Do Washington’s bailouts and rescues simply amount to an intervention in the American free market system on behalf of elite institutions and big capital, against the interests of the American consumer? And is there a fundamental disconnect between the principles guiding such intervention and the shape of the global economy?
If the answer to both questions is “yes”, retail investors are best advised to forego bullishness and to use all significant rallies in the S&P 500 to sell (QQQQ, SPY) aggressively, and to buy put options when such rallies are accompanied by record implied volatility. After the sharp fall in equity markets on Monday, a number of mutual fund managers continue to espouse the longer term view in one television appearance after another, despite the fact that economic data on the domestic and global front is clearly telling us that the deleveraging process is certain to have painful repercussions for asset valuations and for consumer loan delinquencies through 2009 and beyond.
In a classic free-market capitalist society, financial institutions and corporations are not protected from market forces. The $8 trillion government program involving both cash outlays and guarantees is not only destroying the dynamics of private capital; it is also creating new systemic risks, while claiming to remove underlying threats to the process of capital accumulation and to mainstream deposit and lending mechanisms. The biggest system risk being established today pertains to the qualitative deterioration in the “full faith and credit” of the US government.
Of more immediate concern to retail investors should be the alarming inability of rescue targets to bring any post-rescue credible business models into the public domain. American International Group (AIG), Goldman Sachs (GS) and Citigroup (C), for example, remain in semi-permanent restructuring mode. Others accessing government funds and guarantees are still refraining from identifying the full extent of asset depreciations; General Electric (GE), for example, needs to restate its emerging market assets (given the turmoil in India, Thailand, Turkey, Brazil and the Middle East) before anyone can figure out how its stock should be valued. This week the focus will be on Detroit, and there is every reason to believe that aid in the face of a failed business model will be termed a medium-term loan.
In the absence of any detailed business plans from the bailout targets, it is best not be misguided by the rather vague argument that, in time, the American tax-payer will actually benefit from concerted and widespread government intervention. On the contrary, the targets will simply drift along, in the hope that either the domestic stimulus packages will result in a sustainable improvement in household balance sheets and overall credit quality, or the stimulus packages in Europe, China, India, Brazil or Russia will lead the world out of this deep-rooted recession.
The Obama administration has been touting the recently-announced stimulus package (expected to reach $800 billion) as being friendly to the American worker. History does not support that proposition. The fact remains state capitalism has always been about the control of the means of production and the related financial superstructure by the state; the evidence shows that, even in instances where the state (e.g. Russia and China) claims to represent workers and peasants, it is the political elites who control the ebbs and flows of capital, and the fate of the population at large. So check who controls or directs Washington’s lawmakers before executing any long-term bullish trades.
This short call is premised on the ideological assumption that state capitalism, at its roots, is bad for the retail investor, near-term or long-term. For a profound analysis of the state capitalism phenomenon, study the post-WW II analysis of the Soviet Union by Tony Cliff and Raya Dunayevskaya at your leisure. Both writers were of the view that America’s Cold War enemy was not a communist state in the first place!
Tags: Add new tag, capital, DIA, QQQQ, socialism, SPY, state capitalism
