The Mother of All Bailouts (MOAB) keeps growing. SurvivalBlog reader PhotoTom sent us this: U.S. Tries a Trillion-Dollar Key for Locked Lending. Here is a snippet: “The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.”
I’ve been warning about the likelihood of hedge fund collapses for years. This first trillion dollars in bailout money for the hedge funds is little more than a kind gesture between banking buddies. But it won’t magically restore liquidity to a global credit market that measures in the hundreds of trillions. International liquidity is still frozen, asset values are still plunging, the level of opacity and obfuscation are nearly total, and the level of mutual trust betwixt bankers is miniscule. The current “Price Discovery” system is a joke. Most of the once-touted collateralized debt obligation (CDO) derivatives, for example, are so onion-layered that there is no effective method to judge their safety. And we cannot depend on “neutral third parties” to judge value, risk, and credit-worthiness. The so-called watchdogs at Standard & Poors, Fitch, and Moody’s, we have learned, were complicit in the subprime Housing Bubble swindle. They were on the take. Who wants to buy packaged debt instruments when they may contain toxic debt? Who is going to lend in that environment? I can foresee that the write-downs may eventually be as deep as 80% for many derivative instruments such as CDOs and credit default swaps (CDSs).
I stand by my prediction of massive hedge fund failures and redemption suspensions. The next wave will likely come in early April, when hedge fund earnings (or more likely the lack thereof) are announced at the end of Q1.
An aside: Two of my consulting clients are hedge fund managers. Both of them are looking for extremely safe, remote, and self-sufficient rural retreats. Who can blame them? More than most other observers and certainly more that the still clueless talking heads on CNBC, hedge fund managers can see the enormity of the economic crisis, its full implications and the most likely final outcome. And that outcome will be a lot more like The Road Warrior than it will be It’s a Wonderful Life.
Dollars and Real Money
Do you recall my mention that the US Dollar’s recent gains against the Euro are more of a function of banking weakness in Europe than it is of any real strength in the Dollar itself? This article with accompanying graph prove my point: Financial Crises And Public Finances: Where Is The Greatest Risk? (My thanks to veteran economist John Mauldin, who pointed me to the BCA Research web site.) According to Mauldin, Europe is just one small step from a total systemic banking collapse. I concur. If one European nation’s banking system fails, the rest may follow, like a house if cards. The American banking system may be precarious, but the situation is even more tenuous in Europe. My advice? Get out of paper currencies (both the Dollar and the Euro) and buy practical tangibles. Things like Silver, gold, stainless steel (handguns) and lead (the JHP variety). Forget fine art, vintage wines, and collectibles. Those are all headed into a downward spiral. But if by chance you do fancy any of those, just wait until we reach the depth of the Depression, and you’ll be able to pick them up for 20 cents on the dollar. Presently, you should be getting out of your dollar-denominated investments, and stuffing your home gun vault vault full of battle rifles, large bore autopistols, and full capacity magazines. A few bags of pre-’65 junk silver make nice ballast for the bottom of the vault. The current (and most likely short-lived) strength in the Dollar represents perhaps your last chance to pay down your debts and shelter your assets in tangibles.