Just Add Liquidity, Wait a Few Days: Claim Victory

The stock market has risen the last three days and commodities prices have fallen sharply, all in the wake of the rescue of Bear Stearns. Prior to that, equities had plummeted, commodities had skyrocketed, the dollar completely cratered and a powerful flight-to-quality had ensued. I mean, a snap-back in the wake of hundreds of billions of Fed intervention was not particularly surprising, no? But read some headlines today and it is as if the Fed and Bernanke have won. Won what? A three-day reprieve from a long-term problem that is necessarily exacerbated by the Fed’s historic injection of liquidity to avert crisis? I mean come on. Can’t we even wait a few months before knighting Sir Ben and anointing him “Slayer of the Evil Commodities Bubble?”

Even by journalistic terms these headlines are hopeful if not outright fanciful. Oil drops to $102? Gold to only $910? Wow, happy days are here again! How about this formula: have a deadline, need a headline, look at data in the absence of context, stir for 2 minutes, write a story. This from Bloomberg in a story titled Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke:

     March 21 (Bloomberg) — The biggest commodity collapse in
at least five decades may signal Federal Reserve Chairman Ben S.
Bernanke has revived confidence in U.S. financial firms.

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“Bernanke took care of the commodity bubble,” said Ron
Goodis, the retail trading director at Equidex Brokerage Group
Inc. in Closter, New Jersey. “Commodities are coming back to
earth. The stock market looks OK, and Bernanke is starting to
look a little better.”

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Gold had its biggest weekly loss since August 1990 after
reaching a record $1,033.90 an ounce on March 17. Oil plunged
almost $10 over three days, after rallying to $111.80 a barrel,
the highest ever. Corn dropped more than 9 percent for the week,
the most since July.    

Until this week, commodities had outperformed stocks and
bonds as the Fed reduced its benchmark rate five times since
September, eroding the value of the dollar and fueling concern
that inflation would accelerate. This week’s rate cut brought
the Fed’s target for overnight loans among banks down to 2.25
percent.

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Oil, soybeans, platinum and wheat all jumped to records
this year. The weighted UBS Bloomberg Constant Maturity
Commodity Index of 26 futures has gained more than 20 percent
every year since 2001. The index is up 10 percent this year.    

Gold had rallied as much as 43 percent since Sept. 18, when
the policy makers began lowering the federal-funds rate for the
first time in four years.

Has confidence been revived in U.S. financial firms? Nobody I know, myself included, feels this way. Did Bernanke take care of the commodity bubble? Commodities are coming back to earth? Really? Relative to their highs over the past week? And have commodities simply outperformed stocks and bonds during the Fed’s easing? What about the data in the article that discusses price of the UBS/Bloomberg commodities index rising more than 20% per year for the last six years and is up over 10% this year? This isn’t called outperformance; this is called a trend.

There were a few professionals quoted in the article that take a more balanced view of the proceedings, and their comments are nicely stashed at the very end of the article:

“He has taken extraordinary measures, things that we
haven’t seen since the Great Depression,” said former Fed vice
chairman Alan Blinder, a Princeton University professor. “He’s
working overtime, literally and figuratively, to get this panic
under control. But so far, it’s not under control.”   

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“This is all about money,” said Leonard Kaplan, president
of Prospector Asset Management in Evanston, Illinois, who has
been trading gold since 1973. “The Fed can control the price of
money but the banks still don’t want to lend.”

Only time will tell, but in any case a declaration of victory for anything other addressing this week’s crisis is months if not years away. Let’s not lose sight of this fact, because the minute those in positions to make large policy decisions stop using their brains and begin thinking the worst is over, watch out. Because their overconfidence will only sow the seeds of turmoil.

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COMMENT:

AUTHOR: inner daemon

EMAIL: outerdaemon@gmail.com

URL: http://innerdaemon.wordpress.com

DATE: 03/21/2008 09:38:49 AM

Fyi:

Commercial-finance firm CIT Group said itís in trouble yesterday, having had to tap more than $7 billion in emergency loans from its backup credit line, and forced to sell off up to $7 billion in assets. After its credit ratings were cut a few days ago, the century-old company, which has $83 billion in assets, hasnít been able to get the short-term debt that had been no problem just weeks ago. Its shares fell as much as 45 percent before settling down 17 percent.

http://www.cjr.org/the_audit/opening_bell_ripple_effect.php

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What temporary measure will be tried next? 

Also, just to tie in with your earlier post: http://www.informationarbitrage.com/2008/03/hostility-towar.html, do you sense that there is enough serious thought regarding long term effects from the impending fallout? I certainly don’t.

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COMMENT:

AUTHOR: Paul Denlinger

EMAIL: paul.denlinger@gmail.com

URL: http://www.chinavortex.com

DATE: 03/23/2008 01:51:44 AM

The trouble with taking short-term measures to settle long-term problems is that when things break the next time, they become worse. Eventually, it gets to the point where you cannot fix things because everything is broken so badly.

With some luck, and the rest of the world’s help, Bernanke just might be able to fix things cosmetically until things break the next time. But he shouldn’t fool himself into thinking that it’s possible to cure cancer with a Band-Aid.

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2 years ago | view comments |  Current Affairs