Chiangmai Mail - Vol. VIII No. 20 - Tuesday May 19

At the time of writing this people will either be getting wet or hiding over the Songkran. People are starting to be more optimistic. Woe betide false prophets (this can be used phonetically as well) is all I can say. That eminently sensible financial magazine, Barron’s, is slightly more pragmatic - the “End of the Rally is Nigh.”
Another realist, Marc Faber, believes there will be a 10% fall in the market before the rally gets going again. Personally, I am surprised he is this optimistic. He said recently, “In terms of fiscal spending, bailouts don’t usually work.” What we have now is one of the biggest bailouts in history. Time and time again, emperors, dictators and/or governments have tried to replace declining private demand with perceived public requirements. With one or two honourable exceptions, this just does not work. Government debt will rise and the balance sheet will get bigger.
With what the governments are planning at the moment, there is very little chance of the present mess we are in bottoming out before the end of next year. Faber thinks there is a case to be made for saying it could last for ten years. Whenever the end does come inflationary pressure will be massive and interest rates will begin to go up.
Another realist, Rick Ackerman, believes that the problem with the present rally is there is no capitulation. If there is none then there is hope and many people still remain to be sucked in. However, once there is a full surrender then we will see the bottom of market.
If you try to postpone a recession the only result you get is prolonging it or driving the world into a depression. By doing what America, Britain and others are trying to do now which is basically deficit financing then there will be enormous debt growth. As a percentage of Gross Domestic Product (GDP), debt has grown from 130% in 1980 to 360% as of now. Also, please remember that this does not include major liabilities such as healthcare, pensions or social welfare.
This is the public forum, the private one is no better, credit card debt is the worst it has ever been. Balances fell by almost ten percent in February. The situation with home loans is no better. Foreclosures and auctions will soon start to flood the market thus driving house prices down. When this happens then the collateral being held by banks falls as do the assets which hold up other financial institutions as well. Believe me, the worst is still yet to come.
People are desperate to find good in the bad. Take Fannie Mae for instance, it recently announced that they were employing 2,000 new people. Wonderful! Look a bit closer and you will find they are all debt collectors! I need say no more. Well, I should not but the evidence says I should.
There are folk out there who are arguing that markets should look beyond economic forecasts. While this is true to a certain extent, realism also has to be considered. Ackerman again, “In January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse, domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totalled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline.”
What this means is that even though there has been an enormous drop in the price of stocks and shares people are still holding them which means there is more selling coming up soon. Ackerman goes on, “This bear market will end, like every other bear market in history, with a wholesale dumping of stocks at prices that will make current values seem exorbitant in comparison.”
What really does beggar belief is that those who have let us down so badly are still believed. The media still quotes Greenspan as though he has all the answers. They forget he is the one who got us into this mess in the first place. He is not the only one, what about all the analysts who said it was a great time to buy when the Dow had just dropped ten percent from its all time high? Let us not forget Tim Geithner, a regulator, who completely missed what Madoff was up to. The best, though, has to go to Hank Paulson who believed sub prime had topped out at USD100 billion. We now know the present cost of bailing out the system is nearly USD13 trillion.
So, apart from Greenspan, can we blame anyone else for this lot? Reuters recently wrote that, “Paulson (is) a Wall Street insider who was looking out for his own, and Bernanke (is) an academic misguidedly trying to refight the 1930s Great Depression. Together they formed the wrong team at the wrong time whose ad hoc approach threw away hundreds of billions of dollars and more than doubled the Fed’s balance sheet.
“What you’re seeing Bernanke do is he’s trying to create a bailout reflationary bubble, which he can’t describe as a bubble, just as Greenspan couldn’t describe the housing mortgage bubble as a bubble. What we’re seeing by Bernanke is a covert attempt to rebubble.”
Someone who has called just about everything to do with this crisis correctly, Nouriel Roubini, has called Jim Cramer “a buffoon.”
“He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame... He’s not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong.”
Roubini warned two years ago that the United States faced its worse recession in four decades. He points out that the current rally on Wall Street merely follows the pattern of other major downturns. “Once people get the reality check than it’s going to get ugly again,” he says.
All agree that what should have been allowed to happen was a short, sharp recession just after Bush got elected. This would have stopped everything that has happened since from actually occurring. There would still be a good chance that the auto industry would not need the massive injections of capital that it now needs. Also, the banks would be in a much better state. Faber believes we should let the financial institutions that need help just roll over and die. It would still be possible to protect those who had deposits and policies with these companies; however, it would “let the system, through the market mechanism, deal with the problem.”
They also concur that despite all the bad things which will follow, inflation is the only way out. People will suffer from this policy but there is no alternative now that the printing presses are working 24/7.
The only thing to do is pull in your belts and save what you can, when you can.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Paul Gambles on paul@mbmg-international.com

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