At the election, the American people voted for change. They were evidently sick of all the lies and Washington BS. It emerged that a crisis had come about as a result of excess/loose credit and they wanted that to stop too.
Do you think they got it?
Do you believe we have seen the end of all the lies and over-indebtedness of the establishment?
If by now you don’t know that the epicenter of this financial earthquake was the US housing market (and hence the loans on them) crashing, you’ve been living on a desert island.
If that DOES apply to you, welcome back. The long and short of it is that right now, a Chinese farm-worker’s destiny is in the hands of the value of a 3/2 single family home in Whereverville, USA. Americans stop consuming junk, the world stops turning. IT’S THAT SIMPLE. (As an aside, the other countries of the world are looking at ways to end this precarious symbiosis).
So the banks got burned on those loans- badly. The banks are the heart of any capitalist economy. Without them functioning properly, it just doesn’t work. To be specific, banks need to be ‘capitalized’. This means they need sufficient assets on their balance sheet to be able to lend and lending is at the root of a thriving modern economy (how many people could pay cash for a home or an office building?).
Understand so far? Great…
Okay, so let’s say Bank of America makes a loan on a home in 2005 for $100,000. That asset is now worth only $50,000. In this scenario, Bank of America’s balance sheet – or CAPITALIZATION- just got whacked in half.
That’s the story so far.
So we have a problem. BUT, the government steps in to the rescue…
First, they write a few checks with our hard-earned money. That didn’t plug the capitalization gap.
So next they say, “Okay Bank of America, so your assets are only worth this and that sucks. So instead, let’s say they’re worth more. We’ll let you do this by relaxing our so called ‘mark to market’ rules whereby you have to list your assets at what the market says they are worth.” This is the government saying this now.
In short, pure fantasy. Smoke and mirrors. Lies.
Lack of transparency and oversight got us into this mess… and the medicine being administered is… more of the same. I guess the government learned a few things from Enron.
So you tell me. Did you get the change you voted for?
By the way, even with this magic show, the capitalization gap is STILL $700 billion.
So while we play silly number games and try to hide this fiasco, the Chinese are dealing with reality. The navy is building. They have been secretly building their gold reserves since 2003 and now own more than Switzerland. They are regrouping and restructuring so not be so reliant on making money by Americans getting fat and buying junk in malls. They are using their hoard of increasingly worthless dollars to stockpile hard assets at rock bottom prices.
Should we be frightened?
No, we should learn. (By the way, the Chinese are just as much within their rights to build a navy as we are.)
My advice: teach your kids to speak Mandarin (not Spanish)- that’s the new economic frontier.
Okay, back to the short term…
Right now I see just as much risk in buying as I do selling- it’s really a waiting it out period. But, we could know very quickly. I write this letter on the weekend preceding the Monday you read, and by the time you’re reading this, the market may have sent us the signal we wanted.
Make no mistake, this IS a bear market rally (a bullish rise in a bearish trend) but one that could go high and perhaps even stay there for a while. I have said as much since the end of 2008, so don’t think I’m just commentating here.
In past letters, I’ve explained the importance of ignoring all the opinion and just letting the market itself tell us what it’s going to do next- it’s called ‘Dow Theory’ (long time readers will recall me using this technique to predict a significant fall when the Dow went below 7470 on this advance- quickly after it sunk a thousand points). From this point of view, something very interesting happened recently.
From the high in this rally of 8131 on the Dow, it sunk back again to 7500ish before rising again. NOW, IF it closes this week back above 8,131, it’s extremely likely (it’s never guaranteed) that the rally will resume.
This may coincide with the latest act in the government magic show they’re calling ‘stress tests’ of the big banks on Friday. Short-term, the market is a sucker for this kind of garbage regardless, and things could rise.
Conversely, if it can’t climb back above 8,131 soon, it may mark the end of this rally.
Remember; this is NOT a buy and hold market. It’s one for nimble, in-and-out trades. Even if the rally does resume it could turn in a day. Fly fast and don’t be afraid to pull the ‘eject handle’ if it doesn’t work out!
But my friend, that’s where those gain-locks I’ve been explaining in recent issues come in.
What else do I see…?
Copper looks like it rose too much too fast- I can see that falling in the short term. Contrarian traders will probably go short on this.
Oil seems to be stuck in a trading range between $43 and $50 and traders are making money both ways because of this, though I’d rather be on the long side of this trade for now.
What can I say about gold? It just keeps on pleasantly surprising. With a rising market, gold would/should be sinking as appetite for risk emerges, but this week it rose with the stock market after the news about the Chinese secretly building their reserves (China is such a powerful buyer it can make the price of gold move drastically so it does so in stages, quietly). I can’t say there’s going to be a ‘good’ time to buy gold- I can see it going either way in the short term, but longer term, skywards. Many people I respect simply believe gold is good value below $1000 and that people should just close their eyes and jump in. With what the Fed is up to, I personally believe anyone who doesn’t own even a little gold now is a fool- and that’s purely for protection, not an investment or trade.
Anyway, it’s time to say goodbye until next time, but until then, I’d like you to consider where things are going. If we’ve learned one thing, it’s that change is the only certain thing. Please look at additional income possibilities NOW, not when it’s too late.
Until next time,