Merrill Lynch bullish on gold

http://www.mineweb.com/mineweb/view/mineweb/en/page32?oid=106655&sn=Detail

David Rosenberg bullish on gold

http://moneynews.com/Headline/Rosenberg-Euro-Gold-3/2010/05/05/id/357940

Rosenberg, Chief Economist for Gluskin Sheff, is a former economist for Merrill Lynch and rumor has it that they parted ways due to his too bearish stance on the economy. I guess honesty is too much to ask from Wall Street.

Merill Lynch's take on financial assets

Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.

Rich investors are spurning gold exchange traded funds in favour of krugerrands.

Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.

"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.

Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.

The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It's win-win either way," said Mr Dugan.

He added that deflation may prove the greater risk in coming months. "It's very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait."

by Ambrose Evans-Pritchard

Lehman and Merill Lynch this morning....

I wrote this in response to a concerned client:

XXXXX, on the contrary. These firms (investment banks, commercial banks, and insurance companies) invested in mortgage-backed securities, thinking they were safe. Little did they know it was just another asset bubble bursting.

Life insurance companies are more conservative by nature, investing premium payments in short- and long-term bonds, and in the case of indexed products, are linked to stock indexes like the S & P 500. With your contracts, if the S & P tanks, you are still guaranteed a 1% floor--which isn't much, but it's better than losing 15% or more, which is what your current stock portfolio is doing. They are able to guarantee the 1% due to options trading, much like they cap you at 15%.

Expect a big loss in the stock market this morning, as this is really, really bad news, but not something I didn't warn you all about several months and years ago. I predicted the real estate bubble, and it's coming to fruition as well. While the more expensive neighborhoods of the bay area are holding up, expect high-end prices to start declining. Manhattanites continue to brag their real estate market has held up, but do you really think that will continue, now that hundreds of billions of dollars are vanishing? Not only are Wall Street bonuses going to disappear at the end of this year, but many investment bankers will be lucky to have jobs. Having a consortium of banks to band together to raise money to prevent the next disaster is akin to gathering 10 cancer victims into a leaky boat--a few will get tossed over the side. First Bear Stearns, Countrywide, now Lehman and Merrill Lynch. Don't forget insolvent Freddie Mac and Fannie Mae, who only hold trillions of dollars of mortgages (70% of all US mortgages). Check out their share prices--they've lost over 90% of their market cap, which makes the tech bubble look like Disneyland.

Expect more big losses and layoffs--it is going to be a bloodbath--the biggest since the Great Depression. Insurance companies were the only ones standing in the aftermath of the Depression, as thousands of banks failed. They set premiums based on actuarial data, not based on speculative lending practices. Banks use 10:1 leverage, which works great in a growing economy, but is terrible in a downturn, as bad loans mount. Expect Washington Mutual to fold, too--unless they get bailed out. It amazes me that people still think banks are safe, despite pervasive evidence to the contrary. How many more banks have to fail before people get it? In any case, insurance companies are forbidden by law to implement that type of leverage.

The VC market has dried up as well--last quarter was the first time ever that there were no IPOs. The liquidity crisis is spreading up and down the food chain--couples with high FICO scores and sizeable assets are having trouble getting financing. Cash is more important than ever, so curb your spending and hoard it. Don't mess around this time, this ride is going to be hell.

In summary, this is EXACTLY what should be doing in a severe downturn, where every asset you turn to is dropping like a Thai thunderstorm downpour. The next 2 (or more years) will be very difficult, and when the last bulls finally turn bearish, basically giving up all hope and expecting the world to end. hopefully we will reach a bottom. Real estate agents and stock brokers have been preaching to me their respective markets will turn around for the last two years, and given their polyannish outlook, I know this hellstorm is going to last longer. They're like Colonel Klink in Hogan's Heroes--whatever they say will happen, do the exact opposite.

If you had to pin me down, the meltdown recovers in 2010, which means you can expect a climactic abyss in stock markets late 2009. THAT will be the time to nibble at good companies who got thrown out with the baby wash--the companies themselves are solid, but the financial hurricane took them down unfairly Pick the winners of each struggling group: Goldman Sachs will be a screaming buy in a couple years, but don't try to catch a falling knife--it'lll cut you. Wait till they bottom and bounce off the bottom a couple times. It's better to be late when bottom-fishing (buying), and it's better to be early when selling.

Of course, I could be wrong and too optimistic on the recovery time, at which point, all bets are off. Just to give you an idea of how bad it is, Warren Buffett of Berkshire Hathaway just sent a directive to one of his portfolio companies, a reinsurer who guarantees funds above the FDIC limit of $100,000 for banks. They lost a mint in guaranteeing losses when IndyMac went under recently, so the reinsurer just notified thousands of banks they are no longer guaranteeing accounts above $100,000! Do you think wealthy depositors are going to react to that?

As an aside, the formerly venerable Lehman firm was the preemiment fixed-income (bond) banker who got themselves in trouble with junk offerings years ago. Buffett actually stepped in and helped bail them out at the time. Obviously, he's not bailing them out this time. These subprime mortgages are the latest cyanide, only this time the Kool-Aid is a lot more toxic. You thought I was a doom and gloomer earlier, and it turns out I understated the magnitude. And unfortunately, it's going to get even worse.