http://www.scribd.com/doc/5948509/And-Hank-and-Ben-Looked-at-Their-Handiwork-
and-They-Were-Glad
If remembering what this did to your accounts doesn’t make the hair stand up on your neck, you’re a better investor than me. ‘A cautionary tale from the past’ to keep anyone from falling too far in love with current gains. Keep a core account, sure, but ring the register on your trading stuff.
Note that to keep in line with our gracious host’s guidelines, I’ve only presented a little bit of Don’s remarks – unfair since he really does a good job, in retrospect, of laying out what happened. BTW, in his calls later in 2008, he does a pretty sharp job picking which commods, in a beaten-down market, traders should be acquiring.
Excerpts:
Thank you all for tuning in to the call, which comes to you from Chicago. The chart that we
faxed out was the CRB futures and the tag line is “And Hank And Ben Looked At Their Handiwork And They Were Glad”. As the chart reveals, we had a fast run up from the first of May to mid-July in the commodities and then came the massacre of Sunday the 13th. And we’ve had a plunge to the CRB. And the CRB breaks its uptrend line if we get down to 350. We’re at 374 at the moment.
So I don’t have to tell anybody on this call that what’s happened in the last nearly two months
has been pretty devastating. And it’s been against a backdrop of bear markets in equities around
the world. And they aren’t confirmed bear markets in North America unless they break through
lower levels. And the breakdown levels would be 1210 on the S&P and we would get a
breakdown on the Dow at 10,850. We get a breakdown in the Transports at 4650. We get a
breakdown in the TSE at 12,000. And the FTSE at 5150 and it’s only, not even 200 points above
that.
So, let’s talk about this, what they did, why they did it and how brilliantly they did it, because
this is the most massive intervention of government into the capital markets or the financial
system since Roosevelt closed the banks back in 1933, briefly.
Well, one of the things that we have to address in this is, first of all, why they did it and then how
they did it. But we have to look at also, what are the chances that their intervention in fact
changed the fundamentals enough so that we’ve got the commodity story right off the table for
an extended period of time. And in looking at that, I’d like to take you back to where we were in
the first week in July. And that seems like eons ago and that’s why I’m going to take you through
it. Because it’s hard for some people to recall just how much we were up so recently.
Back then, gold looked like it was going to break through the 1,000 mark, which it had done
briefly at the time of the Bear Stearns bailout. But this time it was also being fueled by the big
surges that occurred in CPI from spring.
————–
So what they did – and this is why you want in a crisis like this, you want a Goldman Sachs ex-
CEO at work. People sometimes sneer about the fact that Goldman seems to just get all these big
appointments. But what it means is you’ve not only got somebody that really knows the markets,
but somebody who’s access to information is terrific and who really understands how you can
intervene in the markets successfully. Because if you’re going to do a strategy like this, it’s got
to work.
So what they were able to get information on, with help from the Commodity Futures Trading
Corporation, was the change in the make up of who was driving this huge rally in the
commodities. And there had been a change since May in the speculative investors had a much
bigger share on the buy side. And these were levered speculators lead by the hedge funds.
So what they did was basically said “All right, we’ve got to bail out these over-levered banks,
we’ve got to do something to get the bank index rising so that we can create equity in the
banking system that they can do re-financing. So we’ll go from taking all the pressure on
leverage off the banks to putting it on the commodities. And we’re going to focus particularly on
oil, gold and the grains.” Because if you could take those out, you would also take out the
inflation scare. So you get a psychological effect, plus the real effect of the leverage being
unwound in the private sector in a way that was deemed deleterious to the financial system.
And they did it and it worked. And leverage was being unwound dramatically. And of course by doing it Sunday night, that was
brilliant because the hedge funds who were short the financials and long the commodities were
