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Saturday, September 20, 2008

Bailout comments

Bailout Rant
Back in August 2007, Bush said there would be "no bailout for pinched homeowners". At that time I told a friend of mine, that means they already decided to bail everyone out. Bush through his entire administration has always told blatant lies upfront. At least Bush is consistent.

Today Bush has asked for 700 Billion more, and to raise once again, the national budget deficit to 11.3 Trillion dollars. NOTE: This does NOT count the 6+ trillion dollars of FRE/FNM, since that isn't on the books as debt since "it will be paid' in the future.

I have had people question why isn't this good? Well for one thing look at the history of countries, any government that engages in socialist bailouts has not had a good run afterward. Japan's bank bailout in 1990 resulted in a 10+ year recession. (9/21/08, article comparing US to Japan) Between Thursday and Friday, the 13 year treasury note's interest rate went up by 1000%. Yes, you read that right, interest rates spiked 1000%.
But in fairness, the treasury note was unusually low going into Thursday since the financial world was crumbling, and the flight to safety meant the treasury note didn't need to pay any interest, it was the place to be in the collapse that was occurring. This illustrate how close the US was to a great depression type crash. Unfortunately, we may have changed trajectory as the US prints money, as I feared (and I wish I believed then) Thursday AM.

Also gold reacted with a spike of about 15% in just two days.

News still coming in, will try to write Sunday. BTW, some banks failed announced on Friday, Ameribank is one, but don't worry, the US printing presses are in overdrive.

So what does this all mean?
If the US government goes through, and at this point, I suspect they will, to bail everyone out in sight, we will have sealed the fate of this country to enduring a long recession, and have inched closer to an all out depression. Why? Cause there is no "free" way of getting out of debt. If the financial market makers are bailed out, it WILL manifest elsewhere. Interest rates likely to start rising as the USA bonds likely become downgraded from AAA. Our national 11+ trillion dollars in debt will quickly escalate and strangle/tie the governments hands. Taxes will be raised, job loss increased, and yes, more home owners will lose their houses. But the "good news" is the banks will be able to unload those houses to the government.

The US must pay for the debt incurred, and someone has to take the hit.

THIS IS STILL NOT A good time to buy financial stocks, or for that matter much else. What is a good time to buy is tax free federal bonds. Why tax free? in the year to come, higher taxes are almost guaranteed. The big question for Gold/Oil is will we still deflate before inflate. Jury is out, but if we follow Japan, still deflate first, which means Gold will go down. Consider a buy under 650, and a definite good purchase at under 500.

Shorting Stocks
On a different note, to clear up the banning of short selling. In China it is illegal to short sell. Chinese Shanghai stock market plunged over 65% in less than a year. When you don't allow shorting, stocks go higher than they should. When stocks collapse, they gain speed quicker since there was no counter balance in the market. Bank stocks soared Friday. Are they REALLY that good of a buy? Wachovia as an example, fair to say a "troubled" bank, their stock went from 10 bucks to a high of 24 on Friday. If your 401K mutual fund is buying at this price, does that give you confidence that it is a good buy?

Also notice, no one complained when the stocks became over-valued by leveraged speculation, but a witch hunt ensues when stocks are re-valued lower by shorting. Kinda like bookies only taking bets on the Giants, in a Giants-Jet game. When everyone is cheering for the same team, it may seem like a good bet, but it's hard to judge how good of a bet it is without an opposing force to gauge by. And to further put salt in the wound, Market Makers can STILL SHORT stocks. Kinda like the bookies allowing to bet on Jets only, but no one else.
If this situation was described as happening "in country XYZ", most people would comment stay away from there. Slap the USA in front and somehow it become legitimate. Time will tell.

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