China and the Long Term View

I decided to write the next blog when the market went up, and today was a big uptick.  It is surprising the Citi is being credit for this, along with the intention of reinstating the uptick rule when shorting stocks.  I think today's gain is still the bear working, since these fluctuations are normal.  

My main focus for this blog is China.  Several recent significant events have occurred:

*  Ms. Clinton's visit to China did not include any discussion of 'human rights.'  The focus was on money.

*  The Dalai Lama  has publicly said how his people have been through 'hell on earth' under Chinese rule.

*  China's military said that our Navy 'broke the law' when they circled our ship with theirs.

China has a surplus of cash as we continue to dig a deeper hole of debt.  They are becoming stronger financially through our actions of borrowing. I am concerned that we may be 'naive' in thinking that China will continue to act as in the past since we have been the major buyer of their products.  With both Congress and the President being of the same party, I am concerned there is no one standing back and looking beyond the immediate to see the potential of what lies on the horizon as a result of our indiscriminate spending.  Yes, the Republicans are speaking, yet I think they are basically ineffective in  promoting a conservative agenda.  When I look at the other major players (countries), they are all weakened from lower oil prices, their debt, and the continue fallout of the banks from bad loans.

Housing values are expected to continue to fall for the rest of this year, knocking another 20% or more.   This will keep the current bank challenge in the forefront.  We will reach the 'law of diminishing returns' and then the question is 'what's next?'

Inflation

GDP contracted, a given.  The Feds loaning and giving billions to the top banks, backing commercial paper and money market funds.  Banks holding the money, doing the opposite of the intention of $700B bailout.  How long has it been since it was shoved through congress with the warning that there would be a financial meltdown without it?  There's a credibility gap with the Treasury with them using the 'cry wolf' approach.

Everyone is focused on the trees as inflation moves silently through the forest.   I can see a headline on the near horizon:  The world struggles to contain inflation that has jumped into the double digits.  People would argue that commodity prices are falling.  I am looking at the massive printing of money to meet the trillions of spending set in motion by Congress and the Treasury Department.  And if we end up with a Democratic controlled House of Representatives, Senate, and Presidency, then the momentum will continue with deficit spending to rescue the 'American people.'  

The good news is the stock markets don't mind inflation because prices can be raised to offset it.  The bad news is the consumer's money is worth less unless they are receiving raises or creating money to meet or exceed the inflation percentage increase.

What I find unfortunate is that we have had a check and balance for the last 8 years with a Democratic controlled Congress and a Republican presidency, and still we increased our debt by the trillions.  It appears that regardless of who is in control, the same path is continued.  I know that, at the world level, we will reach a peak regarding the debt level because there will no longer be willing and eager buyers without huge interest returns.  There will be a point where the answer is 'no.'  That will be a good turning point and also a painful one for those of us who participate in the financial system; virtually all of us.

Washington Mutual Takeover

Yesterday, I sent messages to Roy Blunt (House Minority Whip), Richard Shelby(against bailout), plus Feinstein, Boxer,  Herger, and Wolf Blitzer at CNN regarding the government taking over Washington Mutual and how it is in stark contrast to what the House Republicans want using private investment versus taxpayer money to help the financial sector.  This is what I wrote specifically to Mr. Shelby:

"Last night's (9/25) FDIC takeover of Washington Mutual was an action that is in contrast to what the Republicans are recommending on this bailout; that private investment should be encouraged versus taxpayer money.  In March, a private investment group invested $8B in Washington Mutual.  Today that investment is worth practically nothing as well as for the individual investor.  Why was the biggest thrift with over $300B in assets taken over in this format?  What foresight or consideration was given in comparison to what is being recommended?  I see lack of continuity with what the Feds are doing and what Congress is saying.  That is the primary reason for the distrust with the average citizen.  I am glad there is such a turnout protesting this bailout all across the nation.

Also, the current Washington Mutual CEO has been on the job for 16 days and has a severance package of $19M.  THe previous CEO left with $57M. This kind of reward has no bearing on the actual performance and thus again, another reason to look at Washington as being out-of-touch with reality.

In an earlier email to my congress representatives this week, I indicated my opposition to the bailout plan and why.  More debt of that magnitude added to the already enormous debt load makes us weaker as a nation and provides less room to maneuver with the world.  I think the market forces should be allowed to take the path that corrects the excess in the housing market.  Yes, it is painful, but the pain will be much shorter than trying to come up with a plan that will only delay the inevitable. And those of us alive today should bear the brunt of this fall: not our children, grandchildren, and those to come.  Thank you for considering my view."

The Unquantifiable Bailout

We are definitely living at a time of great change mirrored in the financial arena of the world.  The citizens of the U.S. are going to assume more debt, collectively, to rescue the financial sector due to dire consequences of what would happen if we don't.  When congressional leaders, the president, and the Fed got together last night and listened to what lies ahead, there was a stunned silence of 5-10 seconds.  When politicians have no words for that period of time, there is a landscape portrayed that none of them have experienced before.  The total liability is not measurable as this time, but 'hundreds of billions' means closer to two to three trillion.  I worked in the defense industry for 20 years and no contract met its original estimate, especially those funded for new design and technology.  We are dealing with the same here.  The ones deciding what to implement to save the U.S. financial system are having to be creative.  

This 'Plan' covers toxic mortgage-backed securities that banks hold.  The government would take these off their hands, hold them, and try to sell them again at a later date after they figure out the maze of who owes who. 

Today, the SEC put out a list of 799 financial companies that are excluded from the short selling list.  I think they should have excluded all companies like Britain did under pressure from us.  

Has anyone started talking about the bond insurers yet?  They are a new wrinkle in this financial fabric that is being sown.  Today ABK dropped 42% and it was on the excluded short sale list.   Our system has evolved to be so expansive and intricate that no one person or group understands the total ramifications of our actions.  Keep looking for the red flags like ABK.  There is a blind path here that takes a special dance.  We are only learning what the steps are.

We are only 11 days away from October, the month that has historically reflected major changes for the market.  What does October 2008 bring?