Tuesday, January 20, 2009

Hyper Inflation From the Bubble President

Obama himself is incredibly insubstantial in terms of knowledge, experience, and competence. He can best be viewed as a potent symbol and flashpoint for multiple dynamic and powerful social, political, ideological, cultural, and economic forces on the national and international levels. As a figurehead and facade, therefore, Obama is quite effective. It is only when wise and competent action is called for, that figureheads begin to show their core inadequacy.

Most members of the general and voting public have a caricatured view of how the world works and what is involved in administering a gigantic national phenomenon like the 21st century US. For many younger and less intelligent voters, a symbolic figurehead may seem the appropriate type of person to serve as head of state. But in the absence of decisive and informed decision-making from the top of the hierarchy, a multitude of competing bureaucratic kingpins will create an unholy cacophony of governmental destruction.

The current credit crunch and deflationary cycle we are experiencing can be written off to a number of factors, many of which were described by Kondratieff and others (via Dennis Mangan). But whether a timely recovery from this long-expected deflation will occur depends largely on economic decisions that will be made by the incoming Obama reich.

Here are a few of the shoes yet to drop:
1) Commercial Real Estate is going to face the same challenges that the residential housing market went through and continues to go through - except it will be worse. This shoe has implications for banks and insurance companies as well as the commercial real estate developers, both public and private.

2) There will be at least one automobile manufacturer (GM) bankruptcy by early spring. If this shoe drops, a second automobile bankruptcy (Chrysler) should follow shortly thereafter. And, a European automobile manufacturer could also go into Administration as well.

3) Corporate pension plans will show a big problem. Specifically, most, if not all, corporate pension funds are significantly underfunded and will require companies to shore up those pensions using up vitally needed cash.

4) Private Equity will suffer severely as funding continues to be very difficult and operations of the businesses will be impacted by the recession and will require capital. In addition, the IPO market will provide no relief for P/E to monetize investments and exit businesses.

5) Hedge Funds will continue to face redemptions and underwhelming performance. This will continue to pressure the markets and reduce liquidity. It will also impact the brokerage industry.

6) Municipalities all across the country will face huge budget deficits and will be forced to cut services and raise taxes. A major municipal default will occur before year end.

7) More small and mid-sized bank failures will occur...these will be the flip flops of the shoe storm.

8) The housing depression will continue as prices continue to fall and demand for homes does not materialize even with all the government programs being put forth. Housing inventory will rise to historic levels. at least one major homebuilder will go bankrupt.

9) There will be at least one, more likely many, major retail bankrupcty and at least one major commercial retail landlord, REIT, will go bankrupt.

10) Warren Buffets Berkshire Hathaway (BRK.A) will face the slings and arrows of the ongoing economic weakness and financial crisis. The stock will be cut down to size - maybe $50,000/share or so. Having just won the CEO of the Year award for 2008, which he probably deserved many years ago, it would only be fit for the company to show its vulnerabilities, which believe it or not it has, and succumb to the forces that have impacted every company in every business that Berkshire Hathaway owns or operates. _SeekingAlpha
I don't know about Buffet's company being re-valued, but I wouldn't be surprised. I don't really care. There are worse problems on the backburner. Bubbles within bubbles, threatening to burst.

The Obama phenomenon is clearly a hyper-inflated bubble, aided by Oprah and the national and international news and entertainment media. But the Obama bubble is riding on a much more ominous bubble, the bubble of the US Treasury. The deflationary risk posed by the impending bursting of the latter bubble puts all of the plans of the Obama / Pelosi monetary hyper-inflationary plans at risk. There is no simple formula for balancing catastrophic deflationary processes with deranged hyper-inflationary budgetary policies.

Obama and Pelosi appear to favour the hyper-inflationary approach of recovering from a recession, credit crunch, and de-leveraging of the financial system. They are in the company of a large number of academic, governmental, media and think tank economists in promoting a huge injection of liquidity into the the monetary system. It is an opportunity to spend into the trillions, that they have been waiting for all their lives. They simply cannot bring themselves to walk away. They believe they have Keynes on their side.

For Al Fin readers who want to have some sort of wealth at the end of this government-amplified and prolonged destructive process, think outside of normal investments. Some businesses will do very well if they are not nationalised or otherwise confiscated, hamstrung by regulations, or taxed to death by increasingly desperate governments at the local, state, and national levels. More on those businesses later.

Think about the various systems of barter and off the books trade that may be available. Think about precious metals in various forms. Think about necessities for you, for your neighbors, for society at large. Consider the cascading dynamics of failure as they will play out in your community. Remember, we are a few generations away from the tough people who survived the 1930's Keynes/Roosevelt-prolonged depression. People are much softer now, less competent in basic skills, and far more dependent on governments for even simple things, and soon to become even more dependent on governments under Obama / Pelosi.
But America in 2008 was not the America of 1930. There was never any danger of mass runs on the banks. The vast majority of Americans are of the opinion, rightly in my view, that the fed would not allow the banking system to collapse, an opinion that Bernanke's monetary policy has strongly reinforced. The danger is that by flooding the system with money, Bernanke will trigger a wave of inflation. Considering his unwavering devotion to the Keynesian faith, I think this is a highly likely outcome. To top it off, the crisis was the outcome of Keynesian policies that have given Obama the excuse to massively increase government spending. I think the results are going to be pretty ugly. _SeekingAlpha
This is not climate catastrophe, although if the world cools as recent data suggests it might, climate will make things worse. This is not peak oil, although under Obama / Pelosi, "political peak oil" is highly likely. This is not some obscure Mayan prophecy or other hocus pocus. It is the combination of incompetent people ( who happen to possess the hubris of deities) in places of power, with influence over a cyclic economic process that requires a deft yet delicate hand at the wheel.

Be prepared.
Previously published on Al Fin

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