Straight Talk from Larry Lindsey at the New Orleans Investment Conference

The New Orleans Investment Conference in October is a major annual event for institutions and investors in the precious metals and mining sector. This year, the attendance turned out to be lower than last year, a bullish sign for gold from a contrarian point of view (even gold was then $100 higher than it was two months earlier in August.) One of the guest speakers was Larry (Lawrence) Lindsey, the former economic advisor to the President. Larry, now as a private citizen and not a government official, gave a very straight, plain and candid talk about his views on various subjects. An attendee from a renowned investment service provider put together a very good recap of Larry's main points in his speech and the subsequent Q&A session.

First, Larry commented that the Fed had turned the humble home from a place to live into a financial asset that had become an ATM machine for homeowners. He went on to say that once the Fed noticed how bad the quality of loans was becoming, they were reluctant "to tinker with a boom," so they sat on their hands. Nothing new here.

He showed a chart of the declining real estate market, including the number of months of supply, and said that now that the real estate credit cycle had ended, few would be able to refinance their existing mortgages which previously had all those teaser rates, and that housing prices were going to go into a steep decline. Again, nothing new there.

Then he went into the CDO problem, the ABCP (asset-backed commercial paper) market and mortgage-backed securities. He said that it will "force banks et al. to mark these products to market (over time) instead of their current practice of marking to model... or to myth." However, he appeared delighted that Wall Street had been able to unload hundreds of billions of dollars' worth of CDOs on the rest of the world, saying that "we Americans were very clever" in doing this.

This reinforces my view expressed in several of my earlier posts that the only difference between the current crisis and those of the 1930s and 1970s is that we have many foreigners holding the bag together with us. Of course, the price we pay is the reputation of our fixed income market and the declining U.S. dollar. Since many attendees at this Conference were non-Americans, I hope his comment didn't ruin U.S. image too much even though he was speaking sincerely.

For many of these rich foreign institutions and investors, it is like a triple whammy. They are not only holding our CDO products, and but they are most likely holding our equities too, such as bank shares of Citigroup, and all are denominated in a falling U.S. dollar. Some of the brave ones are doubling up, such as Abu Dhabi's $7.5B investment in Citigroup. But this bottom picking might turn out to be too early. Trouble with banks is usually too difficult and complex to get an accurate and full assessment, and takes a very long time to resolve and recover, since the bottom is usually followed by another lower bottom. It is quite different from picking a bottom at Europe Disneyland theme park where it is easier and more transparent to evaluate and forecast both top and bottom line growth.

Regarding the U.S. dollar, one attendee asked whether the current dollar devaluation is either planned (Plaza Accord-style) or unplanned, and how that would affect the U.S. Lindsey didn't answer directly, but said that it was foreign holders of dollar assets that would be hurt the most, not the U.S. He said "a 20-30% drop in the value of the dollar would have minimal impact within the U.S." We have heard that very recently and it is consistent with Ben Bernanke's view. At the congressional hearing last month, when congressman Ron Paul asked Ben Bernanke about falling dollar hurting U.S. citizens, Ben quickly said it has no impact to us but only to foreigners holding our assets. Larry's comments were similar to the one made back in the early '70s by then-Treasury Secretary John Connolly, when he said (to European central bankers), "It may be our currency, but it's your problem."

In answer to another question about the obviously suspicious and probably bogus CPI numbers, Lindsey said that it was a government statistic and that, speaking as a businessman himself, anyone in business should definitely not rely on it! Whoa, this is something.

Another attendee asked about his comments in the speech about CPI and expressed (in the questioner's own view) that it was obvious that the inflation genie was out of the bottle, as commodity prices were on the rise and even gold was up to $750 (at that time). Then he further asked Larry how long he thought the Fed and the Treasury Department were going to hold the gold price down. Larry answered "Neither the U.S. Treasury nor the Fed is doing anything to influence the gold price. It's all coming from the European central banks." Well, at least now we know someone out there is doing it. He then volunteered that he was, in fact, a "gold bull" because of all that was currently happening in the world. He then repeated again that he was a "gold bull." I hope he is right.

Most of his views are not new, but it is still very interesting to hear them from a former government official with ties to the current administration.

Comments

[ussmls7]

If the gov & there pals on wall street were brought to account for how they have hid what is supposed to be free & transparent market, the free markets would have takeing care of it's self.
Now we have the SEC turning the other way, when it comes to the surpressing of silver/gold by a few, that may turn out to be the mother of all f!!!!!'ups.Bullion Banks have sold off gold, that makes you think, who are the 4 large shorts? Centralbanks? or the Federal reserve? Is there phyical gold/silver to cover?, if not, then what. I have read so many reports, mostly crap, but can someone tell me what would the fall out be if the large shorts had to cover & the lack of true info if the metal is there?