Dan Denning is a contributing editor to Diggers & Drillers and a regular columnist for Money Weekly, a Taiwanese financial publication. From 2000 to 2006, Dan was the editor of Strategic Investment of Agora Publishing. His reporting and analysis for The Daily Reckoning is read by more than 500,000 people regularly.
Let’s be clear about what we think the last two days mean: the Fed and Treasury are worried about the viability of the banking system. Why? Well, another bank was taken over in the U.S. (Wachovia by Citibank) and four European banks were effectively nationalised.
While most investors fly to safety, Warren Buffett is buying Wall Street. He’s buying about 4% of Goldman Sachs (NYSE:GS). Is Buffett’s buy the sign of a bottom in fincacials? Dan Denning says before you rush out and follow Buffett, you should first consider a few points made by Stansberry Research publisher Porter Stansberry…
Are the American people really gullible enough to buy into Hank Paulson’s $700 billion bailout plan? Unfortunately, it seems so. After all, most bought into the Patriot Act in 2001 and the Federal Reserve Act in 1913. The consequences of Paulson’s bill, however, will be dire, says Dan Denning. For a start, it will involve the government buying bad debt from banksat “hold-to-maturity” prices – that is, a ways above their market price.
US Supreme Court Justice Potter Stewart, confronted with the challenge of distinguishing pornography from free speech or art, famously said, “I know it when I see it.” The same is true with investors and inflationary monetary and fiscal policy, says Dan Denning.
Well that didn’t work out at all. Investors had a full weekend to think about the details of the worldwide plan to save markets. And then they became terrified. They sold shares and bought commodities.
The proposed $700 billion safety net for banks and lenders hasn’t stopped the Dow from sliding over 200 points today. Neither has the SEC’s temporary ban on the short selling of 799 financial institutions.
According to Dan Denning in The Daily Reckoning Australia, the ban could actually make the crisis worse. That’s because investors could be reluctant to take up long positions in stocks when they cannot hedge their risks with short plays.
If confidence is not restored quickly, the next logical step for regulators would be to close the markets altogether…
It’s highly unlikely that the collapse of Lehman Brothers (NYSE:LEH) and sale of Merrill Lynch (NYSE:MER) marks the end of the credit crisis. There is still $1 trillion in at-risk Alt-A mortgage debt out there and an even bigger amount of money tied up in credit derivatives. It’s only a matter of time before investors realize that US Treasury bonds are the biggest bubble of them all, says Dan Denning.
OPEC said today it would cut output by more than 500,000 barrels of oil a day by sticking closer to production quotas. OPEC is trying to stop the slide in oil prices. The cartel doesn’t want oil prices too high, either, says Dan Denning. That would force its clients to start looking in earnest for cheaper alternative and (whisper it) more environmentally friendly energy sources.
Could the US be ahead of the pack when in its economic downturn? “America has had its slower growth, weaker currency, massive housing meltdown and lived to tell about it. Now, with Fannie and Freddie taken into Uncle Sam’s bosom, America is ahead in the global game,” says Dan Denning in The Daily Reckoning Australia…