February 21, 2009

Market Insights 21-Feb-2009

Weekly Snapshot
• Spot Gold price reached $1,006 on Friday and closed at $992.65 for the week
• U.S. consumer prices rose by 0.3% last month, core inflation, which excludes energy and food, increased by 0.2%
• Nestle raised its dividend after reporting a 69% rise in net profit and forecasts 5% sales growth for this year
• Intuit beats earnings expectations, 2nd quarter results above Wall Street expectations
• China and Brazil signed an agreement to finance oil and gas reserves in exchange for guarantees of oil supply
• California legislators agreed on a budget to deal with the $42bn deficit
• UBS agrees to pay $780 in fines on tax evasion
• Obama's $75bn plan to reduce mortgage payments for 9million borrowers
• GM and Chrysler asked for another $21.6bn in aid this week
• Japan’s economy contracted by 3.3% in the last quarter of 2008
• China will lend $25 billion to Russia to guarantee the supply of 300,000 barrels of oil/day for next 20 years

Recommended Read
Mike Shedlog raises an interesting question in one of his recent blogs: http://globaleconomicanalysis.blogspot.com/2009/02/nationalization-train-has-left-station.html

Can we save capitalism by destroying it? Using the often quoted "Ben Tre logic" to rationalize destroying something out of the perceived best interests of everyone involved is problematic. But there may be certain scenarios where such an act, however ethically and morally questionable, may be the most rational solution to a problem. There are many real life situations where Ben Tre logic works. For instance it is often easier and faster, certainly more economical, to destroy an old house and start building from scratch, rather than trying to repair the house, particularly when the foundation and major structural elements are in bad shape.

The foundations of free markets and capitalism are very brittle at the moment; certain structural elements are near a breaking point. It may indeed be faster and more economical in the long run to let certain institutions fail and let the economy play its course. As Mike Shedlog pointed out, 95% of Russian banks went bust and yet Russia experienced one of the biggest economic booms in the decade after the financial crisis of 1998.

However, I would still disagree with the author. Ben Tre Logic may work, not by destroying capitalism (or whatever is left of it) all together, but by letting those institutions fail who would have failed anyway. In true Ben Tre fashion, the government should not support them but rather force them to restructure. Shut them down because for all intents and purposes, they are bankrupt. In a way we would have a cleaner sheet and Capitalism 2.0 may be a leaner, fairer and more robust. But at the present moment, we won’t know if Capitalism 2.0 is ever going to be created. For now, the powers to be are tinkering with repairing an old house from the top down without fixing all the cracks in the foundation.

Madoff's Mini-Me?
As the financial crisis lingers on, we could safely assume that more Ponzi or other fraudulent schemes would come to light. We didn't have to wait long before another multi-billion Dollar fraud was exposed. Sadly, it's not due to the fact that the regulators are working more efficiently but rather another negative side-effect of the financial crisis. Not only honest investors, but fraudsters too get hurt by the decline in asset values. Allen Stanford was charged in connection with an alleged $8bn fraud. It's yet too early to say whether Mr. Standford could be considered Madoff's Mini-Me but rest assured: this won't be the last case of criminals being charged after the dust from this crisis settles...

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