Friday, October 3, 2008

PERMA-BULLS, BAILOUTS & BULL**** in a free market!

The Bailout grows larger everyday ($700Billion now) - ban short selling - may be ban mark to market pricing - cut taxes - raise deposit guarantee limits: The cost is going to be humongous!!!!
As the US elections near, election politics are taking centre stage.

What adds insult to injury is that the spin doctors and regulators, under whose watchful eye this whole ‘calamity’ went unsupervised, are now absolutely clueless about a way out of this financial maze.
The guys at the top are well aware of the mess they put us in, so they are now hoping to bide their time and dump this hot potato on the new guy (Obama/McCain), who by the looks of it has no clue either.

What is most annoying is that the whole scheme feels like the rush into the War in Iraq. ‘Trust us, we must do this or else…’ … or the ‘We are saving the American People and the world from financial Armageddon’ routine appears to be poorly researched and lacks adequate explanation and transparency -- unless you are in the Bernanke- Paulson- Bush camp or are a CEO in the Investment banking Industry.
What about the large, medium and small businesses that did not overtrade and borrow recklessly, or the ‘fools’ that carefully repaid their mortgages over the years? Are they going to be rewarded for their prudence and rational risk taking?

Using tons and tons of money to buy worthless toxic junk ( that no one in the private sector is willing to buy)------- is just a bad idea if it means short term rallies in the stock market and long term damage to the American and indirectly the world economy.

I am also surprised that no Foreign Sovereign Wealth funds (read: Temasek and GIC of Singapore and Middle East Sovereign Wealth funds) have stepped up to the plate yet.
Even Warren Buffett’s deals with Goldman Sachs and now General Electric do not involve an upfront equity stake in either company, but are opportunistic deals by an astute cash rich financier.
Does this mean that the coming bailouts will wipe off all the equity of the investment banks?

Oversight and Executive pay!
Finger pointing and blame games as to who was responsible for the collapse of the first Bailout Plan are yet another meaningless distraction, as are calls for more oversight and continuous whining about exorbitant executive pay.
Oversight! We sure don’t need any more of that. Look at the fine job that the OFHEO (Office of Federal Housing Enterprise Oversight) did with Freddie Mac and Fannie Mae. As for Executive pay- the shareholders sure didn’t complain when the stock prices of the US Investment banks were at their 52 week highs.
Well, looks like the recovery in the second half of 2008 is going to be postponed indefinitely.
In the meantime everyone is ignoring the continued weakness in US home prices, and as the quarterly results come in, we may be in for more disappointments. The new government is going to have a lot of explaining to do, as job losses increase and the virus spreads from the financial sector to the industrial sector. They may have to Bailout the US Auto Industry as well, or risk losing a LOT of votes!
Emerging markets that are major exporters too face tough times as the US Economy slows.

The US Dollar is now rallying, as there is a flight to safety, as money is exiting all asset classes from commodities to emerging markets. The stronger USD is going to eat into the profitability of large US multinationals, whose recent earnings have been ‘subsidized’ by the weak USD. In the longer run, these short term artificial supports are going to fail, and the final recovery is going to be even more painful and delayed.

So is the market facing inflation/deflation/recession/ stagflation?
First of all, ignore the wise men who are still not willing to face facts. The US has been in recession for a while, and over the last quarter we have drifted from stagflation to nearer the edge of a possible deflation (read: deflation = decrease in money supply and prolonged periods of falling general prices)!
I must say that although I expected prices to fall (read: US real estate/US Equities/ Industrial Metals), the declines have been rather sharp.
Deleveraging after a boom that was built on foundations of easy money and lax regulation is going to be more horrible than I first thought.
With the US Fed leading the way, the Central banks are going to fight this deflationary spiral with all the money they’ve got (fighting insolvency with liquidity – not a smart move), this is going to do real harm to their currencies in the long term.

This is going to be extremely positive for Gold, and although its $100 price swings continue for now- It will be the currency that survives and continues to be a true store of value.


Focus on Capital Preservation, not Wealth Creation.

Use the wild swings in Gold Prices to buy on declines, the Central Banks and Bailouts will fuel its bull run.

Ignore all analysis / advice / research reports / recommendations of all the wise guys who have appalling track records, and have called one bottom after another for the market. Focus on the guys that have been consistent and right all along, guys like Robert R Prechter Jr., Prof. Nouriel Roubini, Michael Panzner (of Financial Armageddon), Barry Ritholtz of Big Picture, Tim Iacono of ‘The Mess that Greenspan Made blog’ and many others, who were amongst the first to warn us about the current crisis.

If you are looking to buy into stock markets anywhere----DON’T, but if you must, be aware that the recovery can take a long long long time, and there is more downside to come. Deleveraging, and tight credit affects a wide range of industries, not just the financial sector. The rising cost of working Capital and tight commercial paper markets are going to be the real WMD’s.
The Central Banks may buy all the Toxic Junk they want, but they can’t force the banks to lend.

Over the past month, I have been re-reading a book –
‘Conquer the Crash – by Robert R Prechter Jr.’. When I first read the book in 2004, I found it rather radical, and I wondered whether things could really get that bad.
Well I think it’s worth a read given the times we face today.

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