However, let’s address the most recent in a recent string of atrocities being contemplated.

The Treasury Secretary and the Federal Reserve Chairman briefed some high ranking members of congress. In that meeting, they basically said that he financial system (as they know it) was getting ready to have a major dislocation. The congressional leaders are reported to have been very scared coming out of that meeting.

Mission Accomplished!

Be Afraid! Be VERY Afraid! Because that’s how we get you to make stupid decisions without thinking, much less discussing the ramifications — that benefit “us” — you see?

Is the US Congress so stupid that they forget how they rammed the Iraq war down their throat? (don’t answer that – it was rhetorical)

Interestingly, it wasn’t really a *danger* until Goldman Sachs (the company that the Treasury Secretary used to head up) came under the attack of the short sellers…People betting that their balance sheet was full of falsehoods and misrepresentations which would preclude their ability to raise additional capital or merely buy back their own now “undervalued” stock (yeah right).

You see, Goldman (ball)Sachs used to be private. During the last boom (1999) they foisted that turd off on the public.

In return they got some capital to allow them to “expand” (read: liquify their principals).

So, in theory, if the stock ever got down to their original price, it’s no problem right? They’ve been using the money they got to expand operations into profitable lines of business for the now owners (the stockholders) and the corporate entity is now worth far more than in 1999, right?

What’s that? They’ve been spending 10’s of Billions in MASSIVE bonuses to management and corporate insiders and they haven’t really been keeping that value in the institution to benefit the owners?

Oops.

Guys, this fear mongering by Hank and Ben are nothing more than utter b.s. YES, there is a massive dislocation in the financial markets. However, in this case the suggested medicine is worse than the disease.

And, it’s, once again, just more socialism for the rich. It’s a way for them to get their assets out of the fire while pensioners, taxpayer and the other bag holders get ready to “swing”.

Don’t believe me?

In addition to this little bit of treason being foisting onto the public, they (temporarily) made it illegal to short a stock — illegal to bet that a stock will go down in price (temporarily). However, not just any stock. Just financial stocks.

Some misguided people think that a stock goes up the company gets more money….WRONG. They got their money the day they sold a tranche to the underwriters. After that, stock price moves only enable secondary offerings and stock options — both of which dilute existing “investors”.

I’ve already given the “speech” that anyone who is buying a stock with the intent on selling it later for a higher price is really “speculating” — even if they think they are investing. An investor intends to hold the stock forever and collect money from the dividends only.

Ever bought a stock with no dividend?
Ever bought a stock with the intent on selling it for more money later?

If so, you’re a speculator.

What makes speculating long vs. speculating short more righteous? I’ll tell you. Because it keeps the monied elite in their positions at these overleverage financial firms in a position to continue to leech from you….long enough to push this crap debt they benefited from selling over the years, onto the national debt for you and your kids to pay for in the form of higher taxes, lower levels of services, and a less valuable dollar.

“But spending 700 Billion now on a hasty plan giving Hank Paulson carte blanche to do what he wants with the funds and no oversight is better than the alternative.”

Really?

Why are we so afraid of a “downturn” in the business cycle?

I know some people’s lives and livelihoods are tied to models that demand constant growth. But a ponzi scheme by mathematical definition is doomed to failure.

Is it really better that we “put a floor under home prices” when salaries in many areas don’t allow people to afford the homes at the price they sell for?

I’ll grant you that this has been a rambling, incoherent, message at best. But I wanted to say this in summary:

There is no “magic money machine”. No “free energy device”. No “free lunch”. Someone pays for it. In this case, they are suggesting it should be you rather than the wall street elite.

Wake up.

This does NOT stop a crash from happening.

Illegalizing shorts does NOT stop a market crash from happening. It does NOT suddenly make these firms solvent. It does NOT suddenly raise the value of shaky assets.

I predict this will be pushed through congress quickly (like all the other bailouts). Once again, they will realize they’ve solved nothing. I’m guessing that by then, they hope, the election will be decided already and all their wall street piglet friends will have already gotten their affairs in order.

My suggestion is to vote out each and every congress person who votes for this and prepare yourself for an even Greater Depression.

ciao,
Uruguay Guy

While, there seems to be an “argument” between the “deflationary” malaise (1930’s US, 1990’s Japan) and “inflationary” (1970’s US, Gernam Weimar Republic 1920’s) camps, I have been careful to try to walk in both worlds.

(technically, inflation is creation of new money (or credit) — deflation is removal of said money or credit. In this case I’m talking about “price inflation” which is a symptom of the former)

My feeling was that:

asset prices (stocks, non govt bonds, real estate) would deflate, while the price of things that you need to live your “everyday life” would inflate.

The idea was that the availability of money for assets would disappear — and drive down the ability of people to speculate in them. Meanwhile, the Federal Reserve, in trying to maintain the status quo of high asset prices would create additional liquidity. However, that liquidity would find a home chasing “things that the Chinese and Indians are buying” — commodities and the raw material inputs for a society growing into “first world” status.

So far, whether that was the real reason that things have played out as predicted or not, that has worked out. However, this week, for some reason, the “wheels” came off that trade.

What happened to my account balance?

With this background in place I want to talk about what I saw in the markets today. Financial stocks were whipsawing wildly. Commodities, and commodity stocks were all under severe pressure most of the entire week.

While it’s probably more important (and often smarter) to just follow the markets and not try to understand what is going on in the moment, I’m not geared to do that. And, that’s why I’ll probably never be a good trader. So, in here I’ll attempt to explain what *I* think is driving the market activity of the last few days.

Bear Stearns — obviously the Bear Stearns collapse was a huge event, for a lot of reasons. The most important was that it scared the bejeebus out of a bunch of people in the FED, the Treasury, the Admin, on Wall Street, Fannie, Freddie, and OFHEO.

Basically EVERYONE went to battle stations and immediately started damage control.

The FED slashed rates .75 points.
The FED cut the discount window rate by .25
The FED now allows non-banks, organizations that it does not directly monitor or control or oversee in any way to give it collateral of dubious value (home loans basically) and in return give out CHEAP loans of treasury paper which can be sold on the open market by these non-banks (think JP Morgain, Goldman Sachs, Lehman, etc.)

Why this is important is that while banks are subject to capital restrictions that cap their use of leverage around 7-1, the investment banks are not….They and their hedge fund clients often use 2 to 4 times as much leverage.

OFHEO relaxed restrictions that Fannie and Freddie were under (for failure to accurately report financials! in the past) and are letting these institutions “gear up” their leverage even further into the face of a declining Real Estate market.

Wall Street investment banks, in a bit of a panic i believe, have begun calling in the leverage being used by their hedge fund clients.

Many of these hedge funds had gone “short” the financials, and long on commodities (fuBarrio’s trade for the last couple of years) and this has become a very crowded trade. As the hedge funds are all racing for the door simultaneously it’s creating a massive short squeeze in the financials and a quick butchering in the commodity complex.

Meanwhile back in the Bond pits…..

US short term treasuries are now yielding .5% per annum on a 3 month. That’s the lowest on record. And, according to Karl Denniger http://market-ticker.denninger.net you could actually execute a “reverse carry trade” on the Japanese the yield is so low.

Denninger explains it as black and white:

1.) either the bond guys (who move many billions of dollars btw) don’t know that they are doing, or
2.) we are entering a massive deflationary collapse on the scale of the Great Depression.

I’ve just started reading Denninger in the last month or so, but he is the best I’ve found online in trying to explain the gordian knot we’ve created for ourselves with this debt mess. He does a posting pretty much every trading day.

Good luck, everyone. At this point, I’ve paired back my exposure to the precious metals to just my “core holding” which is more of an “inflation hedge” than a spec that we are taking off while I’m still looking to go short on runups…..again a very crowded trade, and likely not that profitable until people start relaxin a little more.

If gold can somehow carve out a nice round bottom in the 800’s…..retest the 1000….and pullback momentarily, we will be looking at a classic cup and handle after a big up move and i would be recommending to go in very long, perhaps in a leveraged way to catch a big upmove. Now, is not that time yet.

If you are not a trader, and have actually read this far, and wondering what you should do to protect yourself in case things continue to get “nasty” out there….get out of debt, stock up on food and cash, stay in touch with friends and family, (move to south america ), and get a gold coin or two and a little silver “just in case”.

ciao,
fuBarrio