Thursday, March 12, 2009

Hey, Big Borrower

Warren Buffett, in's "Buffett Resumes U.S. Takeover Hunt as Prices, Competition Ease", reports a Depression mentality among Americans:

“The change in the American consumer’s behavior in the last six months is like nothing that’s ever happened,” Buffett said. “They won’t go in our jewelry stores. They’ve got the money, but when Valentine’s comes along, they think: ‘I still love my wife, you know, but I’ll just tell her this year.’”

In fact, the article reports that he's got the frugality bug himself:

“Frankly, when we had $45 billion, the threshold wasn’t as high for the first deal as it would be subsequently,” Buffett said (ed: Berkshire has $25.5 B now) . “I’m open for business, but it’s got to be the best business in town.”

Bottom line: he's been burned by purchases at bull-market prices. Like Citigroup's former CEO Charles Prince, he too felt he had to dance as the music played.

Meanwhile, Freddie Mac reported that in Q4 2008, it lost thirteen billion dollars on derivative hedges. Taxpayers will make up that loss. However, some other entities made the equivalent profit on the same derivatives. Many of those entities were foreign. In any case, it's just one more example of the taxpayer taking the loss and private entities getting the gain.

The Merchants of Debt are like the Terminator. They will not quit. Their mission is to keep the volume of debt growing, no matter whether there is any logic to it. The President himself has said that the economy depends on credit (which is the flip side of debt). Here are some examples, from today's Investor's Business Daily:

The head of the IMF said "there is still room to have more stimulus" (meaning more deficit spending in almost every country);

Treasury Sec'y Tim Geithner called for an increase in the IMF's emergency fund to help troubled countries. How much of an increase did he call for? 50%, perhaps? Double? No, he called for a ten times increase, to $500 B. (This extra $450 B will of course come out of thin air.)

The Bank of England has begun its announced program to print money and use that "money" to purchase Briatin's equivalent of Treasuries, which the Mother Country calls "gilts". (Gilts, as in gold-edged; this is now derisory, given that the Brits went off the gold standard long before the U.S.)

And Bloomberg reports that the European Central Bank has increased its bailout for the banks, by moving to a lower, 0.5% borrowing rate for banks. The result: higher profit margins to the banks and less money for the rest of us, both depositors and borrowers.

One can go on, but what's the point? The powers that appear to be solidly in control have determined that more debt is the solution for the debt crisis. As for the role of derivatives such as credit default swaps in this crisis, governments will apparently ratify their use and regulate these toxic monstrosities.

What are individuals with capital to do?

Re stocks, a classical rally off a bottom shoots up with good leadership on day 1, steadies or corrects on day 2, then takes no prisoners and shoots up on day 3, squeezing the shorts and drawing new money in as glamourous leading stocks break out to new highs. Japan collapsed down over 2% today; Europe's bourses are down 1-1 1/2% today. Today could be important here in the former citadel of capitalism.

Nouriel Roubini the analyst (rather than the policy wonk) has come back into EBR's good graces with the following post from last night:

"Bernie Madoff is the Mirror of a Made-Off Ponzi Economy". (No link as subscription required)

Roubini sums things up with:

Madoff may now spend the rest of his life in prison. The US household and financial and non financial firms and government may spend the next generation in debtor's prison having to tighten their belts to pay for the losses inflicted by a decade or more of reckless leverage, over consumption and risk taking.

DoctoRx here again. As the reckless borrowing shifts to the nation-state and its handmaidens, the allegedly once-independent central banks, the stock market fades into irrelevancy. The greater issue for investors is how the governments will deal with their own debt burden. Will they inflate it away, and if so when and how? If so, with what asset class will the insiders protect their gains? What asset class will see confiscation?

An outsider can stay informed; think independently, which may be helped by avoiding mainstream media with its proven ability to affect one's thinking and emotions; have no religious-type belief in any particular financial asset class; and adjust to the major trends and facts "on the ground".

The current trend is for increasing state control of the means of production through the credit-creation and debt-destruction mechanism, with "equity" such as that of GM, Fannie and Freddie, Citi, etc. potentially disappearing almost overnight with the state determining what use it wants to make of the carcass of the company.

The current fact is that Federal Reserve notes, commonly called "dollars", remain generally accepted as "money" as of today.

Copyright (C) Long Lake LLC 2009

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