The Cleverest Bear You’ll Ever Meet

What could it mean that Bank of America was down 5.2% in U.S. trading overnight? Or that Wells Fargo fell 4.2%? Or Citigroup fell 4.5%? Or that JP Morgan fell 2.8%?

Well, it could mean nothing.

Or it could be the leading edge of a financial merde-storm that is about to hit the U.S. market and reverse the global risk trade that’s propelled the Aussie dollar to within a husky whisper of parity. If and when that storm hits, you can expect to see a correction in gold and big falls in base metals prices and across the whole commodity complex.

But it’s tricky, isn’t it? Signs of hyper-inflation or “elevated” inflation are commodity bullish. Besides, how is it possible that a major mortgage crisis in the U.S. could lead to a stronger U.S. dollar? How does evidence of massive financial weakness at the heart of the American financial system translate into a reversal of the dollar’s relentless slide against everything else?

If it’s a repeat of 2008, then suddenly-terrified investors who’ve been borrowing in Ben Bernanke’s cheap currency unit to buy real things and higher yields will take their post-2009 low profits and cash in. Then they will head for their heavily fortified silk-lined and fuel-cell powered bunkers, with canned foods, gold coins, and bottled water, and commence the vigil/death watch on America’s incredibly complex, fragile, and fraudulent financial system.

You may think we’re exaggerating today. We’re not. Of course we’re trying to avoid over reacting as well. When retail investors abandon stocks in droves, it’s almost always a good time to buy. And lately, U.S. investors have been exiting equity mutual funds in favour of bond funds, exchange traded funds, and emerging market funds. The herd has a habit of buying high and selling low. Is now one of those times?

The shift in capital flows does not exactly show a general risk aversion to stocks; it’s just an aversion to U.S. common stocks. This leads us to believe this is one of the cleverest Bears you’ll ever meet. Maybe one of the cleverest, most gluttonous bears ever. He can hardly believe his luck, if bears believe in things, that is.

Since the March lows on major indexes in 2009, the Bear has retreated to his cave to munch on the dollar carcass as it steadily declined. Meanwhile, investors, believing the picnic ground is clear, have busted open the Chardonnay and begun buying bonds, commodities, and emerging markets with glee.

Meanwhile, the Bear in his lair lays low and keeps quiet. He’s probably busy reading (with growing hunger) about how major U.S. banks may face massive losses from repatriated securitised mortgages which will be put back to them by investors who now understand the paper they own isn’t worth anything because, (a) the bank may never legally sold what it claimed to sell, so the investor never really owned it and, (b) the people paying on the mortgage which underlies the security have begun the great national screw-the-banksters revolt by stopping payment on mortgages, whether they’re in foreclosure or not.

The Bear loves him some bank stocks. And we think he’s going to eat up in anticipation for a very long North American (Kondratiev) winter. Other bank stocks in the same financial ecosystem should be very worried too (yes Australian banks, this means you). Word around these parts is that Slipstream Trader Murray Dawes is not only bearish on the ASX, he’s recommended some trades designed to profit if certain Aussie bank stocks fall.

But wait!

There is always the possibility that this really IS the big one for the US dollar and that’s what bad for the greenback is good for Australia and the things in mines. That is, this is the moment when global investors turn against the greenback as a reserve currency. If that were the case, the Aussie would smash through parity and break out of its old relationship with the U.S. dollar. Come to think of it, a lot of things would break, and probably be beyond fixing, including the current uneasy, co-dependent, increasingly antagonistic relationship between America and China.

You have to wonder if U.S. monetary authorities are capable of reversing the dollar’s slide at this point, even if it’s an outcome they desire. For what it’s worth, we think the authorities want a weak dollar, but not for the reasons they say. A weak dollar should improve U.S. exports. Yet America had a $43 billion trade deficit in August. And its bi-lateral deficit with China was at an all-time high.

Of course you can’t improve your exports to a market when your currency doesn’t get cheaper because its value is pegged to that market. When the dollar slides, the Yuan stays in a fixed relationship to it with a fixed exchange rate (or a managed floating rate). China has not suffered a competitive blow to its exports from the dollar slide. But that doesn’t mean the Chinese are happy about the weaker dollar.

They realise that a deliberately weaker dollar is a kind of strategic default or depreciation on long-term U.S. liabilities. “The dollar’s depreciation may appear to be market-driven. In reality, it is a depreciation coloured by very strong, deliberate actions,” says Li Xiangyang to Reuters.

Li pointed out that Fed’s weaker-dollar strategy is all about making America’s creditors pay for its debt problems. He says that, “If the global financial crisis was about nationalizing private debt, then in the post-crisis period the urgent need of the United States is to internationalize its national debt.”

Dollar depreciation, then, is really about, “spreading the debt around” to America’s creditors through inflation. You can see why the Chinese government, as a large creditor of the American government, would be worried about this debt redistribution program. It would own a large pile of increasingly worthless American debt obligations.

People fight over these kinds of things, historically.

But for now, the opening battle in the currency wars is all financial. And your editor is admittedly fascinated/obsessed with the idea that from out of the blue, this mortgage fraud situation has the potential to tip the American (and global) financial systems right back into an acute capital crisis.

Those trillions in bad U.S. housing loans have not ever been written down or purged from the system. And now they appear to be going sour/blowing up well ahead of schedule. Everyone thought the foreclosure problem wouldn’t hit until rates went higher or interest only and ARM mortgages adjusted.

Scratch that. The endemic fraud in the U.S. mortgage system is quickly becoming an existential threat to big U.S. banks, you know, the ones that are too big to fail. If these banks face losses or non-payment on large chunks of their loan portfolios, they will require huge capital injections, reorganisation, or outright nationalisation by the U.S. government (which is currently on the road to bankruptcy).

And thus you will finally have the nationalisation of American finance, where the bankrupt State and the amoral corporate financial sector finally merge into one entity with complete mastery over the little guy. The merger of the State with Corporations is also called Fascism. It’s the sort of threat that, once realised, should make well-armed Americans very angry with their incompetent government.

But will the bone-deep dread that’s setting in with your editor cause investors to sell everything ahead of the coming elections? Or will they keep buying gold, the financial back door to this whole coming barroom brawl between the Banks and the People? Or will this be another orderly retreat from the systemic precipice and from risk, leading to a handy little U.S. dollar rally and more gains in the Aussie gold price? Stay tuned…

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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11 Comments on "The Cleverest Bear You’ll Ever Meet"

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Richo (the Second)

Funny how the US have the nerve to call Chinese “currency manipulators” – they are currency manipulators themselves.


funny how the quasi/neo fascist US calls others communists or socialists. scarey stuff.
really funny it seems to Australians that US mortagees can walk away from their mortgage. imagine how more crazy Australias housing bubble would be if we could do that here? how could they have such a facility in the land of the free and brave is beyond me. ironies abound in this world.

Americans have always prided themselves on a comparative lack-of-red-tape, freedom-from-regulations-style business model, peterg. During past trips to the US we’ve always been a little awed just how easy it seems to get anything approved. For a she’ll-be-right-mate nation, _our_ obsession with regulation borders on neo-fascism!~ All that appears to have changed in the US recently. It’s possibly a backlash to 9/11, the GFC, New Orleans flooding, oilspills, school shootings, increased litigation on an immense scale… you name it. Bill’s recent musings touch on some of these changes. The US housing debacle is complex, but the jingle-mail aspect is, as you’ve… Read more »
I came across some more details on US housing, 1% tax per annum (not sure if local rates are on top of that, I would guess they are). tax deductability on personal loans (thats 25% min savings to start with). the ratinalisation is that it encourages home building… yeh, they got that right, plenty of housing “over there”. (WWII song reference, perhaps ironic.) Ive always wanted to know about social security there, and as it is largely a state matter and variable, its been difficult to find out. dont mention the Porche idea too much, they are desperate enough to… Read more »

My guess is that it may get worse before it gets better over there.

You’d need to reread Shoes’ link related to buying in the US.
While the article really doesn’t address the unemployment scenario sufficiently, it provides a good description of building standards and construction shortcomings, particularly in terms of continual repairs.

‘Winterizing’ can be an issue in northern locations, too.

The majority of our rentals here need no repairs whatsoever…
and our builder addresses any issues, anyway… . :)


the link pls? I must have missed it before, dont make me go back there. :-/

No worries, peterg: Perhaps equally important as the unemployment issue in the US, is the matter of extreme US oversupply. Last weekend’s ‘Australian’ carried a very interesting set of stats on housing oversupply, in the US; as opposed to Australia. For most of the last decade, the US has generated _three times_ the number of housing starts per head of population as Australia. In 2006 – 2007, there were 4.5 times the number of housing starts p.h.o.p., as in Australia! The US bubble had been steadily building since 2001, but in those two years construction went _crazy_ as supply… Read more »
Letter to Wells Fargo Spokeswpman Vickee Adams, Dear Ms. Vickee Adams, In your recent Wells Fargo’s press release, you declared that “”Our records show that Wells Fargo’s foreclosure affidavits are accurate, When the company finds employees that don’t follow procedure, it takes “corrective action.” That’s a lie. I can say for a fact that Wells Fargo made us fraudulent mortgage loan and foreclosed my home based on hugely inflated and fraudulent appraisal and refused to correct its mortgage fraud. Wells Fargo teamed up with its attorneys and spent last 4 years in Nevada courts defending its appraisal and mortgage fraud.… Read more »

of course theres the good side, when US goes socialist theres all those homes for the noveau poor and homeless to move in to. I’ve often reflected on the boom of the 1920s, sydney inner suburbs, all those houses built, and the wonderful train lines that we can seem to build today. OTOH all those homes are still standing, not too sure about the modern houses in the outer ‘burbs, quality like you said, and peek petrol etc. glad to be here but not too smug about it. thanks for the link.


“…theres all those homes for the noveau poor and homeless to move into…”

There’s always a silver lining, mate! One of the issues may be determining who actually _owns_ them. The lawyers must be rubbing their paws with glee!~


just read that one, BP, theres more than a few grains of salt in that stew. ouchhh…

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