1929 in the horizon

This was a post over the weekend of the Bear Stearns "take-under". While March 1929 was the "right" reference point (given the market crash 7 months later in both 1929 and 2008), I think you can say I hit the mark. And I have to give myself some credit for some really prescient calls in this article.

I don't know if this is October 20, 1929 (I believe the crash was on the24th), or if this is September 1929, or perhaps March 1928. And I don't know if things will unfold in as spectacular of fashion as it did 80 years ago, but I do think that we are in the very early stages of globalmeltdown on par with the 1929 market crash and the ensuing Great Depression.

Before you read the rest of this, I am not telling anyone to go out and sell all of their stocks or stock up a bomb shelter. These things never happen when or how you expect them to. For all I know, we are on theverge of hyperinflation in which stocks are one of the better ways to protect yourself. But this is a time to be very wary of what ishappening around us - the USD has collapsed in value which is why gas prices are going up 20 cents a week.

The authorities may be able to kick the can one last time to stall what is going on in the markets, but the end result looks like it is set in stone right now. And it is not looking pretty.

Just in the last couple of hours, the action has been frantic and wild. JP Morgan, after they and the Fed put together an emergency bailout of Bear Stearns ("BSC") on Friday morning, just announced (as expected) that they are buying BSC for $2 per share. WTF?!?!?!? The Fed agreed to fund $30 billion of BSC assets (probably with an implicit guarantee - postdated note: I was correct and the Fed is losing its shirt on this portfolio) and lowered the discount rate in an emergency meeting (they were scheduled to meet on Tuesday anyway).

For a background on how ridiculous $2 per share is, Bear Stearns finished trading Friday around $29 or so and was trading at $65 earlier in the week. It was a $150 stock a year ago. The CEO, Alan Schwartz, was just on CNBC on Wednesday assuring everyone that BSC was strong and healthy with no cash flow or liquidity issues (I'm glad I am not him right now - postdate, nothing happened to Schwartz for lying on TV) to quell rumours of a pending collapse. The rumours were right.

What is going on? They are starting to panic me, and I have been expecting this to happen - my portfolio is set up to profit from this environment, it is 33% gold and silver, 20% other commodities (mostly water), 30% ultrashorts (it goes up when the stock market goes down) and10% blue chips (mostly GE and ConEd); only my stupid pension plans are trapped in traditional portfolios.

I am stunned by the sheer panic of the Fed and the U.S. Treasury. The Fed is now announcing multiple bailouts and emergency meetings each week. There have been three emergency meeting in just the last 6 days -what is going on? It is crazy that I am getting nervous since you all know that I have called this fiasco each step of the way down - from the collapse of the real estate market and the USD to the panic spreading through credit markets and now finally into the stock market.

The markets are also feeling the panic as Asian markets are down big overnight. I have no idea what the U.S. markets will look like in the morning.

Postdate note - the U.S. markets turned in a fu&k you rally that day as the "bottom was in". I suspected that might happen as I mentioned in the commentary.

To believe that this is no big deal, you have to believe that BSC is just an isolated case of bad management. If so, then this is just another financial panic that will eventually get worked through. However, I think that BSC was just the weakest animal in the pack. But they are all sick and the cancerous virus is spreading and metastasizingas we speak. The Fed and U.S. Government must believe that my view is correct or elsewhy are they showing obvious and public signs of panic. My guess is that Lehman Brothers is next and I also believe that Citigroup is insolvent. I also think that Fannie Mae and Freddie Mac are probably insolvent, and this situation has deteriorated to the point of being tobig to bail out.

Postdate: Wow - this is a classic paragraph where I made a bunch of crazy and correct calls. Only a handful of people were calling for Lehman to go down, let alone Citigroup and nobody was talking about Freddie and Fannie at that time.

This is a truly unbelievable turn in events. Everyone knew that JPM would buy but people didn't expect them to get it for free. That means that the situation was much worse than anyone thought.

JPM is taking a HUGE risk taking on BSC, my guess is that the Fed gave them some sort of implicit guarantee on BSC exposures. Otherwise, how could they have made an informed decision in 3 days or even 7 days if the talks started last week. It would take months of due diligence to assess a company as large and complex as BSC.

I believe that we are watching the Fed/U.S. Gov't double down on a bad hand, just a like a gambling junkie in Vegas. It is sad that the former global superpower has been reduced to beggar status in the global markets with a ponzi scheme financial system.

Similar to the Bank of America bailout of Countrywide (which I still don't believe will be completed), we are potentially turning a bad situation into a catastrophic one. It is one thing for companies like Countrywide and Bear Stearns to go under, yes it will ripple across markets and perhaps turn a mild recession into a nasty one. But if banks such as Bank of America (another great call in hindsight) and JP Morgan Chase go under, now you are talking about the very pillars of the U.S. economy.

I really don't think that the authorities (Bernanke, Paulson, Bush,etc...) have any idea what they are doing. They are panicking and potentially making some very bad decisions. What are they going to do if another wave of companies go under? What if I am right and Citigroup is bankrupt? Postdate: Ha - we go into a depression which is what happened.

This is crazy and getting worse by the day. I hope that someone can stabilize the situation so that things can start functioning normally again, even if it is at much lower valuations. I hope one of the major players (private or public) steps up and instills some confidence in the financial system.

If not, this may be October 1929 and our lives may start getting a lot more interesting. Interesting is not always good as we have now found out.