Thank God for the Bailout and The Ghost of Xmas Future

Thank god the $700 billion bailout got approved last week. If the government hadn't agreed to borrow another $700 billion that we don't have from foreigners and future potential taxes - the stock market might have gone down....... (SARCRASM)...... it went down anyways for anyone that has watched things over the past two days.

I think the fundamental problem is the belief that borrowing more money can get us out of the problem of borrowing too much money in the first place. The argument from the "professionals" is that by borrowing $700 billion the government can use it to buy up bad assets and recapitalize the banks, then the banks can start making loans again - but isn't the crazy amounts of credit in the economy and credit availability what got us to this spot in the first place? Why are housing prices falling 50% in some areas (think San Diego)? Maybe because they only went up that high because of stupid loans in the first place.

The repricing of homes, stocks, businesses, assets of all types terrible news for a finance based economy like ours that is heavily dependent on credit availability as the grease to keep things moving - the funny thing is that when the credit goes away, unleveraged returns on investments actually increase and better investment opportunities arise. I understand the authorities concerns that if they stand by and do nothing we will have another depression (based on the underlying economics of our Country - that is exactly what would happen if they just the forced deleveraging play out).

The problem is that borrowing $700B to buy the bad assets isn't going to cut it. The best proposals I saw were the ones that argued for nationalization of the banking system so that the government directly inserted $700B of capital into the banks in exchange for ownership so that the banks would again be able to absorb the writedowns they have been having so much trouble with.

The adjustment for our economy is not going to be pretty. Many things discussed in this blog over the past several years have come to pass. Many of the bank stocks and real estate related stocks that were highlighted have gone bankrupt. This process is not over.

We are still in the deflation / panic stage of the unwinding with stock prices likely to fall much further. I expect this bear market to last for a minimum of another 6 months. The opportunity during this time period will be to acquire shares in assets likely to have some fundamental value regardless of what happens to the US economy.

The next chapter of this book is hyperinflation. The most memorable hyperinflation in the history of the world is Weimar Republic Germany. The German Mark lost 99.99% of its value over a three year period, and the German public had to carry around currency in wheelbarrows in order to purchase bread. Prices of items doubled and tripled from one hour to the next.

Why will we have hyperinflation in the USA and what assets will perform well?

1) We are likely to have a hyperinflation because our government is intent on bailing us out of this crisis by spending money that we don't have (aka printing money). They are arguing that we are "borrowing" the money, but on many levels this is false. When someone who is broke owes you $10,000 and they borrow another $1,000 from you so they can pay you interest it becomes clear at some point to anyone with common sense that you need to stop lending. The same thing will happen to the USA. When we reach that point treasury rates will shoot to the sky and the dollar will lose most of its value relative to the rest of the world's currencies.

2) What assets would perform well in a hyperinflation? Real assets - unleveraged real estate, energy trusts paying dividends, gold and silver, agriculture - basically all the assets that are being thrown out the window during this current deleveraging cycle.

I am not sure how much longer the deflation crunch will last - it may go for 2 weeks......... it may go for 20 more months - but at some point the government will print (that is basically all they know how to do) - and at an increasingly fast pace.

I will try to cover where things are headed in more detail in future posts.