Agora Financial’s Rude Awakening

Jump to Comments

Dubai, UAE

• Gold’s “fire sale” price and just how long it can last,
• The Fed stokes the dollar flames with TAFs and TSLFs,
• $810 billion ready to go up in smoke, Atlantis burns and plenty more…   

Joel Bowman, reporting from Dubai in the Persian Gulf…

As we sat down to pen yesterday’s edition of your Rude Awakening, your editor had a kind of Rude Awakening of his own. A melodious siren suddenly smashed the peace and quiet in his apartment and a voice wailed over the building’s speaker system:

“This is an alarm. Do not panic. Proceed in an orderly fashion to the lobby of the building. Do not use the elevators. Do not panic. This is an alarm…”

Doing our best to remain calm amidst the deafening sound of the alarms, your editor headed for the nearest stairway, pausing only to grab a couple of small books and an old pencil case along the way. Taking the stairs two at a time, we started to wonder what we were running towards. Is the fire above us or below us? Could it be that the lobby we are running towards is ablaze? And, if so, shouldn’t we be heading in the opposite direction, to the rooftop?

Then, what could we do from the roof? Flag down a helicopter? We tried to think of what our father, a fireman of 25 years, would do. For a start, he probably would have taken an apartment on one of the lower floors…

When we eventually arrived in the lobby, puffing and panting after the 35-floor decent, we saw that it was already crowded with our neighbors. People were shouting and scampering about, clearly paying no heed to the “do not panic” instructions. We were then told to assemble outside the building in the “meeting area.”

Your editor, thankful that he did not have to turn around and make for the roof after all, took a moment to observe what items the other tenants had thought to rescue from the inferno.

One woman, an elderly lady dressed in gym clothes with brilliant white hair, clutched onto a small dog. Both woman and pooch were yelling at the doorman, demanding answers he surely didn’t have. We noticed two young couples, probably around our own age, who had thought to grab their briefcases and binders. At least if the building burned to the ground they could still make it to the office with the relevant paperwork. Some people brought only themselves and the contents of their pockets; others carted photos or assorted nick-knacks and keepsakes. One woman even thought to bring her wedding dress, still on its hanger. (She was probably on the way back from the drycleaners when the alarm sounded, we reasoned.)

We looked down to our own hands. Two small blue books, filled with stamps and dates and a worn out pencil case, conspicuously heavy and clinking as if it were full of cutlery.

After a while a man came over to address the crowd. He was a small Indian man but with a sonorous voice he declared, “There is no fire. Only false alarm. Problem with switch only.”

The assembly gradually began to disperse. Lady and pooch huffed and complained, clearly indignant that they had been disturbed from their daytime television. We wondered if a few of the people wished there had been a fire, if only to give the whole occasion some purpose.

Later that evening, we thought about the things worth saving. In an economic inferno, what would you rescue? In the rest of today’s rude, we take a look at why grabbing the gold and leaving the dollars to burn might be your best bet. Enjoy… 

—- The Strategic Short Report —-

New Research Source Reveals…

The Bear Market Strategy So Powerful, Governments Have Tried to OUTLAW It At Least Three Times

Last year, it made as much as $10.96 million per day for one astute investor… For the first time, we’re revealing the five-step secret that lets you do this… Read On Here

——————————————–

Money To Burn
By Ian Mathias

It’s no secret the Federal Reserve plays a big role in American inflation. It sets the country’s benchmark lending rates, it prints money… Heck, even a hint of inflation expectations from Ben Bernanke can put the dollar in the doghouse. But starting late last year, Bernanke and his brood created a whole new way to devalue the greenback…one that has resulted in the printing, borrowing, and trading of over $1.5 trillion.

Flash back to December 2007. The credit crisis was about to swing into full force. U.S. banks had recently issued a slew of dreadful earnings reports, and even worse losses and bigger write-downs seemed imminent. Banks needed cash to cover these losses - right away - and they needed to cheaply.

Enter the Fed…and its Term Auction Facility, or TAF. In a TAF, the Fed offers banks billions in 28- or 35-day loans at a rate below the Fed’s published lending rates. In the first, on Dec. 17, 2007, banks received $20 billion in cheap loans from the Fed. It held another TAF a few days later…another $20 billion.

The “success” of the TAF was instantly evident. Banks were asking for more than the Fed was willing to lend, and each auction appeared to provide temporary relief for financials. It worked so well the Fed decided to keep on holding TAF auctions…indefinitely. As this credit crisis worsened, it even started offering more money…up to $75 billion each auction.

There’s been a TAF every other week since December. To date, TAF auctions have resulted in the printing and lending of $810 billion to financials fighting to remain solvent - not exactly “prime” borrowers.

Enter the Fed’s Trash-for-Treasuries

The Bear Stearns crisis hit full force in March - bringing home to the Fed that investment banks were on the hook too. Billions and billions of mortgage-backed securities so clouded their books that not a soul on Wall Street was willing to buy them. Thus, the TSLF was born.

In a TSLF, investment banks trade illiquid asset-backed securities for U.S. Treasuries. In other words, the Fed willingly exchanges the debt of the United States, the global embodiment of a “sure thing” security, for subprime trash. And the icing on the cake…the Fed gives a multimillion-dollar “haircut” to investment banks attending the TSLFs. Lest we forget, the Fed’s in the business of printing and making money.

Like the TAFs, the TSLFs have been a big hit.

So now you see…between the TAFs and the TSLFs, the Fed has placed a $1.5 trillion bet on the fate of financials. True, there’s a chance all the loans will be paid back. Maybe those toxic mortgage securities will one day return to full valuation. But they might not. And it’ll be as if the Fed printed
money just to throw it away.

From the geoeconomic point of view…these auctions slay the dollar. The Fed - the central bank of the U.S. - is running the presses 24/7, lending extra cheap cash to companies in legitimate danger of going under. Even worse, Bernanke and company are implicitly calling bundles of subprime loans and U.S. Treasury notes one and the same. If you were managing China’s holdings of U.S. Treasury notes - worth some $500 billion - how would you feel about your U.S. IOUs? If you were a currency trader, would this prompt a buy or a sell?

But here’s the real kicker: No one is talking about the TAFs and the TSLFs.  No “expert” commentary, no subtle hints of the rife moral hazard of it all…not even a tally of exactly how much the Fed has given away to date. When the combined efforts of the TAFs and TSLFs crossed the $1 trillion mark… not a peep from any major media outlet. Just business as usual.

Every paper in the country blasted headlines of the Fed’s $30 billion bailout of Bear Stearns, but this slow and steady trillion-dollar bailout of the financial community at large is back-page news. And it’ll stay that way until we start to make some noise. So tell your friends. If we don’t keep the Fed in check, who will?

And if you haven’t started already, we propose more gold buying in your future. It’s the one store of value the Fed can’t keep handing out like candy. There’s no TAF or TSLF for gold. Bless you, Comex and the London Gold Fix.

—- Gold’s Discount Window Is Closing —-

With Gold Back Down Around $800, it’s no wonder everyone’s talking about it again. But what they don’t know about are “Vancouver LEAPERS”

Here’s How To Use “Vancouver LEAPERS” To Make Huge Gains in this Blowoff Phase of the Gold Rally

The last time we saw a gold market like this, some investors made 971%, 2,464% and even 3,987% with little-known “LEAPER” stocks. Today, you have a once-in-a-lifetime chance at similar gains for as little as $500… Details Here   

—————————————————

Tale of Two Malls
By Paul Tustain

A Texan customer who came to see me a few months ago told me a story which illustrates the fine mess we’re in.

In the 1980s boom his neighborhood boasted not one but two commercial real-estate developers, both of whom were building shopping malls.

The one developer was cautious. He’d already built two malls successfully, and by re-investing some of his profits as equity in his new project he’d reduced his leverage and his risk.

Further along the avenue, however, was a more aggressive developer. He’d borrowed 98% of his construction costs on artificially cheap credit; money which had been pumped into the banking system by the Fed to keep the economy steaming along.

Anyway, the experienced developer was earlier into his construction project and completed it ahead of schedule – and he got his mall nearly fully occupied. His competitor, as well as being more highly geared, was slower to build and later to complete, so you can guess what happened next.

As the early ’80s boom in Texan oil projects and real estate turned into bust, the new mall couldn’t get any tenants, which meant there was no revenue to pay down the debt. The aggressive developer went bust, and with the local economy sagging, the near worthless debts on his empty mall were sold by the bank at just 18 cents on the dollar.

That allowed the new owners to slash the asking rents. They charged 4 cents on the original construction dollar, making a yield of 4/18 – a healthy 22% yield on their outlay. But that rent deeply undercut the other, more cautiously built shopping mall. It was charging 12 cents on its construction-cost dollar, fully three times as much.

Naturally, as the recession wore on, the cautious developer watched his tenants quit his mall for those cheaper rents down the freeway. So now the cautious developer failed too.

Why? Because overcapacity – first of credit, then of malls – had driven the local price of rented retail space down to third of its reasonable rate of return. The total rent that could be earned on two malls was significantly less than what could have been earned on one.

I have always found it difficult to make the logical step from cheap credit – which sounds so helpful – to financial collapse, which seems so regularly to follow it. This story shows how the route passes through overcapacity. Yet even overcapacity was not bad news for those investors who bought the distressed mall at 18% of its construction cost.

How were they able to get such a bargain? Simple. They could raise cash when almost no-one else could. That probably meant they were debt free at the end of the expansion, and had found a reliable store of ready value as the credit liquidation played itself out.

I like to think that lots of BullionVault users will one day be the opportunists in stories like this, though I also believe the credit crunch has a long way to go, which means it will not be for some considerable time. Gold certainly doesn’t offer a 22% yield, but when other asset classes do, perhaps sellers of BullionVault gold will contribute the capital which kick-starts our economies from the bottom of the coming slump.

Until then debtors, politicians, and central bankers will call us hoarders, and accuse us of destroying the economy. It’s not a label which makes me feel particularly proud, but I think I can live with it.

[Joel's Note: When the smoke eventually does clear, there is likely to be a fire sale in the U.S. economy. Those who have their savings in gold will be able to trade it in at the top of the market for some heavily discounted assets. Now, there are many ways you can get your hands on some fireproof metal. Paul Tustain happens to be the director at BullionVault, the world’s largest provider of professional, wholesale gold bullion to private investors. If it’s the security of physical gold you’re after, we recommend you take a look at BullionVault’s operation. Details Here.

——————————————–

[Rude Endnote: As we write to you this morning, a friend forwarded us an email with some pretty amazing pictures. Coincidentally, around the same time we were bounding down the stairs during yesterday’s false alarm, a real fire was raging on just a few kilometers away. Here is a shot of The Atlantis Hotel, the centerpiece of the world famous Palm Jumeirah island, in all its flaming glory.

We hope nobody left their passports or gold stash in their room.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com