How I Learned to Stop Worrying and Love the Fed

… for full documentation of the discussions that took place between Paulson, Bush, & Co. in New York War Rooms in the fall of 2008, check out the movie.

Bull vs. Bear

In the debate between stock market bulls and bears, it is quite obvious that the bears have all the rational arguments (chronic unemployment, record gov debt leading to higher taxes, broke consumer,  broken credit markets, uncertainty about economy once stimulus subsided, and so on). The bulls, on the other hand, offer pink and fluffy arguments that are based on hope and optimism.

The one flawed argument by the bears, though, is the claim that the market is all driven by government money. Well, that may be true, but who cares? Up is up, that’s all that matters as far as your trading P&L is concerned. There are no beauty prices for stock gains that are “justified by economic strength” vs. stock gains that “come from government-induced asset inflation”.

It is our conviction that in 2010, the current suggar bubble will collapse. But for the time being, giddiness rules. And one should also not forget how long a correct macro argument can exist before the market catches up to it. Example: In 2005 and earlier, some pundits warned of the coming real estate collapse, but it did not happen till 2007!

Market Prediction, Part II

Following up on Part I,  our gut feeling is that the market’s rally will continue a bit longer and then, we will break down with a vengeance. The downward move will not happen out of nowhere. There will be a catalyst – a very visible event that breaks the current theories of recovery and prosperity. But in the meantime, the giddiness is likely to keep building:

• With Wall Street eagerly upgrading each other‘s institutions;
• With Bernanke declaring the recession over;
• With short interest falling and falling;
• With a return of massive risk taking courtesy of the Fed-induced  moral hazard;

It’s a true love fest of Bulls out there, and we do not expect this to reverse out of nowhere. But when it reverses, the drop is likely to be all the steeper.

News media’s credibility plunges to new low

Shocking revelation! Media has lost the trust of the public. Inquiring minds want to know how that could have happened!

American Dream Becoming the American Illusion?

“As a country, we must demand that our politicians stop serving those whose business models are based on systemic theft and start serving those who seek to create value for others — the workers, innovators and investors who have made this country great.” – Dylan Ratigan

Well said, Mr. Ratigan. Clearly shows that you are unfit for CNBC.

More Green Shoots

Just out of the printing press, this one is a particularly good one:

Poverty hits 1 in 8 Americans: About 2.5 million Americans slipped below the poverty line line as recession and layoffs hammered the economy last year, driving poverty to its highest level since 1998, the U.S. Census Bureau reported Thursday. The annual survey showed that more than one in eight U.S. residents – 13.2 percent – are living on less than $10,991 for an individual – slightly more than $200 a week – or $22,025 for a family of four.

… ah, not to worry. Wall Street’s well I heard and you know how they say: “Wall Street’s well, all is well.”

Market Prediction

Predictions are hard, especially about the future. If one still has to make them, it is advisable to rely on a careful analysis to defend one’s argument. Such a careful analysis may, for example, rely on macro-economic considerations. Here, we will use an argument of a different nature, and while not entirely rigurous, it should at least be provokative.

It is no secret at this point that banks have been making their earnings courtesy of (a) changes in accounting rules, and (b) their proprietary trading. In fact, the latter has been extremely proftable for banks with well-run trading desks. The problem is that it is much harder to make huge amounts of money when markets flat-line as they recently have. So, some market movement seems desirable, and if it does not come by itself, then next quarter’s bank earnings may disappoint and thereby trigger said movement. Alternatively, realizing that they need some “market action”, banks may just kickstart it themselves.

Now, if market movement is necessary and indispensable, then the question is which direction the market is going to move …

As Blunders Go …

… Mr Bush clearly is in a class of his own with his handling of 9/11. Quoting from Ritholtz, because we could not have said it better:

On September 11th, George W. Bush was presented one of those rare and horrible historical moments. The terrorist attacks united the country and the world around the President: His approval rating skyrocketed to 90%. Even the French Prime Minister announced, “Tonight, we are all Americans.”

The historical opportunity was laid at the feet of the President. With a unified country behind him and a sympathetic world willing to cooperate with him in just about every imaginable way, he could have achieved monumental greatness: He could have asked for great sacrifices from the populace, and they would have willingly made them. At that moment, any reach across the aisle would have been fruitful on a number of vexing issues. A bipartisan approach to any political problem at home – cutting pork out of domestic policies, reforming Social Security, renovating the tax code – could have been accomplished in a bipartisan spirit of strengthening the economy and defending the country. He might have even done something about our education system so, in truth, no child would be left behind.

One would imagine that a man elected under what can be charitably described as “inauspicious circumstances” – with nary a mandate in sight – might have taken the 9/11 tragedy as an opportunity to move to the center, putting aside partisan political differences, and governing “all the people.” To be, in fact, truly a “uniter,” not a “divider.”

Alas, it was not to be.

Australia Records Tamiflu-Resistant Swine Case

And so the storry goes …

A Perth man has contracted the first known Australian case of swine flu that is resistant to the main antiviral drug Tamiflu.

Full story here.

Death of Demand

Back in 2004, Tom Osenton in “The Death of Demand” explained how consumers are so saturated with goods and services that corporate top lines have become lifeless. And that was back in the days of easy credit. Now, demand saturation meets inability to finance purchases, and we expect the result to be a protracted and deep contraction in economic activity. The Bank of International Settlement reaches the same conclusion:

“The current financial crisis is unlike any others,” says the Bank for International Settlements. Lasting damage has been done. The “cumulative output loss” is likely to reach 20pc of GDP in the major economies.