Panic At The Fed

Panic At The Fed

 

Ben Bernanke, Chairman of the Federal Reserve Bank is in a full-fledged panic.Despite his best efforts, the fallout from the 2-year housing bust is getting worse by the day:

• Home inventory levels are at twice the levels of several years ago … and still heading skyward

• Nationwide, median home prices just took their largest percentage drop in nearly 37 years. Recovery could take 10 years.
  
• New home construction has plummeted.  
  
• Foreclosures will hit 2 million in 2007.  That's nearly 1 in 62 households – a rate approaching heights not seen since the Great Depression.
  
• Another 2 million ARMs will be soon resetting to much higher interest rates.

Bernanke knows the signs are ominous.  The housing market is in a painful recession.  The mortgage industry is collapsing amid bankruptcies, layoffs and SEC scandals. 

 

Wall Street and Main Street are begging him to work his 'magic' to prevent an all-out recession.  The mantra on the street and in Washington is:  "Bernanke won't allow a recession to start."

 

It's why he flooded the market with $114 billion of newly-printed paper money.  It's why he significantly cut the Fed interest rate … and may do so again!

 

But in spite of the all the money injected by the Fed and the monumental price cuts for houses, the traffic of prospective buyers continues sliding to new record lows.  No traffic.  No sales.  No turnaround.  It's that simple.

 

It's why we believe the housing bust has yet to hit bottom. 

 

The one consistent factor throughout this 2-year-old housing bust is that economists and government officials have underestimated its size and duration every step of the way.
 
This Housing Tsunami that's currently rolling over the economy is simply too big for Bernanke to tame.  He knows it and it's why he's panicked. His meddling has already triggered a staggering collapse of the dollar.

 

The Fed is not cutting interest rates as a confirmation of a successful 'soft landing' for the housing market, but rather in fearful panic of an economy-destroying hard landing.  What's happening today in real estate is deflationary.  As housing prices drop and mortgages go into default, wealth is wiped out.

 

And for the Fed, deflation is just too difficult to control and all the rate cuts in the world may not stop the carnage.  This is exactly what happened in the popping of the high-tech bubble in 2000. 

 

Even with former Fed Chairman Greenspan cutting the Discount Rate a record 11 times in 2001, a recession became unavoidable and the stock market didn't hit bottom until October 2002. 

 

Bottom line: We're not confident that Bernanke and the Feds can contain the housing bust … and our outlook for the market is bearish.

 

And the questions I hear most often are: "Are we on the brink of a recession?  And if so, what does it mean for my investments?"

 

An Aging Bull Market or Young Bear Market?

 

Even when the calamity in the housing market got underway, the Dow was still able to break through new highs … 13,000 to 14,000 points.  As of October 2007, we were in the third longest bull market in S&P history.

 

But the hard truth we must now face is:  The Federal Reserve can sometimes extend an economic cycle, but unfortunately they can't stop it. 

It's true that the Fed cutting interest rates is historically bullish for the market. 

 

But it didn't work in 2000 and it's becoming more clear that this economic recovery, which began in 2001, is getting a little long in the tooth – propped up by the artificial money tinkering of a panicked Fed. 

 

Besides the fall in the DOW, you'll see that the ABX Credit Derivative Indexes, which are insurance policies against defaults, have been tumbling to new lows.  The lower the index, the more it costs to buy protection. 

 

Even when the DOW was rising, an indicator that all wais not well was that the small-cap stocks and leading small cap indexes were not showing the gains or new highs that the DOW had seen.  The Russell 2000 Index traded below levels hit over 10 months ago.

 

And corporate confidence is now at its lowest level since the 2001 recession.

 

Sadly, I have to conclude that the market outlook is bearish. Soon we may very well be embroiled in a young virile bear market.  We may even look back at the DOW at 14,000 as the last high before the inevitable stock market plummet. 

 

.

__,_._,___