The Goldwatcher

Is the safety net unravelling?

            In an article on George Bush’s fabled ownership society turning into a default society Alen Abelson writes in Saturday’s Barrons:    ‘And just as the contempt for risk that made possible the gross extravagances in housing and the financial markets was sustained by confidence that Mr G would always bail out the participants — the so-called Greenspan put — so the current collapse in housing and the financial markets merits a special designation, one that similarly recognizes his critical role. How about the Greenspan Kaput?’ 

             The Goldwatcher has been blogging since 26^th March this year. As the calamity played out in slow motion risks in the system have been highlighted. The last Goldwatcher posting on July 30^th implicitly forecast the. Bernanke’s put would follow the Greenspan’s put. With all the leveraged debt in the system Dr. Bernanke had no option last week other than to pump liquidity into the money market. If not, to use Mr. Greenspan’s turn of phrase in 1998 when Long Term Capital were in trouble,  markets would have seized up. To be more correct they would have imploded.   Quoting the ever astute Dr Marc Faber Barrons included this caution last Saturday : ‘with the pervasive leverage in every nook and corner of the financial system, including futures and options and all manner of structured products, “the current credit excesses, both in terms of their quantity and low quality” dwarfs those of the Roaring ’20s. Comforting thought.’ . The Goldwatcher  May 21^st   post warned that if everyone ran for the exits at the same time derivatives would prove to be, in Warren Buffett’s words, weapons of financial mass destruction.  And in the post of 16^th July there was a link to  Paul Tustain’s red alert on the toxic debt crisis.    

         The value of global cooperation in defusing a crisis can’t be under estimated. But iif no solution is forthcoming on how the debt will be paid intervention will only buy time  A solution will depend on how much junk debt has been offloaded all over the world and there may be too much for any comfortable solution.  Barons quote Marc Faber as estimating ‘subprime mortgages made up more than half of the $500-odd billion in CDOs sold in ‘06 and 25% of their face value, or roughly $250 billion, is ‘in jeopardy.’ That’s not exactly small potatoes, he points out, ‘when compared with the $875 billion of capital sported by U.S. commercial banks.’  And even as a joke we can’t say  ’that’s comforting.’

The uses and abuses of alchemy:   

           Short of financial alchemy there are  only three ways governments get money: (1) Taxes, (2) borrowing or (3) printing money. It’s not rocket science to work out which option is going to be used for bale out loans. Nor is it rocket science to figure out what the consequences will be if George Bush’s ownership society has turned out to be  a default society. Bear in mind Bush’s borrowings are bumping the statutory ceiling . Treasury Secretary Paulson has already called for the ceiling to be raised. The Goldwatcher has been warning on bumping the ceiling since April  2^nd.   And short of chemical alchemy that’s never worked with gold, or anything else, and never will, there is only one way to get more gold. Mine it. With costs of energy, equipment and everything else going up miner’s are also  finding their costs going up. If if ever it made sense to consider including  gold in portfolios across the spectrum – from pension funds to private investors – now must be the time.  Unless, of course, we believe in alchemy or think the toxic debt crisis is going to be a damp squib.