Wall Street has been rallied by news that Messrs Paulson and Bernanke plan to spend a weekend together to get the financial markets all sorted out. Can it really be that simple? Surely we are just going to see more of the nationalization and money injections of the past week, but dressed up as a plan. Bottom line: this is all going to be inflationary and extremely good for precious metal prices.
Therefore if the unveiling of this plan rallies stocks and the dollar and is bad for gold prices then take this cue to buy the precious metals while you still can at what are going to look bargain basement prices.
One thing is perfectly clear. We are not immediately going to see a return to the days of the highly leveraged casino. Without that there is going to be some real pain among the former participants whose fancy financial instruments are becoming the seeds of their own destruction.
Helicopter Ben Bernanke can ease the pain with a few handouts but this is going to be a very different world. And it is going to be a highly inflationary one, as we have already started to realize with prices soaring this year.
But it has to be really. The alternative is the John McCain option – and why on earth did he suddenly call for the chairman of the SEC to be fired in the middle of the panic this week, hardly a constructive approach?
The hard-edged Republicans think the US financial system should be allowed to collapse and then we should wait for the recovery. They want a return to the Great Depression of the 1930s. Inflation is by far the less painful option to deflation.
What the Bernanke and Paulson bail out will do is push up inflation rates around the world and devalue the US dollar again. That will be uncomfortable but it will prevent a true crash. As in the late 1970s gold and silver will be the asset class to own, and provide the best returns in a difficult period for investors.
The previous asset classes of choice will all do very badly. US stocks should fall below their 2003 lows, and real estate is already a cooked goose. I do not like the look of the bond market either.
For the UAE prospects are better than almost anywhere else as inflation will support relatively high oil prices, and that will keep real estate and equity markets stronger than elsewhere, and create a buying opportunity for local stocks very soon.
The more I watch of the Senate hearings on the bail out plan the less I like it. You really have to be an incredible optimist - and the US is full of them - to think that the global derivatives problem can be solved with a $700 billion plan. A former McKinsey guy in Hong Kong puts the figure at $5 trillion. So are we going to avoid a full on Wall Street Crash with shares melting down? I have my doubts - gold and silver look a good insurance policy in this environment.
Comment by peterjcooper — September 24, 2008 @ 9:56 am