September 25, 2008

A safe haven for capital...

I don't know enough to know if the numbers really work, but this WSJ article by Andy Kessler, The Paulson Plan Will Make Money For Taxpayers, is quite intriguing.
...Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion.

So the U.S. will be stuck with a portfolio in the trillions of dollars in bad loans and last-to-be-paid derivatives. Where is the trade in that?

Well, unlike Mr. Buffett or any hedge fund, the Treasury and the Federal Reserve get to cheat. It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates -- in effect, "talking their book." While normally this creates a threat of inflation and a run on the dollar, and we may see dollar exchange rates turn south near term, don't expect it to last.

First, with Goldman Sachs and Morgan Stanley now operating as low-leverage bank holding companies, a dollar injected into the economy will most likely turn into $10 in capital (instead of $30 when they were investment banks). This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets, will become a safe haven for capital.

Europe is threatened by an angry Russian bear. The Far East, especially China, has its own post-Olympic banking house of cards of non-performing loans to deal with. Interest rates will tick up as the economy expands -- a plus for the dollar. Finally, a stronger economy driven by industry instead of financials means more jobs, less foreclosures and higher held-to-maturity payouts on this Fed loan portfolio.

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward's purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson's Folly.

Mr McCain was laughed at by lefty retards for suggesting that our economy is fundamentally sound. But it IS fundamentally sound. In fact, it's the wonder of the world, and has been since the Reagan tax cuts (With an assist from the Bush tax cuts.) Last quarter it grew at a 3.2% annual rate, even as the press was begging people to believe we are in a recession. Most European countries would kill to get their economies growing at 1%.

The financial sector has tied itself up in knots with derivatives, but the underlying asset is the USA. And to give you an example of how strong we are, our current military budget is about half the planet's total military military expenditure, and yet, as a % of GDP our defense budget is about half what it was in the Reagan years...

Posted by John Weidner at September 25, 2008 7:13 AM
Weblog by John Weidner