Go to Heaven for the climate, Hell for the company.
-- Mark Twain
It is no surprise that Tim Geithner and Ben Bernanke's plan to steal trillions of dollars from hardworking, taxpaying Americans and give it away to their friends on Wall Street would cause a big rally in the stock market.
Unfortunately, Geithner's plan is flawed. Its primary objective is to prevent any bankruptcies or receiverships in the politically favored money-center banking and Wall Street financial sectors. Put simply, the plan inflates the value of toxic assets, held by the money-center banks like
Bank of America
and Wall Street firms such as
, and gives away trillions in free taxpayer money to other politically connected private equity and hedge funds to buy those assets.
Geithner's plan, combined with the
unprecedented monetization of our debt and money-printing, are the worst possible approaches to dealing with our economic problems. These actions by the Treasury and the Fed are major reasons why the Chinese recently announced publicly that they have lost faith in the dollar and want to move away from it as a reserve currency.
The implications of this move by the Chinese, which is also being supported by the International Monetary Fund (IMF) and other developing nations, are not being fully understood by the media or the financial markets and will be extremely negative for our country down the road.
To put it in very simple terms, think of what happens when somebody with very little savings has his credit taken away. He goes broke very quickly. That is what will happen to us if the world moves away from the dollar as a reserve currency. Our ability to print the dollar at will and use it as means of repayment to the rest of the world for decades has assured our prosperity even in the face of absurdly incompetent management of our economy and outrageous overconsumption by our population.
It has been the equivalent of a credit card with no limit that could also be used to pay interest on the debt accumulated using the credit card. This bizarre situation has created the illusion for us of an economic paradise that provides free lunches for everyone as long as the Fed and Treasury continue to run our printing press. Unfortunately for us, that era appears to be coming to an end.
Why now? The Chinese and the rest of the world have endured our dollar reserve currency regime for decades. The banking crisis, recent irresponsible moves by the Fed and Treasury, and economic weakness in America, combined with the emergence of China, India, Brazil and other developing nations as major economic players, have created an environment that is ideal for challenging the dollar's status.
We have made the situation even worse with our recent shift to protectionism, which has further antagonized the Chinese and the rest of the developing world. In a recent speech, the current EU President Mirek Topolanek called recent protectionist and socialist actions like cap and trade and the endless bailouts of failed companies by the U.S. "the road to hell."
Topolanek is from the Czech Republic, a country that knows from experience just how well socialism really works. Brazil's president recently called our shift toward protectionism a "drug" and declared that "white, blue-eyed bankers have brought the world economy to its knees" because "they don't know anything about economics." This open antagonism abroad toward the Western financial establishment symbolized by Wall Street and toward America's economic dominance in general is rising, and we are making it worse by our continued mishandling of this crisis here at home.
What are these other countries so angry about anyway? The Chinese are irritated because we are attacking them for currency manipulation at the same time we are also begging them to keep buying our bonds at interest rates that are being manipulated to an artificially low level by our Fed. On top of all that, we are condemning their domestic labor practices and implementing protectionist trade measures against them.
We are taking similar actions against many other developing countries, either directly or indirectly. Our recent actions against the Chinese and others are the equivalent of robbing someone's house, then demanding a loan on favorable terms from that person, and then calling that person a crook.
Is it any surprise that they are angry at us under these circumstances?
The long-term effects of a movement away from the dollar as the world's reserve currency will be economically disastrous for America. We will face higher interest rates, lower liquidity and credit, higher import prices, and higher inflation in general. Our standard of living will be dramatically reduced. So why has the stock market just rallied 25%?
There are several reasons. First, we were severely oversold and due for a big bear market rally.
Second, there were a lot of traders and hedge funds leaning short, so we got a big short squeeze.
Third, the Fed is adding a massive amount of liquidity into the financial markets, and some of it is going into stocks.
Fourth, and most importantly, Wall Street sees an opportunity to use Geithner's plan to take the American taxpayer for trillions of dollars. His plan would be an enormous transfer of wealth from hardworking, taxpaying Americans to money-center banks such as Citigroup, Bank of America,
and JPMorgan Chase; Wall Street firms liks Goldman Sachs and Morgan Stanley, hedge funds like
, and private-equity firms like
. Those are some very good reasons for a short-term stock market rally, but it will probably not last very long.
The problem with our current economic policies is that they contradict hundreds of years of economic history. Propping up failed institutions, doing sweetheart deals with politically connected firms rather than allowing for open market bidding, monetizing the debt and excessively printing money to inflate your way out of recession; protectionism, central planning and currency debasement are all policies that have been tried and failed many times in many different countries.
To my knowledge, none of these policies have ever created any sustainable economic prosperity for any significant length of time in any place. Maybe we will get a miracle or a
event this time, but it is extremely unlikely that these policies will lead to anything but more economic problems for our country down the road.
For investors, savers and taxpayers, these policies are especially awful. Unless you're an insider at a big financial firm or investment fund, you will probably get no net benefit from all of this government generosity with your money.
The current stock market rally is not likely to last very long as people realize that the era of free lunches and free money will not continue forever. Taxes are likely to rise to pay for all of this spending. Inflation is likely to rise because of all of this money printing and currency debasement. Interest rates are likely to stay low until the process of economic collapse is in its final stages, at which point the value of your savings will already have been destroyed.
So how can you protect yourself as an investor from all of this? Owning some gold and oil through ETFs like
PowerShares DB Gold Double Long ETN
Proshares Ultra DJ Crude
can provide some protection from dollar weakness and perceptions of risk in the financial system.
Shorting some long-term Treasuries through an ETF like the
UltraShort 20 Plus Year Treasury ProShares
can also provide some insurance against the reduction in the value of your cash held in dollars.
In general, shorting stocks is difficult in an environment of excessive central bank liquidity creation. However, owning some ETFs that are short financials such as
UltraShort Financials ProShares
could be attractive for aggressive traders.
This is because the balance sheets of most financial institutions will continue to be toxic despite all of these efforts by the government to give them money and keep them alive. Further, the new regulatory structure will make it even more difficult for big financial companies such as Citigroup, Bank of America, Wells Fargo, JPMorgan or any others taking government money to be very profitable.
For these reasons, the common stock of most of these companies will become worthless over time. All of these securities are only to be used as hedges if you're holding a lot cash or cash equivalents. They are not long-term investment holdings because all of them are subject to something similar to options decay because of the leveraged nature of these ETFs.
For long-term investors, the best thing to do is find stable income investments such as
and borrow long-term fixed-rate debt to buy them. This is because interest rates will probably be much higher in the future and apartment rents will probably also rise even if the economy is weak because shelter is a basic necessity and behaves more like commodities, which tend to rise during periods of inflation.
For very long-term investors with an expected holding period more than 10 years, owning stock index funds would start to make sense if the
were to get back to below the 700 level.
At current levels, stocks in general do not seem to make much sense either short term or long term. Bonds, in general, are either at a high risk of default and failure to repay principal or do not pay a return high enough to compensate for the risk of inflation and future increases in interest rates.
Christopher Grey is a managing partner and co-founder of
, a leading restructuring adviser, distressed situations expert and turnaround operating company focused on the real estate industry. Previously, Grey was a managing director in the California office of Emigrant Realty Finance, the real estate group of Emigrant Bank, a New York-based financial institution with $17 billion of assets. Founded in September 2005, the California office of Emigrant Realty Finance completed and managed on balance sheet $2.5 billion of debt investments.
Grey is a founding member of the Capital Markets Forum II of the National Association of Office and Industrial Properties and the Stanford Real Estate Network. He is a graduate of Stanford University with a degree in economics and holds a California real estate broker's license.