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US on a Credit Death Row -II

July 15, 2008

  • God, how I love sequels. I think this is going to go down in the history of Jump Up!, for starting the trend of Part Twos and Part Threes.

    Okay first of all, the last post seems to be inching closer and closer to reality. Oh that shucks!

    Almost like a thrilling end. But its sort of a beginning of the end![Almost!]

    WSJ on Saturday reported, that Government of USA has decided to pocket the debts of Freddie Mac and Fennie Mae….

    Wow! That literally put the DOW on scorched rally isn’t it? Well, it was nothing more than a deadcat bounce.
    You know what is that?

    A short term, whiplash or shortlived rally which “flatters to deceive”! That is, leading to a huger crash.

    Okay quoting a particular disturbing paragraph,

    Treasury Secretary Hank Paulson swatted back reports of government nationalization of Fannie and Freddie, which would mean making explicit what, has long been an implicit taxpayer guarantee of their liabilities. This would instantly add $5 trillion in liabilities to the federal balance sheet, doubling the U.S. public debt burden and putting America’s AAA credit rating at risk. This is a nightmare scenario for taxpayers.

    You know what does that mean, US Government has just decided it has fallen in love with the very colour of Marxism. Literally and Figuratively. The color red, on their ledgerbooks!

    Although, this gracious pocketing of red ink, has lead the market to some positive upside, but this is just the beginning of the end. As told earlier in the post, US government has outstanding writeoffs of the order of some $400 billion. Yeah ‘b’ as in billion. And on that, it has decided to actually clean the mess, Freddie Mac and Fannie Mae-d.

    Come on, accept it, they were no poster boys of corporate ethical practices. They were crooked to their bones in their practices and ethics. But when US government decides to save them, certain things are worth looking:

      1. Fed is not playing by the books. Where is its advocacy of free market and sworn allegiance to Adam Smith’s invisble hand?
      2. This writeoff has just deepened the wound. This means a weak dollar
      3. A weak dollar means strong oil [bad], strong gold [neutral], weak bourses[bad],rising commodity[bad], strong yen[not so good] and instability overall.
      4. A strong rupee and a stronger short term euro. “RBI let the rupee loose!”
      5. And it strongly means US is becoming an increasingly risky investment preposition. Possibly a loss of AAA???

    A lot remains to be seen. A lot of them above is a specultation. Many of them would lead to an apocalypse sort of situation. And as for oil, it seems only Murphy’s law is holding. First the highly mismatched supply demand situation, now a weak dollar.

    But, in the midst of this, there is yet another silver lining.
    Gold!
    Gold has not shown that “jalwa” when we look in the same lens as that of oil. Hope the situation changes now.
    My bet would be to invest in companies which has anything (even remotely) to do with oil infrastructure [Reliance] or anything to do with gold, like futures, or etfs.

    With valuable insights from Chris Ciovacco from his article GSEs: Raw Deal for Tax Payers & Investors

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