Watch Out For More Bouncing Dead Cats

What we saw yesterday is yet another example of the "dead cat bounce." And I believe this baby is going to be bouncing for a little while, after which in all likelihood the rally will cease, fear will return and the market will continue its march downward in the face of massive de-leveraging.

There is no choice; it is the case of the irresistible force (investors hoping and wishing for the bad times to be over, courtesy of the Fed) meeting the immovable object (the disastrous fiscal and financial market realities facing the U.S.). The Fed can lower rates to 0% - but that in and of itself doesn't create jobs, make banks more willing to lend and stimulate economic activity.

What it will do, of course, is cause a massive capital flight out of the U.S. and its debased currency, fueling a downward spiral of economic activity in tandem with upward pressure on prices that will hit with devastating effect. Not a scenario I am looking forward to.

Remember what I said back on November 28th?

The Fed is scared, that's for sure. They see the dislocation in the credit market persisting, and perhaps getting worse. All we need is the failure of a single monoline insurer or (another) 10-figure write-down by a major bank to toss the financial markets into a complete panic, which would be good for precisely nobody (except perhaps Bill Ackman, Jim Chanos and a few others). So in light of these risks, they may well tilt towards an accomodative stance. However, if they do this, will this really stimulate growth in the real economy and meaningfully loosen up tight credit markets? Debatable. There are likely more direct steps they could take to provide banks and other financial intermediaries with the liquidity to bridge the gap and to address the tightness in the mortgage markets, steps that maybe wouldn't have such an adverse effect upon the dollar. And what if they continue to push down short term rates, and the real economy doesn't react as hoped? In the absence of real growth and in light of lower rates, the dollar will fall further, only exacerbating an already difficult situation. This could have the effect of causing foreign capital to flee and long rates to rise, making it more costly for firms to raise stable, long-term capital (not to mention the US Government).

I could have written this on Monday; I believe my words are as applicable now as they were then. For those who are playing, the (SPY) closed at 147.13 on that day, after having rallied from 140.95 on November 26th. It bounced as high as 150.94, reached on December 10th, after which it dropped all the way down to 130.72 on January 22nd. Today we sit at 133.63, down from the October 9th high of 156.48. For a non-economist I think I nailed the situation pretty well.

So my point isn't that rallies can't happen, but that one needs to take a big step back from the headlines and ask: how is this going to change the fundamental outlook for the real economy, consumer confidence, purchasing power, the health of our financial institutions and the vitality of the credit markets? Oh yes, and trivial matters like the dollar, inflation and profligate spending on non-value creating activities like wars.

As it stands today, I am not convinced the Fed, the U.S. Treasury or our President have the answers. What I do know is that a lot of investors who are breathing a sigh of relief today are going to be shedding tears of disappointment in the not-too-distant future. Because I just saw a dead cat bounce. Again.

Comments

[scobbydube]

Right on - It is so pathetic what happened this fall with the stock market after the August correction - rallying to 14,000+ but then giving it all back.. Once again we will see that as you say.. Main Street needs help not Wall Street.. Savers need to be rewarded not those who spend - spend - spend.

[nukldrager]

Even responsible consumers will have serious problems managing their front DTI in the current economy. How long since;
"The US Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. More than 1,000 savings and loan institutions (S&Ls) failed in "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time."[1] The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government -- that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts-- [2], which contributed to the large budget deficits of the early 1990s. The resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse-selection incentives compounded the system’s losses" from Wikipedia.
The CDO debacle is reported to be in the $400 trillion range. Humpty Dumpty is going to be a cube when we see him again, because it's cheaper to make squares than it is to make circles.

[galewhitaker]

Roger
I think behind the scenes the Administration is on the phone to Ben on a daily basis. The message goes like this, "Ben, do you know what is going to happen to you if the Democrats when the Presidency"?
Your message didn't include any mention of the high price of energy. I don't know if we have passed "peak oi" but the the effects are the same. I don't think our economy can survive $100 oil. The effects of high energy prices are just beginning to be felt. The refiners have yet to pass on the costs of these new oil prices. Our world poised for the perfect storm. As I speak there is a "money manager" on CNBC with a list of stocks that are are too cheap to pass up. I think a lot of little guys are going to get hurt in the coming weeks.

The Cynic

[notsosmart]

there is little or no accountability for failure among the elite. thats why this happened.mostly the same people get elected & reelected & nobody really cares.take the money & run.the chickens are coming home to roost.

[BackToTheLand]

"scobbydube" nailed it in their comment above. It is time to reward positive behavior (e.g. saving) with favorable tax treatment. In the absence of that, my savings are being spent on self sufficiency supplies, more valuable than a devalued currency during a depression. I feel a bit like Chicken Little...