The horror of this financial crisis continues to grow. 

The debate continues over bailing out the auto industry. What do you think?  If a bailout occurs it will only be the first in a never ending line of industries seeking help. The world is now quickly changing and moving with a determined force we have not witnessed in our generation or the generation before. 

Any of you out there have teenagers? Wow!  For years when my own were young I wondered what was the big deal? What human being could change so dramatically in just a very short period of time? But childhood is followed by puberty and puberty is followed by hell (the teenage years.)  It is frustrating because we see the same mistakes we made at their age.  And we want to warn them and to prepare them but for the most part they want to experience the true rewards of failure themselves. They just don’t want to listen to anyone once that magical age of 13 is reached. Their minds become as hard to crack as turtle shells. And inside is only mush and toxic waste.  Failed derivatives. Oh, do I have a teenager? Watching the financial world disintegrate before my eyes is often easier than trying to understand a simple teen.

I just heard a financial commentator on CNBC state that the “buy & hold “ strategy does not always work because many stocks now are less than they were 10 years ago. I actually heard the man say that there may be times when it is appropriate to sell. I understand the President elect is negotiating to keep and to continue using his Blackberry. An ABC blogger voiced the following opinion.

“If he follows through on some of the things he is talking about, I am liking this guy more every day.” “I for one am willing to give the guy a chance to succeed or fail on the merits of his plan and his staff.”  Blogger, ABC

Well, unfortunately, with the US debt now rising by vast multiples there just may not be anything left soon to continue to manage.  We’re all going to the poor house.

“The Fed is basically printing money.” 

I hear that quote repeated continuously on the news cable stations.  7 new trillion newly pressed American US dollars. At least the reality of the monetary rescue plan is being grasped. All printed new money with nothing backing it. The mortgage rate dropped a full half a point last week. So what does this matter to someone who has lost his job? Or totally become overwhelmed with a debt load that has become totally unmanageable? A little money is being spent out there in market land.  I bought a 32 inch Samsung for a great give away price. This brand has the little big button on the bottom and in the middle of the TV. The button makes this model a definite buy.

Paul Volcker - "What this crisis reveals is a broken financial system like no other in my lifetime…” "Normal monetary policy is not able to get money flowing.” “The Empire State index of manufacturing dropped to minus 24.6 in October, the lowest ever recorded. Paul Ashworth, US economist at Capital Economics, said business spending was now going into "meltdown", compounding the collapse in consumer spending that is already under way.” “Mr Volcker…warned that it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months.” "I don't think anybody thinks we're going to get through this recession in a hurry…” "There has been leveraging in the economy beyond imagination…” telegraph.co.uk/finance/economics/3474683/Volcker-issues-dire-warning-on-sl ump.html, 11-17-2008

I get tired of the big 3 automotive industries blaming the American auto worker for their financial problems.  If this argument is allowed to run its course the inevitability of wage price caps will become middle class reality.  Kind of reminds me of how economic problems were attempted to be settled as the Roman Empire sank into near bankruptcy in the 3rd century.  Their proposal was to force all work to become hereditary. What your daddy did you will do also. So much for ambition.  And the only way out was to become a monk and join a Monastery.  And remember in 1971 when then President Nixon imposed his much applauded (then) wage and price controls?  An abject failure. Let’s first talk about these over paid bonuses the executives are getting for poor and failing performance.

“In a move widely applauded by the public and a fair number of (but by no means all) economists, President Nixon imposed wage and price controls.” “The initial attempt to dampen inflation by calming inflationary expectations was a monumental failure.”  econreview.com/events/wageprice1971b.htm

Events we have become accustomed to for 30 years are now collapsing and unfolding right before our eyes and our wallets. Self improvement or self denial? Often, we have to lose everything to see what we have got and what is important. Obviously, the typical consumer world wide in civilized nations is waking to the reality that depression and economic chaos is not merely a long forgotten ghost from the past. 

“Fifty-four more US banks added to 'problem list' “The Federal Deposit Insurance Corp. said Tuesday the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter - yet another sign of escalating problems among the institutions controlling Americans' deposits.” “As the FDIC report shows, the number of hobbled institutions is rising at a quickening pace, a trend that has already begun to reshape the banking industry.” “This quarter, the pace appears to be picking up - nine banks have already failed since Sept. 30, including Downey Savings and Loan Association, based in Newport Beach, California.” biz.thestar.com.my/news/story.asp

How I remember well the many, many times I heard and read just a few years ago that our financial system had safe guards today and we were immune from economic chaos. When I heard that I always had visions of the Titanic. We’ve entered an era that no one really believed would ever arrive in our life times.

“Citigroup says gold could rise above $2,000 next year as world unravels. Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup.”  “Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009.”  “Gold has tripled in value over the last seven years, vastly outperforming Wall Street…” telegraph.co.uk/finance/comment/ambroseevans_pritchard/3526645

Because this day has arrived and is staring us directly in the face it is difficult to write about it. The growing pain and loss is being felt all over the world by rich and poor alike. Castles made of sand being washed away by an incoming tide. What companies are now doing well? Dollar General’s stock is near a 52 week high. Wal-Mart continues to see an increase in profits. Hedge fund assets are still falling and falling. 100 billion lost in October alone.

"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions" Greenspan, May 2005

Well, I’m glad to see an “underpinning the greater resilience of our largest financial institutions." But while Greenspan was praising the use of derivatives and hedge funds just a few years ago one senator was warning the world almost a decade back.

“This bill will, in my judgment, raise the likelihood of future massive taxpayer bailouts.”  “…if you want to gamble, go to Las Vegas. If you want to trade in derivatives, God bless you.” North Dakota Senator Byron Dorgan, 1999

And what about the new attention being focused on America’s finest delicacy…SPAM? The demand for cheap and inexpensive spam is growing by leaps and bounds. Employers are working around the clock in 24 hour shifts to keep the kitchen cabinets filled with America’s defined escargot.

“…Hormel is cranking out as much Spam as its workers can produce.” “But these days, consumers are rediscovering relatively cheap foods, Spam among them.”  “We’ll probably see Spam lines instead of soup lines.” nytimes.com/2008/11/15/business/15spam.html

And what about the giant Citigroup? Citigroup, the nation's second largest financial institution is on the brink of failure. The 45 billion poured into it by our government is a mere pittance of its 40 trillion in derivatives and credit default swaps. This bank is huge with over 2 trillion in deposits alone.  When this bank goes bankrupt it will be a nightmare in the markets. If the government truly wishes to save this monstrosity it will take a great deal more than the trifling 45 billion poured into it thus far. Did you know that women were primarily responsible for the growth of middle class prosperity in our generation?

“…the real earnings of families in the middle have risen only slightly…” “The meager income growth that these families have experienced has come not from hourly wages, but rather from growth in the labor force participation of married women.”  Robert H. Frank, “Falling Behind”

The middle class really hasn’t seen real monetary growth these past 20 or so years. More a pseudo type of artificial prosperity. The extra “wealth” has come from equity loans, overtime, second jobs, and/or a wife holding down an excellent paying job. Do you really believe we have seen an increase in true wealth these past decades?  Well, consider the following below.

“…the net worth of the median household remained virtually unchanged between 1989 and 1999, a period during which the total net worth of American households nearly doubled.”  Robert H. Frank, “Falling Behind”

So, if incomes remained the same for these years where did the money come for these more expensive houses we see in every new subdivision?  Easy question to answer.  Debt. A great deal more debt than the previous generation ever acquired. Wow!  We talk about the rich getting richer and the poor getting poorer and this is a fact. During around 1980 and 2000 the bottom 40% of households saw a reduction in net worth of over 25%. And what about the top 1% of our privileged society? They saw an increase of over 40% of their net worth. The rich get richer. The poor get poorer still.  Around 1980 there were 13 billionaires. Today there are over 374 billionaires. 

Richard Daughty – “So if the dollar is going down in value, but gold and silver hold their value like they have for the last few thousand freaking years, doesn't it ever sink into your tiny, little pea-brains that they will be going up in price?” kitco.com/ind/Daughty/nov242008.html

In short I’d say that today anyone with a previous net worth of 100,000 dollars or less is extremely unhappy. This money was tied up in home values and portfolios. And the economic crisis is bringing those values down, down, down. No one believed in cash and what they placed their wealth in has gone “caput.”  But for those who have maintained piles of cash and zero debt they are in heaven. Buying very depreciating assets with abandon. Wells Fargo sure followed this policy. Warren Buffet also.

“RUSSIAN ANALYST PREDICTS DECLINE AND BREAKUP OF USA” “A leading Russian political analyst has said the economic turmoil in the United States has confirmed his long-held view that the country is heading for collapse, and will divide into separate parts.” "THE DOLLAR IS NOT SECURED BY ANYTHING.”  "It is already collapsing. Due to the financial crisis, three of the largest and oldest five banks on Wall Street have already ceased to exist, and two are barely surviving. Their losses are the biggest in history. Now what we will see is a change in the regulatory system on a global financial scale: America will no longer be the world's financial regulator." drudgereport.com/flashrur.htm, 11-25-2008

Hang in there with the gold stocks. Gold is still going to be around even when all this present economic mess settles down in ten or so years.

Click here to order Gold Letter

David Vaughn
Gold Letter, Inc.
David4054@charter.net
12-2-2008

****

The publisher and its affiliates, officers, directors and owner may actively trade in investments discussed in this newsletter. They may have positions in the securities recommended and may increase or decrease such positions without notice. The publisher is not a registered investment advisor. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment-related advice. The news and editorial viewpoints, and other information on the investments discussed herein are obtained from sources deemed reliable, but their accuracy is not guaranteed.

© Copyright 2007, Gold Letter Inc.