Below are some of Bert Dohmen’s most recent comments on Gold, the Economy and Goldman.

On the Barbaric Metal……

GOLD: A NEAR-PERFECT ENVIRONMENT
The environment as described above is perfect for a bull market in the precious metals.
There are some other factors at work as well.

The Executive Board of the International Monetary Fund (IMF) approved a ten-fold expansion of the Fund’s New Arrangements to Borrow (NAB). Yes, “ten-fold.” That means the IMF, urged on by the G-20 nations, will create $500 billion out of thin air, via the creation of SDRs, to lend to countries in trouble, like Greece, Portugal, Spain, etc. SDRs used to be called “Paper Gold” by the IMF and the governments. If that isn’t a contradiction in terms, we don’t know what is.
What is the NAB? The IMF website explains: The NAB is a credit arrangement between the IMF and a group of members and institutions to provide supplementary resources to the IMF when these are needed to forestall or cope with an impairment of the international monetary system.
Obviously, the IMF and G-20 see the danger of “an impairment of the international monetary system. The ten-fold increase suggests that there are some huge sovereign debt problems lurking out there. That supports our view that the next crisis, whenever it occurs, will be a sovereign debt problem. Greece is just the first one.
Here is a line to the IMF release: http://www.imf.org/external/np/sec/pr/2010/pr10145.htm
Gold is the best way to protect your long-term portfolio against continued reduction of the value of paper money. There is the typical seasonal weakness in the summer when European jewelry manufacturers close. That would be the best time to accumulate a strong position.
Rising inflation expectations in an environment of excess global liquidity is perfect for gold. Gold has already made a new historic high versus the Euro. That shows that gold is a global asset, not just a hedge against a weaker dollar. But gold is never a smooth ride.

On the Coming Inflation……

The Economy

There are now more signs that the economy is trying a recovery. Hotel occupancies are rising instead of declining, airplanes are full, apartment vacancies are declining, and from what we hear from some of our valued clients, community banks are making their first loans in a long time and businesses are hiring more temps.
All economic numbers now are compared to a year ago, which was the worst period of the recession. These comparisons are easy and look good.
The Fed’s Beige Book report on economic conditions released on April 14 was lukewarm on the economy. It said, Consumer spending increased, with several Fed banks saying consumers were “somewhat more confident” and businesses “cautiously optimistic” about future sales. “While labor markets generally remained weak, some hiring activity was evident, particularly for temporary staff.”
That doesn’t sound very bullish. But it will change, probably in the next report.
The next few months, will see more improvement in the economic numbers. Employment will look better mainly because of the census “workers” going to your house asking questions. The recruitment ads for these people are for $25 per hour pay, “no qualifications” required.
However, even without the census workers, employment will improve. We like the stocks of the temp employment firms, like Manpower. They will see the first pickup.

But the very important positive is that banks are starting to make loans again, carefully, and selectively. Bankers feel comfortable in a crowd. When some of their competitors lend, they will do it as well. Currently the number of businesses able to get loans is small. It can’t be enough to produce a significant recovery. Bankers have to get more aggressive, but the bank examiners are an obstacle.
Here is evidence that banks are lending again. The chart of COMMERCIAL & INDUSTRIAL LOANS (from the Federal Reserve) reflects that:
You see that little “fish hook” in late March. It’s not much, but it’s the first rise in two years. As you know, our point has been that a sustainable economic recovery must see credit growth. This is a good sign that it is happening. This is the major reason for us to be more optimistic going into year end.
The world is dynamic. We are now entering the phase where the accumulated liquidity will go to work. Large companies already have access to credit via issuance of bonds and other debt instruments. Companies that have huge amounts of cash, like Microsoft, are selling bonds in order to raise even more cash. It’s cheap today. They expect interest rates to be much higher in the future.
Even small banks are starting to lend again. This has been the missing ingredient for a recovery. An economic rebound will become more visible. And when companies are no longer concerned about a loss of business, we will see an avalanche of price increases.

It’s already happening in a number of sectors. Suppliers of iron to China have raised prices substantially. The large paper product makers and box makers in the United States have raised prices. Those are very sensitive economic indicators. Air fares, hotel rates, restaurant prices are all experiencing price hikes. Many price increases will occur to raise profit margins, but many others, such as service businesses, will have to raise prices to offset the higher cost of taxes on labor.
One indicator we consider very important, because it is totally discretionary, is gaming revenues in Nevada. Double-digit gains are reported for last month. This is important. People are feeling better about their own situation and the future, in spite of what’s going on in Washington. And this is at a time that “official” unemployment is still near 10%. Once the price hikes start avalanching, watch out.
For investors, the question is whether the improvements aren’t already priced into stocks at this point. We believe that some of it is. But the animal spirits of risk taking will come out of the closet.
Risk aversion is disappearing. Junk bonds are finding big demand. So far this year, $91 billion have been issued. The yield spread with T-bonds is now at the lowest since December 2007. Is “over-exuberance” resurfacing? Sure seems like it. This can last a long time before there is finally another crisis.
Speculation will rise sharply. That will make the casino stocks and other speculative sectors attractive. After all, in a time of inflation fears, making 5% on your portfolio is not sufficient. You have to “speculate” in your investments.
The precious metals should have a great year, especially when the seasonal weakness during the summer gets out of the way.

On Goldman Sachs…..

FRAUD ON WALL STREET?
Is it possible? Fraud is such a harsh word. The SEC filed fraud charges against Goldman Sachs (GS). What a shocker! This reminds us of the Humphrey Bogart statement, “I am shocked. There is gambling going on here.” The stock immediately plunged more than $20 per share in one day. In our view, this is just the start of a long decline. Eventually, GS will go private again.
Remember the CDOs (Collateralized Debt Obligations), which we discussed in detail in 2007–2008, when we predicted they would implode? These were pools of mortgages created by the Wall Street firms. Then they sold participation certificates in these pools to unsophisticated pension plans, governments, and banks around the world.
In my book, Prelude to Meltdown, written in 2007, I discussed the CDOs at a time when most people had never heard of them. I wrote about the garbage they put into these. With the assistance of well-compensated rating agencies, they thus created AAA securities, which entitled the investor to a portion of real garbage. It’s like an alchemist who makes gold out of lead. Genius!
Even more amazing, there were tranches of these CDOs that were so bad they couldn’t be sold. So, Wall Street created “CDOs Squared.” They packed all these tranches of CDOs that couldn’t be sold into new CDOs, and sold those with a better credit rating.
The SEC charges allege that one of the biggest beneficiaries of the meltdown, the company that shorted the CDOs (Paulson & Co.), helped GS determine which “garbage” (mortgages) they would put into these. Thereafter, they shorted bought CDSs (credit default swaps) on the CDOs, betting that they would implode.

They had virtually no risk. Paulson’s hedge funds may have made as much as $25 billion. However, whether the SEC can make these charges stick is being debated.
SEC Enforcement Director Robert Khuzami said the following:
“The product was new and complex but the deception and conflicts are old and simple. Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
One might ask, where were the regulators three years ago? If we and others suspected this in 2007, where was the SEC at the time? Shouldn’t they have stopped this practice, if it was illegal, instead of bringing charges three year later after hundreds of billions were lost? Therefore, does the SEC have a case?
It’s unrealistic for investors to think that Wall Street advice is aimed to make the client money. Wall Street is a marketing machine. Their business is to sell stuff and sell investments they create, all to make a profit. Of course, deception is a different thing.
Some lawyers appearing in the media defend Wall Street against the allegations with the excuse that the CDOs “were sold to sophisticated, institutional investors. They should have known.” The “should-have-known” defense is interesting. Does that mean the law no longer applies?
The buyers of these apparent “designed-to-fail” CDOs were institutions. The casual observers may say, so what. But in most cases, this institutional money includes retirement funds of individuals, cities around the globe whose budgets were demolished, and savings banks as in Germany that were virtually wiped out. These are not “wealthy” victims.
The New York Times quoted one expert: “The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen.... When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”
GS has a huge reputational risk right now. And then they will be faced by an avalanche of lawsuits, from the institutions and banks in Europe that bought the CDOs, to AIG that sold the CDSs that virtually bankrupted AIG, to the now defunct Lehman. We believe that these suits may involve several hundred billion dollars. The lawyers are probably salivating. This stock will be under pressure for a long time. What institution would want to have such a tarnished company in its portfolio?
Unfortunately, the SEC suit and revelations may get the “Financial Reform” bill passed. It is 1300 pages long, yet will do nothing to prevent another crisis. The crisis wasn’t caused by insufficient legislation, just lack of enforcement because of collusion between Wall Street and Washington. The Reform Bill will just enhance that.
If the charge is fraud, there have been “anti-fraud” statutes on the books of all the regulators for decades, whether Federal, State, or city. And this bill will give massive new powers to the Federal government over all sectors, not just financial. As they say in Washington, “Never let a crisis go to waste.” This bill is all about “coercive power” not “reform.”
Here is what one of the most popular news sites, www.newsmax.com, writes about it, so you don’t have to take my word:
The legislation he (Treasury Secretary Geithner) seeks to pilot through the Senate (it already passed the House) literally gives the Secretary of the Treasury the power to seize any company in any sector which, in his judgment, is in danger of insolvency and whose failure would cause systemic damage to the national economy (a.k.a. too big to fail).
Well, this is exactly what we wrote when the House passed that bill. But how many people know this? It’s so easy to topple freedom and democracy when most people don’t get involved and so many politicians are dishonest. This bill is the sword that will hang over every large business. What company would dare criticize the government if it would mean a potential governmental takeover?

Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049
Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: client@dohmencapital.com