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November 14, 2005

Refco "Hiccup" a Symptom of Easy Money Binge Drinking?
by Bruce Culver

I would like to apologize for a bit of possibly misleading hyperbole in my last piece, What the Refco Mess Teaches Us that was published here on October, 24. In that article I referred to Refco as "one of the world's largest financial institutions".

Certainly Refco was huge compared to say your local bank, and its bankruptcy was of enough import to financial markets to warrant coverage by international news agencies. Nevertheless, even before the collapse of its share price, Refco was dwarfed in terms of market capitalization by institutions such as the money center banks, like JP Morgan, or GSEs such as Fannie Mae. Therefore, I think my characterization of Refco was needlessly hyperbolic. For that, I'm sorry.

Furthermore, as we have seen, Refco's bankruptcy, while delivering quite a blow to some investors, even one as famous as Jim Rogers, is probably nothing more than a hiccup to the broader financial markets. And while it was ostensibly caused by some malfeasance on the part of its former CEO, I believe this "hiccup", if you will, is symptomatic of a financial system that is drunk on monetary, credit and derivative excesses.

Of course, it is no coincidence that these types of problems begin to come to the fore during periods of Fed rate hiking. As the Fed "removes the punch bowl" the real drunks at the party, those who have over extended their credit, begin to get the DTs. Expect to see more of this type of thing as rates continue to rise. I still stand by the main point of my essay: we may be on the brink of a nasty credit crunch that would lead to lots of counter party failures in derivatives markets, making precious metals much more attractive to investors in their traditional role as a portfolio hedge. And I will add that it would take only a tiny fraction of the money in the derivatives markets to move into precious metals to launch them to prices which are multiples of what they are now.

BTW: Taking a look at the most recent money supply data, I see that since August, M3 has been rising at a 12% annualized rate.

Could this have something to do with a clandestine Fed bail out of...say...Fannie Mae, due to its derivative excesses?

A little monetary "hair of the dog" after some derivative binge drinking?

Could this be why the Fed is going to discontinue publishing figures for M3? Wouldn't want that to put the lie to their inflation fighting stance.

Could this be what precious metal markets are sniffing? Hmmmmmmmmmm.

Bruce Culver

Bruce Culver is an English teacher, small-time private investor and a gold bug.

His writings are for entertainment and the provocation of thought and should in no way be construed as investment advice.

Copyright © 2005 - 2006 Bruce Culver

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