Eat what you cooked

Karl Denninger comments on the proposals to make banks write down some outstanding capital on loans, to secure what's left of the banking system. Painful, but it might save the day.

I wouldn't say it's impossible. America has more resilience and capacity to renew than its envious enemies wish to believe.

Good luck.

Subprime hitting GSEs

Karl Denninger comments trenchantly on a new scheme by "Fannie Mae", the government-sponsored mortgage lender: "Homesaver Advance" takes the borrower's missed mortgage payments and puts them into an unsecured loan, thus "healing" the credit history so that home lending can continue as if (as if!) everything were normal. Denninger sees this as a signal to "short" Fannie Mae.

But over a period, Denninger has moved on from trying to exploit such market weaknesses, to urging his fellow citizens to protest about the corruption of the financial system. His tone is now getting darker - like Jeffrey Nyquist, he's beginning to worry about international relations, for example the way that China's population pressure may threaten Russia's land. Lhasa 1950, Khabarovsk and Irkutsk when?

Which crank are you?

In turbulent times, we get an increase in prophets, astrologers, clairvoyants, magicians and mountebanks. Perhaps we can place more reliance on the significance of their appearing, than on the things they have to say.

"Deepcaster", who I think of as the Nostradamus of finance, often refers to a shadowy clique he calls The Cartel; if only one could identify them - or him! But there is some basis for the paranoid - for example, who owns the Federal Reserve does indeed seem to be a secret; though I doubt the chairman strokes a white cat. Here are some of Deepcaster's tips for economic survivalism:

Keep a significant portion of your wealth in tangible assets including Precious Monetary Metals (in amounts subject to timing considerations) and Strategic (e.g. Crude Oil) and select agricultural commodities which the public needs and regularly uses...

Attempt to make, although it may be very difficult, an evaluation of counterparty strength. Regarding options, for example, are they clearing house guaranteed? And how strong is the clearing house?

“Go local” in banking, and commercial, and essential goods supply relationships. “Self reliance” and “local reliance” are key goals...

Develop an investing and trading regime for certain key tangible assets markets to minimize or avoid the impact of Cartel-initiated takedowns...

Stay informed...

Since we're going back to the Seventies, here's Al Stewart's 1973 cult Nostradamus lyric (from Past, Present and Future). There's always a little frisson in old mortality. Speaking of which, Jeffrey Nyquist returns to his Cassandran theme of America as ancient Athens on the brink of the Peloponnesian catastrophe.

I shouldn't laugh too much at all this. The vibrations of the First World War were, I think, felt in the art and music of the years before it; and the millennarian gloom of Eliot's Waste Land (1922) was also only a few years ahead of economic, social and military turmoil. The current flock of seers and chanters may be like the restless sheep before the earthquake.

A pound to a penny

Adrian Ash points out that against gold, the British pound is now less than 1% of its value in 1931.

Why there are no customers' yachts

Hedge fund and investment trust managers sit on a big pile of money and a small percentage creamed off still means a handsome living. But Daniel Amerman maintains that's not the biggest advantage they have over you. As he shows with worked examples, shrewd use of the rules of the game can turn a real investment loss into a substantial gain.

By borrowing money at preferential interest rates, and writing-off the interest as a business expense, they can multiply the amount invested, reduce taxation and massively boost the return on the original capital. All is well as long as prices go up, and Amerman sees this a huge incentive to continue the inflation in financial assets: the system demands it.

His conclusion, in general terms, is to ignore the usual fairytales told to the small investor, work out how the con really operates, and exploit it. He thinks you should be in tangible assets, and understand the implications of taxation and inflation for your portfolio .

Michael Kilbach echoes that with respect to commodities, though like me, he thinks there'll be a step back before the next jump:

In the long term we believe prices are heading much higher and we are therefore looking for pessimism in the precious metals market before adding to our positions. We sell into extreme optimism. We understand that we could miss out on an opportunity to have more invested for a short term move higher, and we are willing to risk losing that opportunity. Rather than trying to catch up to the current markets move we try to anticipate the next markets move.

Don't take on gunslingers

A client raised an important point some weeks ago: when he decides to sell or switch his holdings in a collective investment (e.g. an insurance bond or pension), the company wants to receive the authorisation in writing, by which time it could be too late. The traders can act straight away, on the price they see on their screens.

Paul Lamont echoes this in SafeHaven:

The Wall Street Firms will know if the Ambac deal fails long before investors. We commented last April: "As the editor of The Commercial and Financial Chronicle in November of 1929 reported on the Great Crash, 'the crowd didn't sell, they got sold out.' The trading desks of the Wall Street Firms will cash out as the panic develops, the lady in Omaha will be stuck on the phone with a busy signal... To avoid this, investors should be moving now to financially healthy institutions and buying U.S. Treasury Bills."

You can't outdraw the fast hand, but you can get out of town when you hear he's coming.

Creak... squeak... pop!

This and more is in the latest ContraryInvestor piece on SafeHaven. Almost all of the above is concentrated in a mere five banks.

The tone is not doomster:

The world is not about to come to an end. Through adversity is born opportunity for those prepared both emotionally and financially.

As with Northern Rock, I expect that when calamity strikes, the bank directors and financial regulators will still have good payoffs and pensions. What a tolerant society we live in.