John Mauldin – Big Bad Bailout – Sept. 27, 2008

This is an email I sent to John Mauldin of “Thoughts from the Frontline”. Needless to say, I did not get a reply.

@ John Mauldin re: “Who’s afraid of a Big, Bad Bailout?” Sept, 26, 2008

I’ve been around for a long time and, based on your article, I have a lot more faith in the common man than you do. If 90% of Americans are against the $700 billion “Bailout,” then that should give you pause for thought. There is more wisdom in a crowd than you realize. After all, isn’t the concept of majority the basis of democracy? Remember democracy, John? 

The effectiveness of the bailout is based on several unfounded assumptions. First, it assumes that a bottom is at hand or very close. There is no evidence of that. In fact, events show that the meltdown is accelerating and there is no bottom in sight yet.

Second, the key to recovery is stabilizing real estate prices and an end to foreclosures in order for lenders to get back on their feet. The bailout will do nothing for house prices. Furthermore, sub-prime is the least of the problems and represents a tiny snowball on the tip of the iceberg. You mentioned in a previous article that Alt-A mortgages are just beginning to reset to higher monthly payment rates. As well, unemployment is accelerating. Both of these will result in more foreclosures, which, in turn, will further depress real estate prices. Many observers predict prices will fall another 10% to 20% or more, the bottom isn’t expected for another year, and every month the bottom seems to recede further and further into the future. 

Third, you assume the size of the problem is what we’re told and that this is as bad as it’s going to get and yet, every week it gets worse. At what point do we realize that the problem is too big to “fix?”

 Four, you assume the government’s statistics are based in reality. Everybody knows that government statistics are fudged, bear no resemblance to reality and should be filed under “science fiction.” Multiply official statistics by a multiple of two or three and you’ll see that America is far beyond the help of a $700 billion bailout. 

Five, you assume that the “elite” are better qualified to run America than the average American. Yet, recent events show the average American has a better grip on reality than does America’s deluded elite. You claim to be “as free market as it comes” yet you’re advocating socialism for the rich in bailing out Wall Street’s shareholders. 

Let’s look at the facts. The BIS, Bank of International Settlements, the central bank of central banks, in June calculated that there are now more than one quadrillion dollars of derivatives worldwide. Derivatives are structured financial instruments that have turned into worthless garbage. Most of them are worth about ten cents on the dollar. 60% are owned by American financial institutions. The $700 billion bailout amounts to less than 1/10 of 1% of this toxic paper. Does this give you an idea of the size of the problem? $700 billion this week, another $700 billion next week, and the week after, and the week after……. A story from London is titled: …”UK banks hold US$175 billion of sour assets that could qualify for US bailout plan.” And that’s just the UK. In other words, $700 billion is a drop in a bucket and a very leaky bucket it is.

 The definition of insanity is doing the same thing over and over an expecting a different result. In this case, the American government is insane. Government intervention in free markets – creation of the central bank, fiat currency, artificially low interest rates resulting in free money, suppression of gold & silver prices, manipulation of the stock markets, crony job patronage at Fannie & Freddie, etc. etc. – got us into this mess. Now, you and the elite advocate more government intervention to solve the problems created by government intervention in the first place. When you’re in a hole, stop digging. You say we shouldn’t let ideology stand in the way of action. John, the problem isn’t ideology, it’s insanity. Stop the insanity! It’s not working.

 Yes, it’s time to let the free market solve the problem (remember free markets, John?) Yes, it will be messy. Yes, it will be painful. However, the alternative you recommend; continued government intervention, will be far worse because the problems are obviously far bigger than any amount of government intervention will solve. We are beyond the “point of no return” and further intervention will only extend the pain, delay the inevitable and make recovery longer, more difficult and even more painful. The entire world’s financial, economic and monetary systems are broken beyond any hope of repair. We stand at a confluence of events never before seen in history. A $700 billion bailout is a fart in a hurricane.

 At the end of this year, former Goldman Sacs chief, Hank Paulson, will leave the U.S Treasury. He’ll probably go back to Goldman Sacs and he’ll have a fat check for hundreds of billions in his pocket to bail out Goldman’s greedy shareholders. Do you think the average American is so stupid they don’t realize this? You say it’s not a bailout; it’s an economic stabilization plan. Nice spin but, the average American is not buying it. At least the captain of the Titanic had the courage to go down with his ship. Today’s Titanic is America. The common man is locked below deck, the $700 billion bailout merely rearranges the deck chairs while the shameless “capitalist” officers are pushing aside women and children to get to the life boats.

You say, “the risk we take is not a deep recession but a soft depression.” You’re deluding yourself. It’s not a risk; it’s inevitable. Look at the accelerating pace of the meltdown beginning more than a year ago. The size and intractability of the problem will result in a deep and long depression that will make the Great Depression look like a walk in the park. More government intervention will only exacerbate the problem, destroy the currency and create rampant inflation.

 You say, “In a few years, things will be back to normal.” A while back, we were told it would be a few months, then we were told the end of this year, then next year, now it’s a few years. Don’t you see the trend? John, there will be no more “normal” as we know it. Nothing will ever be the same. The first step in solving a problem is admitting there is a problem. The second step is analyzing the size of the problem. The third step is developing a solution. You and the rest of the American elite are still grappling with the first step, are in deep denial about the size of the problem and are using insanity as a solution. Heaven help America because America’s leaders can’t.

 History will be the judge. Govern yourself accordingly because I doubt that America will be writing this history book.


Sept. 27, 2008

Some important background to the email I sent to John Mauldin above – I expect the bailout to be passed by Congress this weekend, probably Sunday. If it does pass, “the world will be saved” as far as Americans and investors globally are concerned. I closed out my UltraShort ETF’s last week. If you’re invested in short ETF’s here are some signs to look for and if you see them, get out fast:

–       bailout announced on Sunday evening news

–       European stocks up 3% Monday morning

–       Dow moves up 200 points or more in the first hour Monday 

Also, if this happens then gold and gold stocks will be hit hard in the short term, so I’ll be bailing out of my few remaining gold stocks first thing Monday (I’m about 80% cash now.) I’ll wait for gold stocks to bottom out before picking up more bargains. If I’m wrong and miss the boat, oh well. An investor’s primary purpose is to preserve capital.  

            It’s hard to predict how long the euphoria will last, but this bailout will be the largest since WW II and Keynesian economics could create another bubble. Each bubble is larger than the last. Each bubble lasts shorter than the last. Each one bursts harder. We are now in an age of volatility. Eventually it will go “boom!” and all fall down. Gold and gold stocks will then go ballistic 

            If you want to dabble in stocks, be prepared to trade, not invest or else have an iron stomach. In other words, buy and sell constantly. As we near the end, be prepared to day trade but be careful “when the music stops.” Otherwise put your money into GIC’s. Stay out of bonds as they will go down as the government raises interest rates to fight inflation. Mutual funds, I can’t say where they’ll go, I don’t pay attention to them, I don’t care for them, they’re a rip-off. At least Canadian bank GIC’s (American CD’s) are backed by the government.

            I subscribe to John Mauldin’s “Thoughts from the Front Lines” because it helps to know what the “enemy” – our lords & masters are up to and how they’re going to screw us in order to enrich themselves. He is mainline, elitist and a spokesman for the authorities & robber barons. If you want, you can subscribe for free here

            Paying attention to John is like reading Machiavelli who, incidentally, is greatly misunderstood. Machiavelli wrote (in the Middle Ages) for the common man but disguised his work by “writing it for the elite.” He told the elite what they already know (you don’t get to be a prince without blood on your hands.) He told the elite how to screw the common man and stab competitors in the back. If he had written “How Your Lords & Masters Will Screw You” it would never have been published and he’d have rotted in prison.

         On a dungeon wall in a Dukes’ palace in Venice are inscribed the words: “From the man I trust may God defend me. From the man I trust not I will defend myself.” That poor bastard did NOT read Machiavelli.

 Stay tuned. It’s getting really interesting.

Disclaimer: I’m not an investment advisor and these articles are for commentary only. For specific advice you should consult your own investment professional.

Your comments are WELCOME! Lengthy comments may time-out before you’re finished so consider doing them in a word doc first then copy and paste to “Leave a Reply” below.

About gerold

I have a bit of financial experience having invested in stocks in the 1960s & 70s, commodities in the 80s & commercial real estate in the 90s (I sold in 2005.) I'm back in stocks. I am appalled at our rapidly deteriorating global condition so I've written articles for family, friends & colleagues since 2007; warning them and doing my best to explain what's happening, what we can expect in the future and what you can do to prepare and mitigate the worst of the economic, social, political and nuclear fallout. As a public service in 2010 I decided to create a blog accessible to a larger number of people because I believe that knowledge not shared is wasted.
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