PRIVATE CLIENT LETTER
This letter is intended only for accredited investors who are clients of either Blackburne & Brown or C-Loans, Inc. You signed up for this letter with Blackburne & Brown or by using C-Loans.com. Removal instructions are below. Today we'll discuss how to preserve your wealth during these schizophrenic economic times.
Joke
Du Jour
This guy goes to a costume party with a girl on his back. "What the heck are you?" asks the host. "I'm a snail" says the guy. "But... you have a girl on your back," replies the host. "Yeah," he says, "that's Michelle!"
Schizophrenic Times?
The Fed injects $200 billion into the banking system to shore up the banks. It's the most inflationary act by a central bank since the days of Weimar Germany in 1921. The Dow soars 400+ points.
Just two days later, the investment banking giant, Bear Stearns, teeters on the edge of insolvency. The Fed rushes in to arrange a massive bailout loan from JP Morgan Chase. The Dow gives up the last 190 points of that big 400 point rally.
All the while the dollar sinks and sinks and sinks. Are we going to have runaway hyperinflation or crushing deflation? The financial world is suffering from acute schizophrenia. The situation is sooo confusing. What should an investor do to preserve his savings?
Dinosaur Joke
Q: What do you call a dinosaur in cowboy boots?
A: Tyrannosaurus Tex
The Real Problem
The Fed can inject hundreds of billions of dollars into the banking system to solve the liquidity problem, but this doesn't solve the larger problem.
The biggest challenge facing the Fed and the Treasury right now is the economy's solvency problem, not its liquidity problem.
Our banks and investment banks are stuck with hundreds of billions of dollars worth of unsold mortgages to homeowners who cannot afford the payments. If these home loans were "marked to market", most of our largest banks and investment banks would be insolvent.
Making additional loans to these banks and investment banks doesn't really solve the underlying solvency problem.
Jingle Mail
You've all heard of e-mail and snail mail. Now there's a new kind of mail - "jingle mail". This is when a homeowner gives up on trying to make his house payments and mails his house keys back to the lender.
George's Three Investment Recommendations
To preserve your capital, I recommend three investments - long term U.S. Treasuries, gold, and farm land.
The bulk of your holdings should be in U.S. Treasuries right now. When even huge banks (Citicorp, Washington Mutual) and huge investment banks (Bear Stearns) are teetering on the edge of failure, first and foremost you need to preserve your capital. Arguably U.S. Treasuries are the safest investments in the world.
Don't worry too much about inflation eating away at the value of your treasury bonds. Remember, deflation is now the default mode. The Fed can't inject $200 billion into the banking system every week. The moment the Fed stops aggressively and continuously injecting new money into the system, deflation will reassert itself.
Golf Shot Joke
A guy is standing over his tee shot, looking up, looking down, measuring the distance, figuring the wind direction and speed. His partner says, "What's taking so long?" The first guy says, "My wife is on the clubhouse porch, so I want to make a perfect shot." His partner says, "Forget it. You'll never hit her from here."
Gold Cannot Default
I have been recommending gold for years. We kissed $1,000 an ounce on Friday, and we closed at $999.50 per ounce. Right now gold is a play on the falling dollar. As the Fed drives interest rates to the floor, at a time when the U.S. balance of trade is so negative, the dollar is getting pummeled. In dollar terms, gold is soaring.
But there is a more important reason to buy physical gold. Gold cannot default. Mark my words. The AAA-rated bonds of some of the largest and best known U.S. companies are going to default. This week we lost Sharper Image. Starbucks Coffee is closing hundreds of stores, as consumers can no longer afford $4 coffees. It's the solvency problem, silly.
Flying Elephant Joke
Q: Do you know how to make an elephant fly?
A: Well, first you have to start with a 60-inch zipper...
Why I Like Farmland
Two-thirds of all of the grain in the world is used to feed cows, pigs, chickens and other livestock. As Asian and South American consumers become wealthier, they are eating more meat. Increasing meat consumption is the 2,000 pound gorilla behind soaring grain prices and increasing farmland prices.
The diversion of corn land into ethanol production is admittedly contributing to rising corn prices. Just three years ago corn was selling for just $2.20 per bushel. Corn for July delivery closed at $5.71 per bushel on Friday, and Purdue agronomists predicted in a recent conference that corn would soon reach $6 per bushel.
Finally, global climate change is also wrecking havoc on food production. Record snow storms in China recently destroyed much of their winter grain harvest. Across the globe farmland is also being lost to expanding deserts. It's true that South American farmers are busy clearing and irrigating more fields, but this work takes time. In the meantime, the last of the world's grain reserves are disappearing.
In my last newsletter, we pointed out that in the future, everything you own (stocks, bonds, your home) is likely to fall in value, while everything you need to buy regularly (food and gas) is likely to soar in price. Well, you gotta eat.
Leper Joke
Q: Why did the leper go to the gun dealer?
A: He wanted to buy some arms. (Eeeuuuuu!)
Trust Deed Investments
For information about investing in 9% to 11% first trust deeds, please click here.
Iceland Joke
Q: If your mother was born in Iceland and your father was born in Cuba, what does that make you?
A: An ice cube.
So How Bad Could Things Get? A Banana?
Warren Buffet, Alan Greenspan, and Steven Roach all made comments this week that this recession is going to be a severe one. In fact, all three suggested that something worse than a severe recession was a distinct possibility.
"George, they weren't hinting of a possible banana, were they?" That's the way I read it - all three of them in a single week. Yikes! (A banana? It is the custom and practice in the field of high finance and economics never to use the "D-word", for fear of creating a self-fulfilling prophesy.)
Redneck Murders Joke
Q: Do you know why redneck murder mysteries are so hard to solve?
A: The DNA is all the same and there are no dental records.
Need a Commercial Loan?
Blackburne & Brown is now making hard money commercial loans and land loans as low as 9.9% and zero points for 15 years. Call Alicia Gandy at 916-338-3232.
Thermos Joke
(An oldie but a goodie.) A striking blonde woman walks into a store. Curious about a shiny object behind the counter, she asks, "What is that?" The helpful store clerk responds, "Why, it's a thermos." Still curious, the blonde asks, "What does it do?" "It keeps hot things hot and cold things cold," replies the clerk. So she buys one.... The next day, she brings her new thermos to work with her. Her boss, also a blonde, asks, "What's that shiny thingy?" She replies with authority, "It's a thermos." "Oh," says he, "And what's it do?" "Well," says she, "It keeps hot things hot and cold things cold." Then he asks, "So what do you have in there today?", her boss asked. The blonde replied, "Two cups of coffee and a Popsicle."
Are You Bankable? Need a Commercial Loan?
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Recent Quote From Lawrence Summers
“You have three vicious cycles going on simultaneously. A liquidity vicious cycle – in which asset prices fall, people sell and therefore prices fall more; a Keynesian vicious cycle – where people’s incomes go down, so they spend less, so other people’s income falls and they spend less; and a credit accelerator, where economic losses cause financial problems that cause more real economy problems”. Mr. Summers is the former Secretary of the Treasury.
Will You Read My New Book in Time?
A titanic battle between hyperinflation and crushing deflation is playing out right in front of our eyes. Could deflation possibly overcome the Fed's best efforts to reinflate the money supply?
My new book, The Reverse Multiplier Effect - When Crushing Deflation Destroys America, is a financial thriller that explains the dangers and significant chances of deflation. The lemmings are headed for a cliff. You need to step out of the pack.
Badge of Authority Joke
A Department of Water Representative stopped at a ranch and talked with an old rancher. He told the rancher, "I need to inspect your ranch for your water allocation." The old rancher said, " Okay, but don't go in that field over there." The Water Representative said, "Listen mister, I have the authority of the Federal Government with me. See this card? This card means I am allowed to go where ever I wish on any agricultural land. No questions asked or answered. Have I made myself clear? Do you understand?"
The old rancher nodded politely and went about his chores. Later, the old rancher heard a loud scream and saw the Water Representative running for the fence. Close behind him was the rancher's angry bull. The bull was gaining on the Water Rep with every step. The Rep was clearly terrified, so the old rancher immediately threw down his tools, ran to the fence and shouted out, "YOUR CARD! YOUR CARD! SHOW HIM YOUR CARD!"
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