• $41 billion in Fed lifelines and how they affect your investments,
• Protecting your dollars in the material-energy system of economics,
• Delinquencies, Dow tumbles, a CD made of Gold and plenty more...

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Eric Fry, reporting from Laguna Beach, California…

Mortgage delinquencies doubled last month compared to the year before. That's not a good thing.

The Dow fell 362 points yesterday. That's not a good thing either.

The Fed pumped $41 billion into the financial system yesterday…and that's probably a terrible thing.

The Fed does not toss out $41 billion lifelines unless someone is actually drowning. And if our suspicions are correct, a few big financial institutions might be at risk of slipping under the waves.

As detailed in several recent editions of the Rude Awakening – (in particular, the October 26 edition, "SIV Positive" and the October 17 edition "Bail Out Nation") many large financial institutions are gazing around desperately for lifelines, but the financial markets stubbornly refuse to provide them.

The vast community of investors worldwide is refusing to finance mortgage-backed-securities of any size or description or credit-rating. That's why the Federal Reserve is in bail-out mode. The Fed's $41 billion of repo activity yesterday was the largest such injection since September 2001 (think 9-11). Tellingly, the Fed's maneuver yesterday occurred amidst rumors that Citigroup might cut its dividend to preserve capital. And – oh by the way – the Dow tumbled 362 points on the back of a brand new interest rate cut that was supposed to make everything all better.

But the rate cut did not make everything all better. It did not make anything better…because it can't. A rate cut cannot convert a defaulted subprime mortgage into a valuable asset. It cannot convert a AAA-rated CDO full of toxic, overpriced garbage into an actual AAA security…and most of all, a rate cut cannot convert liars into truth-tellers.

We don't know where all the liars might be; but we're pretty sure that many of them draw paychecks from the financial institutions that hold lots of mortgage-backed securities. As the mortgage market proceeds from bad to worse to catastrophe, we're pretty sure that many officers of financial institutions are not telling the whole truth and nothing but the truth about the value of their mortgage-backed securities.

Rather than fessing up to massive mark-to-market losses, many finance companies are resorting to desperate rescue plans of one sort or another. Citigroup's "crisis management" strategy, for example, seems to consist of showing up on the Treasury Secretary's doorstep with a bouquet, a box of chocolates and puppy-dog eyes.

Secretary Paulson has responded with sympathy and billion-dollar rescue plans. But these efforts cannot possibly replace the entire capital markets.

Not even the U.S. Treasury and the Fed combined can replace the capital markets. (Some folks in Russia tried that tactic a few years back and it did not work very well). For as long as Treasury and the big banks continue to play "Hide the CDO," the capital markets will remain on strike. As long as governmental agencies and major finance companies collude to conceal the fair-market value of mortgage-backed securities, the market for these securities will continue to spiral toward disaster.

In this context, Citibank's prospective dividend cut assumes a mock-heroic stature. The dividend assumes a seeming importance much greater than its actual importance. Citi's dividend is more symbol than substance. Why? Because Citigroup is probably facing a crisis far more serious than whether to pay its shareholders 5.6% per year or 4.6% or zero percent. All totaled, Citigroup dispenses almost $10 billion per year in dividends. So a modest dividend cut would only yield two or three billion dollars. That's real money. But the big bank might need even "realer" money – the kind that only a complete elimination of the dividend would yield.

Best case, Citibank will not be extending vast amounts of credit any time soon, nor will Bank of America or Countrywide Financial or any other major American lending institution. Worst case? Don't even ask.

This is where the real problems begin.

Without fresh credit, what will become of the American consumer? How will the American consumer continue to over-leverage himself? And what will become of the American economy without millions of over-leveraged consumers?

Play is safe, dear investor. Play it safe. These are not the days that will reward investment heroism.

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Scary Stuff
By Byron King

Halloween featured some very scary sights this year: Crude oil at $95 a barrel and gold at $800 an ounce. These frightening visions of runaway commodity prices must be terrifying to anyone who trusts the Federal Reserve to preserve the dollar's value. On the other hand, individuals who invest in oil, gold and other types of commodities can derive a ghoulish delight from the dollar's slow demise. These individuals are making money… and they are likely to make even more money, as the world comes to grips with a genuine shortage of crude oil.

Two weeks ago, I attended the convention of the U.S. branch of the Association for the Study of Peak Oil & Gas (ASPO), held in Houston. The news was, as you might expect, pretty bleak. Slide after slide, chart after chart, speaker after speaker told the tale of the world's oil fields peaking in output and, in due course, going into irreversible decline.

From the North Slope to the North Sea, Saudi Arabia to Siberia, Canada to China, Iran to Indonesia, output of oil greatly exceeds new discovery. Many of the world's largest oil fields and provinces, such as Saudi Arabia's Ghawar, Kuwait's Burgan, Russia's Romashkino, Mexico's Cantarell and others, are decades old, with no real replacements anywhere on any horizon.

Yet despite the declining output from the world's principal oil provinces, worldwide demand is creeping upward. For example, about 50 million new motor vehicles hit the world's roads and highways every year. Every one of these new sets of wheels comes with a gas tank. You do the math.

At the ASPO conference, one of the speakers was legendary Texas oilman T. Boone Pickens. Mr. Pickens has been in the oil business since 1951 and has pretty much seen it all. One questioner asked Mr. Pickens when he expects world oil output to peak. The answer was fast and firm. "We peaked last year," said Mr. Pickens. "We are pulling about 85 million barrels per day out of the world, and that's about as good as it is ever going to get. It is only going to go down from here on out." During the ASPO conference, oil was crossing the $90 per barrel mark. Mr. Pickens commented on this as well, saying, "I think we are going to see $100 oil before we ever see $80 again. There might be a recession that would pull the price back to $80, but we'll see $100 first."

And Mr. Pickens had more to say along these lines. "Now we are in the decline phase. From here on out, the question is what will the decline phase be? That's the only real question going forward, isn't it? If it's a shallow decline rate, then overall we might be able to conserve and substitute for energy use, to stay ahead of it. But if it's faster than we can conserve and substitute, then we are going to have some serious problems."

Someone asked Mr. Pickens if there is some way to control demand for oil. He replied, "The only way to kill demand is with prices. Much higher prices. Looking ahead, higher prices will allocate the available supplies."

"Much higher prices?" Aboard our good ship Outstanding Investments, we have the lookouts posted. From bridge wing to crow's-nest, we are watching for the signal when oil crosses the $100 level and gold goes over $800. Sure, as the numbers get close the automatic sell triggers might kick in around the globe.

Oil might get to $99.99 and gold to $799.99, and then the Masters of the Universe on Wall Street might sell their futures and drive the prices back down for a while and buy some time. No need to alarm the masses, right?

But the tide has turned in the world economy. In a post-Peak Oil world, a material-energy system of economics is now beginning to dominate over the neoclassical monetary system. The idea of "capital" is no longer confined to the number of U.S. dollars one has in a bank. After all, U.S. dollars can be (and have been) created in gross excess at the whim and caprice of the Federal Reserve. Now the questions are: "Where is the oil? Where is the gold?"

And as we wait for the fateful pricing occurrence, that moment when we will see new modern records for oil and gold, we have to ponder the implications. Just what will be the true meaning of that signal, as the prices of black liquid and yellow metal break into uncharted territory? Will it be just another day at the office for the traders of the world and the pundits who chronicle their exploits? Or will we see some sort of economic detonation and mushroom cloud? And if there is a mushroom cloud, can the shock wave be far behind?

I expect to see gold at $850 per ounce in the not-too-distant future, and then $900 and $1,000 within 18 months, if not sooner. Actually, we regret having to say that, because it means that the U.S. dollar will be losing value in a precipitous drop during 2008. It will not be a pretty sight. Just imagine the loss of purchasing power, and the associated destruction of capital, that our society collectively will experience as this occurs. Imagine a scenario of asset deflation and price inflation.

Even if you move all of your investments to foreign currencies, along the lines of what our old friend Jim Rogers has announced he is doing, you may still suffer the effects of the declining value of the dollar. If the U.S. economy is, as the analogy goes, the world's economic locomotive, then this train is about to derail. Take long-term monetary mismanagement, plus fiscal profligacy at home and an unaffordable war abroad, and you have the ingredients for economic disaster. Stand by for a domestic recession as the value of the U.S. dollar drifts downward. There will be pockets of prosperity in export-related fields such as high-tech and large capital goods like commercial aircraft (thanks, Boeing). But if you don't earn a living building Dreamliners, we suggest that you get out of debt, fast…and buy gold.

[Joel's Note: Now, what is an investor faced with a Federal Reserve whipped by Wall Street, escalating prices of commodities and dwindling value of his dollars? You could wait for your greenbacks to hit rock bottom, lamenting the fact you didn't convert them to something "golder" when you had the chance...or you could invest in one or more of the foreign currency or commodity-backed FDIC-insured certificates of deposit (CDs) that our friends at EverBank offer.

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Rude Endnote: We're not sure if it's due to gold's meteoric rise over the past few years, or the fact that we've recently relocated to Dubai – also known as the City of Gold – but your editor has been struck with a case of acute gold fever since we arrived in our new home.

Much to the delight of your editor's girlfriend, we're off to Dubai's gold souks this afternoon to do a spot of research for a future Rude special on Dubai gold...and to possibly buy a few shiny trinkets while we're there.

Oil may be hitting record highs too, and perhaps it's also a good place to park a few eroding dollars...but a jerry can of black goo doesn't buy nearly as many neck massages as a new pair of earrings does.

We'll be back next week with some pics from the gold souks and a look at how the rocketing price of everyone's favorite yellow metal is playing out in the world's largest gold retail market.

Cheers,