Obama To The Rescue?
John Browne
Nov 6, 2008
Having received 62.5 million
votes, Barack Obama has earned a spectacular personal victory
and a clear mandate to bring some form of change to the United
States. Obama's decisive and masterly election campaign, where
he first had to outmaneuver the formidable Clinton machine, may
bode well for his ability to implement a government response
of unprecedented magnitude. Time will tell if this is a blessing
or a curse.
In the short term, markets may likely rally on the grounds that
election uncertainty is over and that Obama and a Democratic
Congress may institute massive infrastructure spending along
the lines of Roosevelt's New Deal. The larger question for investors
will be whether Government spending will make any difference
to long term performance, or whether the markets are already
locked into a downward spiral that no amount of pump priming
can counteract?
There is increasing evidence that the severe recession or depression
that we have long forecast is now becoming reality. One has only
to look inside local shopping malls to see the physical effect
of a visible loss of consumer confidence. Once confidence is
lost, it is exponentially more difficult to regain.
To avoid a deep recession, as the government now hopes to do,
massive intervention would have been required - months ago. But,
in the absence of extraordinary political cooperation with the
sitting President, we can assume no significant changes in policy
until Obama takes office in late January. When new programs do
come, the big question will be size.
The outgoing Bush Administration, which is responsible for creating
the vast asset booms, has thus far provided only $172 billion
in a stimulus package and some $700 billion in authorized asset
purchases, mainly to bailout Wall Street. Historically, these
are large numbers, but today they are dwarfed by losses already
suffered by real estate and stock investors.
Losses incurred on the $14 trillion U.S. mortgage market will
be significant, and we can expect government initiatives to try
to replace these vanished assets. Of course, not all of these
mortgages will go bad. But with rising corporate and individual
bankruptcies and increasing unemployment, an increasingly large
number will default.
Almost $5 trillion of these mortgages were 'sliced and diced'
into the now notorious mortgage-backed securities. Despite their
'toxic waste' content, these so-called 'securities' were sold
to conservative investors, including U.S.-based pension funds,
the solvency of which will be a major issue for the Obama Administration.
But the losses don't end with the mortgage market. As we had
forecast, state governments and corporate America, including
insurance, credit cards and auto companies, have arrived in Washington,
hat in hand, asking for taxpayer money. Looming rapidly into
sight is the more than $20 trillion of private sector corporate
and consumer debt. As is reflected in widening credit spreads
and the threatened bankruptcy of national business icons such
as GM and Ford, this debt is also being called increasingly into
question.
How many trillions of dollars of Government spending will be
necessary to make whole the institutions and individuals swamped
by this tide of credit defaults? Is the government prepared to
float multi-trillion dollar annual deficits? Apparently so. If
such sums are palatable to our creditors, then perhaps the worst
can be avoided.
Regardless of government action, we feel that the recession will
be both severe and long lasting. The resulting fall in corporate
earnings will be reflected in future stock prices. In light
of this, we urge investors to be wary of claims that U.S. stocks
are cheap.
It is worth remembering that prior to the stock market crash
of October of 1929, the Dow had peaked 381 earlier that same
year. It was not until some three years later, when severe recession
and then depression took hold, that the Dow reached its low of
just 42, a fall of some 90 percent from its 1929 highs.
In a historical context, the Dow's recent fall from 14,164 to
some 8,200 (a decline of just over 40%) does not necessarily
indicate that stocks are cheap....
...Today, a 90% fall would
bring the Dow down to a level of 1,416.
###
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Nov 5, 2008
John Browne
Senior
Market Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: jbrowne@europac.net
website:
www.europac.net
 John
Browne is the Senior Market Strategist for Euro Pacific Capital,
Inc. Mr. Browne is a distinguished former member of Britain's
Parliament who served on the Treasury Select Committee, as Chairman
of the Conservative Small Business Committee, and as a close associate
of then-Prime Minister Margaret Thatcher. Among his many notable
assignments, John served as a principal advisor to Mrs. Thatcher's
government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Browne's advocacy,
Thatcher famously pronounced that Gorbachev was a man the West
"could do business with." A graduate of the Royal Military
Academy Sandhurst, Britain's version of West Point and retired
British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.
In addition to careers in British politics and the military, John
has a significant background, spanning some 37 years, in finance
and business. After graduating from the Harvard Business School,
John joined the New York firm of Morgan Stanley & Co as an
investment banker. He has also worked with such firms as Barclays
Bank and Citigroup. During his career he has served on the boards
of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's
Kudlow & Co. and the former editor of NewsMax Media's Financial
Intelligence Report and Moneynews.com. He holds FINRA series 7
& 63 licenses.
321gold Ltd
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