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U.S. Mortgage Debacle Revisited

Darren V. Long, Senior Analyst, Guildhall Wealth Management, As Published on NuWireInvestor.com

Let me ask you a question. What would happen if you did the following? You built a portfolio of successful investments predicated on one single set of underlying “AAA” securities. Let us assume that your entire portfolio was booming based on this underlying grouping of assets and you could share your portfolio with friends globally, and, if you will, even sell these investments to them.

Then, when you least expect it, you find out that the underlying assets that you thought were “AAA” and that served as the foundation for all of the subsequent investments you made around the world with other friends were just a bunch of junk. They were virtually worthless. Would you panic? Probably.

Now realizing you were in a lot of trouble, you go to your local bank and tell them your story. Being sympathetic to your needs as they always have been (witticism aside), they say, “Hmmm … your investments are toxic and have infected the globe. We will have to support you here as this is obviously a situation that could cascade out of control.”

Your local bank goes to its vaults and turns on its printing presses and they print all the money needed to prop up the investments — and they even end up buying a large portion of these bad investments themselves.

You breathe a sigh of relief knowing that the banks are there to back you up and you can live another day. So who really cares that the whole investment has gone to hell in a hand basket. In fact, you start to feel so much better that you go back to your old ways. The bank, for their part, continues to print fiat money for you and to relieve any subsequent stress that might have resulted from this situation.

Of course, we all know you and your local bank branch could never get away with this. You would be long gone, rotting in a cell for having pulled a “Madoff”. However, don’t be so certain that the story didn’t take form in some other way.

The subprime mortgage debacle and the ongoing printing of fiat paper money by the Federal Reserve in the U.S. are very much like the story above. This is how all the “too big to fail” institutions were supported as a result of the panic of 2008.

Too Big To Fail

Those four words, “too-big-to-fail”, literally have such a stigma attached to them that they may well serve as the title for a story about the end of capitalism as we know it. I do not pretend to like the current state of capitalism but it is what it is. In a normal world, no person or business is “too big to fail”, period! But here we are, some five years later, having watched the Fed in the U.S. profligate trillions of dollars in bailout money to the “too-big-to-fail” institutions worldwide.

It has become a money pit of unprecedented duration and amount and it now involves the major economies of the world. The underlying assets in this new science experiment are you and I and the test involves an attempt, at least in my humble opinion, to get us to buy the worthless paper at all costs. This helps make certain that those at the top continue to make the most and get the greatest rewards.

It is Cheap Money

Cheap money flanked by artificially prolonged low-interest rates and without it not only would there have never been a recovery, but we here in Canada would have suffered the greatest fall in history alongside most of the rest of the developed world.

More recently, the markets got a little shock when “Helicopter” Ben Bernanke, the chair of the Federal Reserve in the U.S., announced there would not be any tapering of the $85 billion a month that the FED is currently spending, despite expectations to the contrary by almost 90 per cent or greater of the financial media pundits and analysts alike. It’s a wonder how long people will continue to blindly follow the media.

Countries like the U.S., Canada, China, the Eurozone and others have been propping up their own currencies and economies with the printing of low-interest cheap money and bond-buying schemes, and there is no way in heck they can stop now as they would be risking higher interest rates, no more cheap money and a global economy meltdown.

In the coming years, it is highly likely that both gold and silver will increase in price for many of the reasons I have discussed for years. But when you consider that we are in completely uncharted territory, in which we are constantly having the wool pulled over our eyes by skewed statistics and numbers, is it not unreasonable to put insurance into your portfolio? Ultimately holding hard assets trumps paper and presents an incredible opportunity to those with eyes wide open.

Yours to the penny,

Darren V. Long
Guildhall Wealth Management Inc.

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