A Volatile Economy Fights On

10/09/2008

Paul Munnis


If you like cheap gas why it’s coming down – it’s now under $3 per gal here in Minnesota. If you like better exchange rates – you got it – the dollar is stronger against most other currencies making foreign travel once more less expensive.

Commodity prices are coming down too.

Everyone wants to be invested in America because that’s where the safety is. If you want to see inflation end – it has in stocks – we are disinflating stocks to a point where the prices are cracker-jack prize box prices. Can you believe $4.76 per share for GM?

I think people are crazy. IBM will bring home billions in revenue from around the world this year, they have some of the best earnings reports I have seen in ages, they might take advantage of the low prices to buy back some of their own stock. Yet their stock is being driven down by short-sellers. GM just got money from the Congress to the tune of $25 billion to make cars yet its stocks are falling. That tells you that logic is no longer at work.

Much of this is because banks won’t make overnight commercial loans at reasonable rates of interest. It may be necessary to nationalize these banks for the American economy is not that sick. It is being made to look anemic however by short-sellers.

I guess we may save a lot of bureaucracy and not have to buy their debt if we nationalize the commercial banks – we’ll just inherit their savings and loans, both good and bad.

Starting Monday the Federal Reserve will start loaning directly to companies and that should start the ball rolling again. We do need to start asking if banks should keep their charters when they refuse to perform banking. I suspect that the Federal Reserve is going to have clean house and dump the weaker banks and give their charter to someone else who can run a bank profitably. That will cause some weak banks to fail just as they should.

We also need to ask if the short-selling ban shouldn’t be reinstated until people calm down. In business school we are taught that short-sellers are valuable in the marketplace. They act to set prices and to prevent stocks from inflating artificially, yet I dunno -- they seem to be destroying our economy. I guess this is one more thing needing regulation.

If you were a candidate of either Party tonight then you must be wondering what sort of a nation you are going to inherit. The answer is that after the election stock should take off like a rocket ship. There is so much cash parked on the sidelines that it is mind boggling. As it gets reinvested it will create new opportunities for American companies. What goes down also can go back up. That includes the money lost to retirement accounts. When it does the other problem will be overheating of the economy. This kind of volatility is good for traders but upsets people who want stability. The next president will inherit an economy that needs regulating really bad.

Believe it not the problem is not inflation – it’s rapidly becoming disinflation. American farmers have been buying land at high prices anticipating $4.50 or higher per bushel of corn. It looks like corn is headed back down -- so are copper and other industrial metals. Gold however is rising. Gold prices right now reflect the fear factor. As prices drop Americans can once more afford to live on their stagnant wages. So there is some good news for consumers in this wild ride. The bad news is that jobs are going away. The next president is going to have to address that right off the bat. Right now the Fed is tryig to save jobs by getting the commercial loans restarted.

In the meantime stocks will just have to bottom out. Then the buying will start. As for companies – it’s all about our ability to regulate the commercial banks. If we can’t then we will be forced to nationalize them.

To the curmudgeons sitting about our nations’ coffee shops and pontificating about the U.S. economy and how the dollar isn’t worth the paper its printed on -- please ask yourself why is Europe rushing to buy American debt in the form of Treasuries? It is because we back the Treasury notes with the taxing authority of the United States Government—it’s because they are safe and secure. By contrast risk is much higher in nations outside of America.