September, 2008 Update

It's been 4 years since my last post. In that time Greenspan has retired, the housing market has imploded, the Dow is up 10%, gold has doubled, Bear Stearns is out of business. The Beijing Olympics is over, and the mood of the country is decidedly pensive coming into the post Labor Day period.

At this point they are quietly announcing the close of about 1 bank a week on Friday evenings. In the world stock markets, most are sinking (e.g. the Hang Seng is down 28% YTD) while the countries themselves report persistent inflation.

Gold spot prices were crushed 20% since July 15th, but interestingly the premiums charged have more than doubled and are close to 10% in spite of this. The American Eagle and the Kruggerand have both temporarily suspended production.

The general public, in large part, has not expressed any anger towards the use of derivatives. They seem unaware of how market prices can be suppressed, or how executives in a company can sap most of the earnings out to their own pockets by using stock buybacks in lieu of dividends. Ford, GM, Chrysler, Fannie, Freddie, and Citigroup are on the brink. There are 32 companies with a market cap of over $10B, that have a debt equity ratio in excess of 5-1, including Morgan Stanley, Citi, Merrill, Amex, Deutche Bank, and Goldman Sachs.

The question at this point with such high leverage is - which way is the economy going to go, inflation or deflation? After 6 years, I am still torn on this debate. While the government is busy changing the rules (naked short selling of banks) and opening the discount window to less than prime collateral, it still is creating a suspicion that this "floating in air" economy will soon shatter - but when?