Bearish comments.

[Willi]

Save Housing:
Put Financial System Into Receivership

by John Hoefle

You can hardly look at the news these days without hearing about the U.S. housing crisis. Foreclosures are at an all-time high and the rate is accelerating, home prices are falling all across the nation, and the number of homeowners who owe more on their homes than they are worth is rising. This is a national problem which must be solved.

At the same time, however, this housing crisis is being used in a heartless and cynical way by the big financial institutions, which are seeking to have themselves bailed out under the guise of helping homeowners. Proposals abound in Washington which are aimed at protecting not the homeowners, but the mortgage-holders, and the holders of trillions of dollars of mortgage-backed and mortgage-related securities. Under all the posturing and spin, the American people are being thrown to the wolves by the bankers, in order to protect the fictitious values of speculative financial paper.

To sell their bailout, the financiers constructed a phony story about how the subprime problems developed, painting themselves as the victims of unscrupulous subprime lenders and greedy home-buyers. They got away with it because a year ago, when they started pushing this scam, the cracks in the banking system were not nearly so visible as they are today. The bankers knew, but the public did not, and the bankers played on that ignorance.

One year later, the financial markets are in panic, and the bailout process has begun. If we continue down this road, not only will the housing crisis worsen, but the economy will explode in a hyperinflationary blowout the likes of which the United States has never experienced.

Housing Meltdown

Bad, and getting worse, sums up the situation for homeowners. Foreclosures rose to a all-time high in 2007, according to the Mortgage Bankers Association, which noted that 40% of all foreclosures involved people with prime or subprime mortgages who walk away from their homes before their adjustable-rate-mortgage interest rates reset, and another 23% involved people who walked away from their homes after receiving some sort of beneficial loan modification. Late payments rose to a 23-year high, with 5.8% of all home loans more than 30 days late, a rate not seen since 1985.

Nationally, some 29% of all subprime loans were in trouble at 2007 year-end, as were 35% of all adjustable-rate subprime loans. Subprime loans accounted for about 13% of the total number of mortgages. Troubles with prime loans are also increasing, with 4.5% of all prime mortgages delinquent or in foreclosure nationally, as were 8.7% of adjustable-rate prime mortgages.

The net worth of households fell in the fourth quarter of 2007 for the first time since 2002, decreasing by $533 billion, with housing-related net worth falling by $176 billion, according to the Federal Reserve. That net loss would have been almost three times bigger, had the Fed used the figures from S&P/Case-Shiller instead of those from the Office of Federal Housing Oversight, according to J.P. Morgan Chase.

The drop in housing prices, combined with the refinancing wave of the past several years, means that as a whole, the amount of equity Americans own in their homes has dropped below 50%, Federal Reserve statistics show. Since about 35% of homeowners own their homes outright and have no mortgages, the 65% who do have mortgages owe a lot more than 50% of their homes' value.

Freddie Mac projects that sales on new and existing homes in the United States will probably fall to 5 million this year, down a third from the all-time high of 7.5 million in 2005, and even that number reflects increased government bailout activity, since the private mortgage-backed securities market has collapsed.

While foreclosures get most of the press coverage, the effects of the housing crisis are also hitting people who are still making their payments. The exorbitant prices for homes in recent years have put many families in the position of having to pay far more for housing than they should, and the combination of high mortgage and rent payments, high gasoline prices, and the rising cost of food and other essentials due to the falling value of the dollar, has put households in a terrible bind.

The Cause

The fact that subprime loans are at the bleeding edge of the housing crisis does not mean that subprime loans were the cause of the housing crisis. For the cause, one has to look at the banking system and the creation of the largest speculative bubble in history.

Far from being caused by subprime lenders on the periphery of the financial system, the real estate bubble was the creation of Wall Street. The game was to run up real estate values, and use the "wealth" created by the higher valuations as fuel for the bubble. The debt created by the mortgages was then used as the basis for the creation of an even larger market in mortgage-backed securities and even more mortgage-related securities such as collateralized debt obligations and other forms of insanity. As the bubble grew, it required ever larger amounts of fuel, which in turn, required more, and bigger, mortgages.

As housing prices rose, they began to outpace the ability of the population to pay the mortgages, so the banks began to loosen loan requirements. Over the last few years, with prices so high that buyers were increasingly difficult to find, the lenders opened the floodgates, issuing adjustable-rate mortgages, subprime loans, low-documentation loans, no-documentation loans—basically doing whatever they had to do to keep the mortgage debt flowing. By design, and intent, the banking system was selling mortgages to people who could not afford them.

The idea that this was the fault of the subprime lenders is a myth, for two main reasons. The first is that the subprime lenders were just middlemen—they originated the loans and then immediately sold them to larger institutions which would combine them in pools for mortgage-backed securities. Had the big banks not bought the loans from the originators, the originators would have quickly run out of capital and ceased to exist. The second reason is that many of the subprime lenders were allied with, or even owned by, big banks.

This whole business was run by the big commercial and investment banks from the top down, and they in turn fed a steady stream of mortgage-backed paper into the hedge funds, the mutual funds, the money market, pension and other investment vehicles. It was a giant pyramid scheme which was—seemingly—enormously profitable when real estate prices were rising, only to be revealed as an even bigger disaster when that price-growth peaked.

The homebuyers, far from benefitting from this process, instead found themselves paying huge amounts of money to the bankers through artificially high mortgage prices. Many individuals profitted from this speculative game while it was growing, but from a systemic standpoint, and, after the dust clears, it will be seen as one of the most destructive boondoggles of all time.

Crash, and Bail

To casual observers, the cracks in this system began to appear in early 2007, when the banks pulled the plug on the subprime lenders and began to portray themselves as victims. That Summer, the cracks split wide open with the Bear Stearns hedge fund crisis, and the death of the market for mortgage-backed securities. As the panic deepened, the market for other asset-backed securities, such as those backed by credit-card receivables, also seized up. By year's end, the whole securitization system had ground to a virtual halt, and the central banks were pumping liquidity like crazy, keeping the system on life-support.

With the new year came the next phase, the banking crisis; though called a "credit crunch," the real problem was insolvency, among banks with huge amounts of worthless paper on their books.

Now, things have deteriorated to the point that the talk about the insolvency of the banking system is out in the open, and the Federal government is openly discussing measures designed to save financial institutions. It is a far cry from a year ago, when all the experts were confidently assuring us that everything was under control, that the damage from the mortgage sector was containable. Today, the public statements are even more foolish, and far less confident. Panic is in the air, as is the toxic smell of a bailout.

Have no illusions about what is happening. The international banking crowd is doing what it always does in such circumstances, which is to dump as much of the losses as possible on the public. The bailout schemes before Congress vary slightly, but all have the goal of having the Federal government, and the U.S. taxpayer, buy the bad paper from the banks, so that the public takes the hit. Given the enormous amounts involved and the pitiful state of the U.S. physical economy, such a move would not only destroy the economy, but trigger a hyperinflationary collapse of the dollar, which would spread worldwide. It is insane, and it is coming, unless we stop it. If you think you have problems now, just wait. Better still, help LaRouche pass the Homeowners and Bank Protection Act and put a stop to the bankers' insane wet dream. (See National for news on the HBPA.)

[Willi]

The Panic Of '08

RHINEBECK, NY -- The United States' economy is in meltdown mode. The Panic of '08, the beginning of the worst financial crisis to ever have hit modern America, is under way.
But despite the daily doses of dire economic data pointing to disaster, the media doesn't report how bad it really is (if they report it at all), while Wall Street and Washington deny a recession is coming ... or proclaim that should one arrive, the economic landing will be gentle.
For all those needing more proof of just how bad it is or how bad it will get, the evidence is clear and the outcome is predictable.
The Dow fell 315 points on Friday, capping off its fourth-straight monthly decline. Oil prices have passed $103 a barrel, while gas at the pump is expected to hit $4 a gallon by the summer driving season.
The beaten down dollar continues its dive against the euro, and keeps dropping against six major counterparts to the lowest level since 1973 when Richard Nixon decoupled the greenback from gold.
New home sales are at their lowest level since February 1995, house prices slid by a record 15 percent from a year ago, and construction spending fell the most since 1994. Home prices in 20 US cities fell in December by the most on record and sales of existing homes in the US fell in January to the lowest level since records began. Nearly 200,000 newly constructed single-family homes are sitting empty, the most since 1973 when the Commerce Department began compiling the statistics.
Consumer prices surged 4.1 percent last year, the most in 17 years. Wholesale costs accelerated to 7.4 percent in January, the biggest jump since 1981. Durable-goods orders for January plunged 5.3 percent and consumer sentiment fell to the lowest level since February 1992.
The Commerce Department reported the economy grew a paltry 0.6 percent in the fourth quarter of 2007, while the National Association for Business Economics estimates growth for the first quarter of 2008 will slow to a meager 0.4 percent.
The Labor Department reported initial claims for unemployment insurance climbed 19,000 last week the second-highest level since a surge in claims in the aftermath of Hurricane Katrina in 2005.
The National Association of Purchasing Managers-Chicago index of regional business conditions tumbled to 44.5, its lowest since December 2001 well below the level of 50 that separates growth from contraction while manufacturing shrank at the fastest pace in almost five years.
Duh Evidence
Yet, despite the facts that tell the story, "experts" and politicians claim the economic damage is light and the ship of state isn't sinking. "The evidence is piling up that the economy is slipping into at least a mild recession," said Scott Anderson, a senior economist at Wells Fargo & Co., who had forecast that the Chicago index would only drop to 48.
"I don't think we're headed to a recession," President Bush said last Thursday, echoing Fed Chief Bernanke's prediction to Congress that "the US economy will return to a strong growth path with price stability."
Inconceivably, despite the ample evidence pointing to Wall Street's failure to predict past and current economic trends ... and Washington's dismal track record of massive strategic blunders and costly economic errors the press pumps out the swill for the ill-informed and terminally gullible to swallow.
Publisher's Note: We do not provide financial advice, we are trends forecasters. As Trends Journal subscribers, you are well aware of our dollar/gold forecasts and their accuracy over the past several years. With the Federal Reserve trending toward moving interest rates lower and with the Euro zone planning to keep their rates steady the prospects for the dollar to dive toward $1.60 euros is highly probable before the fourth quarter.
As the dollar weakens, gold prices will move closer to hitting our $2000 per ounce target. (See "Gold 2000," 4 November 2007.) In the interim, and in the absence of wild card events, we forecast that gold will swiftly move toward the $1,200 to $1,500 trading range, and experience a sharp correction before proceeding higher.
Gerald Celente
Founder/Director
The Trends Research Institute
+++++++++++++++++++++++++++

The Federal Reserve
Has Become Irrelevant

by John Hoefle

Could they really be that stupid? That is the question which comes to mind watching the recent spate of statements by government officials discussing what they see as the problems facing the economy, and what needs to be done to solve them. Rather than admitting the global financial system has failed, and must be put through bankruptcy, they blather on about whether or not we have entered into a recession, and about the need to protect asset values from the effects of what they prefer to call the "housing crisis."

Take the case of poor Ben Bernanke, who had the misfortune of taking over as chairman of the Federal Reserve just in time for the worst financial crash in six centuries. Bernanke has a reputation for being an expert on the Crash of 1929 and the banking problems which surrounded it, but judging from his public statements, he still believes we are in the midst of a housing crisis.

"Many of the challenges now facing our economy stem from the continuing contraction of the U.S. housing market," Bernanke told the House Committee on Financial Services in his Feb. 27, Semiannual Monetary Report to Congress.

We do not dispute that there is a housing crisis in the U.S.; home sales and home prices are indeed falling, precipitously, with predictable effects. What we reject, and emphatically so, is the idea that housing is the cause of the present crisis: As we have detailed in prior articles, it is the bankruptcy of the system as a whole, which blew out the real estate markets. The so-called "subprime crisis" is actually an effect of a financial system which depended upon ever-higher mortgage debts to feed a financial bubble. The subprime loans were a response from the banking system to continue to sell homes when prices rose so high people could no longer afford them.

What we are facing is a crisis of the banking system itself, and of the securitization and off-balance-sheet apparatus which the banks created to hide their own bankruptcy, and anyone who is afraid to say that, is irrelevant.

Banking Crisis

The fact that they refuse to say it, doesn't mean they don't understand it, at least in part. It is clear from the Fed's money-pumping and collateral-soaking operations that the Fed realizes the banking system is in meltdown mode, and it is fair to suspect that the Fed is doing far more than it would dare publicly admit, to keep the banks' doors open.

The problem facing the regulators is that the financial system is collapsing, held together more by denial than anything else. The vaporization of trillions of dollars of nominal wealth has triggered an avalanche of losses, losses which the system cannot withstand, and so considerable effort is being expended to maintain the fiction that the bond market hasn't exploded, the paper still has value, and the banks are not broke. The problem is that the event—the collapse of the global financial system—has already occurred, and what we are now witnessing are the effects of that collapse.

The FDIC has already begun adding staff to its Division of Resolutions and Receiverships in preparation for a wave of bank failures, and has placed job postings on its website for those with the skills in "duties associated with a financial-institution closing." Three banks failed in 2007, compared to none in the two previous years, and the number of institutions on the FDIC's "problem" list jumped 50%, from 50 in 2006, to 76 in 2007.

One need but look at the headlines of the agency's latest Quarterly Banking Profile to see signs of trouble ahead. "Quarterly Net Income Declines to a 16-Year Low," said one; "One in Four Large Institutions Lost Money in the Fourth Quarter" said another. The banks still reported a profit of $5.8 billion for the quarter, the lowest such total since 1991, and down 84% from the $35 billion the banks reported for the fourth quarter of 2006. For the year, the banks claimed $105 billion in profits, down 27% from $145 billion in 2006. In an era where write-offs of double-digit-billions have become almost common, the handwriting is on the wall.

The ominous tone of the normally upbeat FDIC report continues well beyond the headlines. Non-current loans—loans 90 days or more behind in payments—rose by $27 billion, or 33% in the last three months of the year, the largest percentage rise in the 24 years the FDIC has been tracking the figure, and net charge-offs jumped sharply. The banks as a whole added a net $15 billion to loan loss reserves, despite which, the level of reserves fell to just 93 cents for every dollar of reported non-current loans, the first time since 1993 that non-current loans have exceeded reserves.

In a development of significant interest, the level of derivatives reported by the banks fell during the quarter, to $165 trillion at year-end from $173 trillion on Sept. 30. The level of derivatives for 2007 was still up 25% over 2006, and quarterly drops in derivatives holdings have happened before, but in dollar terms, the $8 trillion drop in the fourth quarter was the largest quarterly drop ever, and in percentage terms, at 5%, it was second only to the $6 trillion (12%) drop in the fourth quarter of 2001, the quarter following 9/11. If the derivatives markets have peaked, then the problems facing the banks are far worse than anything the banks and their regulators have admitted.

Other signs of a banking crisis abound. The big banks which own Visa, the world's largest credit-card processor, are planning on selling roughly half of the company in an initial public offering. The IPO is intended to raise some $15-19 billion, giving the banks some badly needed capital, and helping them reduce their exposure to credit cards, one of the many nightmares on the horizon. Raising capital has become serious business for the banks, with Citigroup, Merrill Lynch, Morgan Stanley, Bank of America, and Wachovia raising over $55 billion in the last few months, to offset some of their losses.

While the biggest banks are the most bankrupt, the smaller banks are also in trouble. Figures from the Comptroller of the Currency (OCC) show that the commercial real estate exposure of the nation's community and mid-sized banks is in the range of 275% of their capital as of 2006, compared to about 80% for the large banks.

Bailouts

Numerous bailout proposals are circulating in Washington, all of them based upon the idea that the current asset decline is an aberration, and that the government should step in and protect the asset valuations until the market returns to normal. FDIC chairman Sheila Bair has proposed freezing scheduled interest rate hikes on troubled mortgages. Sen. Chris Dodd (D-Conn.), head of the Senate Banking Committee, proposed that the Federal government purchase and refinance mortgages headed for foreclosure. Bank of America and Crédit Suisse are circulating their own proposals. Many of these proposals involve having the Federal Housing Administration insure loans, and then having Fannie Mae and Freddie Mac buy them; Freddie and Fannie have been instructed to begin buying so-called jumbo loans—those over $417,000—despite the fact that both institutions are already hemorrhaging money. Freddie Mac reported a loss of $2.5 billion for the fourth quarter, while Fannie Mae lost $3.6 billion.

All of the plans, while claiming to protect the public, are actually intended to protect the valuations of mortgage-related securities, as a way of protecting the banking system. Rather than admit that housing prices are too high, that debt levels are unsustainable, and must be adjusted through bankruptcy proceedings, the plans would convert the debt to government obligations, in effect shifting the huge asset losses to the taxpayers.

Treasury Secretary Henry Paulson has attacked some of these proposals as bailouts of speculators, even while advancing his own bailout plans. While some bankers are clamoring to be saved, Paulson is smart enough to realize that the bankers—or at least some of them—will have to take their lumps. He has been adamant that banks must write down their losses and recapitalize, even while he has attempted to organize private-sector bailouts like his ill-fated M-LEC Super-SIV plan, and his Hope Now Alliance.

Paulson, as a former Goldman Sachs banker, knows quite well that the financial system is finished, and is determined to save the core institutions of that old system—a handful of big banks, investment banks, and other institutions—to survive as part of the new system the bankers are attempting to put into place. Much of the old system will have to be let go, with the new system to be raised, Phoenix-like, out of its ashes. The politicians are to be kept out of this as much as possible, in Paulson's view, because the new system will rely much more on technocrats than politicians, much more on the private sector than the government.

While the technocrats attempt to decide our fate, the news media is doing its best to distract us with minor dramas like the fate of the monoline bond insurers, and all the losses that will follow should the monolines fail to retain their crucial AAA credit ratings. If they fail, we are repeatedly and breathlessly told, all hell will break loose. But, all hell has already broken loose. The monolines wouldn't even be an issue were the bond market not collapsing, a point which ought to be obvious, but which the media continually misses.

California Gov. Arnold Schwarzenegger and New York Mayor Michael Bloomberg, acting on behalf of fascist bankers like Felix Rohatyn, are touring the country pushing privatization of public infrastructure. They claim the private sector, with all its cash, can afford to build projects the governments cannot, but it is the old bait and switch scam. These private sector funds are rapidly evaporating. The bankers don't intend to spend billions, they intend to make billions by charging ordinary citizens for using infrastructure the citizens have already paid for. It is a very old-fashioned rip-off, and you can expect to pay through the teeth. Assuming, of course, that you survive.

[Willi]

LaRouche: Why You're Paying $4 for Gasoline

March 12, 2008--As the dollar dramatically collapsed below $1.55/euro today following the Federal Reserve's announcement of a huge new bank bailout, the "spot price" of a barrel of oil settled at just under $110, up 60% in six months, 25% in six weeks, and accelerating. The world's leading physical economist, Lyndon LaRouche, bluntly stated what is going on.

LaRouche noted that the current gasoline price is heading for $4/gallon ; but the Saudis, on long-term supply contracts, get only $3 per barrel for their oil at the wellhead. Americans are paying more per gallon for gasoline at the pump, than the Saudis receive in long-term contracts per 42-gallon barrel of oil at the wellhead.

Why? The "spot" futures price of oil, and the value of the dollar, is controlled by the British. This was launched, LaRouche said, with Richard Nixon's treason against the U.S. for the British Empire. When Nixon destroyed the Bretton Woods System in 1971-73, the British were left in control of the growing masses of overseas dollar deposits, called "eurodollars." In the phony oil crises of 1974 and 1979, long-term fixed-price oil contracts, frequently for 24-36 months, were replaced with spot markets, and then with futures markets, controlled from London. Thanks to the Nixon Administration, the British Empire controls oil, and they run the dollar through the oil speculative markets.

The London International Petroleum Exchange (IPE) controls the price of 60% of world oil, by controlling the price of Brent Crude oil, which is less than one-half percent of the oil produced. On May 14, 2004, Brent Crude contracts on the IPE reached 375 million barrels,-- about five times the daily production of all sorts of oil worldwide. The huge masses of "paper oil" traded on futures markets control the price of the far smaller volumes of real oil.

On the London IPE, a speculator can buy an oil futures contract by putting up only 3.8% of the price. A tiny group of London-based speculators control the price of all oil worldwide.

"That's why you're about to pay $4 for a gallon of gasoline," LaRouche said. "If you want to blame somebody, blame Nixon and George Shultz for destroying Franklin Roosevelt's Bretton Woods system, and giving control of the dollar to the City of London."

[Willi]

Prometheus, With The Cuffs On
By Bill Bonner

Money carries no passport, but it slides through almost any border. It flies no flag, but it is welcome in almost every nation. It speaks no language, but when it talks, everyone listens. But for all its passe-partout appeal, money has more enemies than friends. And the biggest threat is probably the financial industry itself.

"Don't worry," the bright young man at a London private bank told us, "we maintain the highest levels of professionalism and use the most sophisticated tools of modern portfolio management."

That was just what we were worried about. What follows is a lament...and a complaint...about the current state of people in the financial métier: they have been disabled by their own theories...handicapped by their own greasy trade.

We were impressed by the man in front of us. Handsome, well-dressed, well spoken in three different languages, he had spent years learning the principles of economics, finance and business management. His palaver to prospective clients was flawless. Yes, he said, the research department is keenly searching for alpha...but it knows that 80% of performance comes from careful asset allocation, which the bank's strategists have calculated based on risk/return analyses going back a hundred years. The expected return from Japanese equities over the next five years, for example, will be precisely 7.56%...but with an anticipated volatility of 20.43%.

But then we learned that we didn't have to live with volatility. The firm's analysts have done extensive research, he explained; they've been able to find many different asset classes that had equal and opposite volatilities.

When Japanese stocks bob in one direction, for example, the firm's Ultra-leveraged Macro Opportunity Hedge fund weaves in another.

Just throw the mathematicians a bone; they'll figure out how to put these things together so that you can optimize your return while minimizing your risk. Then, according to the math whizzes' calculations, you could find yourself with a 90% probability that your $100 investment will grow to somewhere between $292 and $132 in year 10. This, it should be mentioned, is a "nominal" value. Even if the target is hit, the $132 may not even buy you a cup of coffee in London. It barely buys you one now.

So many numbers... 6s and 7s...5s and 4s...every number the Arabs ever invented is brought into service. But what do they really mean?

"Can you tell us what the price of oil will be next week," we began to torment our interlocutor. "Or, how about the dollar?"

"Of course not."

"Then, how can you make projections ten years out...on investments, all of which will be greatly influenced by the price of oil, the strength of the dollar, inflation rates and completely unforeseeable events?"

"Well, these are not predictions. They are projections, based on many years of experience. Our researchers are the best in the business, with degrees from Harvard, MIT and Oxbridge. Of course, no one knows what the future will bring...but these projections are the best output of modern portfolio management."

Pointing to a helpful chart supplied by the investment firm, we continued our interrogation:

"In the last 6 months, Merrill Lynch has had to write down an amount equal to almost half its book value? UBS has written off 40%. If these financial engineers were really able to project earnings and risk out to 2 decimal places, how come they couldn't protect themselves from this blow up?"

They ought to give special parking places to anyone who studied business, economics or finance in the last 30 years. Higher education has lowered their I.Qs. Years of toil in academia have weakened their vision and taken the common sense right out of them.

A blind man could have seen the blow-up in sub-prime coming. But somehow, the geniuses missed it. What went wrong? The disabling infection may be understood by looking at how the hot shots handle risk. Of course, they don't really have any way of knowing what real risk is; no one can know the future. For all we know, a plague will wipe us all out in the next three weeks. None of us knows what the price of oil will be next week...or next year...or 10 years from now. Nor do any of us know what real risks the oil market faces. War...weather...technological advance...who can say?

But rather than admit that it just didn't know...the financial industry embarked on a staggering series of myths and conceits that must have taken the gods' breath away.

Since they couldn't know real risk, they substituted volatility as a proxy, which is a little like getting an inflatable doll to take your wife's place at a dinner party; the conversation may be dull, but at least she won't contradict you.

Once they had shut up risk, they could say whatever they wanted. They could pretend that price movements, for example, were like natural phenomena. It was absurd and everyone knew it. Prices depended on what people thought; volcanic eruptions did not. But Richard Fama put forward the Efficient Market Hypothesis in the 1960s as if he had stolen the gods' fire. He claimed market data could be treated as if they were random fluctuations. If an earthquake had stuck Rome only twice in the last 100 years, the 'risk' of an earthquake was only 2%. For all they know, the streets of the Eternal City will rock and roll every day for the next 200 years...but this little subterfuge gave their mathematicians something to work with. Then, looking at price patterns as if they were seismic records, they could make all sorts of fantastic simulations...and come up with fancy new products, such as a Highly Leveraged, Sub-prime Debt Portfolio. Using historical norms, they pressed the junk credits together like potted meat and - in a miracle that would have floored Jesus – transformed it into Prime A.

But it was all nonsense. The prices thought to be random weren't random at all, but the consequence of practices, ideas, and institutions built up over centuries. Change the circumstances...and the numbers changed too. As Soros puts it, markets are 'reflexive.' In our words, prices are neither fixed nor random...but subject to influence. For example, it was observed that stocks outperformed bonds over the longterm. Stocks for the Long Run was the title of a best-selling investment book in 1994, which argued that stocks would make you rich if you held them long enough. This long-term reward was in return for investors' willingness to take short-term risks; they called it the risk premium...which they defined, again, as volatility. Stocks were down in some periods, but always up over the long term. Thus, for a person who could wait, there was no risk at all.

By 1999, no truth was more obvious: stocks would make you rich. By then, the whole financial world was alight...stocks had risen three times since 1994 – to over 11,000 on the Dow by the end of the year. Now, it was time to pour on the gasoline. Another best-seller appeared that year: Dow 36,000 .

No one seemed to notice that those data points that convinced investors that stocks were such a great investment were registered when people thought stocks weren't so great. For much of the stock market's history, investors had demanded higher dividend yields from stocks than they got from bonds – to make up for the risk. And they had rarely paid more than 20 times earnings. Yet, in 1999, the p/e ratio of the S&P rose over 32 – about twice the long term average. Circumstances had changed; the insight was no longer valid. And the fire went out.

The Dow may still go to 36,000, probably when a cup of coffee goes to $132. Last we looked, it was almost 10 years later and the Dow was back to where it ended 1999. During this time, too, the dollar has lost about 30% of its purchasing power...so the investor who believed in stocks for the long run is down about a third.

To be continued next week...


Buy Gold – With Your Pocket Change

Gold has already briefly touched $1,000 an ounce – and one experts believes that it will hit $2,000 by the end of 2008.

But no matter how high gold goes, you can take as big a position in the yellow metal as you like – for a penny per ounce.

Take advantage now...

---------------------

“O mighty Caesar! dost thou lie so low?
Are all thy conquests, glories, triumphs, spoils,
Shrunk to this little measure?”

You will recognize that line, dear reader. It describes what happened to Julius Ceasar after he was stabbed to death by a group of rivals on the Ides of March in the year

The Ides of March came this past Saturday. When it had gone, the bloody corpse on the ground was that of one of Wall Street’s biggest players – Bear Stearns.

Last week, we reported a rumor. That a large Wall Street firm was in trouble – which was said to be the real reason that the Fed announced its new $200 billion of loans.

By week’s end the news was out: the Bear had gotten the ‘Margin Call from Hell.’

The Fed and J.P. Morgan Chase rushed in to give aid and comfort. But officials were very worried that if a deal to rescue Bear Stearns were not completed before Asian markets opened this morning, there could be a financial meltdown.

“I’ve been on the phone for a couple of days straight, throughout the weekend,” said U.S. Treasury Secretary Hank Paulson on television...”but I’m not going to project right now what the outcome of that situation is...”

“That situation” of course, was the situation at Bear Stearns. Early reports here in London say that a deal was finally struck with J.P. Morgan Chase to buy out the Bear for a reported $2 a share.

The background for this latest crisis is what we’ve been reckoning with in these Daily Reckonings for so many months. The geniuses at Bear Stearns had their calculators...their Black Sholes Option Pricing Model...their mathematicians...their risk figures... They had some of the finest minds in the country – or at least, some of the finest minds money could buy on Wall Street.

And yet, a year ago they also had a stock trading for $150. Now, it is down to $2...the shareholders have been largely wiped out.

When Wall Street got the news of the Bear’s predicament, stocks were sold off – driving the Dow down 300 points. Then came word that the Fed and JP Morgan Chase were on the case, and the index bounced back, closing down 194 points. Hardest hit, (this will come as no surprise) was Bearn Stearns itself – down 47%. Other financial stocks took a beating too.

We began last week worrying that we might be wrong. We begin this one worrying that we are probably right. At the beginning of the week, U.S. stocks seemed to be rising more than gold. By week’s end, things were happening as they should: God was in his heaven. The queen was on her throne. Gold was rising...and stocks were going down. All is right with the world...or as right as it can be after a 27-year credit expansion.

Little noticed in the Bear affair is the role of Chinese investment firm, Citic. The Chinese were going to put up some money to prop up Bear Stearns. There might be many explanations for why the Citic deal didn’t go forward, but here we suggest one that is the most far-reaching: the foreigners are growing wary of the United States. You will recall our friend in Geneva told us to “Sell the United States...sell its money...sell its stocks...sell its debt.” That attitude is spreading – the belief that the United States is a short sale.

“For years,” begins a report in the Wall Street Journal , “the US economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer.”

“Clearly, the whole world is focused on the financial crisis and the US is really the epicenter of the tension,” the paper quotes Carlos Asills, at Globista Investments. “As a result, we’re seeing the capital flow out of the US.”

Ed Hadas adds:

“The Fed’s rescue of Bear increases the odds of a generalized, taxpayer-funded financial bailout. Combined with superlow rates, that will add to pressure on the beleaguered dollar. Bear is the biggest firm so far to hit the wall this time around. But the biggest name in financial distress could eventually be the US.”

*** How do you like those foreigners? We were nice enough to take their money...spend it on stuff they sent over...and ruin our own economy and our own balance sheets so theirs could grow at breakneck speed. And this is the thanks we get! Now that we really need their money, instead of opening their wallets, they ask questions: what’s that paper really worth, they want to know?

The United States emits a lot of paper – bonds, notes, SIVs, MBS, securities, repos, you name it – but one piece of paper is the one emitted most and the one the foreigners are probably most concerned about: the paper with pictures of dead presidents.

Colleague Manraaj Singh in London surveys the latest ungrateful grumbling:

“In Japan, Finance Minister Fukushiro Nukaga, today said abrupt currency moves are ‘bad’ for economic growth, while Economics Minister Hiroko Ota called them ‘undesirable’ and blamed them on dollar’s weakness rather than yen’s strength – those are strong statements from the normally reserved Japanese. Closer to home, European Central Bank President Jean Claude Trichet said on Monday that he [was] still concerned about the impact of the euro’s surge.

“In Brazil, they’ve already gone beyond talking about it though. They’ve taken action to stem the currency's appreciation by reducing the flow of hot money into the country. Brazil has introduced a 1.5 per cent tax on purchases of real-denominated, fixed-income securities by foreign investors and will no longer require exporters to pay a 0.38 percent levy on currency purchases in order to cut the costs of sales abroad.

“‘The [US] dollar is melting,’ Brazil’s finance minister Guido Mantega, said on Tuesday. ‘Our plan is to avert an abrupt impact on the foreign exchange rate and help mitigate, in a smooth way, the dollar's freefall.’”

The Wall Street Journal fears a “rout” in the dollar this week. “Dollar poised to fall again,” it says...pointing out that another rate cut is likely to send investors rushing to other currencies. It’s hard for us to believe that investors don’t already know about the coming rate cut and haven’t already sold off the buck.

It seems more likely to us that world’s central bankers will announce an effort to save the greenback – which will send the dollar up again. If that happens, dear reader, you know what to do: sell it on the bounce.

*** David Walker, former U.S. Comptroller General (and one of the main focuses of our documentary, I.O.U.S.A. ), gives us another reason to sell the United States.

The U.S. “financing gap” – the difference between what the U.S. government can reasonably expect in revenues and what it has committed to pay out – is growing by $2 to $3 trillion per year. Since George W. Bush took over in the White House, $20 trillion has been added to this deficit.

*** Politicians can’t get away with anything anymore – except killing people and destroying their nation’s economies.

“I don’t get it...” said a French businessman over lunch on Friday. “In fact, I don’t think any of us get it. You’ve got a guy – the governor of New York – who hires a prostitute. He gets caught and has to resign. But the President of the United States lied to the American people and started a war in which thousands have died...a war that is so expensive it threatens to bankrupt the entire nation. How come he doesn’t have to resign? Strange system.”

We tried to explain. Getting caught with a prostitute is an unpardonable diversion. Starting a war is what politicians are supposed to do.

“You have to understand,” we began, “that getting a call girl is a simple, understandable act. To most Americans, it’s a sin. They don’t want an elected official who does things like that. They want him taking care of their problems, not his own tawdry whims and desires.

“The war in Iraq is a very different thing. Was it a mistake...was it a lie? We don’t really know the details. It’s complex. Maybe it was in the national interest...or people thought it was. We don’t know if it was a good idea or not. You can’t know things like that.

“Besides, people come to believe what they need to believe in order to play their roles in history. The people of a great empire have to believe that sending their armies all over the world is worth the cost. Europeans are very much against war...and afraid of it. They’ve had their imperial ambitions...and the inevitable disasters that follow. But Americans are not. Most have no regret about the war in Iraq except they wish it had gone better. And the argument among America’s politicians is not about whether it was right or wrong, but about whether it was pursued effectively.”

Until tomorrow,

Bill Bonner
The Daily Reckoning

[Rudi]

Excellent articles. Bill Bonner has been preaching this for a while. The chickens are coming home to roost. Alall this was inevitable. Don't be surprised if we have another war before this Presidency is up.

[Karl]

How can you stop it when if foreclosures continue to increase and the values of houses on the market continue to fall that it reaches a level where even those who could afford to remain in their houses find it more beneficial to walk away from their property and by the foreclosure down the street for a third of the current mortgage they are carrying?

Unfortunately or not the Federal government has gone down a path of pumping up liquidity...the only way to go now is straight ahead...pump even more money into the markets. So as I am seeing it there shall be during the "breathing space" a real look at the size of the problem and a determination arrived at on how much money must be...MUST thrown at the problem - how far lower interest rates must be lowered, where to inject funds, which financial houses must be 'let go' and which to 'keep alive'...and somehow funds have to be found to pump up available jobs - tremendous revitalization and build out of infrastructure - water systems, electrical systems, increase energy efficiency, sewage sytems, roads, other transportation systems., etc? etc???

...increase exports? ...somehow get the cost of oil down?

mmmm?????
There is going to be money to made by some...many?! ...when it all 'washes out'????