Stephen’s Posterous

Below is the full text of the statement by U.S. Treasury Secretary Tim Geithner at the G-20 meeting of finance ministers and central bank governors:

I want to start with the state of the global economic recovery.

Yesterday’s jobs numbers in the United States reinforced that this is still a very tough economic environment. The pace of job losses has slowed sharply, but unemployment is very high and still rising. Millions of Americans are out of work, or working less than they would like. The crisis caused enormous damage, and that damage has left consumers and businesses still cautious and tentative about the future.

We need a period of sustained economic growth to bring the unemployment rate down.

And that process of growth is now beginning. The U.S. economy and the global economy are growing again. Businesses are starting to invest. And consumers are spending. Business and consumer confidence has improved. Global trade is expanding at an encouraging pace.

As the crisis has receded, the value of savings around the world has risen. The cost of credit has fallen. Confidence in the stability of the financial system has been reestablished. These improvements have been more rapid and more broad-based than many anticipated.

At the start of this year, the world was confronting the very real risk of a great depression, global deflation, and financial collapse. Now, the forceful policy response of governments and central banks around the world has put out most of the financial fire and restarted growth in private activity.

Banks in the United States are repaying the government’s investments with interest. We have wound down the broad-based guarantees and large scale capital programs for banks that were essential to break the financial panic of last fall.

The consensus of private forecasts now anticipates global growth in the range of three percent next year.

With growth now underway and the financial fires winding down, the policy challenge is changing.

The first stage was the emergency rescue, providing tax cuts to boost personal and business income and public investments to help offset the fall in private demand.

The next stage is about catalyzing private demand and business investment. This will require continued policy support.

This is why the recovery programs put in place in the United States and around the world were designed to provide support for growth over a two year period, and this is why governments around the world are committed to continue to reinforce the recovery now underway, before we shift to restraint.

That is why President Obama signed legislation on Friday expanding and extending tax cuts for businesses and supporting workers who are struggling to find jobs.

That is why we are continuing to provide targeted support for small businesses and small banks to make sure we repair and open up the financial pipes that provide credit.

That is why we will continue to support the stabilization of the housing market.

That is why we are working to build consensus with our major trading partners on ways to open global markets.

That is why we are providing very substantial incentives for basic science, research and development, for job training and education, for new energy technologies.

And that is why we are trying to reduce the costs and burdens our existing health care system imposes on American families and businesses.

Government policy has to provide a bridge to growth led by the private sector. We’re now in the middle span of that bridge.

As growth strengthens and financial headwinds diminish, we will be able to begin the essential process of restoring balance to public finances and fully removing the broad backstop still in place for credit markets.

This will require a delicate balance.

If we put the brakes on too quickly, we will weaken the economy and the financial system, unemployment will rise, more businesses will fail, budget deficits will rise, and the ultimate cost of the crisis will be greater.

Our citizens and businesses and investors around the world must be confident that we will find the political will to restore fiscal responsibility and balance when recovery is in place. If that confidence ebbs, the recovery will be weaker, and we will have less flexibility to provide the reinforcement that the economy and the financial system may still require in the near term.

We need to reinforce growth to create jobs and get businesses investing again to underpin the recovery in the housing market and to repair the credit markets. It is too early to start to lean against recovery. The classic mistake in past crises was to put on the brakes too quickly. But we all recognize that confidence in our ability to reduce future deficits and to exit from the extraordinary monetary policy and financial emergency measures is very important to confidence in the sustainability of recovery.

Today’s G-20 statement reflects a very broad consensus that growth remains the dominant policy imperative across our economies. And we are bringing the same commitment to cooperation and coordination we demonstrated in the crisis to the agenda of reforms we outlined in London and Pittsburgh.

These reforms are directed at the critical priorities of laying the foundation for stronger, more balanced and more sustainable growth, at financial reforms that will create a more stable system with stronger rules to constrain risk-taking and at building stronger international financial institutions.

These are all global challenges. They are important to our national economic interest, but they cannot be addressed by the United States alone.

We made important progress on all these fronts today and look forward to advancing these reforms in the months ahead.

Let me conclude by thanking Prime Minister Brown, Chancellor Darling and his colleagues for bringing us to this beautiful country and for their leadership of the G-20 this year. That role now moves to Canada and Korea.

Thank you.

Source.

General Motors burned through $10.2 billion in the first quarter. And you thought start-ups in 2000 during the dot com bust burned through a lot of cash.

Revenue plunged 47%. In case you haven't noticed, the automobile business is not the business to be in, especially in a recession. GM is currently surviving on a Pay Day loan from Uncle Sam of $15.4 billion and it still needs another $11.6 billion.

If GM were your brother, would you load them more cash? The Wall Street Journal reported that Frederick Henderson, the CEO, has that while he hopes to avoid a bankruptcy filing, the scenario is increasingly likely.

If GM succeeds, it would ask the U.S. Treasury to approve a plan in which the government would swap much of the auto maker's debt in exchange for taking a 50% stake in the company.

Mr. Young said GM hasn't engaged with an ad hoc committee representing some of the company's institutional bondholders. The group proposed a counteroffer to GM's debt swap that would give bondholders, rather than the government, a majority stake in the auto maker. Mr. Young said any changes to GM's offer would have to happen in the near term for the swap to be complete by June 1. He declined to comment on the likelihood of any changes.

The Financial Times Lex column said that General Motors shares are wildy overvalued at $1.70 a share. No kidding. If GM files for bankruptcy, equity will be wiped out and GM will be trading pennies on the dollar, or more likely $0.001 a share.

The article says that hope springs enternal. The thinking must be similar to that line, "Too Big To Fail." After all, who would let a company as iconic as General Motors simply fail? The reality is that tax payers may let the company fail. After all, the Financial Times reported that US banks need $75 billion, and no one wants their local bank to go out of business.

After reporting earnings on May 7, 2009, GM can look back at two decades of selling 170 million vehicles and generating $3,300 billion in revenue with $60 billion of losses in the process, which is more than its profit of the previous 80 years as stated by the Lex article.

Buying GM shares at this point doesn't make any sense. The current proposal from the Obama administration leaves some hope that a bankruptcty can be averted if creditors can agree within the next three weeks. But this still leaves GM shareholders with very little in equity.

Seeking Out Recession-Proof Stocks by Teresa Rivas, Barrons.com

The recent rally has bought comfort to many investors, but Walter Gerasimowicz isn't ready to celebrate just yet. Gerasimowicz warns that the market remains volatile, but that uncertainty also creates opportunities.

Many stocks are currently undervalued, he argues, making today's market a buffet for value investors. However, with the recession still very real, investors must also focus their picks on earnings growth in recession-resistant areas, and be willing to move quickly to adapt to changing conditions.

Gerasimowicz has a history to back up his theories. He formerly headed international portfolio advisory groups at JPMorgan and Lehman Brothers, before founding Meditron Asset Management in 2003. As chairman and CEO, he overseas the firm's wealth-management and private-equity businesses, and its hedge fund.

Since Meditron Fundamental Value/Growth Fund's 2003 launch, the hedge fund is up a cumulative 36.1%, compared to the S&P's negative return over that period.

Below are some excerpts from his conversation with Barrons.com.

The stock market has seen a remarkable rally recently. How do you view the market recovery and the possibility of the end of the recession?

With respect to the current market, we are in a rather volatile situation. Not only from the equity markets, but from the economy. We still have a host of economic data suggesting that we are in a market decline, although of late the contraction itself appears to be moderating.

I feel that not only the U.S., but the entire world is still facing these one-step-forward, two-steps-backward type of announcements that seem to come every other day. And one could ask, are we now, through the bottom of the bear market?

I say by their very nature, bear markets are very difficult to fathom and understand, and I'm not certain that we are not going to retrace over the summer. We will have pullbacks. If you take a look at where it all began with the U.S. housing market, the consumer, the banking system, they are intact in the U.S.; however, we still are only beginning to see very small positive momentum in those area.

The housing market appears to be recovering, but much of that is still due to the purchase of real estate that is for sale at fire-sale or foreclosure prices, and consumers continue to be cautious. Bank balance sheets remain somewhat questionable, although the Federal Reserve, the Treasury and Congress are all attempting to stabilize bank balance sheets, so we are seeing some improvement.

Globally speaking, the treasuries of various countries and the leaders therein are actually being forced to increase the size of their budgets to further stimulate their own economies with injections of money. There's also quantitative easing that is ongoing, a terse economic term for printing money, which the U.S. and British authorities have been doing.

On the other side of it, you have deflation, beginning to rear its ugly head, and we could begin to see greater acceptance of monetary stimulus, quantitative easing, as there is no further room to cut interests rates. Just as the U.S. was the first economy to go into a decline, based on the fact that we have acted quickly, we will be the first to begin to come out of this.

Perhaps China will beat us out of the recession, because they have the ability to react much more quickly. We need to see freer credit, not only for the consumer but for business, and as we begin to see the credit markets free up, so then we will begin to see an expansion. I feel comfortable indicating that toward the last quarter of 2009 and into 2010 we will see a positive but barely gross domestic product number, perhaps at the 1% or 1.5% level.

How can investors navigate this kind of market?

You cannot be just an asset allocator or a buy-and-hold investor in this market. You have to do the fundamental analysis and deal with capital preservation instead of chasing returns. The fact is that just because a security is cheap, doesn't mean it is of good value.

You still have to examine balance sheets of companies, earnings growth, and ask: Are they well diversified? Do they have low debt? Are they in sectors that are recession-proof or those that will lead us out of a recession? And then, should the company decline, you have get out.

You have to not only deal with the discipline of a stop-loss mechanism, but at the same time make certain you execute. That is where most investors fall down, they don't want to sell in a disciplined way. And then when they finally do, the stock has gone so far away, they're selling at a bottom.

Can you name a company you like now, that fits these criteria?

Gilead Sciences (ticker: GILD) is a biotechnology company that deals with three areas: cardiovascular, respiratory, and the treatment of HIV/AIDS. Unfortunately, it appears that even in the U.S. HIV infection is rising again. We have about a million HIV-positive people in this country and 30 million worldwide.

About 55%-60% are being treated with HIV drugs, and if they aren't treated, then it progresses to become AIDS. With proper drugs you can live for a number of decades, and the earlier the treatment, the better. The number of patients on HIV-related drugs continues to grow. Gilead is the primary player in this field.

Four out of every five patients with HIV take one of Gilead's drugs. Their sales come mainly from the U.S., Europe and Japan. In Africa Gilead licenses their drugs to third parties, which sell at a lower price. Their profits for the first quarter jumped 21%, with a 22% increase in revenues.

They beat all estimates and reiterated 2009 forecasts. They have an excellent pipeline for hepatitis, hypertension and new classes of HIV drugs, and a solid balance sheet. Their shares should trend sharply higher.

Ralcorp Holdings (RAH) is another one of your picks.

Ralcorp is a leading food company that offers nearly everything: cereal products, salad dressings, jelly, corn chips. They also now own Post and they sell their products in virtually every retail outlet as well.

One of the things about the company is they are heavily involved in the private-label business, so if you go into a supermarket or a Wal-Mart that has a lot of its own store brands, most of them are produced by Ralcorp through private-labeling agreements. And those private-label sales should only increase.

Their earnings growth has been phenomenal, along the order of 40%, a lot of that is the Post integration. They continue to grow through acquisitions, they bought over 20 companies in recent years, and we believe their margins will continue to increase. Currently their price to earnings is only about 11 times, which is wonderful. Even during times like this, people love to eat. We think the company will advance in terms of earnings, and remain recession proof.

Q: Thanks for your time.

Source.

The most talked-about investing strategy these days isn't stuffing money in a mattress, it's the reflation trade he bet that the world economy will rebound, driving up interest rates and commodities prices. Even though the economy continues to struggle, investors are looking ahead to time when the massive rescue efforts by central banks and governments gain traction.

They are focused on raw materials and commodity-related stocks that would benefit from the surge in infrastructure spending. They are looking to exploit potential bottlenecks in production that could lift prices and corporate earnings. Some are layering on insurance against a spike in inflation should central banks lose control of their stimulus efforts.

"Between the bailouts and the stimulus, it's pretty clear that we're going to have some inflation when we get out of this mess," says Roger Ibbotson, founder of Ibbotson Associates and chairman of hedge-fund manager Zebra Capital Management. It may not show up for another two years, he says, "but after that I think it's quite likely and I think you should be positioning a portfolio against that."

Evidence of the trade shows up in higher yields on bonds that adjust for inflation and a surge in prices for commodities including copper, up 19% in March, zinc and oil. Shawn Rubin, an adviser at Smith Barney in New York, has moved some clients partly into natural-resources stocks while using strategies to protect against a spike in inflation.

One way is to use options, where an investor is able to use relatively small amounts of money and take positions that would profit from a massive drop in Treasury prices or a near doubling in gold prices. While in the short run such trades may not work, "it's a long-term move," Mr. Rubin says. "You want to buy insurance when it's cheap."

For now, the U.S. remains in a deflationary mode. The economy is believed to have contracted roughly 5% in the first quarter. Consumer prices are expected to post a year-to-year drop of 1.3% through June, according to the latest Wall Street Journal survey of economists.

Despite the recent rally that lifted stocks 20% from their lows as of Thursday, the common definition of the return to a bull market, though they promptly fell again Friday, most investors expect a challenging environment well into next year. But the Federal Reserve has taken dramatic steps to revive the economy and stabilize the financial system. It has lowered interest rates essentially to zero and is on track to pump more than $2 trillion into the credit markets.

On top of that, there is the $787 billion federal stimulus program coupled with a growing budget deficit. Around the globe central banks and governments are making similar moves.

Paul Kasriel, director of economic research at Northern Trust, says the Fed will likely err on the side of ensuring the recovery is sustained "and usually that means they will be late" in turning against inflation. The "political sentiment will be toward inflation and in preventing deflation," he adds.

Until a few weeks ago, investors weren't even thinking about preparing for a recovery, hoarding cash and U.S. Treasury bonds and defensive stocks that would perform better than most in a recession. And the longer the economy takes to rebound, the longer it will take for the so-called reflation trade to pay off. In the meantime, investors with those bets run the risk of big losses.

"Until real demand recovers, the trade has a chance of getting ahead of itself," says Mark Liinamaa, natural-resources analyst at Morgan Stanley.

Mr. Liinamaa suggests investors keep a "survivor bias." That means "looking for names that have low cost structures and balance-sheet capacity to still be standing" even if demand doesn't recover soon. He cites steel producer Nucor as one example.

Already there are signs that the market is less worried about deflation. That's clearest in the market for Treasury Inflation-Protected Securities. Back in February, five-year TIPS were priced for a 0.5% drop in consumer prices, now that's swung around to a 1.35% increase.

The magnitude of the expected inflation rise predicted by TIPS may be small, but the direction tells the tale, says John Hollyer, a co-manager of Vanguard Inflation-Protected Securities Fund.

"The fiscal and monetary stimulus are causing investors to say there's a decent chance the Fed will be successful and there will be an increase in inflation," he says. Other markets are yet to reflect a shift toward inflation fears. In the Treasury market, where inflation erodes the value of the interest payments over time, the 10-year bond is yielding just 2.761%.

But it isn't just the ripples from the money flooding into the financial system that has some looking at a "reflation" trade. Even if there isn't a strong recovery, the economic collapse has taken substantial amounts of raw-material production offline.

Reduced inventories could in turn result in price-rise bottlenecks even with just a moderate rebound in demand from commodity users.

"You could see a reflation in commodity prices even without broad inflation in the overall economy," says Jason Trennert, chief investment strategist at Strategas Research Partners LLC. He is recommending energy and materials stocks, as well as an exchange-traded gold fund, to play the reflation trade over the next one to three years.

The possibility of rising commodity prices without inflation was highlighted last week in a report from Cambridge Energy Research Associates estimating that half the new oil and gas production that was in the works is now at risk of being deferred or canceled. While crude-oil prices are still down 64% from their high hit last summer, they are up 54% from their low hit on Feb. 12 and are up 17% this year.

It isn't just Washington's stimulus that has investors preparing for inflation. For many, the source of potential capacity constraints could well be China.

"China's stimulus package may be even more important for the inflation trade than what happens in the U.S." says Mr. Trennert. China pledged to devote nearly 75% of its $586 billion stimulus package to infrastructure development and reconstruction of an earthquake-stricken area. The U.S. is allocating just $48 billion to direct infrastructure spending.

China's efforts have rippled through to the markets for at least a few metals. Prices for copper, commonly used in power generation and construction, are up 44% from the low hit in December. Zinc, needed for producing galvanized steel used by utilities and the auto industry, is up 24% from its low.

Rising prices stand to benefit the commodity-producing economies. That has encouraged John Baur, a co-manager of Eaton Vance Global Macro Fund, to avoid long-term U.S. Treasurys in favor of Brazilian debt. That country's stock market is up 12% this year.

China's refined-copper imports soared 99% in February from a year ago, perhaps indicating that "they want to have the material available" when infrastructure projects start, says Catherine Virga, a researcher at commodities research firm CPM Group.

Source.

From Alan Greenspan, former chairman of the Federal Reserve and president of Greenspan Associates LLC.

The extraordinary risk-management discipline that developed out of the writings of the University of Chicago’s Harry Markowitz in the 1950s produced insights that won several Nobel prizes in economics. It was widely embraced not only by academia but also by a large majority of financial professionals and global regulators.

But in August 2007, the risk-management structure cracked. All the sophisticated mathematics and computer wizardry essentially rested on one central premise: that the enlightened self-interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring their firms’ capital and risk positions.

For generations, that premise appeared incontestable but, in the summer of 2007, it failed. It is clear that the levels of complexity to which market practitioners, at the height of their euphoria, carried risk-management techniques and risk-product design were too much for even the most sophisticated market players to handle prudently.

Even with the breakdown of self-regulation, the financial system would have held together had the second bulwark against crisis – our regulatory system – functioned effectively. But, under crisis pressure, it too failed. Only a year earlier, the Federal Deposit Insurance Corporation had noted that “more than 99 per cent of all insured institutions met or exceeded the requirements of the highest regulatory capital standards”.

US banks are extensively regulated and, even though our largest 10 to 15 banking institutions have had permanently assigned on-site examiners to oversee daily operations, many of these banks still took on toxic assets that brought them to their knees.

The UK’s heavily praised Financial Services Authority was unable to anticipate and prevent the bank run that threatened Northern Rock. The Basel Committee, representing regulatory authorities from the world’s major financial systems, promulgated a set of capital rules that failed to foresee the need that arose in August 2007 for large capital buffers.

The important lesson is that bank regulators cannot fully or accurately forecast whether, for example, subprime mortgages will turn toxic, or a particular tranche of a collateralised debt obligation will default, or even if the financial system will seize up. A large fraction of such difficult forecasts will invariably be proved wrong.

What, in my experience, supervision and examination can do is set and enforce capital and collateral requirements and other rules that are preventative and do not require anticipating an uncertain future. It can, and has, put limits or prohibitions on certain types of bank lending, for example, in commercial real estate.

But it is incumbent on advocates of new regulations that they improve the ability of financial institutions to direct a nation’s savings into the most productive capital investments – those that enhance living standards. Much regulation fails that test and is often costly and counterproductive. Regulation should enhance the effectiveness of competitive markets, not impede them. Competition, not protectionism, is the source of capitalism’s great success over the generations.

New regulatory challenges arise because of the recently proven fact that some financial institutions have become too big to fail as their failure would raise systemic concerns. This status gives them a highly market-distorting special competitive advantage in pricing their debt and equities.

The solution is to have graduated regulatory capital requirements to discourage them from becoming too big and to offset their competitive advantage. In any event, we need not rush to reform. Private markets are now imposing far greater restraint than would any of the current sets of regulatory proposals.

Free-market capitalism has emerged from the battle of ideas as the most effective means to maximise material wellbeing, but it has also been periodically derailed by asset-price bubbles and rare but devastating economic collapse that engenders widespread misery.

Bubbles seem to require prolonged periods of prosperity, damped inflation and low long-term interest rates. Euphoria-driven bubbles do not arise in inflation-racked or unsuccessful economies. I do not recall bubbles emerging in the former Soviet Union.

History also demonstrates that underpriced risk – the hallmark of bubbles – can persist for years. I feared “irrational exuberance” in 1996, but the dotcom bubble proceeded to inflate for another four years.

Similarly, I opined in a federal open market committee meeting in 2002 that “it’s hard to escape the conclusion that ... our extraordinary housing boom ... finan­ced by very large increases in mortgage debt, cannot continue indefinitely into the future”. The housing bubble did continue to inflate into 2006.

It has rarely been a problem of judging when risk is historically underpriced. Credit spreads are reliable guides. Anticipating the onset of crisis, however, appears out of our forecasting reach. Financial crises are defined by a sharp discontinuity of asset prices.

But that requires that the crisis be largely unanticipated by market participants. For, were it otherwise, financial arbitrage would have diverted it. Earlier this decade, for example, it was widely expected that the next crisis would be triggered by the large and persistent US current-account deficit precipitating a collapse of the US dollar.

The dollar accordingly came under heavy selling pressure. The rise in the euro-dollar exchange rate from, say, 1.10 in the spring of 2003 to 1.30 at the end of 2004 appears to have arbitraged away the presumed dollar trigger of the “next” crisis. Instead, arguably, it was the excess securitisation of US subprime mortgages that unexpectedly set off the current solvency crisis.

Once a bubble emerges out of an exceptionally positive economic environment, an inbred propensity of human nature fosters speculative fever that builds on itself, seeking new unexplored, leveraged areas of profit. Mortgage-backed securities were sliced into collateralised debt obligations and then into CDOs squared. Speculative fever creates new avenues of excess until the house of cards collapses. What causes it finally to fall? Reality.

An event shocks markets when it contradicts conventional wisdom of how the financial world is supposed to work. The uncertainty leads to a dramatic disengagement by the financial community that almost always requires sales and, hence, lower prices of goods and assets. We can model the euphoria and the fear stage of the business cycle. Their parameters are quite different. We have never successfully modelled the transition from euphoria to fear.

I do not question that central banks can defuse any bubble. But it has been my experience that unless monetary policy crushes economic activity and, for example, breaks the back of rising profits or rents, policy actions to abort bubbles will fail. I know of no instance where incremental monetary policy has defused a bubble.

I believe that recent risk spreads suggest that markets require perhaps 13 or 14 per cent capital (up from 10 per cent) before US banks are likely to lend freely again. Thus, before we probe too deeply into what type of new regulatory structure is appropriate, we have to find ways to restore our now-broken system of financial intermediation.

Restoring the US banking system is a key requirement of global rebalancing. The US Treasury’s purchase of $250bn (€185bn, £173bn) of preferred stock of US commercial banks under the troubled asset relief programme (subsequent to the Lehman Brothers default) was measurably successful in reducing the risk of US bank insolvency.

But, starting in mid-January 2009, without further investments from the US Treasury, the improvement has stalled. The restoration of normal bank lending by banks will require a very large capital infusion from private or public sources. Analysis of the US consolidated bank balance sheet suggests a potential loss of at least $1,000bn out of the more than $12,000bn of US commercial bank assets at original book value.

Through the end of 2008, approximately $500bn had been written off, leaving an additional $500bn yet to be recognised. But funding the latter $500bn will not be enough to foster normal lending if investors in the liabilities of banks require, as I suspect, an additional 3-4 percentage points of cushion in their equity capital-to-asset ratios.

The overall need appears to be north of $850bn. Some is being replenished by increased bank cash flow. A turnround of global equity prices could deliver a far larger part of those needs. Still, a deep hole must be filled, probably with sovereign US Treasury credits. It is too soon to evaluate the US Treasury’s most recent public-private initiatives. Hopefully, they will succeed in removing much of the heavy burden of illiquid bank assets.

Mr. Greenspan is the author of The Age of Turbulence: Adventures in a New World. 

Source.

Cerberus has its roots in the sometimes thuggish, hardball world of distressed debt. But on its way out of that world, the alternative investment firm has made what appear to be some seriously misjudged calls. As a result of its investments in Chrysler and GMAC, the financing arm of General Motors, as well as in several banks, it finds itself deep in two of the most troubled sectors of the US economy.

That does not, however, seem to trouble Steve Feinberg, Cerberus’s founder. “We always try to hang in, but not at the expense of being commercial,” Mr Feinberg says. “As far as GMAC and Chrysler are concerned, we will hang in there as long as it takes. There is the feeling of a greater calling.”

Such sentiments may be dubious comfort to investors. More reassuring is the fact the combined weighting of GMAC and Chrysler in Cerberus’s portfolio, originally 12 per cent of total assets under management, now represents only about 7 per cent.

“They are less exposed than everyone thinks,” says Mark Epley, who is responsible for the relations with private equity firms at Deutsche Bank. “They are diversified. Nothing kills them.”

It is still too soon to know how Cerberus’s investments in GMAC and Chrysler will work out. But to many investors, the fact that GMAC remains in business is testimony to Cerberus’s “relentless, maniacal desire to save it” says Chad Leat, chairman of the alternative assets group in Citigroup’s investment banking division.

Much of this drive and intensity is attributable to the personality of Mr Feinberg, who attempts to hide such traits under an “aw shucks” everyman persona. He is an expert chess player, but when asked about his favourite pastimes he talks of hunting.

Mr Feinberg describes Cerberus as “a working-man’s kind of place”, where people adopt “a blue-collar, spread-the-wealth mentality”. His brother-in-law worked on the floor of GM, his godson served as a Marine for eight years and two nephews served in the armed services, one in Iraq.

Even before Cerberus linked itself to the fate of the US car industry, Mr Feinberg and his senior management team were vocal patriots. He practically never travels, the notable exception being when one Cerberus executive persuaded him to visit Davos at the time of the World Economic Forum several years ago. He says he hated it.

And while many investors in the manufacturing sector look to China and elsewhere for cheap labour, Cerberus executives are proud they have invested so heavily in America and in its manufacturing base. They believe even those deals that appear to be troubled today will ultimately succeed.

Friends say formerly Mr Feinberg would criticise acquaintances for buying foreign cars, but he is now likely to lecture them for an hour on the subject. He has only ever driven US-made vehicles, with a preference for trucks. Immediately after buying control of Chrysler, he switched from the GM and Ford trucks he owned to a Chrysler-built Ram. He says it is the best truck he has ever owned.

Mr Feinberg applies the same intensity to his deals as to his chess game. When Cerberus bought GMAC in November 2006, he realised problems with its mortgage arm, ResCap, meant the resources Cerberus thought it possessed against the approaching storm might well prove inadequate.

“They were out in front with GMAC,” says one investor who joined Cerberus on the GMAC investment. “Other firms would have gunned it. But they hunkered down. Now GMAC is standing, and so many other financial firms have disappeared.” “Within one month after we closed, ResCap stopped writing subprime mortgages. By the middle of the following year ResCap had become even more conservative,” Mr Feinberg recalls.

“We had to change some of the ResCap management team because they wanted to continue the business the old way and failed to recognise the changing markets.”  While Cerberus was advised to abandon ResCap to salvage the rest of the operation, Mr Feinberg stood by the distressed unit.

He was determined, he says, that when every other mortgage lender disappeared, ResCap would be left standing and profitable. Cerberus also concluded ResCap might be vital for GMAC to obtain a formal licence, at the suggestion of GMAC’s new chief executive Al de Molina, as a bank holding company. With GMAC’s new status, the argument runs, the government stands behind GMAC, ensuring its survival.

Meanwhile, GMAC tried desperately to sell assets and shrink its balance sheet. “But it was so big; GMAC couldn’t get out of as much as we wanted,” says Mr Feinberg.  In June 2008, Cerberus helped GMAC to orchestrate a debt exchange with bondholders and, for a brief moment, executives at Cerberus thought the worst was over. But by the autumn, car sales started to fall off the cliff.

“We try to focus on turning around companies [by] cost savings, introducing efficiencies and operational improvements,” Mr Feinberg says. “But the operational improvements just weren’t keeping up with the level of disaster in the overall economy.”

Getting GMAC the status of a bank holding company was a milestone. But it came at the price of dilution, even for those investors who put in new money, in return for funding from the US Treasury. On the flipside, though, GMAC is “more competitive because they now have a lower cost of capital”, says a GMAC investor.

Cerberus’s commitment to GMAC, however, is finite. Although Mr Feinberg reckons other owners would have walked away, he says it would be irresponsible to the pension funds, endowments and individuals who trust Cerberus to manage their money to invest more of the firm’s capital in GMAC and Chrysler. And it would also violate Cerberus’s limits in regard to how much can be dedicated to a single investment.

In any case, Chrysler and GMAC are unlikely to determine Cerberus’s fate. Their weighting in the portfolio has fallen. Luckily, as it turned out, Cerberus failed to bid high enough for some of the companies it wanted – such as Washington Mutual – which would have increased its exposure to today’s global economic crisis.

Ironically, TPG, which did buy WaMu and Cerberus both made bets on finance too early. The two also waded in too early to the market for discounted debt, TPG in April and Cerberus in the autumn, although Mr Feinberg says some of those investments are now recovering from their fourth-quarter markdowns.

There are other investments in the Cerberus portfolio that will take time to recover, such as Aozora, the Japanese bank. Cerberus has also marked down the value of Bawag, the Austrian bank.

The group has also had setbacks on the trading side. In its December 1008 letter to investors, Mr Feinberg said: “[In] September, we thought trading levels for debt were ridiculously low and there was a great buying opportunity, especially in RMBS [residential mortgage-backed securities]. We were wrong.”

At the same time, Cerberus took the unusual step of attempting to hedge its exposure to an economic downdraft by taking bearish positions on important indices, a strategy Mr Feinberg says was profitable and wishes now he had pursued even more boldly.

Such gains, however, are relatively rare. One of Cerberus’ flagship funds fell by almost 22 per cent in 2008. And the firm decided to impose timing limits on the ability of investors in certain of its funds to get their money out, “so as not to unduly increase the illiquidity . . . for remaining investors and to enable us to support our existing investments with new capital where necessary,” according to December’s letter.

Other investments ought to prove more lucrative. Sale of Talecris Biotherapeutics, carved out from German conglomerate Bayer, is likely to return Cerberus six times its initial investment, assuming the approvals come through as expected, according to the group. Albertsons, the supermarket chain that Cerberus bought in a consortium with Supervalu and CVS in 2005, is also looking extremely profitable, thanks in part to early property sales.

Like many of its peers, in December Cerberus laid off people to cut its own costs, a task Mr Feinberg had postponed for months before giving his consent to the recommendations of his management team at Cerberus.

“He is not confrontational,” says the friend who drives a foreign car. “He always wants to walk away [as] the nice guy.”

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The currency markets have been in a strange place recently. For the last few months the dollar maintained its strength even in the anticipation of more government debt and Federal Reserve policies that would seem to encourage dollar weakness.

With the most recent announcement of the newest plan to nuke the festering assets on the balance sheets of U.S. banks, the dollar is stronger, rallying even when the equity market is rising.

There are numerous expectations about what could transpire for the dollar in coming months. Some believe the greenback will, or should, weaken due to anticipation of a bloated federal budget and current-account deficit that concerns foreign investors about the U.S. system’s stability. Others suggest that if markets do recover, it would undermine the case for the dollar, as investors would be more persuaded to buy riskier assets denominated in other currencies.

“It’s really a struggle today, and a tug of war between improvement in risk appetite, which should be driving the dollar lower and foreign demand for dollars, and the assurance for foreign investors that there is basically a floor the U.S. government wants to create for these toxic assets,” says Kathy Lien, director of currency research at GFT. “The risk for the banks are diminishing by the day and that’s why banking stocks are rallying.”

Others arrive at a divergent view of the plan’s impact on the dollar. Chris Gaffney, vice president at EverBank World Markets Group, believes the dollar rally on Monday, March 23, 2009, is the result of traders reversing earlier gains after the dollar sold off sharply late last week.

While he believes the plan increases the risk to the U.S. currency, he noted that traditional safe-haven assets such as U.S. Treasurys and gold have not rallied along with the dollar. The lack of a positive move in those assets could also be a profit-covering move, but this interpretation has its own complications, because it undermines the case for safe-haven positioning by investors.

It may be that investors are reacting positively to a plan that increases investor appetite for risk, but are also heartened by the swiftness of the U.S. government’s moves, when compared with others.

“It’s fair to say there is an element of this that [the market] was oversold,” says Chris Furness, head of currency strategy at 4Cast Ltd. “Everyone and his brother were short at the time. There’s also a slight feeling in the background that maybe the U.S. administration is getting to grips with things, or rather more quickly than most of the rest of the world.”

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Citigroup shares were up 25% on March 19, 2009, in late-morning trading amid a big short squeeze in the stock tied in part to an upcoming massive exchange offer for the company's preferred stock that will result in a huge increase in the number of Citi shares outstanding.

Citi shares, which were recently trading at $3.14 a share, now have more than tripled from a low of $1 reached on March 5.

Arbitragers say that Citi shares are virtually impossible to short now because of heavy demand from those who had set up an arbitrage in which they bought Citi preferred and shorted the stock after the banking giant announced the exchange offer on Feb. 27.

Traders say that Citi shares could fall once the exchange offer is complete, which is expected in about a month. That's because of the dilution created by the additional common shares.

Citi is expected to file information on the exchange offer with the Securities and Exchange Commission in the next few days.

In a bid to boost its depleted tangible common equity, Citi announced an exchange offer involving some $25 billion of preferred held by the government under the TARP program, some $12.5 billion of preferred held by a group of private investors, including Saudi Prince Alaweed, and $14.9 billion of publicly held preferred.

Citi shares fell sharply in the wake of that announcement, dropping to under $1 from $2.50 as investors banked on massive dilution of existing common holders. Citi's shares outstanding are expected to rise to about 22 billion from 5.5 billion once the roughly $52 billion of preferred is converted into common shares.

The preferred exchange offer is voluntary but the vast majority of public holders are expected to participate. The Treasury Department also is planning to participate.

Arbs who initially bought Citi preferred and shorted Citi common banking on earning a roughly 10% spread until the deal closed now are facing huge losses with one arb calling the situation "a death march."

Citi's actively traded series P preferred now trades around $13.50, way below the exchange value of the preferred of about $20. Holders of the series P preferred will get 7.31 shares of Citi common for each preferred share, which has a face value of $25.

Right after the exchange offer was announced, the series P preferred traded around $8, roughly $1 below the value of the common shares offered in the exchange. That spread has widened to $6.50, badly stinging any arbs who are long the preferred and short Citi.

The talk is that JPMorgan yesterday urged investors interested in owning Citi to buy the preferred, not the common, given the big discount on the preferred. A buyer of the series P preferred can effectively create Citi shares below $2 a share, indicating that Citi may trade lower once the exchange offer is done.

Some wonder why a stock in which there are 5.5 billion outstanding shares is tough to borrow. For starters, many firms are reluctant to lend shares that trade below $5 a share. And many institutional investors are unwilling to lend out their securities in the wake of the collapse of Lehman Brothers amid fears of counterparty risk.

The bottom line is that a massive short squeeze in Citi appears to be a major factor behind the sharp rise in the stock. It's true that financials have rallied recently, but the gain in Citi has been outsized relative to its peers. For those bullish on beleaguered Citi, its preferred, including the series P issue and three other issues, looks like the best bet.

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With the US and other countries monetizing budget deficits, the chance of rapid inflation has surged. The annual production of gold, the traditional hedge, is far below the world’s rate of monetary growth. An inflationary panic could thus bring an explosive gold price rise.

Gold has little intrinsic value; if it had never been coined its price would probably rest around the $250 per ounce of the late 1990s. However because of its history it is regarded as an inflation hedge and store of value, and that psychological association becomes tighter as inflation worsens and the gold price rises. Hence arguments about the irrationality of gold investment are wrong: in an inflation-prone environment belief in gold becomes self-reinforcing.

Alternative safe-haven stores of value, such as foreign currencies and US Treasuries, are falling away as the Swiss and Japanese authorities seek to weaken their exchange rates and the US runs ever-greater deficits.

In the stagflationary conditions of 1980, the gold price peaked at $875, the equivalent of $2,300 today. However the rise to 1980’s inflation levels was gradual; monetary policy in the 1970s was only moderately over-expansive and the US fiscal deficit was modest by current standards.

Including the Fed’s March 18 announcement of further monetary stimulus, monetary and fiscal policies in the US and globally are far more inflationary than in the 1970s. Consequently, there’s a real threat that if inflation returns, it will do so violently.

Smart investors are hedging against this possibility through gold. Hedge fund tycoon John Paulson paid $1.28bn for 11.3% of AngloGold Ashanti. That company is unprofitable at present gold price levels, but would hugely benefit from a price rise.

Should other hedge funds turn to gold, its price could soar. At current prices, annual gold output is worth only $104bn and the global gold stock only $5.12 trillion. Central bank gold reserves total $895bn, a fifth of currency in circulation. Even a quintupling in the gold price, to $5,000 per ounce, would raise the value of annual gold production only to $500bn and the global gold stock to $25tn, just 20% above the world’s M1 money supply.

Recent bubbles in stocks, housing and commodities have been driven by easy credit. The ongoing US Treasury bond bubble is driven by desire for a safe haven. When it collapses, a gold bubble driven by inflationary concerns may be inevitable.

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