Home

Global: Fish on a hot cement sidewalk

Sunday, 30 Nov 2008

Summary

We all at least have heard of  Tennessee Williams' 1955 play, "Cat on a  hot tin roof". Well, on a lesser literary level, how about visualizing a fish, freshly pulled out of a tank, and being thrown on to a hot sidewalk? What can it do but to flop around vigorously? Step in, "Fish on a hot cement sidewalk". Readers know how we view the shape of things to come. Today I want to refresh this view against the backdrop of last week's fantastic Wall Street performance. 

Topics Covered

  1. What did - and did not - happen last week in America
  2. Bond blow out the next hit?
  3. How to make money off this idea

Background

1. What did - and did not - happen last week in America

There is a wonderful American bit of sarcasm, "Don't do something, stand there!" Well, the good news is that last week, Washington did act. It did "something" - and stood there. What do I mean?

Its bureaucrats and politicians are bailing-out those chickens of irresponsibility that have come home to roost. According to Lynn Thomasson's Bloomberg filing of 29th November 2008:

  • Citigroup's share price doubled because the government plans to insure $306 billion in toxic assets owned by the bank;
  • GM's shares soared 71% because it "plans" to sell some if its brands;
  • It is likely that Congress will grant GM, Ford as well as Chrysler short-term bridging loans to carry them through until Obama assumes office;
  • the Fed will buy up to $100 billion of direct debts of Fannie Mae, Freddie and Mac and of the Federal Home Loan Banks;
  • the Fed will buy a further $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginne Mae, and
  • the Fed will lend up to $200 billion on a non-recourse basis to holders of AAA-rated asset-backed securities backed by newly and recently originated loans. "Non-recourse" means that if the loan sours, the Fed has recourse only to these underlying

This all smacks of a politically-charged bailout binge, not of something getting to the root cause of why this happened in the first place: easy credit, as well as: collusion between ratings agencies, banks, regulators and banks.  Forget any "deep investigations": all of these players are part of the story. 

So: my take is that this last week was much ado - with no tangible results except a short-term spurt in the markets. Caveat, emptor!

This has everything to do with the fish on the hot cement sidewalk. Markets will flop around in "L" for a good six months at least, and Friday's popgun missile is a good example of this.

2. Bond blowout the next hit?

Somewhere I read that this year alone, between them, the Fed and the Treasury have racked up an additional $7.7 trillion in promises and thus debts. Well, reflect on the fact that the stock of U.S. federal debt outstanding is $10 trillion, and you could argue that the cumulative US debt this year has shot up by 77% - i.e. by about how much the GM stock gained on Friday...

When will markets register this debt blowout? When they do, I fear an horrendous dollar crash due to "investors" massively unloading their government as well as corporate US dollar bonds. 

This will happen once the credit card crisis - the one built on hot air as in: "trust me, I will repay you (with my other 14 credit cards)" - hits. Shortly after Obama takes office and unemployment really rides high?

 

3. How to Make Money Off This Idea

  1. Always consult your financial adviser first.
  2. Remain long of the ETF which allows you to short America's stock market, for instance SDS:US
  3. Remain long of hte ETF which allows you to short America's financial stocks, SKF:US
  4. Be long of gold, e.g. the ETF PHAU:LN. As we pointed out in Saturday's Advice Tracker: gold will become a store of value - NOT because of inflation (that is 2010's story), but because people flee the current candy shop, the US dollar and "safe" government bills and bonds....

| login or register to post comments