Oldtent Archives 2007 - 2008

I posted this chart back in August when hurricane Gustav was projected to hit NO.  PO of $81 I said — probably raised some eyebrows at the time.  Right on time.  Where to from here?

was not just caused by Bank failures ,it was the ARTIFICIAL LOW PRICE SET FOR GOLD ….If they are to prevent another DEPRESSION they MUST not listen to Bankers that don’t want competition for the Dollar .It was they that decided Gold should be set at a LOW price and it was their action that caused a SHRINKAGE of the Money supply and “The Great Contraction ” as Milton Freedman put it. If they repeat this mistake again the money supply will shrink to a level that is on par with “Real Money”…GOLD’ and another “Depression” that will stretch on for years will ensue..All this can be avoided by a proper Gold price which will take into account the size of the economy and the relationship between the Price of Gold and the numbers of Dollars in circulation around the world.If they are allowed to keep Gold at an artifically low price another “Great Contraction” is enevitable.It was the Bankers that created the “Great Depression”that dragged on for 10 years .They wanted the Dollar to be “as good as Gold”..what nonsence it was then as would be again if they have their way.! The Price of Gold is the Key to avoid another Contraction in the Money supply.!

  Would you like to borrow my moose gun …

SOEE— That is an interesting chart you posted.

Surveyor— Ian Gordon believes that GOLD will end up 4:1 to the Dow.

If things get real bad, I’ll borrow your Jack Russell AND take shooting lessons from you. I do have some golf clubs, and I do know how to swing them. But as they say, can’t take a golf club to a gun fight.

she THINKS she’s HUGE.   I’ll just back her up with my 30.06

Twice (or maybe 3 times) in the Twentieth Century the Dow-Gold ratio was 1:1.  I fully expect that to happen again before we are out of the current mess.  However, I am hoping it won’t be achieved by just one side of the ratio doing all the moving. 

The HUGE difference is that back then the dollar was as good as gold.  Today, the dollar is worth zippo backed by nadda….whoops make that backed by a bunch of BS.  Also, anyone doing a dow/gold ratio further back then 1973-77 is comparing apple and oranges.   If the DJIA fell 90% in the Great Depression, then I don’t see why we can’t expect see a bottom when the DJIA/POG ratio corrects 85-90% from its top.

During the great depression, the DOW went down close to 90%.

I don’t even have a small canine.

  1000 DOW, 1000 gold would not be a pretty sight

  Agree about investors being numb - I’m numb, er maybe just a numbskull for holding gold stocks.

  Good to DOW and SPX futures up but sure would be nice to see our metals get some bang for the down buck.

  It’s all a dream I guess.

be out on the streets.  You would have to defend your home with more than a large canine.  People would rob for food.  Let’s hope Dow 1000 is NOT in the cards, at least, in my lifetime.

I don’t think we’ll ever see Dow 1000 thanks to inflation, but we may see the Dow at a level that if converted to cash would only buy what Dow 1000 would buy today, and that’s what matters.

I remember seeing a chart a long while ago of the Dow/Gold ratio, and the Dow had crashed in terms of gold years ago. I was thinking earlier today that it would be interesting to see that chart updated since last week’s market debacle.

www.gold-eagle.com/gold_digest_08/taylor101108.html

Of course we will see huge bear market rallies, but I have to agree with Ian Gordon that the DOW will fall to levels that most people right now think are impossible. And I think 1000 will be closer to the right number than 6000.

How to capitalise the banks and save finance

By George Soros

Published: October 12 2008 19:14 | Last updated: October 12 2008 19:14

Now that Hank Paulson has recognised that the troubled asset relief programme is best used to recapitalise the banking system, it is important to spell out exactly how it should be done. Since it was not part of the Treasury secretary’s original approach, there is a real danger that the scheme will not be properly structured and will not achieve its objective. With financial markets on the brink of meltdown it is vital to make the prospects of a successful recapitalisation clearly visible.

This is how Tarp ought to work. The Treasury secretary should begin by asking the banking supervisors to produce an estimate for each bank, how much additional capital they would need to meet the statutory requirement of 8 per cent. The supervisors are familiar with the banks and are aggressively examining and gathering information. They would be able to come up with an estimate in short order provided they are given clear instructions on what assumptions to use. The estimates would be reasonably reliable for the smaller, simpler institutions, but the likes of Citibank and Goldman Sachs would require some guesswork.

Managements of solvent banks would then have the option of raising additional capital themselves or turning to Tarp, which would state the terms on which it is willing to underwrite a new issue of convertible preferred shares. (Convertibles are better than warrants because the banks should not need additional capital infusions later.) The preferred shares would carry a low coupon, say 5 per cent, so as not to impair banks’ profitability. The new issues would dilute existing shareholders but they would be given preferential rights to subscribe on the same terms as Tarp and if they were willing and able to put up additional capital they would not be diluted. The rights would be transferable and if the terms were set right, other investors would take them up.

Using this approach, $700bn should be more than sufficient to recapitalise the entire banking system and funds would be available to buy and hold to maturity mortgage related securities. Since insolvent banks would not be eligible for recapitalisation, the Federal Deposit Insurance Corporation would certainly require topping up.

Concurrent to the recapitalisation scheme the authorities would lower minimum capital requirements so that banks would compete for new business. The Fed would also guarantee interbank borrowing by banks eligible for recapitalisation. This would reactivate the interbank market and return the spread of Libor over Fed funds to normal and reduce the abnormally high interest rates on business and mortgage loans linked to Libor.

The success of the bank recapitalisation programme could be undermined by a downward overshoot in housing prices. A separate set of measures is needed to keep foreclosures to a minimum and to fundamentally restructure the deeply flawed US system of mortgage finance. Taken together the two sets of measures would not prevent a recession – too much damage has been done to the financial system and the general public has been traumatised by the events of the past few days – but they would reduce its duration and severity. Once the economy returns to normal, the minimum capital requirements of banks would be raised again.

The international financial system also needs repairing but there are grounds for optimism. Europe has realised that it needs to complement the euro with a government safety net for interbank credit. And the International Monetary Fund is finding a new mission in protecting countries at the periphery from the storm at the centre.

The recapitalisation scheme outlined here would suffer from none of the difficulties of reverse auctions for hard-to-price securities. It would help restart the economy and likely produce returns for taxpayers comparable to my fund’s. But time is of the essence. The authorities have lost control of the situation because they were constantly lagging behind events. By the time they acted, measures that could have stabilised markets were ineffective. Only by promptly announcing a comprehensive set of measures and executing them vigorously can the situation be brought under control.

Actions speak louder than words. Specifically, Morgan Stanley urgently needs rescue. The Treasury should offer to match Mitsubishi’s investment with preferred shares whose conversion price is higher than Mitsubishi’s purchase price. This will save the Mitsubishi deal and buy time for successfully implementing the recapitalisation and mortgage reform programmes.

The writer is chairman of Soros Fund Management