Sunday, March 16, 2008

Our Favorite Not-A-Marxist's Tocsin For The Week

My neighbor:
The unseemly glee with which the Street folk responded to the revelation of the bare facts of Mr. Spitzer's indiscretion and the dire consequences for him that followed can be at least partly excused on the grounds that it has been a long while since investors, traders and even investment bankers have had anything to cheer about. Before Tuesday's surge, the Dow was down some 17%, the S&P 18% and Nasdaq roughly 24% from their October 2007 highs.

Helping spur the spectacular gusher in stock prices, moreover, was profound investor despair, usually a prerequisite for a bounce. Bears among the advisers canvassed by Investors Intelligence handily outnumbered bulls (43% to 31%), the Consensus Index of traders and their ilk had shrunk to a shockingly low 25% and the American Association of Individual Investors poll showed a lopsided 59.2% to 20.4% bearish tilt. Short interest, meanwhile, spiked, setting the stage for a rush to cover when the market took off.

The conspicuous trigger for the leap upward was the latest Fed effort to stem the remorselessly crushing credit crunch. The Term Securities Lending Facility, as it's called, is not be confused with that august agency's previous kindred undertaking, the Term Auction Facility, which also was the spark for a sharp but regrettably brief bolt upward by equities. In deliberately resorting to such bland nomenclature for its supposedly innovative conceptions, Bernanke & Co. obviously hope to avoid stirring up the masses by using a more descriptive name, like The Bankers and Brokers Relief Program.

This latest financial contraption calls for the Fed to provide a fresh pour of liquidity to the big lenders, conspicuously including those that are not officially banks, by funneling $200 billion in the form of 28-day loans of Treasuries, against which the borrowers can pledge a variety of securities as collateral, including for the first time (don't laugh, please) highly-rated mortgage-backed and residential mortgage-backed securities.

If only because some of our best friends are brokers and bankers, we can't object too shrilly to preemptive bailouts of their institutions by whatever appellative guise the actual mechanism goes by. For in any case, as its action in orchestrating Friday's rescue of Bear Stearns from a fate worse than debt graphically illustrates, the Fed is in the bailout business all the way.

But make no mistake: What Mr. Bernanke's "facilities" won't do is dispel the toxic cloud that's enveloping the subprime mortgage market and spreading inexorably across the troubled credit landscape, prevent housing from plunging deeper into a black hole, abort the incipient and potentially devastating recession, stem the mounting loss of jobs, ease the tightening vise of runaway rising prices and stagnant income that's sending the consumer into hibernation, or keep the dollar from its awesome and unrelenting descent.

What the Fed's frantic exertions do tell us is that the good governors and their equally confused colleagues are frightened out of their skins and at wits' end. And another of those heavyweight whacks out of interest rates this week should be seen as only confirming that impression. Under the circumstances, and as Friday's cascade of selling made painfully clear, the only sensible advice to equity investors is, as St. Augustine might put it, caveat emptor!

PAUL BRODSKY IS SOMETHING of a scholar manqué. Despite that formidable handicap, he and his partner, Lee Quaintance, who run a hedge fund called QB Partners are astute investors, and what makes them especially rare specimens of the breed is that they're fully conscious of risk without being paralyzed by it.

From time to time, we've graced these irreverent scribblings with their engagingly splenetic comments on Wall Street and its quixotic penchants and their interesting take on the economy, the markets and the other things that make the financial world go 'round. We don't always buy their view (which should give them more than a dollop of comfort), but their stuff is invariably thoughtful and frequently provocative.

The excuse for this little prologue is a recent dispatch from them entitled "It's a dollar bubble -- not a commodity bubble." Since both the dollar and commodities have been making news lately, if not exactly of the same kind, the theme attracted us as timely and the distinction -- between which is and which is not a bubble -- intriguing.

Paul and Lee's firm belief is that commodity prices, despite their recent sprints, still have a long way to run. And the nub of their argument, they coyly contend, is "simple."

To wit: Thanks to the determined debasement of our currency "it will take many more dollars and credit than it does today to purchase a real asset because the global purchasing power of each U.S. dollar is declining at a rapid rate and will continue to do so."

They do not, lest you're ready to leap to the logical conclusion, assume a sharp and quick increase in demand. Rather, they anticipate that "global demand for wheat, energy and base metals will remain relatively constant, even if prolonged recession hits the developed economies." And, they confidently predict that "We're going to see numbers (commodity prices in U.S. dollars) that the world hasn't seen before." Why doesn't that strike is as an unabashed blessing?

As a nation, Lee and Paul reflect, the U.S. is burdened by a monstrous mountain of "paper claims priced from extraordinary high rates of past consumption." To pay off those claims, we're counting on future wage and asset gains and the Fed, almost reflexively, is doing its part by steadily providing us with fresh infusions of money and credit.

As it happens, the money and credit the Fed is destined to continue to create is "the currency with which commodities are traded globally." So, the QB duo contends, "the nominal prices of those commodities must continue rising" because the currency will continue to be diluted.

The bet on crude at $105 (or $85 or $125) or gold at $1,000 (or $850 or $1,500), they aver, is "a bet on a relatively stable supply/demand equilibrium and an inflated (and inflating) money supply. No more, no less."

The risk to their analysis, as they see it, is twofold: a severe drop in global demand big enough to overwhelm "a 15%-plus rise in annual global fiat currency creation" or destruction of global money and credit at a faster rate than central banks can create it.

They plainly like the odds against either eventuality. And not the least of the reasons they do is the incredible vigor with which "Ben Bernanke and his foreign central bank colleagues are dropping currencies from a fleet of helicopters 24/7."

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