Thursday, March 5, 2009

Some Pennies for your Citi?

It appears that bad news is sprouting up everywhere, even in unheard of type places like General Electric. Yes, the old saying still holds true that, "As goes General Electric, As goes America."

How could they be in trouble? They are in just about every business known to man, and on top of that they are a global company helping offset the losses from America's economic woes.

The problem is that in their desire to increase their value over the past few years they also put a heavy emphasis on a branch known as GE Capital. This was essentially an enormous hedge fund. During the financial boom years, GE Capital did what any smart business would do, it leveraged up toxic debt. And it leveraged up big.

Will they survive? Probably not without some sort of major bail out for its financing unit. Perhaps the government will just take that portion of the company and give it to the tax payers, as they have done with the toxic assets from AIG and Citigroup, which is currently trading under $1 per share as we speak. Amazing.

There was a relief rally yesterday when news was released about China putting together an upgraded stimulus plan. Why do the markets rally when China announces stimulus plans and crash when team Obama announces stimulus plans? There are a few reasons:

1. Obama's stimulus plans have nothing to do with stimulus. They have to do with spending. China's stimulus plans involve tax cuts, infrastructure growth, and spurring production.

2. To pay for Obama's porkulus plan, he plans on borrowing from the Chinese. The Chinese stimulus plans is paid for by their savings.

America's plan is the equivalent of a bankrupt business borrowing money to have a corporate party. China's plan is the equivalent of using cash savings from the business to invest in future growth of the company. Can you see the difference?

The following is a fantastic article written by Thomas Woods. He just recently released a book called "Meltdown", which explains what is happening in the world today through the eyes of a real Austrian economist. (Have to cut and paste, sorry)

http://www.amconmag.com/article/2009/mar/09/00012/

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