It's The End Of The World As We Know It...

...And I feel fine?

Actually, I don't know about you, but I have an ever-growing sinking feeling that this house of cards we've built up around us is about to come tumbling down! As I sit here drinking my early morning coffee and musing over the latest round of disappointing headlines, I'm beginning to see that despite all the vain attempts by the Federal Reserve to plug their finger in the levee, there are just too many holes and cracks to even think about stopping the floodwaters now.

I find all this talk of the "green shoots" of recovery a little insulting, it's kind of like the emperor's new clothes - everybody is too afraid to tell the mighty emperor that he is in fact naked, and those magnificent garments are just a figment of his overactive imagination! I have no idea how we managed to have such a great rally during March and April, I figure that many people decided that "it couldn't really get much worse" and just jumped in regardless! The bank stress tests were little more than a sick joke and a waste of tax payers money, even the so called "worst case scenario" that they incorporated is a better state of the economy than what is actually happening in reality right now!! I'm sure that makes sense to someone somewhere, but it seems like a another cover-up to me. I've just about had enough of all the smoke and mirrors, let's just bring the facts out into the light and deal with them.

So, moving on. Retail figures anyone? Er...yeah, they're less than pretty. With consumer spending continuing to drop, we should be expecting another round of corporate losses, missed earnings, and falling stock prices. Add into that the continuing increase in unemployment figures, which are not going to improve anytime soon in the light of continued corporate bankruptcies and cost cutting exercises and you will soon realize that we're in for even lower consumer spending and a fresh wave of home foreclosures and credit card defaults. In fact, while the stock market was putting in a huge rally during March and April, the number of home foreclosures surged to a record high according to RealtyTrac. If it was the bursting of the housing bubble that got us into this mess, then I find it hard to imagine getting out of the mess without a significant improvement in the real estate sector and I don't see this happening for a few years yet. Yes, I did really say YEARS. I don't subscribe to the permanent mantra of "we should expect to see recovery in ...insert time 2 quarters away..." That's just not realistic. The huge wave of mortgage losses and loan defaults that we will continue to see is going to finally expose many banks as being little more than bankrupt shell corporations. The government cannot save them all, and really shouldn't try.

Actually, given the huge shortfall in the funds needed to pay Social Security and Medicare to the millions of baby boomers retiring this year, I wonder in the Federal Reserve should really be trying to save any company, period. I think the latest estimate for the shortfall is somewhere north of $50 trillion which dwarfs many other economic issues right now. We already know that the Chinese and Japanese have taken on just about as much US debt as they are likely to, so the Federal Reserve can't just keep on running the printing presses without decimating the US dollar which is only going to harm the country further. We've already started to see the beginnings of the unraveling of the dollar, and I'm sure there is much worse to come.

So where do we go from here? Down.

Disclosure - At the time of writing the author held shares in ProShares Ultrashort 20+ Year Treasury ETF (TBT) and Direxion Financial Bear 3X ETF (FAZ).

Selling Out On China?

On Tuesday morning, Bank of America (BAC) announced the sale of 13.5 billion shares of China Construction Bank, representing a 5.8% stake in the company. Bank of America (BAC) raised around $7.3 billion through this sale, which was required in order to meet capital requirements following on from last week's stress tests.

So what's the big deal you might ask? Well, where do I start? There are a number of interesting observations that you could make.

* The shares were sold at around a 14% discount to China Construction Bank's previous closing price of HK$4.91.
* Back in January, Bank of America (BAC) had already sold around $2.8 billion of China Construction Bank shares.
* There is no shortage of buyers for the shares, with a private fund headed by Fang Fenglei, picking up the lion's share.
* Rather than plummeting, the stock price actually rose slightly following the huge sale.

In fact, this year overseas financial companies have sold over $15 billion of Chinese financial stocks as they are forced to try to repair their shattered balance sheets. I see this in a lot of ways as counter-productive. They are being forced to sell valuable assets that will inevitably see tremendous growth in coming years and yet will have to hold onto a lot of the toxic assets that got them into the mess in the first place. Bank of America (BAC) was obviously very desperate to sell their shares, as they had to offload them far below market price, and I'm sure if they weren't locked into holding the remainder of their stake (around 11% of CCB) until 2011, that they would've attempted to offload much of that too.

It would appear that there is good liquidity among Chinese financial stocks, with this huge glut of shares being absorbed relatively quietly by a small group of investors. Where US financial institutions are resorting to desperate measures to try to raise capital, Asian bargain hunters are snapping up golden opportunities at great prices. It appears to be yet another example of the Chinese propping up the failing US economy. The Chinese are already the largest holders of US government debt, and now have the opportunity to use their vast cash reserves to buy up Chinese assets held by overseas institutions, as well as continuing to fuel their insatiable appetite for commodities.

I am confident that China will continue its amazing growth story, despite the recent global economic downturn. The reduced US demand for Chinese goods will only cause temporary harm to the Chinese economy as manufacturers will be forced to focus more on intrinsic growth within China rather than being dependent on foreign economies. This will fuel the next stage in the growth of China, resulting in a stronger, more independent, economic superpower which no longer needs to rely on the economies of the West. It is a little ironic that overseas institutions are being forced to sell out of such great Chinese opportunities as they are forced to take their cash off the table now.

Disclosure: At the time of writing the author did not hold shares in Bank of America (BAC).