Grasping at Straws

We are currently in the early stages of the most serious financial crisis since 1929. Not only is there great danger lurking in the ever larger and increasing shadows, but the potential surprises are not even recognized, let alone being discussed nor is anyone trying to do anything about them.


If you think that I am exaggerating the danger, I haven't even scratched the surface. It has already been admitted that we currently have an 11 month overhang of unsold homes and that is before the bulk of the ARM mortgage resetting hits. The more logical number really stands between, a three to five year over supply of homes. With our generic population growth at barely 1%, can the flood of illegal and legal immigrants absorb this massive oversupply with a simple ¼ or even ½ point cut in interest rates? Who is kidding whom?


Sure there is, but it certainly isn't the one that is being bandied about. Since history repeats, it's about time we learn something from the past before the s__t hits the fan. During the Savings and Loan crisis, we were fortunate enough to have hired Bill Seidman to solve our problem. He promptly liquidated all the insolvent institutions instead of creating SIV's to extend the problem into the future. He then cleared the massive real estate overhang by liquidating and auctioning off all the defaulted properties as quickly as possible at whatever the market would pay. He let the Free Market work and turned what most thought would be a TRILLION DOLLAR hit to the taxpayers into a moderate $157 billion loss, with nary a dent to the dollar or the economy and without destroying the Constitution. So far, the FED's ½ point followed closely by an additional ¼ point managed only a 1 ½ day rally and contributed mightily to tanking the US Dollar. Get wise Ben and show some guts and tell all those know nothing Media and Wall Street talking heads what's what. Also, warn our idiot politicians that the breaking of the contracts between mortgagees and the mortgage holders will destroy our country by turning it from one that is ruled by law into one that is ruled by the mob.


Just one example is the $50 trillion that's trillion with a (T) of outstanding unregulated Derivatives, which makes the Portfolio Insurance Debacle of 1987 fame seem like chump change in comparison. So far, Warren Buffet is the only person of stature to have noticed it when he said, "that it was a disaster just waiting to happen."

Citi Corp has an estimated $20 trillion on its books (I'm not sure if it's accounted for either on or off the books a la ENRON ) which is over 200 times its total capital. A measly 5% loss would wipe out Citi's capital 10 times over. Does anyone really believe that an injection of $7.5 billion at 11% and convertible to boot, now makes Citi a good buy? Did you ever wonder why Citi did not offer that exact same deal to its existing shareholders? Could it be that if they did, Citi would have had to file a prospectus fully disclosing what dire straights they are really in? Do you think that they might be worried about Sarbanes Oxley? And I always thought that smoking dope was illegal. Anyway, it's about time a couple of Arab Sheiks get their comeuppance.


The SIV's that they have set up are clearly in big trouble.

When a company the size of Citi borrows short term and invests in long term assets, it's supposed to have a plan for when one of its investments goes bad and not just wine about disorderly markets. But their problem is that more than just one of their bets has the serious probability of collapsing. Should Citi fail, you can rest assured that they will not be the only one and the ramifications will be felt worldwide and endanger the world's financial system. So the FED and the Treasury will do everything in their power to avoid that disaster, but will it be enough? I hope so, but I for one will be staying short the major banks and brokers.


Another problem which may not seem so big yet may be just as dangerous, is the $950 billion, and rising rapidly, Credit Card Debt. For the last ten years or so, people have been refinancing their homes and in most cases, lowering their payments and paying off their credit card debt. In doing so, they even got a bonus. Their non-deductible credit card interest suddenly became tax deductible and so they received an ever increasing Income Tax rebate. Hey, what could be better than that? But low and behold, all good things must eventually come to an end. For the past year or so, more and more people were using their credit cards to pay their mortgages. And the credit card default rates are rising sharply. For the banks, this problem is much worse than a mortgage default. When there is a default on a mortgage all is not lost, the homes still have value and the banks can still determine what value to place on the homes that they now have on their books. But when a person defaults on his credit card, all is lost and the banks must take a complete write-off, reducing their capital base by the total amount of the default. And that really hurts.


There are no simple solutions that work and yet the financial media, Wall Street and the politicians are all grasping at the straw of cutting interest rates as their simple Quick Fix. Bernanke knows better or at least he should - but does he have the guts to stand up to all that pressure? When I taught economics, what they now call Conundrums used to be called Vicious Circles. Depreciating the Dollar; helps exports on one hand, but you then ramp up inflation and destroy the economy on the other hand. There is no such thing as a WIN WIN, all around easy solution.

Almost everyone refuses to learn the lessons of the past. For example, Japan after its crash in 1990, has lowered its rates to near zero, but that hasn't worked. Their economy and real estate markets have been mired in recession/depression for more than 17 years. Does anyone think that they labor under a different set of economic principles than we do? Why does anyone think that doing more of what got us into trouble in the first place (Easy Credit, Excessively Low Interest Rates and Printing Money) will solve the problem? Is that not the definition of insanity?


Happy days are here again. We have had our 10% correction and the market is now ready to roll, or is it? The Media and Wall Street touts .are twisting and turning every piece of economic news in their attempt to convince us that the market is cheap, while they either, ignore, oversimplify or twist any negative news into obscurity. I have outlined for you as long as a year ago that the real estate and mortgage markets were a disaster just waiting to happen and that it would take at least 10 or maybe as much as 15 years before they can right themselves. So far, all news leaking out only goes to reinforce my original suppositions. We are heading for a crash at least as bad as 1973-1974 and if the Government, Congress and the FED are not careful, we can be in for a 1930's type depression.

The sub-prime, although a major problem, is minor in relation to the worldwide credit crunch that the central bankers have already injected $100 trillion in their attempt to ward off an international financial collapse. Why do you think gold has increased more than $200/ounce if we have no inflation as is claimed? Sounds serious to me, but the media has attempted to paper over the problem by ignoring it.

I have been warning you as far back as September that after the Market makes a new high, it will then go back and retest its August lows: After which the market will once again attempt to make one more new high into December or early January 2008. However this last rally, which will be a very thin suck in rally, will be too dangerous to trade. Keep your powder dry and wait for the sentiment figures to confirm that the Market has finally topped out. I am looking for a minimum 30% to as much as a 50% Bear Market; so if you get in 5% or even 10% after the Market has finally peaked you will still be in great position to make a lot of money.



Gold is behaving almost exactly as expected and called for in all of my past letters. We have just had an almost perfect Elliott Wave 37.5 % or $75 hoped for correction of an almost straight up $200 Wave 3 run. What more could you ask for? I hope you are all not looking a gift horse in the mouth. Gold stocks will go up with Gold Bullion and even though I own both Gold and Silver Bullion as well as Gold and Silver stocks, I do NOTdo enough independent research on Silver or on Gold and Silver stocks to recommend any in good conscience, so please don't ask.


In my opinion, we are now completing Wave 4 of Wave III, with Wave 5 yet to come which should then bring us to a $1,000+. Is that enough information as to what I think you should be doing or do I have to spell it out?





Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL


20 November 2007

The above information has been gleaned from information that I believe to be reliable but is not guaranteed by me. The information provided is strictly for educational purposes and is not meant to be used as investment recommendations.

A single ounce of gold (about 28 grams) can be stretched into a gold thread 5 miles (8 kilometers) long.

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