Agora Financial’s Rude Awakening

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Dubai, UAE

· Asia takes a dive to lead off the week,
· What to do when Mr. Market abandons reason,
· A bear market strategy that might fit your style and more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

“Obviously there are many moving parts to the equation,” a fellow financial punter commented to us over the weekend. “But if Asia sells off before markets open in the States on Monday, well…let’s just say it won’t be a good sign.”

As we write this morning, China’s Hang Seng finished down almost 5%. Japan’s Nikkei 225 closed 4.25% down.

What does it mean? Maybe nothing; maybe NOT nothing. Could the market suddenly find its feet and bolt up 500 points? Sure. But it could also collapse again too. Over the past few weeks, the latter has obviously been the better bet.

In times of mass liquidation, as we are seeing now, it’s very hard to tell which way things will swing. As we wrote yesterday, this is a market in which hedges ain’t hedging, correlations ain’t correlating and all reason seems to have escaped Mr. Markets modus operandi. We suspect things will return to “normal” eventually. The only problem, as Keynes astutely pointed out, is that “The market can stay irrational longer than you can stay solvent.”

In fact, many of the guys who “got it right” on the fall of the financials are struggling to keep their heads above water. Rain, as they say, is falling on the guilty and the innocent alike. A quick look at most long-only portfolio reveals some pretty gruesome losses. Without an adequate short strategy, many portfolios look like a crash scene.

With that in mind, we’ve managed to secure a report from our resident short seller, Dan Amoss, which might be of interest to you. Now, we realize that Dan’s approach might not be precisely what you’re after and, as always, we encourage you to look around until you find something you are comfortable with. That said, Dan’s closed trades so far in his Strategic Short Report have landed his readers an average gain of 119%.

That’s enough to put some jive back into even the most beaten-down portfolio. So, before we get into today’s column, below, we encourage you to check out his Ultimate Bear Markets Strategy Report right here

And now, over to Bill Bonner for a few words on why a gruesome history is looking mighty familiar…

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Ghosts of the Great Depression
by Bill Bonner

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It will purge the rottenness out of the system…values will be adjusted, and enterprising people will pick up the wrecks from less competent people…”

That is the advice from a ghost – U.S. Treasury Secretary Andrew Mellon. But this is 2008, not 1928…the climate has changed. This week began with heavy weather – and then got worse. Over on the continent, Fortis was going under. And in British waters, the government had a rescue helicopter hovering over Bradford and Bingley. The Baltic Freight Index ran aground on the coast of Brazil, after the Chinese refused to kowtow to Vale’s new price demands for its iron ore. Shipping costs went down by 25% last week – 10% on Friday alone. Apparently, the Chinese turned off their heavy factories before the Olympics; now, they can’t seem to find the switch to get them going again. Then, by Friday, the railroads were in crash mode too. Housing prices are falling faster than ever in the United States. In Britain, the average house is falling by 93 pounds per day; the average wage is only 65 pounds per day.

We do not usually give advice to governments. To be fully transparent about it, none has ever asked. It is enough to try to advise Daily Reckoning readers. If we were to save the entire world’s financial system, at least we would want something in exchange…say, a signed photo of our president with a thank you note. Still, in the spirit of public service we undertake to unclog the following drain:

Taking into account even the most “severe assumptions” on default rates, Barron’s columnist Jonathan Laing calculated that Paulson’s bailout plan would have given the feds positive carry [the difference between the cost of borrowing money and what you earn from it] of at least 7% or 8%. He figured that the government would have ended up with a $75 billion profit in two years.

But even with the hope of profit before it, the House of Representatives rejected the plan…and then, the hurricane winds blew even harder. The world’s stock markets had their worse day ever. The choice is clear, warned a flange of kibitzers, either a bailout bill or a Great Depression. Most likely, today, Congress will vote for the former and get something close to the latter.

By Wednesday, scores of commentators had been to the cemetery. Most were channeling Franklin Roosevelt. He “understood that his first job was to restore confidence,” wrote David Brooks in the New York Times . Over in the Financial Times , Martin Wolf even quotes Roosevelt’s puerile remark that “the only thing we have to fear is fear itself”. What about 25% unemployment, one is tempted to ask?

“[W]e might have done nothing. That would have been utter ruin. Instead we met the situation with proposals…of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic… Some of the reactionary economists urged that we should allow the liquidation to take its course until we have found bottom… We determined that we would not follow the advice of the bitter-end liquidationists…”

That quotation comes neither from Paulson nor Bernankes, but from another ghost. Herbert Hoover has gotten the reputation for being a “do nothing” president. Would it were so. When the Herbert Hoover passed the baton to Roosevelt, his can-do meddling had already helped turn a financial crisis into a Great Depression. You see, ghosts are often morons too.

Poor Andrew Mellon was shouldered aside in the early ’30s. Then, Hoover got to work. His first improvement is known to us by two knuckleheads who turned it into law – Misters Smoot and Hawley. The idea was to protect U.S. business by imposing higher tariffs on foreign trade. A group of 1,000 economists, bankers and other notables realized that blocking trade at the onset of an economic slump would be suicide. They urged him to veto the bill. But Hoover believed in tariffs as he believed in almost all other forms of government interference. He signed the bill with approval.

He called on the Fed to provide “an ample supply of credit at low rates of interest,” and initiated a program of public works – including the Hoover Dam, a massive lump of concrete that blocks the Colorado River. He threatened federal regulation of the New York Stock Exchange and attacked short selling.

Hoover’s chief concern seemed to be to hold up the price of labor. He cut off immigration, in an effort to keep out wage competition. Then, he got the business community to pledge that it would not reduce wages. Since the cost of labor was then too high for the closely shaved profit margins, businesses could not hire. Unemployment rose.

Roosevelt was a better politician, which is to say – he was more shameless. He attacked Hoover for spending too much money – won the presidency – and then spent more. He began so many agencies and projects – from the AAA (Agriculture Adjustment Act) to the CCC (Civilian Conservation Corps) to the SSA (Social Security Act) – he practically ran out of alphabet. He also imposed wage and price controls, as well as limits to executive salaries.

What was the result of all these good intentions? Instead of a panic and quick recovery – a la 1921 – the U.S. economy went into a long, hard on-again, off-again depression that put a quarter of the workforce out of a job. It might have lasted until the ’50s had it not been for the biggest public works program of all time came along – WWII.

And now the ghosts of the Great Depression haunt the Capitol, while today’s Smoots and Hawleys vote on a new plan. They’ve pledged a new bailout program by the end of the week. When last we looked world markets were turning up their faces, hopefully…like a girl expecting a kiss. What they’re more likely to get is a good fright.

—- Protect Your Assets: The Strategic Short Report —-

First Bear Stearns, then Fannie and Freddie, Lehman and Merrill…and now AIG…

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[Rude Endnote: We’re cooking for five tonight. Usually we only order for two, so this ought to be a bit of a challenge. With a few pots on the boil and one eye on the market, we’d best get too it.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com