Thoughts on things

In an effort to have a longterm plan in the background of day to day scalping, I am going to layout my thoughts on everything market related.

Banks: The model of the supermarket bank has been smashed. I feel Glass Steigal should be brought back, but this is about what I think will happen, not what should. Ben and Timmy will not let any of the big banks fail, but what will they look like going forward. Rest assured, the banks will have further losses, some staggering. Todays values are ludicrous. The banks have diluted shareholders a great deal, and going forward they will have reduced earning capacity. They can borrow cheaply but they will never see the level of profits they had, because securitization will not get back to pre meltdown levels. Also consumer credit will not in several generations reach the levels of pre crisis. Best case scenario, banks are a short to probably half of there current levels. This may take a few years to play out, but they will be down from here. Worst case scenario, which is still possible, RMBS and CMBS take some of the big guys to the brink of failure and the FDIC, already low on funds, is unable to help causing the treasury to step in yet again. Who knows where we could go from there.

China: I think China will slowly sell its vast store of treasuries and use the dollars to purchase more and more resources. I don't think they want to disrupt the market too much, but they have made it clear they do not like current U.S. policies. Somewhere down the road, China will inevitably overtake the U.S. in terms of economic output.

Commodities: Commodities are enjoying nice rallies now as people feel the reflation trade is for real. Not so fast I say. Although it is my belief that the long term bias of commodities is much higher, I think in the short term we could see very depressed levels. Over the next 3-5 years as the fallout from the financial crisis play out the U.S. should continue to see price deflation. Unless, the banks begin lending all the money we have given them, which they cannot, because the money only serves to plug holes in there balance sheets, deleveraging will continue. At some point however, this trend will reverse, and world demand, and loose U.S. monetary policy will lead to a massive run up in commodity prices denominated in dollars.

Oil: Oil is close if not already past Hubberts peak. Oil production will, for all intents and purposes , decline from here on out. I do not feel politicians and others are taking this seriously enough. There will be wars fought over oil in the next couple of decades. Therefore the price trend will be up. I think we will make one more leg down into the 20s though before we continue up indefinately.

Treasuries: At some point treasury rates will have to increase dramatically. As the deficit spending grows out of control people will demand a much higher rate of return. What will rates look like when the U.S. is downgraded?

California: Boy are these guys in trouble. The only answer I see is much higher taxes. Who will want to stay in that environment. I don't know what the ramifications of there reckless spending will be, but it won't end pretty. I'm sure uncle sam will step into the breach and keep everything afloat, but there will be spending cuts and tax increases.

Europe: As of late I feel people have forgotten that they have it worse than we do. I look for the trend of the euro out performing the dollar to reverse course in the next 6-12 months. The worst case scenario for Europe is pretty bleak. I can still see possibility of the union splitting. In the best case growth will be weak for the forseeable future.

U.S: And that leads me to the outlook for our country. Although I feel the all out armageddon I felt was possible 6 months ago is not very likely, I am scarred for our country. I do not think that our prospects going forward are very good for at least a generation. In aggregate our economy will not experience much growth. Equity prices will see downward pressure for the next several years. The march lows will not hold. This comes with a caveat however. If monetary policy becomes so loose as to really ramp up inflation, nominal values could rise substantially, although they would not keep pace with inflation. On the bright side, I think there will be tremendous opportunity to buy assets at good prices. Entitlement spending will have to be dealt with at some point. The loss of SS and Medicare benefits will hurt many poor Americans. I don't feel this can be avoided. America is not dead, but we have done some messed up things over the last 3 decades that we will pay for. But, we will pull through. Its going to be tough for a while as we learn to live within our means. We need to return to producing things in this country and not relying solely on service. Its gonna be tough, but we will get there.