Poster’s Paradise

Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com

Oct 10 2008

Financial History in the making

So much has happened this month, where to begin? It’s been a month to end all months with one monumental crisis following another. At times, events were moving so quickly it was hard to keep up. Many analysts we know stayed up all night, several times, as developments and markets spiraled out of control in what’s being called a financial tsunami.

What lies ahead is unknown because massive changes are still taking place as the worst financial crisis since the Great Depression unfolds. We do know that this is clearly the end of an era and the beginning of a new one, and we’ll all be affected in one way or another.

LENDER OF LAST RESORT

For now, opinions are running rampant and although we can make some valid assumptions, no one actually knows how this will all end up. Here’s why…

As you all know, the bailouts this month were massive and truly mind boggling, but the big spending actually started before. First, there was the $150 billion in stimulus checks, booming money supply, super low interest rates and the Bear Stearns bust.

Then came the takeover of Fannie Mae and Freddie Mac, which made the government responsible for about half of the mortgages in the U.S. , totaling about $5 trillion. This amounted to the biggest bailout ever, costing $200 billion. But if just 10% of those loans have to be covered, it would mean another $500 billion and this alone equals the size of the entire annual defense budget… Then things really intensified.

A HOUSE OF CARDS

Lehman Brothers went bankrupt, Merrill Lynch agreed to be bought and the foundation of the financial system took a serious blow. Wall Street started to panic and the Federal Reserve, along with the world’s largest central banks, poured unprecedented amounts of money into the banking system to provide ever more liquidity as stocks fell sharply and the banking situation grew more serious.

The government then took over AIG, to avoid the worst collapse in history of the U.S.’s largest insurer. Money market funds, which have always been considered safe, came under pressure. Worried investors started pulling out of these to preserve their savings, resulting in the Fed also having to lend banks about $400 billion in guarantees to meet these withdrawal demands. The bottom line was that in just one week, the Fed spent over $1 trillion to keep things going.

Next, Washington Mutual failed, which was the biggest bank failure in U.S. history. While all this was happening, the bailout package was a top priority. Bernanke and Paulson were desperate to get it passed, and fast. The President pushed for it too as they all warned that the alternative would be far worse.

PANIC SET IN

But the House rejected it and this shocked the markets. The Dow plunged in its biggest one day loss ever, dropping $1.3 trillion, which was way more than the $700 billion requested in the bailout.

Seeing the market’s reaction, the package then passed quickly but stocks continued falling sharply anyway. The general feeling was that the $700 billion won’t be enough and the plan is insufficient. Some feel this could be like the initial low estimates for the Iraq war and the final bailout tally could be $2 to $5 trillion, or more.

REALITY HITS MAIN STREET

Meanwhile, folks on Main Street were generally against the package. They simply didn’t trust it or the politicians. Once they saw the stock market’s reaction to the no vote, however, many people changed their minds as it became more obvious hat this wasn’t simply a plan to bailout the mistakes made by greedy Wall Street big shots. People saw the writing on the wall and realized that this would affect everyone, resulting in a worsening economy, more job losses and no credit.  And since U.S. retirement assets are already down $2 trillion in the past 15 months, dropping 401 and real estate values, bank failures and insecurity are also taking their toll.

The economy is the number one concern for most people and they’re irritated at the mud slinging direction the election has taken while the priority issues take a back seat. So it’ll be interesting to see how the election unfolds too.

DELICATE GLOBAL FINANCIAL SYSTEM

There’s no question these are dangerous times and the financial world is in uncharted waters. The global financial system is on very thin ice, teetering on collapse.   Yesterday’s coordinated interest rate drop by seven central banks clearly illustrates this because it was the first time ever that so many central banks lowered rates together and by half a percent.  They’re literally pulling out all the stops to revive lending and the world economy.

Will these efforts work? Will they be enough? Those are the most important unanswered questions of the day and only time will tell, but we should know much more in the critical month or so ahead. Why?

HYPER-INFLATION OR DEFLATION?

The Fed is spending money at an astronomical rate. It’s creating this money out of thin air by monetizing bad debts and whatever else it has to. Remember, this is on top of all the other ongoing government expenses and it’s extremely inflationary.

Normally, there is a lag of about a year or so between money creation and inflation but eventually, what’s recently happened will result in massive inflation, a much lower U.S. dollar and a soaring gold price. This is inevitable but as our dear friend Chris Weber points out… not necessarily.

The bottom line is this, if the banks start to lend again, then the economy will be on the road to recovery and inflation. But we know the banks are scared and they’re being extremely cautious, for good reason. So if the banks decide not to lend and instead just sit on their cash, then the inflation process will freeze.

In other words, the risk of deflation has greatly increased. Inflation is not a given and much will depend on what the banks do, or don’t do in the period just ahead. The Fed is providing the ammunition but the banks have to use it. If they don’t, the outcome could be much different than what most analysts feel is a done deal.

WHAT TO DO

At this point, it’s best to be prepared for either outcome. That means gold for inflation and cash for deflation, at least until we see how things unfold.

For now, important changes are taking place but that also means challenges and opportunities. This may all end up differently than what we initially thought, but we’ll adapt and keep an open mind. Whatever lies ahead, the current challenge is getting safely from here to there relatively unscathed and we’ll do our best.

That should have been on the list too. I guess when it comes to the wild and stock market ignorance is bliss doesn’t apply. Probably why they have to make signs like that of below.I ran in the mountains all the time, till I moved away. Always liked it better than city. Climbed some water falls straight up once without cams(things you stick in rocks) was a camless climber, got stuck a couple of times. One time I had to make a rope out of tree branches to get back down. My friend also stuck said you don’t think Im gonna use that thing do you! Well I found I didn’t need it but my friend used it. I said , hey it worked! I got the dirtiest look.

An interesting post…those comments were a combination of funny but pitiful…reminded me of when I worked with the Forest Service and an Atlanta woman called one summer day, interested in camping in one of our campgrounds but before making the trip wanted to know when we last sprayed for mosquitoes.

I see that you mentioned the Appalachian Trail…the mileage totals 2,175 miles from Maine to Georgia.  I hiked a portion of it a year and a half ago in one of the roughest areas of NE Georgia - Blood Mtn…to celebrate my birthday…the last mile was shear rock, almost straight up…but what a view!

Moggy

good question, ignorance is bliss I guess it is harder to know what is happening than not because you can’t do anything about it but watch. And protect yourself with short etfs, they went parabolic, don’t like the candles they formed today though. We may have recoverys here and there but were still in a bear market with earning that wont beat last yrs. for most except some staples maybe, thats for sure.

  Makes you want to stop paying your life insurance policy.  Unless the gov nationalizes them too.  It’s out of control.  The whole world needs to just stop everything and take a 2 month holiday…paid for by the gov’s of the world of course.

btw, the worst week ever on record for the S&P down 18%. 

Could have been worse, like Japan down 25% on the week because the yen crushes their economy.  Jap CB should be forced to sell their yen, but they can’t push the rate any lower.  This is a big problem I hope they discuss in G7.

from HS…a worldwide banking holiday over the weekend…don’t ask, I won’t tell.

Moggy

compilations of what kids say in class or in essays in school or, in your case, what tourists ask park wardens (because I think clever people with time on there hands enjoy dreaming up such questions for entertainment and to post them as ‘authentic’). 

But assuming that there are some truly authentic questions  in the examples you posted, it does not surprise me, given the perceptions behind some of these funny question, that there may be some problems for the general public to grasp what is happening with global manipulation of the US dollar index and it’s reciprocal twins (the price of gold and the price of silver).  And a similar set of seemingly funny questions from the public could be compiled in respect to the global currency/precious metals markets.

Who are  the sheep here and who are  the border collies guiding the sheep, when it comes to the value put on the U.S. dollar index, and therefore the price of gold?   And I wish you a pleasant Friday evening.  Equiz.

Causing the yield curve to go bonkers again.  Loved it in Feb 2007 bernanke said that we could be enter a period where the yield curve would stay “permanently flat”.  or NOT!

Thanks for the chuckle !! Definitely needed after a week like this.

Stratford

Red Alert: The G-7 — Geopolitics, Politics and the Financial Crisis
The finance ministers of the G-7 countries are meeting in Washington. The first announcements on the meetings will come this weekend. It is not too extreme to say that the outcome of these meetings could redefine how the financial markets work, certainly for months and perhaps for a generation. The Americans are arguing that the regime of intervention and bailouts be allowed to continue. Others, like the British, are arguing for what in effect would be the nationalization of financial markets on a global scale. It is not clear what will be decided, but it is clear that this meeting matters.

The meetings will extend through the weekend to include members of the G-20 countries, which together account for about 90 percent of the global economy. This meeting was called because previous steps have not freed up lending between financial institutions, and the financial problem has increasingly become an economic one, affecting production and consumption in the global economy. The political leadership of these countries is under extreme pressure from the public to do something to solve — or at least alleviate — the problem.

Underlying this political pressure is a sense that the financial class, people who run global financial institutions, have failed to behave responsibly and effectively, and have therefore lost their legitimacy. The expectation, reasonable or not, is that the political system will now supplant these managers and impose at least a temporary solution. The finance ministers therefore have a political mandate, almost global in scope, to act decisively. The question is what they will do?

That question then divides further into two parts. The first is whether they will try to craft a single, global, integrated solution. The second is the degree to which they will take control of the financial system — and inter-financial institution lending in particular. (A primary reason for the credit crunch is that banks are currently afraid to lend — even to each other.) Thus far, attempts at solutions on the whole have been national rather than international. In addition, they have been built around incentivizing certain action and increasing the available money in the system.

So far, this hasn’t worked. The first problem is that financial institutions have not increased interbank lending significantly because they are concerned about the unknowns in the borrower’s balance sheet, and about the borrowers’ ability to repay the loans. With even large institutions failing, the fear is that other institutions will fail, but since the identity of the ones that will fail is unknown, lending on any terms — with or without government money — is imprudent. There is more lending to non-financial corporations than to financial ones because fewer unknowns are involved. Therefore, in the United States, infusions and promises of infusion of funds have not solved the basic problem: the uncertain solvency of the borrower.

The second problem is the international character of the crisis. An example from the Icelandic meltdown is relevant. The government of Iceland promised to repay Icelandic depositors in the island country’s failed banks. They did not extend the guarantee to non-Icelandic depositors. Partly they simply didn’t have the cash, but partly the view has been that taking care of one’s own takes priority. Countries do not want to bail out foreigners, and different governments do not want to assume the liabilities of other nations. The nature of political solutions is always that politicians respond to their own constituencies, not to people who can’t vote for them.

This weekend some basic decisions have to be made. The first is whether to give the bailouts time to work, to increase the packages or to accept that they have failed and move to the next step. The next step is for governments and central banks to take over decision making from financial institutions, and cause them to lend. This can be done in one of two ways. The first is to guarantee the loans made between financial institutions so that solvency is not an issue and risk is eliminated. The second is to directly take over the lending process, with the state dictating how much is lent to whom. In a real sense, the distinction between the two is not as significant as it appears. The market is abolished and wealth is distributed through mechanisms created by the state, with risk eliminated from the system, or more precisely, transferred from the lender to the taxing authority of the state.

The more complex issue is how to manage this on an international scale. For example, American banks lend to European banks. If the United States comes up with a plan which guarantees loans to U.S. banks but not European banks, and Europeans lend to Europe and not the United States, the integration of the global economy will very quickly shatter, leading to significant limitations on international trade, currency convertibility and so on. You will nationalize economies that can’t stand being purely national.

At the same time, there is no global mechanism for managing radical solutions. In taking over lending or guarantees, the administrative structure is everything. Managing the interbank-lending of the global economy is something for which there is no institution. And even with coordination, finance ministries and central banks would find it difficult to bear the burden — not to mention managing the system’s Herculean size and labyrinthine complexity. But if the G-7 in effect nationalize global financial systems and do it without international understandings and coordination, the consequences will be immediate and serious.

The G-7 is looking hard for a solution that will not require this level of intrusion, both because they don’t want to abolish markets even temporarily, and more important, because they have no idea how to manage this on a global scale. They very much want to have the problem solved with liquidity injections and bailouts. Their inclination is to give the current regime some more time. The problem is that the global equity markets are destroying value at extremely high rates and declines are approaching historic levels.

In other words, a crisis in the financial system is becoming an economic problem — and that means public pressure will surge, not decline. Therefore, it is plausible that they might choose to ask for what FDR did in 1933, a bank holiday, which in this case would be the suspension of trading on equity markets globally for several days while administrative solutions are reached. We have no information whatsoever that they are thinking of this, but in starting to grapple with a problem of this magnitude — and searching for solutions on this scale — it is totally understandable that they might like to buy some time.

It is not clear what they will decide. Fundamental issues to watch for are whether they move from manipulating markets through government intrusions that leave the markets fundamentally free, or do they abandon free markets at least temporarily.

Another such issue is whether they can find a way to do this globally or whether it will be done nationally. If they do go international and suspending markets, the question is how they will unwind this situation. It will be easier to start this than to end it and state-controlled markets are usually not very attractive in the long run. But then again, neither is where we are now.

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I was just wondering if you and Mr Polly were still having luck buying junk gold and silver or if people wern’t selling as much as before. TIA
Cheers
Dusty

http://www.youtube.com/watch?v=xIsHD7nwTbU

Interesting stuff..

http://dollardaze.org/blog/?post_id=00405&cat_id=20

After reading this I think you will agree that it is CHEAP…..
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Silver From the Mine to You
by Northwest Territorial Mint Staff

Silver has long been mined, refined, struck into coinage or formed into ornaments and items for thousands of years. As often as we buy and sell it, we rarely think about the amazing process that liberates silver from the earth and places it into our possession. For those who are curious — but not engineers — this summary is intended to highlight some of the science involved in the process.

Silver and lead are often found together, and, in fact, silver is usually a byproduct of mining for lead, or often copper or gold. To mine silver, it must first be pulled from the ground as ore — a metal-bearing rock material that is valuable enough to be mined. If the ore is sufficiently close to the surface, the mine may be an open pit style surface mine. If it is too deep, shafts down to the ore are dug and the ore is brought to the surface.

In order to obtain usable metal from the rock, many steps requiring massive equipment and immense power are required.

First, the rocks containing the desired metal are pulverized, crushed until small enough to fall through a sieve, then added to water, making a muddy slurry. A solution is added that enables the silver (and gold, often) to dissolve.

Once dissolved, the silver is separated with the help of carbon. When introduced to the slurry, the carbon attracts the silver, which binds to it; the rest of the slurry is directed away, leaving a tank full of precious-metal-coated carbon.

The metal is washed off of the carbon with water, then the carbon removed, leaving a muddle of silver and water. To finally get the silver from this mixture, electricity is run through the mixture, drawing the silver particles to stainless steel cathodes, where it adheres. After the water is removed, the silver sludge adhered to the cathodes is permitted to dry, leaving a silver powder.

After exposing the powder to enormously high temperature and a chemical agent that attracts impurities, the powder melts. When poured into molds, only the silver and gold pour off; everything else is left behind. What emerges from the molds is a bar of about 99% pure silver and gold weighing about 50 lbs.

These bars are sent to be further refined, separating the metals to a purity of 99.9% or higher. The refined metal is poured into large bars of approximately 1,000 ounces for delivery to industry.

Refined silver bars such as these make their way to mints (although not every mint works with bars; the US Mint, for example, buys its blanks from other vendors, and only strikes its coins).

At Northwest Territorial Mint, however, these bars are further melted into smaller billets (cylinders of silver). The warmed billets are fed into an extruding machine, which, through vast pressure, converts the billets into strips of silver of the correct thickness for 100-ounce bars all the way down to 1-ounce rounds.

To create the blanks for the die-struck bars or rounds, the extruded silver strips are fed into a blanking machine, which punches the correct shape out of the strip; the leftover is then melted again for the next production run. Blanks are then struck with dies at up to a thousand tons of pressure to create the silver product that investors buy at a rate of tens of thousands of ounces per day.

This process is remarkable and capital-intensive, yielding an ancient asset that is beautiful, enduring… and always valuable.

Dusty

also…I have never owned UNWPX…I will look at the holdings,,,Probably will buy some..

Thank You!…I am dollar cost averaging in…I dont need the Money..

over the long haul, probably will look back & say…”WHY DID I NOT BUY MORE”

about 5 pts…but for whatever reason things seem completely hopeless IMO.

I guess i feel that way because the silver stocks were sent off to the guillotine the past few days

PAAS - p/e of 10.5 now — consider it a complete option on silver

SLW p/e of 13; SIL 0.6; CDE 27; AEM 50  — SSRI and HL neg last quarter

when I saw they had smacked silver early this morning with gold still up 7 bucks - I got the feeling that gold would get pounded again.  I hoped that it would have a different ending this time - but - the outcome was the same.  

Glad that I was not able to watch the markets after 11am EST - my computer and tv might not have survived!    

I believe it is correct, but a bit misleading.  It’s how much they paid out last year as a lump sum divided by their current NAV.  As share prices have plummeted [NAV down] that calculated yield has gone up (let’s say it was 5% at the end of last year, now calculates 16%), but do not expect the same yield this year if any.  Check out UNWPX, the sister fund, they consistently pay out larger yields the past 7 years.  Just be aware that UNWPX has more speculative stocks in for good or bad.  That said, I still believe that there will be no snap back V shaped bottom.  This correction will most likely take a long time to heal and then there will be an eventual retest months down the road.

Like my writing when Im busy

Any National Park…

“Have we done all there is to do, or are we missing something?”
“What is there to do around here at night?”
“Is there anything interesting up the trail, or just more of the same? (trees, rocks, streams, you know)”
“Tourists to one another: “Are you seeing anything good?”
“Since there are bears here, should I keep my cat inside the tent?”

Denali National Park, Alaska

“What time do you feed the bears?”
“Can you show me where the Yeti lives?”
“How often do you mow the tundra?”
“How much does Mount McKinley weigh?”

Price William Sound, Alaska

Tourist while kayaking at sea: “What elevation are we at?”

Yosemite National Park

“Where are the cages for the animals?”
“What time do you turn on the falls?”
“Can I get my picture taken with the carving of President Clinton?”
“How long is the two hour Valley Floor Tour?”

Mammoth Cave

“How much of mammoth cave is underground?”

Grand Canyon National Park

“Do you light it up at night?
“I bought tickets for the elevator to the bottom; where is it?
“Is the mule train air conditioned?
“Are there dining cars on the mule trail?
“What time does old faithful go off? (Recall, this is Grand Canyon)
“So where are the faces of the presidents? (see above)
“Was this man-made? How did they make it?
“What year did they build this?
“Exactly why did you guys put it here?

Glacier National Park

” What does the park service do with all the animals in the winter?

Yellowstone National Park

“Does old faithful erupt at night?”
“How do you turn it on?”
“When does the guy who turns it on get to sleep?”
“Where do the animals sleep at night?”
“We had no trouble finding the park entrances, but where are the exits?”
“Do we have to leave at night before the gates are closed?”
“When do the deer turn into elk?”
“Can we eat this? (holding a handful of moose droppings that look like milk duds)”

Grand Teton National Park

“What is the white stuff up there? (pointing at snowfields)”

Mesa Verde National Park

“Did people build this, or did Indians?”
“Why did the Indians decide to live in Colorado?”
“Why did they build ruins?”
“Why did they build the ruins so close to the road?”
“What did they worskip in the kivas — their own made up religion?”
“Do you know of any undiscovered ruins?”

Carlsbad National Caverns

“How much of this cave is underground?”
“What’s in the unexplored part of the cave?”
“Does it ever rain in here?”
“How many ping pong balls would it take to fill this up?”
“So what is this, just a hole in the ground?”

Devils Tower National Monument

“Where’s the entrance to the elevator?”

Lake Michigan

“What Ocean is this?”
“Are there waves on Lake Michigan?”
“But its always to cold to swim in, right?” (debateable)
“Wouldn’t it be neat if they built a pipeline so we could”
use this water to irrigate our crops in California” (grrr…)

Niagra Falls

“Where can I buy a ticket for the barrel ride? ”

Appalcaian Trail

“How much further does this trail go” (about 1200 miles)

Everglades National Park

“Are the alligators real?”
“Are the baby alligators for sale?”
“Where are all the rides?”
“What time does the two o’clock bus leave?”

Edinburgh, Scotland

“Do you have any photgraphs of the castle under construction?” (the castle dates back to parts of the 10th century AD).
“Can we see the original blueprints of the castle?”
“Wouldn’t it have been better if they built the castle nearer the stores?”

You are too funny and I really appreciate the LAUGH!  I made it back from the club and jacuzzi/sauna and am happily sipping my Gin (a cheap one) martini.  I didn’t have time to stuff the olives with Danish bleu cheese, but I can pretend.

Amazing… the combined market cap of the 500 or so companies comprising the CDNX is less than $15 billion CDN.    Goldcorp alone has a market cap of $21 billion.

Yield?… is this correct?

bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=userx&sid=0&o_symb=userx&freq=2&time=20&x=40&y=17

For example, Russell Metals, which we have held in our portfolio for about 5 years now, at today’s price has a P/E ratio of only 7.5, and with an annual dividend of $1.80 per share has a yield of over 9 %/year at its current price.  This is a steady workhorse in our portfolio and I do not know of any company-specific bad news to explain its recent fishing-line plunge.  Think how pleased we would be if we could hold a gold-mining stock that paid a dividend of 9 % per year.

The chart below indicates what a strange market we are in now.  Cheers.  Equiz.

http://stockcharts.com/h-sc/ui?s=RUS.TO&p=D&yr=3&mn=0&dy=0&id=p86289054249