Jaws

Looking into the future of the United States, I agree with the prediction that the credit crisis will end, the housing crisis will end, the U.S. consumer will resume spending, the U.S. economy will adapt and grow, and stock prices will be much higher in the future than they are now.

In the meantime, however, the U.S. government has liquidated $504 billion in bad paper with about $1 trillion to go. Global equity markets have declined $14 trillion since October 2007.

Remember the popular book “Jaws” written by Peter Benchley? Millions saw the movie. The book was scarier than the movie. Just read the first “bite incident” from the book to see what I mean. A woman goes swimming in the dark as her drunken husband falls asleep on shore.

“At first the woman thought she had snagged her leg on a rock or a piece of floating wood. There was no initial pain, only one violent tug on her right leg. She reached down to touch her foot, treading water with her left leg to keep her head up, feeling in the blackness with her left hand. She could not find her foot. She reached higher on her leg, and then she was overcome by a rush of nausea and dizziness. Her groping fingers had found a nub of bone and tattered flesh. She knew that the warm, pulsing flow over her fingers in the chill water was her own blood.

“Pain and panic struck together. The woman threw her head back and screamed a gutteral cry of terror.”

As far as I can tell, we are just to the stage where the markets got part of the leg bitten off, the rest of this market will be consumed next. The workings of this economy look like a jaw with opposing parts chomping together.

The top jaw of the economy is like the deflation that comes down with a crash in asset prices of paper like mortgages, mortgage derivatives, dollars, equity shares of banks and investment companies, bonds, etc. The lower jaw is coming up with inflationary prices of food, energy and materials.

Those who are unaware or simply don’t have the money will be financial victims just as depicted in the 1974 hit “Jaws”. Investors who have estates to protect will be whipsawed as the deflation/inflation fever rises, then chills, with trillions in hot money moving in waves from this to that. During the collapse of the financial sector mega trillions moved from financial stocks to energy, for example. We don’t know yet how many trillions of dollars will be needed to liquidate toxic paper like CDOs, credit cards, school loans, etc. for the next few years.

It is inflationary action that shrinks the middle class while those who have excess invest in inflation hedges thereby making their nominal worth explode. This is how the government guts the middle class while making the rich even richer. Over and over again, governments have paid for wars by inflating their currencies which leads to “banana republic” economies of huge numbers of poor, virtually no middle class, and a powerfully rich elite class who elect governments with their growing wealth.

To those who have borrowed against their homes to maintain a standard of living in the face of the rising costs of gasoline, heating oil, bread, milk and machine tools; there is no doubt they are vomiting and terrified as they are forced to move their families from their homes because they couldn’t continue to make the higher payments.

Six and a half million homes are projected to foreclose in the near future. That means millions of Americans will face the terror of their own financial nightmare. Untold thousands stopped making payments on their homes months ago with thousands more choosing to live in their cars so they could get to work while making that smaller car payment each month.

Maybe the bailout will cure some of the foreclosures, but just see how the D.C. crowd has manipulated our two big lending agencies with this research from Agora Financial: “And Fannie and Freddie CEOs get permanent vacations and fat bonuses. Dan Mudd and Richard Syron, Fannie’s and Freddie’s CEOs, were fired today. Both have “earned” about $26 million in cash and stock compensation since 2003-2004. And according to the New York Times today, both stand to collect a total of $23 million in severance.

Mudd will be replaced by Herbert Allison, former COO of Merrill Lynch, former John McCain finance committee head and, most recently, chairman of the mega-money management firm TIAA-CREF.

Freddie Mac will now be run by David Moffett. He’s the former CFO of the subprime-slammed U.S. Bancorp and sits on the board of MBIA, among others. His latest role was as senior adviser to the Carlyle Group, a controversial hedge fund with close ties to the Bush family, the U.S. defense industry and Middle East oil.”

Where to Go, What to Do Next?

First, stay away from companies that will be forced to liquidate their assets in order to meet debt payments. This deleveraging will cause many of them to fail because asset prices are falling with fewer buyers.

Second, stay away from companies sensitive to rising costs of raw materials. Oil refiners took it on the chin while oil was hitting new highs.

Third, rises in all equity markets have been temporary and the downward bias plunges so the best way to play this market is to go neutral with cash and bullion gold, buy contrary ETFs and take profits after a 1-3 day surge upward.

Short ETFs with a quick profit is not my investment style, therefore I’ll not be participating. While this market savages balance sheets and bank accounts, I am going to take a break from writing about the markets.

Maybe I’ll come back with some outrage. WWII vet and financial writer Richard Russell of Dow Theory Letters ended his piece today with this:

“Where’s the damn outrage? The two CEOs who were relieved of their duties at Fannie and Freddie, as I understand it, received parting gifts of $9 million and $14 million. Disgusting! And what about the CEO’s of all the big banks and the 219 local banks on the “watch list.” They allowed their banks to buy so many toxic bonds that when the bonds were priced to market, the banks were seen to be under water. What happens to all these moron CEOs? Do they get kicked out with gifts of millions too? Where’s the responsibility? Where’s the justice? Where’s the outrage? Why aren’t charges brought against these fakers who got away with super-stupidity and derelictions of duty? Why are they receiving millions as they are kicked out of office? Disgusting, shameful, ugly! And there’s no outrage.”
In the meantime, here are a few graphs that hint at future profits. Lockheed Martin continues to do well as both leading presidential candidates have described an attack-mode foreign policy. SDS shorts the S&P 500. QID shorts the NASDAQ. You may be able to chip off a few percent premium if you monitor the charts.