The National Expositor

March 16, 2008

Sutton Financial – It doesn’t matter what newspaper you picked up. It doesn’t matter what TV show you watched. Records fell like no time in recent history with perhaps the exception of Carl Lewis running loose at the Olympics in his heyday. I wonder how much his Gold medals are worth now?

$1.55 on the Euro, $100 on the Yen, $1000 Gold, $110 oil. The three pillars of what we have been writing about for almost 2 years in this column are falling into place exactly as we said they would. Gold and oil up, the Dollar down. This was no stroke of genius mind you, but rather a dead-wringer given the circumstances surrounding the financial system. Things are starting to get interesting, but AGAIN, rather than stand up and admit how bad this problem is, the powers that be continue to offer fairytale assertions of how things are fine and that the bottom is in. Crying bottom has already cost a number of forecasters their reputations and in some cases, their jobs.

Yesterday, Standard & Poor’s took their turn on the stump saying that the writedowns from subprime mortgages are basically over. A few weeks ago, CNBC trotted out T. Boone Pickens in an attempt to talk down the price of oil. The effort fell flat on its face and Mr. Pickens ended up looking rather badly. He also lost quite a bit of money if he was actually short oil, which I seriously doubt. This has been the way of things. Every time I watch one of these interviews, I feel the need to dig through cereal boxes looking for the special glasses they used to include to help you see the magic patterns on the back of the box. So the latest is that the subprime writedowns are over; blue skies are here again.

What? We are only about halfway through the mortgage reset process, and even though there has been a lot of talk about freezing rates, nothing is in stone yet. Unlike the easy ‘economic stimulus’ package, it is a harder sell when asking bankers to part with profits. Given the cloak and dagger nature with which this problem first emerged and has stealthily worked its way through the financial system, gobbling balance sheets along the way, I am surprised anyone would risk their reputation at this point. Maybe I shouldn’t be. The stock market rallied heavily after the comments, and after all, that is what is needed right now. Minus intervention, the markets are looking downright ugly and Wall Street needs your money. Pure and simple. It just isn’t fun shuffling around billions of dollars between big banks. Without your 401’s, they are done. I think that deep down there is an understanding of the difference between real capital (foregoing of consumption in favor of investment) and the stuff rolling off the printing presses. The Fed can print dollars, but it cannot print capital. Capital formation encourages real growth, whereas the additional fiat created while in crisis mode only destroys the value of the existing capital. Retirement plans are essentially the last bastion of genuine savings in our economy.

Speaking of 401’s, the problem is that people are cashing in 401’s in record numbers right now so they can avoid foreclosure. Just when the markets need buyers, the little guy is selling. This will be a short term Band-Aid at best. The penalties and taxes alone on an early withdrawals will take over 1/3 of the money. Most people with any kind of retirement plan from the bull market of the 1990’s got cleaned out in the tech wreck. Only in 2006 did they finally ‘break even’ again (see article here). They had a short window of about a year to get out of the market before the barber showed up and gave the major indices a 15% haircut. So in reality, how much money do these people have left? Not much. Robbing Peter to pay WaMu will last a little while, but the long-term effect of having no retirement funds coupled with failing Social Security will be much worse than a foreclosure.

Against this backdrop, the Bernanke Fed continues to make history before our very eyes. Day after day, move after move they place another nail in the coffin and further cement their role as the facilitator of the next US Depression. So perfectly wrong has Fed policy been over the past 18 months that it will likely become the test case for what not to do in the future. This should not be a surprise to anyone. This is all they know how to do. The irony here is that Ben Bernanke has always thought that the reason we had the Great Depression was because the Fed didn’t print enough money. So now he will take us back there again, this time by printing too much. The Planners are limited by their understanding of economics, and more importantly, their lack of desire to do anything politically unpopular. The fact that we are in an election year will only exacerbate the situation. There has been much talk, but precious little meaningful action and even that has been dead wrong.

At this point their best bet would be to stop their acronym-denoted inflation creating devices (TAF, TSLF) and let the bad apples rot to nothing, particularly Bear Stearns which is now officially on life support. This would cause economic pain. But once the system cleanses, normal economic growth could resume. By not allowing the system to cleanse, they are guaranteeing that the pain will be worse and last much longer than necessary. It appears that they are willing to accept that in exchange for a few more months of status quo. They have a serious problem in that inflation is running out of control, and at the same time, the economy is sinking. Stagflation is upon us. The more money the Fed prints to solve the liquidity and banking problems, the higher prices will climb at the consumer level. This is great if you’re an investor in anything tangible, but a downright disaster if you’re a consumer.

This week has been unlike any other week in recent memory. Things are moving quickly, and it is important to stay tuned and keep your eye on the ball. The protective measures discussed in My Two Cents over the past two years are still in play, granted at much higher costs now, but as the saying goes, the best time to plant an oak tree was fifty years ago; the second best time is right now. Make sure yours is planted while there is still some growing time left.

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