Much has been made about the paralysis of lending by banks in both Great Britain and the United States. Balance sheet repair is certainly a significant part of the credit smackdown that is dominating financial news and creating in some a sense of desperation. The other half of this bitter pill is that..well..no one trusts anyone else. I have the feeling that long after people have forgotten what TARP represented the name Bernie Madoff will stand as a testament to investment fear, gullibility and anger. There are two schools of thought (at least) on the lending issue.
The first counsels caution on the part of Governments and goes like this: Banks know lending (please try and keep a straight face) and will begin making committments when its prudent and they feel secure in their financial status. Let's not get burned again. Liquidity will move through the general system (financial to business to individuals/families and back to business and the payback to financials) the way it always has. This is the Historical Guide Model. Slow and steady.
The second is the Political Reality Model and its priorities are much different than the first. They must keep the 'The Most Self Indulgent Generation' (baby boomers) and their sequences of MTV offspring from bombarding them with a combination of endless whining and then significant social unrest. In order to placate these groups the Government will do whatever it monetarily and fiscally takes, in large part because they never see themselves as having to pay it back. It's like a loan taken out on one's behalf by a very wealthy, far distant Uncle who just can't say no..almost too good to be true.
The short of it is the Historical Guide has no chance... zero. The Political Model will rule the next year (or two)... this group has an endless bag of tricks and the naysayers will be painted as distant academics and bureaucrats who are heartless and don't know the everyday pain of people. A Bush Administration would have strong headwinds in pullng this off..for an Obama Administration it is manna from political heaven. Here's what will likely happen and how to profit...
1. The Government can put tremendous back channel pressure on Banks to lend. To give the lending credibility and market cover they'll need to come up with real programs..look for infrastructure of every imaginable type to start ruling the discussion (it's already beginning)...
Transportation (roads, rail, bridges, river dredging, port renovation, etc.), Grid (electrical transmission, electrical monitoring, establishing the Renewable Energy Highway), Research (everything from new and better materials to vehicles and machines to make the new America work better)...
The investments: SGR, CAT, ABB (worldwide), FWLT, FLR, JEC, HXL (carbon fiber) - these are but a few but the list includes engineering heavyweights and engineers will rule the day. Closed End Funds CGW (water) and NLR (nuclear energy) provide relatively well balanced portfolios and save a lot of investor time.
2. Americans are capable of creating small businesses at incredible rates. These small businesses will serve, in many cases, as site support and subcontractors on larger projects. Banks refuse to lend? Congress will pass legislation establishing Small Business Bonds and they'll fund them through Fed purchase if necessary. Banks will loan. Loans mean profits in the coming environment.
3. All of the above will be overlaid with a dramatic turnaround in oil prices and a steady depreciation in currencies across the board. Currencies will only look good compared to each other - all will depreciate. This means gold and silver will become staples of many Central Bank and Government storehouses (especially in the Middle East).
The investments: ETFs like GDX (miners) and GLD and SLV will serve for many investors. Some physical gold is a necessity. Closed End Funds like BGR and GCS (highly recommended) will do extremely well through early 2010. USO, DBE and UNG are musts for oil and gas. LINE for income, safe haven oil and gas and a long reserve life - it isperhaps the best income/resource investment on the table.
Areas to be very cautious of: Coal - Obama's people hate the stuff. Every Administration needs a whipping boy and coal will be it.
Housing and the REIT market are for another time!
The bottom line: Inflation is coming. It will fly under the radar for awhile because no one will want to think about it. Inflation has a very nasty way of growing as money moves more quickly and it hardly ever goes away nicely.
Disclosure: Long USO (400), LINE (1500) andphysical gold (120 oz.).