What's Next After the Bailout?

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I wont discuss the bailout program in depth in this issue, but I will tell you it makes me sick that were collectively bailing out the losing side of a trade for those who made the wrong call. Ive been through thousands of commodity trades in my career. Wouldnt it be nice if someone bailed me out of the losers while I got to keep the gains? Its never happened, and it never will.

Let the free market operate freely. If the hedge funds, investment banks and mortgage brokers had been regulated under a system similar to the regulated futures markets, none of this would have happened. In futures, we can trade on high leverage--sometimes 20-to-1. Lehman Brothers and other investment banks were trading at even higher leverage around 30 and, in some cases, 40-to-1.

Heres the big difference. At the Chicago Mercantile Exchange and other regulated futures exchanges, all positions are marked to the market every day. If a position goes against a trader, he receives a margin call that day and has a day or two to meet that call or his position can be sold out from under him. In certain cases, a clearing firm may give a good customer another day or two, but because the clearing firms are required to immediately post the margin money at the exchange, nobody waits longer than that.

These toxic mortgage-backed securities may have been worth only 20 cents on the dollar, but firms were holding them on their books at 100 cents on the dollar for months--even years--and borrowing against these phony values. There was no margin clerk demanding they post the difference; the regulators were asleep at the switch. Theres a difference between regulation of a free marketwhich is necessary to prevent the kind of mess were in now--and the socialization of capital in which the government takes control.

The question is: How will all this affect the freely-traded commodities markets in which short selling is actually allowed? The bears argue that theres been a destruction of capital, which is both deflationary and bearish to commodity prices. Additionally, many of the big hedge and index funds that previously bought commoditiesAmerican International Group (AIG) had the biggest--are history. Who will step up to buy this stuff now?

There may be some validity to these arguments, although I disagree about the destruction of commodity prices. I believe whats happening now is inflationary, not deflationary. Theres a way to help determine who is right, but Ill discuss more about that later.

My argument is that raising the debt ceiling will ultimately be very inflationary. Printing more money is inflationary. Debasing the value of the dollar is inflationary. Europe is in worst shape than the US. Its also instituting inflationary measures, so the euro is being debased as well. Yield investors such as Warren Buffet are particularly demanding, indicating theyre looking for inflation to heat up.

Would you rather own a share of stock or a bond in a firm like Lehman Brothers or a bag of coffee or a bushel of wheat? At least the coffee and the wheat have intrinsic, utilitarian value and will be worth something to someone sometime in the future. Now that the hedge funds are disappearing, commodity values will be determined by traditional supply and demand. For more than 100 years in all economic environments, when a demand in excess of an available supply was created, the commodity in question would stage a big rally.

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Bulletproof Yourself From the Bank Crisis

This sector is rock solid and producing winners every month. Take a look at whats happening so far in 2008:

There are 22 stocks in my Income Portfolio. 13 are producing double-digit gains and four are red hot and producing triple digits! And for the record only one is negative.

How do you tell whos winning this deflation/inflation argument? Keep an eye on gold. An inability to remain above $900 an ounce supports the deflation camp, while a move above that level lends credence to the inflation camp.

Im looking for inflation to heat up, which in turn inflates commodity prices. But inflation aside, two commodities have projections for extremely tight supplies moving into 2009: corn and soybeans.

People dont stop eating because of bad mortgage debt. Although the harvest is currently only 10 to 15 percent complete, Ive heard reports of disappointing yields. As I mentioned in the Sept. 15 issue of Commodities Trends, The September Soybean Squeeze, I believe the current soybean supplies are tighter than theyre telling us. And the coming harvest wont solve this problem.

The US Dept of Agriculture (USDA) is projecting a 1 billion bushel decline in this years corn crop because of lower planted acreage. And if yields are lower than whats projected, it will probably be even smaller.

The Chinese are aggressively subsidizing their livestock herds, particularly pork. Theyll have very little corn to export this year, steering export demand to the US. Soybeans and corn closed lower last week because of financial liquidation of all assets and the onset of harvest. Food demand will be least affected by the financial crisis, and I expect well reach a bottom in early October during the thick of harvest.

Ill make specific recommendations in my subscription-based service, Futures Market Forecaster

July Corn

Finally, a Bailout Plan for Investors

Top Wall Street executives left holding millions, but many small investors were left holding the bag.

Now, however, there is a project underway that will bail out investors. It's the biggest rebuilding effort ever undertaken, and it will reward early responders with millions of dollars for the rest of their lives.