Investors worldwide in various markets appear to have had their fill for market risk after watching their investments lose significant value in recent months. This has been particularly true with the junior mining share market where investors have become skittish in buying shares for the time being as shares corrected beyond what most analysts had expected.
Market Risk Assessment
In recent conversations with several different fund managers, I have heard many of the same sentiments expressed that the world is awash with risk and it is better to be on the sideline at the moment. The problem is that money sitting in a bank or in U.S. dollars probably represents greater risk then the so called investment or speculative markets at this point.
Recent news regarding the latest problem children, Wachovia Bank and Washington Mutual, show just how bad the cancer is spreading throughout the body of the so called banking elite. And many rumors keep surfacing regarding the names of financial firms that are against the ropes and fading fast into oblivion.
Information that is seeping out from behind closed doors quickly points to the fact that the mother of all financial meltdowns is in the making. Look at some of these quotes pulled from the mainstream media recently:
| Residential Capital LLC, the mortgage lending unit of GMAC LLC, said Tuesday it needs more than three times more cash to stay in business than it estimated just weeks ago. ResCap estimates it now needs about $2 billion in cash by the end of June to meet liquidity demands, according to a regulatory filing with the Securities and Exchange Commission. It previously estimated it needed just $600 million by the end of the month. Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. declined in New York trading after Standard & Poor's lowered credit ratings for the investment banks, saying they may have to book more writedown's on devalued assets. Morgan Stanley, the second-biggest U.S. securities firm by market value, was cut one level to A+ from AA-, S&P said today in a report. Merrill Lynch, the third-biggest, was also cut one level to A from A+, as was Lehman Brothers, the fourth-biggest. Goldman Sachs Group Inc., the largest of the group, was affirmed at AA-. The outlook on all four New York-based companies remains negative, S&P said. Battling to relieve stressed credit markets, the Federal Reserve said Tuesday it has provided a total of $435 billion in short-term loans to squeezed banks since December to help them overcome credit problems. David Einhorn, in his remarks at the conference held by Grant's Interest Rate Observer, notes that in the case of Carlyle Capital, the publicly traded fund collapsed due to the noxious combination of agency securities and 30:1 leverage. "Given the historical safety of instruments, Carlyle and its lenders judged thirty times leverage to be appropriate," said Einhorn, who added that the world learned as a result that "investment companies with thirty times leverage are not safe." |
These are just a few of the glaring news items we are seeing on a daily basis, let alone the things we don't yet know about that about to head south.
The average citizen is beginning to realize that market risk is a bigger concern than they have been led to believe. While they may not understand the specifics of what is causing the problems they see, they can sense that all is not well and have started to learn more about how they can protect themselves. A recent poll by ABC showed economic anxiety among citizens at its highest level since 1981. 68% of respondents said they were concerned about their ability to keep up their current lifestyles, a 17% jump just in the last five months.
The two main causes for concern that are threatening our wealth and prosperity are:
- Systemic risk to the financial system caused from OTC derivatives
- The continuing collapse of the U.S. dollar due to rapid inflation and political stupidity
Precious Metals as Protection
As regulators and investors try to grapple with the deepening losses caused by the collapse of the OTC derivative market, and the rapid deterioration of the U.S. dollar, more and more people are going to discover the benefits of owning the precious metals as protection against such problems. We may even see governments trying to go back to some kind of gold standard in a last ditch effort to restore investor confidence as things worsen and counter-party risk shows its ugly head. Remember that counter-party risk is when your investment is dependent on someone else's promise. Lots of these paper promises will be broken as the inevitable debacle in OTC derivatives continues to grow and the U.S. government continues down the road to fiat currency destruction. The rapid acceleration of both of these problems is very alarming.
A quote I recently saw from Warren Buffet's father when he was serving in Congress sums up the only solution I see for the country. He made this statement on May 4th, 1948. Too bad very few have listened then or now to such common sense.
"Our finances will never be brought into order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion."
The counterpart risks that exists in the markets worldwide today because of the problems listed above are absolutely staggering.
Central banks and government regulators will eventually be brought to the realization that that no amount of incremental tweaking, central bank maneuvering or manipulation will address the coming collapse of the U.S. Dollar and OTC derivatives. The economic effects to individual investors because of these failures will be nothing short of catastrophic.
Invest in Precious Metals & Mining Stocks
To remove yourself from as much risk as possible and protect your family, buy the precious metals, particularly gold and silver and avoid exposure to the U.S. dollar. You can accomplish this through physical purchases of gold and silver, owning quality precious metals mining stocks, and getting money into other tangible assets. It is also wise to consider putting money into another country like Canada, keeping as much of your wealth as possible away from the U.S. Dollar.
Until next time,
Greg McCoach
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In the name of the common good, and for the US to get back on the Gold Standard