http://www.sandersresearch.com/index.php?option=com_content&task=view&id=1336 Stock market follies By Chris Sanders Jan/23/2008 Comical may seem a strange word to apply to world stock markets given the ferocious sell off that began a week ago, but it is the right one. Consider, the proximate cause of all this pandemonium is the damage done to the US financial sector that is meant to cause a recession in the US leading to an unwinding of the excesses of the last twenty years. At least, that appears to be the bear case. It may turn out that way for all we know, but we are focused not so much on what has happened over the last twenty years as we are on what is happening right now as the shareholders of Citibank, Merrill Lynch, Morgan Stanley and other august financial institutions get their pockets picked. Don't get me wrong, they deserve it. Anybody stupid enough to buy their paper given the obvious debacle unfolding in the US housing market over the last three years needn't ask for special consideration. But the rest of us may legitimately ask what is going on when those same institutions offer such generous terms to their best international clients in order to sell them major chunks of their equity. Taking the two Citibank deals as an industry bellwether, the first offers the Abu Dhabi Investment Company 11% per annum for five years during which time it will be forced to convert in stages to Citi common. The second offers the buyers (Korea Investment Co., Saudi Arabia's Olayan Group and Waleed bin Talal, Singapore's GIC, the Kuwait Investment Authority, etcŠ) a perpetual convertible preference share paying 7%. The initial reaction of many observers to all this is that the banks have had to go cap in hand to those with the money and that this explains the generous terms. Maybe, but then again, maybe not. Our take is that the sub-prime debacle and its knock-on problems in bond insurance and so on are real enough, but manageable given time, and that eventual realised losses will be much smaller than the huge numbers feared by the markets. The American S&L industry's collapse in the late 80s was, in our estimation, bigger than the sub prime problem. The Resolution Trust Corporation assumed some $394 billion of S&L assets, and recovered 90% of them by 1996. Before the RTC was created in 1989, FSLIC had already wound up about $125 billion in S&L assets. To put the numbers in perspective this equates to more than $2 trillion in today's dollars. This approaches the top end of loss estimates for the sub prime mess. It's true enough that the situation is complex, that there is massive fraud but viewed in its historical context, it does not portend the end of life as we know it or even the end of the western financial system. To the cynic it simply represents the way that system really works. Does anyone really think that Charles Prince, John Mack or anyone else in charge did not know about the risks associated with lending money to borrowers who did not have the means to service their debt? Does anyone really believe that this is a surprise? The US housing bubble and the embedded sub-prime debacle has to have been the most widely anticipated financial problems in history. The bubble itself peaked toward the end of 2005. By spring the following year Goldman Sachs's Henry Paulson had been put in charge of Treasury, where his principle job (in our opinion at least) has been to make sure that a sufficiently large pool of foreign investment capital would be made available to plug the gaps in the US banking balance sheet brought about by the disconnect between bonuses and salaries on the one hand and the mortgage losses to come on the other. It takes time to negotiate deals this large; the idea that this all happened after August last year seems unlikely. That all this portends global recession is an analytic arrow wide of the mark. GE's earnings announced last week say it all. Earnings are up on global infrastructure spending and the outlook is for much more where that came from. Money supply growth world wide is surging, led by the US, where broad money growth is well over 12% per annum. The idea that the real estate problem in the US has "wiped out" capital is simply absurd. Carpet bombing industrial assets wipes out capital. Mortgage defaults and market volatility entail a transfer of money from one pocket to another, not its disappearance. Investors need to ask themselves, with inflation surging along with money supply, what does one do with one's money? Do you park it in government bonds yielding less than nothing in real terms, do you leave in cash yielding even less or do you buy real assets and real companies doing real things? When the dust settles, the smart money will be doing the latter, and in the meantime, it is buying some very attractive bank stocks. It will no doubt focus closely on the large amounts of urban real estate coming on the market in the wake of the wave of sub-rime defaults. Real estate that is ripe for gentrification when those with money decide to trade their expensive commutes for an urban lifestyle as petrol prices go up. All that has really happened is that the capital "R" has been put back into risk. Until the next time, that is. -- -------------------------------------------------------- newslog archives: http://cyberjournal.org/show_archives/?lists=newslog Escaping the Matrix: http://escapingthematrix.org/ cyberjournal: http://cyberjournal.org The Phoenix Project: http://phoenixgathering.blogspot.com/2008/01/phoenix-gathering-seeking-intelligent.html rkm blog: "How We the People can change the world": http://governourselves.blogspot.com/ The Post-Bush Regime: A Prognosis http://globalresearch.ca/index.php?context=va&aid=7693 Community Democracy Framework: http://cyberjournal.org/DemocracyFramework.html Moderator: •••@••.••• (comments welcome)
