KRUGMAN

Krugman nailed it Friday, as usual. He basically says: this mess is going to take a long time to get out of, and the government is going to have to resist calls to pull back on its massive spending. As always, well worth reading.

MAULDIN

The first of several snippets from his latest letter that caught my eye concerns the amount homeowners drew down in home equity loans three years ago versus last year. This was money we borrowed to keep the good times rolling. And then it stopped:

Quarter 1-2006 we had $223 billion in mortgage equity withdrawals. Quarter 2-2008 it was $9.5 billion. Is it any wonder we were in recession by 2008? By the third and fourth quarters there was no money to keep the treadmill going. That $50 trillion in credit was shrinking fast. We were imploding it. Further — just as a little throwaway slide — if you look at 2010 and 2011, we are getting ready for another huge wave of mortgage resets.

☞ It may not be the worst time to remind you of “a safe-ish way to short the market.” The caveats being, first, that, as explained here, time is not on our side with RSW and SDS. And, far more important: this Administration knows all about the mistakes of the Depression, all about the collapse in consumer demand and the risks of doing too little . . . and, for this reason alone, history may not remotely repeat itself. (Another reason: don’t forget Kurzweil and the on-rush of ever-accelerating technological progress. Indeed, last night’s “60 Minutes” suggested cold fusion might not be impossible after all. Free energy.)

So I don’t know how this story turns out.

Mauldin’s prediction: “Understand, the Fed is going to keep [printing] money until we get inflation. You can count on it. I don’t know what that number is, I’m guessing $2 trillion. I’ve seen some studies. Ray Dalio of Bridgewater thinks it’s about $1.5 trillion. It’s some big number, some number way beyond $300 billion, and they are going to keep at it until we get inflation.”

This sounds right to me, and is good news, because it means we’ll do what needs to be done to avoid cataclysm and convulsion, even as we embark on a fairly wrenching decade-long national diet and fitness program – the Great Transformation instead of the Great Depression. A sort of boot camp to get lean and – well, not mean, I hope, but efficient.

Finally, Mauldin says:

Will [all this money printing] create an asset bubble in stocks again? I don’t know, it could. . . . I would be nervous about stock markets, both on the long side, as I think we are in a bear market rally, but also there is real risk in being short. Bill Fleckenstein will be here tonight. He is a very famous short trader. He closed a short fund a couple of months ago. He says he doesn’t have as many good opportunities, and basically he’s scared of being short with so much stimulus coming in. So it’s going to work, at least in terms of reflation, but the question is when. A year? Two years?

Oh, and there’s an aside I have to quote as well:

By the way, this AIG thing and the bonuses, that’s so bogus. I mean, the 40 people that created the problem were gone, they go to 40 other people and say, stick around because we’ve got to have somebody who actually knows what these things are to try and unwind it, and we’ll give you a bonus. Some of them worked for a dollar against getting that bonus, and now we’ve told the world that a contract isn’t a contract in the US of A, for a lousy 160 million dollars.

NIBBLE ANYWAY?

I liked this story from my pal Chris Brown of Aristides Capital, and – despite my guess we may see another drop in the market – bought a little anyway.

He writes:

Would you like to own part of a company trading at 2.5 times EBITDA, 3.7 times forward earnings, with excellent products, a great CEO and CFO, a solid growth strategy, cash in the bank, and zero debt?

Of course you would. Better yet, it’s a pharmaceutical company, so I’m certain I understand its business model and its products. Cornerstone Therapeutics (CRTX) is the best stock buy I’ve ever seen in my life. [He’s not that old! – A.T.]

Long story short, a stellar, profitable private company (Cornerstone) did a “reverse merger” with a mismanaged, cash bleeding public company (Critical Therapeutics) for the purpose of acquiring its lead product (Zyflo) that it was doing a terrible job selling (in spite of its being a good drug), and is quickly demonstrating the excellence of excellent management. The stock closed today at $3.80. I can see it easily trading at $9-10 within a year; of course, it’s illiquid and very underfollowed, so there’s nothing stopping it from trading down before it eventually trades at some sane valuation, but I really like the odds. Better yet, it’s market beta is essentially zero, so you can buy it even if you don’t like the market here. (Disclosure: my Fund is long CRTX.)

☞ There are no free lunches, but Chris generally does his homework.

COLBERT GATHERS THE STORM

In case you missed this last week, here is Stephen Colbert’s take on the now-famous anti-marriage ad.

 

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