A new era began today. There is hardly any other way to describe the possible outcome of the measures which the US an other authorities took in order to deploy the parachutes designed to stop this week's freefall in global confidence and markets. A series of light bulbs went on as officials gathered to map out a frontal assault on the evils of the subprime Hydra. The realization that plugging leaky holes one at a time in a dam larger than Mr. Hoover's was a waste gave rise to a master plan that includes a broad range of immediate and future countermeasures with which to fight the enemy. And, yes, they do involve collateral damage and some real sacrifice.
This, then, will become known as the week during which one can- for the first time ever -write the sentence: "Gold prices rose and fell by the largest amount in 28 years" within 48 hours' time. Try wrapping your mind around that, for starters. The list of action items born overnight is long and their enactment will yield outcomes which have not yet been fathomed. Start with a ban on short-selling 799 financial stocks. Add the building of the world's largest toxic waste container into which to pour the radioactive subprime sludge. Mix in a good dose of insurance for money-market funds. Stir. Then, season the mix with the proposal to buy Frannie debt, add more liquidity and a host of additional schemes to be designed and announced over the weekend. The pundits whose job it is to ponder the effects of all of this on various markets may not have enough time and column width to fully analyze what will result.
Seismic shifts of this intensity occur but once a century, on average. But, occur they do, and one must adjust their thinking, their lifestyle, and their priorities as regards that root of all evil -money- under the conditions that emerge once the dust settles. It is not this author's intent to rush out an either pop a champagne cork or hide under a bed. Those who are brave enough to declare that 'This is IT' or express confidence that gold/the dollar/stocks/housing/etc. will now follow a clear path this way, or that, will very likely live to eat their initial prognostications with a ladle full or yummy crow. Within days. Thus, we say, 'wait and see.' You have a lot to lose by rushing to conclusions. Like your money, sleep, and faith. Repeat: wait. Let the fog lift and the day begin.
Now then, we have had gold slaloming from $918 down to $824 and back to $870 in less than 24 hours. It opened today somewhere around the $850 mark (like it matters) and promptly headed...in no particular clear direction. Where is it going? Not a good question to ask today. Or, maybe even next week. Be glad if your 10% safety net is in place, but hope not to have to sell it. Try trading on the news and diametrically opposed predictions that will be offered later and regret will follow as sure as day follows night. Silver gained 65 cents to $12.57, platinum rose $58 to $1139, palladium was up $1 at $232. Again, just numbers at this point. Where they will be next week or next month depends on a list of factors that is entirely too long to list here. For today, let's ignore the topic of 'price' - it is simply irrelevant and not indicative of anything that is to come. IMHO.
Will the volatility continue? Probably not in the 'banned' stocks on 'that' list. Not for now, at least. Everything else, is another story. Will there be cries of 'socialism!' and 'unfair!' to come? Of course. Will there be false starts, incomprehensible rallies, and deep plunges? It's a given. The Global Bailout Brigade has sprung into action and the results of their jihad will set the stage for the type of financial world we retire in and our children will have to make a go of it in. But don't ask for details on this brave new world just yet. We have only spotted its coastline. We know not what the landscape looks like. Our advice is to bring plenty of useful tools to settle this virgin land.
Views on the crisis and its proposed solutions will continue to flood TV screens and newspapers for some time to come. Different people will be seeing different things in different places when staring at the same problem. There are no finite conclusions to be offered as yet. However, for starters, let's try to learn what is being offered in the way of survival tips by people who have demonstrated that they would have been winning contestants on the show bearing the same name:
George Soros, Barton Biggs and Robert J. Shiller have all published books in recent months that ponder what to do when U.S. financial institutions stagger.
So as market turmoil lashed American International Group Inc., I thumbed back through these and other finance books to glean 10 easy tips for fixing the mess and weathering the storm. The recommendations range from the apocalyptic (stockpile food) to the abstract (dump the Efficient Market Hypothesis).
Americans should face the scale of the mess and take a one- time $1 trillion asset writedown, advises former banker and financial writer Charles R. Morris in his primer, "The Trillion Dollar Meltdown" (PublicAffairs).
So far, banks worldwide have written off about half that amount, $518 billion. Brace for more pain.
Though $1 trillion stunned some readers when Morris's book came out in March, the figure has since been cited by bond-fund manager Bill Gross at Pacific Investment Management Co.
During Alan Greenspan's tenure as chairman of the U.S. Federal Reserve, "the creative destruction component of capitalism was routinely suppressed," writes William A. Fleckenstein in "Greenspan's Bubbles" (McGraw-Hill).
The upshot: Bankers became fearless and "lost respect for the idea that they might lose money," says the president of Fleckenstein Capital Inc. in Seattle.
Risk isn't risk-free, as Lehman Brothers Holdings Inc. learned after becoming the largest underwriter of mortgage bonds.
Listen to Your Kids
Paul Muolo, executive editor of National Mortgage News, recalls in "Chain of Blame" (Wiley) how teenagers started using "subprime" as a verb.
"I'd better not subprime that test," his 13-year-old daughter Sherry observed one day.
Things could be worse: She might have Greenspaned her final.
George Soros has long disputed the theory that markets always move toward equilibrium. The current meltdown -- which he calls the worst financial crisis since the Great Depression -- proves his point, he writes in "The New Paradigm for Financial Markets" (PublicAffairs).
The billionaire investor brainstorms through solutions that range from abandoning some financial instruments to creating a clearing house or exchange for credit-default swaps.
Yet this is mostly a plea to reject the belief in efficient markets that has led Ph.D.s armed with PCs to concoct ever more exotic investing strategies and instruments.
Heed Your Inner Cockroach
Simplify financial instruments, cut leverage and act like a cockroach, writes Richard Bookstaber, a former Moore Capital Management Inc. risk manager, in "A Demon of Our Own Design" (Wiley), which came out in 2007.
Unlike today's tightly coupled, complicated markets, the cockroach excels at responding to unanticipated risks. Armed with a crude defense mechanism, it moves away from any puff of air that "might signal an approaching predator," he says.
"Simpler financial instruments and less leverage will create a market that is more robust and survivable," he says.
Yale economist Robert J. Shiller, the dot-com and housing- bubble Cassandra, remains a contrarian now that events have proved him right. In a market blasted by what Warren Buffett termed "weapons of financial mass destruction," Shiller calls for more financial innovation, not less, in "The Subprime Solution" (Princeton).
We should expand ownership among low-income people by creating such things as ``continuous-workout mortgages," in which a homeowner's payments would be adjusted to reflect his or her ability to pay and trends in the housing market, he says.
Sounds like a full-employment plan for mortgage lenders.
Former Republican strategist Kevin Phillips slams politicians in "Bad Money" (Viking) for allowing Wall Street to hijack the U.S. economy.
Like Hapsburg Spain, the maritime Dutch Republic and imperial Britain, America as chosen to "luxuriate in finance at the expense of harvesting, manufacturing, or transporting things," he writes.
What can be done? He advises the U.S. to focus on high- value-added manufacturing -- as Switzerland does.
Markets often crash when powerful forces collide -- like the weather systems in Sebastian Junger's "The Perfect Storm." Calming the maelstrom is rarely easy, as Robert F. Bruner and Sean D. Carr show in their case study, "The Panic of 1907."
J. Pierpont Morgan Sr.'s struggle to tame that crisis illustrates how "collective action by leaders can arrest the spiral, though the speed and effectiveness with which they act ultimately determine the length and severity of the crisis," the authors say.
Rethink Tax Deductions
Martin Fridson's "Unwarranted Intrusions" (Wiley) came out when U.S. housing prices were peaking in 2006. The former Merrill Lynch & Co. junk-bond strategist raised a point many now make about the dangers of the U.S. tax deduction given on interest on home mortgages: The real benefactors of this break include builders and real-estate agents who enjoy an increased demand for housing, he writes.
Head for the Hills
Mankind endures "an episode of great wealth destruction" at least once a century, says Barton Biggs, of hedge fund Traxis Partners LLC, in "Wealth, War and Wisdom" (Wiley).
His advice: Diversify your investments and prepare for the worst. Buy yourself a farm that's off the beaten track yet easy to reach and stock it with seed, fertilizer, medicine and guns.
"Think Swiss Family Robinson," he says.
Thank you, Bloomberg for giving us this philosophical collage.
This weekend's prescription: Take the some time off, sit in front of the TV, watch and listen. We have seen several talking head say ' we are going up' in the morning and come back on the air only to say ' we are going to head down' about the prospects for the same asset, based on the same set of conditions. Kind of like the McCain take on the economy and AIG. What fun. Give this greatest show on earth at least through the weekend to unfold. And don't forget to take notes.
Kitco Bullion Dealers Montreal
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