Posted At : March 17, 2009 10:37 AM
All the kings’ horses and all the kings’ men are trying so desperately to put the nation back together again. In an action packed Tuesday, we started the day with testimony from the Prince (of darkness), Ben Bernanke, preaching the virtues of the capitalist system, and how it will overcome a decade of over-indulgence, greed and gratuitous consumption by peasant (if they weren’t then, they are now) and nobleman alike. The main part of the speech was a declaration that the government does not want to takeover the banks. Certainly excellent news to all, and particularly the stock market, as it staged a strong rally. The market feels that he is doing all he can and that he is being honest. That goes a long way. As I said last week, it certainly feels like Geinther is not giving us the whole truth.
The evening brought us an encore presentation from the King himself, sermonizing the caliber and righteousness of the American way, and how we will regain our strength. Welcome news to Americans who have been overwhelmed with negativity and pessimism. As I walk through the Denver airport I see the headlines of practically every paper: “We Will Overcome”. This is true, we will overcome this crises and a new Bull Market will emerge from the ashes, as hard as it may be to believe at the moment. The first step is optimism as it will lead to confidence. What did investors think? The market responded by dropping to new lows by weeks end. It’s clearly time to tell us the truth about how bad it is, and what it will take to fix it.
One thing is for sure is that the world situation is worsening. The risks to European banks are at significant risk and rising fast. The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. That would be the equivalent of a US bank bailout package estimated to be in excess of $10-14 trillion. In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the “host” countries to of 50:1! That means the ability to nationalize their banks is simply not there.
Western European banks have been very aggressive in lending to emerging market countries worldwide, according to the IMF, they are 50% more leveraged than US banks. “The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan — and Turkey next — and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world. Help is going to have to come from larger countries. But as these countries problems increase at home, how will they sell that to their own people. The day they decide not to save one of these countries it could trigger a massive crisis with contagion spreading throughout the EU.
This goodwill may in fact be the catalyst for a long overdue rally, which could be ferocious. The building blocks are in place, as the incredible pessimism and bearishness is often the launching ground for strong rallies. It does appear that just a good bit of news could send the market soaring. Even Robert Prechter, the perpetual perma-bear has said as much. But how low do we go first.
Regards – Keith Springer