Boing, Boing, Boing… And So It Goes
What we saw today is yet another example of the “dead cat bounce.” And I believe this baby is going to be bouncing for a little while, after which in all likelihood the rally will cease, fear will return and the market will continue its march downward in the face of massive de-leveraging. There is no choice; it is the case of the irresistible force (investors hoping and wishing for the bad times to be over, courtesy of the Fed) meeting the immovable object (the disastrous fiscal and financial market realities facing the U.S.). The Fed can lower rates to 0% - but that in and of itself doesn’t create jobs, make banks more willing to lend and stimulate economic activity. What it will do, of course, is cause a massive capital flight out of the U.S. and its debased currency, fueling a downward spiral of economic activity in tandem with upward pressure on prices that will hit with devastating effect. Not a scenario I am looking forward to.
Remember what I said back on November 28th, in my post Did I Just See a Dead Cat Bounce?
The Fed is scared, that’s for sure. They see the dislocation in the
credit market persisting, and perhaps getting worse. All we need is the
failure of a single monoline insurer or (another) 10-figure write-down
by a major bank to toss the financial markets into a complete panic,
which would be good for precisely nobody (except perhaps Bill Ackman,
Jim Chanos and a few others). So in light of these risks, they may well
tilt towards an accomodative stance. However, if they do this, will
this really stimulate growth in the real economy and meaningfully
loosen up tight credit markets? Debatable. There are likely more direct
steps they could take to provide banks and other financial
intermediaries with the liquidity to bridge the gap and to address the
tightness in the mortgage markets, steps that maybe wouldn’t have such
an adverse effect upon the dollar. And what if they continue to push
down short term rates, and the real economy doesn’t react as hoped? In
the absence of real growth and in light of lower rates, the dollar will
fall further, only exacerbating an already difficult situation. This
could have the effect of causing foreign capital to flee and long rates
to rise, making it more costly for firms to raise stable, long-term
capital (not to mention the US Government).
I could have written this yesterday; I believe my words are as applicable now as they were then. For those who are playing, the SPY closed at 147.13 on that day, after having rallied from 140.95 on November 26th. It bounced as high as 150.94, reached on December 10th, after which it dropped all the way down to 130.72 on January 22nd. Today we sit at 133.63, down from the October 9th high of 156.48. For a non-economist I think I nailed the situation pretty well.
So my point isn’t that rallies can’t happen, but that one needs to take a big step back from the headlines and ask: how is this going to change the fundamental outlook for the real economy, consumer confidence, purchasing power, the health of our financial institutions and the vitality of the credit markets? Oh yes, and trivial matters like the dollar, inflation and profligate spending on non-value creating activities like wars. As it stands today, I am not convinced the Fed, the U.S. Treasury or our President have the answers. What I do know is that a lot of investors who are breathing a sigh of relief today are going to be shedding tears of disappointment in the not-too-distant future. Because I just saw a dead cat bounce. Again.
