Nationalizing U.S. Banks

I've been listening to numerous Bloomberg interviews from the World Economic Forum in Davos, Switzerland, and found a somewhat controversial recurring theme. In an interview with NYU's Nouriel Roubini, he stated that the nationalization of our major banks might be the best option given our current situation. With his research estimating $3.6 trillion in total credit losses, he has good reason to believe that nationalization might be the only alternative. As of this month, only $1.1 trillion has been written down, meaning that the delerveraging process might only be in its jeuvinile stage. George Soros also stressed the point that banks will need an imense amount of recapitalizing. If this recapitalizing doesn't come from the private sector, the government will be forced to increase their intervention. A later interview with Nasim Taleb, author of The Black Swan, revealed a similar outlook. Currently, we have socialized losses and privatized gains (crazy, I know). Taleb believes that we should socialize the profits by nationalizing the banks, giving the government the chance to sort out the assets. Once the banks are solvent, they would then be sold back to the private sector. Easier said than done when the government can barely run the post office. However, in the coming months, this may prove to be a very viable option in order to steer clear of a "zombie bank" type situation that succeeded in bringing Japan to its knees.

LEI Follow-Up

Here's an interesting graphic from the economics blog econompicdata. Putting it simply, until those colorful blocks in negative territory begin to turn positive, we can expect tough times ahead.

Golden Opportunity?

The Leading Indicator index released today was better than expected, supported by a 100 basis point increase in the money supply (M2). This may be a sign that the credit freeze is slowly thawing, though I don't expect the credit clog to be flushed out for some time. This increase in M2 just goes to show how much money the Fed is throwing at the problem. A marginal increase in lending by the banks could promptly resurrect the threat of inflation; however, banks will remain wary until they can accurately value their books. Money supply aside, the rest of the indicators were ugly, including the mounting jobless claims which now sit at a 26-year high. Nonetheless, one should always be prepared for the unexpected. If the banks had followed this simple mantra, I likely wouldn't be posting on this topic. If the Fed executes perfectly, inflation shouldn't be a problem, but unfortunately my money is on an imperfect execution. Gold is a good way to hedge against unanticipated future inflation, and acts as a nice hedge against an Armageddon scenario as well (both possible, but one more unlikely than the other). I don't view gold as a long term investment, but rather a medium term hedge. The global economy will likely be intact at this time next year, but in such a volatile environment I've decided to create a little room in my portfolio for gold. Below I have included some interesting technical observations for the gold ETF: GLD.

GLD looks to have broken out of a significant downtrend over the past couple of days, but seems to be somewhat overextended. I'm hoping for a pull-back in the near term.