Mortgage crisis bailout - Buffett in, but should we join him?

Warren Buffett has made a significant symbolic action in our economy. He has invested $5 billion into Goldman Sachs, the bank. Not the investment bank but the commercial bank that it has now become. The difference may sound small but it’s huge.

In doing this he has signaled his long-term belief that the American economy will weather this storm. Which few doubted. But this one act is hardly enough to resolve all the issues between now and his normal 5 – 7 year investment window.

Now I realize confidence needed to enter the markets. And the doubt of the bailout plan did not help anything. This is a great stabilizing factor. But the bailout plan is not a smart bet, and will not benefit the nation near-term.

The reality is that the Government wants to give Ben Bernanke $700 billion dollars to accept the bad debt of the financial markets. This is the same individual that failed to identify or resolve the problems in the financial markets that I saw back in January at least. And he is planning to accept every problem every size bank can shovel into this deal.

Have no doubt that every bank is working out how they can get their debt passed onto the taxpayers. These are individuals that were smart enough to create the derivatives that regulators are not smart enough to see as a problem for over 5 years. And suddenly we think that more regulation will prevent bad decisions and prevent being unable to understand what is happening in the markets.

The Government should not be in the business of owning banks. The Government is not smart enough, efficient enough, nor reactive enough. The Government is not able to take on debt at a realistic valuation since it does not understand the value, and thus every dollar spent on the bailout will be a waste. And the Government has never been able to intervene in the financial markets to the benefit the nation or investors.

I would bet that Warren Buffett was asked by the Government to step into the market. He is too strong a figurehead to be ignored, and thus symbolically stabilizes the markets. And the fact that Goldman had to become a less powerful commercial bank, and thus seek out deposits to shore up its bad books and loan reserves, to get the investment by Buffett is telling indeed.

The fact is that nothing will prevent the markets from going lower in the short-term. They need to. And if there is to be any real confidence we need to see other investors step up and make similar styled investments. I want to see the Blackstone Group, and Apollo Investments to make similar steps. Bill Gates too. But that is not happening yet.

The Government has been given time, to sort out what it will do. My advice would be to let the markets sort out the problem created in the markets and bad decisions. Because all a bailout does is tell the markets that the Government will step in every time they make an overly greedy decision. And if you think I am wrong, go back and look at what the auto industry is asking Congress right now.

But perhaps one of the worst things a bailout will signal is opening the floodgates on mortgages. If we bailout bad bets by financials, why not bailout the home owners that made bad decisions? And if we can help those home owners, how the hell can we not say that people like myself that made a smart decision on their loans deserve help too. Why should my taxes go to help pay a mortgage that is not my own? Especially since all those home owners had to do is read their documents and do the math.

The Government is not responsible for correcting the bad decisions those it governs makes. But in making the bailout a fact that is exactly what it is doing. And that is more than a small step towards a socialist government and away from a Democracy.

In the Star Wars movies there is a scene where it is said that

“This is how Democracy dies. With thunderous applause.”

But I believe that that is not the only way we can lose it. It can die with a funnel of money draining from the people. Not as dramatic or poetic, but perhaps far more effective and deceptive.

Recession fears help push gold stocks higher

Recently I saw some interesting news discussing the growth of gold stocks amid the significant rise in gold spot prices.

“We believe that 2008 continues to be a volatile year for gold based on its late 2007 activity and early start to 2008 with increased sensitivity to geopolitical tensions (Pakistan, Iran) and fear of record oil prices (resulting in inflationary pressures for the average consumer and more specifically, cost pressures for producers),” analyst Paul O’Brien wrote in a note to clients.”

Sounds familiar? Perhaps you read a similar statement somewhere

“Since that time we have seen oil soar and attain the century mark. Former Prime Minister Bhutto was viciously assassinated in Pakistan, either by Al Quida or the military/government there. The Fed did cut rates and the housing market has slowed down. At the same time, reinsurers for high-risk mortgages have been hit and another round of write-offs seems imminent. Many are starting to talk recession, and gold spot prices have hit in excess of $850 with many calling for a run to $1000.”

Well enough of the patting myself on the back.

The fact is that with the calls of a recession in the United States by Morgan Stanley and Goldman Sachs, and the various other factors affecting gold, prices continue to ratchet up. Already expectations have been increased, again, for many gold stocks including:

Western Goldfields Inc moved to $5.25
Agnico-Eagle Mines Ltd moved to $65
Alamos Gold Inc moved to $7.50
Anatolia Minerals Development Ltd moved to $7.75
European Goldfields Ltd moved to $9.50
Goldcorp Inc moved to $36

Many of these increases are moves of 15% -20% higher than the prior targets, accompanied with market perform and outperform ratings. Obviously the various brokerage houses believe that this run up is not something that is about to end immediately. And considering the factors involved it seems apparent why.

And this is not limited to the United States. The rise in the gold stocks has been attributed to helping provide a surge to the Chinese markets as well. It was identified as one of the keys in a turnaround from the early session sell-off that began with the prior sell-off in the U.S. markets.

The surge in a few of the better known Chinese gold stocks was in the 8% range, a decent increase in any market.

Zhaojin Mining up 8.27% at 40.60 hkd
Lingbao Gold was up 8.67% at 6.14 hkd

Where this run will end is hard to estimate, but with Raymond James targeting $903 for gold, demand high in China and India, and calls for a U.S. recession, $1000 doesn’t seem that far away anymore.

What's moving gold?

The ripple effect from the mortgage crisis here in America continues to reverberate around the world. As in China and Asia

“With the chance that U.S. markets will be receiving another rate cut by the Federal Reseve, Hong Kong rallied and took much of the Asia markets with it. Even the Chinese banks, which are expected to raise the reserve ratio to a high of 17%, gained with expectation”

the actions by President Bush and the expectations on the Fed have affected gold prices and stocks.

“This re-iterates that in America they will do anything to stop sub-prime. It has put confidence back into the US market, and that is why guys are going out of gold.”

Even with this resurgence in confidence, and the prospect of lower rates in American and subsequently the rest of the world markets, there is still the possibility that a recession is in America’s future.

Several factors remain in the air that will influence the outcome of the economy and the price of gold and gold stocks. Sales for the holiday season, and the amount of discount being provided by retailers, are being watched closely for clues on year end and first quarter corporate numbers. Energy prices, which were recently as high as $100 dollars for a barrel of oil, has helped to put pressure on the economy as well.

“When will oil prices break thru the $100 a barrel mark? That is a question that Europe and America are considering now, even as OPEC has decided to hold production levels steady, and the question of an American recession loom on the horizon.”

Not to mention the predictions of Goldman Sachs

“Goldman Sachs said today that investors should sell gold in 2008 to take advantage of the steadying dollar.”

Yet with all of this gold rose above $800 on Tuesday. To say that speculation is in the air is the least of things. With so many factors inter-related, geo-political unknowns and the impending primary voting on the horizon there is no surprise that February gold futures contracts were recently quoted at $855.

Will the futures contracts be accurate? Will America fall into a recession? Will a Democrat be elected President? No one is quite sure, but the answers will become apparent very soon.