| What we witnessed this past week is what the | | | | the West. For decades and decades Americans, |
| TREND letter has been predicting would happen over | | | | Canadians, and Europeans have been very |
| 2 years ago - so we cannot be surprised. But | | | | comfortable putting their money in banks, in the |
| whether or not we were surprised, it is still quite | | | | forms of bonds or what have you. They did this |
| numbing when you see such a disaster occur. Last | | | | comfortably because they were confident that the |
| week, we saw history being made. | | | | bank would repay them their money, plus the implied |
| Where to start? Last fall we reported that in Britain, | | | | interest for lending the money. It was a form of |
| the Northern Bank had to be bailed out by the Bank | | | | trust - I lend you this money because I know you will |
| of England. At that time, we said "there is never just | | | | pay me back, with interest. |
| one cockroach" and predicted that this was just the | | | | The banks operated the same way - they lend |
| beginning of a series of major financial institution | | | | money, expecting to be paid back. Banks lend money |
| failures to come. | | | | to customers and to other banks, fully expecting to |
| Fast forward to March 16th, we have the failure and | | | | receive that money, plus interest in the future. Over |
| subsequent bailout of Bear Sterns. Next up on the | | | | the past year and a half, banks were not getting all |
| major failures list, we had Fannie Mae and Freddy | | | | of their money back, certainly not to the level they |
| Mac two weeks ago. Then last week, we had some | | | | expected. |
| historical events: | | | | What we saw this past week was the tipping point |
| Sunday: The Federal Reserve pumped a bunch of | | | | of confidence. Here we had a legitimate fear develop |
| money into the system, increased the amount it will | | | | that lending money would not necessarily result in |
| provide in lending facilities and further liberalized the | | | | getting that money back. There became a real lack |
| collateral it will accept in exchange for loans. | | | | of confidence in the financial system. What had |
| Monday: First we had Lehman Brothers declare | | | | developed was a fear that every institution was at |
| bankruptcy, and then we had the Bank of America | | | | risk here - banks did not want to lend money to |
| take control of Merrill Lynch. | | | | customers or other banks because they had no |
| Tuesday: The Federal Reserve announces a | | | | confidence that they would be paid back. This fear |
| two-year, $85 billion loan to bail out AIG. | | | | spread through the whole system - huge banks, small |
| Wednesday: The Treasury announced a new finance | | | | banks and average citizens. There was no confidence. |
| program where it would auction off Treasuries, these | | | | In the US, there is over $3.6 trillion that trade in the |
| in addition to what it already offers. The proceeds will | | | | money markets daily. When people have money |
| go to the Federal Reserve to use for "initiatives." | | | | invested in these money markets and they start to |
| Thursday: Throughout the globe, we had Central | | | | lose confidence that they will be able to get their |
| banks get together and pump nearly $250 billion into | | | | money back out - they panic. When they panic, they |
| the financial system in an attempt to avoid a financial | | | | take their money out of those markets. This is very |
| disaster. | | | | similar to the old fashioned "run on the bank." |
| Friday: Yet another new initiative, this one engineered | | | | On Thursday, the fear was so great, that people |
| by Treasury Secretary Henry Paulson. In this initiative, | | | | were taking their money out of money markets, and |
| Paulson put together $800 billion in a newly created | | | | financial institutions and putting it into US treasury bills |
| institution and $400 billion more at the FDIC. The | | | | - the last resort. Believe it or not, on Thursday, the |
| money will be used to accept the bad/risky assets | | | | yield on those Treasury bills actually went into the |
| off troubled balance sheets and pump up the money | | | | negative! Think about that - people were so scared, |
| markets. | | | | they were willing to buy a 30 or 90 day treasury and |
| At the end of the week it looks like the US | | | | get less than they were investing in return. But they |
| taxpayers, who were already on the hook for the | | | | were willing to do that because they were afraid |
| $5.17 trillion with Fannie and Freddie, now take on | | | | that if they left the money invested in a bank, they |
| AIG, and they will soon be on the hook to pay off | | | | would get nothing back. |
| the nearly $1.2 trillion that Bernanke and Paulson are | | | | We saw the same reaction with gold. Gold is |
| proposing the government shell out to loan the | | | | considered a safe haven and when the crap hit the |
| financial system. Hell, the government even stopped | | | | fan, people rushed to gold. We saw the price of gold |
| short selling - so much for the free market. The US is | | | | climb over $120 in less than 48 hours - the biggest |
| pushing for democracy throughout the world, yet at | | | | rise in the history of gold. Trust in the overall financial |
| home things are looking very socialistic. . | | | | system was in doubt, and the implications were |
| In early 2007, we started to highlight the number of | | | | profoundly negative. |
| financial institutions that had gone belly up. Since then, | | | | We need to understand that this was not an isolated |
| the number has climbed to a remarkable 285. We | | | | problem for the US - the ramifications of this financial |
| expect that there will be quite a few more in the | | | | crisis were felt throughout the world. Russia closed its |
| weeks and months to come. These bail outs and | | | | stock markets for a couple of days. The China |
| bankruptcies are involving huge financial institutions - | | | | government is telling its citizens to buy bank stocks |
| AIG was the largest insurance company in the world. | | | | and companies to re-purchase their outstanding |
| This is nothing less than a financial disaster. . | | | | shares. |
| As investors, we need to understand that today's | | | | This financial crisis is so severe that here we are in |
| financial markets are built on confidence. Think about | | | | the middle of an American presidential election and |
| that. When you buy something for cash, say a | | | | we have the Republicans and the Democrats willing |
| sandwich from a deli, the deli owner is confident that | | | | to huddle together to pass massive bail out legislation. |
| the pieces of paper that you handed him for the | | | | Much to the chagrin of the US mass media, it is not |
| sandwich are worth something. It sounds absurd | | | | politics that rules the world, its economics. |
| when you think about it. We buy TVs, iPods, you | | | | Where to next? |
| name it - and in return we hand over pieces of paper. | | | | Be prepared for further declines in the equity |
| But this process works because the person accepting | | | | markets as we are expecting that many investors |
| our paper has the confidence that these pieces of | | | | will again have second thoughts and look to grab |
| paper that they accepted can be exchanged for | | | | some of the profits from the Thursday and Friday |
| other goods and services. That is the nature of | | | | gains. We have positioned ourselves largely in cash |
| money. But the question that arises is - what | | | | and gold and will stay there for the short term. We |
| happens when people lose confidence in this process? | | | | expect gold to bounce around some more, but |
| A good example is Zimbabwe, where they have an | | | | should do well in the next few weeks. |
| inflation rate of 12.5 million percent (that is not a | | | | For those who have not yet positioned themselves in |
| typo), where citizens are now accepting gasoline | | | | gold, we expect that you will have some more |
| coupons instead of their national currency. The | | | | opportunities in the next couple of weeks. With all of |
| Zimbabwe government recently introduced a $100 | | | | these bailouts, the US has taken on another $1.2 |
| billion note, which was still not enough to buy a loaf | | | | trillion of debt - this is not bullish for the US dollar long |
| of bread. | | | | term. Short term the dollar may still do well as we |
| The reason for this ridiculous situation in Zimbabwe is | | | | have stated, Americans have moved to safety - |
| that no ones believes in the Zimbabwe government's | | | | meaning US treasuries and gold. |
| guarantee of their currency, so they will not accept it | | | | We expect gold bullion to outperform the stocks in |
| as a valued money in trading goods and services - | | | | the short term, as we have seen, the mining stocks |
| they would rather accept something of value, such | | | | tend to move with the general market during volatile |
| as a gasoline coupon. | | | | times. Stay tuned! |
| The same theme is now happening in America and | | | | |