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The Great Transfer of Wealth


In years past, when the U.S. fell on hard financial times foreign wealth was nil. This time is much different.


It has often been said that when the U.S. sneezes the rest of the world catches a cold. As we finish out 2007 and attempt to wade through the murky waters we find ourselves in, I believe this phrase may be obsolete and it now may be said that when the U.S. sneezes the rest of the world goes shopping.

Late last night Citigroup (C) announced a $7.5 bln capital infusion, which can be converted into slightly less than 5% of the company's equity from the Abu Dhabi Investment Authority. When I heard the news broadcast on National Public Radio it was bittersweet as I had a feeling it may bring some stabilization to a stock I have recently purchased and it may give a lift to the U.S. markets, but then my thoughts quickly shifted to Bedford Falls and Mr. Potter from It's a Wonderful Life. Many know the scene where Mr. Potter exercises his capitalistic rights, graciously offering to buy out the Building and Loan shareholders for 50 cents on the dollar to avoid any further panic. Fear-struck shareholders were eager to sell, but George Bailey wouldn't allow such a fire sale to take place, putting up his own capital to ride out the turbulence.

For more on Citigroup and Abu Dhabi, check out Prof. Bloudek's Citigroup: The Real Deal.

I have not entirely worked through my feelings regarding this transaction but only seek to relay that, in my opinion, what we have seen paves the way for what will ultimately be what stabilizes the U.S. markets and fixes the problems that the U.S. has created. In years past, when the U.S. fell on hard financial times foreign wealth was nil and the U.S. was stuck to work through the problems alone, holding onto its assets until the economy came roaring back. This time is much different and the moons have aligned to put the U.S. on the auction block. A real estate fall, a dollar plummet, foreign wealth at record levels and now a rapidly declining stock market has all the ingredients to make one heck of a spicy global wealth transfer pie.

The problems the U.S. is facing today have come as a result of its own actions and it is now facing the consequences. This is nothing new and one can review many times in U.S. history when cycles have ebbed and flowed, resulting in booms and busts, the most recent being the technology bubble that came as a result of innovation, coupled with easy or cheap money and fueled by greed.

When it finally burst the unwinding was painful and took a few years to work itself out, but it was primarily built upon a virtual world where those that did not survive disappeared into cyberspace. During this correction, however, we see a real estate decline which ultimately ties into the livelihood of Americans everywhere.

U.S. currency has declined over 30% this year alone and domestic buyers are nowhere to be found. Now, however, it seems the U.S.' white knight has arrived and the U.S. will gladly accept the international community's assistance in working out its problems. Of course, this comes at a price and that is a transfer of this wealth at an incredible discount. If a foreign currency has increased in value against the U.S. dollar by 30% and a corporation like Citigroup has fallen by 45%, is it too simple to assume that this equity is being transferred for 25 cents on the dollar or a 75% discount? Isn't this even a better deal than Mr. Potter received?

For many weeks I have pondered how the U.S. situation would run this course and what would ultimately happen. The outcome in my mind has always been dire as I ponder the years it would take to recover from the challenges the U.S. is facing. I am sure the U.S. is still facing a major hurdle and all of this will not be sold away overnight, but I believe we just saw what will ultimately be what keeps the U.S. running and who the buyers will be that step in to save the day.

While I am still not sure how I feel about it all and I still need to process it quite a bit, my job as a market participant is not necessarily to over-analyze but to find a way to profit from it. I will be watching the financial stocks such as Citigroup, Washington Mutual (WM), Bank of America (BAC) to see how they handle today's news. If they can bounce from these levels I would suspect the S&P may start to find its footing, but if they cannot the blue light special may just have started.
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