Sunday, August 30, 2009

Rude Awakening - Drowning Helicopters

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Rude Awakening

The Rude Awakening

Taipei, Taiwan

Sunday, August 30, 2009


* Adrift in the longest sucker's rally in history,

* Pricing volatility and the rising tide of risk,

* Hyperinflation tsunamis and plenty more...


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Joel Bowman, reporting from Taipei, Taiwan...

The end of the month is nigh, and our fellow investors face again the age-old quandary. To buy, or not to buy? To sell, or not to sell? Where to from here?

Having rallied some 50% since its March lows, Wall Street has mounted a comeback of historic proportions. We say "historic" because, in the past, such bounces almost always occur after cataclysmic selloffs, like the one we experienced from 2007 through 2008 and into the early part of this year.

And now, riding the crest of one of the largest rallies (read: bounces) in history, we surf headlong into September, historically the toughest month for stocks. Will Mr. Market execute a perfect-10 barrel ride, skirting trouble and earning the adoration of all the babes on the beach? Or will he come unstuck on the reef, mild wipeout his best case scenario, drowning his worst and severe concussion somewhere in between?

The last time we saw Fed Chairman Ben Bernanke paddling onto a swell, it pitched, spat him out then crushed him into the sand. But look, our brave, though somewhat battered hero is back! More correctly, but less fortunately, the floundering Fed Head never actually went away. He was right there when the banking system he was keeping an eye on capsized under his nose...he was there to boost Bear Stearns into JP Morgan's lifeboat while allowing Lehman Bros. to drown...he was there to breathe $180 billion of artificial life into fight for increased powers at the Fed and to double its balance sheet to over $2 trillion...and now, after doing such a bang up job as life guard of the entire financial system, he'll be right there to oversee it all again into the middle of the next decade.

Last week, while C.E.Obama was busy lavishing praise on the man who, with "calm and wisdom...put the brakes on our economic freefall," Bernanke kept busy loading up the Fed's balance sheet. The buyer of last resort's portfolio swelled as follows: Treasury securities up $8.8 billion to $744.9 billion; mortgage-backed securities heavier $13.3 billion to $622.9 billion; federal agency debt up $5.6 billion to $117.4 billion. Never mind a "calm" man, that's insane buying for a lunatic!

Bernanke himself explained the process of his creative rescue mission earlier this year in the now in/famous 60 Minutes "Green Shoots" interview:

"To lend to a bank, we simply use the computer to mark up the size of the account they have with the Fed...It's much more akin to printing money than it is to borrowing...We need to do that because our economy is very weak and inflation is very low."

Indeed, prices of many assets continue to plumb new depths. Commercial real estate prices, already down 30% from their 2007 highs, show no signs of bottoming out anytime soon. The economy still loses hundreds of thousands of jobs each and every month while consumer bankruptcies and foreclosures in the residential real estate sector look equally ominous. So far, only the stock market has sucked in any of Bernanke's laughing gas...and even that now looks to be on shaky grounds.

Although the current rally still lags the '29 market crash snapback in magnitude, it is now longer in duration. Is a correction, therefore, already be overdue? Maybe.

The VIX, or Chicago Board Options Exchange Volatility Index, confirms the lurking concern in the markets. October futures ended at 30.40 on Friday, a near 5.5 point premium over the spot VIX. In other words, the index, which measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, predicts troubled waters ahead.

Bernanke and his pals spent a lot of time warning about what might happen if they were not allowed to intervene in the markets on an unprecedented level. A better question now might be what will happen now that they did. If Wall Street sinks after unloading hundreds of billions of dollars onto the Fed's balance sheet, who will be there to resuscitate the Fed itself?

As the natural, downward pressure on the stock markets mount, so does the temptation to inflate, to "print money" at all costs. The list of governments that were able to print their way out of a depression is very short (zero)...especially compared to those that drowned in hyperinflationary tsunamis.

Bernanke may be the man of the hour now that he has managed to take off on the biggest wave of the set...but, when the real flood begins, he might just find himself hopelessly looking for a plughole at the bottom of the ocean.

In your Rude reading wrap-up, below, you'll find musings from our usual cast of characters on everything from maverick high net worth individuals (HNWI) to low intellect government employees (LIGE). Please enjoy and send any comments to the address at the bottom of the page...

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No Recovery, Not Now…Not Ever
By Bill Bonner

That we live in an age of miracles has become common knowledge. A man may sit on a beach near Sydney, with nothing but the bucket bottom of the universe over his head, and still carry on a casual conversation with an Eskimo near the North Pole. Using an Internet- based phone service, he may do so at negligible cost. If this were not miracle enough, he may now grow himself a new nose, if he needs one, on his own arm.

See Uncle Sam Borrow
By Bill Bonner

The United States is in the third and fatal stage of a great country's life-cycle – the political stage. In this stage, money and power migrate from the financial community to the political community. The politicians get away with taking trillions out of the productive economy and spending them on their pet projects and private corruptions.

The Second Coming of Natural Gas
By Chris Mayer

Natural gas is in the dumps. And that is a good reason to own some. Cycles self-correct, and for natural gas, the self-correction process is already in the works.

Buying Time
By Patrick Cox

At the Agora Financial conference in Vancouver, I participated in a panel that attempted to name "the trade of the decade." Many of the recommendations involved commodity or resource plays. I suspect that these defensive recommendations are worthwhile. They may, in fact, protect investors from the worst of this downturn. I don't believe, however, that they are in any way trades "of the decade."

The Recovery That Isn't
By James Howad Kunstler

Whew, what a relief! Everybody from Ben Bernanke and a Who's Who of banking poobahs schmoozing it up in the heady vapors of Jackson Hole, Wyoming, to weigh in with glad tidings that the world's capital finance system survived what turned out to be a mere protracted bout of heartburn and has been reborn as the Miracle Bull economy. Our worries over. If you believe the claptrap. Which I don't.


[Rude Endnote: "Did you hear that, Joel?" your editor's mother joked last week. "She gives ALL her money to her family."

We decided to take mother to a Karaoke bar, along with our girlfriend and some Taiwanese friends, to show her some of the local "youth culture."

"And," added mother, one eyebrow raised in comical fashion, "she works eighty hours a week."

Our friend is not an unusual case here in Taiwan's capital city. She works two jobs and, as long as she lives with her family, is expected to hand her wages over to the head of the household.

"They give me a small allowance to live to get to work and buy some clothes. But they are very traditional. They don't approve of drinking or buying fancy things. Mostly they save the money and invest it back into the family business...

"But it's still better than finding a Taiwanese boyfriend," our friend continued. "Men here under 30 are all immature. They don't understand about life. They just care about drinking and partying."

Mother and girlfriend now both raised their a suitably comical fashion, we think...

We'll be back during the week with more Rude views.

Until then...


Joel Bowman

The Rude Awakening

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