 Alice in Wonderland
Peter Schiff
Mar 21, 2008
How do you know when you're
through the looking glass? A fairly good indication is when the
price of gold, which normally moves up in response to monetary
easing, instead plummets in reaction to one of the largest rate
cuts in Fed history. Apparently, yesterday's 6% drop in gold
resulted from the "hawkishness" shown by the Fed in
only cutting rates by 75 basis points, rather than the 100 points
that many had expected. It is a testament to how low the bar
has been set that the Fed can slash rates in the face of a collapsing
dollar and soaring commodity prices and still be viewed as hawkish
on inflation. Is it just me, or is Ben Bernanke morphing into
the Mad Hatter?
Despite the mildly tough language
in its statement, it should be clear to all that the Fed sees
inflation as the only politically acceptable "solution"
to the problems it created. The conclusion that a 75 point cut
shows concern about inflation is half right. The Fed is concerned,
but only to the extent that the markets stay focused on bogus
CPI numbers and fail to notice severe price increases throughout
the economy. The fact is that inflation will be with us for some
time, and the knee jerk drop in gold is yet another excellent
buying opportunity.
As the credit and financial
crisis spirals out of control, and the Fed moved $30 billion
of garbage Bear Stearns debt onto the public balance sheet, the
proposals coming from other market leaders are taking similarly
phantasmagorical turns. Steve Forbes, in an interview on CNBC
earlier in the week, proposed that the government suspend "mark-to-market"
rules for one year so that holders of unsellable mortgage-backed
securities no longer have to recognize losses. Remember, the
dominos began to fall precisely when two Bear Stearns hedge funds
were forced to actually sell assets they had failed to properly
mark-to-market. Were the government to actually follow this advice
it would destroy what little confidence remains in our financial
system. However, Mr. Forbes believes that the markets can be
spared unnecessary pain if participants can simply pretend that
their holdings are worth par value. This amounts to a plea for
accounting by mutually beneficial mass delusion.
Later in the week, investors
were cheered by the Government's decision to slash the surplus
capital requirement of already overextended Fannie Mae and Freddie
Mac by 33%, and by Wall Street's success in convincing investors
to dump $17.9 billion into the record IPO of Visa, which may
qualify as the largest sucker bet in history. But the most bizarre
idea was introduced on the pages of the Wall Street Journal when
veteran opinion page writer Holman Jenkins Jr. recommended that
the government buy and "bulldoze" foreclosed homes
in order to prop up the values of those that remain standing.
I'll deal with these ideas in sequence.
After pushing through earlier
proposals that allow and encourage Fannie and Freddie to buy
larger loans, the reduction of capital requirements now pushes
the government sponsored lenders farther out on a leveraged limb.
By allowing the accumulation of even more taxpayer guaranteed
debt, the moves will merely delay and exacerbate the housing
problems and will increase the size of losses when these two
government sponsored enterprises ultimately fail. In the meantime,
by taking on more risk, the appeal of existing Fannie and Freddie
insured debt will erode further, driving up mortgage costs, and
creating additional losses for leveraged owners of these securities.
In the early stages of the
biggest credit crunch in U.S. history, buying shares in Visa,
a company that derives its revenues based on transaction fees
from credit card purchases, qualifies as a particularly ill-
timed investment. Perhaps buyers of these shares didn't get the
memo, but the days of Americans using credit cards to buy products
they cannot afford are about to come to an end. For all its flaws,
Wall Street does possess an extraordinary ability to apply lipstick
on any pig. For the formerly private owners of Visa, this is
perhaps one the best exit strategies ever engineered, on par
with the Hail Mary orchestrated by Blackstone last year (shares
of Blackstone are now trading for half their IPO price).
Finally, in response to Mr.
Jenkins' proposals, there is no question that we built far too
many homes during the housing bubble. However, destroying them
now will merely compound our losses. The one benefit we have
from excess construction is an ample supply of what will soon
be highly affordable homes. At the moment foreclosed houses are
only unwanted because their prices are still too high. Once prices
drop sufficiently there will be plenty of demand. However, destroying
existing homes reduces their value to zero (actually less due
to demolition costs) and only exacerbates the losses to creditors
and society. Mr. Jenkins' thinking is formed by the same perverse
logic that led the Roosevelt Administration to destroy farm animals
and crops during the 1930's because he wanted to prop up food
prices. As I wrote in my book "Crash Proof", we must
certainly be on the eve of our financial destruction, as we are
clearly a nation gone completely mad.
***
For a more in depth analysis
of our financial problems and the inherent dangers they pose
for the U.S. economy and U.S. dollar denominated investments,
read my new book "Crash Proof: How to Profit from the
Coming Economic Collapse." Click here
to buy a copy today.
 More importantly, don't wait for reality
to set in. Protect your wealth and preserve your purchasing power
before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download my free
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newsletter.
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
321gold Ltd
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