Wednesday, September 23, 2009

Don't Teach Grandma To Suck Eggs

Charts: The S&P 500 closed at 1061, down 1%. The charts were scary today. On the surface very little technical damage was created by this small drop. But the market’s reaction to the Fed’s statement was disquieting. The Fed announced more bubble-inducing liquidity measures. And like a trained seal the market roared up, but towards the close profit-takers sold it down. So today was a mini-bubble pop.

Fundamentals: The Fed said today that it is extending its program to buy US housing debt. So far it has bought $857 billion in mortgage backed securities and $130 billion in Fannie and Freddie debt. The Fed acknowledges that it will have to be much more aggressive than that. Congress is getting ready to nearly double its $8000 first time home buyer tax credit and expand it to all home buyers (hugely expensive). We’ve already talked about the FHA’s trillion dollars worth of sub-prime mortgage lending. Federal support for housing is mind-boggling. Meanwhile, the gap between home owners who are delinquent on their loans and those in foreclosure is at an all-time high and climbing. In other words, many delinquent home owners aren’t being foreclosed and the shadow supply in housing is growing. Despite rules and regs limiting foreclosures, they too are at an all-time high. So the housing recovery and the global economic recovery is built on ever-expanding US debt which is built on foreign debt buyers stepping up to the plate. Russia and the Gulf States have cut back on buying US debt. Japan and China have filled this gap and are buying more. So let’s look at asset bubbles. From 1998 to 2000 tech stocks rocketed up, not on fundamentals but because of excess liquidity, like today. Bubbles can last up to two years. Or they can pop unpredictably at any time. This speaks to the need for market timing, not buy and hold.

Geopolitics: Team Obama has told General McChrystal not to send his troop request to the White House. McChrystal is openly defying Team Obama and sending the request in a couple days, setting up a huge political battle. Liberals are saying that America should withdraw US troops immediately while training the Afghan Army, expanding the Afghan Army and deploying it against the bad guys, all in one fell swoop (laughable and absurd). This is what McChrystal is saying: Even with the extra troops NATO doesn’t have the horsepower to defeat the Taliban. But if the troop request is granted the good guys will have enough horsepower to protect Afghani citizens in several key cities. This will give US Army trainers breathing space to build-up and train the Afghan Army from within those key cities and then in a few years the Afghan Army, the American Army, and the Pakistani Army together will be able to completely defeat the bad guys. That strategy will work if it is given a chance. Frankly, I’ve been caught off guard by how hard Team Obama is digging in its heels on the troop request.
The Philippine Army captured Abu Sayyaf’s main base. Abu Sayyaf is the most dangerous Al-Qaeda franchisee in Southeast Asia. This is a huge victory. The Yemeni Army killed 150 bad guys and took 70 prisoners Sunday. These two national armies are US proxies. Especially in the Philippines, the US military is heavily involved in training. So the liberals are right in a way, the brunt of the Long War fighting needs to be done by America’s proxy armies. Have you ever heard the saying, “Don’t teach your old Grandma how to suck eggs?” The Pentagon knows how to build up and deploy proxy armies. It doesn’t need a bunch of liberal dummies on Capitol Hill teaching it how to suck eggs.

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