Friday, October 15, 2010

Double, double, toil and trouble

I think it's funny how slow things seem to move sometimes.

I first started talking about the foreclosure crisis over a week and a half ago. The enormity of the issue seemed, IMHO, self-evident.

The fallout, just as obvious.

Yet it has only been the last two days that stocks in the financials sector have started to take a hit. I mean, wouldn't you have dumped those stocks the very next day?

But things move slowly.

And what of the investment banks?

As this article on Seeking Alpha notes, there's a pretty strong case that they lied to the investors in many if not most of the mortgage bond deals they put together.

The risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

What has been sold to these investors is nothing short of fraud.

These investment banks bought up loans they knew were bad, packaged them up and sold them on to some buy-side sucker under the guise of a triple A rating.

As the Seeking Alpha article outlines, it’s clear that the banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool.

That’s a lie of omission. And you can bet your bottom dollar there is going to be a Tsunami of lawsuits from investors who are going to want their money back.

It is going to be a very long time before the banking system is going to be free and clear of the nightmare it created with these securitized mortgages.

And those financial stocks? The drop over the last two days is nothing compared to what's coming.


If the destruction that is going to be caused to the banking system by the foreclosure crisis wasn't bad enough, there is the topic of inflation.

Here is another earthquake that most of us are completely oblivious to.

The paradox of concurrent deflation/inflation continues to elude the grasp of many.

One of the biggest deceptions we are being fed right now is that inflation is running at only 1%. When you hear that, you certainly don't conjure up images of the 1970s do you?

But as I have discussed before, the manner in which inflation is calculated was changed in 2000.

That's why I continue to be a big fan of John William's website Shadow Government Statistics.

Among other things, William's continues to offer calculations based on the pre-2000 formulas for measuring inflation.

Take the month of September, for example.

The September consumer inflation rate was an almost non-existant 1.1%.

But calculate the inflation rate as it was calculated before 2000 and the rate of inflation in the month of September was 8.5%.


If we are going to compare today with the stagflation of the 1970s, you have to use data that is calculated in the same manner.

And keep in mind that the US Federal Reserve is desperate to boost the rate of inflation even higher. They are trying to achieve a target under the current format of about 3-4%. This means we are probably looking to achieve a rate of inflation that is something on the order of 12-20% based on using pre-2000 statistics.

Currency induced cost-push inflation is already upon us. It's important you understand and appreciate that.



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1 comment:

  1. Great article Mr Whispers. This inflation issue is something that most people are missing, because they are being purposely mislead. Nearly every media source quotes the government stats and probably have never heard of John Williams, who also presents recalculated figures for GDP, unemployment and M3.
    It just amazes me how people such as Garth Turner ignore the increases in money supply and then tell people that gold is in a bubble and calls them "goldbugs", when they purchase precious metals to protect their purchasing power. At the same time recommending financial assets as the place to put ones money.