The United States, Europe and Bretton Woods II

By George Friedman and Peter ZeihanFrench President Nicolas Sarkozy and U.S. President George W. Bush met Oct. 18 to discuss the possibility of a global financial summit. The meeting ended with an American offer to host a global summit in December modeled on the 1944 Bretton Woods system that founded the modern economic system.

Related Special Topic Page
Political Economy and the Financial Crisis

The Bretton Woods framework is one of the more misunderstood developments in human history. The conventional wisdom is that Bretton Woods crafted the modern international economic architecture, lashing the trading and currency systems to the gold standard to achieve global stability. To a certain degree, that is true. But the form that Bretton Woods took in the public mind is only a veneer. The real implications and meaning of Bretton Woods are a different story altogether.

Conventional Wisdom: The Depression and Bretton Woods
The origin of Bretton Woods lies in the Great Depression. As economic output dropped in the 1930s, governments worldwide adopted a swathe of protectionist, populist policies – import tariffs were particularly in vogue – that enervated international trade. In order to maintain employment, governments and firms alike encouraged ongoing production of goods even though mutual tariff walls prevented the sale of those goods abroad. As a result, prices for these goods dropped and deflation set in. Soon firms found that the prices they could reasonably charge for their goods had dropped below the costs of producing them.

The reduction in profitability led to layoffs, which reduced demand for products in general, further reducing prices. Firms went out of business en masse, workers in the millions lost their jobs, demand withered, and prices followed suit. An effort designed originally to protect jobs (the tariffs) resulted in a deep, self-reinforcing deflationary spiral, and the variety of measures adopted to combat it – the New Deal included – could not seem to right the system.

Economically, World War II was a godsend. The military effort generated demand for goods and labor. The goods part is pretty straightforward, but the labor issue is what really allowed the global economy to turn the corner. Obviously, the war effort required more workers to craft goods, whether bars of soap or aircraft carriers, but “workers” were also called upon to serve as soldiers. The war removed tens of millions of men from the labor force, shipping them off to – economically speaking – nonproductive endeavors. Sustained demand for goods combined with labor shortages raised prices, and as expectations for inflation rather than deflation set in, consumers became more willing to spend their money for fear it would be worth less in the future. The deflationary spiral was broken; supply and demand came back into balance.

Policymakers of the time realized that the prosecution of the war had suspended the depression, but few were confident that the war had actually ended the conditions that made the depression possible. So in July 1944, 730 representatives from 44 different countries converged on a small ski village in New Hampshire to cobble together a system that would prevent additional depressions and – were one to occur – come up with a means of ending it shy of depending upon a world war.

When all was said and done, the delegates agreed to a system of exchangeable currencies and broadly open rules of trade. The system would be based on the gold standard to prevent currency fluctuations, and a pair of institutions – what would become known as the International Monetary Fund (IMF) and the World Bank – would serve as guardians of the system’s financial and fiduciary particulars.

The conventional wisdom is that Bretton Woods worked for a time, but that since the entire system was linked to gold, the limited availability of gold put an upper limit on what the new system could handle. As postwar economic activity expanded – but the supply of gold did not – that problem became so mammoth that the United States abandoned the gold standard in 1971. Most point to that period as the end of the Bretton Woods system. In fact, we are still using Bretton Woods, and while nothing that has been discussed to this point is wrong exactly, it is only part of the story.

A Deeper Understanding: World War II and Bretton Woods
Think back to July 1944. The Normandy invasion was in its first month. The United Kingdom served as the staging ground, but with London exhausted, its military commitment to the operation was modest. While the tide of the war had clearly turned, there was much slogging ahead. It had become apparent that launching the invasion of Europe – much less sustaining it – was impossible without large-scale U.S. involvement. Similarly, the balance of forces on the Eastern Front radically favored the Soviets. While the particulars were, of course, open to debate, no one was so idealistic to think that after suffering at Nazi hands, the Soviets were simply going to withdraw from territory captured on their way to Berlin.

The shape of the Cold War was already beginning to unfold. Between the United States and the Soviet Union, the rest of the modern world – namely, Europe – was going to either experience Soviet occupation or become a U.S. protectorate.

At the core of that realization were twin challenges. For the Europeans, any hope they had of rebuilding was totally dependent upon U.S. willingness to remain engaged. Issues of Soviet attack aside, the war had decimated Europe, and the damage was only becoming worse with each inch of Nazi territory the Americans or Soviets conquered. The Continental states – and even the United Kingdom – were not simply economically spent and indebted but were, to be perfectly blunt, destitute. This was not World War I, where most of the fighting had occurred along a single series of trenches. This was blitzkrieg and saturation bombings, which left the Continent in ruins, and there was almost nothing left from which to rebuild. Simply avoiding mass starvation would be a challenge, and any rebuilding effort would be utterly dependent upon U.S. financing. The Europeans were willing to accept nearly whatever was on offer.

For the United States, the issue was one of seizing a historic opportunity. Historically, the United States thought of the United Kingdom and France – with their maritime traditions – as more of a threat to U.S. interests than the largely land-based Soviet Union and Germany. Even World War I did not fully dispel this concern. (Japan, for its part, was always viewed as a hostile power.) The United States entered World War II late and the war did not occur on U.S. soil. So – uniquely among all the world’s major powers of the day – U.S. infrastructure and industrial capacity would emerge from the war larger (far, far larger) than when it entered. With its traditional rivals either already greatly weakened or well on their way to being so, the United States had the opportunity to set itself up as the core of the new order.

In this, the United States faced the challenges of defending against the Soviet Union. The United States could not occupy Western Europe as it expected the Soviets to occupy Eastern Europe; it lacked the troops and was on the wrong side of the ocean. The United States had to have not just the participation of the Western Europeans in holding back the Soviet tide, it needed the Europeans to defer to American political and military demands – and to do so willingly. Considering the desperation and destitution of the Europeans, and the unprecedented and unparalleled U.S. economic strength, economic carrots were the obvious way to go.

Put another way, Bretton Woods was part of a broader American effort to extend the wartime alliance – sans the Soviets – beyond Germany’s surrender. After all wars, there is the hope that alliances that have defeated a common enemy will continue to function to administer and maintain the peace. This happened at the Congress of Vienna and Versailles as well. Bretton Woods was more than an attempt to shape the global economic system, it was an effort to grow a military alliance into a broader U.S.-led and -dominated bloc to counter the Soviets.

At Bretton Woods, the United States made itself the core of the new system, agreeing to become the trading partner of first and last resort. The United States would allow Europe near tariff-free access to its markets, and turn a blind eye to Europe’s own tariffs so long as they did not become too egregious – something that at least in part flew in the face of the Great Depression’s lessons. The sale of European goods in the United States would help Europe develop economically, and, in exchange, the United States would receive deference on political and military matters: NATO – the ultimate hedge against Soviet invasion – was born.

The “free world” alliance would not consist of a series of equal states. Instead, it would consist of the United States and everyone else. The “everyone else” included shattered European economies, their impoverished colonies, independent successor states and so on. The truth was that Bretton Woods was less a compact of equals than a framework for economic relations within an unequal alliance against the Soviet Union. The foundation of Bretton Woods was American economic power – and the American interest in strengthening the economies of the rest of the world to immunize them from communism and build the containment of the Soviet Union.

Almost immediately after the war, the United States began acting in ways that indicated that Bretton Woods was not – for itself at least – an economic program. When loans to fund Western Europe’s redevelopment failed to stimulate growth, those loans became grants, aka the Marshall Plan. Shortly thereafter, the United States – certainly to its economic loss – almost absentmindedly extended the benefits of Bretton Woods to any state involved on the American side of the Cold War, with Japan, South Korea and Taiwan signing up as its most enthusiastic participants.

And fast-forwarding to when the world went off of the gold standard and Bretton Woods supposedly died, gold was actually replaced by the U.S. dollar. Far from dying, the political/military understanding that underpinned Bretton Woods had only become more entrenched. Whereas before, the greatest limiter was on the availability of gold, now it became – and remains – the whim of the U.S. government’s monetary authorities.

Toward Bretton Woods II
For many of the states that will be attending what is already being dubbed Bretton Woods II, having this American centrality as such a key pillar of the system is the core of the problem.

The fundamental principle of Bretton Woods was national sovereignty within a framework of relationships, ultimately guaranteed not just by American political power but by American economic power. Bretton Woods was not so much a system as a reality. American economic power dwarfed the rest of the noncommunist world, and guaranteed the stability of the international financial system.

What the September financial crisis has shown is not that the basic financial system has changed, but what happens when the guarantor of the financial system itself undergoes a crisis. When the economic bubble in Japan – the world’s second-largest economy – burst in 1990-1991, it did not infect the rest of the world. Neither did the East Asian crisis in 1997, nor the ruble crisis of 1998. A crisis in France or the United Kingdom would similarly remain a local one. But a crisis in the U.S. economy becomes global. The fundamental reality of Bretton Woods remains unchanged: The U.S. economy remains the largest, and dysfunctions there affect the world. That is the reality of the international system, and that is ultimately what the French call for a new Bretton Woods is about.

There has been talk of a meeting at which the United States gives up its place as the world’s reserve currency and primacy of the economic system. That is not what this meeting will be about, and certainly not what the French are after. The use of the dollar as world reserve currency is not based on an aggrandizing fiat, but the reality that the dollar alone has a global presence and trust. The euro, after all, is only a decade old, and is not backed either by sovereign taxing powers or by a central bank with vast authority. The European Central Bank (ECB) certainly steadies the European financial system, but it is the sovereign countries that define economic policies. As we have seen in the recent crisis, the ECB actually lacks the authority to regulate Europe’s banks. Relying on a currency that is not in the hands of a sovereign taxing power, but dependent on the political will of (so far) 15 countries with very different interests, does not make for a reliable reserve currency.

The Europeans are not looking to challenge the reality of American power, they are looking to increase the degree to which the rest of the world can influence the dynamics of the American economy, with an eye toward limiting the ability of the Americans to accidentally destabilize the international financial system again. The French in particular look at the current crisis as the result of a failure in the U.S. regulatory system.

And the Europeans certainly have a point. If fault is to be pinned, it is on the United States for letting the problem grow and grow until it triggered a liquidity crisis. The Bretton Woods institutions – specifically the IMF, which is supposed to serve the role of financial lighthouse and crisis manager – proved irrelevant to the problems the world is currently passing through. Indeed, all multinational institutions failed or, more precisely, have little to do with the financial system that was operating in 2008. The 64-year-old Bretton Woods agreement simply didn’t have anything to do with the current reality.

Ultimately, the Europeans would like to see a shift in focus in the world of international economic interactions from strengthening the international trading system to controlling the international financial system. In practical terms, they want an oversight body that can guarantee that there won’t be a repeat of the current crisis. This would involve everything from regulations on accounting methods, to restrictions on what can and cannot be traded and by whom (offshore financial havens and hedge funds would definitely find their worlds circumscribed), to frameworks for global interventions. The net effect would be to create an international bureaucracy to oversee global financial markets.

Fundamentally, the Europeans are not simply hoping to modernize Bretton Woods, but instead to Europeanize the American financial markets. This is ultimately not a financial question, but a political one. The French are trying to flip Bretton Woods from a system where the United States is the buttress of the international system to a situation where the United States remains the buttress but is more constrained by the broader international system. The European view is that this will help everybody. The American position is not yet framed and won’t be until the new president is in office.

But it will be a very tough sell. For one, at its core the American problem is “simply” a liquidity freeze and one that is already thawing. Europe’s and East Asia’s recessions are bound to be deeper and longer lasting. So the United States is sure – no matter who takes over in January – to be less than keen about revamps of international processes in general. Far more important, any international system that oversees aspects of American finance would, by definition, not be under full American control, but under some sort of quasi-Brussels-like organization. And no American president is going to engage gleefully on that sort of topic.

Unless something else is on offer.

Bretton Woods was ultimately about the United States trading access to its economic might for political and military deference. The reality of American economic might remains. The question, then, is simple: What will the Europeans bring to the table with which to bargain?

Tell Stratfor What You Think

This report may be forwarded or republished on your website with attribution to

Corrupt Financiers Should Stop Their Assault on U.S., World Economy

By Appo Jabarian
Executive Publisher
& Managing Editor

USA Armenian Life Magazine — Issue #1121 Sept. 19-25, 2008riday September 19, 2008                                                        
Yesterday, it was the evaporation of Enron, Global Crossing, WorldCom, etc. Recently, it was Fannie Mae and Freddie Mac, Bear Stearns, J.P. Morgan Chase & Co., and IndyMac Bank. Now, it is the collapse of Lehman Brothers Holdings Inc., Merrill Lynch & Co., and American International Group Inc.


Which mega-corporations are next?
The recent downfall of a number of major U.S. corporations has cost the American taxpayers huge amounts of money. Some who applaud the federal bailout of these failed corporations should realize that it is the taxpayer that is being further saddled with the burden of paying off these corporate “debts.”
But are these “debts” real? Are they the result of honest mistakes? Or are they the by-products of greed and sugar-coated “mismanagement?”
One of the reasons may lie in the fact that in late 1990’s, the Republican-controlled Congress and Democratic President Clinton “reshaped the financial landscape. That 1999 legislation removed Depression-era barriers between commercial banks and investment firms and allowed the creation of financial behemoths where years later the risks of underwriting sub-prime mortgages were somewhat hidden,” wrote Liz Sidoti of the Associated Press on Sept. 16.
On September 15 the Wall Street’s Dow Jones took a historic plunge with the loss of 504 points. Although the drop was only 4.42% it made enough damage to make us realize that in today’s financial climate the economy of the United States is so weakened that even a minor loss in the percentage of its business volume, may send financial shockwaves.
In a Sept. 15 article titled “Economic slump: Ethics loom large,” David R. Francis of the Christian Science Monitor wrote that the cause of the mild 2001 recession and the current slump “has been dishonesty, greed, and weak business ethics. … Today’s sinking economy … is the result of sagging real estate values and the bad behavior of many in the mortgage industry and on Wall Street. … In mature, highly developed countries like the US, individual acts of malfeasance are unlikely to have a widespread effect on the economy, notes Frank Vogl, cofounder of Transparency International, a nonprofit group which ranks nations each year by their degree of corruption, as perceived by investors. (Its next report is scheduled for release next week.) But, he adds, when ‘so many people engaged in so many aspects of finance have lost their ethical compass and put their short-term personal gains above other considerations,’ such as was the case in the sub-prime mortgage market in the US, it can have a ‘profound macroeconomic impact.’ In other words, the broad economy gets hurt by greed and selfishness as ensuing financial losses mount and trust fades.”
The bottom line is that the American middle class is being subjected to double or even quadruple taxation.
It is high time for the reinstatement of the Depression-era safety checks and barriers so that the corrupt financiers do not dip their hands deep in the American taxpayers’ pockets.


October 13, 2008 Volume 31: No. 21



It was a historic week in the markets. Our colleague in Australia, Graham Dyer, wrote today: “Last week will go down in history as a share market milestone like October 1929.”

In my book published in January this year, PRELUDE TO MELTDOWN, I wrote that in the fall of this year we would have a market crash, and people would be talking about 1929.

The head of the IMF (International Monetary Fund) says the world financial system is “teetering on the edge of systemic meltdown.” Well, that’s pretty much what I wrote LAST YEAR in my book. But no one wanted to believe it.

On the positive side, when things get this precarious, then you’re normally at a bottom, at least on an intermediate term basis.


Last Friday, the G-7 finance ministers held an emergency session in Washington to discuss solutions to the global financial crisis. Here is the result as reported by Bloomberg:

Group of Seven finance chiefs, meeting after stocks plunged and as a global recession looms, vowed to prevent the collapse of major banks while failing to unveil new initiatives for thawing credit markets.

“The current situation calls for urgent and exceptional action,” the finance ministers and central bankers said in a statement after talks in Washington yesterday. They pledged to


The Global Financial Crisis


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“take all necessary steps to unfreeze credit and money markets” without detailing how that would be accomplished.

There were no specifics. Does it mean they have no plan, or will they announce a number of “surprise” actions that they think will have a greater effect?

Numerous actions have been taken by different countries around the world. But so far nothing has worked. Now the governments will have to guarantee all deposits in the banks, and all transactions between banks, in order to unfreeze the financial markets. It has already started and will be beneficial in restoring some temporary confidence.

Ireland has already started down that road. Iceland has allowed its own citizens to withdraw money from their accounts after it nationalized the banking system. But so far, it is not extending the privilege to foreign depositors. Lawsuits and retaliatory actions by other governments against Iceland have started.

Australia just announced that all deposits in banks, building societies and credit unions in Australia will be guaranteed by the government for the next three years.

After the G-7 meeting on Friday, Treasury Secretary Henry Paulson provided some new details of a plan by our government to provide capital directly into a “broad array” of financial firms. The plan is to attract private capital to complement the government’s funds, he said.



On (Sunday) it appeared that the G-20 nations met. They know something has to be done. Monday is a semi-holiday (Columbus Day) in the U.S., and Thanksgiving in Canada.








That means by Tuesday Washington will come up with a workable plan that will produce a strong global market rally. If they don’t do the right things, we could have global meltdown. I believe that by now these sleepyheads have awakened to reality and will come up with some remedies that will work, at least for a while.

It was reported on Saturday that the largest British banks will unveil plans to raise a huge amount of new capital on Monday. The U.K. government is requiring the banks to raise a total of roughly 25 billion pounds. That’s nice, but where will they get it? It was suggested that it would come from private investors or sovereign wealth funds. Well, good luck there. However, the statement said “or the government.” There’s your “investor.” The government will probably take preferred stock in the banks, which was one of the suggestions I made in our last issue.

As you can see, there is a scramble in the U.S. and Europe to come up with something substantial before the markets open on Monday. The news flow will be heavy this week. We will watch it from the sidelines for a few days.

Bert Dohmen’s

Bert Dohmen’s


Wellington Letter


Our subscribers to SMARTE TRADER would have






closed out all short positions on Friday, per our Thursday night message. Our PRIVATE PORTFOLIO subscribers were advised on Friday to close out all the bear ETF’s,

which had huge profits on ALL the positions, as you can see here:


FXP +68%

EEV +85%

QID +93%

SRS +74%

SKF +69%


Yes, bear markets and even crashes can be very profitable. But you have to turn off your TV. Those profits will pay for the subscriptions for many, many years.

And what have non-subscribers done? Well, so far in the past year, the stock market loss, according to the DJ Wilshire 5000 index, is $8.4 TRILLION. The losses globally are probably as high, giving a total of maybe $16 TRILLION that has gone to money heaven.


Friday, Oct. 10, was an incredible day in the markets. I commented recently that trading in this environment, which I do very actively, was like “flying a hanglider in a hurricane.” Here is a 5-minute chart (each bar is 5 minutes of trading) of Friday’s action, courtesy of our friend Larry Pesavento (


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3 Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected] 4


The S&P 500 index had the worst weekly decline in history, as did the emerging markets, which are now submerging, per our prediction of earlier this year. In Europe and Japan the indices had the largest declines since the Oct. 1987 crash.

It was a total flight to cash, to safety, out of everything that was saleable. Commodity prices plunged as well, with oil hitting $77, down almost 10% for the day.

Morgan Stanley (MS) plunged 27% on Friday, as Moody’s said it may cut the firm’s credit rating. MS is getting help from Mitsubishi bank, which is buying part of MS. If I were Mitsubishi, I would renegotiate the purchase price of those shares.

On Friday, just looking at small changes in the major indices, it sure looked like a boring day. But look at the volatility of the chart. That shows a different picture. What does this high volatility mean? Experience shows that a turn is now highly likely. The buyers and sellers are now fighting it out. The sellers have had their way for five weeks. A relief rally is likely.

Technical indicators are suggesting the same. The Volatility Index (VIX) made a new record high of 76 today, a number never imagined. The higher it goes the worse the market plunge is. Usually when it goes into the high 30’s it’s a sign of a bottom in the market. Now it is twice that high. Such an extreme usually marks a bottom. The only exception would be if the crash continues into a global debacle, with the governments just shutting the markets down.

On Friday, a record 11.6 billion shares traded on the NYSE. During the last weeks when so many analysts were proclaiming a bottom, we said that the big volume was missing. Well, on Friday we got it. Huge volume like this is a sign of the big trading operations switching from being short to going long.

The number of “new 12-month lows” hit a new high above 2000 on the NYSE on Friday, another sign of a selling climax. The number of “new highs” almost disappeared.

And then we look at the NYSE, where the down volume was 97% of total volume. That’s a climactic extreme.

However, don’t get too excited about any rally. In the aftermath of the crisis, the damage will float to the surface over the next several months.

Hedge fund manager Doug Kass says that several of the largest hedge funds will close down because of huge losses and redemptions.



There are likely to be some very large corporate bankruptcies. These are firms that had already run down their cash reserves and no longer had access to the credit markets to finance operations.






Bert Dohmen’s TM

Wellington Letter

It is rumored that Treasury Secretary Paulson will announce that he will not serve under the next administration, regardless of who is elected.

Washington, led by Pelosi, is working on another stimulus bill. Apparently it will focus on giving money to communities so the can use it for their social programs. This method is always like throwing money down the rathole. It will do absolutely nothing to “stimulate.”

And nothing will stop the consumer-led economy from contracting and thus corporate profits from vanishing.

The long-term chart of the DOW JONES INDUSTRIALS (weekly) shows a clear 1-2-3 point top. As long time subscribers know, point 3 is the last chance to sell. That’s when the indicator below cannot cross the blue line on a rally, and then starts declining. The breakdown below the three-year trendline was like a dam breaking. There was a brief “throwback rally” this summer, which tricked a number of high-profile analysts into declaring that, “July 15 is the bear market low.” At the time we voiced our strong disagreement. And then the plunge started in early September. On September 5, we advised to be short in the market.



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5 Bert Dohmen’s TM Wellington Letter

But now that we have had the slow-motion crash, it’s time for a short-term rally. It could last several weeks. For traders, and subscribers to our SMARTE TRADER service, this will be another great opportunity. But anyone participating should not follow the crowd and think that this is the bottom of the bear market.

The NASDAQ COMPOSITE (daily) shows the huge “head and shoulder” top, which we had discussed over the past several months. When the 38.2% Fibonacci level broke, it was like a dam had broken. On Friday, the index hit the 76.4% Fibonacci support. That should at least provide support for a bounce or temporary rally. This chart clearly shows that by all definitions, this has been a crash, just as we predicted in January would happen in the fall of this year. The good news is that after a crash, you usually get a good, short- to intermediate-term rally.



The following chart is of the Australian Dollar in terms of the Japanese Yen. Here you can see the flight away from a resource-based economy. The Canadian Dollar has also had a severe plunge. Note how the patterns are similar. I trade the currencies as well as stocks. Clues that I see in one market give me good clues as to what is likely to happen in another market. Such an extreme downmove will now produce a strong bear market rally in these currencies.


NOTE: In order to get this issue out ASAP, we will not show more charts. But we will in the next issue.

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6 Bert Dohmen’s TM Wellington Letter

All year long we heard from Wall Street analysts appearing in the media that “stocks are cheap.” They said the S&P 500 was at a P/E ratio of 15-16, which historically is cheap. We said that it was one of the most expensive markets historically, and that P/E ratios would have to be cut by 50% to make it interesting.

Now JP Morgan’s London office calculates that global stocks, per the MSCI World Index, are trading at 10 times current earnings, the cheapest since October 1982. The MSCI Europe Index is at a P/E of 8, the lowest since Sept. 1981. In normal bear markets, these would be attractive levels, but these are not “normal” times.

How does the S&P 500 compare? It’s selling at a P/E of a lofty 16, only the cheapest since last year, Sept. 2007.

The U.S. stock market will decline another 40-50% from current levels over the next several years. But there will be some great trading opportunities on the long side as well. In fact, a strong rally going into year-end is now a good possibility.

(Consider our SMARTE TRADER service, which is issued almost daily for traders. The profits have been extraordinary.)

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7 Bert Dohmen’s TM Wellington Letter








Let me point out to new subscribers that this publication is designed to give you the best timing and overall analysis and forecasts regarding the big picture. When longer-term positions, either long or short, are warranted, we will give specific recommendations on those. However, when the markets become extremely volatile, we will go into protective mode, and have either no, or only small positions. During such times, you need daily updates, which is beyond the scope of this publication. For that we have our SMARTE TRADER service and the FEARLESS FUND & INDEX TRADER. Subscribers to these services had the opportunity to make a fortune during the financial crisis of the last five weeks. Therefore, anyone willing to trade the markets should consider one of these services, IN ADDITION to the WELLINGTON LETTER.



In our Sept. 22 issue, we wrote: “Right now, we would take a position in gold related assets. I would use the






SPYDER GOLD TRUST ETF (GLD) the price of which is about 1/10th

of the price of gold.”

We still recommend this for all the reasons we gave in this and the last several issues.

In spite of the outlook for a rally, we will not issue additional recommendations here, because it will be a temporary affair. But our trading services mentioned above will participate.




Although the stock markets should have a rally, looking out over the next year, the worst is still ahead.

As we have advised previously, if you want to see whether financial stress is easing or intensifying, just watch the credit spreads. One I like is the TED Spread. It’s the difference in yield between LIBOR and T-bills. When it widens, it indicates stress. Currently, it’s at the highest level ever. But even that is fictitious, as no one is lending at the LIBOR rate – or any other. The credit markets are frozen.

That means the global economies are now plunging off of a cliff without a safety net below. The wheels of commerce are grinding to a halt.

During this year the freeze in the vital commercial paper (CP) market intensified. I warned about this late last year when the CP outstanding diminished by about $1 TRILLION because new CP’s could not be sold. This market is used by companies to get short-term (90 days) money for corporate purposes, such as preparing for seasonal cash needs like Christmas. Now that market is basically shut down. The Fed announced last week that it may become a buyer of CP, but so far nothing has been done. A shut


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down of the CP market used to be considered impossible because of the horrendous economic consequences. Now we have it.

And it gets worse: 90% of world trade is done with Letters of Credit (LOC). The sellers of goods ask for an LOC from the buyer, where a reputable bank guarantees payment if the goods are loaded on the ships, or upon delivery. Now sellers are no longer willing to accept LOC’s because they don’t trust the banks who issue them. World-trade without LOC’s is considered nearly impossible. The world would retreat to the Stone Age.




: The most essential parts of the global economy are at a standstill. Here they are: 1.

Banks are not lending to each other, while at the same time many banks can’t make additional loans as they are at or below the capital reserve requirements. Therefore, businesses can’t




finance the normal stocking up for Christmas. 2.

The CP market is frozen, so companies can’t




produce goods for the holidays. 3.

And goods




can’t be shipped, because sellers don’t trust the LOC’s. Without an LOC, the buyer has to pay cash to someone overseas and then trust the seller that he will actually ship. That’s a huge leap of faith.

So, there is no money to produce goods, no money for retailers to buy them and no LOC’s to ship them. The store shelves will be pretty bare. Not that it matters, because there will be very few shoppers. And that means huge employment cuts, because business activity will plunge.




The dollar is one of the strongest currencies, but the yen is even stronger. The yen soared to the biggest weekly gain in 10 years versus the dollar. Why? Longtime subscribers will remember all my discussions about the unwinding of the “yen carry-trade.” This involves trillions of yen. Hedge funds and traders around the world have been borrowing yen at very low interest rates, below 1%, converting the yen to currencies offering higher rates, and then investing in the bonds of those countries, like the U.S. If you can borrow money at 0.5% interest, and invest it in U.S. Treasuries at 5%, and you do that with 100:1 leverage, you can make a bundle, unless the currency you borrowed rises.



And that’s what’s happening now as the entire world deleverages. Getting out of the carry-trade means buying back borrowed yen, which in effect is a huge short position. Now we are seeing the short squeeze. At a leverage of 100:1 to one, you lose ALL your own money every time the yen rises 1%. Since the beginning of September, the yen has soared 12%, which means that for every $1 of capital invested, these hedge funds have $12 in losses. It doesn’t take long to go bankrupt with such leverage.






Bert Dohmen’s TM

Wellington Letter

More than $25 trillion has been erased from global equities in 2008. Central banks from London and Frankfurt to Washington and Hong Kong were forced to cut interest rates this week after the year-long credit-market seizure stoked concerns that banks will run short of money.



President Bush on Oct. 10: “We will prosecute those who manipulate stocks downward for their own person gain.” It’s clear that those who manipulate stocks upward will not be prosecuted. Well, we always knew that. After all, the President’s Working Group, otherwise known as the Plunge Protection Team (PPT), has the mission to buy index futures in order to “provide orderly markets.”

The best example of that was in the first hour on Oct. 10, as the DJI was plunging 100 points every minute to a low of 7882. The PPT was able to reverse that plunge, and the ensuing rally drove that index slightly into positive territory. It seems that once that happens, they are not allowed to intervene any further, because that’s where rallies stop.

Are stocks cheap? Not according to this chart. In fact, the current P/E ratio on the S&P 500 is more indicative of a market top, not a bottom. The heavy line is the S&P index. The red line, second from the top, is an “overvalued” P/E ratio of 20. The bottom line is a P/E ration of 10, which would be “undervalued.” Note that the S&P would have to drop about 25% or more to get to the “undervalued” line. But that is based on current earnings. Assuming that earnings plunge during a recession, that line will plunge too. That means that the S&P may have to drop 50% to get to an “undervalued” buy point.

Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]



10 Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected] 11


After a crisis, its always interesting the get the behind-the-scenes news about how the crisis started. Take the Merrill Lynch takeover by Bank of America (BAC). The news now is that JP Morgan made a collateral call, i.e. margin call, for a hefty $5 billion dollars against Merrill Lynch. This means that some paper MER had borrowed against from JPM plunged in value and JPM wanted more cash to protect itself. That forced MER into a shotgun wedding with BAC.

But BAC has its own financial problems. JPM is still asking for the $5 billion. If the buyout of MER goes through, BAC will have to come up with that. Therefore, maybe investors shouldn’t just assume that this merger will go through. What if it falls apart? Will that put the existence of MER into question?

Also, consider that BAC did a stock offering to raise $10 billion on Oct. 7. To get it done, it had to take a 30% discount from the last trading price. Poor shareholders! If you consider that GE had to go to Warren Buffet to get $5 billion, you can see that this is the worst credit crunch the world has seen in 100 years.

You know the story of two drunks getting together to hold each other up? Late Friday, there was a news item that GM and Chrysler are in discussions for a merger. That’s two former giants now in a struggle to stay alive. Both companies survived the Great Depression, just like the Wall Street firms, Bear Stearns and Lehman. But they can’t survive this. Last year, I wrote that in many respects this crisis would be worse than the 1930’s, but without the soup lines.



The bullish analysts who have told you all year to buy stocks, are now advising you not to panic. Well, actually there are times when panicking helps you survive. It is a survival instinct, as when you are being chased by a bear. If you had panicked with your high-tech portfolio in the year 2000, you would have saved yourself a fortune by selling and not suffering during the meltdown of the next two years. Yes, panicking can be productive.



Paolo Pasquariello, a professor at the University of Michigan’s Ross School of Business, says a panic is a “






situation in which people do things that contradict rationality.”

So, we must ask, did those who sold their stock holdings this year “panic”? I don’t think so.



Had you “panicked” when we gave the sell signal in these pages on Oct. 15, 2007, when the DJI hit a bull market high of 14,198, you would have saved yourself from a plunge of over 6000 points. Had you panicked in March of this year during the Bear Stearns crisis, you would have saved yourself a 4000-point decline in the DJI. And had you panicked when we gave a new “sell” signal on Sept. 5, you would have saved yourself from a 3000-point plunge in the DJI over a 5-week period.






Bert Dohmen’s TM

Wellington Letter

There were many chances to sell. Therefore, this cannot be called “panicking.” Those who did sell were intelligent. Those who didn’t sell believed the fable of “holding for the long term,” which I have often called a prescription for financial ruin.



A large number of our subscribers have been with us for more than 15 years, and some for more than 25 years. That’s amazing subscriber loyalty. They know that we use sophisticated technical analysis that helps us to pinpoint important tops and bottoms, no matter what market. Our work shows that chart patterns repeat, independent of what market it is. In other words, an extremely overextended bull market in one stock, index or commodity, once it bursts, will have a chart similar to another investment vehicle in another area, even if they are not related.

Such similarities have enabled us to predict the huge bear market in the NASDAQ, starting in 2000, when we compared it to the DJI in 1929. As you know, the NASDAQ COMPOSITE ultimately declined by more than 80% in the 2000-2002 bear market. The reason why these chart patterns repeat is that each chart depicts human emotions. And that is the factor that connects all markets.

Can this be applied to oil, although some say the oil price rise was caused by a production deficit, not excessive speculation? You bet!



In the real world, everything is connected to human emotions.


Here is a chart of oil vs. the NASDAQ, (courtesy of Note that so far, in the early phase of the oil price, there is a great similarity between oil now and the NASDAQ in 2000.






Update the chart yourself by putting an “X” at the $80 level

. If the patterns continue, oil below $50 is a cinch. In fact, $30 oil is a possibility. But that would mean a very, very deep recession.

Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]



12 Bert Dohmen’s TM Wellington Letter

The price of oil has plunged from $150 to $77, almost a 50% decline, since May. Our sell signal in May was very timely. It wasn’t rocket science, just technical analysis combined with a projection of where the global economies were heading. Our first target was the $75-80 area. Later oil will drop to $50 or lower.

For new subscribers, we show that chart again. The “1-2-3” pattern is one of our favorites for pinpointing important tops. The “3,” when it’s lower than “2,” is where you always want to sell.

Yet we see so many energy analysts, whether in oil or alternatives, still holding on to the past. These advisors are beating the dead horse of oil. Human nature never changes. In the tech bear market of 2000-2002 the vast majority of analysts continued to recommend the tech stocks all the way down because they were “cheap” compared to where they had been. Well, almost none of these stocks got back to their year 2000 highs, and most are now between 60% to 100% lower (yes, worthless) than their peaks.



In the Middle East, the oil countries are still building new cities and great centers of attraction. Last year I wrote






that these will be the monuments of a historic financial and commodity boom gone berserk.

I wrote that Dubai City, where 25% of the world’s construction cranes are working, will be a ghost town, the greatest real estate fiasco since the Tower of Babylon.


Our advice to our clients is to avoid the energy and related sectors for the next several years, except maybe for a short-term trade






. It’s a fact that the sectors that led the last bull market will never, ever be the leaders of the next one.

In fact, by 2010, investors will have forgotten about oil as an investment.

Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]



13 Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected] 14


And that has serious implications for alternative energy. With oil at $150, wind, solar, oil shale and other forms of energy were just getting to the point where they could be competitive. But at $75 oil, or $50 oil, these alternatives will be much too expensive. Cheap oil will drive them out of business, again. It’s unfortunate. However, I believe that solar will be a survivor. With all the research and development that has gone into it, solar does have a chance of becoming a true alternative for a number of applications. That’s especially true for the “thin film” technology which doesn’t use silicon.

Cheap oil will bring an upheaval in the world, to the benefit of the U.S. Our enemies, which in many cases are the oil producers, will find their profits diminish. Whereas the oil producers have long been in the driver’s seat, in the future the consumers will name the terms. After all, the producers can’t drink their oil. Early this year, I wrote that Iran was already chartering the biggest oil tankers, not for transportation, but for storage. A huge surplus will develop. Cheap oil may make Iran a little friendlier. Perhaps Russia’s Vladimir Putin will follow suit. Even Hugo Chavez of Venezuela may calm his anti-U.S. rhetoric. The plunge in oil prices will be our greatest ally. After all, why offend your biggest customer?

Obviously, this will reduce the misplaced inflation fears at the Fed. The professors at the Fed will realize that “deflation,” not inflation, is the major problem. But will they know how to handle it? Fed head Ben Bernanke may throw money out of helicopters, but even that won’t work, except to make gold even more desirable.



The super-high oil prices actually benefited world trade. It boosted the numbers for exports and imports, and the obscene profits were “invested” – of course, not always in productive investments. But the high prices did increase commerce by several trillion dollars. The plunge in oil prices will mean that world trade may actually contract.






And that means global deflation, just as we saw in the early 1930’s.

Where are the intelligent people in Washington and other countries who recognize these dangers and will plan for such deflation? The problem in politics is that the best talkers, not the most intelligent, usually win. But talk is cheap, and can’t resolve the global crisis we have now.


Bottom line: We will have a strong rally in oil right now from the oversold lows of last week. It’s a relief rally, on the hope that the global economies will recover now that the governments are starting to own part of the global banking systems. Taking that erroneous logic further, maybe if all these countries adopt communism and take over ALL industries, the DJI would go to 100,000. But I doubt that.



I am posting an interesting commentary a subscriber sent me. I cannot vouch for the accuracy of the numbers, but it’s food for thought.






Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]


Last year, Congress borrowed MORE than the interest it paid on the national debt. That’s right – Congress is paying its interest bills with borrowed money! And you thought that Congress just “printed up new money.” (No, it doesn’t. Congress has the constitutional power to coin money [stamp bullion] or borrow money. If it DID have the power to create new money, it wouldn’t need to BORROW it.)



Worse, the national debt (9.4 trillion) is denominated in lawful money, and FRNs (Federal Reserve Notes, i.e., our currency) cannot pay it. If computed





in terms of ounces of gold, America’s national debt is roughly 99 times greater than the whole world’s stock of above ground bullion. At current mining rates, it would only take 87 thousand years to dig up enough – if the debt were frozen right now. And thanks to the 14th Amendment, you cannot question the validity of the national debt. (!)


As we go into a long-term global recession, government budget deficits will skyrocket. For the U.S. the latest estimate for the 2009 budget deficit $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to Morgan Stanley’s chief economist. Two weeks ago, the estimate was $1.5 trillion. That’s a 33% increase in two weeks. Amazing!

On top of that, local and state governments will have huge financing requirements. All of this will continue to put extreme pressures on the credit markets.

Now here’s a quotable quote:

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest [we] become bankrupt. People must again learn to work, instead of living on public assistance




. – Cicero, 55 BC, speaking about Rome

You see, things never change. And that’s why the behavior of charts in technical analysis never change. Charts map human emotions.

That seems like the ultimate reason to invest in gold, at least eventually. But first, we must go through the deflationary wave.




We all know the plight of the domestic auto manufacturers. But until recently, Toyota was able to show sales gains, where Detroit had huge declines. But that has now changed. A Toyota representative in the U.S. said: “There’s just no showroom traffic, especially in the last 10 days.”






Bert Dohmen’s TM

Wellington Letter


One of the best indicators of global economic activity is the






Baltic Dry Freight Index, which we have been showing for the past year. Obviously, the transport of goods tells you whether global trade is turning better or worse. We predicted in May, when the index hit an all-time high, that it was a “false breakout,” and that the index would plunge. We said that eventually it would decline back to the 2003 lows, which would mean an 80% decline in the cost of shipping goods on the ocean. To many analysts that forecast was incomprehensible. Now we have it. Look at this chart.

It shows a 77% decline!



How could we correctly forecast such a huge decline? Technical chart analysis! You see, charts reflect human emotions, whether it’s stocks, commodities, economic indicators or anything else, like freight. The false upside breakout in May was the perfect top of the huge rise since 2001. When new highs are quickly reversed to the downside, it almost always leads to sharp declines, no matter what you are charting.






It’s an exhaustion move. Oil had its exhaustion move when it hit $150.

Of course, such a huge drop in freight rates suggests a similar drop in economic activity



. Not on a percentage basis, but back to the time points, e.g., if freight rates go back to 2002 levels, then economic activity should get back to those levels as well. And that would mean a substantial decline in everything around you, such as home prices, values of commercial real estate, values of commodities, etc.

Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]



16 Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected] 17


Lehman Brothers Holdings

Inc. reached an agreement Monday to sell its Neuberger Berman unit to private-equity firms Bain Capital LLC and Hellman & Friedman LLC for $2.15 billion. The deal includes other Lehman money-management units, including private-equity funds.











Just one month ago, Neuberger alone was valued at over $7.5 billion.









































































Obama, Pelosi, Harry Reid and others tell us that “deregulation” is to blame for the financial crisis. They don’t tell you that the financial “deregulation” act was passed under President Clinton.



NewsMax writes this









Clinton was asked in an interview if he regretted signing legislation in 1999 that repealed the Glass-Steagall Act of 1933, which had separated commercial and investment banking.

No, because it wasn’t a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure,” Clinton said emphatically in the







The Gramm-Leach-Bliley Act passed the Senate on a 90-8 vote, among them 38 Democrats, some of them quite vocal supporters of the deregulation bill, including






Sens. Chuck Schumer, John Kerry, Chris Dodd, John Edwards, Dick Durbin, Tom Daschle and Joe Biden.

“Schumer was especially fulsome in his endorsement,” observes






The Wall Street Journal


Now, according to the






, these facts will likely come as news to many, including the national press corps and presidential candidate Barack Obama, who are promoting the idea that deregulation is to blame for the mortgage market meltdown.



Apparently, Obama and his friends don’t realize that they are criticizing all their closest buddies, including the democratic VP candidate.



What most people don’t realize is that the CEO of Fannie Mae, the biggest financial disaster so far, was fired in 2004.








OFHEO Director James B. Lockhart III said the former executives “improperly Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]



manipulated earnings to maximize their bonuses . . . misleading the regulator and the public.” These charges cover 1998 to 2004.



The incentive plan, of course, was promoted and passed by his buddies in the Congress, named above. So, when the fraud was discovered, these two were fired.








The ex-CEO got $240 million in compensation

. This person was also the head of the OFFICE OF BUDGET AND MANAGEMENT under President Clinton. It is said that he is now an advisor to the Democratic Presidential candidate.




In early 2000 Alan Greenspan didn’t see the recession right around the corner, and the devastating bear market in stocks. In testimony before the House of Representatives on Feb. 23, 2000, he said:

…there are few signs to date of slowing in the pace of innovation and the spread of our newer technologies that, as I have indicated in previous testimonies, have been at the root of our extraordinary productivity improvement. Indeed, some analysts conjecture that we still may be in the earlier stages of the rapid adoption of new technologies and not yet in sight of the stage when this wave of innovation will crest.



Well, that was just the time that we warning of an important top and a devastating decline. The signs were there. Just three weeks later, we warned about a “stock market crash.” As we know now, the top in the NASDAQ was on March 10, 2000, exactly at the time we made that forecast.




CANADA: Canada’s dollar suffered the biggest weekly and daily declines in at least 37 years as the deepening credit crisis drove investors to take refuge in the U.S. dollar.

The Canadian currency declined 10 percent against its U.S. counterpart since Oct. 3, the biggest weekly loss since January 1971, when Bloomberg records begin. It touched the lowest since August 2005 today, as prices for commodities including crude oil plummeted and global stock markets plunged.

The Canadian dollar dropped as much as 5.4 percent on Friday to C$1.2125 per U.S. dollar, from C$1.1501 the prior day.



AUSTRALIA: The Aussie Dollar has plunged about 30% versus the US$








since August. These are unbelievably large currency moves. As my colleague Graham Dyer in Australia points out, that means that for an Australian investor gold is now about AUD$1400, up from AUD$800 in August. And that’s why gold is now becoming a very desirable asset around the world. Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]



EUROPE: All of Europe is now involved in one banking crisis after another. The very big Fortis Bank was bailed out with the cooperation of three European nations, Belgium, Netherlands and Luxembourg. Apparently, one nation alone couldn’t do it.

In Britain, several of the major financial institutions either failed or required bailouts. Then the crisis traveled to Ireland. Then this week Ireland decided simply to insure all deposits in Irish banks, no matter the size, because of a banking crisis. Immediately, a flood of money from all over Europe flowed into Ireland, hurting mainland European banks as they desperately need the capital. European policymakers reportedly are furious with Ireland.

Iceland is having severe problems now. Last week the Government basically took over the country’s banking system, as it had to rescue the three largest banks. They have huge commercial paper positions that can’t be rolled over. Iceland yesterday suspended equity trading until Oct. 13. As a result, the Icelandic currency plunged 15% last week alone. The government is going to Moscow next week to ask for a $5 billion loan. Russia is going to make it expensive, like making Iceland allow a Russian naval base there.



Iceland’s banks have about $61 billion of debt,








12 times the size of the economy

, according to Bloomberg. “The collapses have affected 420,000 British and Dutch customers, and frozen assets held by universities, hospitals, councils and even London’s police force,” according to Bloomberg. “This looks like a total collapse,” said Thomas Haugaard Jensen, an economist at Svenska Handelsbanken AB. “It’ll take several years before the economy can start to return to growth.”

In the first half of last year, the financial conditions in Iceland were one of our “canaries in the mine.” We said countries like Iceland, New Zealand and some of the other emerging markets were signaling big trouble ahead for the global economies.



For the last 10 days, trading in Russia’s stock market had been stopped repeatedly, several times a day, because of the intense selling and the large declines. Putin announced on Friday that








next week the Russian government would start buying stocks in the open market in order to support it

. Government is always the ultimate manipulator.

In Europe, as mentioned above, three governments had to combine their strengths to take over the very large Fortis Bank. In Germany, the Munich-based HypoBank, a very large bank specializing in real estate loans, had to be bailed out. The government thought it had a deal with three private banks assisting in the rescue. However, by the weekend, the private banks had backed out.

In Indonesia, the stock market was closed for several days and late in the week the government extended the closure. Here you see what may eventually happen in the U.S.



Italy’s securities-market regulator banned all short sales on the country’s stocks.








Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]



In Japan, a large REIT, New City Residence Investment Corp., filed for bankruptcy protection. It’s the first real-estate investment trust failure in Japan. Yamato Life Insurance Co. also filed for court protection from creditors in the nation’s first bankruptcy in the life insurance industry in seven years.

Economics professor Nouriel Roubini tells us that there are 800 billion dollars deposited in U.S. banks by foreign counterparties. Some people worry that foreigners will pull that money out. I am not worried. Where would they put it? European banks are probably more vulnerable. In fact, we will eventually see a flood of money into the U.S., for safety, if Washington guarantees all bank deposits.



It is logical to think that, if these industrialized nations have huge financial problems, then the emerging countries will have immense crises. I have written that








the best short position for the next two years would be the emerging markets

. They are now so vulnerable to large capital outflows that their creditworthiness will come into question.

We will now see an epidemic of crises in the currencies and economies of our trading partners, especially the emerging countries. Get positioned. This is a fantastic profit opportunity, by selling short.





Yes, the government decided to insure assets in retail money market funds, because of the panic rush to get out of them. Recently over $200 billion left these funds IN ONE DAY, and that’s when Washington announced the guarantee.

As usual, a simple guarantee without “traps” is not something Washington can do. Before you feel comfortable now, read this. You can find the info at:












Limits on the guarantee – The insurance provided by the guarantee program extends only to the total value of a shareholder’s account in a participating fund as of the close of business on September 19, 2008.

What you put into the fund after that date is NOT insured.











– Initially, the program will be in effect for three months, beginning September 19, 2008. After three months, the Secretary of the Treasury will assess the program, including whether to extend it (up to September 18, 2009).


Can you imagine the stupidity! Why not guarantee all amounts? This means that MMF’s will not get any new money coming in. Furthermore, the guarantee expires in 3 MONTHS. In other words, every holder of the MMF’s will now be busy getting his money out before the guarantee expires and putting it into








Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]



something that is safe, like a ‘TREASURY ONLY’ FUND. Maybe that was the intent. It means that MMF’s will have a rapidly increasing problem selling their assets to meet redemptions.

The bottom line is that whatever amounts you held in a participating money market fund as of September 19 will be protected under Treasury’s guarantee program for as long as the program remains in effect. For more information, see Treasury’s FAQs online.




Not long ago in these pages we warned against investing in the latest hype, i.e.. infrastructure stocks. We said that many of these projects would be cancelled as governments run short of cash.



Well, the








Wall Street Journal

‘s “Heard on the Street” column of Aug. 27 discussed the state of infrastructure building around the world. Surprise: There are some significant cancellations. Here is part of what they wrote.

Morgan Stanley recently estimated that 8%, or $60 billion, of the $750 billion of infrastructure projects slated for 2008 are being delayed or canceled. That is four times historical cancellation rates of 2% a year, according to the Morgan Stanley and World Bank data. The report cites 40 canceled or delayed projects so far this year, including a $2.4 billion high-speed train between Singapore and Kuala Lumpur and a $3 billion aluminum smelter in Abu Dhabi. The most common reasons: rising costs and tight credit.



As governments on a local, national, and global scale start running out of money because of low tax receipts, there will be many repercussions. One is spending on new projects. Another is higher taxes.




The major financial TV network interviewed a newsletter writer whose virtual portfolio is actually up nicely this year. I know the individual and have always respected his work. The journalist mentioned that she had interviewed him last year when he was (correctly) very bearish, and took “a lot of heat internally” for having someone so bearish on the program.

There you have it. Bears are not allowed, except by accident.




Bert Dohmen








Bert Dohmen’s TM

Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: E-mail: [email protected]



22 Bert Dohmen’s Wellington LetterTM



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The 15 major European nations have agreed to do something workable, as opposed to the stupid $700 billion program in Washington. They will provide unlimited access from the banks to the central bank. Germany alone is putting 500 billion Euros into such a program. On Wednesday, the other 12 member nations, which do not yet use the Euro currency, will meet and decide whether to join this rescue action.

Finally, there is something strong enough to reinstill confidence, at least for a little while. Eventually, of course, economic reality will take over, and all this money will vaporize. But this is at least buying some time.

Washington is reportedly working on a similar program to be announced this week, possibly as early as Tuesday. There is nothing like a global meltdown to focus the minds of politicians.

The Fannie and Freddie Rescue WELLINGTON LETTER


September 8, 2008 Volume 31: No. 17




The Fannie and Freddie Rescue





On Sunday, Sept. 7, the Federal government announced that it would be putting Fannie Mae and Freddie Mac into “conservatorship.” The CEO’s of both firms will be replaced and the dividends will be eliminated.

The Treasury Department said it will immediately receive $1 billion in senior preferred stock, paying 10 percent interest, from each company. Over time, the government could be required to put up as much as $100 billion for each if the funds are needed to keep them afloat as losses mount. You can bet that the actual total will be many times that.

The government will also receive warrants representing ownership stakes of 79.9 percent in each company. Apparently that means that shareholders would not be wiped out, but they would lose about 80% of the company. That’s substantial dilution.

Furthermore, dividends on both common and preferred stock would be eliminated, saving about $2 billion a year. Mid-size and small banks own a lot of the many different classes of the preferred for their high dividends. With the dividend eliminated, what is the reason to own them? Some banks will take a substantial bath on these investments.





However, the Treasury will not let these banks fail. Bloomberg reported:


The Federal Reserve and three other bank regulators said that they will work to “develop capital restoration plans” with the “limited number” of smaller institutions that hold Fannie and Freddie stock as a significant portion of their capital.

By ensuring that Fannie and Freddie maintain positive net worth, the Treasury will provide “additional security” to the owners of Fannie and Freddie bonds and “additional confidence” for the holders of their mortgage-backed securities, it said. The Treasury noted that Fannie and Freddie securities are held by central banks and “investors around the world.”



In plain English, the banks will not have to write down the value of these securities immediately.

The former president of the St. Louis Fed, William Poole, told Bloomberg that “I would not be surprised if their total losses aggregate about 5 percent of their obligations” of about $6 trillion. In my view, that’s much too conservative. I think the loss will be at least 20% of the portfolio, which would be over $1 trillion.



Note that the takeover is by the government, not the Federal Reserve. After all, the Fed is not owned by the government, although most people think it is. However,the future status of these firms is still unclear. Treasury Secretary Henry Paulson said that “only Congress” can tackle the “inherent conflict” of serving both shareholders and a public mission. Currently, the plan doesn’t address the question of whether the companies will be nationalized, privatized or kept as government-sponsored enterprises that are shareholder owned.


I think a significant part of the statement is that the Treasury said it would reduce the portfolios of both companies by 10 percent a year starting in 2010. That is a big negative because most private mortgage companies are already not lending. If these two GSE’s reduce lending, instead of expanding it, it means that the housing debacle will continue. And only a turnaround in housing can hope to stop the current credit contraction that is leading the world into a financial crisis.


What is likely to happen to the markets?


The initial “sigh of relief” rally may be much shorter than the bulls would like. Yes, the Fannie and Freddie problems are resolved – for now. The fact that the Treasury took these steps confirms that the liquidity situation of both firms was getting critical. But the rescue had already been built into the markets over the past seven weeks. It was obvious that the government could not let them fail.

So, what’s for an encore? Does it resolve the write-down problems of assets in the banking system? What about the Wall Street firms? And what about the future problems of the private equity firms as their acquired companies have trouble making debt service?



The serious problems are still out there. Everyone knew that these two GSE’s would not be allowed to go out of business. That is no surprise. It only gives a psychological boost, but it will take more than psychology to compensate for trillions of dollars of derivatives melting down.

What will be the reactions in the markets? The dollar will have a brief rest in its strong rise, meaning a brief correction before it goes higher. That will also cause a brief pop in the commodity markets, including the precious metals. Late last week, these markets had met first technical levels which normally causes brief counter-trend moves. No one can know if the rally will last one or two days, or maybe even a week. In fact, it may not even last to the end of Monday. We will see. But an end to the credit crisis is far, far away.



Its important to remember that everything that the Fed and the U.S. Treasury have done over the past 12 months, which includes the Fed using half its balance sheet, i.e. $400 billion of Treasury securities, has not resolved anything, but only prolonged the inevitable.


The major indices last week started breaking down to new bear market lows, unemployment is soaring, and the economy is in a certain recession which the guys with their Ph.D.’s won’t recognize until next year.

The ill-defined Fannie and Freddie bailouts won’t be any different. It’s like using an aspirin to fight terminal cancer.




While the bullish analysts tell you about the good earnings of companies, and the exciting “widgets” they make, and the virtually unlimited demand for them, they totally ignore the primary driving factor in economies and investment markets, i.e., credit availability. Without credit, economic growth comes to a screeching halt.

And that’s where we are now. Most banks can’t lend because they are close to their capital reserve requirements. They must raise more capital, which is very difficult, or just stop lending and call in loans.

Major firms, such as Lehman, Fannie Mae, Freddie Mac, GM, Ford, etc. are totally unable to raise long-term capital to strengthen their balance sheets. Their preferred stock yields, and yields on long-term debt, are sky high, implying that the market believes they will not be able to survive. The preferred issues yield from 13%-18%. They can’t raise new capital issuing new preferred at these yields, as it would accelerate their demise. GM’s short-term debt is now yielding well over 20%. Investors obviously are not worried about the return ON their money, but OF their money.

Apparently, many investors are being fooled by the $4-5 billion write-offs repeatedly taken by large financial firms. The amounts seem manageable, so they don’t worry. But you have to add them up. For example, MER wrote down $5.5 billion last October. It got a capital injection from Singapore to compensate. However, at this time, the write-offs of MER amount to $48 billion.



Hundreds of billions of dollars in short-term financing used to be conducted in the commercial paper (CP) market. Consider these Federal Reserve figures on commercial paper outstanding: The “asset-backed” CP outstanding has plunged by about $500 billion dollars, or 40%, from last year’s peak of about $1220 billion. That’s the biggest decline of any credit market in history. How can anyone believe that it won’t cause a serious recession?


However, there is a small positive, namely that “non-financial commercial paper” has seen a rise lately. This is the CP issued by large, non-financial companies. It means that someone is able to raise money in the commercial paper market.

But it’s the banks that usually provide credit to smaller and mid-size firms. They are not able to do so now except on a minor scale. And that’s where the problem lies. During the 14-year stagnation in Japan, the banks could basically not lend because they were still loaded up with all the bad loans created during the 1980’s bubble. Their government should have created a mechanism to get those bad loans out of the banks so that they could lend again. The Fed knows the Japanese problem, and is trying to make sure that it doesn’t happen in the U.S. Their answer is “Term Facilities,” where the Fed trades liquid U.S. Treasury paper it holds for the illiquid paper assets held by the banks. But these are loans, not permanent capital infusions.

While the Fed holds these securities, they continue to lose value. Wouldn’t the banks be smarter to just dump them before they become worthless? They probably hope that eventually the Fed, or the Treasury, will just keep them, because reversing the swaps would mean instant bankruptcy for the banks, as they have to write down the value.

Values of all these paper “assets” are shrinking. Merrill Lynch recently dumped its CDO’s, which was a smart move. These CDO’s were declining every day, and finally MER decided to get a dwindling asset off of its books before everyone else decides to dump their own holdings.

Mortgages held by financial institutions are losing their value on a weekly basis. The huge bond investment firm, PIMCO, estimates that $5 TRILLION of mortgage loans are in the “risky asset” category. That’s about 40% of all mortgages. If you are one of the bulls, just think, how can the Fed, or the Treasury, bail out $5 trillion in bad mortgages?



The credit crunch is worsening, yet a number of economists, including some presidents of Federal Reserve districts, are urging the Fed to raise interest rates. This is a great argument for not letting human beings be in charge of something as important as setting interest rates. The markets can do a much better job. The hawks on rates fail to see that the “low” Fed Funds rate of 2% has nothing to do with market rates, which is what the average person, and the average corporation, pay. The low Fed Funds rate creates a steep yield curve, which allows banks to improve their profitability. Higher rates will cause more bank failures. Is that what we want?

This technique of creating a steep yield curve helped resolve the banking crisis of 1990-1991. Banks borrow at the low short-term rates and invest the money into much higher-yielding U.S. Treasury bond rates, thus making a nice profit. That is also the reason that the prices of these Treasuries continue to rise, totally confusing economists who have been saying that bond prices should decline because of higher inflation. These economists just don’t know how the markets work.

The number of business bankruptcy filings rose 42% in the 12-month period through June 30. The numbers are still relatively small, but the trend is definitely negative.



GMAC and its Residential Capital LLC home lending unit announced that they plan to fire 5,000 employees, or 60 percent of the staff, and close all 200 GMAC Mortgage retail offices because of weak real estate markets. Loans originated by outside brokers through the company’s Homecomings unit will cease and business lending will be curtailed, the company said.


And that’s how credit becomes tighter.



Ford reported that domestic sales fell 27% in August. That’s the 21st decline in 22 months. Ford is reducing its planned second-half production in North America by 50,000 vehicles. In July, sales of U.S. carmakers declined to the lowest sales rate in 16 years.


Meanwhile, Nissan of Japan reported that its sales gained 14%. What’s wrong with Detroit management?



We are now coming to the phase of the bear market and recession where there is a realization by the majority of the investment establishment that the credit crunch is accelerating. Such an acceleration acts like an avalanche, where the lenders and other sources of liquidity suddenly realize that their previous “bargain hunting” has resulted in big losses and they are no longer willing to provide capital.

Banks shut their lending windows for two reasons: they don’t have the capital, and they don’t want to take the risk.

Bill Gross, founder of PIMCO, the largest bond firm in the world, and a very astute analyst of the credit markets, was very candid and revealing last week on CNBC. He admitted that PIMCO had been too quick to provide capital to financial firms early this year when they thought the worst was over.



Obviously, they don’t subscribe to our WELLINGTON LETTER, where we warned last year that the bargain hunters were much too early. He said that currently, they and other investment firms are no longer willing to provide capital.


He said that, to resolve the current crisis, the financial markets need $500 billion of capital. This is huge.


No one can provide that except the government. Remember, the investments by the large, foreign “Wealth Funds,” which invest in governmental surpluses, have been investing the amount of $4-6 billion. And they now hesitate to invest more. Well, the $500 billion required is nowhere to be found, except at the U.S. Treasury printing press.

Late last year we said that a capital infusion of that much by the Federal government was the only way to restore confidence, not the small amounts of $20 billion and $50 billion which the Fed actually did provide. Paulson had it right a few months ago when he said that when everyone knows you have a bazooka, instead of a little pistol, you don’t have to use it.

Of course, at that time, most of the policy makers in Washington didn’t even think there was a crisis. Our leaders in Washington are reactive. When the meltdown really gets going, they’ll start scrambling. But wouldn’t it be better for them to come up with a program now, totally avoiding the next crisis?


This is why bargain hunting right now in any asset, except U.S. Treasury bonds, is a sure loss investment. We are seeing the greatest un-leveraging in the history of the world. That means everything gets sold. And when it’s sold, the seller searches for a safe place for that money. The only safe place is U.S. Treasuries. As I wrote in March this year, I believe that we could even see a short period where investors will be willing to get a zero yield on 30-day T-bills, or less, just to have their money safe. Advice: avoid all money market funds which have other than U.S. Treasury securities.

I gave the same advice in the middle of last year. But institutional investors thought they could improve yield by buying



“Auction Rate Securities

” that were sold by Wall Street as being the same as money market funds. Well, now these securities cannot be sold. There is no market.

The next wave of crisis is not far away, even with the rescue of Fannie and Freddie.

(Note: Our next issue will be published in one week and will include the normal, complete assessment of the investment markets, with charts.)


Seminar Appearance, Bert Dohmen


I will be participating at a great seminar in Los Angeles (Century City) conducted by my long-time friend, Donald McAlvany. IT’S FREE! Details:



Don McAlvany and David McAlvany cordially invite you to attend their




financial and geo-political briefing. Please make plans to attend an in-depth analysis on the following topics:


~ Death of the Dollar: The Ramifications of Losing the Status of the “World Reserve Currency”

~ Changing of the Guard: How to Prepare for a Global Shift of Power

~ Banks on the Brink: Your Money & How Safe Is It?

~ Mega Crash: The Coming Derivatives Meltdown

Hyatt Regency Century Plaza, 2025 Avenue of the Stars, Los Angeles, CA 90067



Tuesday, September 23


rd at 6:30-PM


Call 800.525.9556 x118 to Guarantee Your Place

The seminar is FREE! I will be on a small panel to discuss some of the important situations in the markets and answer questions from the audience.



Bert Dohmen



US Rescue Seen at Hand for Two Mortgage Giants

by: Stephen Labaton and Andrew Ross Sorkin, The New York Times


    Washington – Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

    The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

    It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

    The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees, and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount.

    Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.

    A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans.

    The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said.

    For months, administration officials have grappled with the steady erosion of the books of the two mortgage finance giants. A fierce behind-the-scenes debate among policy makers has been waged over whether to seize the companies or let them work out their problems. Even after the companies are put under government control, debates will continue over whether they should be independent and how they should operate over the long term.

    The declines in the housing and financial markets apparently forced the administration’s hand. With foreign governments increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital, the administration apparently decided it would be better to act now rather than closer to the presidential election in two months.

    Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.

    As their problems have deepened – and the marketplace has come to expect some sort of government rescue – both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies.

    In issuing their quarterly financial statements last month, the two companies reported huge losses and predicted that home prices would fall more than previously projected.

    The debt securities the companies issue to finance their operations are widely owned by mutual funds, pension funds, foreign governments and big companies.

    Officials said the participants at the meetings included Mr. Paulson, Ben S. Bernanke, the chairman of the Fed, and James Lockhart, the head of both the old and new agency that regulates the companies. The companies were represented by Daniel H. Mudd, the chief executive of Fannie Mae, and Richard F. Syron, chief executive of Freddie Mac. Also participating was H. Rodgin Cohen, the chairman of the law firm Sullivan & Cromwell, who was representing Fannie.

    Officials and executives briefed on the meetings said that Mr. Mudd and Mr. Syron were told that they would have to leave the companies.

    Spokesmen at the two companies did not return telephone calls seeking comment.

    The meetings reflected the reality that senior administration officials did not believe they could wait for some kind of financial tipping point, as happened with Bear Stearns, which was saved from insolvency in March by government intervention after its stock plummeted and lenders withheld their capital.

    Instead, Mr. Paulson has struggled to navigate through potentially conflicting goals – stabilizing the financial markets, making mortgages more widely available in a tightening credit environment, and protecting taxpayers from possibly enormous losses.

    Publicly, administration officials have tried to bolster the companies because the nation’s mortgage system relies on their continued ability to purchase mortgages from commercial lenders and pull the housing markets out of their slump.

    But privately, senior officials have been critical of top executives at the companies, particularly Freddie Mac. They have raised concerns about major risks to taxpayers of a bailout of companies whose executives have received huge compensation packages. Mr. Syron, for instance, collected more than $38 million in compensation since he joined the company in 2003.

    Although Mr. Syron promised regulators earlier this year that he would raise $5.5 billion from investors, he has failed to make good on that promise – even as Fannie Mae raised more than $7 billion. Mr. Syron was slated to step down from the chief executive position last year, but that was delayed when his appointed successor, Eugene McQuade, chose to leave the company.

    With the possible removal of the top management and the board, it is no longer clear who would appoint new management.

    Mr. Paulson had hoped that merely having the authority to bail out the two companies, which Congress provided in its recent housing bill, would be enough to calm the markets, but if anything anxiety has been increasing. The clearest measure of that anxiety has been the gradually widening spread between interest rates on Fannie- or Freddie-backed mortgage securities and rates for Treasury securities, making home mortgages more expensive. The stock prices of the companies have also plunged.

    After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50, down from $70 a year ago. Freddie was trading at about $4, down from about $65 a year ago.

    With Fannie and Freddie guaranteeing $5 trillion in mortgage-backed securities, and a big share of those held by central banks and investors around the world, Mr. Paulson appears to have decided that the stakes are too high to take chances.

    The Treasury Department is required by the new law to obtain agreement from the boards of Fannie and Freddie for a capital infusion. The exception is if the companies’ regulator, Mr. Lockhart, determines that the companies are insolvent or deeply undercapitalized it could take the companies over anyway.

    Charles Calomiris, a professor of economics at Columbia Business School, said delaying a rescue would only increase the risks and costs.

    “The last thing you want to do is give a distressed borrower more time, because when people are in distress they tend to take a lot of risks,” he said. “You don’t want zombie institutions floating around with time on their hands.”


    Stephen Labaton reported from Washington and Andrew Ross Sorkin from New York. Edmund L. Andrews contributed reporting from Washington, and Eric Dash and Charles Duhigg from New York.