My Finance Times

WSJ asks and answers some important questions :

Will fewer companies look to insource into America if the federal government is willing to bail out their domestic competitors?

The answer :

The answer is an obvious yes. Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here….

Will a U.S.-government bailout go ignored by policy makers abroad?

The answer :

No. A bailout will likely entrench and expand protectionist practices across the globe, and thus erode the foreign sales and competitiveness of U.S. multinationals. And that would reduce these companies’ U.S. employment, R&D and related activities. That would be bad for America…..

Will a federal bailout that politicizes American markets bolster foreign-investor demand for U.S. assets?

The answer :

Not likely. Instead, America runs the risk of creating the kind of “political-risk premium” that investors have long placed on other countries — and that would reduce demand for U.S. assets and thereby the value of the U.S. dollar.

Reduced foreign demand for U.S. assets would be troubling at any time. Its prospect is especially troubling now, when the federal government’s fiscal 2009 deficit is widely forecast to reach something near or exceeding $1 trillion — up from $456 billion last year. With net saving still near zero for U.S. households and falling profits for U.S. companies, financing that deficit will require attracting foreign capital.

The WSJ reviews another bubble bursting, just after the subprime one last year :

Credit markets have started to thaw, yet stocks and the larger economy keep sliding. What’s going on? Among the problems are the reality of recession and the uncertainty over Barack Obama’s policies. But the larger story is that the global economy is fast popping its latest monetary bubble, the one over the last 14 months in commodity prices and non-dollar currencies.

Its origin. Not decades ago, but this started in 2007, with Ben Bernanke in the top job as Chairman of Federal Reserve :

This is Ben Bernanke’s creation. The Fed chose to confront the credit crunch as if it were mainly a problem of too little liquidity, not fear of insolvency. To that end it flooded the economy with money, while taking short-term interest rates down to 2% from 5.25% in seven months. The panic only got worse, and this September’s stampede finally led the Treasury and Fed to address the solvency problem by supplying public capital and numerous guarantees to the financial system.

Understanding the chart on the right :

The Fed created a commodity bubble of record proportions, with oil doing a round trip in a single year from $70 up to $147 and back down to $69 yesterday. The dollar also plunged along the way against most global currencies, notably the euro, as the bottom chart illustrates.

The worst part definitely is that oil remained high throughout the year, compelling auto-makers to make huge investments in clean/alternative technology, only to realize oil slump back to $69, and SUVs again in demand.

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When all stockowners, mutual fund managers, and hedge funds are turning to cash instead of equities, Warren Buffett takes the contrarian view and says that such a time is fit for buying oversold stocks .  His view :

Be fearful when others are greedy, and be greedy when others are fearful.

The unemployment rate may be rising, and banks faltering by the dozen, recession hitting us from all angles, but Warren Buffett seems to put it straight:

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

The Oracle of Omaha also makes a few points clear :

I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over…

Towards the end, Warren Buffett paints a good picture for the future:

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Comments, Votes??

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