Andre J. Peschong

Gordon Brown, the currently embattled Prime minister of the UK, has just been dealt another crushing blow that has very serious and profound consequences.  Because of the UK’s current economic plight, mainly stemming from banking bailout, his country’s AAA debt has been downgraded by S&P from a stable to a negative outlook.  This is a direct result of the current debt to GDP (Gross Domestic Product) load which is now at 53%, and at the current rate will be at 100% by 2013.  The UK is an industrialized world power that could see its debt priced at that of emerging economies.  Is the US soon to follow is not so distant cousin?

In other news, GMAC is receiving another $7 billion infusion.  Why haven’t they provided any plan of reorganization or how they plan to stem the shortfall?  The “corporate welfare system” is in full force by the current administration.  I believe our administration does not know how to fix it but they believe throwing additional capital at the problem will solve it temporarily, which is the path of least resistance.  Remember people, this is your money and your future debt.  Where is the accountability?

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This post on the “When Giants Fall” website really crystallizes the administration’s agenda.  One of the key foundations of our capital markets system is confidence, without confidence there would be mass panic and chaos.  All of the US treasuries and debt issued by our government is backed by what?  It is backed by the full faith and credit of the government, which lightly translated is confidence.  What happens when investors, the true backbone of the capital markets lose faith?  That is a daunting question that is fundamentally brought to light in the current administration’s actions of changing the rules.  You cannot arbitrarily change the rights of contractual bond holders (i.e. Chrysler Corp.) or that of mortgage holders; this is the slippery slope I refer to.  If investors believe that contracts and rules can be changed mid stream they will likely seek a higher risk premium, thus making financing costs soar. 

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Yes, an odd name for an article but one that has true meaning in this particular case.  The following piece came out about a week ago and it distills down the essence of the “white elephant.”  First of all, what is a white elephant?  Well, in the deal business and in “Wall Street speak,” it is a term that refers to a glaring problem or issue (the white elephant) that everyone clearly sees but no one wants to acknowledge.  The subject matter in the article, “The Looming Crisis,” is just that.  There will be serious repercussions when the hammer falls and people realize that all of the money being pumped into the economy, the feel good Obama 100 days, and especially the media blitz that Obama has been conducting trying to calm the markets, will not stop, slow down or even be a speed bump in the commercial real estate melt down. 

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In uncertain and scary times I like to use analogies so that a larger groups of people understand the gravity of the situation. Plus it also helps me distill down the essence of what is happening into relatable nuggets.  Here is my latest and greatest. 

George Washington, our founding president, of the United States died in 1799 from the common influenza virus or related symptoms of the flu.  The doctors of the day used Calomel, a mercury based product that caused the body to forcefully regurgitate its contents, and bloodletting.  Both of these methods, standard at the time, were used to treat the symptoms of the illness hoping the illness would be expunged and that the body would recover.  Well, in this instance, according to modern doctors, the treatment actually caused the death of the patient, our first president.  How could this analogy possibly relate to what is currently happening in the market?   Here goes my attempt to pull it all together. Read and observe.

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After my last post on the stock market, I had the opportunity to do an interview on Chicago’s WBBM Radio for their Noon Business Hour show.  Listen here.

Ladies and gentlemen, the four week rally we are experiencing has been significant and has certainly helped all of our bruised psyches, but at the end of the day what has fundamentally changed?  We still have rising unemployment; the banking sector is still very weak, regardless of the massive injection of cash, and the political process is calling for greater scrutiny and regulation.  The global economy is still suffering a downturn in consumption and thus output.  Even our developing countries are seeing the first major pullback.  Regardless of the capital being injected into the system by the Fed and Obama’s endless rhetoric about fixing the system, our economy has a lot to work through before we get back on a growth path. 

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