5 Things You Can Bet on Following the Treasury's Plan

So finally, the US government has done what it should have done a year ago, but which was politically unfeasible until a few companies blow up. The way brokerages and AIG fell last week resembled a bank run by depositors - only the run was by shareholders, which made capital raising prohibitively expensive.

There are a few things that one can bet on right now:

1) Tax rates are going up in US. Somebody needs to finance the bailouts, and it is the tax-payers. So buy muni-bonds. This ain't a free lunch.

2) Earnings estimates are high now simply because corporate tax rates next year are going to be higher than this year. So forget $90 S&P EPS estimate. Be happy if we see $75.

3) Debt issued by financial sector companies is now a great place to invest, particularly with the US government stepping in as a buyer in the credit market. If this enables the financial companies to clear their balance sheets and raise equity from the marketplace, debt holders can really benefit.

4) The impact on the dollar is unclear. Any other country and I would have said short the currency. But because this is the US, and the dollar has the safe haven status, I dont know what happens here. If there is a run on the dollar, it will become a bad nightmare.

5) Because the direction of dollar is unclear, the direction of commodities is unclear. Buying gold might not be a bad option after all right now. If the world loses faith in the dollar, gold can go up 2x-3x easily. All the Indian grandmothers will have a smirk on their face at that time - for they would think thet figured this out sitting in the homes while the high flying financiers on Wall Street got bankrupt.

Comments

[woofus:]

I stopped reading after #1. Municipalities are behind the financial eight ball even more than the federal government. But they can't print money. All they can do is go bankrupt. This is what the writer urges us to do? What crap!

2008 Sep 22 10:16 AM

[SW Richmond:]

OMFG

2008 Sep 22 09:45 PM

[Smarty_Pants:]

I guess polite disagreement is in order to maintain friendly relations amongst nations (the US will need all the friends we can get soon enough).

I don't follow Indian stocks at all, but the simple laws of supply and demand still hold here in the US. Print more money, each dollar is worth less than it used to be. More supply = lower price.

Counterpoints to statements in the article:

1) Tax receipts are going down, even with higher tax rates, because business activity will plummet along with shrinking disposable income and increasing unemployment. Interest rates will go up so personal borrowing isn't a long term solution either.

2) Obviously. Earnings have been overstated for some time in the financials by dumping losses into level 3 status and burying them in the footnotes of corporate balance sheets. Other businesses will see profits drop with diminished economic activity.

3) Good luck with that one. Sure, the debt instrument won't go under maybe, but it won't be paying out much for some time either. My preference would be to NOT tie up a bunch of my money in an illiquid instrument that might eventually be worth more than I paid for it in nominal dollars (but which really represents less purchasing power than the original price).

4) Wishful thinking on the author's part. The impact on the dollar of a massive dilution like the one that's coming is certain. The dollar will go down. The question will be how far and for how long. Also, since the dollar is only a piece of paper with ink like any other currency, its reserve status is in jeopardy. If China, Japan, and the arab states decide to 'diversify' to other currencies as their major reserve, the dollar is toast regardless of what the US government or economy does.

5) As can be plainly seen from the recent activity in the gold market, the downtrend has been sharply broken and an uptrend is now firmly in place. Gold price has jumped 20% in a week's time, if that's not bullish I don't know what would be. Other commodities will eventually follow as massive amounts of new dollars flood the world marketplace and drive the purchasing power of a dollar into the basement.

The very fact that US indebtedness will have global impacts is what will eventually force foreign debt holders to choose between saving themselves and saving the US. Five will get you Ten that they don't choose the US when it really counts.

This choice will redefine the balance of world power just as it did in the early 1900s when Britain's financial hardships put the US in a dominant position. It's unlikely that the dollar remain a dominant reserve currency beyond that point.

2008 Sep 22 11:48 PM

[NOWHEREMAN:]

OMFG

2008 Sep 23 10:36 AM

[User 30121:]

Your kidding, right?

Nos 1, 2, 3, and 5, have problems.
No 4 is at best LUDICRIOUS! The dollar is DECEASED. Its not BURIED because they can't find a coffin big enough to hold the CORPSE. Once that occurs (in 2009 at the latest) it will be gone to Dollar-hell.

As for gold, BUY and BUY SOME MORE (SILVER,too).

2008 Sep 23 03:00 PM

[GaryD:]

OMFG

2008 Sep 23 04:00 PM

[ZagnZig:]

Thanks to all who have posted interesting points. I live in Switzerland next to the BIS and whose citizens are very proud of their “safe-haven” status currency. But I have serious questions about reserve currency comments, much as “Smarty_Pants” suggests: “China, Japan, and the Arab states decide to 'diversify' to other currencies as their major reserve” –

But that misses the whole point of the function of a reserve currency. In any and all events, the world MUST have a reserve currency. No? Therefore, many people are commenting about possible ‘diversification alternatives’. But there are no alternatives – and none in the offering in the next decade.

Which currency do you think would arise as a “major reserve” ?
THIS WEEK the worlds central banks desperately needed extra reserves.

Whether you agree or not about the propriety of such actions. consider the $ allocation in last 5 days,
ECB $110B
CHF $27B
GB $40B
CAN $10B
JPN $60B
USA $55B and another $30B to AUS and the Scando countries today.

The point is, there is simply no other currency which could possibly match these amounts to bolster the “reserves” of other central banks. The $ is the reserve by the very fact that it is so readily available and accessible.

The ultimate function of any reserve currency is utility and expedience. It is not necessary any preconceived “value” of that currency in relation to another currency or commodity.

Am I crazy? I am American and deeply sadden by our current problems.

2008 Sep 24 07:49 AM