News from the World!

Discussion in 'Financial Cents' started by Clyde, Mar 13, 2008.

  1. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    <table align="center" border="0" cellpadding="4" width="650"><tbody> <tr> <td>A friend sent me this from the Taipan Daily. He lives in India and follows news from all over the world as that is where his investors are from. His comment when he forward this to me: Get ready for dark days ahead.
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    • Citigroup investors demanded a bailout -- and the Fed delivered.
    • Yesterday's $200 billion shot in the arm was just the beginning. Wall Street will need more. Much more...
    • Be prepared for extreme consequences.. And don't forget to grab your share.
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    The Biggest Bailout in History (and How You Can Grab Your Share)
    by Justice Litle, Editorial Director, Taipan Publishing Group

    "Losses of [$2-$3 trillion] would decapitalise the financial system. The government would have to mount a rescue… We would have more than the biggest US financial crisis since the 1930s. It would be an epochal political event."
    - Martin Wolf, Chief Economics Commentator, The Financial Times
    "When E.F. Hutton talks, people listen."

    That was a popular tagline in the '70s and '80s, when Hutton was the second-biggest brokerage firm in the country. But after 80-plus years in business, the firm was undone by financial scandals and the turmoil of the 1987 crash. In the end, Hutton's mortal remains were swallowed up by Citigroup.
    Now the saying might go, "When sovereign wealth funds talk, the Fed listens.."
    Last week, the CEO of Dubai International Capital made it very clear that cash-rich Middle East investors could not save Citigroup. Not the Abu Dhabi Investment Authority; not the Kuwait Investment Authority; not Saudi Prince Alwaleed bin Talal.
    "It's going to take more than that to save Citi," he said.
    All the king's horses and all the king's men, can't put Wall Street together again. Not without a big assist from the U.S. government, at least.
    The Rally Felt Round the World
    We called it gamesmanship. Whatever it was, it worked. On Tuesday, the Fed unveiled a $200 billion bailout plan -- and the markets soared.

    The Dow shot up 416 points for a rise of 3.5% -- the biggest single-day percentage move in five years. Financial stocks as a group did double that, rising an average of 7%.
    The more battered the lender, the bigger the pop. Citigroup racked up gains of 9.1%. Fannie Mae and Freddie Mac gained between 9% and 13%. Countrywide Financial rose more than 17%.
    Investors in faraway lands cheered, too. Japanese stocks jumped, Asia breathed a collective sigh of relief, and one Australian banking name even saw its biggest pop in a decade.
    Prelude to a Bailout
    How did Ben Bernanke gin up such a powerful reaction? What just happened?
    There a number of ways to answer that question. The practical answer is that, in its recent actions, the Fed has committed much more than just $200 billion. It has committed itself to funding the mother of all bailouts. They have burned the bridges and damned the torpedoes; Wall Street will be saved, no matter what it takes.
    What the Fed is doing might not qualify as the biggest bailout in history… yet. But it will. Before all is said and done, the Fed's ongoing rescue attempt -- and desperate measures to stave off a deflationary downward spiral -- will go further and deeper than anyone can imagine. (Well, almost anyone.)

    Bring Us Your Garbage
    To give a more detailed answer, the Fed has engaged in some nifty sleight-of-hand.
    The problem is that Wall Street's normal lending channels are gummed up with toxic sludge (i.e., dodgy mortgage loans gone bad). The books are loaded up with garbage, and banks are deathly afraid to lend -- to outside customers or each other -- for fear of getting burned.
    So the Fed has promised to suck up $200 billion worth of subprime sludge, taking it on as collateral for a lending program of last resort. They have created a new entity, the Term Securities Lending Facility, or TSLF, to do this.
    "Send over your mortgage-backed swill -- you know, the stuff that no one in their right mind would want," Bernanke has essentially said. "And in return we will lend you cash, sweet cash to keep you afloat."
    Technically, the Fed has only promised to accept "AAA" rated mortgage securities -- the top-quality stuff. But everyone knows this comes with a wink and a nod. In spite of all the tough talk from ratings agencies, there are still more than $100 billion worth of "AAA" securities floating around with 40% or more of the underlying mortgages gone sour.
    The ratings agencies have failed to lay the hammer down for fear of killing the system. Now their last vestiges of lenience have provided a loophole for the Fed. Bernanke is exploiting that loophole by promising to take in garbage and hand out cash.
    The ironic thing here is that the Fed's widely hailed plan is just more of the same. Packaging dodgy loans and pretending they were golden is what got us here in the first place. To fend off a liquidity crisis, the Fed is doing just what the banks did -- paying up for garbage -- when they got themselves in so much trouble.
    Give a Mouse a Cookie
    As the old saying goes, "give a mouse a cookie and he'll want a glass of milk." If Wall Street is the mouse, Fed Chair Bernanke is the friendly fellow with the cookies and the milk.
    In other words, this $200 billion garbage-into-gold lending plan is only a stopgap. It's just the first salvo in what could become an increasingly desperate campaign to save Wall Street from itself.
    As financial commentator Barry Ritholtz observes, "The good news is this will help brokers and banks; the bad news is it will do nothing to help the Housing market, or stop the decline in house prices. Nor will it help resolve the inverted pyramid of derivatives that sits atop Housing. And one has to believe it will only add to inflationary pressures."
    Economics professor Nouriel Roubini has estimated that, for every 10% post-peak decline in U.S. housing prices, an additional $2 trillion is wiped off household wealth.
    If Merrill Lynch economist David Rosenberg is right in his belief that we are headed for the worst recession since the 1970s, average home prices could fall another 20 to 30% -- in addition to the 11% they have already dropped from 2006 highs.
    Put together the Roubini math and the Rosenberg prediction, and what do you get? Another $4-$6 trillion in household wealth wiped away before all is said and done.
    It could be less than that, of course. But it could also be more, depending on the severity of ripple effects throughout the financial system. Either way, chief economics commentator Martin Wolf ofThe Financial Times wryly notes that, "A trillion dollars here, a trillion dollars there, and pretty soon you are talking real money, even for the US."
    According to Wolf, it would only take $2-$3 trillion in collective losses to trigger disaster. If we see that much pain, Wolf believes, the U.S. government would have to start nationalizing assets. Wolf speaks of "the biggest US financial crisis since the 1930s" and "an epochal political event."
    Walking Away
    Would now be a good time to mention that Main Street is possibly in even worse shape than Wall Street? The fear is spreading, if the pages of USA Today are any indication..
    While newspapers like The Wall Street Journal and The Financial Times are the choice of hardcore news junkies -- like yours truly -- USA Today is more the "everyman" paper of record. It is the biggest in the nation because it winds up in front of so many hotel room doors at 5 in the morning.
    It is the paper that semi-interested business travelers and breakfast eaters read -- the folks who take a more casual approach to finding out what's happening in the world. (This is just my off-the-cuff opinion, I might add.)
    Lately, courtesy of my hotel-delivered USA Today here in Baltimore, I have seen front-page headlines filled with gloom. Stories of "jingle mail" -- tapped-out homeowners with no equity simply leaving the keys in the mailbox and walking away. Stories of 401(k) cash-outs and desperate attempts to avoid foreclosure at any cost.
    And on top of that, stories of gasoline "insanity" as fuel and food prices skyrocket. Travellers passing through the scenic little town of Gorda, California, now pay more than $5 a gallon.
    Avoidance at All Costs
    Now getting back to the Fed…
    Ben Bernanke is a devoted student of the Great Depression. He has made the study of it his life's work. Not just as a central banker, but as a man, it is his goal above goals to avoid a repeat of those dark days.
    That is why the Fed is acting so frantically now and why, Titanic or no Titanic, the Fed will do all that is humanly possible to keep the American financial system from hitting that iceberg.
    What does that mean? It means that if the mouse wants a glass of milk, or a gallon of milk, or even a tankerful of milk, it will get it.
    If a $200 billion lending spree on super-easy terms is not enough, then the Fed will ultimately consider buying bad mortgages straight out.
    If Bernanke fails to avert disaster by lending money against garbage, he will whip out the checkbook and start buying up the garbage, sovereign-style. If mortgage walkaways and consumer credit delinquencies threaten to engulf the system, the Fed will find some way, somehow, by hook or by crook, to buy the problem.
    Money will be gotten into the hands of the battered, bleeding banks -- and that money will be spent. This is an absolute guarantee. The system will not be allowed to fail for lack of trying -- not under any circumstance.
    Perhaps Wall Street Is Right to Cheer
    In your humble editor's opinion, this is why Wall Street rallied so ferociously on Tuesday. The message got through. And that message goes something like this: "Whatever it takes, whatever you need, we will get it done. The cash will come through. Tens of billions? Okay. Hundreds of billions? Okay. You say it's trillions you need? Okay. This… Fed… will.. come… through.Period."
    You see the problem, of course. Those checks the Fed is so willing to write for hundreds of billions to trillions -- the ones to pay for these bad and bleeding assets that effectively need nationalizing -- come straight out of the taxpayer's pocketbook.
    Actually, scratch that. Those checks come out of the dollar holder's pocket book. Because, when the Fed pumps hundreds and hundreds of billions in emergency rescue money into the system, all that pumping devalues the dollars already in circulation.
    This means oil above $100 and rising. It means spring wheat above $20 a bushel. It means gold near $1,000 an ounce on its way to $2,000 an ounce, maybe $3,000, $4,000, who the heck knows. It means the deliberate and methodical destruction of the world's reserve currency as a means of saving the system from itself.
    But it also means that stocks might not go down these next few years. Some of them might go up, and up, and up.
    As we have written in these pages before, periods of runaway inflation do not always mean a down market for stocks. Sometimes they mean a skyrocketing market for stocks. Zimbabwe is the current example du jour, as we have previously noted. In 2007, Zimbabwe's stock exchange rose well over 10,000%, even as inflation galloped ahead in the tens of thousands of percent.

    To Get Your Share, Be Prepared
    Be prepared for the possibility of a stimulus-fueled melt-up, that is. This is by no means guaranteed to happen, but it could. The historical precedent is there.
    By dint of their production value or long-term hard asset value, certain sectors, industries and commodities could see a bigger rocket-fuel kick from an all-out Federal Reserve rescue than you can imagine. We are in a time of unprecedented stress to the global financial system, and that could lead to some truly eye-popping results.
    Here at Taipan we are following these sectors and industries and commodities. We are investing in them and trading in them and regularly recommending them. If you aren't in there with us, why not? You should be.
    There is more to discuss as always, but not today. It's hard to do more than scratch the surface with sweeping topics such as these. The bottom line is, be prepared for more wildness ahead. And stay tuned to Taipan Daily for the scoop on what's really happening out there.

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