Volume XI, No. IX

The folks camped down in Zuccotti Park near Wall Street don't seem to want to go home. We all know the organizers are left-wing liberal political types, just as we all know that the Tea Party is right wing conservative types. So what? Let's remember these are real people who are out there demonstrating and protesting for a reason. With the recent arrests of 23 people in clashes with police, in addition to a previous 700 arrests, maybe it's time to go beyond who these people are to what's really bugging them. It will help us understand why this economic and financial crisis, like the protestors, just won't go away.

So the first thing we'll be looking at this month is

• What's Really Behind the Wall Street Protests

Meanwhile, across the Atlantic, a major European bank just collapsed – with very little fanfare. The bank's name is Dexia. Remember that name. It's the first big bank in Europe to be bailed out. Remember that phrase too: "bailed out." That's going to help us understand exactly

• How The Collapse of Dexia Shows Why Those Protestors are Right

And we'll finish up with a few words from a wise man on

• Why You Should Care

But first, after a few weeks of wild moves down – and then up – let's quickly update where things stand in the markets.

Stocks

The price drops weren't quite the crashes we had back in August where you could argue we had an authentic market crash. But, really, that's kind of splitting hairs. Something's up. While we may not drop much more going forward – I don't really know – I'm wondering whether two things happened that we need to take note of.

First, the drop in stocks was initially a reaction to Bernanke's "Operation Twist" announcement, where the Fed sells short-duration treasuries and buys longer-duration treasuries. Perhaps the stock market "thinks" such a move isn't as smart as Bernanke thinks it is.

Second, the stock market may be "seeing" something "out there" (typically 3 - 9 months) like, oh let's say, a recession - or something even worse. But the coming weeks will give us a better idea.

In any case, it's all part of the "inhuman volatility" that's going to be with us for a long time to come.

The Dollar

In spite of the whole idea that the dollar is going to eventually collapse to zero – someday – it's been strengthening lately. Just remember that it's strengthening relative to other currencies, all of which are fiat currencies which have consistently lost value to gold...but WAIT A MINUTE: ISN'T GOLD COLLAPSING?

Gold

No, gold isn't collapsing. Gold was way overbought and is now correcting. The correction and the intensity of it is no shock or even surprise. It's certainly not pleasant if you own gold, but it's to be expected. Oh, and silver's acting as silver always does: more volatile than gold.

Bonds

So, with all that, people still buy US treasuries when they're afraid to put their money anywhere else; so one would have to believe that the dollar's "demise" is a long way off (since treasuries are denominated in dollars). Then again, we're certainly not betting the ranch that the dollar will hold up forever.

Summary

So let's see what the coming weeks bring us. In the meantime, we hope your assets are positioned in such a way that you're not losing sleep or having heart palpitations. If not, think about how your assets should be positioned from now on. Just remember that typically it's losing investors who react to events like this with uncontrolled anxiety and fear. That's why people sell in a panic. (Did you?) If you're reacting this way, it's time to figure out why - and change your investing habits.

Now, back to this month's subject.

So what's their beef? Greedy capitalists? Rich bankers? If that's the case, they're in the right place. Wall Street is, after all, the home of rich, greedy, capitalist bankers, right?

Now, rather than dismiss their chants and slogans as a left-wing rant against capitalism, let's try to find what's percolating underneath all those slogans. We'll start with these comments from both sides of the political fence.

Presidential candidate Herman Cain, reputedly a Tea Party candidate, thinks it's all a way to distract attention from the problems of the current administration. As reported in New York's Daily News, Cain said, "Don't blame Wall Street, don't blame the big banks, if you don't have a job and you're not rich, blame yourself. It is not someone's fault if they succeeded, it is someone's fault if they failed." Cain went on to say that while banks may have done some wrong things in 2008, it's now 2011 and the banks are fine now. Hmmm.

Whether either of these comments strikes you as right or even reasonable, notice that the banks – and by "the banks" these folks mean the big banks, the so-called "Too Big To Fail" (TBTF) banks – are the common thread.

To find out why, we only have to look at what just happened to Dexia bank – that Too Big To Fail European Bank that just collapsed.

As recently reported by Reuters in the Financial Post:

The important phrase is "bailed out." Just like the U.S. did in 2008, the European governments will now bail out their banks. Okay, so what's new?

Well, the thing that's probably egging on the Wall Street protestors – and a lot of other people – is not that banks were and most likely will be bailed out. It's what these bail outs really mean, more importantly, what they've done to us.

Understand that the bail outs aren't just keeping the banks in business. You may, in fact, think that's a good idea. Maybe you‘re afraid that if another one of these TBTF banks goes down (like Lehman Brothers did), an even worse crisis than we had in 2008 will wipe out our entire financial system. That's what America's political and financial big boys insisted that would happen unless the Congress passed those infamous bail out packages in 2008; the European big boys claim the same will happen if their governments don't bail out their TBTF banks this year.

Okay, let's grant them that. Let's say that it really is necessary to "save" these big banks so that we all don't face the end of the world as we know it. Fine. Save ‘em. But since the devil is usually in the details, let's check out some interesting details about Dexia.

First of all, Dexia just received a "clean bill of health" from the last "stress test" conducted by European bank regulators. Second, this isn't the first time that Dexia has been bailed out. The first time was in 2008.

So what does this tell us?

First, it would seem reasonable to ask a few questions about those stress tests: Were the authorities incompetent? Were they hiding something? Was the recent stress test just a phony "show" to gain some time and allow for a consensus among European governments to bail out any big bank that failed?

Second, a couple of questions about the fact that Dexia has now been bailed out a second time: Can it be bailed out a third time? Will any big bank that collapses now simply assume they'll be bailed out…again and again and again? Most importantly, why would they have to be continually bailed out? Shouldn't once be enough?

We can speculate as to the answers. But one critical fact emerged in 2008, and looks like it's being proven in 2011. The way these banks are being bailed out creates what's known as "moral hazard." It allows the banks to take whatever risks they want to take, knowing that they'll be bailed out. Formally stated, moral hazard is a situation in which a party (in this case the TBTF banks) insulated from risk behaves differently than it would if it were fully exposed to risk.

Let's translate that into what it means to us and to the Wall Street protestors.

It means that bankers who take risks get to reap the rewards when their risks succeed. But when they fail – when they take too much risk, or they take ill-advised risk, they don't pay any price.

Notice that we're talking about the bankers here. They make fortunes from their successes but they don't suffer from their failures.

So it turns out that not only are the banks too big to fail, but it would seem the individual bankers who earn incredible salaries and bonuses even if their activities put the financial health of their banks at risk – are somehow too big to fail too.

Can you see why the protestors on Wall Street go on and on about greedy banks and greedy bankers? Do you have to agree with their political views to understand why this whole "bail-out" approach is a problem – or, more to the point – why it's wrong?

As for Herman Cain and Roseanne Barr, let's take them each in turn.

Herman, you've achieved a high level of material success in your life after starting out poor. We can all understand how that can lead you to be impatient with people you perceive as whiners and complainers. And perhaps there are, indeed, some among the folks in Zuccotti park who do whine and complain. But do you really think it makes any sense to tell someone, "if you don't have a job and you're not rich, blame yourself"? Isn't that making a judgment about an individual and their circumstances that you're really not in any position to make? And while I think we can all agree that it's not someone's "fault" if they succeed, do you really believe that it's at all enlightening to say that "it is someone's fault if they failed"?

And Roseanne, what's up with the guillotine? Were you trying to be funny? I realize you're supposed to be a comedienne (at least that's what I'm told). If not, have you ever studied the French Revolution – where the guillotine got its notoriety and where innumerable and unconscionable murders were committed in the name of revolutionary "justice"? Do you believe we're at the point where the only way to deal with one injustice is by another?

By the way, I listened to the full interviews which provided the quotes from these two individuals. (If interested, you can find Cain's here and Barr's here.) While many of us already know that political divisions have deepened in America, it's important to also understand that the same things are weighing down people on the left and the right. And if you're all fired up to take action, remember that a crisis of the magnitude that we're facing simply won't be solved by either personal gumption or the guillotine.

So to answer the question of what bank bail-outs do to us, we've got to say that they threaten our rational and moral judgment. You see that in the remarks by Herman Cain and Roseanne Barr.

But that still leaves the question of what bank bail-outs do to our money. The short answer – which is all we have time for this month – is that it will further increase the money supply. It will increase the money supply because the only source of money to bail out the European banks will, in the end, be the governments of Europe borrowing money to give to their banks. And the only source of money for the governments to borrow will be the European Central Bank which will create money out of thin air (the only way for the central bank to come up with money), just as the only source of money to bail out American banks has been and will be the Federal Reserve creating money to provide liquidity to our Too Big To Fail Banks as needed.

Oh, by the way, did you know that the Federal Reserve has committed to providing "liquidity" for the European Too Big To Fail banks? Yes, that's right, the Federal Reserve Bank of the United States will provide money – money that they ultimately will create out of nothing – for the European banks.

And the result of all that money creation will be (if you've been following these letters, you should have some idea by now) ultimately an expansion of the overall money supply and the loss of value for both the US dollar and the Euro.

Let's wrap up this whole bail-out-syndrome in a nutshell. You'll see why, even though the protestors really do have something to protest about, their left-wing-ism blinds them to a simple, stark fact:

If you carefully think about what's going on, you'll see that our leaders have managed to craft a rather clever "Socialism American-style." They've privatized the profits and socialized the losses. This isn't capitalism, by any definition. Of course it isn't socialism either.

Under real socialism, both profits and losses are shared by everyone (theoretically). Under this hybrid "American-style" socialism, individuals pocket the profits when things go right. And when things go wrong and the money gets printed up to bail them out, the rest of us suffer the losses as our money loses value year after year after year.

Well, that's all we have time for this month. We hope you found the practical advice at the beginning of the letter helpful, as well as the reminder that the forces dragging down the value of our money continue unabated. While the theme of the devaluation of our money may sound repetitious after a while, just remember that the ones being repetitious are the ones devaluing our money, not the ones who report it. And most importantly, of course, act accordingly to protect yourself.

Now for those of you who may be wondering why we focused on a bunch of protestors hanging around Wall Street since September 17th to make our points this month, we pass on these remarks by one of the smartest, most experienced, and wisest people we know in the investment business, Richard Russell. Here is his comment about a similar protest on a half-block stretch of San Francisco's Market Street.

Mark Schwetz, 36, a carpenter from Berkeley who lost his home in Petaluma, California, to foreclosure in 2009, held a sign reading, "We're not leaving!"

"I've been waiting for this moment, for this day for a long time now," Schwetz said. "I worked really hard for my whole life for my home and it was just taken away from me."

Russell, a man in his 80s who lived through the 1930s, commented: "I read the above piece carefully and I conceded that it brought back memories of the Great Depression."

Steve Jobs, RIP

I didn't know Steve Jobs personally and I'm not one of those Apple worshippers. So I was surprised when his passing affected me as it did. No, I didn't burst into tears or run to the Apple Store on 59th Street to place something at the impromptu memorial that appeared within hours of his death. But I was especially saddened, which is strange because – in spite of his fame and notoriety – I never paid much attention to the man throughout his long and storied career.

The only thing I can figure is that, of all the products I've bought in my life, the only "brand loyalty" experience I've ever known came to me via my iPhone. Sure there are competitors that out-tech it; some might be cheaper or even look better. But all I know is that I've never had an especially satisfying consumer experience to match what I've had the few times my iPhone acted up. The Apple folks were knowledgeable and helpful. If you've ever tried to get tech support for any of your gadgets and gizmos, maybe you can appreciate my amazement and, yes, gratitude for what, frankly, should be the norm.

In any case, after the sad news was announced I found myself reading up a bit on Mr. Jobs' life this week and hit on something I'd like to share with you. It's his commencement address in 2005 to Stanford graduates. Just Google "Steve Jobs Stanford commencement" and you'll find oodles of printed versions, commentary and videos of the speech. Apparently I'm not the only one who's been struck by this.

(Here's a link to the text of the speech on the Stanford University website.)

While Jobs does re-state the old "Do what you love" theme in an interesting way, it's his comments about death that struck me. It turns out the speech was given about a year after his first diagnosis of cancer, and mortality was naturally on his mind.

Now I do realize that meditating on death isn't the most natural or – for many of us – inspirational suggestion one can make, but you really ought to take a look at this speech and see what you think of his striking remarks about the simple fact that we all face the same destiny. As with so much else in his life, it would seem that Steve Jobs found a way to make something out of the gifts he was given – including his own death.

The strangest thing about all this for me, though, is the fact that, right before hearing of Jobs' passing, I was reading about Mozart's incomparable "Requiem," and came across some comments about death Mozart wrote to his father in 1787, less than five years before his own death in 1791 at the age of 35. (By the way, Mozart never actually finished his requiem. He died while composing it.)

And while I'm not sure that Steve Jobs' work will live on for centuries in the same way that Mozart's has, I think the two share a common (and, yes, spiritual) understanding and appreciation for the one physical reality – besides birth – that we all share as human beings.

Mozart wrote the following to comfort his dad, who, he had learned, was dying:

I suppose you could simply say that remarkable people can say some remarkable things.

Until next time,

P.S. For more on the trouble brewing with those big banks, see Is Bank Liquidity Becoming More of a Problem. And if you haven't gotten your fill of the Greek Debt Crisis, try "Who Is Going to ‘Resolve' the Greek Debt Crisis." You'll find all this and the latest thoughts on whether China's about to implode on my blog.

Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952

Email: resposito@lighthousewm.com