Agora Financial’s Rude Awakening

Jump to Comments

The Rude Awakening
Ouzilly, France

· The world waits for the dark night ahead,
· G-7 pledges “unlimited” dollar funds to keep markets afloat,
· Going blindly into this dark night and plenty more…

Joel Bowman, reporting from Cairo, Egypt…

Bank Governors from the Group of Seven (G7) marched proudly up the steps of the U.S. Treasury Department in Washington, D.C., last Friday. So far so good, we thought, reaching for our slingshot. Now that we have them all in the same place…

The team looked a little worse for wear, no doubt exhausted from a coordinated blitz last week in which central banks around the world slashed through rates like a samurai sword through sausage. [Here we would have said "sushi," but Japan's central bank was unable to join the festivity. At 0.5%, they don't have too many "shots left in the chamber" anyway.]

The ambitious mob was, they said, simply “responding to fears.” Certainly there is much trepidation in the market right now, much of it warranted. According to the MSCI World index, the global marketplace is 20% poorer this morning than it was one week ago. Indexes are burning through trillions of dollars like money is yesterday’s fashion. From almost any standpoint, things look pretty grim.

But what the G7 posse forgot to mention was what caused the vertiginous highs from which we are now plunging in the first place. They forgot to mention that what goes up must come back down and that the market needs time to correct. Houses and stocks need time to fall enough so people will want to buy them again at reasonable valuations. Crooked bankers and shysters of all stripes need to go to jail and penalties need to be issued.

Politicians climb atop the collective fear of the masses and shout through the bullhorn, “Something (else) must be done!”

“By providing unlimited dollar funds they are acting on the back of the G-7 plan to ensure the system is fully liquidized,” Lena Komileva, an economist at London’s Tullet Prebon Plc told Bloomberg. “We’re going to see even more liquidity provided and more aggressive rate cuts are coming.”

It seems the general strategy is to doubling down on the policies that created the problem in the first place. But since when did adding more of the same ingredients turn poison into panacea?

Rather than let the water find its level, we read this morning that the ECB, Bank of England and the Swiss Central Bank have pledged “unlimited dollar funds” to keep markets “afloat.”

“Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets,” a joint statement from the banks declares.

It appears there is only one step bankers are unwilling to take: a step backwards. And so, under the protection of the enemy, we go blindly into the dark night.

In the column that follows, Bill Bonner reminds us of a time when individuals stepped up to solve crises and takes a look at what happens when their efforts are thwarted by the stupidity of the many. Details below…

— Safeguard Your Wealth Now With Gold —-

Hank Paulson’s Bailout Plan Will Cost Every Man, Woman and Child in America $2,333.

That means more taxes, higher inflation…OR BOTH!

It is no wonder gold is on the march again…

Here’s how you can use “Vancouver LEAPERS” to both secure your savings and maximize your profit potential.

The last time we saw a gold market like this, some investors made 971%, 2,464% and even 3,987% with little-known “LEAPER” stocks.

Today, you have a once-in-a-lifetime chance at similar gains for as little as $500… Details Here

——————————————

Him That Hath Has Less Than He Thought
By Bill Bonner

“They are in trouble in New York,” said J.P. Morgan to Bishop Lawrence.

In October, 1907, J.P. Morgan was 70 years old…and attending a church meeting in Richmond when the importance of the sacred was disturbed by the urgency of the profane. Telegraphs kept arriving from New York; they warned of a disaster. According to Dun’s Review, 8,090 companies had failed in the first 9 months of 1907. Then, a failed takeover of the United Copper Company caused a panic.

“A correction is equal and opposite to the deception that preceded it,” Morgan would have said, if he’d thought of it. Since he didn’t, it falls to us.

Morgan had been around the block when it came to money. He had taken over his father’s banking business decades ago. He’d seen panics, crashes, bankruptcies. And, now, it must have seemed that his whole life had been spent training for this one test. He returned to New York; crowds of investors looked to him to save the day. And he did. He put his own money on the line to help shore up troubled companies. He rallied friends, colleagues and competitors to do likewise. A trust was in trouble…then the New York Stock Exchange itself…then the City of New York…one after another, Morgan brought in the financiers…came up with the money…bullied and cajoled…until the storm had passed and they could all enjoy a good drink.

And when it was over, Senator Nelson W. Aldrich, realizing what Morgan had done said: “Something has got to be done. We may not always have Pierpont Morgan with us to meet a banking crisis. ”

As it turned out, Pierpont Morgan was a ghost four years later. But in that same year – 1913 – the US Federal Reserve was set up to fill his big shoes. This year, it’s the Fed that is being tested.

Armageddon seemed to arrive in Manhattan on Monday. And not just in New York, but in Moscow, Hong Kong, London and Frankfurt too. Germany hastened to succor bank account holders. In Rejkavik the pandemonium was so hot it seemed to melt the ice. Then, on Tuesday, all the plagues and locusts we’ve been warning about here in the Daily Reckoning were loosed on the world: The US stock market fell hard again. Japan was sinking into the sea. Brazil’s market was down 51%, year to date. Central banks were cutting rates like pulpwood. Even so, unemployment was on still the rise. Consumer spending was falling. House prices were going down.

Of course, the world improvers were intervening in the usual clownish ways. Short selling was blamed for more accidents than alcohol. And everywhere, the authorities were getting ready for show trials…perp walks…and public hangings. Over on the Guardian’s front page, for example, was an extended whine about how much Richard Fuld earned at Lehman Bros. before he bankrupted the 158-year institution. $480 million was the number given for the 8 years of disservice. “Is that fair?” asked Congressman Henry Waxman.

Congressman Waxman seemed to think that something needed fixing. But that just goes to show how little he appreciates the free market. Investors handed Fuld that money of their own free will; they got exactly what they deserved. The system was fixing itself.

Politics always lists to the port side. But markets are more exquisitely balanced, between fear and greed. When investors had the wind at the backs, they were ready to believe the most outrageous things – that the financial sector could get rich by lending money to people who couldn’t pay it back…and that a whole economy could flourish by luring consumers to spend more than they could afford. These hallucinations created an immense worldwide bubble of debt and dollars. But now, the wind has swung around. A huge anti-bubble is forming – equal and opposite, in true Newtonian form – a financial whirlpool marked by exaggerated thrift, debt destruction and sweaty-palmed investors.

And where is Morgan when we need him? Where is the Fed? Ten years ago, the giant hedge fund – LTCM – had overdone it. As in 1907, according to Roger Lowenstein’s account, “Rushing for the exits…[traders] posed a danger not only to themselves, but to the entire world financial system.” So, the Federal Reserve Bank of New York called in the big financial houses to help with the rescue. It worked. The crisis was averted. LTCM’s positions were liquidated in an orderly way, just the way Morgan would have wanted.

But this time, the fix doesn’t seem to stay fixed. Bad positions can’t be unwound in an orderly manner; there are too many of them. And it’s not just a handful of speculators who are getting whacked – it’s half the population of the United States of America and Great Britain. Trillions of new cash and credit are being pumped in. The Fed is buying ‘assets’ you would throw out of your refrigerator. Her majesty’s government is now proprietor of 50 billion pounds worth of banking shares; the government of George W. Bush is preparing to enter the banking business too. But as trillions go in, trillions more leak out. So far this year, world equity markets have lost $20 trillion. U.S. property markets alone have lost $6 trillion over the last two years. It is not just a few investment decisions that are being corrected, in other words, it’s the delusions of an entire generation.

“These prices make no logical sense,” said a Wall Street trader, referring to mortgage backed derivatives at Wal-Mart-style discounts, and missing the point. Markets are not scientific. They are poetic. After the liquidity comes the liquidation. After the outsized recklessness comes the appropriate regret.

[Joel's note: Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis .

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking Here: Mobs, Messiahs and Markets

—- Protect Your Assets: The Strategic Short Report —-

First Bear Stearns, then Fannie and Freddie, Lehman and Merrill…and now AIG…

WHO’S NEXT? (And how can you protect your wealth?)

Introducing…

The Ultimate Bear Market Strategy So Powerful, Governments Have Tried to OUTLAW It At Least Three Times

To Ensure Your Wealth Is Protected as Wall Street Crumbles, we’re revealing the five-step secret to the Ultimate Bear Market Strategy… Read On Here

——————————————-

[Rude Endnote: As expected, Asian and European markets rallied hard Monday morning following the weekend’s emergency summits and last week’s rate cuts. China’s Hang Seng is up over 10% as we write while London’s FTSE and France’s CAC are ahead 4.5% and 5.7% respectively.

Gold is back around the mid $850s and a barrel of next month’s oil changes hands for just over $81.

Your editor is about to board a train to Luxor in a few hours but, for now, it’s off into the hustle and bustle of Cairo to calm our jittery nerves.

Until tomorrow…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com