BG 01292009
THE NEXT BUBBLE
The way out of the collapse of the burst market bubble is finding the next bubble in the making. And the next one is going to be big – really big.
By Neil George
Now, the credit bubble has burst. And the results are known to everybody. Stocks are down in the
Meanwhile, the talking heads on financial television are as hyped up as ever either telling you what went wrong – or how bad it’s going to get. And sure, there are some that are telling you that now is the time to buy. But just because many stocks might well be cheap right now doesn’t mean that they’re great buys – but why they will perform.
The key thing is to understand in this process is that for every modern market collapse that there’s been a new market bubble to take its place. And while it might not make for great long-term policy – knowing this gives you real reason to buy into what’s coming up next.
If we look at some of the history of the
Back in the ’80s – federal regulators of savings and loans and thrifts moved to prop up the housing market. S&Ls were allowed to be more flexible with reserves and investments beyond the core mission of taking in deposits and making and holding home mortgages.
The result was a reckoning not too dissimilar to the current banking mess. The workout resulted in the formation of the Resolution Trust Corporation (RTC) which would eventually seize more than 700 thrifts and selling off their loan and other assets.
The collapse of the housing and credit bubble in ’89 brought with it a resulting recession. And while the market losses of 10 plus percent wasn’t as dire – it wouldn’t be that long before the next bubble would begin to make its way into the market.
The Federal Reserve Bank (Fed) not only flooded the economy with cash – but it also worked to ease reserve and margin restrictions in markets for stocks and bonds. This heavy lifting by the
The Dot-Com bubble burst as investors not only began to seriously question company valuations and revenues – but also – money conditions and higher interest rates began to kill off even viable start-up companies.
The burst bubble in stocks resulting in the broader loss of a third of the value of the S&P also sent the
This next bubble sent wealth flying out of the collapsed stock market and into housing even more so than in the ‘80s. The resulting burst of the credit bubble started as slower leaks in various local markets in ’05 with housing falling broadly by more than 20 percent as tracked by Case-Shiller.
And in the process – the Fed along with regulators in the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) was already aiding the next bubble in commodities.
Again – the game plan was to ease up on rules concerning non-exchange trades in commodities – helping to move more cash to commodities or at tracking indexes creating a huge build up in the markets for real goods in ’06 to the peak of the summer of ’07 by more than 49 percent. Then the bubble collapsed since falling more than 42 percent till now.
Now as the credit market is mauled, stocks have been slaughtered, commodities cooked – what’s already well underway to get things going again is Uncle Sam’s plan for the mother of bubbles.
Uncle Sam Inc.
In each of the bubbles burst during the past three decades – as well as plenty before them – politicos, either fearing retribution by voters or being lured by lobbyists, regularly respond not just to level market obstacles – but rather set up the next bubble for the markets.
And in hindsight – over the past decades – you might have or should have cashed in on many of the past bubbles. And right now you need to be getting into the next one.
Uncle Sam is the next bubble.
Government has continued to be a bigger chunk of the economy over the past thirty years. For in just the Federal spending alone has soared by some 550 percent – well more than double the core rate of inflation.
And 2009-on it’s going to get even bigger as the budget right now is estimated to be at over 3.1 trillion dollars.
If I were to tell you about a company that has been growing through recessions and bubbles by that amount and forecast to rise even greater in the coming years – you’d be interested in buying in. And that’s exactly what you need to be doing right now.
Now Uncle Sam might not be publicly listed – but it’s subsidiaries are.
Uncle Sam Inc has 5 core divisions: Banking, Defense, Healthcare, Energy and Infrastructure. And in the current budget - each of these divisions will be seeing massive spending in just the official 2009 numbers.
Each of these divisions is about as close as sure things in terms of cashflows as you can get in the market. But the work comes in figuring out which companies will get the full gains from the capitol.
Bank On It
I’ll start with the most visible bubble in the making – banks.
The major response to the credit and market bubble’s popping is of course the Troubled Asset Relief Program or TARP. The legislation authorizes the US Treasury to be able to spend taxpayer funds on pretty much anything deemed to be helpful at getting the economy and markets working again.
Over the coming years – hundreds of billions of dollars have been allocated with more available initially and ostensibly to buy up troubled loans and other credit assets of banks. That was the plan – but as it’s been put to work after Congress authorized it – the Treasury has begun to buy not troubled loans – but ownership interests in banks as well as now insurance companies and other financials.
In just the past few weeks – 25 banks around the nation have become partially owned by Uncle Sam Inc through direct investment in preferred shares. And that’s before two of the nation’s biggest mortgage lenders – Freddie Mac and Fannie Mae were previously brought into Uncle Sam’s portfolio.
And there’s more to follow – as not only is the Treasury investing directly – but over at the Fed – Uncle Sam is fully into the lending business. And not just to member commercial banks – but now directly to corporations inside and beyond the
The impact of this will be huge. There will be a stream of further consolidation – directed by Uncle Sam resulting in big gains in banks. Right now we need to start doing what Uncle Sam is doing – buying preferred shares of solid banks. One of my favorites over the years is First Banks based in
A solid family-owned bank that’s always shunned risk bought out all of its common stock. Now only issuing preferred. And that’s fine with me as its 8.15 percent preferred (NYSE: FBS A) offers a yield of over 12 percent.
Best Offense Is Defense
One of the steadiest of businesses is supplying Uncle Sam’s military. Spending never goes down. And being one of the biggest divisions in spending – it’s only going to get more profitable.
I’ve been handicapping the best prospects over the past few months and by doing that I’ve come to see one of the most locked in for Federal Cashflows is – General Dynamics (NYSE: GD) with its contracts across nearly all business lines of defense.
Health & Wealth
The transformation of the healthcare industry is still just getting underway. Uncle Sam already spends as much and will spend more on this than Defense.
I’ve written plenty on this over the years concerning the public-private mergers of healthcare over the past few years and see that the model of the Federal Health Benefits Plan (FEHBP) is one of the key models for healthcare benefit managers to cash in on providing broader healthcare coverage for more Americans beyond Uncle Sam’s employees.
One of the leaders in the market for providing healthcare coverage for the FEHBP is UnitedHealth (NYSE: UNH) which should be inline to get a bigger chunk of public and private cashflows.
Energy & Infrastructure
The last two divisions of Uncle Sam Inc focuses on increasing alternative energy and fixing and expanding key bits of our transportation and essential services infrastructure. Again – this has been a big area of focus for years and now I see that the cash is coming – less so from the private sector and now more so from the government.
On energy – there’s a host of projects – but right now nuclear is getting ramped up with deals cut already with one of the leaders in power plant equipment and construction. Areva (OTC: ARVCF) is a partner with an old favorite - Siemens - and has current and pending contracts right now from Uncle Sam.
Then think about what everybody knows that we need – better roads, improved public transport, better air and shipping ports as well as water and other essential services systems. There are plenty of key companies that get the call from Uncle Sam – but one keeps standing out for me – is Shaw Group (NYSE: SGR). With divisions spanning most of our key national needs – its set for Uncle Sam’s cash to flow.
Neil George is editor of By George.
Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.
