Tuesday, December 2, 2008

Bernanke Speaks

Interesting speech yesterday from our great policy leader Mr. Helicopter Ben Bernanke. On a day when the markets were ravaged, he announced to the world his plans on bringing as much destruction as possible to our country in the future.

When asked about interest rates, he said that is was feasible to cut below the 1% Fed Funds rate. This means you can bet the house that interest rates are heading toward zero. That means free money for banks. Free.

Not only that, but he followed up with additional measures to support the economy. His eyes lit up when talking about additional liquidity injections coming down the road. He even had the audacity to say he has plans to purchase treasuries directly. I have been talking about the Fed purchasing treasuries as the final step in our destruction as foreigners stop buying, and he is already talking about doing it now.

In previous discussions I said that the Fed has declared war against our currency, and that doing so would greatly diminish the purchasing power of American's savings. I was terribly mistaken, and I apologize. What we can look forward to now is a nuclear holocaust.

As we enter the final month of 2008 we are winding down one of the greatest periods of deleveraging in history. Hedge funds, investment banks, and major portfolios of all types have spent the last 90 days selling every asset in their portfolio and replacing it with cash and short term treasury bonds. They have sold assets whether they were good, bad, rational, or irrational.

So as 2009 begins we will enter a period of liquidity trapping. This means that all these portfolio's will look at their holdings and realize they are awash with cash and short term treasuries that are yielding close to nothing. They will then look for a place to put this money to work. Where will it go? That is the ten trillion dollar question. Here is where I think:

1. Commodities

As the smoke continues to clear around the world from the credit crisis bomb that was dropped on the global marketplace, the rest of the world will realize that they still have productive economies and that they will continue to grow and produce goods. They will need industrial metals, oil, food, etc., and the artificial prices that are seen today due to the deleveraging process will disappear and begin to move much higher. The second part of this story will come with the falling dollar that I was discussing above. When the dollar falls, commodities become more expensive. The biggest beneficiaries will be oil producing companies, and miners, specifically precious metal miners. I would expect their returns to dwarf all other assets in 2009.

2. Foreign Stocks

Not all foreign stocks. I would be looking at stocks that have no relation to exports to the United States, and I would also stay away from foreign banks in the short term. Both those groups will continue to experience pain as the United States collapses. However, there are an abundance of foreign companies that will feel little to no effect of the US collapse and will benefit as the rest of the global economy continues to push forward. In the past three months, just like commodities, many of these stocks have been irrational sold due to the forced liquidations. They will lead the rebound not only because of their attractive pricing, but because of their strong dividends. Investors will look closely at a 13% dividend from a safe Asian water producing company, over a .02% yield on a bubble treasury bond.

The dollar's recent artificial rise is like a roller coaster rising on the final crest. To me, this means the opportunity of a lifetime for long term investors to exit poor positions and enter others.

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