Inside The Obama Huddle: Housing, Banking, Life and Crisis

The Inauguration is over. It’s PRESIDENT Obama now. So let’s get back to work.

What can we discern about the incoming Obama administration? I had a long talk with an old friend who is a self-described “rabid Democrat.” Let me rephrase that. He’s a rabid Democrat in the way that Pittsburgh Steelers team owner Dan Rooney is a rabid football partisan. This friend of mine loves his Democratic Party. Just as Mr. Rooney wants his Steelers to win the Super Bowl, this guy’s focus in life is for his political tribe to do what’s right for the country. This friend of mine is also privy to the inner circles of Democratic politics. He’s just plain plugged in. He’s on a first-name basis with many on Team Obama.

So what’s on Obama’s plate? “Well, the first thing the new group has to do is stabilize the banking system,” he told me. “Things are still precarious with the banks. Liabilities exceed assets by a large margin. We will probably see more bank failures — small and even some large banks. That would hurt worldwide investor confidence and lead the stock markets down. We could test the old lows of last fall.”

This Democrat insider then got into other issues. “The housing crunch still has more rope to hang out, as well. A lot of the problem is isolated in a few states and regions of states — California, Arizona, southern Florida, the New York City metropolitan area, Massachusetts and a few other places. But it affects a lot of people. We’re dealing with populous, overbuilt places. We are also on the cusp of a lot of failures of government entities, from localities and school districts to counties. We’re going to have a lot of municipal bond defaults. We’re going to see municipal bankruptcies. Some large states are insolvent. California can’t meet payroll.”

And there’s more from this guy. “The next big wave will be that consumer spending dries up. This will lead to a failure of retail businesses all over the country. It’s going to be a huge unwinding. We spent the past 25 years spending more than we could afford. Now we as a nation have to pay some big bills. It’s time to save. It’s a good thing, in the big scheme, for people to save. But it’s going to put a lot of pain into the retail sector of the economy. We’ve overbuilt retail, and everything that goes with it. Too many stores. Too many buildings. Too much inventory. Too much shipping capacity. Too many containerships unloading too much stuff made in China and elsewhere. And a lot of people are going to lose jobs. I mean a lot of people. Everywhere.”

“The Next Two Years Are Going to Stink”

Here’s more from the Democrat insider. “The next two years are going to stink for the economy. Obama will face one financial crisis after another. He’s going to hate Wall Street. He’s going to hate bankers. Every time he turns around, the money people are going to be screwing him. He’ll try to fix one problem, and five more problems will spring up like weeds. (“Only five?” I asked.)

“The coming financial issues will test the ability of the legislative branch to act with integrity in the face of a media-driven clamor. States will be lining up to borrow money from the feds just to pay unemployment compensation, let alone to fund Medicaid and road maintenance. It will test the legal system as well. Expect more petty crime and a lot more bankruptcy. But fewer people will get divorced. Who can afford that anymore?

“And think about the foreign policy issues that the financial crises will cause. Just think in terms that when U.S. prosperity declines, it takes the world down with it. The economic contraction is going to set some societies back by decades. Will people take that lying down? Or will they riot in the streets and burn down the capitol building? Expect a rash of failed states. We’ll be surprised at some of the names that fall off the map. Wow, we might look back and wish for the days when the world hated us just because we invaded Iraq. Now they’ll blame us for stealing their future.”

“The Republicans will make political hay out of it. Unless they are totally incompetent, which you can’t rule out. Democrats will probably lose seats in the House and Senate in the 2010 elections, as well as in state legislatures and governorships. But Obama will be working his own game of building consensus. He’s from a new generation of politician. He’s not nearly as in-your-face confrontational as the Democrats of the 1960s and 1970s era, the Kennedys and Waxmans and Barney Franks. Obama will build coalitions out of whomever he can get on board. You might not like him on issues like gun control or abortion, but you’ll deal with him on tax cuts and energy investment.”

Where Do You Go From Here?

So where do we go from here? Well, here’s my post-Inaugural advice. Build up some cash reserves. Got that? Hold Cash! Cash in the mattress. Cash in the bank. Certificates of deposit. Don’t try to get too fancy. Just save some cash where you can get hold of it in case you need it pronto.

Next, buy precious metals like gold and silver. Bullion coins or bars are my favorites. But it never hurts to buy a few quality numismatic coins as well. Don’t get spooked out of precious metals if we see a price dip in the near to medium term. The dollar is in serious trouble, and eventually the precious metals will come back. Precious metals are a way of preserving your purchasing power over the long term.

As for stocks, in the near future, we could see some severe market declines. Initially, this might look like large trading spikes up and down. Unless you are a serious trader, be careful about trying to “play” the swings. Don’t be afraid to sell any stock that makes you nervous. You have to be able to sleep at night. Along these lines, I’ll keep addressing the OI portfolio in future updates.

There are certain investment ideas that will probably work over the long term, like really good precious metals miners. Kinross Gold (KGC: NYSE) and Goldcorp (GG: NYSE) come to mind. The point is that you want well-capitalized miners with solid reserves and good production facilities.

That’s all for now.

Byron W. King

January 28, 2009

The Daily Reckoning