What a game!

Today’s development in the continuing US financial saga, proves again the ultimate fragility of our entire financial system, but alas it’s good news for those who enjoy playing the investment game (unfortunately, most can’t even play today since all the online brokers sites have crashed).

From what I’ve read, the Fed will seemingly set up an entity which will spend hundreds of billions buying up worthless paper from US banks. Despite the obvious implication for the long-term value of the dollar (i.e. very negative, but positive for energy) this is good news, since it essentially allows banks, over time, to recapitalize and for the financial game to resume as usual in due time. As such, we should be back, at least momentarily, to the regular features of the stock market game: analyzing and making bets on future profit potential and subsequent changes in valuation.

It’s unclear why the government couldn’t have implemented this solution a few weeks ago or a year ago, but perhaps the government needs to give the impression that the financial system is not a house of cards. Or perhaps many in the government really do believe in the reality of our paper-based, or now bit-based, financial system. Clearly, if too many people believed in the Keynesian view that the financial markets are merely “a game of musical chairs”, it becomes difficult to motivate people to work and save, since human psychology doesn’t deal well with irrationality and randomness. So in some sense it is important to scare the living daylights out of market participants once in awhile in order to at least provide a semblance of reality to the financial game. Finally, and most likely, the government, aka Paulson, needed time to orchestrate one of the greatest financial frauds of all time (refer to this post).

However, if you’ve been following the events of the last few weeks closely, surely you would now agree that the financial system is and has always been a casino (i.e. Casino Capitalism), which rests entirely on emotional sentiment, confidence among the players, and continued cash infusions from the government to function.

In a sense it is a massive ponzi scheme, with one crucial difference: The ponzi scheme should never, and will never be allowed to, collapse completely since there is always an entity, i.e. the government, that can, and must out of necessity, infuse money into the system to keep the ponzi game going. There is, of course, nothing wrong or cynical about this state of affairs, since these are simply the rules of the game. Most of the time they function very well, but in certain instances, when confidence is low, the government must step in to get the system running again.

Investment implications of the bailout: As I mentioned in the past, I believe you should continue stick to energy, alternative energy and emerging market (e.g. Brazil) stocks, since printing another $500 billion will surely devalue the dollar over time and force up commodity prices.