first majestic silver

What Has Happened to Common Sense?

September 14, 2008

The total equity of the GSE'S, FNM and FRE has been virtually wiped out over the weekend and their management has been taken over by the government. And that is supposed to be good? It must be because the market opened up over 350 points higher. WHY? Since the government now owns FNM and FRE, their implicit guarantee has now become explicit. That may be good for their bond holders, but what has that done for the real estate and mortgage markets now that they tell us that their business will be curtailed? What about all the banks that hold billions of dollars of Preferred that is now worth next to zero? Will that expand liquidity and enable them to issue more loans and mortgages? Oh yes, the Treasury will be injecting $20 billion into FRE and FNM. Is that to each or both? With $6 trillion in outstanding mortgages, a mere 5% loss on their portfolio wipes out $300 billion or 15 times the money just injected. They asked Bill Gross of PIMCO what he is doing now and he answered that he is buying GSE debt with the hope of selling it back to the government later. Now that is a sure vote of Confidence (?) Really, what else is he supposed to say since his fund is already loaded to the eyeballs with GSE debt?

Summary: What do we have now that we did not have before? The Government just added the $5.3 trillion of GSE outstanding debt to the $5.3 trillion already outstanding Government Bonds Did that strengthen confidence in the GSE debt or did in further weaken the world's confidence in US government debt? Did the fundamentals of the housing and mortgage market change for the better? Did our government stop or at least slow down our money printing presses by bringing some kind of semblance to our budget and trade deficits? Is there a new economic game plan in place or on the table? Have we decided to drill offshore or at least call Congress back into session to begin discussions on a comprehensive energy plan? I could go on, but I think I have made my point. NOTHING has changed for the better, however this 355 point opening rally amounted to a perfect 62% retracement of last week's sell-off and break-down and offered a perfect opportunity to build up your cash positions or to buy puts.


Anybody can criticize anything and anyone, but do they have any alternative concrete proposals or just complaints? Since I started with the GSE'S and both the government and the exchanges will allow them to continue trading, how about if they each had a rights offering on both the Preferred and Common at some very favorable and enticing terms - maybe that could raise some $50 billion. It would inject some fresh new equity, while not diluting the existing shareholders and with the added inducement that the government would continue to lend them money at very favorable terms. Plus there would be the additional upside benefit from the fact that both FNM and FRE would, in 5 years, be split into 5 regional Mortgage Banks with the same advantages that they now have. They could be run on their own or sold off into the private market. Would that be a panacea? NO, but it would be a lot better than what they did, especially since it would be done without the addition of public money. Just a thought - I do not have the time or space to fully flesh out the proposal especially since it would just be a waste of time, nobody in power is listening.


So far, there has been no homeowner bailout in sight. It has all been designed to bailout the banks, mortgage brokers and CDO holders. Once again, we must discover the real problem and it is NOT that there is not enough mortgage money. The problem is that there were too many overpriced homes built during the 5 or 6 years of the real estate bubble, so there is now approximately a 3 to 5 year oversupply of unaffordable homes for sale that nobody wants at their prevailing asked for prices. In addition, no mortgage company is willing to lend at interest rates that are below inflation (negative interest rates). If we cut home prices by 25% to 50% back down to 2001 prices and then offered 8% or even 9% mortgages on the reduced prices, the average worker could afford to pay for their homes (don't forget the reduced taxes and insurance rates on the lower priced homes). Then Banks (remember Supply & Demand) could offer 5% LT CD rates which would create a flood of new money into the banking system providing all the mortgage money that might be needed. In order to get there, we would have to take a lesson from our past. Maybe we could even get Bill Seidman to supervise a NEW RESOLUTION TRUST CORPORATION. First and foremost, take all the bad paper and foreclosures off the books of the institutions, save or merge the ones that can be saved, close the ones that cannot be saved and auction off ALL of the properties to the highest bidders ASAP. The result would be a big drop in prices, but the drop would take 1 year instead of drawing it out for 5 to 10 years. Although there would now be a huge amount of affordable housing available, (their prices would then have only one way to go and that is UP) especially to the people who have already lost their homes and the real estate, building and mortgage industries could then get back to normal- all within 3 years. Just like the Savings and Loan Crisis of the 90's, the bailout package would be estimated at costing $3 + trillion and would probably end up costing only $500 billion to a $1 trillion maximum, but more importantly, it would do the job. I know one thing for SURE, doing more of the same as what got you into trouble in the first place (printing easy money and providing easy credit) NEVER WORKS! It just extends and exacerbates the problem. The only real and lasting solutions to socialist created problems are FREE MARKET solutions.


Gold market manipulation and conspiracy theorists are having a field day.  The past few weeks have seen solid evidence that physical Gold demand from individuals is soaring.  The U.S. Mint had to suspend the sale of one ounce Gold Eagles because of what it terms “unprecedented demand”. Indian Gold sales have dramatically increased in the past few weeks, leading to waiting periods for deliveries as the traditional sellers are short of Gold. Abu Dhabi, a major trading center for precious metals, has seen Gold sales rise by 300% in volume and 250% in value in August compared to a year ago. According to a Reuters report, "It was the best month the market has seen in almost 30 years”. Switzerland's UBS - the world's largest trader of Gold bullion, noted yesterday that "Physical demand continues at a near-record pace”.  The Swiss Bank also noted that the huge liquidation of long positions on the Comex and OTC markets have been the major reason for the fall in Gold prices. “But it's the steady, stellar physical demand that remains the main reasoning behind our strong recommendation to buy Gold.” An interesting note from The New York State based American Precious Metals Advisors comments that "Indian housewives are far better forecasters of the Gold price than most of us who are paid to do the job - Indian jewelry manufacturers are paying as much as five to six dollars an ounce above the world market price reflecting tight local supplies - and, even so, delivery times are several days and even weeks longer than normal.”


With the Dollar at a 12-month high, Gold plunges as Resource stocks dive . Is a conspiracy to depress the price necessarily the answer? One thing for sure is the resurgence of the dollar, which the world's central bankers are manipulating in their efforts to avoid a financial meltdown is driving down not only Gold, but virtually all resource stocks and commodities.  In particular, the oil price (that I recommended shorting up at $140 and above), is now plunging to the $100 a barrel level and may even go lower as there is a tendency to overshoot on the downside, just as it did on the upside. Unfortunately, the Gold price of late seems to be wedded to the price of oil, but not for much longer.

NOTE: Government like all manipulations are short term affairs and cannot last as they do NOT change the fundamentals. That is precisely why you must always maintain your CORE positions in GOLD. Protection is not to be used for short term trading.

But have any of the fundamentals changed? Jawboning and manipulation can only work in the short run if no major changes are made to the fundamentals. The US needs an inflow of $2 billion Plus, a day and instead of reduced deficits, we are looking at budget deficits increasing from $400 billion to over a $1 trillion once all these bailouts are accounted for. Gold, at $800, may remain vulnerable in the near term to a stronger dollar, but is underpinned by rising physical demand in key global markets, deteriorating macroeconomic and financial environments, accelerating inflation, and tight supply/demand fundamentals for the metal itself.  The key for Gold, in the longer term, is that inflation is everywhere -- in the United States, Europe, Japan, India, China, Latin America -- and accelerating.  China and India, the biggest Gold consuming nations, each have recently reported double-digit year-over-year consumer price inflation rates.  Measures of monetary growth in broadly defined money supply and real (inflation adjusted) short-term interest rates are already at inflation-fueling levels.  There's no doubt about it, inflation is a global phenomenon and the acceleration of consumer-price inflation in the major Gold consuming countries and regions, especially India, China, and Japan, will support investment and hedge demand as Gold will shortly resume its steady march higher. As almost anyone reviewing the Gold market will point out, Gold price fundamentals are strong and getting stronger.  Production is slipping. Leading Gold producers in South Africa and Australia are both reporting production declines and although increases in China will take up some of the slack, the overall global production trend seems to be downwards, despite the sharp overall Gold price rise over the past seven years.  Big new Gold deposits are not being found or if they are, they are in increasingly difficult and hostile political and/or geographical environments, while production and equipment costs are skyrocketing as availability of big earth moving machinery remains extremely tight, thus making it difficult for new mines to move into production.

I believe sooner rather than later that Gold will react not only positively, but explosively as well.  The dollar will stabilize and fall back again as perception of the true state of the US dollar and its economy returns to their true state of affairs: Especially since the world's central bank printing presses are still going full blast.  There will be more serious fallouts from the ongoing credit crisis with more bank failures on the horizon, and growing global saber rattling suggests more worrisome times ahead. These are all BIG positives for Gold.  At some stage, the big money that drives all investment will recognize this and seek out precious metals in an effort to protect themselves from the coming inevitable currency debasement. It is only the time frame that seems to be in doubt. BULLSHIT BAFFLES BRAINS, but only in the short run. When the big money wakes up, WATCH OUT!


Without going into a long winded explanation, A DEFLATIONARY DEPRESSION will coincide with a complete lack of faith in Fiat Currency and a RUSH to Gold. GOLD has always (for 5000 years) maintained its purchasing power and NOW is not the time to panic. Protect yourself and your assets in the only true currency and in the only everlasting store of wealth: GOLD

September 8, 2008


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Aubie Baltin CFA, CTA, CFP, PhD.

2078 Bonisle Circle

Palm Beach Gardens FL. 33418


The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins
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