What a day.  Checking in on the markets around noon Central time, I was wondering if we’d seen the top of the bear market rally. There wasn’t much positive price action in the equities I’ve been watching, and gold (GLD: chart, web, Y!) wasn’t making any great shakes either.

Then Bernanke went on a shopping spree.

When I checked back in around the close, nearly everything I was watching not only reversed course, but went into overdrive.

The Fed committed to buying up to $300 billion in long-term Treasurys over the course of the next six months, as well as nearly double the purchasing power of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, totaling $1.25 trillion (remember, trillion is the new billion).

To top it all off, the Fed also doubled the amount of debt it committed to purchase from the inept mortgage lenders.

Effectively, this action is much akin to chopping interest rates even further; when you’ve hit bottom on the interest rates, the next best thing to do is buy the debt.  In a round about way, this increases the leverage on the banks side allowing them to borrow money at an even deeper discount.

Corner Office Comments

While all this sounds good on paper, and the market surely agrees, long term I’m not convinced this move was well thought out.  What is the Fed going to do with all this debt in the long term?  There was no exit strategy revealed.

Further more, anyone holding long term debt when inflation kicks in is going to get chewed up and spit out like something rotten.  The Fed included.  As the value of the dollar decreases, as readers of this blog remember I’m laying a significant amount of chips on some massive inflation, it’s going to take more of those dollars to service the debt the Fed is absorbing.  The fact that gold and petroleum products rallied on the Fed statement seems to reinforce that position.

This move seems to spread much of the financial strain in localized sectors of the economy, more broadly the financial sector, further out over the entire economy.  No longer are nearly worthless mortgage backed securities held by Fannie or Freddie, they’re held by the entire populous of the country (you and me).

From my standpoint Bernanke is throwing up his arms and wiping bad assets of public companies balance sheets, letting them start over, and forcing you and I to eat the bad tasting financial slop.  Things will look rosy for a while, until inflation starts creeping into play and the government will need to print even more money to service the debt.

Any further upside to this rally should be used to capitalize on gains and readjust into a hedge against inflation, in my opinion.

Economics, Finance bernanke, Economics, Fed, Inflation, treasury

Hopefully I’m not the only one that’s noticed that the tone regarding the economy coming out of Washington has changed markedly in the last week.  And it should come as no surprise.

The Obama administration desperately needed to convey how bad things were to garner support for the $700+ billion “stimulus” bill, as well as the $400+ billion budget.  There would be no way he’d have the votes if people thought that kind of money weren’t needed.

Now that those two bills have passed, Obama has become the nation’s loudest cheerleader.  And for good reason.  His entire political capital rests in the success of those two packages to somehow speed economic recovery.

It also doesn’t help that the Chinese are questioning their investment in U.S. debt, to which Obama responded with such arrogance as to question why they would even be worried.  In fact, he’s trying to sell the Chinese even more debt; an effort akin to selling bullshit to a cattle rancher.

In effect, there’s really no reason for Obama to maintain any further pessimism, as doing so no longer helps his cause.

I hope the American public is tuning into the political game that Obama has forced us all to join.   After all, now that he owns Boardwalk and Park Place, he can’t help but encourage you to make a run at GO!  And if you land yourself in jail, not to worry, he’s got incentive to bail you out.

I can hear the construction commencing on those four hotels on the most expensive property on Monopoly.

Economics, Finance Barack Obama, Economics

Last week’s issue of Business Week contains an interview article by Maria Bartiromo with global investor Jim Rogers.  The bulk of the article is on Rogers’ view of the current economic health and the fidelity of the economic policy from the Obama administration.

Reading the article, it was almost as if Rogers was reading my mind.  A few excerpts from the article, but I’d encourage you to read the entire thing here.

Bartiromo: So what should they be doing?

Jim Rogers: What would I like to see happen? I’d like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Likewise, many, many homeowners didn’t go out and buy five homes with no income. Many homeowners have been waiting for this, and now all of a sudden the government is saying: “Well, too bad for you. We don’t care if you did it right or not, we’re going to bail out the 100,000 or 200,000 who did it wrong.” I mean, this is outrageous economics, and it’s terrible morality. -Source

I agree.  It’s as though in this day in age the term “bankruptcy” is a death sentence.  The fact is, bankruptcy should be looked at as a tool to restructure a company to regain a healthy business plan and achieve profitability.  The airline industry has been a friend to Chapter 11 for decades, and airlines have been healthier for it; not to say airlines are well run, just that they take advantage of a system put in place to deal with corporate shortcomings.

Rogers doesn’t stop with the financial sector, either.  He advocates his “let them go bankrupt” mindset across the board:

Bartiromo: What about Citigroup? What about the car companies?

Rogers: They should be allowed to go bankrupt. Why should American taxpayers put up billions to save a few car companies? They made the mistakes! We didn’t make the mistakes! I’m sure they’ll give them the money, but I’m telling you, it’s a mistake. It’s a horrible mistake. -Source

The real beauty of capitalism is that it allows people and businesses achieve great success, but only because it also allows them to fail.

There seems to be this wide-spread notion today that everyone deserves success, and everything should be “fair”; that there needs to be a level playing field all across the board, and no one person or entity should have an advantage over another.  If this continues, our capitalistic society will itself, fail.

Below is an interview with Jim Rogers on Glenn Beck’s radio show.  His overall outlook on the U.S. economy is pretty grim, and may even be extreme to a point, however I don’t think he’s too far off.

An especially good quote from his radio interview: “If you look to Obama and the government for investing advice, you will go bankrupt.”

Economics, Finance bankruptcy, capitalism, Economics, Jim Rogers