As I listen to the Wall Street pundits today, their latest line is about “the inevitable rally” that they claim is coming. One guy went so far as to pronounce on TV that “the market is severely oversold”. Anything is possible in the stock market, because it’s driven as much by emotion as fundamentals, but I wouldn’t count on seeing a substantial uptick anytime soon. Mostly I expect that recovery will be snail-slow, after further decline, and we’ll see DOW 4000 or 5000 much sooner than 8000. I also expect that there will be many more “surprises”. Sure hope I’m wrong – but don’t think so.
With all the talk about the RESULTS of the economic downturn – manufacturing drops, real estate contraction, lost jobs, etc. – it’s hard to keep track of the CAUSE. It’s all about the money!
The mess the financial institutions created has frozen liquidity. Economies run on money. Without credit, the whole thing comes to a screeching halt. That’s where we are now.
I talked in an earlier article about one analysis which has 700 US banks in trouble, with 150 in danger of failing this year. It’s common knowledge that Citi is in deep trouble, and apparently sliding by the day. GE’s a mess. The rumor mill has JP Morgan in deep, deep trouble. Who knows which finance house is next? We can’t measure the full extent of the problem because it’s a state secret – the banks, the Fed & the government aren’t talking. We can’t even find out who already got bailouts, or how much; because the government in its infinite wisdom has decided that the info. should be confidential. We also know that overseas banks are in trouble, and the forex/derivatives/debt mess in Eastern Europe is threatening to spill over, bringing a whole new set of problems measurable in $ Trillions. All these banks are intertwined. If a big foreign bank goes, what will be the effect here in the US?
Here’s the problem. Without credit we can’t do business and we’ll just continue to slide. In order to get credit moving again, the government has to spend more money bailing-out the finance houses (the bailouts so far have had little positive effect). I strongly suspect the problem is much bigger than the public is allowed to know, and it will really come down to a question of whether the government can “print” enough dollars to break the logjam without destroying the dollar in the process. Then there’s the little problem of getting someone to buy all the government debt created in the process. The foreign governments that have been financing us for years are in trouble too. Even though our economies are all intertwined, someone might decide to follow a different path of self-interest. If that happens, we’re in big trouble. I can’t remember a time when our country was more vulnerable to foreign “blackmail” than now.
Until the credit logjam is resolved, all other questions of economic health are on hold. We, and the world at large, will continue to decline. Obama’s plans won’t do squat without a credit thaw. The portion of his package dedicated to the finance mess is just a drop in the bucket – barely an opening gambit.
There are always business opportunities; in any economy. I mentioned one I like in my last article. But now is not a good time to buy into the “Wall Street propaganda”. It’s dangerous out there, and declining daily. Be very, very careful.
We just need to hope that our secretive government & Fed can get a handle on the liquidity freeze. Once they do, we need to hope that inflation & taxes don’t eat up our remaining wealth.
Filed under: Business Blogs | Tagged: Banks, Business, Citi, Credit, debt, Derivatives, dollar, DOW, Eastern Europe, Economy, Fed, Finance, Forex, GE, Gold, Inflation, Jobs, JP Morgan, Liquidity, manufacturing, Money, Obama, Rally, real estate, Recession, Taxes, Wall Street, Wealth | Comments Off