Donald Trump was just on CNBC saying that he longs for the days of Alan Greenspan. He believes that Ben Bernanke has held short rates too high too long. He went on to say that Ben should hold an emergency meeting of the FOMC to cut interest rates. He believes that the coming recession could be one of the worst in a long time.
The President of the Federal Reserve Bank of Richmond wrote a nice rebuttal to Trump's tirade. It was published as the President's message in the "RegionalFocus," spring of 2007. The summary point of the article was, "Monetary policy works best when it allows the real economy to respond appropriately to economic fundamentals, rather than attempts to insulate the economy from shocks by tolerating swings in inflation."
Ben could have lowered rates to "fix" the sub-prime problem. This would have been like castrating a dog to prevent breeding. Ben has injected reserves into the system so that those who are running scared can hoard all the cash they want at relatively low market returns. Neither the fed funds rate nor the discount rate was changed. In a few more months, Ben will be getting high praise for standing firm in order to bring inflation expectations to very attractive levels.
In the meantime, "talking heads" will continue to make "much to do about nothing."
I like optimistic people. A few of my favorite optimistic friends are Don Hayes, Brian Wesbury, Jerry Bowyer and James Pethokowkis. This morning Don Hayes wrote that the "common sense" of the talking heads is "short term thinking common sense." Their "wise" council during turbulent times is to "raise cash, get defensive, and stress quality." He notes that he learned a lesson in 1974 when long term common sense was to BUY, BUY, BUY, while others were using short term common sense.
Jerry Bowyer wrote yesterday about the "sub-prime mess." He notes that of the 44 million mortgages in America, 14% are sub-prime. Of those, 13% are currently at least one payment behind, however, the large majority of the late payers are still paying and many are working with lenders to restructure payments. The bottom line is that there are about 250,000 mortgages that are moving to foreclosure. The total value of these loans is about $7 billion. If these houses are worth 30% less than what is owed, the total money lost will be in the neighborhood of $2B. Americans have net worth of $53 trillion dollars. The "total hit" will be in the neighborhood of .003% of value. Oh, my! Lions and tigers and bears!
The good news is that the baby gets thrown out with the bath water during times like these. This is good news because smart investors can pick up babies on the cheap during times like these.
IS THE PRICE PRESSURE COMING OFF THE OIL MARKET? What if the current weakness in oil were to persist? Based on current market prices, the price of gasoline will be down to $2.50 within a week or two. Based on current jet fuel prices, Continental Airlines, Inc. (NYSE:CAL) will save about $360 million dollars on fuel over the next year (about $3.24 per diluted share). Is the "roll over" or "rotation" finally here?
Over the past 21 days, the XAL (airline index) has fallen 8.99%. During the same time the XOI, oil index, has fallen 13.24%, the XBD, broker dealer index, has fallen 14.16% and the BKS, bank stock index, has fallen 7.88%. This sure looks like a classical mid cycle rotation, but as always, we will not know for sure until after it is well underway. If Big Ben had "chickened out" and cut rates, then I would have to say that the price of commodities might take off again. However, Ben has been as solid as a rock. He has fed the markets enough cash to allow the markets to work. He has not driven down the price of money, thus he has avoided stoking inflation and he is thus setting us up for a very strong second half cycle.
The second half of the business cycle is the time of small business expansion. The first half of the cycle is all about recovery from the worst of the prior downturn. During the second half, those businesses that have done well during the recovery will borrow to expand. Business lending is the mother's milk of profits for the average bank. During the past few years, the big investment banks (broker dealers) have had a fun ride. In recent days, they have been routed. Again, the entire index is off 14.16% during the past 21 days. Take advantage of the turbulent markets to add money to your accounts. It is time to do some BUYING!
A major reason to buy now is because market psychology indicators are screaming BUY, BUY, BUY. I will not go over the indicators in detail, but they show that emotional, trend traders who typically have a lot of short term fun at major turns are as "tilted" as they have been in a long while. These traders make money for a while and then lose their collective shirts when the new trend takes off.
Brian Wesbury wrote a nice piece for the Wall Street Journal yesterday. In it, he pointed out that while the overwhelming majority of professional forecasters see no recession soon, the majority of Americans believe we are already in a recession. Indeed, the public is fed such a rich diet of gloom and doom by the media that they hold a negative bias about the state of the world. Even a majority of the 64% who say they have personally never been better off, say that the world is falling apart.
Brian makes the excellent point that even the shows that "present the fair and balanced" point of view, tend to always have a "bull" and a "bear" debate. The more appropriate debate should often be how to make money now, versus am I going to win or lose. Market investors who stick to the task at hand consistently make money.
Making money this week, month or year is far more doubtful than making money this decade. We are living through exciting times.
James Pethokowkis is correct that there is a risk that we will be pulled off course by vote-hungry politicians. Yesterday, I enjoyed his comments about the "broken window fallacy" trap that Hillary Clinton is willing to lead us into. In this case, Hillary wants to spend a lot of money to "fix" global warming. She talks about a "win-win" scenario. Ironically, she recently voted against the trade deal with Columbia that would have provided a "win-win-win." In her version of a win-win, she would tax Americans directly and indirectly to reduce global warming. She thinks that all the government spending to fix the problem would create lots of jobs and she is correct on this point. The problem is that the jobs thus created would not be equal to the jobs created if the free market were allowed to "fix" the same problem.
HOW MANY TIMES DO WE NEED TO LEARN THE LESSON THAT GOVERNMENT IS NOT AN EFFICIENT CREATOR OF JOBS!
Big Businesses and Politicians
Soon, politicians will attempt to pass laws to "fix" the energy "crisis." The most common "democrat" solution is a cap and trade system for pollution. This is nothing more than another opportunity for big business to win special favors by spending big bucks to lobby politicians.
If we seriously want to curtail energy use, a tax increase on fuel usage should be passed. It should be offset by an equal tax credit for health care or reduced income taxes. NO MORE BIG GOVERNMENT. WE ALREADY HAVE DEMOCRAT AND REPUBLICAN BRIDGES TO NOWHERE!
Got to run. Bye, buy, buy . . . .