How To Trade When The Government Controls Investment
James Bibbings, August 7th, 2009
Page 1
Let me start by thanking each and every one of you for following me and analyzing what I have to say. Last week I wrote an article titled "The 11th Hour, Moments before A US collapse." That article summarized some thoughts that I had regarding government intervention. I followed up with a supporting article earlier this week titled "GDP Fallacy, Do Governments Willfully Mislead People" in which I supported the first two points of my original thesis. In the second article I also began to investigate potential investment opportunities that might make sense if we can gain an understanding of the government's intentions within our increasingly unexplainable market. Today I want to discuss point three in my original theory, so if you aren't up to speed get reading. If you've been following me the whole time let's get started; remember to remain mindful of the GDP equation and the fact that GDP measures economic well being:
GDP = (A) Private Consumption + (B) Gross Investment + (C) Government Spending + ((D) Exports - Imports))
Point Number Three
As I explained previously the government controls 25% of the GDP equation through its spending. Since day one of the recession they have also known that controlling 25% of GDP wasn't enough to make a lasting impact. Thus, recognizing that 75% of the country's well being was outside of their control, the government had to find a way to gain more influence. Let's jump back quickly to my first article, and point number three:
"To further influence GDP the government must control more of the equation. By controlling debt, or the means by which most gross investment comes, the government could influence roughly 50% of the GDP equation. Since private banks were [still are] failing, in order for the banking industry to survive, the government portrayed that US banks "must" be bailed out. [Although this was not true and they should've been allowed to fail]. Thus, through the first bailout a large portion of letter B, or gross investment, moved under government oversight."
Since the government's only goal was to capture more control of the "well being" equation (also known as GDP) they saw an opportunity in our failing banks. By taking control of the banks they effectively took control of gross investment and they did so as quickly as they possibly could. Due to this effort, throughout the great recession a specific question has been repeatedly asked: "What is the criterion for bailing out some financial entities but not others?" Most recently this question was asked for the umpteenth time as CIT Group was on the verge of collapse a couple weekends ago. Inquiring minds have been pondering the situations involving CIT Group, Lehman Brothers, Bear Stearns, and several others that the government decided not to bail out. They are wondering; what was different about CitiGroup, Bank of America/Merrill Lynch, AIG or any of the other financial entities that were pulled from the brink of destruction through government assistance?
The official answer to this question has always been one that involved systemic risk coupled with a generic "these companies were too big to fail" statement. Certainly that explanation is plausible and might even seem reasonable if bailing anything or anyone out was the right choice. Yet, all of these companies were large enough to fit the systemic risk/too big to fail criterion right? Of course they were! If they weren't, there would be no room for debate about who is saved and who is not. So if it can be argued that they were not entirely taken due to systemic risk, what then?
These entities have more similarities than they have differences and for the most part are materially similar. Thus, it is my opinion that the decision to save or not to save lies within a financial companies level of overall access to, and exposure within the markets. Although this seems the same as too big to fail-systemic risk, consider the situation for a moment from a different perspective. If companies aren't allowed to fail is there actually any systemic risk? Under this guise if you're the government and you need to influence GDP but can't "officially" control gross investment what do you do?
