Curried Wealth Building
Finding an Edge

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March 9, 2009
Issue 36  -  Big Picture  
 
This week I'm going to look at a little bigger picture to see if there are any clues about what is happening.  The most important characteristic for a good investor is flexibility.  The investor who clings to one mind set or world view is destined to lose a lot of money.  The wise investor is willing and able to quickly adjust to changing conditions.  There is an old saying that there is always a bull market somewhere.
 
This past year was especially difficult for investors as most assets went down.  There was, however, good profits to be made in shorting the market, the dollar and bonds.  These weren't exactly "traditional" investment classes but they did provide profits for those flexible enough to take advantage.  Contrast that with the devastation to the "normal" investor who lost 40-70%.  These investors are seeing the effects of a dogmatic approach such as "buy and hold."  It will take many years to dig out of this hole.  For those nearing retirement it means either delaying retirement or reducing yearly draws which will mean a lower standard of living.
 
The richest man in the world even lost over 40% of his net worth last year.  Warren Buffet has as his number one rule of investing to "never lose money."  Well what happened?  When you are as large as Buffet, and there is a large turn down in the market, you just can't move fast enough to get out of the way.  This is where we have the advantage over the rich guys and mutual funds.
 
So what is a good course of action at this time?  First, we have to determine the state of the economy in general.  This is quite easy by looking at some key factors.  Yes, the leading economic indicators are bad, but does that mean anything about what is GOING to happen.  Probably not.  To see that, we must look at what the authorities are doing now.  Always look at what they are doing, not at what they are saying.  I'd say that things are pretty bleak as they don't want you to know what they are doing:
 
"Fed Refuses to Release Bank Lending Data, Insists on Secrecy

By Mark Pittman

Enlarge Image/Details

March 5 (Bloomberg) -- The Federal Reserve Board of Governors receives daily reports on loans to banks and securities firms, the institution said in response to a Freedom of Information Act lawsuit filed by Bloomberg News.

The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.

The bank provides “select members and staff of the Board of Governors with daily and weekly reports” on Primary Dealer Credit Facility borrowing, said Susan E. McLaughlin, a senior vice president in the markets group of the Federal Reserve Bank of New York in a deposition for the Fed. The documents “include the names of the primary dealers that have borrowed from the PDCF, individual loan amounts, composition of securities pledged and rates for specific loans.”

The Board of Governors contends that it’s separate from its member banks, including the Federal Reserve Bank of New York which runs the lending programs. Most documents relevant to the Bloomberg suit are at the Federal Reserve Bank of New York, which the Fed contends isn’t subject to FOIA law. The Board of Governors has 231 pages of documents, which it is denying access to under an exemption under trade secrets.

“I would assume that information would be shared by the Fed and the New York Fed,” said U.S. Representative Scott Garrett, a New Jersey Republican. “At some point, the demand for transparency is paramount to any demand that they have for secrecy.”

Bloomberg sued Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs.

‘Financial Crisis’

The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.

Total Fed lending exceeded $2 trillion for the first time Nov. 6 after rising by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA. Fed lending as of Feb. 25 was $1.92 billion.

Posted Collateral

Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit.

On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It sued Nov. 7.

In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”

Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.

The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.

Bank Opposition

Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, the Fed argued in its response.

“You could make everything a trade secret,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.

The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan)."
 
So the Federal Reserve doesn't want to tell us what is happening?  That, to me means trouble.  The excuse that revealing receiving banks will stigmatize them is bogus.  How many normal citizens with deposits in a bank follow the news closely enough to find out if their bank is a receiver of freebies?   Not too many.  The idea that it would hurt the bank to reveal their identities is only showing how desperate they are to keep secret what is actually happening with the money. 
 
Bernanke also had this quote which I'm going to paraphrase.  "We don't want to nationalize banks.  Nationalizing would mean that the share holders would be wiped out.  We don't want that."  Really?  So the Citibank share holder whose shares have plunged from $50 to $1 didn't get wiped out?  Down 98% is, I guess, not too bad to Mr. Bernanke and his cronies.  This is getting to the point of idiocy, and we're the idiots for allowing them to get away with this.  The Congress and Main Stream Media are both asleep at the wheel, or paid off accomplices.  Either way, we get screwed.  We will be left holding the bag.
 
What could the Fed be worried about?  What are they not saying?  Look at this chart and you will have a better idea of what's going on:  (from contraryinvestor.com)
 
 
 
 Now this chart shows the credit card delinquencies.  Remember the consumer was living off of stock capital gains up until 2001.  Then they were feeling no pain as their houses went up and up.  They used that like a giant ATM.  Once the housing bubble popped, they were in a bind.  How do I keep up my overextended lifestyle?  That's right, they went to the credit cards.  Now, as you can see in the chart, that is coming back to bite them as they struggle to keep up.  What's left?  Where can they find funds?  I can't think of anything, and I've thought long and hard, so I'm pretty sure most people can't either.  The delinquencies for credit cards are at an all-time record.  This means that folks are finally having to save.  In fact savings are over 3% when just recently the savings rate was negative.  This means less money spent into the system.
 
Couple this with the state of banks.  Look at this, again from contrary investor:
 
  
 
Obviously, this is not good.  This is the "insurance" agency that "guarantees" your deposits.  Does this look like they are in good shape?  Maybe this is why this happened:
 

"Report: Bill seeks $500 billion for FDIC fund

Legislation would boost credit line in exchange for trimming new bank fees."

 
Most in congress are not reacting favorably to this request so that should give one pause.  Maybe they looked at this chart:
 
 
Now why would the FDIC ask for $500 billion when the total assets of all the "troubled" banks totals less than $160 billion?  Hmmmm.....maybe the problem is much, much worse than we're being told.   Ding, ding, ding, we have a winner.  Basically these liars are hiding trillions of losses and are trying to stick the tax payers with as much as they can.  Unless, congress gets this under control, and they show no signs at present of doing so, we are in big, big trouble.  Obviously, things are going to get worse, before they get better.  Does that mean we ignore the stock market?  Well, that would be the safest course, but I am looking at a short term play here.  I expect a violent rally sometime this year in the world's stock markets.  I will be letting everyone know when I pull the trigger. 
 
As a last point, making money in this environment is tremendously tricky.  So above all else protect your capital. If you can't afford to lose it, get it into something that is safe like Treasuries.   Of course also get some insurance, PHYSICAL gold in your own sweaty little palms.  But you probably knew I was going to say that.