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Wednesday, January 9, 2008



Every day I watch the markets. Since the first of the year, they have been very jittery. Why. I believe it can be explained. The market is both a leading and lagging indicator of what will happen some months down the pike or they respond to something which has happened a number of months previously.

With regards to interest rates and taxes, the market may take 9 to 12 months before it responds to the change. As I said in the past, President Bush who is a much better economist than the Feds Chairman, Bernanke, knows that the tax cuts would have taken some months before the market responds. And, this is exactly what happened. Bernanke was so slow to respond to the sub-prime debacle that it was too little too late when he finally responded. He needs to do even more now, but I am afraid it is too late. When the damage is so great and the response too little we get what we have now.

It has been my contention that the sub-prime collapse occurred because Bernanke increased interest rates so rapidly during a one year period that the market did not have a chance to respond and adjust. What was needed to correct the problem was to reverse the process by decreasing interest rates. The market would find its own money without the Feds having to increase liquidity by pouring more worthless dollars into the system. In fact, by doing this, the Feds actually worsened the problem because it printed more of this worthless money not backed up by any substantial assets such as gold, which by the way it may not have. As a result the dollar goes down in the world markets. The dollar is essentially worth less.

We should realize that this is only a part of why the sub-prime market collapsed. Have you wondered why, as it is believed, that 5 percent of the lending market which represents the sub-prime market can affect such a large part of the financial markets? It is because the lending institutions and the banks wherein the money resides are playing games with money they do not have creating something akin to a black hole. I have tried to study the situation and, although I consider myself an intelligent man, I have a very difficult time understanding it. I will try to explain the situation and maybe I might get some aspects wrong, but I will try anyway.

The people who write the mortgages, the lending institutions, issue the loans. They now have a loan, let us say a 30 year loan, and the loan is expected to earn a substantial amount of money – the profits -- over the term of the loan. The then sell these profits which do not yet exist to a bank for a sum of money. Remember they are not selling anything substantial. They are selling a promise, a piece of paper. The bank gets a piece of paper, but not the deed. The banks do not own the property nor do they own a document saying they own the property. They have a promissory note not backed up by a real asset. It is backed up only by a promise made by an institution which is playing games. As the property devaluates, the promissory note also devaluates. The house of cards is beginning to unfold because as foreclosures occur, the profit which was to accumulate over the term of the note disappears. The bank who has bought the profit now does not have the profit. They are out the money they paid for the potential profit which did not really exist in the first place and they are out also the promissory note now having no value. What a predicament! One can say that they deserve what they now have for playing with play money. It is almost akin to the funny money to which Teddy Forstman referred when RJ Reynolds was being sold using the shares – the funny money – of another company which I believe was Nabisco.

So to get back to our story of the Jittery Markets, why are they so? We have discussed that the markets are adjusting to something which has occurred or is about to occur. In my opinion the market is beginning to realize that in bout 11 months the Democrats might win the general elections. You do not have to be a rich person to worry. If you are a common working person with a 401K, you should worry. If you have any savings either in cash or property you should worry. The Democrats will begin to redistribute your wealth and your children’s wealth to others who have less for whatever reason. You, the common man or woman in the so-called middle class, will pay as you have always paid. Although the Republicans are no better because they also spend money they do not have in order to ingratiate themselves with their voters to get reelected. They also take your money but the Republicans, at least, still believe it is your money to which you have some entitlement. The Democrats have no such illusions.

If you have nothing including the proverbial pot T* P*** I*, you have nothing to worry about. Think about these things when you go to the polls in November.

A side note about the Death Tax. If you worked hard all your life and were fortunate to have accumulated some wealth, which legally belongs to you, why should you not be able to leave it to your family? Why should the government get it. History has shown that they do not spend it wisely so why should they get it. The Death Tax is wholesale thievery by a guy bigger than you. Resist this with all your might. Always remember the Democrats want to give your money away, because they are the party of the minority and because so they must keep the minorities alive with the hope of their getting your money. If you see it differently, please answer my Blog and educate me.

nicola michael c. Tauraso, M.D.
Director, Tauraso Medical Clinic

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