Imagine yourself taking one of your family’s most valuable heirlooms into a professional appraiser and having them offer you an expert opinion of, say, “X.”
Believing the professional evaluator, you contract with him to sell your asset and it sells to the evaluator’s relative for 100% of “X.”
Now imagine that the ‘same buyer’ of your asset turns around and gets a “new” professional opinion of value for your former asset, the very next week, for 5X.
Would such a bizarre scenario – if it were to actually occur – not raise some serious questions regarding motives along with cat-calls for a thorough investigation?
One week ago Sunday the Federal Reserve forced Bear Stearns into a shot-gun marriage with J.P. Morgan Chase [an institution related to the Fed], whereby J.P. Morgan Chase was to acquire Bear for $2 per share.
Today, exactly one week later, reports are surfacing that J.P. Morgan Chase is in talks to raise its bid for Bear Stearns five fold to $10 per share:
JPMorgan in talks to raise Bear Stearns bid
Mon Mar 24, 2008 8:07am EDT
NEW YORK (Reuters) - JPMorgan Chase & Co is in talks to raise its takeover offer for Bear Stearns Cos to about $10 a share in an effort to appease Bear shareholders angry with the cut-rate deal, a person briefed on the discussions said on Monday…
Under these circumstances, how can anyone seriously accept any judgment or opinion of the Federal Reserve as an honest or ethical arbiter?
The original Bear takeover agreement was forged with the support of federal regulators, and the U.S. Federal Reserve is balking at the higher price, The New York Times said, citing people involved in the talks.
The newspaper said the Fed originally directed J.P. Morgan to pay no more than $2 per share to assure that it would not appear that Bear shareholders were being rescued.
By these metrics, will Bear be valued next week at $50 or $0 per share? Better yet, is the DOW properly valued at 12,000, or does 2,000 or perhaps 60,000 sound a little closer to the mark?
Do these grotesque proceedings, from start to finish, not reek of a snake-oil-swindling carnie act?
What has become abundantly clear is at the root of Bear’s bailout/rescue is the state of the global derivatives complex:
Fed's rescue halted a derivatives Chernobyl
We may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.
"If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital.
……Bear Stearns had total positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in "notional" terms. The contracts were described as "swaps", "swaptions", "caps", "collars" and "floors". This heady edifice of new-fangled instruments was built on an asset base of $80bn at best.
The Brutal Reality
What we are witnessing, through the now-failing obscene use of derivatives, is the entrails of the prolonging of failed fiat money system which began its decay when the world was forced onto a pure fiat money system with President Nixon’s revocation of the Gold Standard in 1971.
Borrowing words from my esteemed colleague Rhody,
ALL FIAT CURRENCIES COLLAPSE, because the debt that they represent grows exponentially, eventually overwhelming the ability of any economy to even pay the interest on the debt. This is why interest rates are declining towards zero. Eventually, even interest rates of .1% will be too high to pay and the defaults will implode the financial system. Notice that I did not say the defaults would implode the economy. That will still stagger on, because that is operated by people whole trade real goods and services. It's the financial system that will disappear and be replaced by honest money.
Clearly the system is collapsing now. Last week’s drop of 12% in gold is a sign of instability in the paper system, not a vote of non-confidence in real money. The sell off was contrived by the monetary interests and I expect it will have unintended consequences. For example, taking gold down, means that the perceived value of the US dollar and other paper currencies are raised. But, the problem with taking the price of gold down by raising margin hugely is that the powers that be may have forced any number of hedge funds [or dealers that behave like hedge funds] that were long gold and silver towards bankruptcy.
To save themselves these hedge funds may be forced to sell CDO's and other derivatives that are already illiquid. The values of these derivatives which had been in limbo will be exposed as worthless, and that in turn may expose banks who hold this stuff on their balance sheet as visibly insolvent. It is the rule of unintended consequences biting the manipulators on the butt. Nobody out there understands the complexity of the derivative markets. It's an immense financial domino system, and the plunge protection team may have just tipped dozens of dominoes over. Their collapse is doing to spread and widen until it reaches right back onto the balance sheets of the money center banks. The Fed is going to have to monetize trillions of this crap to stop the dominoes of failure and that's going to kill the dollar and the rest of the fake money out there.
All fiat money is debt. Debt charges a percentage interest rate. All percentage rates generate exponential increase. In time even the smallest percentage interest will exceed the entire economy's ability to pay.
In our world banks create the money we use out of thin air and charge us 5% per year to use it. Eventually the banks end up owning everything and the people are universally bankrupt. It's a form of slavery.
Ownership of physical precious metal helps to preserve purchasing power and has historically insulated investors from the ravages of currency debasement outlined above.
Do you have any?
Today’s Market
Overseas equities began the week on a lack-luster note with Japan’s Nikkei Index losing 2 to 12,480. Meanwhile, North American markets advanced with the DOW ahead 187.20 to 12,548.60, the NASDAQ up 68.64 to 2,326.75 and the S & P climbed 20.30 to 1,349.80. NYMEX crude oil futures ended the day down 1.28 at 100.56 per barrel.
In the interest rate complex the benchmark 5 yr. bond ended the day at 2.62% while the 10 yr. bond finished at 3.55%.
On foreign exchange markets the U.S. Dollar Index finished unchanged at 72.92.
Precious metals ended the day mixed with COMEX gold futures ahead 2.90 to 913.80 per ounce while COMEX silver futures added .23 to 16.99 per ounce. The XAU lost .82 to 171.19 while the HUI gave up 8.91 to 430.14.
On tap for tomorrow, at 10:00 a.m. March Consumer Confidence data is due, expected 74.5 vs. prior 75.0.
Wishing you all a pleasant evening, calm nerves and successful investing!
