The potential loss of a major US brokerage is
shaking markets. Gold over $1000. Dollar breaks to record low. Stock
market volatility erupts.
Despite the ‘good news’ of unbelievably low
inflation, and overnight stock futures up strongly on the ‘good news’
the markets are all now reacting badly to what was, I am sure, supposed
to be even more good news – the bailout of Bear Sterns and Co by JP
Morgan and the Federal Reserve.
Here’s the news:
SAN FRANCISCO (MarketWatch) — Bear Stearns Cos.
said Friday that it got short-term financing from the Federal Reserve
and J.P. Morgan Chase after the brokerage firm’s liquidity
"deteriorated significantly" during the past 24 hours.
On the surface it’s a great thing that JP Morgan and the Federal
Reserve were able to join hands and string together a bailout so
quickly.
On the other hand, what does it mean that Bear Stearn’s "liquidity
deteriorated significantly"? It turns out that we are facing the very
real prospect of the collapse of a major financial institution. And you
never get just one of those. Once one big one falls down, they tend to
drag a bunch of others with them.
More coming as the news develops.
The stock market has been ignoring the bad news for entirely too long.
It is completely clear to nearly all observers that we are already in a
recession, and a particularly nasty one at that. The only indicator not
giving a reliable clue here is the stock market.
I think that’s going to change and, as you know, what little money
I have in the stock market is positioned to benefit from a decline.
Why? Because even garden-variety recessions typically take the stock
market down by 28% and we’re nowhere near that yet. So I see more
downside.
But even more, I see this recession as being anything but garden
variety. It is the double whammy of both having to correct the excesses
from the last recession we never had (thanks to Al Greenspan lowering
rates to 1%) PLUS the bursting of the largest credit bubble in all of
history.
But wait – there’s more.
We’ve never been in this situation because, in the past, we were a
net-creditor nation with savings. Neither of these conditions are true
today which means that Ben Bernanke’s options to cut rates are severely
curtailed by the fact that doing so could cause the dollar to plunge in
value. So we have to add the potential for a dollar crisis into the
mix.
So what does this all mean?
I am certain of several things:
- The Federal Reserve will do everything in its power
to prevent asset prices from declining. By "assets" I mean stocks,
bonds and houses. Plan on continued rescues and liquidity injections
and various other schemes. None of these actions will be good for the
dollar. Get out of dollars. Consider buying gold, silver, foreign
currencies, foreign bonds, oil. - The US Government will continue to be less-than-forthright
about the current situation (witness the 0.0% inflation tale they told
today). In a faith-based economy, such as ours, maintaining the
appearance (or illusion) of health is literally as important as any
other factor. So plan on our government officials doing the most
responsible thing they can which is saying whatever they must to
preserve the illusion that ‘all is fine’. Heck, it’s what I’d do in
their shoes so I do not fault it. However, if you fall for it you could
be severely misled into either the wrong actions or inaction at a time
when you should be vigorously seeking solutions.
All my prior recommendations stand.
- Get out of stocks (or at least buy puts &/or offsetting inverse index funds if you cannot sell at this time for some reason)
- Keep some cash at home
- Reduce your exposure to US dollars (gold, silver, commodities, food)
- Get out of variable rate debt
- Investigate
your financial institutions (banks, brokerages, 410k and pensions
facilities) and be sure you are working with financially sound entities.
Let me know how I can help.
