BEARER OF BAD NEWS
Periodically I get economic updates from a certain investment firm. Following is some of what they had to say this week.
I am reminded of the National Weather Service alert that went out in the days before Katrina hit New Orleans. It warned of massive destruction of property, flooding, loss of electricity and water for weeks or months, and human suffering on an "incredible" scale. It said in plain English that the area would be uninhabitable for weeks or months. And yet somehow we were unprepared to deal with a scenario that common sense and our own eyes told us was coming. At least with Katrina we could blame it on a natural disaster. This one we created ourselves. The smart money is stocking up on staples before inevitable inflation.
AS WE EXPECTED, THE WORLD STOCK MARKETS BEGAN A SUBSTANTIAL RALLY
It should continue for at least another few weeks, possibly for a few months. It is typical of major bear markets to have major rallies. Initially, we chose to participate in this rally by buying some of the heavily shorted stocks in the financial area, we have been quick to take profits after these rose. More recently, we have been buying more oil and gold shares on dips, and have purchased some technology companies that are selling at very low valuations versus their growth rates. We also view the technology purchases as short term. We view the oil and gold share purchases as longer term.
We will also be buying undervalued companies in various industries in the U.S. and China, which we believe are attractively valued and have proven to have long term growth prospects.
So many absurd moves are being made by the U.S. Government; it is hard to keep track of them.
1. Continued auto industry bailouts are ridiculous, and history has shown time and again in other countries that it is a disaster for taxpayers. Eventually, the auto companies and their suppliers end up failing, but only after massive amounts of taxpayer money has been wasted trying to revive an inefficient, short sighted, and uncompetitive industry. The Swedes are demonstrating wisdom by refusing to nationalize Saab.
2. Quantitative Easing, or in plainer English, PRINTING MONEY TO PAY DEBTS, is another costly endeavor. Our politicians had better read up on their history. This is an immense mistake...and the VERY SAME MISTAKE that has set off disastrous inflations in numerous countries, bankrupted millions of honest citizens around the world, and caused serious economic and social disruptions including wars, revolutions and national bankruptcies.
Politicians opt for Quantitative Easing because it serves their purpose. The politicians had a big role in causing the financial problems, with their decades of cheerleading for Fannie Mae and Freddie Mac, and with their pressure on banks to make home loans to those who had no hope of paying their lenders back.
PLEASE DO NOT GET CONFUSED BY THE CHANGE IN TERMINOLOGY...THE TOXIC ASSETS ARE DERIVATIVES.
The politicians looked the other way and cheered for more broad home ownership while:
· buyers who could not afford the houses they were buying lied to lenders (many downloaded from the Internet fraudulent K-1's and 1099's to submit to lenders to help with their deception)
· real estate finance and sales professionals engaged in several kinds of fraud due to the high commissions and fees they earn from each transaction
· greedy bankers from Wall Street (whose crimes have been plastered in the papers in recent weeks) who created new derivatives that made it easy to sell the toxic assets to themselves and others
· greedy accounting and rating agency participants who helped perpetrate the overvaluation of the toxic assets
Now, to deflect the blame from themselves, the politicians are engaging in the theatre of blame...pretending that they did not know about so many of the things that they have known all along, such as big pay and bonuses to their big donors at Fannie Mae, Freddie Mac, Wall Street firms, and in the real estate industry (which was for years the biggest political donor in the U.S.).
The politicians must think the public is so stupid as not to realize what a fraud has been perpetrated by all of the various parties.
Maybe the public is slow to gather the details, but they get the general thrust of the problem. There were too many greedy people making too many political donations to Congress...and too little oversight by the supposed regulators.
None of this is new. Please feel free to review our archives at www.guildinvestment.com to see what we have said about the derivatives crisis numerous times in the years before the problem came to public attention. A further review of our archives will show that we have discussed many global economic and financial events long before they hit the public's radar.
In our opinion, one of the worst mistakes thus far is currently being made, and in a few months or years the public will come to realize it. Just as we notified our readers about the problems with derivatives/toxic assets years before the public became aware of it, this latest tragic mistake is another one that we will discuss in our letters long before the public comes to understand it.
With respect to fixing the banking system, our leaders in Washington appear to be ignoring the advice of former Fed Chairman Paul Volcker, who as one of President Obama's advisors, suggests going back to a much less levered banking system. Paul Volcker suggests returning to something much like the banking system that existed under the Glass-Stegal Act. Instead, the politicians are opting for Treasury Secretary Geithner's plan which includes continuing with a more highly levered banking and finance system.
Why, after all of the problems caused by excess leverage, would they opt for the Geithner plan? Could it be that the financial institutions are too connected, and have been huge donors to many of the politicians at the national level?
England, Switzerland, the U.S., and many other countries have begun to use quantitative easing "money printing" to create a lower currency so they can export their way to prosperity. The countries want to state that they are pro free trade, so they will use the excuse that 'our currency has fallen, and that is why our exports are up and imports are down' argument. This, of course, is a misrepresentation.
When you lower the value of your currency to increase economic activity, it usually leads to more trade, more exports, and more cash in the financial system to spur consumption. Another result is that you encourage inflation. It will work. You will get inflation and perhaps some small economic growth. So it may still be a depression, but an inflationary depression.
The very politicians who are posturing that they care about the elderly, the retired, and low income groups are today creating a circumstance that will devastate those very groups with inflation. Inflation hurts primarily the poor, those on fixed income, and the retired. This is because it is hard for them to work and earn money at the new inflated pay rates. They are forced to sit by and watch as their savings be gradually eaten up by inflation, which erodes the purchasing power of their money.
We expect the U.S. dollar to fall and will invest accordingly.