Bernanke spoke, markets
fell. Confidence in the Fed Chairman
wanes. From a fundamental perspective, until something is done to bail out the
credit insurers, so they maintain their AAA rating from Moodys and S&P,
market rallies will be corrective. This is an economic nuclear bomb at 32,000
feet. This is about bank solvency, bank risk-based capital, the bank
credit function, not about the insurers themselves. Should a downgrade
come to the insurers, billions of municipal bonds will effectively become
illiquid, joining the trillion of CDOs (mostly subprime loan securities) that
have already become illiquid. Without a bailout here, we are headed for a
depression. Period. None of this is lost on the
markets.
Technical analysis doesn't
predict the news, it just recognizes those periods (Bear markets) when a
cacophony of bad news, macroeconomic screw ups, frauds, etc. are likely to
occur, which in turn send market prices lower. We are in one of those periods
now.
How far down we go depends upon how the Master Planners and the mass of human
psychology responds to the current financial crisis. Some folks consider
technical analysis rubbish, however the Dow Theory Bear Market signal came way
back in November, and look at the bad news since. So far, the Master Planners
fiddle, and apparently the mass of human psychology is looking to Barrack Obama
for a solution, the guy who defines $75,000 of income per year as rich. If you
make $75,000, Dartmouth College gives your kid (assuming he gets in) a hardship
scholarship, a 100% free ride. So, who's definition of rich versus poor is
correct? And the Bear Market beat goes on.
The imminent downgrade of AMBAC
and MBIA is the greatest systemic threat to our economy since the bank failures
of the 1930s. Sure they were mismanaged, sure
they deserve to go belly-up, sure they failed to properly assess the risk of a
systemic slowdown in mortgage backed securities they insured, sure they failed
to charge the appropriate credit insurance premiums to securities underwriters
for that risk. But fact is, regulators blew it, which means our government
blew it, and now the entire banking system is at risk, as is the ability for
consumers to get a basic loan, because of loan restrictions banks face based
upon shrinking risk-based capital levels. Time for Congress to get to
work. Time for the most incompetent Fed Chairman since Eugene Isaac Meyer (whom
FDR canned out of necessity in 1933), Fiddling Ben, to take the lead and put
together a just and effective credit insurer bailout. If Hillary wins, will Wall
Street cheer? Would she axe Ben? Would McCain? Ron Paul
would.
The St. Valentine's Day massacre.
That's how markets felt after
listening to Mutt and Jeff on the hill Thursday, as they blathered, snuffing out
a nice confidence-building three day rally earlier this week. Here are some of
their uninspiring comments today: Bernanke proffered, "the economy is likely
to endure a period of sluggish growth . followed by a somewhat stronger pace of
growth later this year," as the effects of the Fed's rate cuts and a newly
enacted stimulus package begin to be felt. But his faith in the fiscal stimulus
package and past rate reductions by the Fed are worrisome. More is clearly
needed. In fact, Republican Senator, Richard Shelby, from Alabama,
disagreed strongly. In rebutting Fiddling Ben, he described the impact of the
rebates as "negligible," and he likened its action to pouring a glass of water
into the ocean. Based upon my own experience testifying on the hill,
Senator Shelby knows a thing or two about the economy and the banking system.
Too bad he isn't the Fed Chair.
Probably the least inspiring
quote of the day came from Treasury Secretary Hank Paulson. Yes, Paulson doesn't
get a free pass here. Senator Charles Schumer, a Democrat from New York, asked
whether policymakers underestimated the severity of the situation.
Paulson's response, and I quote, "It's one thing to identify a problem.
It's another thing to know exactly what to do about it." In other words, he
doesn't have a clue. Just great. The Treasury Secretary of the United
States of America doesn't know what to do about the most serious economic crisis
in 80 years.
Probably the most accurate remark came from Senator
Robert Menendez, a Democrat form New Jersey. He criticized the Master Planners
for what he believed was a too slow response to the housing crisis. "We
count on those at the top . . . To sound an alarm during a crisis. Instead what
we got was a snooze button . . . We've been behind the curve." Yes, just like in
the 1930s.
The Dow Industrials fell 175.26
points Thursday, to 12,376.98, giving up all of Wednesday's
gains.. NYSE volume was
flat at 91 percent of its 10 day average, with downside volume leading at 83
percent, with declining issues at 79 percent, with downside points at 92
percent.
Have a happy Valentine's
Day,
Robert McHugh, Ph.D.