Sunday, November 9, 2008

The Silence is Deafening

Its awfully quiet out there folks

I don't know if this is good or bad. I think we are heading into a wait and see period as the world hopes and prays the bailouts will save the world economies from collapsing.

I think the market will start to trade more off of fundamentals going forward. The interventions/bailouts have been so massive that any new bailouts will be considered mostly irrelevant at this point.

The automotive bailout is about the only thing I see as being a big market mover in the near term. China announced a $580 billion economic stimulus today in an effort to stimulate their rapidly slowing economy. China will feel our pain as our consumers stop consuming. We all know how dependant their factories are on us continuing to spend ourselves into oblivion. Those days are gone as the credit in the USA disappears at lightning speed while we deleverage ourselves. This is going to cripple China's growth.

It will be interesting to see how the market digests this tomorrow. The China growth story obviously appears to be over. My question here is will they still continue to buy treasuries as their growth slows and more money is needed at home? It will be interesting going forward to see how successful the massive treasury sales are as the Fed tries to fund itself after bailing out America.

I mean lets think about this for a second. China, Russia, and the middle east are all critical buyers of our debt. All three are in deep trouble financially as the world recession deepens. China is turning into a disaster as described above, and Russia and the middle east are almost totally dependent on oil. The pullback in oil prices from $147 down to $60 has been crippling for Russia and the middle east. Russia's stock market has virtually disappeared in a matter of months.

I don't see how any of these three will continue to buy treasuries at the same pace they have in the last several years. The scary thing here is their likely pullback is going to come at a time when our government needs them the most.

The Fed has $2 trillion on its balance sheet that it needs to pay for. If the world backs away from our debt, its "lights out" for our economy in my opinion.

Essentially what has happened over the past couple months is the Fed/Treasury has become a highly leveraged hedge fund that is replacing the 40-1 leverage that's been yanked away from the banking system. This is doomed to fail just like anyone else that overleveraged themselves. The failure of the investment banks and Fannie/Freddie have already proved that this doesn't work!

When this occurs is any ones guess but rest assured this idea will fail. When it does, treasury demand will disappear until we approach this the right way by digging ourselves out of debt and letting insolvent companies fail.


Anonymous said...

We are waiting, Jeff. :-)

Jeff said...

Its coming...About an hour...its 5:33