The bear market rally continued today, this time thanks to never before seen moves by the US Federal Reserve. They not only dropped the Fed Funds rate by .50%, but also made it very clear in their forward looking comments that they would provide record amounts of liquidity to the markets going forward and that they would purchase “large quantities of agency debt and mortgage-backed securities,” adding that “it stands ready to expand its purchases.”
It’s snowing here as I write this…actual flurries. We rarely get snow in Houston, so this is a fun time for us. The last time we had snow was Christmas eve, 2004. Prior to that it had been at least 10 years, so I’ll have to ask all of you that live in colder climates to bear with my reaction to the white stuff. We’ve been singing Bing Crosby’s “White Christmas” all evening around the Herriage household.
As I forecast yesterday, the market had a fairly tough day today, ending down over 240 points. If the auto bailout does not take place…as the market is expecting…we could see a 500-1000 point drop in no time at all. I continue to believe that some type of emergency funding will get completed, but all bets are off for this bear market rally if it does not.
Look, I get the argument. The government (see taxpayers….you and me) has thrown away close to $9 trillion into insolvent banks, investment firms, credit card companies and other bankrupt financial institutions, so why not give another $100 billion or so to the Big Three? After all, this is chump change compared to what Wall Street has already received. In this light it’s actually hard to argue the point. We’ve become the bailout nation after all. And, with up to 10 million jobs that could be lost forever (directly and indirectly) if they were allowed to fail, our weakened economy simply could not stand the stress. No doubt about it, this would become the Great Depression II.
Since my latest update (GD 2), I’ve had several readers comment that it was “too depressing” and asked if things can really get that bad again. Well, for one thing, you’ve got to remember that the numbers we are getting from the government now cannot be trusted. For example, according to the government, inflation is just 3.5%.These of course are phony numbers because both food and energy were removed from the calculation a few years ago. Adding these two “must haves” back to the formula gives us annual inflation of over 10%. This is what a greatly devalued dollar does to your purchasing power. And, trusting the government for an accurate accounting on just about anything is becoming increasingly difficult.
Great Depression 2
I’m writing this from the beautiful Marco Island, Florida,
as we prepare for the 7th WMI m2 Wealth Conference. Outside
its gorgeous, but inside…watching the stock market…is
a totally different environment.
Last Thursday I called for a bear market rally when the Dow was down over 300 points. A huge rally began within 30 minutes and we closed up 550 points for the day. An 850 point move in less than 3 hours….amazing. These kinds of moves used to take several days or even weeks to happen, and now they happen on a regular basis at the blink of an eye. This is not an indication of a healthy market, and when you add to this the fact that the same thing is happening in the currency and credit markets, it all adds up to an environment that NO ONE has ever witnessed before.
For those that are brave enough to trade this market, hopefully you’ve been using the advice I’ve provided with both SDS and SSO on my newsletter at www.vraletter.com. When I put out the update “What to Buy for a Bear Market Rally” at about 11 AM the market was down 300 points and began to rally. With the close in the Dow at up 550 points we saw an 850 point move higher in less than 4 hours. Talk about an insanely crazy market! But as I’ve been saying, this is exactly how bear market rallies look.
The Wall Street Journal says that the original $700 billion bailout will not be enough (surprise surprise) which makes it likely that Treasury Secretary Hank Paulson will be forced to go back before Congress and ask for still more money. Just amazing. Congress has a chance to do the right thing and stop this before we send the economy into another Depression. Do any of us think that they have the courage to do this? Outside of Ron Paul and a few others it’s doubtful, but maybe we’ll see them actually listen to their constituents this time. But hey, who am I kidding.
Its common knowledge of course that the US no longer makes anything…not really anyway.We import all of that “stuff” now. Soon, we will have the Big 2 instead of the Big 3, and you can pretty much write-off anything that is manufacturing related…
So, what’s been driving our economy for the last 10 years? Well, approx. 38% of our domestic GDP comes from the financial industry, and while I don’t know exactly what percentage is pure profit/earnings related, it’s safe to say that this represents at least 50% of all corporate profits. So, Wall Street, banks, hedge funds, insurance and credit card co’s, etc., have been the life-blood of our economy for at least a decade.
This bear market has lots of people scratching their heads, especially the so-called gurus of capitalism and self-proclaimed Masters of the Universe (by the way, this is a great time to go back and read Tom Wolf’s classic from the 1980’s, The Bonfire of the Vanities, Wolf’s semi-fictional work on the lives and mindset of Wall Streets super elite).
I speak with a diverse group of people on a daily basis about the shenanigans that allowed this derivatives and leverage implosion to take place; the very wealthy to the not yet wealthy, the well-educated book smart types to the cleverly street smart, and the optimists to the pessimists. One of the comments/belief systems that seems to unite all is: “These guys are getting what they had coming to them for a long while, but why aren’t any of them going to jail?”