As when the bombs fell in the Mideast in winter 1991 in the Gulf War, and again in spring 2003 in the Iraq War, and in fall 2001 with the Afghan War, and in the 1960s when LBJ turned Viet Nam into a must-know-how-to-locate-on-a-map place for the cognoscenti, so with the country possessing Africa’s largest known reserves of oil. Go to war, goose the stock market.
And so it is risk on today.
And it is back to the sickness of the recent Bush years, takeover Monday, proof that credit is flowing freely in the wrong places, allowing one corporation to waste resources rebranding the services another company already provides, the main purpose of the exercise being to enrich investment bankers and the managements of both companies. Today’s overpriced takeover shows the degree of monetary inflation that has occurred the past decade. An also-ran telecom company, T-Mobile, is being valued at $39 B from AT&T. $39 B?!
AT&T, by the way, as of 12/31/2010 has (per Yahoo’s Finance section) a net negative tangible net worth of $22 Billion. If one thinks tangible net worth is too stringent a critieria, let’s look at net working capital. It is negative $13 Billion. Plus, I would question whether its $103 Billion of stated value of property/plant/equipment is overvalued, given the prospects for the land line business. Buying an income stream from a company with no underlying tangible asset value is a risky proposition. What supports the stock price if profits drop to zero or turn negative?
In the same vein of the “authorities” keeping the money flowing, banks of unquestioned financial strength such as Ally Financial have been granted the right to pay dividends. (Sarcasm was on there.) But of course, Ally is majority owned by . . . the U. S. Treasury. So the Ponzi can continue. The Treasury can pump money to Ally, which can return it via dividends. Similarly, the Fed buys Treasuries, the Treasury pays the Fed interest, and the Fed remits the interest back to the Treasury.
Anyone who mistakes today’s “green” in the stock market futures for a reflection of economic vigor is in my humble opinion mistaken. There will be growth in the spring. But that’s in part because government spending is as much a part of GDP measurement as is business investment in productivity-enhancing machinery.
Precious metals and oil remain the most vigorous intermediate-term bull market around. That would change if pols grew the proverbial “pair” and emulated the many other countries that actually approximate a balanced budget and don’t do the worst sort of central bank money printing. Thus I continue to like the petrocurrencies of Norway, Canada and Brazil as ways for Americans to obtain USD diversification without going all in on precious metals and oil.
I can’t wait for the Fed to read Mises and Hayek, and absorb their wise teachings. Till then, or till events force the hands of politicians, unrestrained money-printing, and its various and not always predictable consequences, remains the dominant theme of the American financial landscape.
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