN. 

 Now I do not feel that any form of Real Estate or Stocks or Bonds are going to benefit in any major way with this massive liquidity injection, because those assets have already begun to deflate from previous liquidity surges started as far back as 2002 under Sir Alan Greenspan.  Why can't these assets be inflated again this time around, you ask?  Loss of confidence and excess supply applies to virtually each one of these Three Horsemen of the Apocalypse, Real Estate, Stocks, and Bonds.  Not to mention the fundamentals underpinning these assets are in serious decline, not ascension.    How can real estate prices go up with 8 months supply of existing homes and month-to-month sales rates still well in decline?  How can stocks that are trading at 20 times 2007 estimated earnings offer value to all but the uninformed investor?  What percentage of the S&P 500 is represented by Financial Stocks and Consumer Related Stocks today ...... some 40% plus, so show me how the market is going to rally from here with the banks, brokerages, mortgage companies, and investment banks literally imploding in here.  Not to mention a consumer that has so much debt, that even Zero Percent Interest Rates will not garner this past expansion's anemic 3% Real GDP growth since not all debt can be refinanced at any lower rates that may follow from here.  And lastly, do you want to lend money as a bondholder to any entity, including the U.S. of A. whose near-term financial conditions is a giant unknown, in an environment increasingly Dollar unfriendly, in a liquidity plus demand driven inflationary environment for the mere basics of life, and in a credit market that is currently coming unglued????  If I must have cash, and most everything else is trash, then it is the shortest maturity of paper, U.S. Treasury Bills until the Dollar Index crashes through the 72 level.  Then I don't have a clue where to put liquid funds unless I can easily open a Swiss Franc money market account.

Tangible assets are going to be huge beneficiaries of all the the unprecedented liquidity that is being pumped into the world's financial system.  Since flooding a financial system with cheap money that is priced below the rate of inflation got us to this credit market freeze-up in the first place, it is totally counterintuitive that the same "floatation device" is going to rescue the system from collapse.  In fact, this perpetual response by Central Bankers and government officials to each and every financial crisis makes the end result of such irresponsible management that much more onerous.  Money creation is once again out of control and it is very unlikely that credit creation/issuance to more normal levels will follow.  Until risk is properly priced into the myriad of debt instruments floating around the world, speculators and imprudent asset managers will continue to leverage the global system with increasingly suspect debt instruments.  THIS IS JUST FUEL TO A BURNING FIRE.  Ever try to pour gasoline on a bonfire and not get burned or vaporized in the process.  This analogy is quite fitting to the efforts being taken by the world's Central Banks to prevent systemic collapse of the global credit markets.  However, the loss of confidence has already occurred and eventually, both Gold and Silver will break through the top of the past year's trading range and head toward more realistic valuations.  As Safe Havens in time of economic and financial system collapse and dislocation, Gold and Silver have no equals and have not had any equals for hundreds of years.

GET AS LIQUID AS YOU CAN.  PAY OFF AS MUCH DEBT AS YOU CAN.  INCREASE YOUR TOTAL BULLION HEDGES AS MUCH AS YOU CAN.  SYSTEMIC FINANCIAL SYSTEM FAILURE IS IN PROGRESS.  IN 1998 DURING THE LTCM DISASTER, THERE WERE A "MERE" $80 TRILLION IN OTC DERIVATIVES FLOATING ABOUT THE WORLD.  NOW THERE ARE $415 TRILLION OF THESE EXPLODING TIME BOMBS.  YOU FIGURE THE ODDS AGAINST SEVERE CONSEQUENCES.  

THE CURRENCY OF THE REALM, THE DOLLAR, WILL BE A VICTIM OF THE NEW FLOOD OF DOLLARS INTO THE GLOBAL FINANCIAL SYSTEM.  EXIT AS MANY OF THEM AS YOU CAN. 

(stage instruction)  The Sage is costumed like a grey squirrel burying as many acorns as his little rodenty body can before the cold winds of Financial Winter blow even harder.  This is the Summer of Financial Discontent.  The Stock Market Fall is coming in the Fall.  For the first time since Fall, 1972, the Squirrelly Sage is going to be totally out of debt by year's end 2007.  If I can't pay depreciating cash for an item, I don't need it.

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September 3, 2007, SNIPPET:  The Little Dutch Boy Doesn't Have Enough Fingers for This Leaky Dike! (Alternate Title:  Lambs to the Slaughter)


It must be tradition now that I work some on Labor Day.  I guess it must be the Protestant Ethic that was instilled in my ancestors and passed genetically on to me, even though some of them were Catholic, that leads me to apply myself in a very task-oriented fashion while the majority of the country blissfully recreates today.  But there is probably a less noble motivation for my Making Hay While the Sun Shines:  My forecasts for the future get darker and darker with each passing month, and doing something constructive (okay, I heard that comment about the ezine being "DEstructive"!) takes my mind momentarily off the consequences of decades of American greed, impatience, and corruption.  Now I am not getting up on my High Horse with this observation, since it would be more fittingly a Donkey or a Mule, but eventually, as history has shown us century after century, the imprudent risktakers of the world usually get their just desserts.  We are currently on the threshold of one of those dark entryways in history, where the strong winds of Financial Winter are blowing so fiercely at our backsides that there is no option whether to enter or not.  All Americans are being pushed into this Murky Foyer of History, prepared or unprepared, and none willingly, including yours truly.  We can only hope that there is a well-lit exit at the end of this long, dark passage in history that is likely to occupy the better part of the next two decades.

For the Federal Reserve, the White House, the Treasury, or any other politically motivated Keeper of The Public Funds (and Former Keeper of the Public Trust) to announce this plan or that to prevent the current Financial Crisis from fully unwinding Trillions of Dollars of Mal-Investments of undeterminable value, aka "Ill-Placed Bets", the assumption has been made that the Civil and Investor Populace still lends credence to official pronouncements.  Ah, said Shakespeare, "There lies the rub".  We have finally crossed the threshold of public and investor psychology were confidence in the ability of government to right every wrong, many perpetuated by the same self-professed "rescuers", is badly shaken to the point that the sheep no longer heed the bark of the Official Sheep Dogs.  The sheep are beginning to stampede in a panic, driven by the instinct to survive financially, regardless of the consequences to the "other sheep" and to the systems under which they live, economically and financially.  IT IS IN ESSENCE, EVERY SHEEP FOR HIM- OR HERSELF.  Nothing Bernanke or George W. or Paulson have said of late is going to change the Epidemic Loss of Confidence seeping at electronic speed around the globe today.  

If the vaulted Credit Rating Agencies have been implicit in rating truly questionable debt instruments as AAA or AA when indeed only a private treaty market exists for the eventual sale of these financially engineered "pieces of paper" and creditworthiness was based on theoretical models only, then any retail investor at Wall & Broad had better be shaken to the core.  This whole process of questioning the previously "unquestioned" authorities on the quality of debt issues in the U.S. AND Global financial markets will take years to reverse, not weeks or months.  FINALLY, the corruption of purported fiduciaries that has persisted for the last 30 years is coming to the Light of Public Scrutiny.  Whether it be Moody's, Standard & Poor's, or Fitch, all of these agencies are at the threshold of not only Billion of Dollars of litigation claims, but Congressional hearings/prosecutions that will make Watergate look like the time span of a TV commercial.  I hope they gave generously during the last election cycle.  These fee-seeking, ethics-challenged "agencies" fall from grace will cause every investor in every part of the world to question how accurate the ratings really are on all debt instruments within their portfolios to the point where distressed selling will continue for many quarters to come.  WHEN IN DOUBT, GET OUT.  Granted, some credits' ratings are based upon decades of financial performance and stability, rightfully earned, but the vast majority of financial credits today are of the more questionable variety.  The FORMER QUEST FOR YIELD, regardless of overt or covert risk, is the stepchild of the Greenspan Fed's lowering interest rates well below the domestic rate of inflation in the U.S. and keeping them there for some 5 years plus.  The creation of credit that ensued in the private sector was not only unprecedented in its magnitude, but in its rate of growth and UTTER ABANDONMENT OF SOUND INVESTING PRINCIPLES.

I am not going to list all of the players that will eventually go to the Scoundrels Gallows in the annals of history, welcome to the New Millennium, but those that passed truly "junk debt" from one hand to the next as "prime paper" will either suffer the fate of having invested in this crapola themselves and/or suffer the anger and legal slings and arrows of an Investing Public thrown into Group Reaction; the latter is also known as a "Mob".  So by all means, Official Sheep Dogs, do print more money to solve these massive, "systemic financial system problems" created by the monumental creation of excess credit and liquidity in the first place.  Have you ever known the cause of a problem to also be its solution?????

Setting up a FHA Secure program is so laughable that it brings tears to my tired eyes.  So for how many years does an applicant have to have had "good credit" and in what magnitude of financial transactions before the U.S. Government will subsidize the mortgage refinancing process and provide a guarantee against future default in the newly originated home mortgage.  How do we pay for these subsidies, especially below-market interest rates to a current borrower in default or arrears who does not deserve such a rate?  NEWLY PRINTED DOLLARS.  How do we pay off the new, more-favorably written loan should this "once I had good credit" borrower lose his or her job in the developing recession?  NEWLY PRINTED DOLLARS COURTESY OF THE U.S. TREASURY.  What amount of hair-cut or discount must the FHA get the original lender to provide in order to generate a new FHA Secure Loan?  And will the lender be an FDIC-insured institution whose failure after portfolios losses in home mortgages and CDO's and other exotic derivative-based debt instruments is going to put demands upon another government agency, the FDIC???  PLEASE SEND MORE U.S. TAXPAYERS' DOLLARS TO THE ADDRESS OF RECORD OF THE NOW CLOSED BANK.

So, not that anyone expects Poor George to come up with a solution to a problem that requires washing the system clean of worthless paper, but to have Bernanke promise to take all necessary steps to keep the Ponzi Scheme going, GIVE ME A BREAK YOU BUNCH OF MANGY, FLEA-BITTEN SHEEP DOGS!!  Just ask the Japanese how life has been since 1989 when their Debt Pyramid Scheme collapsed and they have yet to wash out all of the dead credits on the books of their banks!!!  (I know this installment's title was about a Little Dutch Boy trying to plug 1,015 widening holes in a 1929-era dike, but I just got off on a tangent regarding Sheep and Sheep Dogs and I ain't apologizing since when someone robs you of your life's savings in 2007 America, that is all you get, AN APOLOGY.  Don't you feel so much better when a heinous perpetrator apologizes to you???  A drunk trucker drives over your family's favorite feline while doing 45 in a residential area, and with the flattened critter's remains still stuck on one of his massive trailer tires, he slurs, "Gee, I is so sorry, folks.  Just didn't see the little fella."

Cats may have 9 lives but your investment portfolio, your economy, and your way of life don't!!!!!  Once flattened, they pretty much stay flattened like our unfortunate feline fella here.  (Gave the sheep a break for a minute since they were beginning to run out in traffic with nasty results, trying to avoid the wanton baying of the Official Sheep Dogs to get back in line.)

So, Official Sheep Dogs (OSD's), please continue to find solutions to the locking up of the Commercial Paper money markets, the overall locking up of the credit markets where borrowers are afraid to borrow and lenders afraid to lend, the record foreclosures on U.S. homes, the upcoming bank failures when "mark-to-market" adjustments hit the books beginning this month, the way-below inflation Treasury Bill interest rates, and THE JUMPERS FROM THE SKYSCRAPERS ON WALL STREET. 

The only tools that these canines have available all utilize one over-used and problematic ingredient:  DOLLARS.  THROW FRESHLY PRINTED OR CREATED MONEY AT THE PROBLEM AND THAT SHOULD PLUG THE DIKE!  They have the printing presses cranking already, and they just borrowed North Korean or Pakistani technicians to employ nuclear power to really juice up the production rates.  THE UNITED STATES GOVERNMENT IS GOING TO ATTEMPT TO PRINT ITS WAY OUT OF THE CURRENT FINANCIAL CRISIS, aka, "PANIC".  Say goodbye to the purchasing power of the Dollar and eventually its Reserve Currency status.

Why has Gold held up so well during this entire August Angst?  The Sage's Summer of Discontent?  A 6% correction when many assets are down 30% to 50% in the last 30 to 60 days speaks volumes as to what is in store and which assets will outperform in the period ahead.  Speculators, hedge funds, and Idiots-In-General sold gold and silver to plug margin call or liquidity dikes that were badly leaking in other asset markets.  Pure and simple.  Many U.S. investors will be caught unaware when Gold (and, yes, Silver too) take off like an Apologizer shot from a cannon.  THE CALM BEFORE THE STORM.  For the financial markets, THE FALL WILL REALLY BE IN THE FALL.  Back to relaxing on my day off.



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October 3, 2007, SNIPPET:  Excess Liquidity Can Do Strange Things!


I had several rather salient titles picked out for this missive, like "Why Do Savers Have to Always Pay for the Sins of Spendthrifts?!", but at the last minute, chose the above.  The market that defies all logic currently is the Stock Market, attempting to set new highs on all of the indices at a time when the U.S. economy is sinking further and further into RECESSION.  If the inflation statistic used to adjust Nominal GDP were close to the reality of 6% to 10% per annum inflation that we mortal Men/Women on the Street experience every day that we buy something IN THE REAL WORLD, then it can be shown to all who will listen/observe that the U.S. has been in recession, negative GDP, for the last 5 to 6 quarters.  No joke, eventually this fact will become public knowledge, but just remember that you heard it here first:  THE U.S. OF A. HAS BEEN IN RECESSION FOR ALMOST A YEAR AND ONE-HALF NOW.

So why is the Stock Market still trying to separate the last Widow's and Orphan's pennies from them at a time when the fundamentals for stock ownership are deteriorating by the day.  Not only is economic activity sinking with each vainly-fudged Government report (count them, don't take the Sage's word for it), but the condition of our domestic and global financial systems are in increasingly precarious conditions.  I told you that you were going to see Billions of Dollars of write-offs in September/October from the world's major money center banks, and the likes of CitiBank, Deutsche Bank, J.P. Morgan-Chase, Bank of America, on down the line are beginning to cough up the hairballs called NON-PERFORMING (how about NON-EXISTING!) ASSET WRITE-DOWNS.  This process has just begun, because when a contagion exists in a huge global credit market sector such as Over-The-Counter Derivatives ( CMO's, CDO's, CLO's, and I. O. U. Big Time's), the cleansing process always goes longer and deeper than anyone ever predicted at the outset.  100's of Billions of Dollars will evaporate before this process is over.

Remember the highly-paid pundits that declared the worst of the housing slump to be over in Spring of this year?!!  If it were not so pathetic and damaging to the long-term health of the U.S. economy I would laugh outloud at these preposterous statements of "fact", but we just had the lowest Pending Homes Sales figures on record print for those poor slobs trying to pass a still-overpriced home to some uninformed buyer who is going to be lucky to qualify for a loan.  Mortgage rates have stayed stubbornly high or higher since Little Ben waved his magic Liquidity Wand to lower SHORT-TERM RATES BY 50 BASIS POINTS.  And loan demand is hampered by frightened prospective buyers clinging to their jobs in a weakening economy, lenders still holding their lower regions afraid to make any more stupid lending decisions, and regulators charging up the hill an hour after the last combatant expired!  If I could sell my Suburban JoyHouse, even at 10% below current, still-overpriced, market, and move into a cardboard box or second-hand RV to stay mobile ahead of the nuclear blasts, I would do so in a heartbeat.  High price for Sage Sanctuary, $415,000; current market value, $335,000; likely terminal value when all of the excess housing supply begins to be digested, $200,000 (cost basis $260,000, hard cash).  I bet you a Starbucks coffee with real cream that I will not be too far off the mark!  SO THE SAGE SAYS THAT HOME VALUES WILL TAKE HAIRCUTS OF 50% FROM THE HIGHS BEFORE THE DUST SETTLES.  Tell your neighbors or better yet, DON'T!!!

Now I have to go to the Confessional with the reality that the Fed did cut rates this year and is going to cut more.  I thought the guys in charge at the Fed had actually taken one or more College-level Economics courses prior to entering public service, BUT I WAS WRONG.  INFLATION IS NOT REALLY A CONCERN FOR THIS FED.  SAVING THE SYSTEM AT ANY COST TO ITS LONG-TERM VIABILITY IS THE PRIMARY CONCERN OF THE U.S. FEDERAL RESERVE.  Put that on your headlines New York Times Traitors (NYTT's)!!

If they can use phony inflation stats such as the CPI, then they can understate the problem for a couple of additional quarters.  I must tell you that the moment I see an internet analyst using Government CPI numbers in their erudite analyses, I hit the "skip" button.  You cannot analyze diddley squat when your basic assumptions are off the mark by a factor of 2x or 3x.  Even Sir Alan, who goes to the confessional daily via the public podium these days, has made the revelation that China will no longer provide a vacuuming of global inflation with below-world wage rates.  Chinese wages, interest rates, and their manipulated Yuan are all headed higher to the detriment of the Low Inflation As Far As The Eyes Can See Assumptions.  Ben B., I am sending you my Econ 101 textbook from Michigan that describes the scenario where a reduction in the real interest rate of a country puts that country's currency at a disadvantage (devaluing mode!) to competing global currencies such as the Euro, Yen, Swiss Franc, Pound, and Jungle Beads.  Especially when those countries central banks have not soiled themselves and started hitting panic buttons with oil surging past $80 per barrel and tortillas competing with ethanol for grain.  So no longer can we export inflation to China by buying everything on the shelves at Wal-Mart, but we now have the Dollar value of virtually all IMPORTS increasing to put more zip into the official 2% - 3% inflation rate.  Chinese goods prices are invariably going up, and so will the prices of virtually every import brought into the U.S. as the Panicked Fed Reaction to Credit Market Disintermediation knocks the last remaining stuffings out of the U.S. Dollar.

It is the old Beggar-Thy-Neighbor currency routine where the country with the most problems, in this case the U.S.A., takes overt and covert actions to progressively devalue its sovereign currency in order to make all outstanding and future debt obligations much, much easier to repay.  Does Weimar Germany come to mind?!!  It eventually will to the horror of all Dollar holders, including you and me, but more tellingly foreign holders of U.S. sovereign debt called U.S. Treasuries which are entering a bear market on the intermediate to long-term side of the yield curve.   I still say the yield curve is going to steepen sharply as inflationary expectations set in, persistent dollar devaluation requires higher bribe rates, and U.S. financial instability requires a higher risk premium for U.S. debt instruments, both public and private.  I said at the beginning of the year that interest rates were going higher, and they will, even if the Fed's 50 basis point cut and 25 basis point cuts to come temporarily flatten 10-year plus yields.  The Fed has chosen to try to keep the Ponzi Scheme going a little longer, but the die is cast.  THE WORLD IS IN FOR A GUT-WRENCHING ADJUSTMENT PERIOD AHEAD WHERE A LOT OF DEBT THAT WAS FORMERLY CONSIDERED "ASSETS" ON THE LENDERS' BOOKS IS GOING TO DEFLATE IN THE TRILLIONS OF DOLLARS.  Assets are literally going to disappear on balance sheets around the globe.  So it is liquidity pedal-to-the-metal time for the Central Banks of the world.  We are back to the Greenspan fear of deflation, so Bernanke is taking a page from Alan's book and flooding the U.S. system with money via different avenues.  AND LOOK WHERE THAT APPROACH TO "SOUND CENTRAL BANKING" GOT US!!!  

But their uninspired efforts are going to be met with unintended consequences.  The interest rates that determine home mortgages will not respond to short-term rate cuts (they haven't to date!) because of the heightened risk embodied in making a new home loan today:  deteriorating employment prospects for the borrower, continual collateral deterioration of the underlying property, tightening lending standards at company AND Federal levels, and disruptions in the secondary markets for originations.  Wow!  So the Sage also says that mortgage rates are going higher, not lower, no matter what the Fed does.  POOR BEN.  Maybe Greenspan will hire him as an opening act.

Since we now have the Sage's prediction of a LOSS OF CONFIDENCE firmly at play, short-term rates are not going to prompt prospective borrowers to borrow in this environment, bleeding lenders to lend even to the most creditworthy of applicants, or the credit markets to function in such a way as formerly where there was a never-ending supply of recycled funds to keep the game going to higher and higher levels of total outstanding debt.  The commercial paper markets seem to have literally frozen up, as an example purportedly outside of the mortgage markets, as CMO's, CDO's and CLO's related to mortgages have become virtually worthless.  Who would have thought that our money markets were peppered with short-term paper tied into the Subprime Mortgage Mess (SUMM)??!!  Remember that Subprime defaults were just the catalyst that got the Ponzi Scheme of over-rated/underpriced debt to begin to unravel.  There is no lack of fancy-dancy debt instruments out there that suffer from the same fundamental over-rating of credit quality and, hence, under-pricing of compensating yield based upon their true credit risk amounting to SUB-JUNK STATUS.  Trillions of Dollars of credit market landmines yet to explode. 

Put all of your cash into Treasury Bills either through a money market such as American Century Capital Preservation Fund (where I have mine) or through Treasury Direct where the money goes directly from your bank account to the construction account of a Congressman's home improvement project!  Seriously, virtually every money market containing commercial paper and even Treasury Repo's is at risk in the present situation.  This is not an over-reaction where the Sage has not taken his meds!  Remember Will Roger's was concerned during the Great Depression about the Return OF His Money, not the Return ON His Money.

Currently paltry yields are compensated for by utter safety, at least for the time being until foreign investors realize that the U.S. is solidly in the process of devaluing all of its outstanding debt.  The U.S. Government has an endless printing machine for Dollars says Fed Head Ben, so he and his global cohorts have these money machines in overdrive.  But until the U.S. Government overtly defaults on its debt in the future decade, which I think it eventually will in a lengthening of maturities on all Treasuries, Treasury Bills Only are the safest money market bet.

NOTHING HAS GOTTEN BETTER OR BEEN SOLVED SINCE THE BEN BERNANKE PANIC RATE CUT.  The Commercial Paper market has shrunk by approximately 50% as lower credit borrowers can not longer roll over short-term paper.  Mortgage originations are still on a downward spiral, both new (of course!) and refinancings.  Economic activity continues to decrease from one government release to the next.  Spreads in the credit markets, take LIBOR for example, continue to widen to levels that more accurately reflect true credit risk of a borrower, but still do not fully price in the risk of default or late payment; i.e., yields have to go higher in these non-Fed Funds markets.  The Stock Market is a hot air balloon that is kept afloat for now by an excessive amount of money trying to find a home, but prudence will eventually reign supreme even in this Irrational Exuberance Market.  The smart money has been selling to the greedy money all year, and declining corporate profitability with declining sales and inflation squeezed profits margins will be the shoe that soon drops to drop the Stock Market. 

Interest rate cuts have never saved the Stock Market when the fundamentals of the economy and financial system were concurrently declining.  Not once.

Gold is going to $850 before the end of the year, and Silver is going to set the stage on fire with a rocket ride to $15.00 to $16.00 by then.  I forecast $17 silver for 2007, and am just hedging my bets at this point, unlike a Hedge Fund that is anything but "hedged".  The Dollar is in Collapse Phase I with the 80, now 78 level, on the Dollar Index giving way, and much lower levels to follow with subsequent selling of American debt instruments and financial assets such as U.S. stocks by fed up foreign investors.  Money always goes where it is treated best.

Stay the course with Gold and Silver purchases.  Buy the dips in the Precious Metals.  Pay down debt.  Get liquid into Treasury Bills only for your cash hoard.  The latter are still the best bet until the Jig Is Up and the world recognizes that the U.S. Dollar and any financial instrument denominated in it are really Weimar Germany Deutschemarks in disguise.

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November 13, 2007, SNIPPET:  When Lenders Won't Lend AND Borrower's Can't Borrow.


I would first like to address the Chairman of the U.S. Federal Reserve:

"Dear Ben:  I know you don't know me since I did not go to Princeton and have never worked in academia or in Government, but you need to listen for a few minutes even if I only have 6 years of study from that old land grant college called the University of Michigan, very un-ivy-like, I know.  YOU ARE PUSHING ON A STRING, BENNIE BOY.  The cost of money, as so readily manipulated by your minions at the Fed on the short-end of the curve, is not the real problem here.  The problem O' Ivy Tower Economist, is that there is a major deterioration in borrowers' overall confidence levels, in the absolute ability of borrower to assume additional debt, in the collateral required to secure additional debt in today's deflating environment, and in the lending industry's ability and desire to actually lend money out.  Now I know that the Stock Market is all giddy awaiting your next reduction in below-inflation-interest-rates to keep the Wall Street Ponzi Scheme going, but the die is already cast for the U.S. economy, financial markets, and financial system.  You may call me a Fear Monger, but I would rather label my humble street-hardened-self as a Stark Realist who has studied the history of men and money, and have had a growing crowd of Fellow Seers and ezine readers over the last 8 years.  I know it is in your job description that when homeowners, mortgage lenders, realtors, builders, developers, hedge fund managers, derivative issuers, credit rating agencies, GSE's, banks of all genre, and investors start crying over very, very poorly placed bets, that you must do something, even if it knocks the last legs out from under the Currency of the Realm.  But often the greatest courage is summoned when one stands his or her ground, maintaining their current position."

"We both know that Sir Alan Greenspan's flooding of the U.S. financial system with cheap, cheap money and ultra-lax lending standards for about 5 years is the real culprit in the unfolding debacle squarely in front of us, but you did accept the job with your eyes fully open (at least, I hope your eyes were open at the time!).  Often throughout history, it is the modest men of integrity that come behind the naughty elephants to clean up their messes (not a political statement on Bush/Republican free-spending for the last 6 years!).  We hope you have the Right Stuff as Tom Cruise pines for every day, as in the Wizard of Oz tale he is still looking for a brain.  But the ball is in your court, Ben of Princeton, and you need to do the right thing ...... stand pat on interest rates even if you need a supply of Pampers to weather the angry mob that will form outside your Fed office window; the ones in Armani suits are from Broad and Wall.  To lower rates any further below the True Inflation Rate (TIR) of 7% to 10% no contest, is to put the incomes of all U.S. retirees and savers at risk (one more time) as interest income is their safest bet in today's upside down world.  Interest income from Treasuries, U.S., Canadian, Swiss, NOT FROM U.S. COMMERCIAL BANKS OR S&L'S OR INTERNET INTERMEDIARIES SINCE I AM AFRAID THESE BOZO'S HAVE SCREWED UP MONUMENTALLY ONE MORE TIME."  

"Now as a Bullion Dealer whose phone has been ringing off the hook for the last several months, I am grateful that your renewed Interest Rate Cuts that keep the real rate of return of U.S. savers below the 7% to 10% U.S. Inflation Rate (not B.L.S.!) are knocking the stuffing's out of the U.S. Dollar.  Since Gold and Silver are the only real money that us poor men and women on the street can turn to when EVERY GOVERNMENT ON THE PLANET CHOOSES TO DEBASE THEIR DOMESTIC CURRENCY TO MAINTAIN THEIR SYSTEMS AND ECONOMIES, the values of the bullion products I sell to clients are headed for new all-time highs.  Thank Greenspan for me when you see him at the next Austrian Summit on Saving The Global Financial System!  Since foreign investors have come to the realization that the U.S. really does not want a Strong Dollar Policy in actuality, and your rate cutting drives that conclusion ever further home, various central banks are beginning to increase their aversion for U.S. Dollar holdings and the Buck sinks to new, all-time lows!  Gold is going to $2,500 within the next 10 years, Ben, nothing you can do about it since it is a global market for gold and silver, and the common folk are buying every ounce any central bank can or will disgorge.  Silver is headed to $120 per ounce in my non-Ivy League opinion, as good a guess as the recent estimates coming out as to how many $100's of Billions of Mortgage and Derivative Related Debt Instruments are going to vanish off many a financial institutions' balance sheets."

"My hat is off to you, Ben, for taking the helm of the U.S.S. Titanic just at the time that THE Iceberg had floated across the dark financial horizon in a sea of excessive credit generation.  Hopefully, you will not be blamed for the misery that is going to spread across the Nation due to years of ill-founded lending, borrowing, and spending.  But at least you have your generous Government pension to fall back upon should you decide to abandon ship early in your tenure.  And you can always get a professorship at Princeton, specializing in Stable Monetary Policy Theorems.  In case you have not noticed, the IceBerg, the one now named the Sub-Prime and Derivatives Berg (not located in New Jersey!), has ripped open at least 2 of your un-isolated, open bulkheads and the salty, corrosive water is pouring in.  Greenspan should have closed those bulkhead sea-doors years ago by taking away the punchbowl (aren't mixed metaphors great?!  starting to feel seasick?), but there was a press conference on A Deck and he just had to attend.  There is little you can do to save the ship, the U.S. economy and financial system, Ben.  All you can do now is provide lifeboats for the women and children aboard and throw the Wall Street crew a leaden buoy or two (although they seem to be quite good at throwing leaden buoys at themselves decade after decade!).  But we all know you will pander to the Wall Street crew if history is any guide regarding Federal Reserve reactions to financial crises, letting the citizens of the land suffer the consequences of their own financial stupidity, the crookedness of real estate transactors (new WCM word for Webster's), the stupendous greed of debt packagers, and the irresponsible acts of government hacks.  Hopefully, I have not left anyone out, and I purposely included the Citizens Of The Land (COTL's) since their "Spend Everything Now, Pay Maybe Later" psychology and failure to read loan/settlement documents is a colossal portion of these Titanic miscues."


!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Whew, that was almost therapeutic.  We are firmly in a colossal Credit Crunch, O' Loyal Readers and government spies.  If you are fearful of losing your job and/or your most valuable asset is now worth less than you owe on it, are you really going to take on more debt to spend on Xmas goodies or dining out or SUV's or designer shoes in the 2007 economy?!  The Sage thinks not.  Recession is not a probability now, it is a certainty.  The only real question, as has been my query for almost a decade now, WILL THE U.S. AVOID A DEPRESSION?  The debt meltdown that is occurring in the financial sector is now estimated to be on the order of $500 Billion in eventual write-offs for some of the biggest banks and financial institutions in the world.  I will wager that it will most likely approach $1 Trillion or more by the time the dust settles.

But there are other large segments of the global credit markets that we have not even heard from yet where improper risk analysis was performed by both lenders and credit rating agencies (and don't forget the lying borrowers!), and the financial icebergs are still floating out at sea waiting to greet the hull of the U.S.S. Titanic.  I think many M&A financings since 2003 are going to go bad where the junk rating turns into absolute stinking garbage and default/bankruptcy ensues.  But any time you have Billions of Dollars in supposed "assets", these liars' loans with no or questionable collateral AND very questionable financial assumptions, disappearing on a quarter-by-quarter basis, the purse strings of the Nation's lenders draw tighter and tighter.  Case in point, even the most creditworthy of homebuyers are watching real estate closings melt away as the loan originator cannot find a buyer in the secondary market for the origination!  Without this properly functioning secondary market to resell the loan, where is this lender to obtain funds to make additional loans.  The lender will shortly be out of business.  Bad times indeed in CreditVille.  But you, dear Bullion Market Insights Reader, saw it coming years ago.


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Keep buying the metals on the way up; don't get too fancy with market timing and technical hocus pocus.  As we continue the current exponential move, price volatility is going to knock your socks off!  Since financial types have been so creative for the last 30 years, God only knows what icebergs are to break off the NON-Regulated Financial Glacier and head out to sea.  I do disagree with the respected Stephen Roach of Morgan Stanley regarding the Dollar retaining reserve currency status.  I think we will see 2 or more additional regional currencies a la the Euro in the next 5 years making a serious dent in the Dollar's current, albeit diminishing, monopoly in international financial settlements.  Money goes where it is treated best.  And when the country of issue is dead set ........ out of necessity ........ to devalue its sovereign currency and all outstanding debt denominated in it, money will flow elsewhere.

It is already flowing readily into Gold and Silver.  We are just at the beginning of this process.  Heck, I may be too conservative as Jim Sinclair probably is in his $1,650 target for Gold.  We may see $3,200 Gold before the lifeboats reach shore.


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January 1, 2008, min-SNIPPET:  Some Dire Forecasts from the Sage for 2008 (hold the Champagne).


I broke my index finger on Nov. 25th, so no updates have been forthcoming since it is such a pain to try to type with 9 fingers.  Modified hunt-and-peck.  Here goes, but I must say that things are going to be much worse in the years ahead for the Citizens of this country since I never imagined the write-offs of bad debt instruments were going to be in the $100's of Trillions before all is said and done.  Here is what I see as the major events that will shape the landscape in 2008:

1.  Multiple Bank and Financial Institution Failures

Whether it is Money Center/Major Banks or Regional/Local Banks, the continual identification under GAAP accounting standards of "mark-to-market" losses of over-priced/never-sound securitized debt instruments/ derivatives will increasingly take its toll on all but the most strongly capitalized institutions.  AND VIRTUALLY NO U.S. MONEY CENTER BANK WAS DEVOID OF MASSIVE DERIVATIVE EXPOSURE IN RELATION TO CAPITAL ADEQUACY ENTERING SUMMER OF 2007.  Sovereign Wealth Funds will not be interested in taking equity positions in all U.S. institutions, so there will not be avenues for bail-outs from private sources for many banks.  I WOULD NOT HAVE FUNDS IN ANY SAVINGS ACCOUNT OR MONEY MARKET OF A U.S. BANK AT THIS TIME.  Treasury Only Money Markets is where I have parked all of my cash.  The FDIC is grossly under-funded for a Debt Collapse in the Tens and Hundreds of Trillions of Dollars, and I feel strongly that in the future a bankrupt FDIC will pay depositors in 10- to 20-Year Treasury Notes, NOT HARD CASH, in the inevitable case many U.S. banks fail.  All efforts to re-liquefy the global cash markets have failed, I will not even go into their merits since it is like throwing a thimble of water on a forest fire.  Bail out efforts will fail, and have done so in the footsteps of failure of the Super SIV Fund to date.  Make a huge mental note here that we have entered the LOSS OF CONFIDENCE PHASE of this recessionary cycle/ pre-DEpressionary cycle where Lenders are now afraid to lend since they have $Billions of bad bets already on the books to either work-out or write-off, AND Borrowers have compromised collateral and income streams and no stomach for increasing debt loads when they are already defaulting in record numbers ON THE DEBT THEY HAVE ALREADY BITTEN OFF.  Personal Note Here:  The Sage is now totally out of debt for the first time since graduating from Michigan Engineering School.  And if I can't pay cash for something going forward, I don't need it.  That includes automobile and even home purchases!  The Debt Monkey is off my back, and I suggest that you get him off your back too.  In a depression with deflation, debt becomes more and more expensive to service each year.  First we inflate big time through 2008 and possibly into 2009, then the destruction of many financial assets and real estate values in a severe economic decline gradually brings on deflation.

2.  Worsening U.S. Recession as 2008 Progresses

I get absolutely ill when I hear from Government Agencies that all is well with the U.S. economy.  At some point the prevaricators in Washington are going to be tarred and feathered, hopefully not literally,  It is frankly one of the most imbalanced economies on the planet that now has automotive, real estate, mortgage lending, retailing, and the general financial services industry well within recessive sales and earnings trends.  Inflation will exceed 10% in the world you and I live in as we enter 2008, and with oil prices headed well north of $100 this winter, grain crops being bid to the moon by developing country demand and misguided Ethanol producers, money being pushed at Rocket Speed by the world's central banks into a "frozen-up" global financial system, and Governments coming to the "rescue" of all the poor victims of very stupid lending AND borrowing decisions since 2001, I expect to see the Shadow Group print 15% or higher inflation in the U.S. before the wheels come off the cart.  We will Hyper-inflate before we Hyper-DEflate.  The U.S. stock market, even the NASDAQ, did not provide investors with a positive inflation-adjusted return in 2007, and earnings disappointments are going to start coming fast and furious as we enter 2008.  The U.S. stock market has just topped out its Bear Market Rally that started in 2003, nothing more, nothing less.  U.S. Consumers are beginning to panic about variable-rate mortgage resets, continuing home price collapses, food & energy prices, job security, election uncertainties, and debt repayment loads, hardly ingredients to keep the resilient American spenders at their favorite past-time, SPENDING MONEY THEY DO NOT HAVE.  Go ahead, Uncle Sam, make it okay to default on mortgages, auto payments, and installment credit!!!  See what the next generation of Americans become when it comes to honoring financial obligations.  Real, inflation-adjusted GDP in 2008 will average NEGATIVE 5% IN 2008! ( I can forecast as well as Sir Alan did and get paid much less money when I am wrong. )


3.  Many Money Market Funds Will Break The $1 per Share Sanctity

Some high-roller funds that really play on the railroad tracks of debt "quality" have already done so, but based on the massive expansion in money market funds since Sir Alan decided to trade the NASDAQ Bubble for the Real Estate/Credit Expansion Bubble that just burst, many more money markets with non-Treasury paper are going to return less than your principal this year.  Now with Bennie Boy Bernanke pushing yields down probably to 3% before he sees the Inflation Monster on the cover of Time Magazine (Putin, Schmutin, what a choice for 2007 Man of the Year!!! A KGB Kremlin Despotic Oligarch!! who hates American Influence!! AND is selling weapons to our enemies!!), you will have both a loss of principal in many of these funds, not FDIC-insured but who cares, but negative real returns also.  But for liquidity purposes for emergencies like when you break your writing-hand index finger, stash some cash, just be extremely choosey what the fund is invested in.  If a bank or fund cannot or will not tell you what they currently hold in the way of debt instruments, vote with your feet and move your monies elsewhere.  America will eventually technically default on its unpayable debt in the next decade by re-structuring all payment dates and maturities, but until that dark cloud shows up, STAY IN TREASURIES, because no one has audited the Fed's or Treasury's books yet to see how many CDO's, CMO's, SIV's, or other worthless derivative crapola they have bought to save the system.  Don't you feel much better when you know that you as a taxpayer were willing to come to the aid of the Fat Cat Bankers, Hedgefund Managers & Investors, Dumb-Dumb HomeStealers (aka, Fraudulent Homebuyers), AND USE YOUR TAX-DOLLARS, the ink not even dry on them! to BAIL THESE DESTITUTE GAMBLERS OUT!  Be sure to tell your grandchildren to buy a 30-year-lived Hydrogen-powered Scooter for commuting, because that is all they will have left to spend on after the American Bankruptcy.  Bernanke and Paulson, you are just making the size of the final Turkey Coming Home to Roost the size of the Empire State Building or the Sears Tower!  Japanese-style Monetary Policies since 1989 only prolonged the Japanese Depression.


4.  GOLD AND SILVER WILL CONTINUE TO SOAR IN 2008

Of course, you would expect a Bullion Broker to say this, but I think the U.S. public will finally realize there are few secure alternatives for safe-keeping their money in the Debt Collapse we are currently in.  Only about 5% to 10% of Americans have purchased any Gold or Silver since the bull began in 2001, so this incremental demand in a country still flooded with cheap cash (Ben your Xmas gift to a bullion broker just keeps on giving!) will keep the after-burners glowing on the Precious Metals Rocketship.  My forecast for Gold's high in 2008 of $1,138 implies a 36% return at some point during the year, with silver kicking up its heels as the physically more rare metal (at least on the Nymex/Comex!) with a 31% return to just under $20 per ounce at $19.35 some time this year.  ONE SIMPLE FACT TO REMEMBER ABOUT PM PROSPECTS FOR 2008:  THE GLOBAL ECONOMY AND FINANCIAL MARKETS WILL BE OVERALL WORSE THAN THE WORST PERIOD EXPERIENCED DURING 2007!!!  Bad news will be a daily occurrence in the markets this 9th Year of the New Millennium and of greater negative import to all of us.  I have been too conservative in forecasting the size of the financial hole Americans and American institutions are in at this juncture!  The sun will eventually come out again, but we are just at the leading edge of this Perfect Financial Storm System (PFSS).  Although I have been continually surprised about investors' penchant for risk in buying stocks with both hands since 2003, this trend has FINALLY reversed and will precipitate some breathtaking waterfall equity declines in 2008.  MONEY GOES WHERE IT IS TREATED BEST.  And precious metals have blown the doors off of stocks that are basically flat to down since their peak in 2001.  Gold is up some 220% since it's bear market low at around $260 per ounce as the Bank of England impoverished Brits for decades to come with untimely gold sales in 2000.  Silver, not to be outdone, is some 230% off its cycle low.  AND MANY MORE 100% GAINS TO COME IN MY HUMBLE ESTIMATION.

The Nine-Digit Sage now targets Gold's peak to be $3,200 per ounce and Silver peaking at $120 per ounce within the next ten years.  No guarantees, but The Sage has been very right about a lot of topics for the last 9 years.  Just re-read some of the epistles contained herein.  A contribution to the V.F.W. would be appreciated.

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AuAgUAGAUAGAUAGAUAGAUAGauagauagauag


THAT'S IT FOR NOW, OH LOYAL READERS.  GOT TO GO REST THE FINGER.  DON'T FALL ASLEEP AT THE WHEEL IN 2008, BECAUSE WE ARE ALL IN A SEA FULL OF HULL-PIERCING ICEBERGS.  MAN THE GOLDEN AND SILVERY LIFEBOATS! 


And Furthermore:

to all the men and women in our armed forces that are in harm's way, i say a resounding "thank you and god's speed" for a safe return home.  these are the true heroes of our age, those willing to put their lives on the line for the safety and security of their fellow citizens back home in the u.s.a.  we will prevail in our struggle against Islamic Terrorism, because any enemy that kills the women and children of the populace they vainly strive to control, is doomed to failure.  History and freedom are on our side even if the naysayers on Capitol Hill would rather make political hay than save the day.

Happy New Year and thanks to all of the clients of Wexford Capital Management for making 2007 another stellar year.  Money goes where it is treated best.


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