Best Quotes of July 2008

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Published : August 05th, 2008
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Category : Editorials

Frank Barbera, Financial Sense
The phrase ‘systemic collapse’ is rarely used in financial circles, but with housing collateral values in continued decline, there is an enormous financial margin call rippling through the system. In the OTC derivative market, values are unable to be quantified as increasingly spreads are widening and illiquidity becomes more acute. An accident is at hand.

U.S. Senator Jim Bunning, addressing Ben Bernanke and Hank Paulson
Second, the Fed is asking for more power. But the Fed has proven they cannot be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go. As I said a moment ago, their monetary policy is a leading cause of the mess we are in. As regulators, it took them until yesterday to use power we gave them in 1994 to regulate all mortgage lenders. And they stretched their authority to buy 29 billion dollars of Bear Stearns assets so J.P. Morgan could buy Bear at a steep discount.

Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem. I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can do it right, either by taking away their monetary policy responsibility or by requiring them to focus only on inflation.

Third and finally, since I expect we will try to get right to questions in the next hearing, let me say a few words about the G.S.E. bailout plan. When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. The Treasury Secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed’s purchase of Bear Stearns’ assets was amateur socialism compared to this.

And for this unprecedented intervention in the markets what assurances do we get that it will not happen again? None. We are in the process of passing a stronger regulator for the G.S.E.s, and that is important, but it allows them to continue in the current form. If they really do fail, should we let them go back to what they were doing before?

I will close with this question Mr. Chairman. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention in private enterprise will be. More importantly, where does it stop?

Ted Butler, Investment Rarities
Much like a parasitic tapeworm or tumor that has grown larger in mass than its host victim, the removal or resolution of the silver short position threatens the very existence of the silver market. Or more precisely, the resolution of the short position threatens the continued existence of the silver manipulation and guarantees sharply higher prices.

Richard Daughty, the Mogambo Guru
And don't get me started at what in the hell is going on at the commodity exchanges, mostly because I have no idea what in the hell I am talking about, but it seems that the commodity exchanges routinely allow their little buddies to sell fictitious commodities, like "paper" silver, for example, until we are talking about a short position in silver that is (according to Theodore Butler) "an amount of silver equal to all the known silver bullion in the world." Talk about what is effectively a huge naked short position! I bring this up because even now, the one-month lease rate for gold is zero, and is staying at zero! Borrow gold at an interest rate of zero! I gotta tell ya that the Federal Reserve loaning out gold for free makes me angry as hell, because it drives down the price of gold as all this free gold gets borrowed and dumped on the market, upsetting the demand/ supply balance, making a nice piece of change for anybody who is already short gold, who are, I assume, mostly the guys who are dumping the gold in the first place.

Ambrose Evans- Pritchard, Telegraph UK
It feels like the summer of 1931. The world's two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.
The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a "chance of a global recession". Plainly, the IMF cannot or will not offer any useful insights.

Its "mean-reversion" model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True "mean-reversion" would imply debt deflation on such a scale that would, if abrupt, threaten democracy.

My view is that a dollar crash will be averted as it becomes clearer that contagion has spread worldwide. But we are now at the point of maximum danger. Britain, Japan, and the Antipodes are stalling. Denmark is in recession. Germany contracted in the second quarter. May industrial output fell 6pc in Holland and 5.5pc in Sweden.

The coalitions in Belgium and Austria have just collapsed. Germany's left-right team is fraying. One German banker told me that the doctrines of "left Nazism" (Otto Strasser's group, purged by Hitler) had captured the rising Die Linke party. The Social Democrats are picking up its themes to protect their flank.

This is the healthy part of Europe. Further south, we are not far away from civic protest. BNP Paribas has just issued a hurricane alert for Spain.
Finance minister Pedro Solbes said Spain is facing the "most complex" economic crisis in its history. Actually, it is very simple. The country was lulled into a trap by giveaway interest rates of 2pc under EMU, leading to a current account deficit of 10pc of GDP.

A manic property bubble was funded by foreigners buying covered bonds and securities. This market has dried up. Monetary policy is now being tightened into the crunch by the ECB, hence the bankruptcy last week of Martinsa-Fadesa (€5.1bn). With Franco-era labour markets (70pc of wages are inflation-linked), the adjustment will occur through closure of the job marts.
China, India, East Europe and emerging Asia have all stolen growth from the future by condoning credit excess. To varying degrees, they are now being forced to pay back their own "inter-temporal overdrafts".

If we are lucky, America will start to stabilize before Asia goes down. Should our leaders mismanage affairs, almost every part of the global system will go down together. Then we are in trouble.

Bill Fleckenstein, Fleckenstein Capital
Mountains of hot money have been hiding out in tech, as demonstrated by the conclusions of various opinion polls: that the Goldilocks contingent has been betting on a second-half rebound and that tech would be the place to be. It's going to be the place to be, all right, but only for those seeking major pain.

Finally, a word on the world of hurt known as the financial arena. "It's about to blow" is how a friend I've dubbed the "Lord of the Dark Matter" began a call to me last week. Behind the scenes, many parts of the credit/mortgage market were "offered only," with no buyers in sight for troubled loans. My friend said the problem had nothing to do with the end of the month or the end of the quarter. Instead, he believed it had to do with the enormous amount of inventory that would be looking for a home in the next quarter. He said the equity market was "miles behind what was occurring in the mortgage-backed/credit markets." Though he noted that he'd said it before, he repeated: "It's never been this bad."

David Galland, Casey Research
At this point, our bet remains that the Feds will go to default mode which means cranking up the printing presses into the red zone, letting the dollar move ever closer to its intrinsic value: zero. That they’ll follow this route is suggested by two inputs. First, a depreciating dollar means a reduction in the trillions of dollars in obligations now owed by the U.S. government. And, secondly, foreign holders don’t vote. 

Peter Grandich, Grandich Letter
Americans are mostly either in the shock or denial phase at this moment. Tens of millions of Americans are literally being stretched to the limit if not beyond just by the dramatic costs in fuel. Soon, they will enter the angry stage as some already have around the world protesting and demanding something be done. Sadly, despite all the political bantering you hear now, governments like the U.S. can do little. This will lead to the frustration phase when the realization is that there’s indeed little in the way of relief for as far as the eye can see. That will lead to the final phase which is either acceptance (not many will want or be able to live with this) or dismay and radical changes to lifestyle and a forever change to the economic landscape.

As unimaginable as it seems, we could be in just the first half of the worst stock market decline in all of history.

Eric Janszen, iTulip
Inflation leads to hoarding, too, such as the gold bubble of the late 1970s. No one is thinking, "I'll buy gold and get rich" then. Everyone is thinking, "The purchasing power of my money is evaporating. At this rate, I won't have enough money to buy the things I need. Better convert my cash to gold now."

This has not yet occurred to most Americans, but at this rate eventually it will. This is why the Bureau of Labored Statistics (BLS) manages the inflation data as they do: there was no Internet in the 1970s. In the Internet age the inflation meme will spread like wildfire driving precious metals hoarding behavior like nothing before. Keep 'em guessing is better than that making the true inflation rate official. Meanwhile, use interest rate derivatives to suppress interest rates so there is no confirmation there. Is the guessing game over?

James Howard Kunstler
The US economy is crumbling because the way we conduct the activities of daily life is insane relative to our circumstances. We've spent sixty years ramping up a suburban living arrangement that has suddenly entered a state of failure, and all its accessories and furnishings are failing in concert. The far-flung McHouse tracts are becoming both useless and worthless in the face of gasoline prices that will never be cheap again. The strip malls and office "parks" are following the residential real estate off a cliff. The retail tenants of all those places are hemorrhaging customers who have maxed out every last credit card. The lack of business is now leading to substantial layoffs. The airline industry is dying and will probably cease to exist in its familiar form in 24 months. The trucking industry is dying, threatening the entire just-in-time distribution system of things that even people with little money to spend still need, like food. 

These conditions will now get a lot worse, no matter whether the banks continue to conceal their problems. All of it leads to an inflection point that coincides with the November election. By then, I expect that quite a few banks will be toast, job layoffs will rise spectacularly, foreclosures and bankruptcies will be raging across the land, and homeowners north of the magnolia belt will be shattered by the cost of staying warm this winter.

Doug Noland, Prudent Bear
The harsh reality is that Starbucks is a microcosm of scores of enterprises that have come to comprise the core of the U.S. Bubble economy.  The economic viability of so many businesses – and even industries – will be in jeopardy in the unfolding Credit and financial landscape.  The stock market is still in the early stage of discounting the unfolding Credit and economic bust.  And I’ll reiterate that we expect the unfolding economic adjustment to be of such a magnitude as to be classified as an economic depression.

Today, there is little liquidity in the securitization or corporate bond markets.  So, the multi-Trillions of strategies relying on shorting securities for hedging and speculating purposes have gravitated to the relative liquidity of U.S. equities.  And, when it comes to hedging against or seeking profits from heightened systemic risk, one can these days see rather clearly how incredible selling pressure can come down hard on the 19 largest U.S. financial institutions.  And when one considers the scope of derivative strategies that incorporate “delta hedging” trading dynamics – where the amount of selling/shorting increases as the market declines (systemic risk increases) – one recognizes the possibility of a marketplace dislocation along the lines - but significantly more systemic - than the “portfolio insurance” fiasco that fueled the 1987 stock market crash.

Importantly, this issue of acute systemic risk has taken a turn for the worst with the recent deterioration in the conventional mortgage market.  The highly exposed GSEs, mortgage insurers, and leveraged speculators are positioned poorly to withstand a bust in prime mortgages.  The fate of the U.S. Bubble economy today rests on the ongoing supply of low-cost "prime" mortgages.  Any meaningful tightening in conventional mortgage Credit – including the lack of availability of mortgage insurance, required larger down payments, and/or tougher Credit standards – would have a major impact on Credit Availability for core housing markets throughout the country (many that have thus far held together fairly well).  Such a tightening would put significant additional downward pressure on prices, exacerbating already escalating problems for the GSEs, Credit insurers, and speculators.

Ron Paul, Texas Congressman
There are two choices that people can make. The one choice that is unavailable to us is to limp along with the status quo and prop up the system with more debt, inflation and lies. That won’t happen.

One of the two choices, and the one chosen so often by government in the past is that of rejecting the principles of liberty and resorting to even bigger and more authoritarian government. Some argue that giving dictatorial powers to the President, just as we have allowed him to run the American empire, is what we should do. That’s the great danger, and in this post-911 atmosphere, too many Americans are seeking safety over freedom. Real fear of economic collapse could prompt central planners to act to such a degree that the New Deal of the 30’s might look like Jefferson’s Declaration of Independence.

The more the government is allowed to do in taking over and running the economy, the deeper the depression gets and the longer it lasts. That was the story of the 30s and the early 40s, and the same mistakes are likely to be made again if we do not wake up.

Nouriel Roubini, RGE Monitor
Indeed, my initial estimates of $1 to $2 trillion dollars of losses from this financial crisis did not include the bailout of Bear Stearns' creditors, the bailout of the GSEs bondholders, the fiscal costs of the Frank-Dodd bill, the fiscal costs a severe U.S. recession that is mushrooming an already large fiscal deficit, the fiscal cost of bailing out – a' la Bear Stearns - the last four remaining major independent broker dealers (as the time for such independent broker dealers is now gone as – given their wholesale overnight funding - they are subject to bank-like runs much more severe than for banks), the cost of bailing out the Federal Home Loan Bank system (another GSE system that pretends to be private and that has been happily propping up or bailing out – to the tune of hundreds of billions of liquidity support – illiquid and insolvent mortgage lenders). Switching the informal guarantee of GSEs debt to a formal government guarantee would by itself increase the US gross public debt by $5 trillion and effectively double it.

Thus, soon enough, if we fiscalize all of these losses the U.S. may fast lose its AAA sovereign debt rating and eventually end up like an insolvent banana republic.

Steve Saville, Speculative Investor
Even though the dollar is just a piece of paper or a number inside a computer with no physical form whatsoever, it would be a fine currency IF its supply could not be increased. The main reason it and the other fiat currencies of the world are not good forms of money is that their supplies can be increased ad infinitum. And what's worse, their supplies can be increased ad infinitum at virtually zero cost at the whims of governments and banks.

Given the ability to create new money "out of thin air", which can, in turn, be used to buy votes, the average politician will succumb to the temptation to create the money irrespective of the long-term effects of the resulting inflation. In fact, for a politician to be successful it is almost a prerequisite that he/she be prepared to make full use of the inflation tool to garner votes. This will always be the case, which is why it is important that politicians do NOT have this ability. Moreover, the only way to ensure that they don't have this ability is to use money for which the supply is subject to a rigid physical limitation. Gold and silver fulfill this requirement because they are elements that can neither be created nor destroyed by humans. We can change the location of the gold -- for example, by shifting it from below the ground to above the ground -- but we can't create more of it. Furthermore, we can't even shift the gold from below to above the ground without expending considerable resources.

Peter Schiff, EuroPacific Capital
The grim reality is that trillions of dollars were borrowed and spent that will never be repaid. No government program can alter that fact. Someone is going to have to pay the piper for all those granite counter tops and plasma TVs. The price tag is staggering and for all the bailouts and stimulus packages, all the government can do is exacerbate the losses and shift the burden through inflation. Nor can the government resurrect bubble home prices and the fantasy of real estate riches that went along with them. One way or another, rational home prices will be restored and the myths of our asset-based, consumption-dependent economy will be finally discredited.

Darryl Robert Schoon,
Compounding debt, the wellspring of bankers’ profits, will eventually destroy the economy on which it lives. The time it takes to do so is dependent on the strength and productivity of the underlying economy. No economy, however, no matter how strong initially, can out run the constantly compounding debt of credit-based money—not even the United States.

Mike Shedlock, Mish’s Global Economic Trend Analysis
Businesses do not want to lend, consumers do not want to spend, financing approved projects (even large projects in supposedly "recession-proof" Las Vegas) is difficult. Unemployment is soaring, demand for credit ratings is dropping, there is no driver for jobs, the service sector is shot and that is going to put still more pressure on consumer discretionary spending and business borrowing. The credit crunch is not only pervasive, it has now reached critical mass where it will start feeding on itself. The Fed is powerless to stop it.

Expect to see corporate bond yields soar and treasury yields to drop as the credit crunch picks up steam. Those looking for inflation can find it in their rear view mirror.

James Turk, Freemarket Gold and Money Report
I am therefore now prepared to say that gold will never again go back below $850. Gold is just too cheap and the dollar is being inflated away too rapidly for their exchange rate (what we call the “gold price”) to ever again return to that level, regardless of the determined efforts of the gold cartel to cap gold’s price, which brings up one last important point. Ludwig von Mises warned us that governments will destroy free-markets long before they ever understand how they work. I would like to add that governments will destroy free-markets if they do not like the message of the market. Government intervention after all is nothing but a blatant attempt to change the market’s message about the price of some good or service. We have seen this intervention time and again by governments around the world, including the U.S. government. Sen. Lieberman’s bill to prevent institutional investors from buying commodities is a good example of this penchant to destroy the market process rather than put the blame on the real culprit, which is the US government itself and its mismanagement of the dollar, which itself is an un-Constitutional currency.

Christopher Whalen, Institutional Risk Analyst
The implosion of houses such as Bear, Stearns, LEH and, yes, eventually even Goldman Sachs suggests that this pure "agent" institutional dealer business model may be doomed. Are the other heavy users of leverage residing in hedge fund land next?

We know that the larger universal banks are looking for ways to add value, looking at what business lines make sense and those that don't in the post subprime world. Many of those answers are negative, sad to say, judging by the rising tide of redundancies flowing down the Street. Indeed, many of the systemic, market structure issues upon which we harp endlessly call into question entire business models in the financial sector. The data is telling us that the adjustment of bank credit loss experience is still mostly ahead and that loss rates, like recent flooding in the midwest, could exceed 50-year highs.

Jim Willie, Golden Jackass
We are witnessing the destruction of the US financial foundation to its very core, with most of its appendages wrecked as well. The bankers cannot offer any solutions except for the public till to rescue them before they become abject paupers. Amazingly, today Bernanke and Paulson each were on the receiving end of bootlicking by Congressmen, when they should have been vilified. They propose taking more control of the system, when they have destroyed the system. They act as authorities still, when they should be defendants in grand larceny and grand fraud cases before the world court.


John Rubino

John Rubino is co-author, with GoldMoneys James Turk, of The Coming Collapse of the Dollar and How to Profit From It (Doubleday, December 2004), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for Fidelity Magazine, CFA, and Proto.


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John Rubino is the author of The Coming Collapse of the Dollar (co-written with James Turk), How to Profit From the Coming Real Estate Bust (Rodale, 2003), and Main Street, Not Wall Street (William Morrow, 1998). A former Wall Street financial analyst and columnist with, he currently writes for Fidelity Magazine and CFA Magazine He lives in Moscow, Idaho
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