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Drastic times argue for drastic measures..

July 15th, 2008 · 1 Comment

We actually skipped over it the first time reading, but depending a bit on what measure you take, inflation could very well be close to double digit growth in the US already..

Over the past year, wholesale prices have risen 9.2 percent, the most since 1981. Oops. It will be difficult to ignore these signals for too long. However, as scary as this figure is, we think it might not get a whole lot worse:

  • We think the rise in oil will peter out for now
  • Wage earners in the US are in a particularly weak position to demand compensation for rising prices, due to increasing unemployment and a structurally weak position of organized labour. However, that must imply that real take home pay is actually decreasing, which will be a further drag on consumption and the economy, but at least it will keep inflation in check.

The one remaining inflationary worry is the super aggressive monetary easing by the Fed itself though, forced by the ever more precarious situation in the financial system. The Fed is increasing it’s uptake in these hard to market products whose markets have become rather illiquid,  increasing the money supply.

Federal Reserve Chairman Ben Bernanke told Congress Tuesday the fragile economy is facing “numerous difficulties” despite the Fed’s aggressive interest rate reductions and other fortifying steps.

Bernanke, testifying before the Senate Banking Committee, sounded another warning that rising prices for energy and food are elevating inflation risks. This problem looms even as officials try to cope with persistent strains in financial markets, rising joblessness and housing problems.

Indeed!

And what has been given with one hand (tax rebates), can very well be taken away with another:

The two companies hold or guarantee more than $5 trillion in mortgages — almost half of the nation’s total. The Bush administration is asking Congress to temporarily increase lines of credit to Fannie and Freddie and to let the government buy their stock. The Fed has offered to let the companies draw emergency loans.

The pledges of aid have raised concerns about the government’s role in such financial problems and the risk to taxpayers.

Now, in all this mayhem, might there be something good coming out of this? Well, apart from the fact that we’re now in the destruction phase of Schumpeter’s ‘creative destruction’ process, the SEC is pondering on how to curtail shorting.

We have argued here before that shorting is wide open to abuse (a practice called naked shorting). But the SEC seems to believe that scaremongering and false rumors by shorts might have played a role in the downfall of some financial institutions (Bear Stearns comes to mind). And they want to throw some sands in the wheels of the shorters, it’s considering action against naked shorting in the wider market (we found it on the IOC message board – thanks Ken -, we believe it comes from the WSJ):

SEC Curbs Shorting of GSE Stocks, Considers Limits for Wider Market
By Kara Scannell
Word Count: 320 | Companies Featured in This Article: Fannie Mae, Freddie Mac
WASHINGTON — The Securities and Exchange Commission announced an emergency action aimed at reducing short-selling in Fannie Mae and Freddie Mac stock, and will immediately begin considering new rules to extend those trading limits to the rest of the market.

SEC Chairman Christopher Cox said at a Senate Banking Committee hearing that the SEC would institute an emergency order requiring any traders to pre-borrow stock

Here is another link to a similar story.

We know one company that would HUGELY benefit from such action… We’re pretty sure you know what we’re talking about. It happens to be our main featured company..

Tags: IOC · The Markets

1 response so far ↓

  • 1 Jim Tate // Jul 16, 2008 at 4:01 pm

    With over 10 million short and 3.5 million naked short, IOC will fly…May it happen soon. Today works for me…