The Dow rose 40 points yesterday.
Remember our hypothesis: that the feds' inflation will show itself
much more prominently in gold and commodity markets than in the stock
market...and that deflation will hurt stock and property prices more
than it hurts the price of gold.
Yesterday didn't prove anything. But it provided a nice illustration.
While stocks barely budged...gold, oil, and commodities all hit new
record highs.
Gold is now so close to the $1,000 it can feel the body heat. It
jumped $22 yesterday to end up over $988. The CRB also hit a world
record and the price of oil closed over $104.
While gold, commodities and oil soar, price deflation in the housing
market brings millions of Americans closer to sanity. They're finally
realizing that they can't get rich by spending money they don't have
on things they don't need.
Bankruptcy filings rose 18% in February. One of the big mortgage
lenders, Thornburg, of Santa Fe, New Mexico, defaulted on a $320
million loan. Investors sold the stock. Just a week ago, it was a $12
stock. Now it's a $3 stock.
Everything is getting 'marked to meltdown,' says the Wall Street
Journal . Lenders approach a new loan as they might come upon the rim
of an active volcano...worried that it might blow up in their faces at
any minute. Yields on auction rate financing for municipalities and
hospitals have almost doubled. And when the auctions fail, they can
really explode. That's why the ****t Authority found itself paying a
20% rate on money it needed.
All of this is tempting the feds to intervene. Look at it from their
point of view: if they do nothing and things get worse, they'll be
accused of inaction...or worse, insensitivity. Nothing is worse than
inaction. The people curse it. The professionals loathe it. Doing
nothing is always and everywhere detested by practically everyone. In
marriage, it is grounds for annulment. In business, it is cause for
dismissal. And in war it is a ticket to a court martial.
Of course, an economy is never inactive. It is always doing something
- as millions and millions of people go about their business as best
they can. When the feds 'do something' to an economy, it is not as if
they were writing on an empty piece of paper. Instead, they are
scratching out the verses written by private citizens and replacing
them with their own clumsy doggerel...and pu****ng the economy in some
direction it doesn't want to go. Sometimes they are successful - as,
for example, at the beginning of this century, when a torrent of new
cash and credit produced the world's biggest housing bubble. But
sometimes, Mr. Market insists on going where he wants to go.
After five rate cuts and one massive tax rebate program, the feds are
wondering what to do now. The New York Times re****ts that Bush and
Bernanke are "inching towards" a federal bailout of homeowners.
Already, Bernanke has been urging bankers to forgive a ****tion of
their mortgage loans. And Rep. Barney Frank, who wrote in the
Financial Times recently that laissez-faire capitalism was all very
well...as long as politicians got to tell the capitalists what to do,
has proposed that the federal government buy distressed mortgages.
George W. Bush, who will go along with anything, is said to be
studying the legislation with the sharp eye of a Helen Keller.
A bailout is probably coming . But will it work?
More and more observers seem to be coming to the conclusion we reached
- prematurely, it turned out - at the end of the '90s.
Morgan Stanley's Stephen Roach:
"The current recession has been set off by the simultaneous bursting
of property and credit bubbles. The unwinding of these excesses is
likely to exact a lasting toll on both homebuilders and American
consumers. Those two economic sectors collectively peaked at 78
percent of gross domestic product, or fully six times the share of the
sector that pushed the country into recession seven years ago.
"For asset-dependent, bubble-prone economies, a cyclical recovery -
even when assisted by aggressive monetary and fiscal accommodation -
isn't a given. Over the past six years, income-short consumers made up
for the weak increases in their paychecks by extracting equity from
the housing bubble through cut-rate borrowing that was subsidized by
the credit bubble. That game is now over."
Roach goes on to compare America, circa 2008, to Japan at the end of
the '80s. Japan ran loose credit policies in the '80s, which led to
bubbles in stocks and property. America's loose monetary policies of
the '90s led to a bubble in the stock market...and then an even bigger
bubble in housing in the '00s. Faced with a meltdown in the '90s,
Japanese authorities knew they had to 'do something' and they did -
they took the recommended doses of both fiscal and monetary policy.
But the medicine didn't work.
"The toughest, and potentially most relevant, lesson to take from
Japan's economy in the 1990s," Roach continues, "was that the
interplay between financial and real economic bubbles causes serious
damage. An equally lethal interplay between the bursting of housing
and credit bubbles is now at work in the United States.
"American authorities, especially Federal Reserve officials, harbor
the mistaken belief that swift action can forestall a Japan-like
collapse. The greater imperative is to avoid toxic asset bubbles in
the first place. Steeped in denial and engulfed by election-year
myopia, Wa****ngton remains oblivious of the dangers ahead."
We're not sure they're oblivious to the dangers; we just doubt that
they can do anything to make things better. On the other hand, we
don't doubt that what they will do will make things worse.
By Bill Bonner
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