Dollar Bills Falling on my Head!

Puru Saxena
Oct 30, 2008

BIG PICTURE: The cat is out of the bag! Wall Street has now become the official graveyard for some of the world's largest financial institutions.

Unless you have been sleeping under a tree over the past month, I am sure you have heard about the demise of the five largest investment banks:

Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman and Morgan Stanley

The immense scale of the carnage has been impressive so far but what is more astonishing is the mind-numbing intervention by the US establishment. Over the past month alone, thanks to the bail-out of Fannie Mae and Freddie Mac, the US has more than doubled its national debt. Moreover, the 'Troubled Assets Relief Program' (TARP) would have further increased America's debt to US$11.3 trillion. And as if this level of indebtedness was not enough, Mr. Paulson has also agreed to insure money-market funds.

Let there be no mistake; the US has now transformed itself into a great socialist society by using taxpayers' money to buy-out private companies. In my view, this ridiculous measure is a slap in the face of capitalism and will further promote reckless and dubious practices. Essentially, by bailing out the behemoths (Fannie Mae, Freddie Mac and AIG) and allowing the smaller fish (Lehman Brothers) to fail, the US establishment is sending out the following message:

"If you want government protection, please become too big to fail. If your demise threatens our entire financial system, we will help you. Otherwise, we will let you fail"!

There can be no doubt that this policy of 'selective socialism' is totally insane for several reasons. First and foremost, who has given these officials the power to decide which company is worth saving and which one is insignificant enough to fail? Next, what kind of message are they giving to the remaining banks - please merge quickly and grow in size or else you will be allowed to fail? Furthermore, America already has a horrendous debt problem (debt to GDP ratio in excess of 400%) so who has given the US Treasury the authority to take on more debt? Finally, who is going to pay for these trillions of dollars of bail-outs?

Although these bail-outs may offer short-term respite, I am of the opinion that the recent antics of the US establishment will make matters much worse over the medium to long-term. History has shown time and time again that no nation has ever printed its way to prosperity. In fact, all the nations which resorted to money-printing in the past, ultimately saw a total economic collapse. Furthermore, the middle-class and the impoverished people in those countries got totally wiped out due to runaway inflation. And apart from a handful of rich people who were able to ride the inflationary wave, everyone else suffered a great deal. I wish I could come up with more cheerful news but I am afraid the same economic outcome is likely in the US. If the clowns in Washington continue with their senseless inflation agenda by adding more monetary fuel to an already raging fire, I suspect we will see a massive deterioration in the American way of life.

Now, I am aware that the majority of commentators and pundits are applauding the recent bail-outs. According to these folks, the bail-outs were necessary to prevent an outright collapse of the financial system and the government intervention also helped to restore calm in the financial markets.

For sure, the recent nationalisation of assets may have helped the markets in the near-term, however I fail to see how it can be good for the global economy over the long-term. Remember, it was the same reckless money-printing in the aftermath of the NASDAQ bust which caused this massive financial crisis and now the US establishment is throwing more money into the system! In the short-term, this injection of liquidity may act like a shot of heroin for the desperate drug addict but in the longer-term, this dosage of monetary poison will end up killing this terminally-ill patient! After all, how can these bail-outs be good when they will further destroy the purchasing power of the US Dollar? How can these measures be hailed by the investment community when they will cause food and energy prices to sky-rocket in the years ahead? How can more monetary inflation be good if it punishes savers at the expense of debtors?

Make no mistake, this reckless monetary inflation will eventually cause the US Dollar to become worthless and America may have no option but to issue a new dollar bill (Figure 1). And if other nations also embark on this inflationary road to nowhere, we will see a terrible hyper-inflationary depression with currencies plummeting against tangible assets.

Figure 1: US Treasury's new dollar bill?

Despite the horrendous economic environment we find ourselves in, it is fascinating to observe the sheer denial amongst the investment community. Most fund managers, economists and analysts still want the public to believe that the US is not in a recession and that its housing situation is about to improve! Nothing could be further from the truth! How can the US not be in a recession when entire industries have been wiped out? Next time when somebody tells you that the US economy is stronger than you might think, please ask them which industry or group of industries are growing? As far as I am aware, investment banks, automobiles, homebuilders, consumer discretionary and mortgage related businesses are all facing a severe slump. Yet, Mr. Bush and his comrades have no problem in citing the strength of the American economy.

In summary, I maintain my view that the current crisis is far from over and I suggest that you stay well clear of the financial sector. Although, the financial companies may seem cheap due to the recent declines, I can assure you that they could get a whole lot cheaper. The truth is that nobody knows what is on and off the balance sheets of these institutions and at the very best, we may see a lengthy period of consolidation before we get a sustainable recovery in financial stocks.

As far as the broad market is concerned, I suspect the stock market is extremely oversold at the current levels and we may get a technical rally over the coming weeks. Unfortunately, our fundamentally superior resources stocks got sold off in the recent stock-market rout and this may be the best opportunity you will ever get to buy solid, viable companies at such fire-sale prices. So, if you have not done so already, I suggest that you invest your capital in energy, food and metals as these assets are likely to move higher when the newly created 'money' seeps through the system

Puru Saxena
Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.

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