What Will the Blob Absorb Next?

Today’s political hot potato is whether the automobile industry should be bailed out. The free-market types will tell you these companies have been uncompetitive and mismanaged for a long, long time, and so should be forced into bankruptcy court. Those in Michigan will tell you that we shouldn’t bail out brokers and banks while GM (GM), Ford (F) and Chrysler are forced into bankruptcy.

The truly free-market types will say that all should be allowed to fail, and that free markets should remain free, even if that means severe pain.

For what it’s worth, my stance is that some intervention is necessary, so long as the parties have acted responsibly and have a logical plan going forward. The crisis clearly needs to be slowed down, but force-feeding the Blob into my portfolio doesn’t feel quite right.

With the unemployment situation becoming an unmitigated disaster, consumers will begin to save more and consume less. The table is set for higher unemployment, higher continuing claims and a higher unemployment rate.

I can see that the government is trying to force consumers to borrow and spend - but due to the global deflation of asset prices (real estate, debt and equities), I imagine it will be tougher to get folks to break out their wallets. They simply cannot. The recovery will be longer in coming than many would like to believe.

While Treasury-bill rates and rates on Treasury money-market funds approach zero, the question on my mind is whether investors will stay in investments that yield zero, or move back out into the risk spectrum - at least those that can. Others, their portfolios decimated by the “buy and hold” mantra of the past, will retrench. Absolute-return investors are left to carefully pick from the wreckage - present company included. Absolute-return investing just became popular again, albeit a bit too late.

Many have asked me why I think the stock market refuses to fall meaningfully, despite skyrocketing unemployment. Over the past 20 years or so, investors have become accustomed to “buying bad news,” which is the way we usually operate. Though investors were conditioned to buy stocks when consumer confidence fell, this time is different. This is an unprecedented unwinding.


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This doesn’t mean I won’t get meaningfully long equities or credit for periods of time - I’ll just do so in a measured fashion. We must respect the tape.

Summary: What Am I Still Worried About?

For decades, the US has been an exporter of jobs, notably those in manufacturing. I have to scratch my head when I think of automobile manufactures with bloated balance sheets and ridiculous cost structures now begging, hat in hand.

Make no mistake - I feel terrible for people who have lost or will lose their jobs. But I myself have been fired or laid off a few times - and I can’t recall ever asking the Blob for cash. I found another job.

The real issue now, and what I’m most worried about, is that we are no longer exporting jobs; we are now exporting unemployment. The unwinding of the leveraged consumer is now dramatically affecting the rest of the world.

In short, those who bought into the decoupling scenario are now finding that emerging markets, heretofore thought to be impervious, are in an even bigger tailspin than the US. I expect this to continue for a while - at least until the world realizes that our 0% Treasuries are backed by the Blob. It’s why I expect hyper-inflation and a very weak dollar before all of this over. Those who are buying low-coupon Blob-backed assets will wish they hadn’t.

Thanks to by good friend, Robert Ross, Of RBS/ABN Amro for the "Blob" concept.