Investing Blog

There is still so much that must be answered on Bush’s latest call for a $700 Billion bailout package that will be used to clear the balance sheets of banking institutions and be eventually paid back. The problem is that it is doubtful the government will ever see even half of its total $700 Billion investment into the mortgage industry.

The talk in Congress is slowly becoming one of accountability. Lawmakers alike are looking for solutions to hold CEOs and other executives into being held accountable for losses. Many banks overstepped guidelines and industry standards set by the federal government and will now be bailed out even after avoiding the rules. CEOs are also receiving fat bonus checks even as these financial giants are crumbling, stealing shareholder value and paying large cuts to CEOs who simply haven’t run a company correctly.

This $700 Billion plan might look great on paper, but it is instead delaying the inevitable. That being a major correction is still on the horizon as stock prices and real estate markets are still way overpriced. A 10% drop has little impact on a market that rose by 300% in just a few years. We’re only in the beginning of a large correction that must happen, either on the real estate side or on the value of the dollar. The current money supply is not great enough to sustain such high prices, large bailouts help increase money supply but still not equal to the growth necessary to sustain the system. It will surely reduce the number of forecloses and help put a floor under a broken market but the fundamentals remain there. Even with enough credit to shore up the system, the value of the dollar would be cut in half. We can sustain 200% housing price growth with a 200% inflation rate but at the end of the day we’re just moving to trouble at an exponentially faster rate.

If the government allows $700 Billion in short term loans which eventually come back within two years, the credit supply will have been vastly larger, then dropped by $700 Billion. In total its 7% swing within two years compared to M3, the widest monetary statistic. When considered against M2 which is essentially all money that is real (insured) rather than credited, is equal to a 14% swing.

We’ll see how this unfolds. I’m expecting a stock market rally for the next few days, but this news wont sustain the market for too long.

Investing, Real Estate