Professor Elam

Friday Jan 28 2011

Breakdown

President Barack Obama privately pressed Mubarak in a telephone call last week to embrace democratic changes, said the official, who requested anonymity. Secretary of State Hillary Clinton yesterday said Mubarak, in power since 1981, has an “important opportunity” to enact economic, political and social reforms.

It’s a little too late to do the right thing now.

Tanya Tucker

There are three stages of a bear market, denial, panic, and resignation. The President and Hillary are still operating in Stage One, denial.  But this serves as a model for what we are seeing from all governments in response to world wide breakdown. Remember when Gorbachev thought glasnost and perestroika were  going to save the Soviet Union?  That didn’t work either …

The results of governments flooding markets with money are now in the Cairo streets for all to see. The money did not put anyone to work; it did put dissatisfaction with decades old despots on display. The flood of money resulted in rampant speculation in stocks, then commodities, then stocks in commodity producing countries as well as currencies of those countries.

The riots began in Tunisia. ‘President’ Zine al-Abidine Ben Ali ‘stepped down’ and fled. Now unrest has spread to neighboring Yemen and Egypt. Social Media like Facebook and Twitter are helping spread the word and alarm as these despots attempt to control the riots and hold on to power, see quote above.

The same sense of denial is displayed  on the 24/7 news channels as local politicians here claim that ‘temporary’ tax increases and such will solve the developing municipal debt problem. It is now apparent that many debt issuers either fail to file financial reports or are so late that investors cannot assess their financial condition. A story in the Wall Street Journal this week features a silver haired  Maryland retiree shocked to hear of an offer for her MD municipal bonds-at fifty cents on the dollar. Will she take to the streets, Cairo style, and riot?

The next stage is panic. It took a year for this to happen in the US from the fall of 2007 to the fall of 2008. It did not take nearly that long at the Dhaka Exchange in Bangladesh.

On Jan. 10, the Dhaka stock exchange's index dropped 660 points, or 9%, in an hour.

Egypt’s Exchange was down 11% the last I read. You can substitute the names of other developing countries for Dhaka as the unrest becomes ‘widespread.’

This is why we have been out of the stock market. If overall indices are down 9% in an hour you can bet there is literally no market for some issues, just ask the lady in Maryland about her bonds.

Expect governments to announce absurd plans to contain, reduce, quiet, stem the problem. Observers denied that GM would or even could go bankrupt. How quickly sentiment changes. Now Newt Gingrich suggests it would be best if entire states went bankrupt. Yet tiny Vallejo, CA has been in bankruptcy for years now with no outcome. Can anyone imagine the eighth largest economy in the world in Bankruptcy Court (that would be California).

Resignation is the final stage. Reports are coming out now that panic at Lehman lasted as long as it took them to be ushered out of their building; resignation kicked in as they exited the front door. Really nothing has been done to address the underlying problems. The Egyptian does not care to live on $50 a month when he sees the rest of the world living in relative luxury. Like the Watts riots of 1969, people are tired of waiting for change.

So the FED policies have only brought us $3 gasoline. If the Democrats were not holding the White House there would already be calls for price controls on oil companies. Now prices are falling, the markets do work. Oil fell below $90, gold is down over $100, and silver is falling as well.

Our best estimate is that prices of commodities will fall, only to rise again later this year. Remember QE II, printing money and handing it to brokers for speculation, does not officially end until June of this year. Here in the US the municipal bond market was the first to experience widespread breakdown. Denial quickly surfaced as PIMCO and others assured investors this was a ‘buying opportunity.’ Flash crashes have already occurred in numerous stocks. Be prepared and informed, in a depression, cash is king.