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Mark's Market Blog

1-17-09: Zombies and the Fed

By Mark Lawrence

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The market broke decisively out of its previously established trading channel, dropping about 5% below the bottom. Personally, I doubt this has much significance: I think the market will continue to trend upwards for several more weeks, as Obama mania and the thrill of spending $400 billion per year on a jobs program is just too exciting to miss.

Oil, which had spiked up to nearly $50 per barrel, is back down in the mid-thirties. Arabs are complaining that they have lost $2.8 trillion in this stock market, and are holding a conference next week to discuss what to do about it. 60% of arab construction projects have been canceled or put on hold, including Dubai's miracle future cities. Dubai, famous for their ecological disasters, has been building artificial islands and a new university / research institute / carbon neutral city, Masdar. They hope in the future when their oil runs out people will still flock there for the beautiful sunny 116 degree summer days and the open, lively intellectual atmosphere.

Steven Jobs took a medical leave of absence until June '09. Trading in Apple stock was immediately halted for the evening. Jobs had pancreatic cancer in 2004; the two year survival rate is about 5%. He claims his variant was not so deadly, and now he just has a little hormonal imbalance. However, neither Jobs nor Apple has been very forthcoming on information, and there's little trust that the complete truth is being divulged now.

Banks world-wide continue to take a beating. Deutsche Bank will report a loss of about $6.4 billion for the fourth quarter. One of their employees, Rod Lache, gives press conferences about twice a month on how GM and Chrysler will definitely go bankrupt and leave their shareholders penniless. I wonder why Rod didn't warn us about his own bank?

Britain is quickly sinking into their own housing / banking crisis, about six months behind the US. Two of their largest banks, Barclays and HSBC are rumored to be in very serious trouble.

Friday Bank of America got a $20 billion bailout and a $100 billion guarantee against losses on toxic assets. CitiBank and BofA will soon be effectively nationalized, like AIG. "They'll be back for more money," said Sen. Bob Corker. "Our banking system is going to lose hundreds of billions of dollars," and taxpayer money is "going down the drain."

Tuesday, Philadelphia Fed Bank president Charles Plosser publicly took issue with Fed chief Ben Bernanke, urging him to "proceed with caution." Bernanke has expanded the Fed's bond holdings from $900 billion to well over $2 trillion. Plosser believes that the current policy of printing money won't end well and the danger of inflation is very high. Plosser also argued that the Fed has put its independence at risk. He worried that some "interest groups" (read Wall Street) will try to use political persuasion to stop the Fed from selling these bonds and driving down prices.

The latest hot topic is "Zombie Capitalism." This is where the government artificially props up companies that are already dead, to save jobs and the banking system. However doing this means that the worthless companies aren't broken up and the people and assets used to form new healthy companies. This refusal to bury the dead is believed to be exactly what causes Eurosclerosis. It's probably true that we need to keep a lot of banks and businesses on life support right now, but it's also probably true that in a couple years we need to pull the plug on these comatose corporations. Congress helped keep Terri Schiavo in a vegetative state for 16 years; imagine what they might decide to do with BofA.

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