http://www.contrahour.com/contrahour/2009/01/martin-armstrong-the-coming-great-depression.html
We may be at a Short Term bottom near here, 6,000 was my first target. I am PONDERING using SSO (etf 2X spx long) with stops and SHORT LEASH. I dont have a signal for it, with AAII 70% bear reading, oversold mkt in many ways....it should lead to something....capitulation? NO......hardly anyone left optimistic? YES
Could MARK TO MARKET accounting be suspended? one catalyst I been thinking.....ST Rally normal in OCT and MArch too.....lows could bring 3,500- 5000 DOW 2009-2012 ish
D
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The Search for an Economic Policy
By Francis Cianfrocca
It would be refreshing if someone big and important stood up to say that policymakers really haven't a clue how to improve the economic and banking crises. But no one in a position of political authority is apparently willing to do so, least of all the New Masters of the Universe in Washington. Therefore, the task falls to me.
In the US, there's a growing sense that President Barack Obama's Administration just doesn't know what to do about the worsening economic and financial picture. Consumer demand continues to fall, jobs continue to be lost at a rate of more than half a million a month, the credit crisis is still as bad as ever, and housing is still far overpriced.
The bright spot, if it is one, is that Fed Chairman Ben Bernanke has been doing more than anyone else in the world to get ahead of the deepening problems in the capital markets. The leaders of the world's other central banks are mostly watching him and waiting to see if anything works. So far, a lot has worked, but the economic problems that are of greatest concern haven't been touched.
Bernanke's academic specialty has been his studies of the Great Depression, particularly of the dynamics through which a long chain of bank runs and capital-market stresses turned into the worst episode of sustained high unemployment in our history. He also watched closely as Japanese authorities mismanaged their deflationary situation in the early Nineties.
What he concluded is that at a time like this, monetary authorities have to act as fast as possible, and in as much size as possible.
However, he concluded this not because he knows it will work, but rather because nothing else has been known to work. We're in totally uncharted territory, and so far nothing in the broad economy is looking any better.
The trouble began in mid-2007 as a liquidity crisis. Institutions like banks, Wall Street firms and hedge funds were suddenly unable to continue financing their holdings of illiquid assets like mortgage-backed securities. This forced them to de-leverage by selling off other assets that did have liquid markets, like stocks, high-quality corporate debt, and ultimately even commodities like crude oil. That's how markets started crashing.
The point rapidly came at which banks simply stopped lending to each other, even overnight, because of fears that anyone could default, even the biggest names, a fear that was borne out time after time.
Bernanke, followed by other policy makers, aggressively moved to fill this liquidity gap with a vast array of emergency lending facilities. After all, the first job of a central bank is to be a lender of last resort. The Fed has executed this role in gargantuan size, eventually guaranteeing the borrowings of entities across the whole spectrum of short-term capital markets.
In the process, they've printed more new money than I would have even thought possible just two years ago. The Fed nearly tripled the size of its balance sheet (the most basic driver of the money supply) last fall, as it tried (successfully) to prevent the total global meltdown that almost occurred after the collapse of Lehman Brothers. People who don't follow financial markets closely don't realize how narrowly we missed a terrible disaster.
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Today, the capital markets are more or less stable. Interbank borrowing is happening at historically high interest rate spreads, but it's happening. Corporate bond and mortgage issuance is still slow and expensive, but it's not near zero anymore. Commercial paper is rolling over reasonably well.
But the great disease that Ben Bernanke most feared has struck us and taken root. As in the early Great Depression, the waves of capital-market distress have washed over into the real economy, where people go to work and produce goods and services, and where they borrow to fund major purchases and business expansion.
You can see it in the stock markets, which are the financial markets most visible to ordinary people, and most reflective of the real economy (a stock price measures how much money a company is expected to make in the future). After a long lag, stock markets are finally showing major declines.
The hard part, in policy terms, is to figure out where we go from here. The liquidity problems that originally gripped the banking system have morphed into solvency problems, with banks too under-capitalized as a result of investment losses to make any new loans.
And the stock market declines are now causing major distress among public pension funds (the ones that pay retirement benefits to teachers, firefighters and local bureaucrats). They'll soon be needing huge bailouts, along with General Motors, the banks, state governors, millions of homeowners who can't afford their mortgages, and everyone else we're afraid to see fail.
But bailing out everyone means that precious capital is being redirected back to places that have failed. There are good reasons why we should do a certain amount of this (a systemic banking failure would be disastrous). But available private capital today is the rarest commodity in the world, and the continuing string of bailouts is sucking out the little that exists. That's why prices for US Treasury securities continue exceptionally high, while every other asset class in the world except gold is declining. The government is grabbing all the capital that might be used for private industry and consumer borrowing, and using it on bailouts and badly-designed fiscal stimulus to prop up people who have already failed and can't lead a recovery.
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You could well argue that if not for government borrowing, there would be little to no private credit formation and things would be even worse. That's true, in the near term at least. The world is in the process of readjusting its level of debt to a far more realistic one that matches the long-term stable rate of economic growth. Markets are like water flowing downhill. They always go where they want to, and the most you can do is slow them down a little.
What I'm saying is that the world economy got far ahead of itself in the last several years. Why that happened is a subject for a book (maybe a shelf full of books). But it's unwinding rapidly now, and this is the deflationary pressure we see everywhere. We don't need as many autoworkers or factories, because people won't be spending as much on new cars as they once did. And people still need to adjust to lower housing values in many parts of the country.
This process is plain, simple reality. The deleveraging and rebalancing simply has to happen. It's a fast, disruptive process but ultimately a very healthy one. To be blunt, it's like a big dog walking into your kitchen out of the rain. He plants his feet and shakes all the water off. It's smelly and disgusting and you have to clean off your kitchen and yourself, but then it's done and you move on. That's how we're shaking off the debt overhang caused by years of underpriced capital.
The government is flailing because they don't want to allow this process to proceed at its own pace. So they're doing a whole raft of desperate things, like the stimulus package, the desultory bank half-nationalizations, and the exceptionally dangerous attempts to prevent mortgage foreclosures.
Bernanke's approach is to try anything, as long as it's different from what was tried in the past. The Administration's approach is to assume that we can get back to partying like it was 2006 as long as we push enough extra money into the system. It would be far better for everyone if they stepped back, got out of the way, let everyone rebuild her personal balance sheet, and let the housing markets find their own level.
What could we be doing that would really have a positive effect? There's nothing we can do to stem the reduction of debt and the increase in personal savings. (Repeat: there's nothing we can, or should, do about that.)
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What we could be doing is to encourage the eventual return of business and consumer confidence. That's because a good shot of economic growth would provide the resources to make all the other problems less bad. But here, the Administration is doing its worst job of all.
The recently-announced budget would be radical and damaging to business confidence in the best of times. But these are the worst of times, and the budget is nothing short of disastrous. We're being told to expect tax increases on high earners, business income and capital, increases in business regulation, a new energy tax on the whole economy ("cap and trade"), and the biggest expansion in government spending since World War II.
If you're a businessperson, as I am, your reaction can only be to conclude that President Obama doesn't like you. The Administration's stated policies make it very uncertain and unattractive for businesses to try to expand and create new jobs, now and for years to come.
The damage that our young president has already caused to the economy is hard to overstate, because it has a very long tail. It's going to take years to rebuild business confidence now -- and in terms of economic growth, those will be lost years.
Mr. Cianfrocca is a businessman and investor based in New York City.
This article was originally published at The New Ledger.
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