Thursday, September 18, 2008

Free Money

Fannie and Freddie
Sister and Brother?
Chalk and Cheese?
Sodom and Gomorrah?


The Apocalypse?

First let us job back a few days.

The action by the US Treasury to effectively nationalize the two biggies in the American mortgage market at a potential coursed of all are $5 trillion, is either the panacea for other financial problems of the world or applying sticking plaster to a festering sore that needs some strong antibiotics or even an amputation!

On the plus side the market seemed, in the initial 48 hours, to endorse the action but there is no doubt that this was a desperate action -- there was really no alternative -- and somewhat eased the despair in the US mortgage market but easing despair is not a very solid foundation to build on. The intention, no doubt, was to commence restoration of confidence which was of course vital.

Central bankers, on whose recent performance are not known for of their sagacity, or even an ability to think ahead, will have had a collective sigh of relief but with fingers crossed. Being the contrarian that I am, I still see the negatives continuing to obscure the positives.

We cannot divorce the action on that Sunday from the rise in the U. S. dollar in the weeks preceding and a consequent depreciation in the other currencies -- from the Euro to the Yuan. This suggests concerted action by central banks and governments which in turn raises the question of why action then - and not much earlier?

The optimism of a few short weeks ago has become an overwhelming pessimism and fear after Lehman Brothers filed for bankruptcy. You will recall that in my first Blog on Banks I pointed out that Lehman was leveraged 38 – 1.

This aspect should greatly concern investors and Governments – including our own – as nobody ,and I emphasize nobody, has any real idea of the counterpart risk for other institutions, municipalities, pension funds etc. One of the figures which leaves me totally mesmerized is that, excluding commodities, the derivatives market is put at $455 Trillion. Even a small part of this proving uncollectible will guarantee financial mayhem for the world financial community with increasing impact on you and I.

A further reference to Merrill Lynch – The Thundering Herd – in Blog X11 also demonstrated the risk to their solvency – now they are, most likely, being taken over by Bank of America to save the largest firm of its type in the US.

I looked at my Car insurance policy today and find that it is insured by AIG who are desperately looking for $50 billion to tied then over. You can see where the actions of gi-normous firms in distant countries can affect us at the most personal level!

Make no mistake we are not yet in sight of the worst part of this Market and Currency Turmoil, and as I have voiced frequently, your safety is in the precious metals and cash for the foreseeable future. Gold and Silver have had a vicious pounding, particularly since the US$ recovered somewhat, and the two things are not unrelated.

There has been, since the late 90s the belief in some quarters* that the price of gold and silver was in someway manipulated by governments and large banks, including Central Banks and additionally influenced due to hedging by gold producers themselves. The advent of Hedge Funds has given impetus to large scale speculation in commodities and gold/silver.

With manipulation it is impossible to say what the true value of the precious metals is but my guess is that this true value will turn out to be many multiples of current quotations. This applies to many mid-tier producers in particular.

Put it this way, would you prefer your savings – or at least a sizable proportion – to be in any currency that is diminished by inflation and constant printing by Governments, or in a precious metal which is in constant short supply and cannot be manufactured by the same Governments and is regarded as the ultimate safety net?

* see La Metropole Café . Com

Robert Mooney is a contributor to the free stock alerts, market alerts, and stock charts website