4Q08.4 EARNINGS – STIMULUS MALFUNCTION, BUY GOLD

“In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.” -Ronald Reagan, Inaugural Address, January 20, 1981

Rightly or wrongly one needn’t sing the praises of Reaganomics other than in the privacy of one’s home for at least the next four years. Under Barack Obama’s administration the new speed limit for Wall Street is 25 MPH: no more autobahn; yield to all pedestrians. Accepting the spirit of this new world order, along with short term trading/risk management is the only constructive way to navigate the markets right now as the stability of our global economic infrastructure remains in jeopardy. The irony of this situation is that the clarion call of populism is being heeded when it’s least needed. The financial gulf between the middle class from the elite has taken a sharp reversal, and everybody is in a terrible bind; worrying about the top 1% is not constructive in this discussion, and they were the predominant victims of Madoff anyway.

A bigger message could not have been sent last Thursday when Obama declared that Wall Street’s behavior was “shameful” with an hour still remaining in the trading day; how about all the calls to cap "bonuses." Needless to say the market sold off heavily into the close as any number of his advisors could have predicted for him beforehand. Clearly, when it comes to strengthening the Mind, Body, and Spirit of our overall domestic economy, our largest most innovative industry, financial services, is going to suffer at least a few lashes for past sins. This is not to say profits (and bonuses) formerly inflated by financial engineering was an ideal foundation of growth, but an entire generation of our best and brightest (or at least most ambitious) has been disrupted, and probably forced to reinvent themselves. This may be a blessing in the long-run, but how does this possibly help expedite recovery in the short run? How does a TARP-funded firm like Goldman Sachs (GS) sustain its legendary reputation that driven by its risk/reward-loving culture? 

To me the only short term remedies that should be funded are based on the principals of providing food and mortgage workouts of existing homeowners. Obama may intellectually understand that our banking system requires emergency surgery, but he's still insisting on bootstrappin more entitlement spending. How original to waste political capital on repaying your political allies. Considering the prospect of requiring more funds (preferably smart infrastructure related) down the road, we've got to preserve the health of our Treasury market as long as possible. His own prominent economic advisors (of note Larry Summers) preached a prescription of Timely, Targeted & Temporary measures, which earned him the trust of financial conservatives. To the credit of every Republican and about a dozen Democrats who voted against the House version of the Stimulus bill, a loud message was sent to Mr. Post-Partisan, and provided the necessary fodder for the Senate to fulfill its traditional role of breathing in some prudence to the process. As of late Sunday it seems that the Democrats won't be able to bully there way just yet.

Buy Gold.  As was the case last week, there may be earning reports galore to ponder, but all eyes need to be fixed on Washington. However, “selling on the news” is not as straightforward proposition as it was for our anticipated Aggregator/Bad Bank rally (ended at 2:15 last Wednesday after the Fed held rates steady). This week it’s anyone’s guess what new plan Treasury Secretary Tim Geithner will unveil. There is a large risk that the Aggregator Bank idea may be rejected because it would require more taxpayer money to purchase illiquid, toxic assets. Under this administration, the nationalization route (wiping out equity shareholders) as was adopted by Sweden in the early 90’s may be prescribed for the likes of Citigroup (C) and Bank of America (BAC). After all, the Resolution Trust Corporation created to unwind troubled assets from the S&L crisis in the 1980’s was a Republican solution. The lack of policy consensus, the continuation of poor corporate and economic results around the globe, and especially the rapid deterioration of all non USD or JPY currencies (most recently the Mexican peso) suggests the conditions are ripe for a major rally in Gold (GLD) and other precious metals (e.g. SLV, PTM) is ahead of us. I will add this doesn't automatically suggests its time to short Treasuries: there's still plenty of demand for capital presercation, and the U.S. won't hesitate to meet it. However, Obama will soon learn that there is a limit to everything which is why Senate Republicans must find a may to hold the line on social entitlement dollars masquerading as stimulus.

Disclosure: No positions.