Friday, July 3, 2009

Economic Edge Reader Provides Spam(ish) Thoughts and Views!

Richard, a reader and writer of economic spam (lol – hey, I fall into that category!) from the U.K., sent me the following email that I think is spot on in many ways – here it is with a little punctuation editing by me, but otherwise as he wrote it…

2 July 2009

Fierce bear market rallies are designed to tempt investors and traders back into the market, and the second quarter rally this year has been brilliant in producing feel good factors that include economic greenshoots and,"Hey, some of my stocks have actually got back to cost price!” In the coming summer months the markets could surge higher, making valuations even more expensive than they are already. More likely is a sideways chop into the main autumn/winter event, which is a retest of the lows (ASIA/CHINA possibly excepted), and perhaps even lower lows to complete the normal three year bear market cycle that comes with depressions. A worthwhile bet is that the March/June rally is over, that the next leg down has already started, and that "the investor who loses the least in a bear market wins!” Bonds, cash, gold, silver and commodities generally continue to be the best components of any normal "portfolio,” and hopefully it is managed far away from the big "managers of others peoples money.”

The fear of inflation seems to make for a good headline these days, what with Quantative Easing and exploding money supply. However, shrewd investors recall that the real inflation has come and gone. In the years 2002 to 2007 the price of literally everything exploded upwards-STOCKS, CREDIT, CDOs, CDSWAPS, HEDGE FUNDS, SUB PRIME MORTGAGES, CONDOS, OIL, GOLD, SILVER (all other real and agricultural commodities), REAL ESTATE/COMMERCIAL PROPERTY, FOOD, SALARIES /WAGES/BONUSES, ANTIQUES/ART, Classic Cars..................(the list is endless)! In a debt deflation though there ain't no inflation (except in the wife’s shopping basket and the provision of public services), which is why all the asset classes of the 2002-2007 bull market have crashed. The experience of the 1920's Wall Street and 1990's Nikkei crashes is that global inflation will not be a problem for a very long time.

Back in 2005 when the activities of condo flippers in Florida, etc. became obvious to all and sundry (with the exception of most of the financial community), a number of brilliant and original thinkers began to check out the source of their finance, stumbled upon the sub-prime mortgage market, and after further intensive education on this nether world of finance, placed huge bets that the whole house of cards had to collapse eventually. Being short the biggest game in town for a couple of years is a lonely and very expensive place to be, and it wasn't until 2007 that the first signs of peaking property values became apparent. Without being boring, the end of the story is now well documented history, and a few brave original thinkers made billions as the rest of our well regulated world came apart at the seams. Strange and annoying though it is, bear markets do occasionally throw up a "what goes around, comes around" scenario, and of course it has in 2008/2009 because those very same investors who made fortunes correctly shorting the banks, insurers/reinsurers have ended up owning them as taxpayers and depositors! How perverse is that!

Trillions of dollars have gone West in rescuing the Shadow Banking Industry, and respected economists (Black Swan [author Nassim Taleb ]) calculate that $40 to $70 trillion of further deleveraging has to occur before there is any real prospect of recovery. And this writer has been accused of being too bearish!! Back in September 2008 it was calculated that rather than bailing out the Shadow banks for literally trillions of taxpayer monies, twelve new universal banks could have been set up for $600 billion to $1.2 trillion, which could then have been leveraged 8 or 9 times. However it was decided that socializing the losses and privatizing future profits was the best way to restore stability to the financial system, taxpayer monies disappearing down a banking black hole from which they will never ever be repaid or be able to participate in past, present, or future profits. Capitalism normally rewards success and punishes failure, but in the world of modern banking the taxpayer takes the losses and the bankers take all the profits. This was not how it was meant to be, there should be safe boring conservative banks, and their should be private partnerships/investment banks taking well calculated risks with their own capital. Strange that the crippled Shadow Banking Industry, Central Bankers, Treasury Secretaries and politicians cannot see the error of their ways, instead they insist that the Universal Banks have the right to leverage their deposit base in pursuit of profits from products that even they don't understand. A modern version of Glass Steagall is one of the essential reforms that will not see the light of day, and the brilliant students of finance know full well the reasons why!

However, Barclays Bank was a great trade off the lows of 50p, thanks very much "EVIL Knievil!” Now that the details of the compensation package of the new CEO of RBS are in the public domain, it might be worth buying the shares at 40p,with a 20% stop loss at 32p. By having a trailing 20% stop loss if, as and when the shares moonshot to £2.50-£3.00 in the next few years, thereby making Mr. Stephen Hester another banking multi-zillionaire, taxpaying shareholders and depositors might finally reap some reward for rescuing this ghastly Scottish bank.


Well, I don’t know about the Barclays recommendation, but I don’t think we’ve reached overall market bottom yet! The rest of Richard’s musings are right on, not enough attention is given to the effects of the shadow banking system which is still unraveling.

Richard, welcome to the Edge, you're welcome around here anytime!

Dire Straights – Brothers in Arms: