Sunday, March 16, 2008

Hold on to your Gold – it’s real and it has trunks

Yes, gold is real and nearly everything else is over priced, fool’s gold. The only asset class that is appreciating in this market is Gold, while nearly every other sector is tanking. That’s because gold is not backed by paper notes, or paper dollars or lots of hype. Its backed by something real – gold.

Even your house is not real. Sure , it is physically real, but guess what - it’s overpriced. The real value is much less. The past 8 years of this easy credit frenzy has boosted the housing market to ridiculous levels. And the banks that financed all of that are overpriced junk! Borrowing from one of Warren Buffet’s sayings - they are swimming in a market without trunks. Well the tide is going out and revealing to everyone what a farce these banks have been running.

The problem is that several of the nation’s largest banks are basically bankrupt. A large portion of their assets are mortgage securities that can’t be sold. They can't be priced and therefore can't be sold. Nonetheless, the banks still have them on their balance sheets listed as Level 3 "assets". Bear Stearns, the nation’s 5th largest bank, has $28 billion in Level 3 “assets” on their balance sheet. Evidently, Bear’s creditors got nervous and tried to cash out this week; this created a huge panic, a run on the bank. Bear stock lost 47% in one day!

The Fed jumped in to help save the naked swimmer, Bear Stearns. The Fed will do anything to save its banks, yes its banks – they are all in cahoots. The Fed plans to print all the money and give all the loans it can to these lousy bankers.

Why not? What’s the problem with that? How about skyrocketing inflation for starts. How about worthless money? Our dollars are shrinking, thanks to the Feds actions. That 1000 dollars you have in the bank is not anywhere close to a 1000 dollars anymore.

So what else can be done? Let the banks fail. Which means the banks would liquidate and call in all of their loans resulting in foreclosures. Housing prices will collapse, money will be hard to come by, loans will be very difficult to get.

But the Fed has already made their choice. Too bad, Bear Stearns is only the tip of this iceberg. The nation’ largest bank, Citigroup, has more than 4 times that amount or $133 billion of level 3 bad debt. What happens when Citi’s clients get nervous and want to sell? Frankly, I can’t believe they have not already tried to sell out of Citigroup. If Citigroup does not get an injection of cash soon, we are going to see that it’s just as fat and naked as Bear Stearns out there swimming without trunks.

The Fed bailed out Bear Stearns because it's worried that if one bank collapses the dominos will start falling and we will get a full out run on banks.

So, what’s an investor to do? If the Fed continues to bail out these banks, inflation is going up and that means hold on to your gold!


  1. I enjoy your column very much, but please be aware that "it's" with an apostrophe means "it is."

    "The Fed will do anything to save it’s banks, yes it’s banks."

  2. Ah, yes the exception to the rule for pronouns. Thanks