Wall Street's Next Big Bailout?

Ask yourself a simple question: Do you believe that the U.S. dollar will appreciate over the next decade?

That's the question I asked myself on ThePanelist.com.

If you answered "Yes," you should be buying stocks. If you answered "No," you should be getting ready for a painful bear market. The argument here is simple, and is based on four assumptions:

Assumption 1: Share prices are more likely to rise when increasing volumes of money chase the same number of shares. If, on the other hands, lower volumes of money chase the same number of shares, prices fall. This is why the Zimbabwe Stock Exchange was the "best performing" stock market in 2007, with the benchmark index gaining 595% in 10 months as the government dramatically increased money supply.

Assumption 2: American investors can't provide the necessary funds to fuel a stock market rebound. Everyone knows about America's (negative?) savings rate, so it seems unlikely that American savings will push the stock market higher (as explained in Assumption 1). Some Americans used home equity to fund expenses, and this can't go on now that U.S. home values are collapsing. Factor in higher oil prices and a weakening jobs market, and you soon realize that there is less new money available for investment.

Assumption 3: If we assume that U.S. investors don't have sufficient funds for investment, it means that a U.S. stock market rebound will only be sustainable if foreigners are buying.

Assumption 4: Foreigners will refuse to buy U.S. stocks if the U.S. dollar continues to slide lower. It doesn't take a rocket scientist to figure out that a foreigner's investment in a U.S. stock can be wiped out by a depreciating U.S. dollar. For example, if a Japanese investor invests in a U.S. stock that gains 5% while the dollar depreciates by 10%, he loses 5% of his initial investment. On the other hand, foreign investors will rush to buy U.S. stocks if the U.S. dollar comes back from the dead.

I admit that my analysis here is overly simplistic, and I agree that the greenback is only one of many factors that affect U.S. stock market movements. The point I am trying to make is that a meaningful U.S. stock market rebound is less likely to occur if the greenback continues to weaken. Considering that the trigger-happy Federal Reserve is slashing interest rates and quickly running out of ammunition, only coordinated central bank intervention can save the U.S. dollar.

"History shows that, as a rule rather than an exception, multilateral coordinated interventions have been key in establishing turning points in multi-year trends in the major currencies in the past three decades," says Stephen Jen at Morgan Stanley in a note published on March 17. "The preconditions for coordinated interventions are not yet met. However, given that a weakening dollar is fueling dangerous vicious circles through commodity prices and eroding confidence, it is prudent to remain on an intervention watch, monitoring closely whether the preconditions for interventions are met."

Perhaps Wall Street's ultimate bailout will come when central banks coordinate efforts to save the U.S. dollar. Stay tuned on ThePanelist.com . . .

Comments

[wordvarc]

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"Watchful waiting." We've another 5-10% to lose in equity or liquidity according to most high end hedges bet in the last years. The next month or two will be telling...The argument against the bailouts is that we've not yet reached the bottom so any bailout money is just wasted...good money after bad...just like continuing to fund the "war of error" fiascos in Iraq and Afghanistan. Our US banks are now even riskier investments than in governments with a war zone.
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[Sundialsvc4]

I've got a simple but not simplistic suggestion: "rebuild your economy into something that can actually sustain the 303,664,636 people who currently live here, and the money will follow."

When two trading partners are strong, they can buy and sell the very best things that the hand of man can make. They can eat the finest food. They can truly take care of their own with the ample surplus. A wisely managed country is strong enough to be strong not only for itself, but for others. And the United States of America, even during the course of our own generation, was such a country. There's absolutely no reason why it could not be again.

No amount of "fiddling numbers" is going to change that fundamental. If "American investors cannot do..." then: there's your problem. "Why not?"

Any wise farmer sets aside a portion of his seed-crop for next year (being, of course, much too wise to buy endlessly from seed companies or signing agreements that say he can't do this). He does not eat or sell that seed-crop. He manages his fields wisely as the resource that they are, and he prospers.

Our country has been mis-managed for this generation, and the consequences on Wall Street are just that... consequences. They're not the root cause of the problem, which is long-term mismanagement pursued for (unrealized...) short-term "gains."

[joebhed]

I have been observing for a while that this financial collapse will undoubtedly trigger an offer from the more "internationalist" of the financial capitalists in an effort to take over the American economy.
I like the jargon.
The pre-conditions - like, you know, America gives up its right to manage its economy, for the most part, to a group of interventionist bankers from around the globe with no particular affection for, or accountability to, the American public.
I am sure that the "coordinated" effort will have some form of imprimatur of the WorldBank-IMF
Who else will coordinate the banking group.
Just the Swiss, Deutche and Singaporeans?
We will promise that we will keep our money supply growth at X which ensures no federal borrowing at a time when our national debt is umpteen trillion dollars.
Oh, by the way, thanks a lot to the invisible hand.
I had a feeling all along that it was invisible so that it could perpetually be giving us all the finger
Get ready for the hosing, americans.
When the international financial capitalists come-a-calling, grab your last few bucks and stick them in the mattress.
Either that, or demand the creation of our own national bank - the sovereign United States Bank.
empower the Congress to create our money supply, as called for in the Constitution, and throw ALL of the money changers out of the temple.
This time, the revolution will be televised.

[Sundialsvc4]

There always will be men who, finding a man down in the gutter, will steal his wallet. But a country that is both huge and hopelessly in debt must ultimately save himself. "International bankers" may have lots of coin, but they can't run a country and aren't in the business of doing so.

I'm sure that they would be interested, as any capitalist would be interested, in getting in on the ground floor of restarting and rehabilitating what once was, and in many ways still is, the greatest industrial economy on earth. You could become insanely rich having a piece of that, if the two executive councils of the nation's government, and its chief executive officer, are all committed to making it happen.

This would not be "funny money," nor specious wealth. It would be the real thing.

The people who refuse to see the enormous promise in The United States of America are simply... fools. "Uncle Sam" is still out there somewhere. Put him in the gym for a couple of weeks and he'll be good-as-new.

I'm serious: Impeach and/or Expel literally no more than just a few dozen well-placed scoundrels. Hold them in prison awaiting a speedy trial... and make it speedy. Read them their Miranda rights. Quote the Bill of Rights to them and uphold every word of it scrupulously. Give them every thing that they denied their enemies. Give them a trial and a re-trial. And make it clear to the entire world that "we don't do things that way (anymore) over here." Make it clear that, "We're Back." Say, and mean it, "We got rid of those rats and we're going to EARN your trust and confidence again."

It could be a brand new day by Friday if the first (alas, of a great many) Articles of Impeachment were issued, approved and executed, say, by tomorrow afternoon. You want your country back? Earn it back, like our forefathers did.

It's simple human relations, fellow humans: "whatsoever a man soweth, that also shall he reap."