Heavy Weather
May 18th, 2009
The bulls were running hard since the lows we’ve seen in March. Frankly, I was surprised by the excessive strength we saw in some sectors, most notably in financials. In a way, I underestimated the determination of governments to throw unlimited amounts of money at the problem, and the complicity of central banks which have been busy in the printing department. Banks, insurers, car manufacturers, airlines, home owners: everybody is calling for and counting on a government rescue.
And it seems Mr. OB in the White House has nothing much against Big Government. Besides propping up every failing business of any size, OB also wants to introduce a costly health care plan, extend the war in Afghanistan, subsidize green energy and offer free apple pie to everybody.
Who will pay for all this? Why, big business and rich folks of course.
The present strategy could work if an economic recovery becomes self-sustaining quickly, and growth returns. But there are many more shoes to drop, in credit card and commercial loans for instance, and the hundreds of trillions of derivatives still floating around cast some shadow on the rosy picture. Money was being made available too cheap for too long, and a lot of questionable “investments” ensued.
This problem should actually not be tackled by throwing more free money around. But it looks as if most governments can’t say no to anybody asking for help. In fact one group has been shafted badly: the secured creditors of Chrysler (and other big, soon to-fail companies). Bankruptcy laws have been cast aside in favor of government and union interests. This will have bad consequences for future corporate bond issues.
In order to avoid short-term pain we have mortgaged the (perhaps not so) distant future. My gut feeling is that it will all end badly. The house is being undermined, and, although it still looks ok when watched from a distance, it might collapse just suddenly. The real businesses of this world are still hurting badly. Just look at major Japanese companies: they are announcing billions in losses, from Toyota to Toshiba, from Sony to Hitachi. And elsewhere it’s not much better.
Bottom line: the recent rally was fantastic, but it probably was just one of a few bear market rallies which appear during every protracted slump. Our best hope can only be to catch some parts of future rallies, bargain hunting and liquidating at opportune moments. Easier said than done, of course. But that’s the way it is. In life, winning is not mandatory.