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Gold bullion investments will be the ultimate survivor.

April 11, 2011 – The sorry shape of paper asset should be enough to drive any investor to gold bullion. The financial crisis deeply distressed a great many companies, whetting the appetite of Wall Street vultures who swoop in to feed off the carcasses. The scheme is straightforward: buy up debt of struggling companies at bargain rates and when the companies fail that debt is converted into more valuable equity.

But now, thanks to the flood of money pumped into the markets, insiders are looking for anything that will give them good returns. Welcome back junk bonds, and they are thwarting the vultures’ plans. More and more companies are averting bankruptcy by paying off obligations with high yield bonds. The Wall Street Journal offers one example, Lee Enterprises Inc., a large newspaper chain.

Lee was some $1 billion in the hole and “has long been high on the list of potential bankruptcies.” The vultures moved in and picked up Lee’s obligations, certain the company would default and they “could turn their holdings into an ownership stake, giving them access to the company's assets, which include St. Louis Post Dispatch and the Arizona Daily Star newspapers.” A manager at Alden Global, a distressed portfolio manager, “was so frustrated that he called Lee's bankers at Credit Suisse AG last month to berate them for sabotaging his plans.”

While it is amusing to watch such Wall Street infighting, there is an ominous warning between the lines. All that liquidity that Bernanke has channeled onto Wall Street is getting tied up in ever riskier paper. “Lee's debt is about six times its earnings before interest, taxes, depreciation and amortization,” and the Fed’s indirect bailout is not a good thing.

The natural order of things is to let companies die. The vultures pick the bones, either selling off the assets or taking over the company. Natural selection assures the survivors are those most fit, but the Fed has turned that upside down.

The short term reversal in the fortunes of distressed companies is not economic recovery. Quite the opposite – it is a recipe for future disaster. In the end the natural order must be restored, and only gold bullion investments will be left standing strong.

Daily Updates Archive

Jonathan Monroe

Senior Staff Writer -

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