Can We Trust These People?

Day after day we hear from one elected/appointed official after another, each telling us that things are under control because they have a “plan”. Mostly it sounds to me like they have a “plan for a plan”, and that in fact, they have little to no experience in actually running a business, having to make payroll, or in anything that would remotely resemble “real world experience”.

With Fed Chairman Bernanke telling us today that “the US should begin to come out of the recession in late 2009”, and with Obama’s fireside chat for the nation tonight where I have no doubt that he will offer all kinds of interesting predictions, I thought it would be a good time to go back over the last couple of years and explore the words of wisdom from the leaders of the free world.

April 5, 2007: "The damage from the subprime market has been largely contained." Federal Reserve Chairman Ben Bernanke

April 20, 2007: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained."
US Treasury Secretary Henry Paulson

February 21, 2007: "I'm waking up less at night than I was [over the slowdown in housing]. So far, there's been remarkably little effect [from housing] on the rest of the economy." San Francisco Fed President Janet Yellen

March 28, 2007: "At this juncture...the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." Former Federal Reserve Chairman Alan Greenspan

April 20, 2007: "We do see some stabilization of demand in the housing market ... there is some indication that the market could be bottoming out."
Federal Reserve Governor Frederic Mishkin

 I recommend that everyone print this off, and refer to it the next time you are even tempted to believe what these clowns are telling us. There is little doubt in my mind that we have the most serious lack of leadership in US history, and based on the fact that I’ve yet to see much of a hint of strong leadership from a single global head (outside of China and Canada maybe) during this crisis, the international situation is no better off.

Slowly but surely we are repeating just about every single mistake from the Great Depression. The one difference is that our banking system has not been allowed to fail, and this one issue could prevent a complete meltdown of the economy. However, just because we may not reach 25% unemployment during this Depression, it will still feel like the 1930’s to most.

Market Update

As I wrote yesterday, don’t be surprised to see the stock market move higher in the short term. Nothing moves in a straight line, and the current oversold levels have set us up for a decent bear market rally. At the same time however the global financial risks are as high as they have ever been.

Sure, global governments (see taxpayers) can spend tens of trillions to bail out all of the banks, brokerage firms, and insurance companies. But after this the question will become “who is going to bail out all of the governments?”

My biggest concern….one that actually causes me to lose sleep (and I usually sleep like a baby)…is that we run the very real risk of a global systemic financial meltdown. What might this look like? It would likely begin with an overnight financial collapse of a single country; say Latvia, Estonia, Ireland or Spain…one countries failure to make good on their bank settlements with another country or countries. Essentially a bankrupt country that refuses to make good on their financial commitments to others. This would set off a tidal wave of currency and debt implosion, and the collapse in derivatives contracts tied to same would cause fear and panic on a level that no one alive today has witnessed. Global stock markets would drop 20% overnight which would lead to a 1500 point drop in the US at the open. If this were to happen we would have “bank holidays” throughout the world, just as in the 1930’s. Bank holidays…the term sure sounds pleasant enough….unless of course you want your money and can’t get to it. You can imagine the social unrest that would occur if this were to become reality. On the plus side, gold would hit $10,000/ounce and silver would reach $150/ounce.

I only give a 15-20% chance of a global systemic meltdown actually taking place, but it’s that same 15-20% that should motivate you to take the necessary precautions….just in case. Make sure that you have cash on hand…make sure that you have gold and silver coinage…and make sure that you have a game plan in place to act on the extraordinary opportunities that would abound shortly thereafter.

Kip Herriage

Editor, VRA