First the Bailout - Now the Hedge

With a bailout deal now all but done, get ready for the next collapse in the financial house of cards that is the US economy. On Tuesday, investors in hedge funds can take advantage of the first in a series of "cracks". Cracks provide investors with the opportunity to pull their capital out of hedge funds. There are four such cracks. The first is this Tuesday, followed by opportunities in December, March and June.

I predict a run of selling that will see the collapse of many highly marginalized hedge funds. This will be followed by an increase in the stock market as wealth seeks a safe haven in offshore stocks (Asian and European Markets will have a good week this week.) There will also be sharp increases in commodities like oil and gold.

By the end of next week we will be seeing increases in the price of gas at the pumps. Because oil and food increases are no longer are factored in the Consumer Price Index, the CPI will remain unchanged, but in real terms families will begin feeling the pinch.

The injection of $700b into the system waters down the currency, so investors will transfer their dollars to gold. I expect gold prices to hit new highs by the end of next week. The Fed will have no choice but to increase lending rates as the value of the dollar falls inverse to the rise of gold. Companies will revise their profit projections and behind the scenes, the first in a long series of layoffs will be announce.

That's what I think will happen in the coming week.

This Video should be seen.

Peter Schiff wrote about this stuff a while ago. His predictions have been right on the money. Nothing I write comes from any knowledge I might pretend to have. Call it a "gut feeling" or a revelation.

Who Do You Trust II ?

I'm more convinced that the market needs to sort out this mess on its own. The War on Terror enabled civil rights to be thrown out the window. Today, Americans can be eavesdropped on, arrested, and held without due cause. There exists a state of martial law in the US.

Now the executive branch of the government is holding Congress hostage over the Bailout Bill. This bill would eliminate any congressional oversight and not be subject to challenge in the courts. The President appoints the Treasury Secretary - whom serves at his pleasure.

I can't believe it, but it looks like Senators have resisted the pressure to just hold their nose and vote for the Bailout. If this Bill is not signed the Stock Market is going to experience the Great Mother of all Runs as investors move their assets offshore. The market will survive. It may be 10 or so years before it flushes the rot out of the system and recovers, but it will happen.

The real threat is - and has always been the 'shadow value' of the American Dollar. America needs to go back on the Gold Standard and throw Bretton Woods out the window. If I had money to invest I would buy gold and silver - and not certificates but stuff I could hold in my hands. Gold will go to $2,000 by Christmas - the dollar will be worth .50c; that's my prediction. I would also spread my liability around by buying commodities like oil (Canadian Oil Sands), copper, and food ( not dairy, because that has been artificially inflated in value by the Chicago Mercantile Exchange and will fall to its real value very soon ) . Buying Asian currency would also be a safer bet than buying T Bills at 0% interest.

I have a long-shot prediction that things will decline so rapidly that the 2008 elections will be suspended, even if it takes a war with Pakistan or Iran to cement the issue. I think George W. Bush will serve a third term. I know it sounds nuts, but there it is.

Who do you trust?

Wait for it.

Economies are governed by numbers; unlike doomsday theories about phantom planets entering our solar system or other 2012 predictions. A power shot of adrenaline to a damaged heart may keep it beating a season longer, but takes nothing away from the realization that an operation, transplant, or death is the only likely outcome.

A US election is just 6 weeks away. Congress is being asked to trust Treasury Secretary Henry Paulson to take $700b of taxpayer money to bail out financial institutions as 'the fix' needed to right the economy. Every twitch of the stock market is a call to act quickly. Paulson is asking for an unfettered hand. One aspect of the Bailout Bill before Congress states:
“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Where is this money coming from? The Federal Reserve will create a bond issue to cover it - in other words, they will print the money. As early as 1974, the national US foreign debt had a $3b surplus. Today, with a national debt of $10 trillion dollars, soon to increase to $11 trillion when the bailout bill is factored in, means that each individual taxpayer is holding about $25,000 worth of public debt. US dollars have yet to find their real value. By 2009 the value of the US dollar will be half what it is today.

The Credit Default Swap will give way to a collapse of Hedge Funds. It has to. Hedge Funds bear good returns for investors because of the freedom they have to act quickly, short-selling to take advantage of a fluctuating stock market. But short trading has been stopped for 900 stocks, and how will they pay for stocks held when 30, 60, & 90 day margin calls come due. With similar debt-to-net capital profiles as Investment Banks, Hedge Funds can only collapse a month or so from now.

Inflation can only increase. The Federal Reserve has held off increasing interest rates to buy dollars since 2000. With Treasury Bills bearing .017 % interest, rates have nowhere to go but up. When - not if, the Fed begins to raise interest rates to protect the US dollar, the consumer economy will grind to a halt. Mortgage rates, credit card rates, student loans, etc. will all increase. Lowered demand for goods will result in a huge increase in unemployment, at the same time as prices begin to increase for necessities like food and energy.

And what about energy? OPEC is refusing to increase production (perhaps because they don't have the reserves they purport to have). Hurricanes have damaged 800 oil rigs in the Gulf of Mexico to say nothing of the damage to oil refining facilities on the US mainland. No new oil fields in the world have been found. America has yet to give the go-ahead for Alaskan exploration and even if new fields are discovered, they will be decades away from production. Wealth, seeking a safe haven, is flowing into commodities. Yesterday, oil futures experienced the biggest 1 day gain ever, going to $125 a barrel. Some people are predicting oil will reach $250 a barrel in 2009. The US auto industry will be the next demanding a bailout. The cost of credit and oil at the pump will combine to cripple it.

Doomsayer? Or Realist? I am not an economist, but the Housing/Investment crisis is only the first salvo. Yet to come will be a cascading series of crisis' that shifts from the investment community, to the stock market, to the banking industry, to the energy sector, to the auto industry. Unemployment, housing defaults, credit defaults and inflation will paint tomorrow's American landscape.

In my next post, I'll talk about the geo-political ramifications.

Building a House of Cards

Governments and institutions are telling everyone not to panic and stay the course. This to give the top 3% of society time to liquidate before the coming collapse. By the time the little guy at the back of the line gets wise, there will be nothing left.

Economists themselves cannot agree on what is happening. The instruments of the coming catastrophe were established during the climate of fear surrounding 9/11. The stock market could have collapsed then. The dot.com bust and Enron had exposed the weak underbelly, and delicate nature of the market economy. The Securities and Exchange Commission (SEC) needed to do something different to inject capital and confidence back into the marketplace.

So, the SEC relaxed the rules governing some investment banks. Five solid banks: Goldman Sachs, Merril Lynch, Lehman Bros., Bear Stearns and Morgan Stanley, restricted to operating on a 12:1 debt-to-capital ratio for lending, were sanctioned by The SEC to increase their debt to capital ratio to 30 and in some cases 40:1 . In a single stroke, these five institutions; were infused with tens of trillions of dollars. Overnight, it was as if the US mint had printed trillions of dollars and injected it into the economy. These banks don't lend to people, they lend to companies like Freddie Mac and Fannie Mae (Fannie-Mac). Fannie-Mac lend money for mortgages.

Lenders need security for loans. Those insurers are governed by Regulatory bodies to make sure there are sufficient assets for repayment in the event lenders forfeit. To get around these regulatory bodies a new term called "credit default swaps" entered the financial vocabulary. There is no regulatory body for credit default swaps. AIG became the holding company for the credit default swaps that would secure this new investment capital.

The set pieces were all in place.

Home mortgages could be had for a 0% downpayment. First-time home buyers flocked to take advantage with mortgage rates stabilized at 5 & 6%. It became a sellers market and the real estate boom started. New home construction took off, accounting for 15% of new jobs. Houses selling for $100,000 in 2001 were now being evaluated for $200,000 and then $300,000. Ordinary people by the thousands were channelled into seminars where they were told to leverage their mortgages into buying more houses and become millionaires overnight. The magic was many did become millionaires.

Flush with money, banks and lending institutions rode the wave into a new consumer-driven economy. Credit was extended to anyone. In America, a $50,000 income was guarantee enough for a million dollar loan. Illegal immigrants could borrow money. Consumer spending for home furnishings, cars, boats, second homes, education, stocks, and travel was paid for with credit cards and second mortgages. Sub-prime financiers for large-scale construction projects, guaranteeing incredibly high returns, attracted pension funds and the life's savings of retirees and baby boomers hoping to retire early.

Even the war in Iraq, costing $2 billion dollars per week, and a US national debt at $10 Trillion dollars and growing at $600 dollars a second couldn't slow it down. Inflation was steady, GDP was growing, and dollar remained strong. The first inkling people had that something was wrong was when oil crossed the $100 a barrel threshold. It was a gust of wind that teetered the house of cards.

Act Now

The United States economy is dissolving as I write this. I expect emergency measures like the one imposed during World War II, when presidential elections were postponed for the duration. Yes; I believe Congress will suspend the US election this November. This means some kind of bipartisan arrangement with President Bush. By the end of next week trading on the stock exchange will be suspended. Banks will fall, one after the other. There will be a run on cash and banks will close. This will take us through September and October.

The Great Depression will hit North America first. Europe will be next. Then Asia, including New Zealand. The great cities of the world will fall into chaos very quickly. Without cash or credit there will be food riots and looting. Emergency measures will suspend civil rights in a matter of weeks. Police in New Zealand will be armed and the Army and Territorials will be given policing powers. States of Emergency will be instituted in most of the developed world. Aid from the developed world to the third world will stop. Millions will die in those countries. International travel will slow to a trickle.

People will look for a strongman, a saviour, to bring order back into society. Just as the collapse began in the US, this strongman will emerge there and bring a semblance of relative normalcy to people desperate for a solution. Each country, in turn will select their strongmen. The internet will disappear as we know it today. The governments will scour the servers in every country and jail all labeled seditionist.

Nothing is going to stop this from happening. Anybody who reads this should borrow as much money as they can, do whatever they have to do to stock up on food and supplies. Electricity and fuel cannot be counted on. People should concentrate on gathering flour, grains, freeze-dried and canned foods. They should have a supply of seeds to grow food. They should have fishing gear, camping gear, first-aid kits, and the means to make fire. They should have basic tools for harvesting wood. They should have shortwave radios with built in generators to keep abreast of what's happening. People will need weapons to defend themselves. They should collect how-to books on preserving foods, medical treatment and holistic remedies. If family members have farms, then arrangements should be made to gather there and live communally.

I believe it will get very, very, ugly before too long. Those who prepare themselves should survive - those who don't will not.

Congressman Ron Paul - One year ago.

The same full moon that lights up the night outside my home, lit the night sky over the rest of our little world at some point within the last 24 hours. This day will be remembered as the beginning of the end of a lifestyle.
One year ago Ron Paul stood up Congress during the debate about the US budget. He predicted the collapse of the dollar. He talked about the cost of war and the deficit. He blamed an out of control Federal Reserve for printing money, because nobody will lend the US money anymore, so they just turn on the mint presses and churn out more. This is what he said.

ETS - Money Trees

Market driven solutions to climate control and pollution will never work. If someone had dreamed up carbon credit trading as the answer to global warming 30 years ago, it may have had some impact on the number of trees we cut down, but I think it would have only dictated 'where' those trees got axed.
The surest barometer of how effective New Zealand's Emission Trading Scheme, ETS, will work is how willing the New Zealand government has been to give the forests back to Maori. Far North's Iwi are currently negotiating a return of their forests in the Aupouri Peninsula.
The Crown Forestry Rental Trust, current-day Tane Mahuta's, see the writing on the wall and are working overtime to get a deal done before parliament dissolves on October 3rd. They have thrown a quarter of a million dollars at the Te Hiku o Te Ika forum to enable Iwi negotiators to earn while doing the deal, as well as a $36k+ honorarium to chairperson Mangu Awarau, to ensure a proper result. That honorarium was a Crown Forestry Rental Trust add-on, that nobody asked for.
The forests are indeed an asset, but their value will now be dictated by their value as carbon credits in an imaginary marketplace. Converting forestry lands to other use will cost future owners dearly. In reality, the land will be held hostage to tree-making so long as the land is held in trust. It can only be converted to other use when it is transferred back to Maori and that use will have to be profitable enough to offset the penalties of cutting down the trees for the last time. The 'x-factor' of the value of carbon credits is an unknown. Carbon-credit trading is a speculators playground like the dot.com companies that went bust a short while ago. Common sense says that if solid markets like mortgage and loan companies can fail in today's economy, what hope is there for carbon credits that have yet to have any established value.
So who benefits? Since anything that can be sold or traded is taxed, the government always wins. Since title to the forests could only be transferred to Maori anyway, at least in the first instance, the real question is: Why is everyone, including Maori, in such a rush to settle, when the implications of a deal are so unclear?
The biggest question is who is pushing the deal and why.

Millie

At 20, it is difficult to predict where life will take Millie Elder-Holmes. Arrested last week, along with the kick-boxing son of a patched Headhunters member, she was charged with possession with intent to distribute. Less than a year ago, Millie stood in front of me in a lineup for lunch, at an Auckland Rehab facility. At the time I thought, 'tall, pretty, young lady.' I never saw her again, but heard she had discounted that place as the right place for her. Given its reputation as a no-nonsense facility - it was not surprising. There was no place to hide inside its environs. You were there to get well and the clinical staff did not broker any crap.
A pity she didn't take the opportunity. The literature on addiction promises this: "Institutions, jails, and death" for those who continue on the path of addiction... the only alternative is abstention. Rehab for teens is a one-in-a-thousand roll of the dice; their bullet-proof mentality coupled with the denial that feeds their use is a tough combination to beat. Even when one has lost everything and capitulates to a solid recovery programme, the odds are closer to a hundred-to-one for any long term sobriety. It doesn't look good for this young woman.
Being associated with the Headhunters will keep her safe in jail, but the other side of the coin is she will need to keep that association to survive, a prospect that bodes ill for any recovery from drugs. I'd like to see her committed to a serious residential rehabilitation programme, and the best would be Higher Ground in Auckland. But like I say, they do not tolerate behavioural issues beyond the first 40 days and it would be difficult for someone used to the limelight, to submit to being 'just another addict'. The other option would be Odyssey House, an 18-month programme that focuses on behavioural stuff. That might work although her presence would turn a community of others trying to recover in turmoil, I expect. If money were no object, the best option would be to send her to a tough programme somewhere in the US. There, she could be truly anonymous - nobody would know who she is - or care. If she were my daughter and I could afford it, that's what I would do.
Hope springs eternal, but hearts are broken all the time for addicts and their families.

Avalanche - Self Will Run Riot

This clip says just about everything about today's culture.

Wait for it

A couple of weeks ago I was prepared to write a glowing blog about Hone Harawira, Maori Party MP for Tai Tokerau. I like Hone because he is in touch with the people and knows that the basis for creating a better future for Maori lies in education and social spending. But I get uneasy when he is silent about ethical issues. He hasn't said very much about Winni-tanga and recently worked behind the scenes to squash serious assault charges against a Maori man who beat up a housing corporation worker.
Increasingly, he is being seen getting cozy with the old guard of maoridom, quietly supporting their back room tactics in dealings with Northern Iwi. I always saw him as a man of unbridled ethics, but now I'm beginning to wonder if he hasn't become too enamored with having the inside goss and being part of the larger established politic. It's a slippery slope.

Crossroads

I envy those bloggers who carve out and explore a niche. I wish I had a fetish for political campaign buttons, or thimbles, or an in-depth knowledge of anything. Then I could share my knowledge and expertise with someone wanting the quintessential one-stop-shop on something or other. Instead, I jump from thing to thing, not knowing anything in any depth, and without the insider knowledge that makes it special. I went on a rant about Winston Peters for a while because it didn't seem possible that a man, no matter how personable, could escape the rules of society that govern the rest of us. Well, the chickens have come home to roost and he will atone, at least in some way. But that still leaves me with a lot of questions about my place in the blogosphere.

Why do I do it? A part of me wants to be famous, another part just wants to leave some evidence that I existed, still another believes that what I write has value. The key question is more about the person I want to be. Do I want to be the critic and pundit? Will this advance my goal: to find serenity and some kind of spiritual path?

The truth is I do not get any residual satisfaction from criticising other people. I used to... but what kind of value is that in a world already frought with war, poverty, hate, and natural calamity? How do I contribute to making this a better world? With that question in mind I am going to change tack and begin to focus on the possitive. There are little and big miracles all around us - should we choose to seek them out.