A Bear Market Rally

September 8, 2008

I believe this one qualifies perfectly for a bear market rally in the stock market, and risky assets in general. 

 

What has happened with the GSE’s is a rubber- stamping of the inevitable. Basically every single economist in the world knew that these companies would be bailed out, what would happen to the prefferred shares, and common equity was where there was a bit of unclarity. This deal has essentially confirmed that the next government will have the resolve the difficult questions about these massive enterprises. But it has clarified that the US government’s debt is going to be doubled – a worrisome outcome, to say the least.

 

What’s more, we now know that these companies will have to dramatically shrink their balance sheets in time. Indeed, it’s highly unlikely that they will ever again be able to play the role that they have been playing for the past years; creating real estate bubbles through low interest rates is unlikely to be the future mission of these companies, as this time they have been mismanaged to the extreme. 

 

If anything, the new discipline and stringency that will be imposed on their residues will cause mortgage activity to fall further. More importantly, the strange illusion that the government has depthless pockets, and that by putting problem paper on government account one can eliminate it is unlikely to last for long.

 

At best, there will be a rally for a month or so. At worst, the rally will lose momentum before the end of the week.

 

 

 

 

 

 

 

 

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One Response to “A Bear Market Rally”

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