Price Controls 2 by: TimingStrategies.com

Recession, global growth, inflation oh my! What will happen!? Who cares? What’s happening right now is the answer to the question of what to do today about tomorrow.

While the Treasury and administration keep jawboning about the economy and how it’s so “fundamentally strong” because “just look at the stock market, it’s up right”…
(well kinda sorta for now) Rome burns! The Barbarians are at the gates already. Except in the modern day Rome of 2007 it is an electronic paper fire on the books of it’s royalty merchants, the financial institutions of Wall Street. In fact you may very well consider the stock market to some degree an anti-thetical indicator of the economy for the time being. The stock market is not the barometer of the economy and business cycle that it may have been before 1987.

After the crash of the stock market in 1987, before leaving office, Ronald Reagan created the president’s working group on financial markets with executive order 12631 on March 18, 1988. This order, indirectly, gave to what are known as primary broker/dealer banks (think the big ones) an ever increasing carte blanche to steal from the public in several ways. To cover the ways this is accomplished by Wall Street is not the subject of this article, but we’ll get to that at another time.

Rewind the time machine back to the LBJ, Nixon, and Carter era of the 1970’s. Stagflation marks it’s economic foot print of this time period. Although disco comes to mind which I happen to think really was kind of fun, rapid monetary expandtion, commodity asset inflation along with falling business and employment demand apparently wasn’t so much fun. The Nixon administration in it’s attempt to hide these facts, particularly the commodity asset inflation part of it, implemented socialist/communist style price controls on several key material items. How’s that for free market capitalism Mr. Kudlow? Stocks, especially on a real inflation adjusted basis, sank miserably into 1982. Well so much for that idea.

Fast forward to 2007, the incredible bloating of alphabet soup SIV’s, CDO’s, etc: of the Wall Street credit machine has begun the pendulum’s swinging back in their own face. The creators of their own demise are now once again going to Washington for a bail out, just like spoiled little rich boys asking daddy to buy off the judge adjudicating the case in their financial drunk driving/vehicular manslaughter trial. Only in this scenario, the judge and jury are the world’s free markets, to which Wall Street’s little rich boys piled up their car wreck of worthless debt paper on.

Rich daddy George and rich uncle Hank are going to make everything go away though, at least on the surface for now. What we’ll do, they say to each other, is create a common man human drama in the public press to act as a diversionary tactic, sorta. The CIA does this all the time. What we’ll do, is claim that the average American working people who were preyed upon and “sold” these predatory adjustable rate loans, are going to loose their homes from no fault of their own. Therefore we are going to put a “freeze” on “those who qualify” against the higher re-set of the new rate. Presto… instant socialist/communist style price controls! How’s that for free market capitalism Mr. Kudlow?

What has just been accomplished in this approach is another bailout of the Wall Street menace. Had these loans been dealt with by the alledged free market capitalist system accordingly, they would have found their way right back onto the books of their Wall Street creators as a liability. The primary broker/dealer banks, due to FASB rule 157, would then have been forced to mark to market (that means free market, not price controlled market) these loans at their current market price, effectively starting at approximately 60 cents to the dollar of their original face value, all the way down to 10 cents on the dollar. With that kind of negative impact, most certainly there would be several insolvent (read bankrupt) primary broker/dealer banks on Wall Street in very short order. The hedge funds and individual investors that have done their homework (unlike the little rich boys who went financial drunk driving) would have earned their grades.

Price Controls 2 by:TimingStrategies.com
U$D/XLF

Conclusion: In a free market capitalistic process, the financial system would be purged of the cancerous financial rotting paper and even better, the financial system would be rid of those institutions responsible for their creation. For the mean time though, the day of reckoning as been put off once again for another few weeks or months, but the judicious shall have their reward. However during the interim, instead of just waiting for the blow up to occur to then see which decent companies are left to pick over, a simple yet effective strategy would be to short financial stocks using the negative 2 beta ETF symbol SKF and get long the Rydex positive 2 beta strengthening U$ Dollar fund. Yes, as completely contrary to what you may have been programmed to think about our U$ Dollar in regards to what a P.O.S. it may be, Wall Street’s financial institutions are the real problem P.O.S. So while since June 2007, yes the long Rydex U$ Dollar fund would have lost -13% the SKF would be up + 45% for a net return of +32% Why so? Well, keeping the price of oil and deflation topics out of the equation for this article, Wall Street’s financial institutions must now scramble for some of this famed liquidity that’s been on the sidelines for so long to bail out the S.O.B.’s that created this mess. The liquidity that kept being touted for so long that “just has to go into stocks” will now be needed to bail out these Wall Street mucks and will have to come in the form of U$ Dollars.

Dollar demand is just now beginning to rise in the last 2 weeks since Nov. 26th 2007 and is up just 4% or 8% with the Rydex + 2beta, while the same time the SKF is – 9% over that same time period for today Dec. 14, 2007 so about an even spread for the last 2-3 weeks . Another way to accomplish the same process with less risk is to go short the ETF, XLF while being long ½ the same dollar value Rydex + 2 beta U$ Dollar fund, for a net return of +17%. This will help avoid any near term volatility distortions due to more Fed. Intervention. See: Chart U$D/XLF