Unraveling according to schedule

By Peter Brimelow, MarketWatch
Last update: 12:01 a.m. EDT Sept. 8, 2008

NEW YORK (MarketWatch) — A Fannie-Freddie bailout fillip in financial markets? Maybe, but a megabear says it just shows the world is unraveling right on schedule.

Harry Schultz’ The International Harry Schultz Letter was posted last night right about the time the Fannie Mae-Freddie Mac bailout was reported. But Schultz anticipated it, writing sarcastically:

“Flash: As we go to press, the US Government reveals plan to take over Freddie Mac and Fannie Mae, the biggest bail-out by taxpayers in history. It also wipes out the shareholders! Sunday selected to avoid stock market action same day, just as bank closures are told after market close Friday. That tells you what shape markets are in when government and CEOs hide behind holidays.”

Schultz had earlier made his overview clear (I’m translating slightly from of his text-message style):

“Fed maneuver room approximately gone. Any $US injection big enough to avert a depression triggers runaway inflation. If not big enough: depression. US on knife-edge. Gold helps you either way.

“Which brings us to [Pimco bond king] Bill Gross. He went crazy last week, urging government to bail out everyone, to save the system. Either he is a closet socialist, a corporate fascist … or just trying to get government to bail him out of 61% of his toxic waste mortgage backed securities.”

Schultz suggests just two alternative scenarios, both equally appalling:

“If Bush bails them all out, the die would be cast for inflation unseen in the West since 1923 Germany. If no bail: Hello, 1929.”

Gee, thanks.

Schultz’ apocalyptic style is easy to ridicule. Two generations of financial pooh-bahs (the sort of people who ran Freddie (FRE) and Fannie (FNM) ) and their journalist groupies have been dismissing him.

And Schultz is having a hard time right now. Over the past 12 months, HSL is down 14.4% by Hulbert Financial Digest count, vs. a loss of 10.1% for the dividend-reinvested Dow Jones Wilshire 5000. It’s getting worse: Year-to-date, HSL is down 25.8% vs. a loss of 10.3% for the total return DJ-Wilshire 5000.

This is presumably because the great post-millennium hard-assets bull market has stumbled recently, albeit not for the first time. But the Aden sisters, Schultz protégés and publishers of The Aden Forecast, seem to have handled the stumble better, while remaining true believers.

Still, over the past five years, HSL has achieved a 17.82% annualized gain, vs. 7.85% annualized for the total return DJ-Wilshire 5000.

And Schultz was quick to recognize the end of the last hard-assets bull market more than two decades ago. But he still hasn’t called the end of this one.

Plus … well, Fannie and Freddie have collapsed, haven’t they?

In his latest issue, Schultz summarizes:

“Widespread stagflation will probably now build more inflation than stagnation, then gradually morph into more stagnation than inflation. Then, deflation takes over, and ultimately, depression. All this over next 9 years.

“For the moment, seal off major wipe-out risks. Exit all money funds and currency time deposits, step up gold & oil positions, move into 1-2 year government bonds (non-US $) in First World nations. Swiss first choice. Think not of yield; think of an ark’s life preserver around your neck.”

Schultz is currently negative on the stock market. On gold, he writes:

“We were unduly cheerful about gold’s path in last HSL. The entire commodity market from asbestos to zinc took a dive, along with most stock markets, not to mention a business slowdown. It was caused in part by the overshoot all markets had in recent years — many going to record highs — which eventually called for a mega correction to the mega rise. And in part caused by the global monetary mess which is having a deflationary pull-down effect.”

But he concludes:

“Our upside gold targets are still valid, as soon as the currency/metal/oil corrections exhaust themselves, as all storms do.”

Schultz’ upside target, at last report, was $1,600 in fairly short order.