Agora Financial’s Rude Awakening

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Laguna Beach, California

• $41 billion in Fed lifelines and how they effect your investments,
• Protecting your dollars in the material-energy system of economics,
• Delinquencies, Dow tumbles, a CD made of Gold and plenty more…

Eric Fry, reporting from Laguna Beach, California…

Mortgage delinquencies doubled last month compared to the year before. That’s
not a good thing.

The Dow fell 362 points yesterday. That’s not a good thing either.

The Fed pumped $41 billion into the financial system yesterday…and that’s
probably a terrible thing.

The Fed does not toss out $41 billion lifelines unless someone is actually
drowning. And if our suspicions are correct, a few big financial institutions
might be at risk of slipping under the waves.

As detailed in several recent editions of the Rude Awakening – (in
particular, the October 26 edition, “SIV Positive“  and the October
17 edition “Bail Out Nation“) many large financial institutions are gazing
around desperately for lifelines, but the financial markets stubbornly refuse
to provide them.

The vast community of investors worldwide is refusing to finance mortgage-
backed-securities of any size or description or credit-rating. That’s why the
Federal Reserve is in bail-out mode. The Fed’s $41 billion of repo activity
yesterday was the largest such injection since September 2001 (think 9-11).
Tellingly, the Fed’s maneuver yesterday occurred amidst rumors that Citigroup
might cut its dividend to preserve capital. And – oh by the way – the Dow
tumbled 362 points on the back of a brand new interest rate cut that was
supposed to make everything all better.

But the rate cut did not make everything all better. It did not make anything
better…because it can’t. A rate cut cannot convert a defaulted subprime
mortgage into a valuable asset. It cannot convert a AAA-rated CDO full of
toxic, overpriced garbage into an actual AAA security…and most of all, a rate
cut cannot convert liars into truth-tellers.

We don’t know where all the liars might be; but we’re pretty sure that many
of them draw paychecks from the financial institutions that hold lots of
mortgage-backed securities. As the mortgage market proceeds from bad to worse
to catastrophe, we’re pretty sure that many officers of financial
institutions are not telling the whole truth and nothing but the truth about
the value of their mortgage-backed securities.

Rather than fessing up to massive mark-to-market losses, many finance
companies are resorting to desperate rescue plans of one sort or another.
Citigroup’s “crisis management” strategy, for example, seems to consist of
showing up on the Treasury Secretary’s doorstep with a bouquet, a box of
chocolates and puppy-dog eyes.

Secretary Paulson has responded with sympathy and billion-dollar rescue
plans. But these efforts cannot possibly replace the entire capital markets.
Not even the U.S. Treasury and the Fed combined can replace the capital
markets. (Some folks in Russia tried that tactic a few years back and it did
not work very well). For as long as Treasury and the big banks continue to
play “Hide the CDO,” the capital markets will remain on strike. As long as
governmental agencies and major finance companies collude to conceal the
fair-market value of mortgage-backed securities, the market for these
securities will continue to spiral toward disaster.

In this context, Citibank’s prospective dividend cut assumes a mock-heroic
stature. The dividend assumes a seeming importance much greater than its
actual importance. Citi’s dividend is more symbol than substance. Why?
Because Citigroup is probably facing a crisis far more serious than whether
to pay its shareholders 5.6% per year or 4.6% or zero percent. All totaled,
Citigroup dispenses almost $10 billion per year in dividends. So a modest
dividend cut would only yield two or three billion dollars. That’s real
money. But the big bank might need even “realer” money – the kind that only a
complete elimination of the dividend would yield.

Best case, Citibank will not be extending vast amounts of credit any time
soon, nor will Bank of America or Countrywide Financial or any other major
American lending institution. Worst case? Don’t even ask.

This is where the real problems begin.

Without fresh credit, what will become of the American consumer? How will the
American consumer continue to over-leverage himself? And what will become of
the American economy without millions of over-leveraged consumers?

Play is safe, dear investor. Play it safe. These are not the days that will
reward investment heroism.

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Scary Stuff
By Byron King

Halloween featured some very scary sights this year: Crude oil at $95 a
barrel and gold at $800 an ounce. These frightening visions of runaway
commodity prices must be terrifying to anyone who trusts the Federal Reserve
to preserve the dollar’s value. On the other hand, individuals who invest in
oil, gold and other types of commodities can derive a ghoulish delight from
the dollar’s slow demise. These individuals are making money… and they are
likely to make even more money, as the world comes to grips with a genuine
shortage of crude oil.

Two weeks ago, I attended the convention of the U.S. branch of the
Association for the Study of Peak Oil & Gas (ASPO), held in Houston. The news
was, as you might expect, pretty bleak. Slide after slide, chart after chart,
speaker after speaker told the tale of the world’s oil fields peaking in
output and, in due course, going into irreversible decline.

From the North Slope to the North Sea, Saudi Arabia to Siberia, Canada to
China, Iran to Indonesia, output of oil greatly exceeds new discovery. Many
of the world’s largest oil fields and provinces, such as Saudi Arabia’s
Ghawar, Kuwait’s Burgan, Russia’s Romashkino, Mexico’s Cantarell and others,
are decades old, with no real replacements anywhere on any horizon.

Yet despite the declining output from the world’s principal oil provinces,
worldwide demand is creeping upward. For example, about 50 million new motor
vehicles hit the world’s roads and highways every year. Every one of these
new sets of wheels comes with a gas tank. You do the math.

At the ASPO conference, one of the speakers was legendary Texas oilman T.
Boone Pickens. Mr. Pickens has been in the oil business since 1951 and has
pretty much seen it all. One questioner asked Mr. Pickens when he expects
world oil output to peak. The answer was fast and firm. “We peaked last
year,” said Mr. Pickens. “We are pulling about 85 million barrels per day out
of the world, and that’s about as good as it is ever going to get. It is only
going to go down from here on out.” During the ASPO conference, oil was
crossing the $90 per barrel mark. Mr. Pickens commented on this as well,
saying, “I think we are going to see $100 oil before we ever see $80 again.
There might be a recession that would pull the price back to $80, but we’ll
see $100 first.”

And Mr. Pickens had more to say along these lines. “Now we are in the decline
phase. From here on out, the question is what will the decline phase be?
That’s the only real question going forward, isn’t it? If it’s a shallow
decline rate, then overall we might be able to conserve and substitute for
energy use, to stay ahead of it. But if it’s faster than we can conserve and
substitute, then we are going to have some serious problems.”

Someone asked Mr. Pickens if there is some way to control demand for oil. He
replied, “The only way to kill demand is with prices. Much higher prices.
Looking ahead, higher prices will allocate the available supplies.”

“Much higher prices?” Aboard our good ship Outstanding Investments, we have
the lookouts posted. From bridge wing to crow’s-nest, we are watching for the
signal when oil crosses the $100 level and gold goes over $800. Sure, as the
numbers get close the automatic sell triggers might kick in around the globe.

Oil might get to $99.99 and gold to $799.99, and then the Masters of the
Universe on Wall Street might sell their futures and drive the prices back
down for a while and buy some time. No need to alarm the masses, right?

But the tide has turned in the world economy. In a post-Peak Oil world, a
material-energy system of economics is now beginning to dominate over the
neoclassical monetary system. The idea of “capital” is no longer confined to
the number of U.S. dollars one has in a bank. After all, U.S. dollars can be
(and have been) created in gross excess at the whim and caprice of the
Federal Reserve. Now the questions are: “Where is the oil? Where is the
gold?”

And as we wait for the fateful pricing occurrence, that moment when we will
see new modern records for oil and gold, we have to ponder the implications.
Just what will be the true meaning of that signal, as the prices of black
liquid and yellow metal break into uncharted territory? Will it be just
another day at the office for the traders of the world and the pundits who
chronicle their exploits? Or will we see some sort of economic detonation and
mushroom cloud? And if there is a mushroom cloud, can the shock wave be far
behind?

I expect to see gold at $850 per ounce in the not-too-distant future, and
then $900 and $1,000 within 18 months, if not sooner. Actually, we regret
having to say that, because it means that the U.S. dollar will be losing
value in a precipitous drop during 2008. It will not be a pretty sight. Just
imagine the loss of purchasing power, and the associated destruction of
capital, that our society collectively will experience as this occurs.
Imagine a scenario of asset deflation and price inflation.

Even if you move all of your investments to foreign currencies, along the
lines of what our old friend Jim Rogers has announced he is doing, you may
still suffer the effects of the declining value of the dollar. If the U.S.
economy is, as the analogy goes, the world’s economic locomotive, then this
train is about to derail. Take long-term monetary mismanagement, plus fiscal
profligacy at home and an unaffordable war abroad, and you have the
ingredients for economic disaster. Stand by for a domestic recession as the
value of the U.S. dollar drifts downward. There will be pockets of prosperity
in export-related fields such as high-tech and large capital goods like
commercial aircraft (thanks, Boeing). But if you don’t earn a living building
Dreamliners, we suggest that you get out of debt, fast…and buy gold.

[Joel's Note: Now, what is an investor faced with a Federal Reserve whipped
by Wall Street, escalating prices of commodities and dwindling value of his
dollars? You could wait for your greenbacks to hit rock bottom, lamenting the
fact you didn’t convert them to something “golder” when you had the
chance…or you could invest in one or more of the foreign currency or
commodity-backed FDIC-insured certificates of deposit (CDs) that our friends
at EverBank offer.

Agora Publishing has an ongoing business relationship with EverBank, whereby
we work together to create investment tools for our readers based on our
editor’s market insights. If you’d like to learn more about ways you can
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Rude Endnote: We’re not sure if it’s due to gold’s meteoric rise over the
past few years, or the fact that we’ve recently relocated to Dubai – also
known as the City of Gold – but your editor has been struck with a case of
acute gold fever since we arrived in our new home.

Much to the delight of your editor’s girlfriend, we’re off to Dubai’s gold
souks this afternoon to do a spot of research for a future Rude special on
Dubai gold…and to possibly buy a few shiny trinkets while we’re there.

Oil may be hitting record highs too, and perhaps it’s also a good place to
park a few eroding dollars…but a jerry can of black goo doesn’t buy nearly
as many neck massages as a new pair of earrings does.

We’ll be back next week with some pics from the gold souks and a look at how
the rocketing price of everyone’s favorite yellow metal is playing out in the
world’s largest gold retail market.

Cheers,

Joel Bowman
Rude Awakening