Sep 292008
 

Buy Rotten Eggs for $700 Billion in 36 days


The first mistake the Americans made 8 years ago was when they forgot to get the incoming President’s head examined. There is always an intense debate for the suitability of any candidate for the coveted post of the President. More emphasis is always given how the next Commander-In-Chief would act in case of exigencies. No one asked them of their basic knowledge of economics except how much taxes would he reduce.

 

Visit any Forex traders or option trader’s website – they give you $ 1 million to play a demo game. Never before any presidential candidate was asked to play such demo game in public debate. Never before any presidential candidate was asked what will you buy if you were given $700 billion of Taxpayer’s money?

 

However, on the historic Sunday, 28th September 2008 to be precise, a bipartisan agreement was arrived at to authorize the President Bush to succumb to the wishes of the Treasury Secretary Hank Paulson to spend $700 Billions of tax payers’ money to buy rotten eggs lying in the vaults of Banks and Brokers in his last 36 days!

 

When a person is dying, his last wishes are asked for by the relatives circling on him just to listen how much he would get if that fellow dies. When a criminal is condemned to death, his last wishes are asked for before his head is shaven off in preparation for his journey to the death. Hank Paulson did not have to have his head shaven off. His wish was $700 Billions – and America’s most retarded President in the history granted the wish to spend $700 Billion in 36 days! He was joined by the chorus of congressmen/women to tell their Commander in Chief – Yes Sir. The President said – I did not hear you! The congressmen raised their pitch – Yes Sir, Yes Sir, Yes Sir.

 

Ask any businessmen or any person of ordinary prudence – would he give his departing employee even $700,000 of authority when he has already resigned and counting his last 30 notice days? Of course No, then how come the President of United States hands over blank checkbook to his Treasury Secretary with unchecked power of $700 billion when he is counting his last 36 days?. If something goes wrong later – Mr. Paulson would say” I have right to remain silent.” Look at the bill you have passed in the Congress. – No questions to be asked. Period.

 

Only a few months ago, the President Bush with great fanfare distributed Tax Rebate checks to American citizens amounting to $106 billions only to withdraw $ 700 billions from their and their future generations’ pocket on today (28 Sept 08) like a conman. During his presidency, over 4000 soldiers lost lives in Iraq, 1000 more in Afghanistan, over a million innocent people died in Iraq, Twin towers of World Trade Centers were destroyed, billions of dollars of budget surplus was converted into whopping deficits, US Dollar dropped by 40%, hurricanes destroyed several cities, wildfires raged in and tons of mud sided in California,  millions lost jobs and homes, oil prices rose from low 30s to high 145, and industries collapsed one by one – from Auto, airlines, healthcare, Medicare, insurance, brokers, investment banks, and banks for only one reason. He was thoroughly incompetent.

 

Now, let us consign all events until today’s night into history, and focus what will or could happen from now on to the financial markets around the world. Here are the posers and possibilities.

 

 

 

 

Q:

Is it a done deal? Will it become a law?

A:

Preliminary agreement is struck. While leaders have agreed, it is not known whether the rank and file senators will vote for the bill. They have been getting angry response from their constituencies to vote against, There have been street protests in California, Anger is building up which may become violent. US is heading towards unrest and then civil war in a few months.

Q:

What will happen to the market?

A:

Paulson wanted to get the bill signed by the President before the world market opens tomorrow. He expects the market to give solid response. However, the market is always an unpredictable beast. World markets do not act on themselves. They wait until the US market opens. Further, the market movement depends on the major brokers. As you are aware, most of the leading Investment banks like Bears Stearns, Lehman Brothers and Merrill Lynch are either in the coffin or ICU. The credit crunch is so much that most of the brokers do not have money to pump into the market and take their proprietary position.

 

However, Goldman Sach and Morgan Stanley, now being banks, will be given billions of dollars to buy into overseas markets, especially near day close, if the markets do not move up strongly in the morning trades.

Q:

Will the bank start lending and reduce the liquidity freeze?

A:

Doubtful. Most banks from Citibank to UBS have raised capital from the market in the form of High coupon (9% to 11%) preference shares in billions of dollars. They will be forced to retire high cost debt, leaving little in their coffer.

 

Further, more and more debts are being generated in the market due to sub prime default that makes more and more derivatives doubtful. The banks will be forced to pay to the counterparty in respect of future obligations. It can not plead that it does not have money. The creditors may sue the banks to either pay or file bankruptcy. There is no chapter 11 for banks, only Chapter 7 and 13 that compulsorily winds up the company.

 

The mistrust has been built into the market so much that the counterparty risk has risen to the highest level. Under these circumstances, the interbank transactions will remain low. The collapsing banks in USA, UK, and rumors of failures in centers like Hong Kong, will continue to make the market difficult for lending.

 

Corporate lending may take a while. The commercial paper market has become like a junk bond market with interest rates running in high single digit to low double digits even for blue chip customers. The real interest rates are perking up.

Q:

What happens to the Equity markets?

A:

They will open high but then retrace after 2 hours, again peaking up near the close due to US funds buying with billions of dollars in blank checks.

 

The real rally may come only after the reaction of the US market. Tuesday may be stronger than Monday, provided no negative news emerges on deal front.

Q:

How  the markets may react?

A:

  • Dollar block country may do best – Hong Kong, Singapore, Taiwan, Korea may choke 3% to 5% gain initially, go down by 3% in correction, to peak up gain near close by another 3% to close at 8% maximum.
  • Japan may gain by 3% to 5%.
  • Sensex may gain 600 points initially, depending on how the Asian markets have reacted, to lose 300 pts, to make up morning losses as soon as London market opens strongly. If London is lower, due to another bank failure, the Sensex may lose steam. US brokers may not be that active in India market. They need more money at home than park them overseas.
  • Dow Jones may chalk up over 400 pts gain because of massive short covering of Index weighted financial shares. If the bill is passed into law on following day in the congress, then all financials will rally.
    • It is possible that the Banks and Brokers may start reporting profits due to write back of excess provisions caused by higher market value manipulations.
    • If in the meanwhile Mark to Market rule is abolished, the bonds may be re valued to par value on HTM or Hold Till Maturity principle. (In this case, ICICI Bank may also benefit in India)
    • Some large hedge funds may fold up due to changing of rule of short selling of shares in the middle of a game. The losses may run into billions of dollars. If they save the banks, the hedge funds get busted. Will Paulson plan save them too?
    • There could be thousand of law suits in UK and USA against authorities from hedge funds, pension funds for losing money due to sudden changing of short selling rules in middle of the game.
  • Bond market may behave differently, Initial rally may fizzle out. The collapse of banking system has just started. British banks, once considered safe may come into more problems. The bank failures are spreading to every where. From USA to across Atlantic – UK, Germany, Belgium (Benelux countries), Hong Kong and more will follow in Asia and Japan. Many have not shown yet where do they stand. Almost all Asian and Japanese banks are saddled with the American CDO, CDS, and Lehman Bonds that run into billions. When Lehman owed over $600 billions, the question arises – to whom? Those who are trying to buy Lehman because by buying them out, the cross entries will be eliminated.
  • The British banks like HSBC may have more losses. If you look at their balance sheets in Yahoo, there are hundreds of billions or even trillions of dollars of transfer between various assets –
    • long term assets were reduced by 800 billions and short term liabilities rose by $1.2 trillions, ($1200 Billions)
    • Long term Investments rose by $ 1 trillions.($1000 Billions)
    • Cash resources depleted by $300 billions.
    • Its capital is just $88 billions against total liabilities of $2.2 trillions or just 3%.
    • In other words, all off balance sheet assets and liabilities of off shore centers have been brought into the main balance sheets. How much of such trillions of dollars is good, we do not know.  See the following link…  http://finance.yahoo.com/q/bs?s=hbc&annual
    • In short the balance sheet severely deteriorated. This applies to almost all banks who have tied up with USA and who bought US banks or brokers 3 to 5 years ago amid lots of fanfare.
  • The dollar index may gain initially.
  • Commodity price may see fall. Metal stocks may fall worldwide again.
  • Gold too may fall initially by 6% to 8% in 2 or 3 sessions. However, the gold is having lot of real strength. After initial euphoria, it may rise again.
  • Oil Prices may fall due to shorting of futures against buying of $ index. The oil prices are bearing the stamp of Rupert Rubin, ex-Goldman Sach Vice President and former Treasury Secretary and now top executive of Citigroup. With blank checkbook in the hands of Paulson, some billions may be given to old colleague to short the oil and strengthen the dollars
    • It may be noted that recent spike in oil price by $25 in single day was due to short covering of oil contracts ahead of settlement on Nynex. Under the current rules, the settlement is subject to physical delivery. So the short sellers have to either buy back the contracts or deliver millions of barrels of oil physically that they do not have.
    • This scenario may be repeated in November. While buying back the September contracts at huge premium, they shorted the November contracts again in roll over exercise. If the oil prices remain strong, expect another major spike in oil prices in November. Oil is now most manipulated market with the use of derivatives.
    • There are all signs that another Enron is in the making, this time, 20 times larger. Which company is used now, is not known.
  • Interest Rates will go much higher and you should not be surprised, if they get into high double digits in less than 6 months. The lower credit rating of US governments by Fitch and others in oveseas countries (Moodys and S&P will not change their loyalty) may again push up the rates.  If the rates does go to even 12%, the US government will have to service their debt of over $13 trillions @ $ 1.5 trillion per year of repeat expenses.

Q:

Does it mean that USA is on recovery path?

A:

Absolutely not. The manipulative effect does not last longer, especially when the trillion dollar scale is considered. The States and Local government who need over $200 billions to manage their state, may raise their ugly head and demand payment when 3 times more money is given to bankrupt banks. USA is receding into civic unrest and Civil war slowly and surely.

Q:

Is there severe discontent among Americans at the current Bail Out plans

A:

Americans are damn angry. They are losing jobs, homes, healthcare, Medicare every thing… They have now converging on the streets with big banners. If the bill is passed into law, they will flare up, and the anger will spread across the nation like a Californian wild fire. Since guns are freely licensed in USA, there is likely to be mayhem and the ordinary civic unrest will escalate into full scale Civil War. They have to ban gun immediately before situation worsens.

 

This may happen swiftly, even before election. We should be very happy that it does not happen; In fact it should not happen or should not be allowed to happen. For the first time, US Administration will have to use bullets on their own soil to kill the American themselves instead of killing millions of peoples abroad in self engineered war of massive scale.

Q:

What should an Investor do now?

A:

This is pet line of CNBC in its advertisement for which they never reply. The present scenario is very unstable, and changes from moment to moment. It is more akin to war. Deal with it as it comes. No planning is going to work, except holding some portion in gold.

Q:

Is there any solution to the present mess?

A:

Of course, yes. The trouble right now is that no one knows what has suddenly happened and why so swiftly. Watch for my book “Sub Prime Resolved”: that contains complete solution and also wait for my next article here – How we got here? Legalizing Parallel Economy”

Q:

Are we to worry about every thing?

A:

No. The problem will take care of itself. For every problem, there are 10 solutions, One has to find it. I have found them, and sent out a letter to appropriate authorities who received them by FEDEX on 25th August, 2008, but they did not reply. Who is by the way Kalidas? Never heard of him.

Kalidas, Hong Kong
29/9/2008

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