A Random Walk Down Main Street

The index of leading indicators turned positive with a +0.3% in December, but housing, consumer confidence and jobs continue to struggle. Meanwhile, the US government is pulling out all the stops to provide liquidity by injecting a tremendous amount of cash into the financial system. The increase in money supply was the largest on record, even surpassing the previous record when the government rushed to provide cash in the wake of September 11 attacks in 2001.

And now, President Obama and the Democrat-controlled Congress are on a multi-trillion dollar spending spree to keep our economy from slowing even further. Whether all that spending will revive our economy is yet to be seen. However, one thing is very clear — the recession is spreading across the Pacific Ocean to the booming Asian economies.

On top of that, China is also facing pressure from President Obama to allow the yuan to rise in value. Timothy Geithner, Obama's pick for Treasury Secretary, said that "China is manipulating its currency." the last thing China can afford is to allow its currency to rise and make its exports more expensive. So I foresee that the currency-valuation issue will probably turn into some sort of political battle down the road, threatening to make things worse for both the U.S. and China.
And over the Chinese New Year break, I have been deep into discussion with some of my fund investors – and one of the key worries is that there is a strong likelihood that Bank of America and Citigroup could fail despite the most radical government rescues of all time.

These two megabanks are on life support, receiving massive transfusions of government capital. But they're still hemorrhaging, and no one in Washington has found a cure. Already, they have received capital injections of $90 billion ($45 billion each) and this bailout is larger than the total combined capital of PNC Bank, Suntrust Bank and State Street Bank — all among America's ten largest. Please note that Bank of America Corp. and Citigroup, Inc. have combined assets of $3.9 trillion, or 43 times the size of the Treasury bailout funds they've received to date. Bank of America and Citigroup are the nation's second and third largest high-rollers in the derivatives market, with a combined total of $78 trillion in these bets outstanding. That's over ten times the derivatives that Lehman Brothers had on its books when it failed last year.

According to the OCC, JPMorgan Chase is actually the most heavily leveraged, with over 400% of its capital already exposed to the risk of default by trading partners. Bank of America's and Citigroup's exposure (177.6% and 259.5%, respectively) is also wild, but JPMorgan Chase's exposure is obviously far greater.

I am very sure that the economic picture will get uglier. But the best time to buy is when nobody wants to! And don't forget that stock markets historically bottom 6-12 months before the economy does.