The Long Crisis

Posts Tagged ‘Financial Meltdown’

You might be wondering just how the United States lead the world into a financial crisis and depression that will probably turn out to be the “greatest” ever.

With the unemployment rate already over 10% in a number of states this depression is on track to set new records. Let’s hear it for the big banks, mortgage companies, hedge funds, AIG, the sleeping watchdog regulators, and the government who now wants to manage it all.

The video is the best explanation yet as to how this sorry state of affairs came about. Not only that but it shows how Tim Geithner and his team have put together a rocking system to deal with the challenges of an economy gone bad that was created and driven by the smartest people doing stupid things that you can possibly imagine.

This is one video that you must see if you care about the American economy and hope for a better future.

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In 1970 Jim Rogers was a young guy from Alabama hoping to make his fortune on Wall Street. Rogers, as he modestly tells it, by good luck, hooked up with George Soros to start what became the legendary Quantum Fund.

Ten years later Jim Rogers retired as a billionaire. Over the ensuing decades Rogers built an iconoclastic career as a private investor, author, adventurer, and creator of the Rogers International Commodities Index. Rogers, living and operating out of Singapore, has remained an outspoken global investor. He has harsh words for former Fed Chairman Alan Greenspan, suggests President Barack Obama and his economic team are hopelessly lost in la-la land, and thinks that tough love and multiple fat cat institutional bankruptcies are the answer for America’s financial woes.

Here is an interview between Maria Bartiromo, the anchor of CNBC’s Closing Bell,and Jim Rogers, which appeared in the February 26th issue of Business Week.

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MARIA BARTIROMO

What do you think of the government’s response to the economic crisis?
JIM ROGERS

Terrible. They’re making it worse. It’s pretty embarrassing for President Obama, who doesn’t seem to have a clue what’s going on—which would make sense from his background. And he has hired people who are part of the problem. [Treasury Secretary Tim] Geithner was head of the New York Fed, which was supposedly in charge of Wall Street and the banks more than anybody else. And as you remember, [Obama's chief economic adviser, Larry] Summers helped bail out Long-Term Capital Management years ago. These are people who think the only solution is to save their friends on Wall Street rather than to save 300 million Americans.

So what should they be doing?

What would I like to see happen? I’d like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Likewise, many, many homeowners didn’t go out and buy five homes with no income. Many homeowners have been waiting for this, and now all of a sudden the government is saying: “Well, too bad for you. We don’t care if you did it right or not, we’re going to bail out the 100,000 or 200,000 who did it wrong.” I mean, this is outrageous economics, and it’s terrible morality.

You have said Bear Stearns and Lehman (LEHMQ) would still be around if Greenspan hadn’t bailed out Long-Term Capital Management in 1998. Can you explain?

Well, if Long-Term Capital Management had been allowed to fail, Lehman and the rest of them would’ve lost a huge amount of money, their capital would’ve been impaired, and it would’ve put a terrible crimp on Wall Street. It would’ve slowed them down for years. Instead of losing capital, losing assets, and losing incompetent people, they hired more incompetent people.

Stan O’Neal?

Right, Stan O’Neal. He got $150 million for leaving, even though he ruined the company. Look at the guy at Fannie Mae (FNM), Franklin Raines. He did worse accounting than Enron. Fannie Mae and Freddie Mac (FRE) alone did nothing but pure fraudulent accounting year after year, and yet that guy’s walking around with millions of dollars. What the hell kind of system is this?

Are you worried the economic crisis will lead to political turmoil in China and elsewhere?

I absolutely am. We’re going to have social unrest in much of the world. America won’t be immune.

What does all this mean from an investment standpoint?

Always in the past, when people have printed huge amounts of money or spent money they didn’t have, it has led to higher inflation and higher prices. In my view, that’s certainly going to happen again this time. Oil prices are down at the moment, but that’s temporary. And you’re going to see higher prices, especially of commodities, because the fundamentals of commodities are enhanced by what’s happening.

Which commodities are worth buying or holding on to?

I recently bought more of all of them. But I really think agriculture is going to be the best place to be. Agriculture’s been a horrible business for 30 years. For decades the money shufflers, the paper shufflers, have been the captains of the universe. That is now changing. The people who produce real things [will be on top]. You’re going to see stockbrokers driving taxis. The smart ones will learn to drive tractors, because they’ll be working for the farmers. It’s going to be the 29-year-old farmers who have the Lamborghinis. So you should find yourself a nice farmer and hook up with him or her, because that’s where the money’s going to be in the next couple of decades.

Should AIG (AIG) have been allowed to fail, too?

First of all, banks and investment banks and insurance companies have been failing for hundreds of years. Yes, we would’ve had a terrible two years. But you’re dragging out the pain. We had 10 years of the worst credit excesses in world history. You don’t wipe out something like that in six months or a year by saying: “Oh, now let’s wake up and start over again.”

What about Citigroup (C)? What about the car companies?

They should be allowed to go bankrupt. Why should American taxpayers put up billions to save a few car companies? They made the mistakes! We didn’t make the mistakes! I’m sure they’ll give them the money, but I’m telling you, it’s a mistake. It’s a horrible mistake.

I totally understand what you’re saying, but the banks are under massive pressure.

They all took huge, huge profits. Who was the head of Citigroup? Chuck Prince? I mean, how many hundreds of millions of dollars did Prince take out of the company? How many hundreds of millions of dollars did other Citibank execs take out of the company? Wall Street has paid something like $40 billion or $50 billion in bonuses in the past decade. Who was that guy who was the head of Merrill Lynch

Stan O’Neal?

Right, Stan O’Neal. He got $150 million for leaving, even though he ruined the company. Look at the guy at Fannie Mae (FNM), Franklin Raines. He did worse accounting than Enron. Fannie Mae and Freddie Mac (FRE) alone did nothing but pure fraudulent accounting year after year, and yet that guy’s walking around with millions of dollars. What the hell kind of system is this?

Are you worried the economic crisis will lead to political turmoil in China and elsewhere?

I absolutely am. We’re going to have social unrest in much of the world. America won’t be immune.

What does all this mean from an investment standpoint?

Always in the past, when people have printed huge amounts of money or spent money they didn’t have, it has led to higher inflation and higher prices. In my view, that’s certainly going to happen again this time. Oil prices are down at the moment, but that’s temporary. And you’re going to see higher prices, especially of commodities, because the fundamentals of commodities are enhanced by what’s happening.

Which commodities are worth buying or holding on to?

I recently bought more of all of them. But I really think agriculture is going to be the best place to be. Agriculture’s been a horrible business for 30 years. For decades the money shufflers, the paper shufflers, have been the captains of the universe. That is now changing. The people who produce real things [will be on top]. You’re going to see stockbrokers driving taxis. The smart ones will learn to drive tractors, because they’ll be working for the farmers. It’s going to be the 29-year-old farmers who have the Lamborghinis. So you should find yourself a nice farmer and hook up with him or her, because that’s where the money’s going to be in the next couple of decades.
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To put it simply Jim Rogers thinks that conditions are being established now for the greatest agricultural commodities boom of all time. Rogers is sometimes off a little bit with the timing of a major move but he is seldom wrong about the underlying concept.

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Famous billionaire investor and hedge fund creator George Soros said on Friday the world financial system has effectively disintegrated, adding that in his view there is no prospect of a near term resolution to the financial crisis.

Soros hardly needs an introduction as a successful investor. He is viewed as the man most responsible for inventing the hedge fund industry and the 2%, 20% fee structure. Soros is perhaps best known for making over a billion Dollars by shorting the British Pound in the early 1990’s. He still has the distinction of being known as “the man who broke the Bank of England. In 2008 one of Soros lead hedge funds made an 8% return in a very tough year. The average performance for hedge funds in 2008 was a loss of 18%.

“We witnessed the collapse of the financial system,” Soros said at a Columbia University dinner. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.” Soros is not talking about ancient history, he is speaking of the present world wide financial meltdown.

Paul Volcker spoke at the same dinner. Volcker was Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). The federal funds rate, which had averaged 11.2% in 1979, was raised by Volcker to a peak of 20% in June 1981. The prime rate rose to 21.5% in ‘81 as well.

Volcker’s action as an inflation fighter worked. Volcker’s Fed is widely credited with ending the United States’ stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983. At the Columbia University dinner Volcker said “I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

Not very encouraging words from two of the still most highly respected men in the financial world. I believe that the real financial panic is just getting underway and the consequences will be felt for many years. We are not in a normal recession, or even a mild depression. We are in a deleveraging of excessive debt that has built up over many years.

We are in a super down cycle that will lead to a restructuring only after the present structure is pretty much destroyed. There is a long way to go. The stimulus program may help mitigate some areas of the meltdown but in a super cycle capital will be destroyed faster than the government, even with the power of the printing press, can restore it. No matter what the government does the deleverging process will continue until the market begins to stabilize on its own terms and time table.

The instability of paper currencies in a fiat money world is rapidity leading on the part of investors to a mistrust of any currency to retain its value. This mistrust is causing gold as an investment store house of value to enter an entirely new phase. It seems no one but brain washed passive citizens and politicians think that the various governments of the world have a clue as to how to get us out of the meltdown mess.

When super successful investors like George Soros are saying that there is no bottom below perhaps we should all be preparing for the worse. The long crisis is just getting underway in earnest and will put the United States and Americans to a severe test of survival.

It is important to realize that it is highly unlikely that conditions will ever return to “normal”. In time a new financial system of some sort will likely emerge. I doubt that anyone at this time has a good idea as to what that system may be and what path we will follow to get there. The only thing I am sure of is that a lot of pain will be experienced in every developed and emerging country before conditions stabilize.

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