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Tuesday, January 5, 2010

All of this will end badly

US dollar is finally on the mend, US stocks hit new 12 month highs, US manufacturing increased in December. All is well, and another 5 year bull market is to begin.

Or is it? I really want to believe it. I would love to just end my fixation with the stock market, go back to focusing only on computers. But I know that the largest financial bubble ever created has weakened, and all the printing of paper, changing accounting rules, and lack of law enforcement will NOT result in prosperity.

What I don't know is how the downside will manifest. Stock market collapse lower than before? Market flat-lining 30% lower? US dollar collapse? Hyperinflation?

Point is, this rally will continue to whatever level the steam runs out. Heck, another 6 months is not impossible.

But a few facts to consider.
  • Root problem of the financial system as not been addressed, only papered over.
  • The greatest stock market rebound since 1930 is now. SPX 666 straight up (almost straight) to SPX 1132 today in about 9 months.
  • US dollar recently retested historical lows before firming up. US dollar isn't high enough to call it safe from being devalued to new lows.
  • Unemployment is about 10% officially, and closer to 16% if you include underemployed and those who couldn't find a job after benefits expire.
  • There is no growth leadership industry. late 90's was Internet. 2002+ was cheap loans to finance very nice large houses. As covered already, 30 year interest rates for US treasuries is approaching a long term trend line, that if broken, will signal significantly higher rates.
  • Events like Iceland collapsing, Latvia, Greece, Ireland, and other countries under severe pressure from world community. Large corporations failing or becoming zombie institutions under government control.
These are NOT normal times. Hence the reason why laws are not being enforced, and litterally trillions of taxpayer money is being used to cover private debts.

But covering debts doesnt make it go away. It shifts who takes the hit from the bad investments. If capitalism was adhered to, the investors of the corporations who took too much risk would fail. That's it. The economy would take a significant hit and begin to rebuild.

But instead the losses are shifted, not eliminated. The manifestation of those losses will come as higher interest rates for eveyone and every business, US dollar devaluation, or some other way. The losses just don't go away with no impact.

So rejoice the market is higher. But if the market goes 100% higher, everyone's life savings will be destroyed through inflation. If interest rates rise in response to ridiculous spending curve of the US government, then housing will fall, more companies will fail as debt load will cripple, and US government budget will get pinched as the 15 trillion of debt has a higher cost to maintain it.

The image on this blog states "There is no such thing as a free bailout", and I firmly believe it.

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