Dear All,
Nothing will change the fact that all the major banks are insolvent, including Warren Buffet's purchase last week of $5 billion in newly issued preferred shares in a TBTF bank which less than 24 hours prior thereto, had insisted it needed no new capital. Finance dilettantes hailed Buffet's investment as a "vote of confidence" in Bank of America. Hardly. Had Buffet purchased BOA common stock that might have been a legitimate characterization but the deal is in reality a current 6% yielding quasi-debt issue juiced with free stock options and a premium takeout requirement.
As was the case with his prior Goldman Sachs and General Electric preferred stock purchases, Buffet provided emergency bridge liquidity by purchasing preferred dividend paying shares in insolvent entities with the tacit knowledge that the U.S. Treasury and Fed were backstopping his private facilitation of what otherwise would have necessitated a public bailout. Without their TBTF status Buffet would not have touched these companies, all of which were incapable of surviving without government backstopping. Observers misinterpret these investments as something akin to Buffet's purchases of the common shares of what he terms "sensibly priced," well run companies with great franchises. Two significant things occurred immediately prior to the BOA deal's announcement; 1) Buffet had a conversation with President Obama, and 2) NY State Attorney General and BOA nemesis Eric Schneiderman was promptly removed from the national panel of investigators of sub-prime lending abuse. Schneiderman has vigorously opposed a pending windfall settlement for BOA and the other major banks that will provide them broad immunity from further legal action in connection with their massive mortgage fraud.
Warren Buffet well understands the true condition of BOA's assets. He recognizes however the intangible value that a zombie institution provides a large capital allocator such as himself in structuring a low-risk transaction when said zombie has TBTF status. On behalf of Berkshire Hathaway, the agile Buffet has been shrewdly capitalizing on his prestige, elite government relationships and quick turnaround abilities to create sweetheart minimal-risk preferred share opportunities in distressed TBTF companies.
Barry Ritholtz: Big Banks: Under-Capitalized, Overexposed, Opaque" There is a fundamental misunderstanding about the Wall Street bailouts amongst the public, and quite a few policy makers at Treasury and the Federal Reserve: Somehow, they “fixed” the banking system....In fact, they did nothing of the sort."
U.S. financial institutions are overstating their assets to the point of absurdity. The FASB, having suspended the reporting integrity that mark-to-market accounting imposes upon banks, enables them to feign solvency by fabricating asset valuations on their balance sheets. The best evidence of this are the re-stated FDIC valuations in the continuing parade of failed institutions. Immediately upon seizure, the FDIC has been restating bank assets at between 50% and 70% of carrying value.
With the massive private derivatives market magnifying the ills in the banking system nothing can be repaired in nominal terms absent the most brutal of deflationary depressions. There is no political or populist appetite for facing the music head-on and enduring in real time, misery that can alternatively be passed on to another generation. The "cures" will be more of the failed Keynesian remedies that facilitated the credit bust in the first place -- the unavoidable consequence of which is dilution of the currencies in which the ills are denominated. The unprecedented overhang of debt that needs to be inflated away mandates a corresponding unprecedented devaluation of the dollar, Euro and other western currencies against gold and silver.
The New York Sun published a wonderful editorial last week which includes a video of a prescient Charles De Gaulle in 1965 expounding on the inherent problem of one country being able to print the world's reserve currency, and the inevitability of a resulting crisis. Nearly half a century later it has come to pass -- quelle base! la crise du dollar -- NYSun: Waiting for De Gaulle
The trend...
WSJ: Scrap Gold Sales Peter Out in India
DowJones: Kazakhstan Central Bank to Buy All Locally Produced Gold
Reuters: Analysis: Record prices spawn new wave of China gold bugs
Beware of Certified Financial Planners. This article is rich with gold cliches. NYTimes: The Hidden Dangers In Safe Havens “Gold doesn’t have any intrinsic value,” said Larry M. Elkin, president of the Palisades Hudson Financial Group in Scarsdale, N.Y. “It’s this era’s wampum. At one point you could buy Manhattan for beads.”
Be particularly wary of Certified Financial Planners brandishing statistics: "Mr. Fisher calculated that over a 43-year period ending in June 2011, the average annual increase for gold, accounting for inflation, was 3.82 percent compared with 4.92 percent for the Standard & Poor’s 500-stock index."
Gee, how convenient. Why 43 years? Choose a different starting point and you'll get very different results. Moreover, as discussed in my last post, 43 years far exceeds a person's investment lifetime. Short term market-timing is something no investor should attempt but getting the big secular trends right is imperative, something these CFP's apparently aren't taught at CFP School.
I've known both in my life and if I were forced to turn over all of my assets to one or the other to manage, I believe I'd choose a wedding planner over a Certified Financial Planner.
Defenders of the oppressive domestic Security State will claim that the fact that the chance of an American dying in a terrorist type attack is smaller than her being struck by lightning is "proof" that being forced to walk barefoot in airports saves lives. What a colossal waste of money. Government authority expands, individual liberty erodes, deficits increase, productivity decreases and nobody is any safer: Salon: The decade's biggest scam
"The number of people worldwide who are killed by Muslim-type terrorists, Al Qaeda wannabes, is maybe a few hundred outside of war zones. It's basically the same number of people who die drowning in the bathtub each year"
What a classy way to elevate the discussion. Roughly half of the scientific community disagrees with his conclusions, which makes for an awful lot of racists: Al Gore equates global warming skepticism to racism
Gold and silver...
Although disconcerting to the uninitiated, the violent action in gold is something you'll need to get used to for the next few years. Much of it has to do with the tug-of-war between the paper market which is being used to attempt to protect short positions -- and physical demand, which is gradually overpowering the paper market in the price discovery war. The confluence of systemic financial stress, currency debasement, short covering and physical demand will continue to push the price upward, albeit in an often volatile fashion. In the past, large take-downs of gold such as occurred last week required weeks for the market to stabilize. It is now recovering within days. To those of us who have been observing this market for many years, this is very telling. The parade of gold arravistes and quite notably, the pompous Dennis Gartman were all over CNBC last week pronouncing a bursting of the gold bubble and warning that gold could slide hundreds of dollars further still. The market was in fact bottoming as they yapped.
What a farce. Under the pretense of journalism CNBC cheerleader/sycophant (and in this case, blindfloded) Bob Pisani unwittingly shot an infomercial for SPDR Gold Shares, the largest gold ETF (GLD), whose loosey-goosey prospectus and questionable operation gives rise to the belief that GLD is nothing more than a paper derivative scheme. Pisani was shown a "secret vault" allegedly operated by custodian HSBC for the exclusive benefit of GLD. Pisani, having no idea where he was or whose gold he was actually shown presents all that was represented to him as fact. Comically, his one attempt to establish "cred" blows up when he holds up a bar whose serial number does not match with any on the list of GLD gold bars owned. Zerohedge provided an excellent critique of the "journalism" which includes the video of the reporting the dimly lit Pisani undertook. Pisani's piece establishes nothing other than the fact that he was videoed standing in a room somewhere containing gold bars, yet addresses none of the legitimate concerns about the integrity of GLD's custodial practices.
CNBC colleague Sue Herrera's introduction of the piece was interesting as well: "Well the GLD has been literally a gold mine for investors..." Actually Sue, no. GLD does not literally own any gold mines. A gold mine is a hole in the ground with machinery and people moving about that extracts gold from the earth along with other metal by-products and usually lots of rock and dirt in the process. GLD rather, is a company that runs a fractional (it claims otherwise) custodial gold bar operation and issues pieces of paper (known as shares) as claims on them. Did you mean "figuratively," Sue?
Stay away from GLD and any of Wall Street's ETF's alleging to back paper claims with real physical gold or silver. Gold and silver ETF's offer you no greater upside than having physical gold coins in your own possession, but impose considerably greater risk.
Silver is a sleeper. When I read analysis of industrial silver demand I yawn. Once it clears $50 in price silver's industrial role will yield entirely to its monetary attribute. It's all time high will be taken out and once it does there will be no looking back. Wall Street simply does not understand the dynamics driving precious metals. When it finally does the opportunity to buy cheap gold and silver will cease to exist. After 13 years in the sector I remain committed with 100% of my capital in gold, silver and the precious metals shares. The metals shares incidentally appear to have now decisively reversed their trend of underperforming the physical metals.
The financial system has never looked worse in the U.S and Europe and the prospects for the prices of gold and silver never brighter. The trends have been in place for years for those who have had the ability to observe with clarity, tune out Wall Street and look to the other side of the mountain. Most have refused to see or been in denial. Many are finally waking up which is creating the physical demand for the monetary metals.
Often in In investing one needs to stake their position and then patiently wait for the rest of the world to catch on.
All my best,
Jeff