Gee, who could have seen that coming?
As I said Monday (and pretty much every time we have a Fed event): Tuesday’s action is meaningless, it’s all about the folllow-through. I was very pleased that the Fed didn’t go overboard and at 2:59, despite the heavy sell-off, I said to members: "By the way, I’m very, very happy with the Fed’s decision and I will now happily start buying long-term plays because they’re not willing to destroy the economy to make Jim Cramer happy." True to form Jim was on CNBC saying the Fed move was likely to put us into recession, a totally wrong view based on Jim’s belief that the World centers around his buddies in the financial industry.
The problem with this economy IS easy money, more easy money is not the solution for anyone except the speculators who have pumped way too much money into commodities causing a bubble in housing that has driven affordability to the lowest level ever and the price of energy to the highest level ever so either that bubble has to burst or (gasp) wages need to come up in what would be an inflationary cycle. This is how economics works folks! People need to be able to afford the stuff you’re selling or, at a certain point, they stop buying.
Now the Fed has done a remarkable job of flooding the world with dollars while our freinds in Japan have flooded the world with Yen so money has been very easy to come by but, since wages have not kept up with the inflation this causes (whether the government is willing to count it or not) all those loans written by the banks who leveraged the insane amount of money 10 to 1 to be a little risky. A little risky times 10 can equal risky or even extremely risky very quickly when conditions change and this is what Cramer fears. Housing loans were made under a model in which homes would continue to appreciate at a 5% annual rate, a ridiculous assumption over 30 years. This allowed banks to take on investing partners (the homeowner) and go into a partnership (they buy a home together) based on future value assumptions that were fundamentally flawed.
The very obvious problem with this plan for the government is that it gets more expensive to support every year. Since the home commodity bubble relies on an ever-expanding stream of capital to keep growing and since the banks have been making marginal loans that can only be bailed out by continued home inflation and since homes hit a high average price of $250,000 in 2006, it means we needed to add $1.25 Trillion dollars in home value per year to the nation’s 100M homes in order to keep this farce going.
$1.25T happens to be a lot of money. So much money, in fact that the only way to continue to pretend these prices are real in a mere $14T economy is with the willing compliance of the rest of the World. The entire planet’s Gross Domestic Product is about $46T so the growth of US housing alone, at 5% per year, sucks up 3% of the Global GDP. There are only 5 nations on the planet whose entire GDP is as large as the increase in US home prices at that level. For a while, the rest of the world allowed their housing markets to run out of control as well but, being smarter than us, other Central Banks started putting their feet down to stop the madness and now we are playing catch-up.
The financials can’t afford for us to get real. They kept this bubble going by paying more and more outrageous sums of money and finding more and more dubious (from a financial standpoint) investment partners to buy homes with and now that their business plan is failing they are blaming their homeowner business partners (even though they were supposed to be the financially savvy ones) and screaming for the government to bail them out.
Unfortunately, our government is broke and has trouble of it’s own and the amount of money needed to "fix" this problem simply isn’t there so something has to give. The only question now is how much is it really going to hurt. An optimist can see this as a tremendous positive as US housing STOPS sucking up 10% of our GDP.
If only we can burst the other out-of-control bubble, oil, where one dollar per gallon costs the World another $1.4T a year (and that just goes up in smoke!). Fortunately, no matter how immature our government’s policies are, the rest of the world is there to force our hand.
We are a debtor nation and no longer in control of our own destiny, that’s what happens when you have irresponsible management, the investors step in and start calling the shots. Polls indicate they’ll be replacing the CEO and most of the board and hopefully the new crew can turn this country around because the next step is either hostile takeover or bankruptcy!
So nothing unexpected in today’s reaction, we are still realtively neutral in our portfolios as the aftermath of the last few Fed meetings was a flatline for a few days. We can expect a bounce but until we get back over 13,500 and hold it, the most likely trend will be down. Nothing changed my plan to get to at least 90% cash by the end of next week where I will sit out the last two weeks of the year.