House of Cards
Research for Online Investors

7/10/12

We have seen the enemy, he is us.  That old saying should be on all of our minds today as we watch the world bounce from one financial crisis to another.  Who is to blame?  The Bankers?  Sure, Bob Diamond’s Barclays submitted lowball numbers for LIBOR rate setting.  Did they do it out of fear the bank could be cut off if other bankers knew how high their borrow rates were? Who cares?

Sure, Goldman Sachs (GS) sold Mortgage Backed Securities (MBS) that were chocked full of dodgy debt in 2007 and 2008.  GS thought the buyer should beware.  GS bought insurance from AIG in the form of credit default swaps (CDS).  Why did the government make them whole, along with every other bank that dipped their toes in the MBS market?  Why didn’t we say Buyer Beware?  They made an investment and lost…end of story.  Or it should have been.

You and your neighbors were the borrowers, and your insurance company bought them.  Whose fault?  Greece and now Spain and Italy are facing the hard reality you can’t spend other people’s money when they won’t give you anymore.  Darn creditors, they want to be sure they get paid back!

We have seen the enemy, and he is us!

The European Finance ministers met yesterday and came up with a nice plan to save Spanish banks.  Why?  Why not let them go bankrupt just like every mom and pop grocery store or restaurant that doesn’t make a profit?  Why not let the healthy banks in Germany buy the Spanish banks?  Or, just close them.

But you say “That would cause pain in the market. Stock prices would fall.  I would lose money.”  Our answer is to manage your exposure and account.  If you cannot swim, get out of the water!

Why do we want the Federal Reserve to print more money?  Do you really think a little more stimulus is going to make a difference?  Eventually all bad things come to an end.  The companies that make money and pay dividends will be worth something.  The companies that lose money and can’t borrow anymore will disappear.

It is the same with countries.  The ones that monitor spending and don’t succumb to political promises that cannot be met will survive and flourish.  This was the experience of the U.S. for almost 200 years.  For the last 50 years we have been spending money we don’t have.  Borrowing it from investors and other countries.

Step back from your computer and think about the house of cards that is being built brick by brick by all the financial engineering.  For the last four years every problem had to be monitored and addressed by a government or central banker.  Why?

Not so very long ago in a time when people, companies and countries were responsible for their futures this would have never been thought of.  Bankruptcy was available to individuals and companies.  Countries would have to ally with a more financially stable country to survive.  Of course there were demands placed on all in the process.  Some not so pleasant.

But here we are.  All hail the power of Central Bankers and other bureaucrats at the IMF or the UN. Don’t you think the congress should have a hearing?  Whatever it is, they have time.  They should have a hearing on why something happened…so it won’t happen again.  Pass a law.  Regulate it.  Hire a staff to monitor it.

And the world goes round.  The old saying when I was growing up was “Don’t cuss the farmer with your mouth full.”  We can turn it today “Don’t cuss the (banks, regulators, IMF, government) if you want the market to go up.”

The market is down today because traders have collectively decided that China is slowing and the ECB is not doing enough to stimulate the eurozone economy.  So we are going to Sell, Sell, Sell.  What do you want to bet tomorrow a headline will inspire everyone to Buy, Buy, Buy?

Paradoxical Quote of the Decade
Fathom the hypocrisy of a government that requires every citizen to prove they are insured…but not everyone must prove they are a citizen.  Now, let that settle in a while.—sent in by Long-Term subscriber E.H.

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