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Stocks and Liquidity

Posted On: 2007-01-26
Length: 1:08:00

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Alright, this is Johannes Ernharth, you're listening to Vigilant Investor live, every Friday, 3:30 PM Eastern Time, tune on in, you can catch us here and we're available for call ins and chat and so forth. So, you got to visit us at talkshoe.com where we host our show every week, and we can be accessed there by, boy I mean you can do a couple of different things with Talk Shoe which is pretty fantastic. You can just listen if you want to just get the streamcast and of course through vigilantinvestor.com you can always find us, our links to the streamcast there by just clicking on our information about our live show. Additionally, if you want to be part of an ongoing chat in the background of the show, people sometimes log on in and converse and of course there is the call in function, which you can just dial on in to (724) 444 - 7444, dial in our Talk Shoe id which is 982, and then you call in with any questions you have, you just need to make sure you have your own password to do that, sort of a PIN number is what they call it but, basically if you register with Talk Shoe you have your own, but of course we have our own show call in number which is 222-333-4444, that's 222-333-4444. So, all sorts of excitement there if you want to be part of the show. Of course also, because it is a Podcast type show, after we do it live you can just subscribe to us via iTunes or through Talk Shoe, that's all sorts of different ways you can get a hold of our RSS feed and be part of our listening audience that way. Just automatically link up and it syncs up with your iPod if you have one of those through iTunes, very fancy feature, on a weekly basis. So, there is nothing wrong with that. But hey, welcome to another show of Vigilant Investor live, here we are, another week has gone by, we're wrapping up with the markets closing in about 25 minutes here Eastern Time and that always keeps things a little bit interesting with respect to our close. Not a whole lot really going on today in the markets, other than just a touch down with the Dow Jones from earlier highs and S&P is up a touch; Nasdaq is up just a little bit. We take a look at some of our other indicators that we like to monitor, the USDX today, it's up a little bit. So, the U.S. dollar is getting a little strength verses other currencies. It's up about 0.15 and that last rate we have there is 84.26, just hard to believe that just in early December, late November we were dealing with the USDX being below 83 or into the 83 territory which is you know, for the USDX, U.S. dollar, you know, telling you you've got a lot of weakness there. And it was below 83 actually in, trading in the 82's, which is one of those baseline points, we still look at the 50 day moving average we can see that things have been trending down since about a year ago, and it was actually trading above 90 in the late January, early February and even into March and progressively there was a huge slide in April for the dollar verses other currencies and then it moved up a bit through the summer, gained a little strength, it was trading above 86 even peaked over 87 a couple of days, as recently as in October, prior to the big slide on Thanksgiving, which took it from above 85 down to the 82.5 level just about, and now it's gaining strength and it's, looks like it's from that low moving upward and gaining more strength. And of course we always say with the dollar, I mean hey if you're a regular listener you know this one, don't pay attention so much to the USDX though, I mean we monitor that but of course it's verses the five other world's largest currencies. So, when you're considering what they're doing with their currencies, it's very similar to what the U.S. has been doing with its currency with the dollar. The Federal Reserve has been progressively basically printing away, but so have these other central banks. We'll touch on that a little bit later, because we actually have some stats here from the folks at the Economist Magazine, and they've given us an update for 2006 on money supply globally, and boy you know, as much as people have been talking about, you know the Federal Reserve and other central banks really worried about inflation. It is a liquidity binge out there especially when we measure through M3 type figures, which are broad-based money indicators. But in any event, back to the markets today, we take a look at the CRB index, it's gaining a little strength it's up around 295 and we look at natural gas, it's been building up a little bit with this cold weather finally hitting the United States after 70 degree weather around the holidays. And we have crude oil, 40 dollars, looks like a long way from 55.42, we're up a buck, nineteen today. And our other big indicator is gold, which has been gaining a lot of strength over the past couple of weeks and generally it's been trading you know, boy anywhere from 650 down to the 600 level over the past you know, 3 months or so. And in early October it was trading below 600. And we take a look at, let's to a quick look at one year here, because it's been a wild ride for gold. And the reason we take a look at gold is not because of its investment properties, but rather because it ends up being an alternative indicator relative to faith in currencies. Historically, boy, I mean gold's been around since Egypt and the Great Egyptian Empires where you had the Faros and that kind of stuff, gold has been something that has been in demand and boy, plenty of paper currencies have come and gone over the years. Boy, I mean you can count hundreds and hundreds of them, nations have had their currencies, and how many currencies out there do you see where you take a thousand of something to buy you know a pack of cigarettes or something, or just to get a soda. Well, the dollar, you know, we know is getting inflated and we take a look at what's going on with gold just to measure that verses the dollar and we can look at that verses other currencies as well. Because even though pretty much from 82 to about 2000 when everybody considered gold to be the barbarous relic and nobody wanted to have anything to do with it and central banks were dismissing it, folks on Wall Street were dismissing it. Gold ends up being an anchor, an anchor for stability, it ends up being an anchor of responsibility and pretty much since Nixon nixed the connection between gold and the dollar back in 1972, when he removed the exchange window for foreign central banks to exchange their dollars with gold, and it was at 35:1 ration, thirty-five bucks to an ounce of gold. That was virtually a default on the dollar and so be it. But under, boy, you look at Lyndon Baines Johnson, LBJ, what happened with Vietnam, all the expenses, all the social projects and having off balance sheet, things like Social Security, Medicare, he knocked those things all off the, and he had to print a lot of money to cover deficits. And that caught up with the U.S. and foreign central banks finally said, you know what, you're printing a lot of money over there, maybe we'll take that 35:1 ratio, because it ain't worth 35:1, it's worth a whole lot more. And about one day of that lasted, actually the French said they were going to do it and they were getting ready to do it and the British jumped in ahead of the curve and did a lot of conversions and Nixon slammed the door shut. Defaulting on the dollar for the second time in the century, we don't speak of it in those terms here in the United States because we're too proper, we, oh that kind of stuff only happens to banana republics, right? But here in the U.S. don't forget FDR had to do the same thing, he basically made it illegal for people to protect their wealth with gold, he made it illegal to hold gold and he changed the ratio of exchange of gold from about 20:1 in terms of dollars to ounces of gold, and he made it illegal and reneged for individuals for private individuals to hold the money. But [...] buddies in the central banks, say, hey you can still do it, foreign nations, the big power brokers, all that kind of stuff. They're able to do 35:1, up through 1972 and Nixon slammed the door shut. But that was the second default in 72, the first default I think was in 1935 and boy that came in short order, it didn't take too long for that to happen after the Federal Reserve got it's grubby little fingers into the U.S. dollar back in the mid teens. And that may sound a little bit harsh, a little bit loaded language but holy moly, have they destroyed the purchasing power of the dollar. It's lost about 98 percent of the purchasing power in less than one hundred years. A lot of nations have not been able to do it that quickly, granted we're not banana republicing it, we're not doing what Zimbabwe has done to its currency or some other nations have in third world environments. But, were the United States and yet we have destroyed 98 percent of the purchasing power of the dollar. [...] prior one hundred an some years, existence of the dollar, it pretty much was steady. It didn't have a lot of inflation in the U.S., the inflation only in fact occurred during huge wars, civil wars that kind of stuff War of 1812, where a lot of money had to be printed for governments to cover their war debts, or we also had inflation when, the bankers out there a lot of times private interests trying to control the banking system would start monkeying with the money supply as well. And otherwise dollar problems were very much localized regionally and depended upon individual banks and their ability to either inflate or not, when people would catch on to inflation they would bail out of that particular bank's dollars and go elsewhere. And that would cause a run on the bank and that pretty much forced honesty in banking in currency. But, I really have gotten off on a tangent here, haven't I? We were talking about gold prices and here we are but, really since 1972 there have been no anchors whatsoever to keep dollar printing on the ground. And I'm not going to get too much more into the history of that but let it suffice to say, we monitor gold prices here and not because it's just an interesting way to make a fast buck as an investment, you're hearing all sorts of people pushing it out there but, as an economic indicator, I think it makes sense for people to watching it. Because this is a global indicator in terms of what people are perceiving currencies worth to be. And I don't think we're going to see anything changing any time soon. I see my co-host Stephan Ernharth has hopped on board. Hey Stephan, how are you doing today?

Stephan: I'm doing fine Johannes, how about yourself?

Not to badly, just wrapping up the markets here and summarizing what's happening, gold is a, in case you want to know where it is, down a touch today but still trading at about 650 dollars an ounce and I was just elaborating for the benefit of you to catch up here on you know basically why we monitor the gold price as sort of a hedge against you know what's really going on there with real currencies or I should say paper currencies and so forth. Incidentally, moving on, with respect to our other indicators, one other thing I do like to monitor is the VIX, that's the CBOE volatility index, and that is now at 11.10, 11.10. And it has, boy it's been vacillating a bit over the past couple of weeks, close to, it was down in the 10's again earlier, just a few weeks back. And you know, that's still well below historic averages and it tells us that people still are generally complacent, reaffirms, you know, the 12 big Wall Street firms Stephan, that have all echoed each other in saying that they expect the S&P 500 to be positive, they expect Goldilocks economies to be, Goldilocks to be the U.S. economy projection, a soft landing for a recession, maybe not even a recession, probably just a soft landing. Nothing too much to worry about with housing and so forth. So, the VIX is confirming that people really are indifferent as trading still at probably the 95th percentile in terms of lows. It got as low as 8.60 during trading earlier in the year, and since that dipped down it's been trading in the range anywhere from you know 12's to 10's and back and forth from day to day. So all said and done, boy the indifference out there is stunning relative to some of these structural problems we talk to week to week.

Stephan: And I would interject Johannes, yeah, indifference among the average investor who is really not schooled in much other than buy and hold and remember, you cannot expect, and to quote Mark Faber, the esteemed Mark Faber, that you know, realtors are bullish on real estate, stock brokers are bullish on the stock market, you know people are bullish on what they do and what they sell, et cetera. So you always have to take that with a grain of salt. And even though we are seeing distortions out there, the fact that a ton of analysts who are paid by who are bullish on the markets in general, you know, typically we've seen in the past when everybody is over bullish, or over bearish, things tend to go the other way. And that's something that you really need to pay attention to out there.

Absolutely and specifically, you know we've been quoting in the blog over the past week at vigilantinvestor.com talking about some of the past gurus out there who have on the way down prognosticated that the bottom had arrived. And of course currently we're dealing that, with that with the NRA, not the NRA the NAR, the National Association of Realtors, or is it the NRA? Whichever it is. David Lereah, who is their chief economist is quoted all the time, I was just listening to the news yesterday, Stephan and I think it was on local broadcasting station here, major broadcaster KDKA, listening to their news at 6 and they're talking about real estate and boy, the real estate looks like it's really, you know the have this guy who is a guest on there who is being you know interviewed in sort of a snippet. And he's telling us how the real estate is bottoming out and it's a great opportunity to be buying right now and of course he's with the National Association of Realtors. And, tell me he doesn't have an axe to grind. And David Lereah of course is the more prominent and there are actually blogs out there that are tracking his comments. Because this just happened 6 years ago, Stephan, 7 years ago in 2000, and even prior to that as the equity bubble was ballooning higher and higher, the dot.coms and so forth, we heard all these justifications for valuations you know, with a click through rate of a dot.com, of an Internet company and the view rate the eye rate, how many blinks is a web site getting as new ways to value a company's stock, as opposed to basic cash flow profits and so forth. So, you know they you have your Abby Joseph Cohens of the world, you know, here's Goldman's chief analyst who is very prominent back. From March of 2000 all the way down, every day of the week, all we kept hearing out of folks like that with the bottom's here, the bottom's here, it's a great time to buy, you know, the whole way down and in the end, what is their axe to be grinding. They're selling, that's their job. Do you think Abby Joseph Cohen is getting paid by Goldman Sachs to badmouth the market when her job is to be selling stocks?

Stephan: Right, absolutely. So, I think that you never really know and I think the wisest advice and again from being involved in this business since 1987, the wisest advice I can give anybody, not specific investment advice, but in a way to view markets is that things take a lot longer to really shake out the way that they're supposed to shake out. That's on the upside, and that's on the downside. And many times in the midst of a bull market, it can be in stocks, it can be in gold, it can be in oil, you can have these dramatic pull backs, I mean I'm talking 40 percent pull backs and then it shakes out all the speculators and then blows through the stratosphere. On the flip side, what may look like a bottoming in the stock market, or a housing market let's say or any type of a market, it turns out to be a pseudo plateau on the way down and then there's a subsequent collapse after that, so I think it's premature to say that the housing market has bottomed out. You're still looking at a lot of new home builders or sellers etc.., developers using a lot of gimmickry like free kitchens, trips and all these sorts of things to move homes and you know why are they doing that? You know? Why are they doing that?

And that does not show up in the sale price either. What you're seeing is you know, we know the prices are at a certain level they've come down a little bit and everybody says well that's not so much but then you can also consider that I just skimmed an article a few moments ago about the sale are up just a touch in December relative to where they had been in prior months with the dismal numbers that we were seeing. And you know the bottom line is like you're saying you know, they're moving this by doing all sort of give-a-ways, and a lot of those give-a-ways are not worked into the final sales price because they're kind of off balance sheet give-a-ways that really don't reflect the true nature of just how discounted that price is.

Stephan: Right, and I think what you'll see, what you again, what is going to take time to see is you know, these builders, that's cutting into their profit margin. Okay, giving away a free kitchen, subsidizing a purchase by several thousand dollars here or there cuts into your profit margin and in the end they cannot afford to continue doing that. And that'll be the real answer to that question, but it's not now. And I think that one of the key things that you have to keep in mind, you cannot let your prejudices, you cannot let your biases or what you want to happen cloud your objectivity. And if you're in the business, and you're pushing this and you're pushing that, that's a real challenge okay? And we can expect people that sell certain things and make a ton of money, by selling certain things, why would they ever tell us they're bearish on what they're selling?

Absolutely, absolutely. Well one of the things I was going to tell everybody about while I was talking about the USDX before you came on board, Stephan and how we take that with a grain of salt, managed to get from the economist some M3 numbers and so forth to give you an idea of what's really going on out there. And again this is why we monitor things like oil and gold, and oil of course has come up from flirting with 40's and the 50 dollar level, getting below that is now back up above 55. And hey, you know, here we are, and why is that going on and the reality is that global money supply is out of control. In 2006, and this is from the Economist Magazine again, the money supply expanded at an average of 18 percent in Japan, you know this is where the bank loan rate is at a quarter of a percent where they're you know, essentially trying to give money away. I mean you borrow at a quarter percent, and then you go turn around and invest it elsewhere, you wonder why there's liquidity and evaluation problems, dislocation and so forth. Bottom line is that you have in Australia M3 money supply 13 percent higher from a year ago, British M4, 13 percent higher, euro's own M3 9.3 percent higher, 16 year high, Korea's M3 is 10.3 percent, China 16.9 percent, India 20.5, Russia 45 percent. And the U.S. M3 of course they discontinued publishing M3 back in February last year. And that was you know because we just don't need to monitor that figure anymore Stephan, right? You know, who needs to know what M3 is? But it's been reconstructed by several groups, and it's averaging out [...] reconstruction, and you're able to do that, because you know what the components were of M3 to show about 10.7 percent growth in 2006. And you know, the problem here with this, and this gets into some of our core problems with the economy over the next decade in something that's been building over the last couple of decades has been just a continued dependency on expanding money supply to gin up economic activity. And I deliberately used the word activity as opposed to growth because, when you print money supply, and just expand money, the purchasing power you get is from where? It's at the expense of other dollar holders. You're basically fractionalizing the existing wealth out there, and you didn't create anything, you did do any sacrifice to save and set something aside. The stewards of good business, the entrepreneurs out there who are able to plan things accordingly and actually create that kind of wealth, and then reinvest it. The money is getting yanked out of their hands and it's been put into the hot money sector and most recently the most obvious bubble that we're seeing right now that that kind of activity has generated, dislocation, and I always use that word dislocation because it is a dislocation from what would naturally happen. You know you look at, we posted up an article earlier in the week on the condo situation for example in Washington D.C. where they have had to cancel, I mean this is a nationwide problem here in all major metropolitan areas, everybody had delusions of grandeur about what was going to happen with getting rich with condos. And lots of people were investing money into it, where were they getting that money from, well they were borrowing it though the banking system which is you know the ever expanding credit, money supply system in effect. And taking that money away from people who are responsibly saving it or for that matter you know a lot of your retirees, who need to have that money off on the side and live you know month to month. Well the inflation rate that they're dealing with is a factor of all that money supply being increased. And it's getting pushed from them and into an over supply of condo units. Now, they're all taking in D.C. If you read the quotes that we've published up on Vigilant Investor, you know oh we're just going to convert these units over to rentals you know, as if that's not going to flood the rental market in these metropolitan areas and start causing people to have rent issues. Landlords, I mean how can they break even? A lot of them already under water with the prices, and they're not going to be able to make ends meet at current rent levels. And when you start talking about hundreds and hundreds and thousands of units coming on in major metropolitan areas for rent, it's just going to be a mess. And again, a lot of that money is financed, and when you can't make your ends meet based on your projections, what are you going to do with your loans? And that's where these kind of things, this money supply dependency that we have, the expanding money addiction, it's like a bad drug, it's like heroin, all the time you need more and more of it, and slowly you know you need more to get the extra kick and you know slowly you waste away. And there's a point where you have to just cut and go cold turkey and suffer the consequences of getting yourself off that addiction. And yet the world's central banks now have themselves in that dilemma where they're going to have to, if they stop this baloney, it's going to be a recession, it's going to be a deep one, all this misallocation, housing bubbles all the baloneys with the dot.coms, all that kind of stuff is going to have to wash out of the system, and it's not going to be pleasant, maybe they'll be able to rig up another you know round of liquidity to get flooding out there, but this is why we're monitoring gold, this is why we're monitoring oil, this is why prices are going up, this is why they have to understate inflation and so forth. So, interesting things and then you know we were talking earlier Stephan about some of the things that they're doing with Social Security now and Bernanke was getting grilled a little bit on the hot seat last week regarding Social Security, some of the benefit entitlements that we have out there, Medicare, Medicaid and all that kind of stuff, what are we going to do to balance it. And then the conversation kind of bleeds into, well you know what about CPI, maybe we can you know CPI suddenly overstated. Already they've monkied with that number so it's just mere fiction compared to what it was back in the 70's, understating inflation growth. If you reconstitute inflation, CPI measurement, as it used to be done in the 70's you're looking at inflation running close to 10 percent right now based on the old CPI figure. And today they're telling us it's fully under control, now Bernanke's proposing it's still overstated and they want to further reduce it. And that helps them balance budgets when your Social Security payment's dependent upon CPI as the inflater for monthly payments. And so that kind of garbage is going to continue, we've got a bad inflation problem, you know, I was flipping around the TV earlier today, even Montel Williams is talking about his stuff. If you can imagine, people aren't able to make ends meet like they used to. And why is that?

Stephan: I listened to some of Bernanke's testimony and what's intriguing is this and this is really important for our listeners, maybe first time listeners to understand, but the you know, inflation obviously is low balled by the government and people say, well why? Well, for starters, the increase of the money supply, that is inflation. You had mentioned Johannes, the government really doesn't track that anymore because more and more money is getting printed and basically the real rate of inflation could be somewhere between 8-10 percent. Now, the reason that the government doesn't calculate inflation, or the Fed doesn't calculate inflation by it's historic definition which is purely the increase in the money supply, is for among other reasons the fact that Social Security increases are pegged to increasing inflation, increases in the CPI. And so your Social Security benefits are stepped up according to that. The problem is, if we even use the Fed's rates from the 70's Social Security payments would be 70 percent higher. So if you follow that logic in that testimony what you have, I don't think Bernanke was necessarily being grilled, I think it was a well orchestrated feed back and forth softballed back and forth between the committee, and the chairman, Bernanke, and in effect he stated that gee, we are over calculating inflation. And to make it really simple listeners, it's this, Johannes you've used the term, the technical term hedonics, but what it boils down to, and that's always been in the background but now it's in the foreground and -

Among other things, hedonics is but one...

Stephan: Well, Bernanke basically said, in effect if people are substituting ground beef for sirloin, even though sirloin has doubled in price let's say, they're only going to, for that quote, meat, let's say, they're going to use the price for ground beef that people are being forced to buy because they can't afford the sirloin. And I guess when they can only afford Alpo, that's going to be factored into the inflation calculation verses ground beef or ground chuck, let alone sirloin. So in effect, inflation is being rigged low to keep the increases in Social Security low, far lower than the real inflation rate. And so in effect, to the poor taxpayer that's dependent on Social Security is getting jobbed on that end, their benefits are being increased at a far lower rate, and they're also getting paid out in dollars that are worth less and less. And the third leg of that, let me tell you right now, what's going to happen, people are going to get means tested out of Social Security. If you have any type of retirement savings, you will be considered to have too much money and you're not going to get your Social Security okay? And that, we'll see how popular that is politically, but that is what, the table that's being set.

Absolutely and you know the other thing about the whole CPI figure is it also helps boost GDP. Because CPI has deflated the use on Gross Domestic Product, which is the economic indicator. And they can you know overstate Gross Domestic Product and you get a real feel that boy, maybe things aren't so bad, why do things feel bad, this is what they were actually saying on Montel Williams, I mean, not that I sit around and watch Montel Williams on a Friday, but you know, you catch a conversation about economics and you're like, what the heck are they talking about here? And you know, he was actually saying it's almost like they need to have different statistics because the average person feels like they're, the economy is supposedly doing well, and yet the average person out there is feeling the pain of not having as much purchasing power as they did just a few years ago. And that's the reality of it, that you know, you are dealing with a decline in purchasing power, and again if you reconstitute that CPI, you actually see it really happening there. And again you know, you're saying you know, hedonics and that kind of stuff, I mean what they actually are doing with hedonics, and you were talking about the replacement kind of stuff where they substitute a price that's been going up and so forth. But hedonics when they use this with GDP is well to help fudge. You know if, the best example of hedonics ever has got to be in the 90's when they demanded, the federal government forced an environmental additive to added to gasoline in order to improve it's environmental quality of the output, and that caused the price of gas to go up about 10 cents a gallon. What did the official statisticians of the government say? Well, because the economy, excuse me, because the environment improved due to this, you really didn't get a 10 cent increase I the price of gas. So they actually considered the improvement to the environment a deflator. Now, if that's not stretching, I don't know what is. And that's, people saying, oh that can't be happening, they're not doing that. Baloney, it is happening. They do the, with GDP, it's you know, classic, if a computer last year cost a thousand dollars and this year someone spends a thousand dollars on a computer, but it's 10 percent faster, they'll say, well you actually spent one thousand, one hundred dollars. They use that to actually justify economic growth. They'll say that there was actually more growth then there really was in the economy. So they're doing all sorts of stuff. GDP as an indicator is almost, you know, it's questionable as to whether you can even rely on it. The only thing of value for a lot of these things tend to be everybody is watching them so you have to consider those variables and everybody believes GDP to be valid, and I guess you have to rely on it, but there are services out there that reconstitute GDP and they're finding that GDP based on the old way it was calculated years ago, we're actually in recessionary territory right now in negative growth. So, and that's important stuff to consider.

Stephan: Absolutely, if the inflation rate is really 8 or 9 percent, and GDP is what, 4?

Yeah, something like that, yeah.

Stephan: A rate of 4? Okay, so it's growing at a rate really of maybe negative 5 percent. And you know that's interesting. So, I think that obviously there are factors to consider, but you know as we have chatted about, we've chatted about this Johannes you know, we believe that the Fed is looking for a reason to lower interest rates to re-stimulate, because this has been nothing but a credit based, borrowing based economy really for God, the early 90's, alright? And it's really it really had to be stimulated post 2000, 2000, 2003, because the market was in a free fall, because it was abhorrently high, stock market based pretty much on the inflated money supply. And, as in the 1920's what goes up must come down. Where there's a ying, there's pretty much an equivalent ying to every yang. And you know that was what was starting to happen pretty darn dramatically but for 15 interest rates by the Fed, zero percent financing and automotive low interest rates, home equity loans mortgage et cetera, et cetera. And ultimately what you're seeing is as you have mentioned before, this home equity financing, which is what, roughly 50 percent responsible for, home equity extraction responsible for roughly 50 percent of our growth,

Or over that according to a Goldman Sachs study done. They estimated that it's about 2.5 percent. GDP averaged about 4 percent from 2002 to 2006, they're own estimation is that it contributed about 2.5 percent to GDP, home equity withdrawals did.

Stephan: Okay, and it's drying up like you wouldn't believe. So in effect, you know, the Fed realizes that to keep things going, these rates, look the savings rate is minus in this country still. So there is no savings for people to go out and spend. And, but for the ability to borrow more money and the willingness to borrow more money, this economy is going to, could very well stall. And the Fed is looking, we feel, for an excuse to lower rates in the hopes that Americans will borrow more money. Now as they turn 50, will they do that? That's the big question. And that's the wild card, that's where we wonder then will the central banks come in and start buying stocks. Which in effect is a bail out. Which in effect, that money is created out of nowhere, which in effect is going to be inflationary like you won't believe.

Well, and then there's also the other issue now, and this is where things get dicey going forward. Because we kind of have ourselves in this point where, you know, boy, what do you really, how do you really get a good sense...I get a lot of emails, are people, are houses really valued at a good price right now and so forth, and my answer to them is you know, how do we really know? And that's the big disruption when you have all this inflation as the pricing mechanism. The real true value of something gets so out of skew from reality because of artificial stimulation. And in the case of housing obviously it's the bull market interest rates, how do they get so low, well it happened through all the money supply expansion in the United States, the recycling of trade deficit dollars through foreign central banks back into the U.S. and etc.. etc.. etc...that kind of stuff has just been going on, and on, and on. And you know, when is something really going to be you know worth going forward, and now you have the foreign central banks. I mean they're looking at the dilemma of, you know, they have their price of, or they have their fill right now of U.S. dollar denominated assets in the form of U.S. Treasuries. But, you know, they're getting to the point now where you know how many 50 year low 30 year treasuries, or 15 year treasuries do we really need as say, the central bank of China? And it started appearing over the past 45 days where foreign central banks are saying, you know, maybe we need to diversify out of just plain old treasury type debt and government bond debt. And I think, I've forgotten which Middle Eastern central bank was talking about it, saying maybe we need to be dabbling in equities. And now you have the Chinese just this week, I think it was on Saturday of this week, last Saturday, talking about that you know, maybe we need to be dabbling into the equities market in order to improve our returns. Well, this is nothing new, this is exactly what so many investors, hedge funds etc.. etc.. they've been desperate for yield for about 5 years running now as interest rates have continually declined thanks to all the liquidity, all that money sloshes around out there and the demand for high grade bonds has just been through the roof because all that money is out there, so it has depressed the rate return, the rate of interest that lenders had to pay, U. S. government included. And what that does is, the U.S. Treasury is considered to be the absolute risk free rate of return, and as that gets lower and lower, what it starts doing is pulling down the riskier assets demand rate of return. So, in other words higher risk corporations and riskier governments now all of the sudden their bond rates start dropping and sink as well. And basically what's happening there is people cannot make ends meet with a U.S. treasury because the rates are just too darned low, so they go searching for yield elsewhere. They start stretching up in the risk curve to try to get better rates of return. And what starts doing is artificially depressing yields and then to boot, what you have out there is all these people taking advantage of like the Chinese quarter percent rate, and they're out there borrowing left and right and leveraging up investments into securities all over the place. And you know, a big hit was taken by the sub prime mortgage market over the past 4 weeks, when all of the sudden we're seeing a mini implosion happening there, I think already 12 or 13 of them have gone under. And those are smaller mortgage brokers, but that's going to start trickling up. What you're seeing happening there is through, gets a little big complicated but through all these derivative products that are used to help finance mortgages and in this case sub prime mortgages which are higher risk, you know lender, higher risk borrowers I should say. That money has been drying up and also you're getting a little bit of a lock up in the derivatives market there, and what you could see is that reverberating. And you know, we quoted a piece earlier this week on Vigilant Investor with Bill Fleckenstein of Fleckenstein Capital Management, he's on msnbc.com all the time and he was talking about a bunch of emails he's been getting from people who are in that business of trading the tranches of mortgage securities and so forth. And the tranches are basically, it's crazy what they do in the mortgage market, but they break up the different risk parameters or mortgages and so forth, and people trade them, and the riskiest classes are starting to have problems. And boy, you should read some of these, and the fact, let me pull this up, because when you actually hear these emails it makes you shudder. Just give me a second here while we do this...

Stephan: While you're digging that up Johannes, I think it's important to point out the fact that you know, gold has not basically gone from the high 280's to 650 since 2000 for no reason. And the retail investor, and for you all out there, all you listeners, the retail investor is really anybody under 5 million or it's not institution etc... basically most the individuals in America are retail investors. The retail investors certainly are not buying gold. Again, this program is not about giving recommendations, but I'll bet we are one of a thousand typically that have clients in precious metals okay? And the retail investor is not the investor, I'll tell you right now, because the major wire houses etc...you talk to clients that have assets there, they're not being told to get into these assets like gold and silver -

It's all hedge funds these days...

Stephan: Yes, well it's hedge funds and you know what else? I would not be surprised, the Chinese and other nations who invest heavily in the U.S. that are holding a lot of dollars that we keep sending away, they have to be diversifying their currency [...] remember, gold and silver, they are valid substitutes for cash in the sense that they are real money and they're not going to get inflated away. So that driving up of the markets, that's not the retail investor. Yes, it's the hedge funds to a degree, but I would not be surprised if foreign central banks or foreign governments are not heavily investing and diversifying their dollars into real money.

Yeah, exactly and real money, what we mean there is the money that has been historically been considered to be the final payment in the end when fiat currencies collapse and governments go away, what do people really want to start dealing with when you know it's, when push comes to shove, it has been gold. And that's just the reality of it. Even Alan Greenspan has testified as much in Congress that it is the ultimate final payment in the end when you start having serious problems with currencies, and repudiation of currencies and I'll tell you what, when you abuse currencies repeatedly and you start having structural problems in the economy and, it's amazing that people just don't size this up or how they view the current housing slump, ah it's just another ordinary housing slump, I mean what's there to worry about? But, hey let me get you into a couple of these quotes from Bill Fleckenstein, and on housing, here are some of the observations. This is actually an email that was sent to Fleckenstein himself, and he basically quoted in his article and you can link through to this, it's a great article, both of his articles, we've linked into two of them at MSNBC, if you go to vigilantinvestor.com and the headline of our post is, More Bear Observations: Housing and Tech, but "The commentary I am getting from field and legit brokers is that fraud is an out-of-control" and this is something we've talked about here, repeatedly, "fraud is an out of control locomotive. Stated-income loans are now finished for all the unemployed," excuse me, "unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding. "I am truly worried about the aftermath once it is resolved. It truly becomes a vicious cycle. Each time guidelines are pulled back, fewer buyers can buy homes. Thus, lower property values, and more people underwater. The debt piles up on homeowners' balance sheets, and people consume less. This will, and should, take years to play out." And I don't know if it's going to take years, I think it's going to be progressively slower drop than you'd see in equities no doubt, in ordinary equity credit correction, that's just the way housing works but, this guys belief that "Bernanke will yield to the Lobby and the Street, trying once again to lower rates and allow people to bail themselves out, while in turn allowing the buyout firms of the world to overpay for the companies they buy with easy money. The game is so rigged against honesty, it boggles the mind." And then, it goes on to say, another colleague of his, "The sub prime trade continues to evolve. Stage one was the turn in the housing market in July 2005. Ironically, stage two occurred in September 2006, a month after home builder stocks bottomed, when spreads on sub prime home-equity loan securitizations started to widen." And that means basically you got to start paying more and more for the extra risk, in other words borrowers can't get the old deal that they had. Spreads are narrow, that means that you know, risk [...] in risky assets are basically getting too close together in terms of pricing, and there's you know not a sufficient premium for the risk that you're getting by lending to high-risk borrowers. Anyway, it continues, "That might bring the ongoing problems in sub prime to a wider audience. Stage four is when a top-three-listed sub prime lenders goes broke, leaving various Wall St. firms saddled with bad loans. Stage five is when the market really gets it, and Eurodollars (at least for a time) start to rally hard as the market fears some kind of financial turmoil. We're not there yet, as we are just now entering stage three, but do not take your eyes off sub prime loan market for a second." And I could not agree with that any more. And I think that is one of the, you know, it's the tip of the iceberg we're seeing right now in the mortgage industry. And in just the same way that the condo market right now and some of these you know major metropolitan areas where you're seeing huge drops in prices is just the tip of the iceberg. And we're talking about not just you know an iceberg here or there, we're talking about a whole field of icebergs that you know, I think we're seeing more clearly than anybody else out there, I mean there are some people who are on our side of the fence that do a good job as well, Stephan, but it's almost like the rest of the industry that the conventional wisdom is so shrouded in the fog of overconfidence, and they just can't fathom that anything can go wrong. And they don't see that we're in the middle of a, just sailing through icebergs.

Stephan: Johannes I got into the business a few years ahead of you and that was in 1987, okay and that was an intriguing time let me say after you know, a few months ahead of after just taking the bar exam and passing that and getting right into this business, seeing the first sort of [...] black, what was it, Black Monday or Black Friday? I can't remember what it was, but seeing a substantial drop, that was a real eye opener that drop in the Dow. But what you find is that, this industry, sadly to many degrees, it's a sales industry. And I think that's what a lot of people ought to understand out there. Most people do not get told, hey, you know it's 12 thousand [...] 12 thousand, five hundred Dow, isn't it great that you bought and hold? Well, adjusted back for inflation to 2000 as we continually say, and this is the Fed's low figures, 12, 5 Dow in '2000' dollars is roughly 10, 7 Dow. The problem was the Dow was up, but the Dow was 11, 7 in 2000. So, adjusted for inflation you're down a thousand points. But, that is not, that's a tougher thing to tell your clients. And I think what people deserve to know out there is the truth, and the truth is that real rates of return are down about 8 or 9 percent just in the Dow adjusted for inflation. And you know, it's sadly to many degrees has become a sales industry or an unsophisticated industry on the retail level. I believe there are people at higher levels who know exactly what's going on. Now, I think it's also important, you know you mentioned in the attempts to prop up the housing market etc, the lowering of interest rates. Peter Schiff writes an article, January 22nd, and I'm just going to quote him, again Peter Schiff who we highly respect and think he's right on the money -

He's with Euro Pacific.

Stephan: With Euro Pacific and I don't have his web, actually you can hit their web site at europac.net. But ,"In a misguided attempt to prop up the housing market, the Fed will reluctantly cut interested rates. However, this will actually have the opposite effect on the housing market. The dollar will plunge sending long-term interest rates higher, exacerbating the recession, and making housing even less affordable. In the end Bernanke will feel he has no choice other than to rev up his helicopter engines. The recent strength in gold suggests that those engines might already be warming up. Again, before I comment, that's Peter Schiff at europac.net, excellent, excellent analyst. And basically you know, the revving of the helicopter engines again, that will include Johannes, central banks very likely buying into the stock market. And just like a bail out of GM, just like a bail out of a savings and loan, or a major bank, or a railroad, that money, that check to buy the government bonds to pay for that, is, anytime the Fed spends money, the check is stroked out of thin air, and I have the testimony, I can email anybody the testimony and the quotes from members of the Fed stating that.

That's right and you can always reach us at vigilantinvestor.com, there's contact information there where you can get through. Or you can just do it you know, you can email me, jcernharth@vigilantinvestor.com, always available that way. We're not here to give investment advice just so you know but if you have questions definitely fire them away and we will do our best to answer them as we can. One other thing I wanted to point out Stephan, were talking about, you were mentioning that the Dow Jones Industrial still is under water compared to its value in 2000 when you adjust it for inflation, you know, again, nobody talks about it on msnbc.com, they are always, you know, raising the ringing bells, the sirens and you know, all sorts of you know, flashing lights every time they you know, start breaking a new record in terms of nominal highs. But when you adjust that for inflation they're still under water of course as you mentioned when you adjust it for oil and gold you'd be getting half the purchasing power. I'd like to compare the period we're going through right now. And this is you know, far from a prediction, but rather just to illustrate you know, how these things can go, going forward. A lot of people that you talk to have the impression that you know from a historic standpoint, you know we went through the worst of what happens in equities from 2000 and 2002, we should be through the woods. You know onward and upward. And I think that there's you know, a great inflationary case for onward an upward with securities in equities an so forth, just because of all that money printing. Especially if you get the central banks starting to go out there and buy you know they'll start bidding the prices up here with all that you know, they can print money, heck the price is going to go up. Are the earnings going to go up? Real earnings, and is the real economy growing through that? Probably not, but yeah the price will go up. But I want to remind people about a different period, we go back from 1966, through 1982, and you can go to Yahoo Finance just to take a look at the chart on this but, go plop in October 1st 1965 through January 3rd 1983, as your date, they have a real nice little beta system where you can do a charting of the Dow Jones by specific dates, and you can see, you know, it was basically the Dow was just under one thousand in 1965, 66 early 66 when it peaked, and that began the bear market in the Dow Jones Industrial, and that one lasted too 1982, until things finally picked up mid way through, and when things bottomed out, and they picked up for good. But you have periods there where you know, mid way through 1966 towards the end of 66 it bottoms out, you have big run up until about 69 again where it breaks the prior high, only to hit a new low in 1970, just before 71. And then all of the sudden, you get a nice run, up until 1973, January of 73 where you actually get new highs, now of course these are nominal new highs, numerical new highs, where you break the thousand for the first time and everybody believed that you know, the sun was shining on the Dow Jones Industrial. And then what happens by mid 1974, early 1975 the value is cut in half. And again in 76, 77 you're back up to just about a thousand only for it to lose another 30 percent in 78. And these kind of things you've got to look at the chart to understand that. Now if you happened to retire in 1966 with the expectation of getting the average rate of return, just think about that if that were today, what would happen? Now, I'm of the opinion that we're going to be entering a heavy inflationary environment. But the problem with inflation is that only can work for so long until people catch on. And we might see a 30 thousand, 40 thousand Dow, if we do we'll probably be seeing 80-dollar pizzas. But on the flip side, if people start losing faith in what's going on and they start understanding that really what's happening is a ginned up system that is you know slowly undermining the economy etc, etc... and worse yet, the economy starts, you know, we're in a wasting phase. The economy is getting weaker, we may not see it in the numbers because they're fudged, but if you talk to the average person on the street, the run of the mill people out there are actually losing purchasing power, no doubt about it. Now if you happen to be you know, as Dr. Mark Faber refers a member of the money shuffling class and you're up on Wall Street, you're a you know, a junior investment banker or you're you know, one of the top guns up there, yeah you're getting record bonuses, and billions of dollars of bonuses up there because they're the ones that are at the front end of the spigot, and take in the cut as it goes out. You know, fresh money, and then the ones that earn profits and commissions on every issue of new debt that goes out there that's manufactured our of thin air. That's a nice business to be in. So, yeah, they're doing well, they're buying yachts and they're having record banner years, but the average bloke out there is having a hard time affording what's going on at Wal Mart. And thing about what happened to Wal Mart through the holiday season there. It came in well under expectations so, you know, again, again, I'm not predicting at 70's type market environment, I am saying that things are not normal. This is unprecedented and [...] this is just a run of the mill time like any old you know, cycle, get a grip.

Stephan: Well, they're not normal Johannes, and the average person, it's slowly dawning on them and before they do anything about it or adjust themselves properly with their assets, sadly they're going to have missed the boat. And we feel that we are in, still the, even though it's been pretty dramatic over the last 10 or 15 years, we are on the front stages of an inflation super cycle. And that may well, like you said send the Dow to 20 thousand, 30 thousand, but again is it though central bank intervention, is it through massive amounts of borrowing infused into the economy or both? And you're right, you will see a 60 or 70, 80-dollar pizza then. But I also think that you know, again, being a guy, not being Mr. Shopper, I will notice this though. I keep noticing that my packet of Eight O'clock Bean Coffee that I buy to grind up, I don't buy the fancy stuff, but in about the last year and a half to two, and I'm not, I don't have the exact dates and I don't meant to pick on Eight O'clock Bean Coffee, but it's gone from the high 4 dollar range per bag, that size bag, to yesterday I saw it at 6 dollars and 19 cents. Okay? That's basically over a 20 percent increase in about a year and a half to two, okay? And that's basically right in line with what's going on in the money supply.

No doubt about it.

Stephan: And I think the average person is seeing it, but it's just it's like boil, it's the proverbial don't turn up the heat to quickly and you can get a frog to stay in a pot of water and have it boil to death.

Absolutely, and here we are you know on bloomberg.com and I'll post this up on vigilantinvestor.com, but Bloomberg is basically saying they have a [...] the European central bank council member Axel Webber said the bank must continue raising interest rates to combat inflation the fastest economic growth in 6 years. Well, I would argue with economic growth, I would say there's a lot of activity, that's what money supply expansion does. Because I mean hey, you give a bunch of people a million dollars out of thin air, they're going to spend it, it's going to create all sorts of activity. Did it create any growth? Where did that money come from? Was it invented out of thin air? No, savings, no production, nothing. It's unhealthy, it's not only that, it's a fraud, it's stealing purchasing power from existing currency holders. But you know, here we have one of the top, you know, bankers, Axel Webber talking about this and you know I mentioned those M3 numbers earlier. We are stuck in a bad situation now with the world central banks being forced to continue the liquidity process, and they're between a rock and a hard place. And they're [...] saying oh we got Goldilocks kind of an economy, not too hot, not too cold. But I'm of the opinion that it's, you know, we're, to go back to Peter Schiff again, I heard him interviewed last week where he pointed out, don't forget the end of the story where Goldilocks gets unceremoniously bounced from the house when the bear return, unceremoniously thrown out. But I think that you know, what your central bankers are facing right now is an environment where you're seeing you know, the economy, it's not Goldilocks, where it's not too hot, and not too cold. You're seeing an environment where it is simultaneously too hot and too cold. And they're not sure how to get that temperature just right because if you add too much cold, you add too much hot you're going to have problems. And they're, the further this gets stretched out, the more precarious it becomes where you can actually have you know things getting really chilly or just scorching hot. And you know you walk the line long enough and yet again shrouded in the fog of overconfidence, most people just don't surmise this. But this is fundamental to the Austrian school of economics, which is the camp that we sit in. And they were warning about The Great Depression before it happened, they've been warning about the credit excess since the 70's and that they would continue, and you mentioned the super cycle. You know, this is the, you know, we've crossed over a hump here I believe, we're now beginning to head down the back slope, and this is the beginning of the back slope where you start seeing the negative consequences of excessive credit expansion, decade after decade. This is not something that just started happening the past couple of years. This is not something that happened just under George Bush II. Or just, you know, if you want to blame Clinton. This has been going on since before Nixon, since before LBJ all the way back to the creation of the Federal Reserve in the first place. They blew the wheels off the whole apparatus not knowing what the heck they were doing with The Great Depression and yet, you know, and Bernanke will be the first one to say, I think he, there's a quote of his out there that I just came across, let me just pull this up because I just wrote it down, "To understand the Great Depression is the Holy Grail of macroeconomics." Yes, I would agree, but to misinterpret it in the way that they have is the ultimate sin in so far as that they believe that they did not increase money supply rapidly enough to ward off The Great Depression. Well, The Great Depression was nothing but the natural consequence of what they did on the front end. And all they have done since then, what they've learned is that if you keep flooding more and more money supply out there, you can ward off a great depression. Well, yeah you can do it for a while, but each iteration of doing this dislocates more so the bubbles get more distorted, more distended, and you start getting environments, we always go back to the poor old Casey Serin out there with I am Facing Foreclosure, what the heck kind of environment are we living in Stephan, where a 24 year old can get 2.4 million dollars of financing without giving any evidence of his income, no indication, no research done on where he's living and whether it's going to be a primary residence. Take the kid at his word. He's been to a couple of real estate seminars. Good for him. Now he didn't intend to go out there and steal money, that's a huge problem out there, the FBI announced that organized crime has been doing the same thing, not only that but they're jacking up prices artificially and bidding it amongst themselves and you get these stupid mortgage brokers or maybe there's some of their own mortgage [...] getting all that money and leaving the system on the hook for it. But Casey Serin was out there just thinking he was going to make a quick buck and pay all that money back because you know, hey real estate always goes up doesn't it Stephan? And here we are, you know, this is the consequence of it. And if you think this is just an ordinary time again, I can't say this enough. I think you're going to get a rude awakening eventually and it could be severe, it could be a sudden shock, maybe we get you know, problems in Iran, if Israel decides to nuke Iran in order to take out their nuclear facilities before they're fully up and operational. You've got to be monitoring that, I mean after all, I mean there's a huge U.S. build up right now going on in the Persian Gulf and the war of words is escalating there. You know maybe it's you know a severe shock, maybe its what they call a rogue wave where something comes out of the blue and you get you know, an absurdly cold, long winter or maybe a pipeline blows up or who knows what the heck can happen. But just the same it could be very gradual and here's the most deceitful thing, and then I'll shut up and let you do some talking Stephan. But when you're dealing with inflation often times because people are in a trapped economy using only their own currency, they don't recognize really what's going on, on a global scale relative to their currency. And what I mean by that is that we you know, stuck in the U.S. you see the dollar. And you say, okay, I'll use the dollar to buy this or buy that, and we've had the great benefit of all this huge trade deficit creating all this capacity expansion abroad, where we can keep getting cheaper and cheaper technology and flat screen TVs and all that kind of stuff, but we don't see simultaneously that we've lost what you know 40 or 50 percent of the purchasing power of the dollar or something huge like that over the past 5, 6 years. People aren't aware of it because you know, all we deal with is dollars here.

Stephan : Ah yes. I think that it's an important point to make Johannes, because relative to, let's look at two currencies, relative to euro, investors in the Dow Jones have lost a lot of money. Okay? If you're investing dollars in the Dow relative to the euro, you have lost a lot of money since 2000 alright. Secondly, relative to the one real true form of money, gold, you've lost about 40 percent I do believe okay? I.e. a hundred dollars invested in the Dow, in 2000 is somewhere I think around, what is it Johannes, about 120 perhaps, maybe. A hundred dollars invested in gold in 2000 is worth about 201 to 220 dollars, okay, so you have lost to two currencies, one, a paper fiat currency is as vulnerable ultimately as the dollar you have lost a substantial amount and one which is the ultimate currency through history you've been hammered. You have been hammered.

Yeah, and we posted up over the past couple of weeks, you know Mark Faber, he had a great interview. His interview by Bloomberg television and he's repeatedly made the point that you know one of the points that we make, which is you know considered relative to what? You know the Dow Jones Industrial up 14 percent last year, but in euro terms less than 5 percent. Considering that the U.S. dollar has dropped. And that's against the euro, and that's you know again, verses another currency that is being printed out the wazoo like a lot of the other currencies out there. But in any event all sorts of stuff out there to be talking about you know.

Stephan : Absolutely, absolutely. And I think I'd finish on this note as the music comes on Johannes, we can talk about it next week, but I think we are entering the cycle of bull market of things, things including oil, things including gold and silver, things including clean drinking water and especially those things that are not that strongly tied into the economy.

Absolutely and just a couple of other reference points, vigilantinvestor.com this week we boy a couple of good posts out there, we talked about the mortgage fraud out there receding housing bubbles revealing some naked swimmers, or play on the observation from everybody's favorite big investor, that is Berkshire Hathaway's Warren Buffett who said, you don't know who is swimming naked until the tide goes out, well the tide is going out on real estate and we're about to see a lot of stuff we probably don't want to see. Additionally we have a post out there, geopolitical worm starts turning, which gets into some of the issues out there with you know, where the U.S. is. I think we've had a lot of, you know we all know that Bush is facing some serious opposition relative to Iraq and so forth. But there's a very good chance that we could see the U.S. trying you know, at least the administration trying to get us involved in an Iranian situation. So give a couple of those articles reviews including just the accountability issues, hundreds of millions of dollars is you know, vanishing. Nobody knows where they're going out, [...] while the money's gone. West coast flippers are drowning in loss as we came across a great web site out there called the Sacramento Area Flippers in Trouble and we have a link through that and you can just see some of these losses, they just have lists. It's posted, it's updated every Saturday, and the gentleman who runs that site gives you a little snippet, looks like actually somebody's real estate web site trying to sell real estate but it tells you the price that it sold for originally and it's how much it's come down from that last sale price, what they're trying to offer I think right now in the total loss, percentage loss, we're talking losses in the Sacramento area, 23 percent, I'm looking at it right now, 23. 9 percent, 33 percent 26 percent, 19 percent 18 percent, 22, etc.. and it just keeps going on and on and on, I mean there's literally you know 60, 70, 80 listings here where these things have yet to sell and they're already pricing them down you know 20 percent from where they were purchased. How do you like to be stuck in an adjustable rate mortgage dealing with that? One other thing is that, another email related post, emails explaining the rotten side of financial dark matter. You have some people who have justified the you know serious problems that we are to talk about all of the time by saying oh there is this financial dark matter out there that you can't quantify that really indicates strength. And well this is from a author, a journalist at financialtimes.com, Financial Times you know, of London, major financial newspaper out there with the Wall Street Journal globally, and what you got there are you know, some just amazing stories about how risk is just being viewed, I mean let me just read this quickly here, I know we're getting beyond our time here but this is a quote from someone who emailed and she had been getting, this author's been getting all these emails from people who are in the business or dealing with credit and so forth. Quote "I don't think there's ever been a time in history when such a large proportion of the risk gets credit assets, had been owned by such financially weak institutions with a very limited capacity to withstand adverse credit events and market downturns. I'm not sure what is worse, talking to market players who generally believe that this time it's different, or to more seasoned players who privately acknowledge that there is a bubble waiting to burst, but hope problems will not arise until after the next bonus round." And here's a separate email, this is not actually an email but this is again, this is Jillian Tett from Financial Times, Tett continues, "he then relates the case of a typical hedge fund two times levered. That looks modest until you realize it's partially backed by fund to funds money, which is three times leveraged. And investing deeply in subordinate trenches of collateralized debt obligations which are nine times leveraged, thus every one million euros of CDO bonds acquired is effectively supported by less that 20 thousand euros of end investors capital. A two percent price decline in the CDO paper wipes out the capital supporting it. The degree of leverage at work is quite frankly frightening he concludes, very few hedge funds I talk to have got a prayer in the next downturn. Even more worryingly, most of them don't even expect on." So why don't we end on that note, Stephan? I mean that's whoo [...] Stephan : Well, here's what it is you have to understand what it's for, the party, you know the party could go on for while longer than we all expect, but you have to understand that ultimately the hangover will come, and it's not doom and gloom, I think we're already seeing smart money in certain markets like the metals, precious metals acknowledging this. So, you know what we say is, stay vigilant, beware and understand what's really going on out there.

Absolutely, well Johannes Ernharth here, Stephan Ernharth, vigilantinvestor.com. Tune in every Friday, 3:30 PM again and hopefully we'll be getting some emails from you at vigilantinvestor.com contact form on there, you can send us your questions and your comments and be part of the show look forward to hearing from you, until next week, Johannes Ernharth, Stephan Ernharth, Vigilant Investor. And finally, as we always say, nothing we're saying should be construed as investment advice, please always conduct a conversation with investment professionals before you do anything based on what we're talking about here, it's purely for entertainment and informational purposes only.

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Definition of the Day Survivorship Bias

Survivorship Bias In many cases, a company that has made it through a rough patch in its existence will be penalized in any reports that come out because of survivorship bias. These reports will not show that other companies have gone out of business during the...

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