Give Liquidation a Chance!

A plea to lawmakers…give liquidation a chance!

U.S. stockowners got a break yesterday…the Dow rose 236 points. News reports tell us that investors were listening to Ben Bernanke. He’s speaking to Congress…intending to boost investor confidence. But we can’t find anything in Bernanke’s remarks that would give us much confidence.

In fact, consumer confidence is at a record low. And investors couldn’t have taken much comfort from the Fed chief. Bernanke said the economy would start to grow again in 2010…and then, only if the banking system is stabilized. Of course, Bernanke is talking nonsense. He doesn’t know when the economy will begin to grow in earnest again, and if it does begin to grow it won’t be because the banking system is stabilized. You can stabilize a comatose person. You can stabilize a battlefield. You can stabilize a ladder. But stabilizing a crummy bank won’t help the economy grow. For that you need a healthy bank. And the only way a bank can be a healthy bank is if it holds healthy assets and can earn decent money when it makes a loan.

Banks aren’t making loans now because they don’t know who will be able to pay them back…and don’t know what the collateral is worth. They’ll have to wait until this period of price discovery settles down. And that won’t happen until deflation has done its work…until prices have been knocked down to their lowest level. That could happen quickly…or it could take years.

AIG now says it is facing a $60 billion loss. How much is its stock worth? Citigroup is nearing bankruptcy, with the U.S. government getting ready to up its stake to 40%. What will the shares be worth when the operation is over? GE finance says it will get by – maybe. Micro Tech is laying off 2,000 more people in Idaho. And Italy is officially in recession.

One by one, company by company, country by country…the whole world slips into depression.

Oil traded at $39 yesterday. And gold lost $25.

What’s ahead?

We’ll give it to you straight – darned if we know. Stocks could rally from here…or collapse. We have our ‘Crash Alert’ flag up…just in case. The Dow will probably get down to the 3,000 – 5,000 range before this crisis is over. If we’re right, it’s got to lose another 2,000 plus points. You don’t want to be holding stocks when that happens. Might as well get rid of them now – even at the risk of losing out on a rally.

As for gold…

Chris Wood says it will reach $3,500 by next year. Chris is more right than most analysts. In his newsletter, Greed and Fear, he warned that the bubble in sub-prime lending was going to blow up… The Wall Street Journal says he’s the “man who saw it coming.”

Why will gold soar? “It’s the only form of money or credit not contaminated by the credit system,” says Chris. Which explains why it has risen – even while inflation expectations are so low. Investors are not buying gold as a protection against inflation; they’re buying it to protect themselves from deflation. Yesterday, as deflation expectations subsided, so did the price of gold.

Wood is primarily an Asian analyst. Which is to say, he spends most of his time trying to figure out what it going on in the Far East. He’s watched Japan for decades. And now he sees the threat of the entire world entering a Japan-like slump. How to avoid it?

Nationalize the banks, says Wood. And create a ‘bad bank’ where you can dump all the toxic assets. That’s what is already underway…more or less.

Wood believes nationalization is the only way to get the rottenness out of the banking system – quickly. He’s not the only one. Nouriel Roubini is for it. So is Nobel Prize winner Paul Krugman. They believe, as we do, that the banking system is still resting on the sand of trillions in bad loans and radioactive investments. Taken as a whole, the entire banking industry in America is insolvent. That’s another reason banks aren’t making loans – they don’t have any money. And deflation continues to wash out the loose sand and expose the weak foundations of the banks’ assets. It will also undermine their collateral. Until this process is over…the system cannot begin to put itself right.

The banks mustn’t be stabilized as they are, in other words. They need to be cleaned out first.

We don’t disagree. But if it were up to us, we’d give nature a chance. The market seems to be doing a decent job, as near as we can tell. The value of everything on earth put together is about $100 trillion. In the space of less than two years it has wiped out about a third of the entire capital value of the planet.

If our hotline rings and Mr. Obama is on the phone, we know what advice we will give: Let the banks fail. Let them go broke. Let them be liquidated. Then, the surviving banks could buy up the decent assets and emerge stronger than ever.

*** With tax season upon us, everyone is scrambling to figure out what they can and can’t count as deductions. Turns out, with some clever accounting, cat food and even swimming pools can be added as deductions on your federal income taxes. But what about a brand-new car? Gunner and Jim at Penny Stock Fortunes have the answer, below…

“The folks in Washington are ready to make that happen now with plans to make the total cost of auto loans tax deductible – along with other rebate and incentive programs – to try to persuade those with older vehicles to trade in their junkers for new rides.

“The Senate’s tax deduction bill is pretty straightforward. Those with a new auto loan would earn an above-the-line deduction for loans up to $49,500. The second proposal supposedly has environmental benefits. Those who sell an older vehicle for scrap would receive a voucher to aid in the purchase of a newer, more-efficient vehicle.

“It’s difficult to say if either of these proposals will actually help revive auto sales. Some industry experts believe that a more effective fix would need to include measures to make it easier for buyers to secure auto loans in the first place.

“Of course, these are mere proposals – not new laws. And it is unclear at the moment whether any of the measures will become official, or for how long. But the fact that legislators are discussing the problems of the auto industry is a crucial step. Auto stocks will begin to turn around once investor confidence turns. Legislation – whether it will be effective or not – could very well spark a rally in this sector.”

As for right now, the data look bad at best. According to estimates from the National Automobile Dealers Association, 900 dealers closed their doors in 2008. That’s bad for them, but potentially good for one of the companies in the Penny Stock Fortunes portfolio…which is up to the double digits in just a couple weeks.

*** A ‘Slumdog Millionaire’ DR reader writes:

“Thank you for making me feel like the biblical Noah. I am Dinakarananda from India and I am grateful to the entire DR team. I have been an avid reader of DR for the past two years. I am very happy that I stumbled on DR soon after I landed in Melbourne and looking for some Australian business news website that was sensible and truthful. I have been an avid investor in India since 1993 and in the US since 1999.

“I cashed out almost all my investments in equities and bought 130Kg of gold back in October-November of 2007. DR was one of the major factors that influenced my decision and I am happy every minute of my life now to have found DR.

“Thanks a lot to Dan Denning, Bill Bonner, Mogambo guru and all of you in the DR team for guiding my ark and investments. One of those slumdog to millionaire stories inspired by DR I presume. I would be happy if my email finds its way to the reader email that is occasionally published and if it helps a few more slumdogs around the world.”

*** Is the new U.S. president a Markets and Money reader?

In his first address to a joint session of Congress last night, President Obama said, “That day of reckoning has arrived, and the time to take charge of our future is here.”

You can leave your comments in the space provided underneath the post…

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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3 Comments on "Give Liquidation a Chance!"

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nick conidi

If governments were serious about stimulating economies they should
immediately remove the gurantee on deposits. The fear of losing ones’ money in a bank would entice people to spend and invest and it would not cost the tax payer a cent in stimulus (welfare) packages. It would also hasten the liquidation and price discovery process. Bill is this right or am I missing something again?


When the Ponzi schemes in welfare states like Social security in USA, Centrelink in Australia collapse, I believe Mr.Market will mend the minds of millions.


nick…Do that and the only stimulus would be for the “break & enter”industry looking for all that money under the bed!!

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