Abu Dhabi bails out Dubai

In a sign that the risk trade has been restarted, Abu Dhabi announced that it will provide $10b to Dubai World, the sovereign wealth fund that was over-leveraged on risky assets. With this move, we should see stock markets power past their recent resistance points. In this market full of government cash and support, and little recourse for poor decision making, we should be mindful of investing in good balance sheets, and building our personal balance sheets for the next crisis to come. It will only be a matter of months before we start seeing an inflation crisis that will pull the weakest personal balance sheets to insolvency.

New Zealand steps out from the Recession

New Zealand became the latest country to statistically step out of the shadow of the recession, sparking an increased appetite for the carry trade, and thereby bringing the USD under pressure again overnight. Ironically, the country's growth was partially a result of dairy sales, which have caused such grief in Europe.

What's the Fed to do?

Tomorrow will be a significant day for the markets. It may mark the first day we hear the Fed's plans to exit the quantitative easing program initiated during the midst of the crisis. This could cause significant pain to the market short-term, but may provide a catalyst for the markets to move higher. As the Fed moves out of the mortgage business (effectively ending its purchases of 10 and 30-year treasuries), the market will need to soak up all the Treasury's liquidity without the U.S. government's assistance. I'm not sure where the heavy lifting will come from, and this may prompt higher yields in longer term treasuries. While this will reduce confidence in the U.S. dollar, it will do wonders for the competitiveness for U.S. exports, and bringing some inflation into the market. Depending on the velocity of the Fed's tightening of the money supply (through reduced treasury purchases), we will see this inflation bring higher commodity and equity prices, as future earnings prospects will accelerate.

On another note, it will be some time before we see the Fed increase the fed funds increase, as the Fed will need to first remove the layers of support that have been thrown over the faltering economy, including the quantitative easing, TARP and TALF programs. Thus, I see a steeper yield curve, a lower U.S. currency (vs. commodities at the very least), and better future prospects for the equities market. Only time will tell - the initial reaction is not necessarily the right one in the market.

Permabears turning bullish...Many bulls remain frozen in the headlights...

James Grant, a famous bear who had been harping about the housing and credit bubble for years, has turned remarkably bullish, in spite of his fears about the long-term implications of shoveling money into the economy. Grant evidences that in each major recession in the past, the economy has rebounded very quickly, and the harder we fall, the faster we rise.

With the economic meltdown as severe as it was in 2007-2009, it is clear that the next bull market will be much steeper than many predict, and it's great to have a permabear trade in his claws for some horns and hooves.

While Grant has become bullish, many economists and institutional managers alike remain bearish. This in itself is a bullish sign, and I am in the camp that we have entered a secular bull market, that many will only conclude is such a market when we make new highs on the S&P and Dow, which may still be years away. While we may have corrections (even at the current levels), my personal opinion (to be taken with a grain of salt) is that any correction will be fast and furious, to flush out the weakest of hands and the gambling speculators.

Thesis on the Market Recovery

It's been a few weeks since Warren Buffett's op-ed piece, "The Greenback Effect". Obviously the concerns being portrayed are one of a depreciating US currency. I personally see this as being only half the story.



I personally believe that most of the developed world is building a Ponzi scheme of debt, financing each others' ambitious infrastructure plans that will save capitalism from collapse. I don't doubt that this will have been the best approach given the circumstances in the marketplace at the time (frozen credit markets and a catatonic consumer base).



I theorize that the US currency may not fall versus most currencies worldwide, but most currencies will depreciate against hard assets and useable commodities, like oil, copper, etc. With the flood of cash, and some evidence that the credit markets are thawing (see the 750,000 cash for clunker deals that have taken place - at least some of those had to be financed), I expect that the velocity of cash will accelerate quickly through the economy, increasing demands for credit, in order to "get ahead of the curve". As companies will start showing increasing profits and revenues through this "cheap cash", the cash will continue to produce increasing cash through the marketplace (courtesy of the economic multiplier). This cash won't generate jobs as quickly as people anticipate - the market is not quick to bring jobs back into the forray, but productivity gains will continue to increase. The middle class is squeezed by the fact that jobs don't return as quickly as the economy does, and the price of goods increases by worldwide demands. Therefore, middle class individuals lose on two counts: less job stability and inability to increase compensation at the rate of inflation. Until we reach full employment, middle class employees are squeezed, and their wealth is reduced in real rather than nominal terms.

Buffett's latest take - an Op-Ed in the New York Times

This is an important report about the implications of opening the coffers of debt to save the U.S. economic system from collapse. More to follow.

http://www.nytimes.com/2009/08/19/opinion/19buffett.html

Hurricane Season - the Ace in the Hole for the Market?

While hurricanes pose huge risks for cities and individual safety, they may provide another reason for commodities to rise, and inflation to arrive sooner than most analysts think. The Atlantic basin, while quiet, is warming up, and looks like it will bring its share of storms in the coming months. With the Gulf of Mexico already in the 80s (Fahrenheit), it will become a concern (as it does every late summer) to funnel major hurricanes into the major refineries and the major U.S. oilpatch. This year, this will almost certainly bring with it $80 oil, increasing prices for many commodities, and potentially, another reason for the market to move up.