Steve's Value Picks

Bubble Bubble Toil and Trouble

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Well the credit crisis continues to dominate the news. It looks like the Bear Stearns shareholders will at least get something out of their investment. The banks are still scrambling for cash and wondering what they are going to do with all of those mortgage securities that no one seems to be interested in any longer. The Fed is still bailing out everyone in sight. They are giving money away like there is no tomorrow. They are bailing out the banks. They are bailing out as many people as they can who are facing foreclosure. They are pressuring the mortgage companies to do more to work with their borrowers. They redefined Fannie Mae to take on even more and bigger loans. They have pulled out all of the stops. The interest rate is almost down to nothing.

My Credit Union offered me 3.6% interest rate if I renewed one of my CDs for another year. Last year the rate I received was 5.25%. I told them no thank you and pulled the money out and paid down some principal on my own mortgage loan. I plan to do the same with another CD coming due next month. I refuse to accept 3.6% when inflation is higher. It is time for the savers in this country, the prudent, to tell the Fed and their bank where to get off.

So the dollar has to go lower (esp. since we are also funding two wars). The one bright side is that companies in this country exporting to other countries are finding their goods much more competitive, so exports will be up. Also Europeans will flock to the U.S. for vacations where their own currency will buy much more than in their own countries. It also helps that we are safer here from terrorist attack than in many other places in the world.

The stock market continues to levitate to higher levels regardless of the news. With earnings season having begun, there is much potential for bad news. Those who do not make the numbers will get pummeled and those who do will be rewarded with a higher share price. I have a saying, "never underestimate the optimism of the bulls." This saying is once again proving itself true. With rose colored glasses the bulls are encourging one another that "everything is going to be alright." Is it? Will all of our problems evaporate by the sheer will of positive thinking? I think we have replaced the credit bubble with a new bubble. I dubb it "The Fed Bailout Bubble". The train is off the track and the fed is carrying the train on its' back by the shear force of turning up the printing presses full speed ahead. I do not see how we will avoid double digit inflation. The Fed is replacing the ponzi scheme liquidity of leverage to bail out the unwinding of that leverage. I believe that it will only end in tears. One day we are going to have to pay the fiddler. The longer we put it off, by replacing bubble with bubble, the worse the payoff will be.

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