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Judgment Day for Wall Street

Stock-Markets / Credit Crisis 2008 Mar 31, 2008 - 03:01 PM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleIn the first days after the Fed's history-breaking Bear Stearns bailout, a parade of Wall Street pundits preached the theory that ...

"The worst of the crisis is behind us" ...

"The dollar has hit rock bottom," and ...

"The great investor flight to hard commodities is over."

Markets that had been surging fell. Markets that had been falling surged. Investors cheered. And everyone who wanted to believe believed.

But nothing changed.

All across America, home prices were still falling, home sales were still plunging, and consumers continued to suffer withdrawal pains from the greatest debt addiction of all time.

That's why we learned last week that consumer confidence is in a free-fall, consumer spending has just taken a huge blow, J.C. Penney sales are swooning, and retail stocks are getting hammered.

That's why Wall Street firms such as Lehman Brothers are rumored to be on the brink of collapse, while commercial or savings banks — like Fremont in California with $7 billion in deposits — are known to be near failure.

And that's why we recently held an emergency online teleconference, "Judgment Day for Wall Street." I hope you attended. But whether you did or not, I don't think the edited transcript, which I provide below, is something you can afford to miss.

Judgment Day for Wall Street
Martin D. Weiss, Ph.D., Larry Edelson, and Sean Brodrick
with Martin D. Weiss, Ph.D., Larry Edelson, and Sean Brodrick

Bob Nichols (host): Welcome!

A few months ago, our world was stable and your retirement was secure. Today, suddenly, all heck is breaking loose and your future seems like a role of the dice.

A few months ago, Wall Street and Main Street were counting on Fed Chairman Ben Bernanke to protect them from disaster. Now, suddenly, they have awoken to the realization that his efforts have done nothing to end the credit crunch or save the economy ... and have done everything to gut the value of the U.S. dollar.

Just a few months ago, most Americans believed they could count on a dollar to buy a dollar's worth of food, energy and other products. Today, inflation is devouring our buying power at the fastest pace in nearly 30 years — and it's accelerating.

In response, Mr. Bernanke is panicking. He's dishing out hundreds of billions in new "monopoly" money even as we speak. He's getting ready to cut interest rates again. He's gutting the dollar, driving inflation higher. And still, credit markets and the economy are swooning.

Millions of Americans are stunned. And for Wall Street, it's judgment day.

But not everybody is surprised. A small group of astute and far-sighted analysts saw this coming long ago. More than that: They warned us, pleaded with us, to take defensive steps to insulate our wealth and income ... and also to use this unprecedented event to amass tremendous wealth.

Three of those analysts — Martin Weiss, Larry Edelson and Sean Brodrick — are here with us today.

Gentlemen, I've reviewed the conferences we did last year and I had your staff dig up the audio recordings. Bear in mind that these took place at a time when everyone else on TV or in the press was saying the crisis was "contained," or was "limited to subprime mortgages."

But you were saying the opposite. So let's take a few moments to listen to what I asked you back then, and what your answers were ...

" Bob: Martin, not too long ago, something pretty unusual happened: Former Fed Chairman Alan Greenspan said that today's credit crisis is identical to the credit crisis of 1998, when a major hedge fund collapsed. Do you agree?

Martin Weiss: No! I disagree. The credit crisis this time is many times larger. Bernanke is facing a tidal wave of foreclosures in the $824 billion subprime mortgage market ... a tidal wave of foreclosures in the Alt-A mortgage market, which is about $720 billion ... a tidal wave of foreclosures in the so-called jumbo mortgage market, which is over $500 billion ... and, ultimately, you're going to see even a surge in foreclosures among the rest of the $13 trillion mortgage industry.

Plus, as if that weren't enough, Bernanke faces a far broader crisis that threatens to spread to many more debt markets — the consumer credit market, which is about $2.4 trillion, the corporate bond market that's another $10 trillion, and ... derivatives! Just the derivatives held by U.S. banks alone are over $144 trillion!

Bob: OK. Could you sum this up for our audience so we can see the Big Picture in a nutshell?

Martin: First, we know that there are similarities between the 1998 crisis and the crisis today. Second, we have evidence, plenty of evidence, that today's situation is many times worse than the 1998 crisis.

Third, it's clear to us that all this is driving the U.S. dollar down and that the dollar will decline no matter what the Fed does. If they do too little, the dollar will go down because of the housing bust, the mortgage meltdown and more weakness in the U.S. economy. If they do too much, the dollar will go down because of the cheap dollars flooding our economy.

Larry Edelson: The only way Washington knows how to avoid a recession in the United States is to paper the world with unbacked dollars ... and, by definition, to drive up the value of tangible assets like gold, oil, and every natural resource under the sun.

For half a decade, commodities have been like smoldering embers, already in a steady, solid uptrend. And now the monetary authorities of the world are taking those smoldering, burning embers ... and pouring on to them the rocket fuel of devalued money, much more money than ever before.

Bob: Where does that take investors?

Larry: It takes us to the mother lode — the place where Mother Nature and mankind are conspiring to create one of the greatest commodity price explosions you've ever seen ... or you're ever likely to see. Platinum is headed for $2,000. One single ounce of this metal will be worth $2,000."

Bob: We're back live in the studio. And for the longest time, you and Sean have also been forecasting $1,000 gold and $100 oil. Now here we are, and all that has happened. Martin, Larry, Sean, congratulations for your foresight.

Martin: Thank you! But right now, you don't have to foresee this crisis to start taking urgent steps to protect yourself and to make money. You can just look at what's already happening. Look at the price of homes. Look at the S&P. Look at municipal bonds. Their prices have plummeted. And most important of all, look at the U.S. dollar!

Martin D. Weiss, Ph.D.

Bob: I remember this chart from last year — although, of course, the dollar was much higher back then. I remember you said the dollar was going to break down below its all-time lows. Is that what happened?

Martin: Yes! There's that watershed event on the chart — the bust of the 1992 low.

Bob: And you said that after it plunged below its all-time lows, it would dive into a free-fall.

Martin: That's what's taking place right now.

Bob: Geez, Martin. This is a disaster!

Martin: Only if you don't know about the things that naturally — almost inevitably — go up while the dollar is going down.

Sean Brodrick

Sean Brodrick: Look at gold, busting out of its range, surging to nearly $1,000 an ounce. Look at silver. I like silver a lot better than Larry does. He's more into gold. But you know — it didn't matter. Both of them have made people fortunes in the last few months.

And the fact is that some of this stuff I'm going to show you now has made those big gold and silver gains look puny by comparison. Gentlemen, roll the drums. I give you platinum.

Platinum's Latest Surge

Bob: Just from that low last August, how much did it surge?

Sean: By over one thousand dollars per ounce.

Bob: You mean just the increase in the price of platinum is more than the entire cost of gold at its all-time peak?

Sean: Exactly.

Larry: This is the day when the U.S. government — the Federal Reserve, the Treasury Department, the White House and Congress — have no choice but to make a tacit pact to flood the country with money in every way they can. This is what every politician in history has done in this situation.

It's the same old trick, but this time they have new, more powerful tools: In the 19th century, the government ran its money-printing presses in their basement. In the 20th century, they started injecting money into the banking system electronically. And now, the Fed has created not one, but two, brand new money-creation machines.

Martin: Let me jump in here to explain this because it's very important. The Fed's first new money-making machine, which it introduced late last year, effectively replaces the discount window. It lets the Fed make long-term loans to the banks. And it lets the banks put up the shakiest and junkiest forms of collateral ever accepted by the U.S. government in modern history: Bad mortgages and bad loans.

Bob: You mean the Fed is actually buying up all that stuff that's been causing the banks all those billions in losses?

Martin: Not buying — taking it in as collateral for loans. But the net effect is similar. It's toxic paper, poison to the balance sheet of anyone who touches it. And the Fed's not only taking it all in, it's promising to take in as much as it has to in the future, with no limit and no restraint.

The Fed's second new money-making machine, called the Term Securities Lending Facility, was introduced on March 11th and will pump hundreds of billions more into the market. But this one goes beyond any money-creation machine ever invented, because instead of dishing the money out to the banks, it dishes it out to primary dealers, government security dealers.

Bob: No wonder foreign investors are dumping the dollar and rushing into things like gold and other commodities! Who in their right mind would trust a country whose central bank is printing all that money and taking in all that garbage?

Sean: Until now, foreign investors and central banks have accepted our paper, stashed it away in their vaults, kept it on their books ... and everybody was happy.

But no more! Now they're finally beginning to rebel. You've got oil exporters demanding more dollars ... food-producing countries demanding more dollars for their food ... gold and silver producers demanding more dollars for their metal.

Larry: I've said it before and I'll say it again: You can't print oil like you can print paper. You can't create gold like you create dollar bills. There is a finite supply, and that supply is actually very small. So when too many investors crowd into these tiny markets, it's like 10 college kids trying to squeeze into a Volkswagen Beetle.

Look. All the gold that's ever been mined in the entire world can fit into a room that's 19 meters by 19 meters — roughly the size of a tennis court. Imagine millions of investors trying to pile into that all at once.

Or consider this number: The total market cap of all the companies in the world is $51 trillion. The total above-ground gold supplies are only about $4.4 trillion.

Bob: OK. Let me do the math. $4.4 trillion vs. $51 trillion, right? So all the gold in the world is only about what? Eight or nine percent of all stocks in the world?

Larry: 8.6%, to be exact.

Bob: So are you saying that if just 8.6% of the money now invested in stocks moved into gold, it would effectively double the demand for gold?

Larry: Oh no! Far more than that! Almost all of the $4.4 trillion in gold — and almost all of the new production — is already accounted for. So if 8.6% of the money currently in stocks moved into gold, it would multiply the demand thousands of times. But that's not going to happen. Because long before that happens, the price of gold would be so darn high, most of that money would be going elsewhere.

Bob: How high?

Larry: After adjusting for inflation, just to get back to its previous peak, I figure over $2,200 per ounce.

Bob: If this were a year ago, I'd say you're nuts. But now with gold near $1,000, suddenly, it doesn't seem so crazy to me any more. It actually sounds quite plausible.

Larry: Ha-ha. I understand. But the $2,200 target has been my target all along. Never changed.

Bob: What about other commodities?

Larry: The same is true there. The available supplies are minuscule, the smallest in decades. And now you suddenly have a flood of money rushing into those commodities from all sides. Not just stock investors, but also bond investors. Not just individuals, but international banks and hedge funds too. Even retirement funds like California's Calpers are reportedly shifting money into commodities!

Bob: How fast could this happen?

Larry: Just look at how fast it has already happened and that will give you a sneak preview. You've seen how wheat has moved limit up day after day after day. You've seen how platinum has skyrocketed. And I'm not just talking about small niche markets. You've also seen how massively large markets— like the world market for crude oil — have been driven higher by the flood of new investment money, money that's running away from the sinking dollar.

Bob: Sean, you've been writing about this in Money and Markets.

Sean: Yes. Oil hasn't just risen higher than its previous all-time peak — it has risen higher than its previous peak even after adjusting for inflation ! It just plowed right through it. And Larry nailed it right on the head: The Fed can print all the money in the world it wants. But there's only a finite supply of commodities on this planet.

Bob: Give us an example.

Sean: Copper. Right now, despite all the copper mined on the planet, the entire globe has only three days' supply of copper. Three days!

If there is a strike somewhere in Chile, or if there is a power failure in Zambia, all bets are off. Copper, which recently exploded to $4 per pound, could be off to $5, $6 or even $7 per pound. And the demand keeps soaring.

China imported about 1.4 million metric tons of copper in 2007 — a huge 134% increase from the 600,000 tons it imported the year before. China now uses 25% of the world's copper. In real terms, over the next 10 years, China alone will need 50 million tons of copper. But it's not just China. Despite the dramatic rise in prices, total global consumption of copper is projected to climb to 18.95 million metric tons this year from 18.15 million in 2007.

And that's just consumption. That doesn't take into account the surge in investment demand.

Bob: Why the upsurge in investor demand?

Sean: For three reasons: The carrot, the stick, and the vehicle. They're all coming together at the same time.

Bob: Can you elaborate?

Sean: Martin already told you about the stick — the things that are falling, that are ripping apart the portfolios of investors. And we've told you about the carrot — the huge profits investors are now making in commodities. But now we also have the vehicle — exchange-traded funds, ETFs.

Bob: ETFs in mining shares and oil companies?

Sean: That too. But right now I'm talking about ETFs in pure commodities. These ETFs are opening the floodgates to investor money, making it possible for investors to buy commodities like never before in history.

Bob: How do you see that happening?

Sean: I see commodity ETFs rising to the top of the charts all over the world. So if you're an investor in Singapore or Dubai or London or the U.S. ... and you're on the Web searching for the top 10 performers in the stock market, what do you think is going to be at the top of those charts?

Commodity ETFs! Remember, these ETFs are traded just like stocks. In fact, they are shares in companies that invest exclusively in the commodities. Like any other sector that's a top performer, they're going to attract investor dollars — not just individuals, but hedge funds, mutual funds, pension funds ... you name it.

Larry: There's another critical element I want to point out, which goes back to what I said about paper wealth vs. real wealth. If investors have learned anything since the year 2000, it's that ordinary stocks and bonds can fall to zero . If a company defaults on its debts, its bonds can fall practically to zero. If the company goes bankrupt, its common shares fall all the way to zero.

Bob: I remember that. I was reporting those events as they happened — Enron, WorldCom, Global Crossing. Millions of investors got burned by those wipe-outs.

Martin: And we're seeing it again right now: Subprime lenders going under. Builders going bankrupt. Bond insurers in trouble.

Larry: But commodities are different. Gold, food, oil — they can never fall to zero. They have intrinsic value. Even if there's a glut, even if demand falls to record lows, which, by the way, is not going to happen for many years in my opinion ... but even if it did, commodities still have value.

Martin: A word of warning here: None of this means commodities are going straight up.

Bob: I get that. I realize they can down too. Obviously, if you buy at a top and sell after a decline, you're going to lose money.

4 Mind-Boggling Differences Between The Commodity Superboom of the 1970s And the Superboom of the 1980s

Sean: But if you hold on, I think you're going to ride this superboom. And, guys, it's beginning to happen now — right now. Like Martin said earlier, this isn't a long-term future or even a near-term future prediction. It's an observation of what's already beginning to happen.

We have no way of knowing what the future will bring. But what we can do is look back at the past. So I have prepared some point-by-point comparisons with the late 1970s and early 1980s.

That's when gold surged from $35 per ounce to $875. Even without leverage, that was enough to turn $10,000 into $250,000. That's when silver rose from $2.20 per ounce to $50 per ounce, enough to turn $10,000 into 227,000.

Bob: That was then. What about now?

Sean: The trend is the same — UP. But the differences in the potential magnitude and duration of the trend are mind-boggling.

Here's mind-boggling difference #1 : World population! Back then, demand for commodities was almost all concentrated in the United States, Western Europe and Japan. Beyond that, demand was negligible.

Behind the iron curtain in Europe, demand was suppressed or non-existent. Behind the bamboo curtain in Asia, demand was also suppressed or non-existent. Ditto for India and other emerging countries — because of socialism, sheer poverty or both.

So in 1980, we estimate that fewer than 2 billion people on the planet were a significant factor in the demand for commodities. The rest were largely all sequestered behind communism or stuck in poverty.

Bob: And now?

Sean: Three things have happened: First, the world's total population has grown by nearly 50%. Second, with the fall of the Berlin Wall and the opening of China, another billion and a half people have jumped into world commodity markets, directly or indirectly. Third, with the emergence of high-population countries like India, Indonesia, Bangladesh, Brazil and others, another 2 billion or so have also joined the party!

2 billion vs. 6 billion

My point is that, all told, the world population that's potentially having a real impact on commodity prices has not gone up by just 50%. It has nearly tripled!

Bob: In just two decades?

Sean: Yes. Now, let's talk about mind-boggling difference #2 — consumer price inflation. In the late 1970s, the CPI in the U.S. was at double-digits, and that was a huge factor in driving savvy investors into gold, silver and other commodities. Today, it's about a third of what it was last time around.

So here's what you have to be asking right now: If commodities are already hot now, even with consumer price inflation at these ridiculously low levels, how high will commodities go when consumer price inflation surges by double-digits like it did in the 1970s? And what happens when inflation surges beyond the double-digits of the 1970s?

Now, here's mind-boggling difference #3 — diminishing supplies. Back in the '70s, you had tens of thousands of operating wells. Now most of those have been shut down. In gold, South African production is at its lowest point in 87 years.

Bob: And the last?

Sean: Mind-boggling difference #4 is investment demand. Back in the 1970s, gold, silver and many other commodities were considered fringe investments. Your broker would have scoffed at the idea. Today, all that has changed. Brokers are usually open to buying whatever you want. Investors and savers all over the world have a keener awareness of commodities. Plus, in the U.S. alone, there are 43 commodity ETFs— with new ones coming out practically every day.

Larry: Let me sum up. People made fortunes in gold, silver and other commodities in the 1970s and early 1980s. But that's nothing in comparison with what you could make today.

Today, you've got the dollar disintegrating against the world market. You've got central banks devaluing the U.S. dollar. You've got 3 billion new players on the stage who are rapidly modernizing. You've got limited supplies. And you have decades of underinvestment in the infrastructure of commodities. So what we saw in the 1970s was a mere pimple compared to what we have going on today.

Bob: I hear you. But with many of these commodities already so high, hasn't the train left the station?

Paul Volcker

Martin: See this man? When you see another man like this at the helm of the Federal Reserve, then you can talk about it being too late to get on board a commodity superboom. But until then, you've got mostly smooth sailing.

I'm talking about former Fed Chairman Paul Volcker. This is the man who jacked up interest rates by the equivalent of three full percentage points in one fell swoop. This is the only man in modern U.S. history who not only fought inflation ... but actually won (for a while).

Sean: But there's no sign of a Volcker anywhere. And there's no sign of the conditions he dealt with. What you have instead is Ben Bernanke, the man who is, right now, helping to create an inflationary supercycle that goes far beyond anything we've seen since the Civil War.

And what you have is politicians who say they care about inflation and the dollar, but you and I know it's just lip service. They don't give a damn about the falling dollar right now. They just want to win the election.

The last thing in the world they're going to do is ratchet up interest rates to kill off inflation at this point. You would have to have the CPI running at high double-digits before they react. You'd have to have $3,000, $4,000, or $5,000 gold, and then maybe, they'll wake up and say, "Gosh, we better do something about this."

Bob: Larry, when you gave your conference last year, you said that commodities were far below their peaks in inflation-adjusted terms. With the big surge in commodities we've seen so far, have they gotten a lot closer?

Larry: No. Only a tad closer. They still have a long, long way to go.

Sean: Gold is still $1,300 away from its inflation-adjusted peak. Silver is still selling for only one-seventh its peak. The entire CRB index of 16 major commodities is still selling at only half of its peak. And now we see mounting evidence that many of these commodities could blow far past their previous peaks.

Bob: OK. Let me play the devil's advocate here. What are the counterforces here? What could turn this whole thing upside down? For instance, are there new, hidden supplies of commodities that could somehow come out of the woodwork?

Sean: No. In fact, the World Bank says that at current demand levels, by the year 2020 — just a dozen years from now — we will need two planets just to sustain the earth's population!

Bob: Is the demand for commodities going to shrink?

Sean: No. Three billion new consumers in Asia are not about to reduce their appetite for commodities. And look at investor demand. It's just beginning to flood into the market!

Bob: Is the Fed going to jack up interest rates?

Sean: Hah! That's a joke, right?

The Wild Cards

Larry: Look, Bob. I don't think you're going to find anything that could derail this. Instead, I think we need to talk about some of the wild cards that could drive commodities even higher. Throughout this conversation, no one has mentioned the biggest wild card of all, the forces that can create explosive commodity moves that go far beyond anything we've mentioned so far.

I'm talking about disasters — especially man-made disasters, strikes and rebellions, wars and revolutions.

It's human nature. When you have assets like commodities that are creating instant riches around the world ... and you have people, sometimes desperate people, vying for control of those riches ... you're going to get conflict.

Why do you think Indonesia is about to kick Freeport-McMoRan out of the Grasberg mine there, the largest gold mine in the world? Why do you think Hugo Chavez of Venezuela is rattling his sabers? Why do you think rebels are attacking oil fields in Nigeria?

Sean: Even if we have no disasters, I think these commodities are going through the roof and investors will make a lot of money. But whatever you do, for your own sake, don't run out and just buy any commodity and forget about them. We're looking at some of the most dramatic price rises in any market in any time in history. So you've also got to expect equally dramatic corrections.

Plus, sometimes one market, like platinum, will absolutely explode, leaping far ahead of all others. Those are the moves that make history — and also make investors fortunes. You don't want to count on them, but you also don't want to miss them.

Martin: Thank you, gentlemen, and thank YOU, our loyal readers and listeners. We are witnessing truly powerful forces in our world today. Make sure they don't hurt you. And make sure you don't miss the opportunity to convert their power into profits. Have a wonderful day!


Urgent note from Martin: I have just posted to my website a blockbuster report designed to help you profit immediately from the dollar collapse and commodity superboom. But if you want to jump in, your deadline is Wednesday of this week . To bring the report up on your screen right away, just click here .

Good luck and God bless!


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