An Unbelievable Fed

Did you know that the down volume on the NYSE on Monday, after accounting for foreign stocks and REITs and closed end bond funds, was 98.6%? That's one of the most lopsided days that history has ever seen. So do you still think selling pressure is used up?

Investors have no reason to buy stocks, and every time the government acts isn't giving them new hope, it's giving them another reason NOT to buy stocks.

The Paulson effect I told you all about a while back (and is now being used all over TV and all over the place) is still working and hasn't failed once. As soon as that man gets on TV the market holds for the first 5 minutes. But then he keeps going and you can watch as the market starts dropping. It's the only reliable options trade on the CME right now.

Now the government is guaranteeing mortgage bonds but you're not seeing any action on that front. Why do you think that is? It's because for the past 7 weeks foreign central banks have been selling agency securities, bringing the Fed's holdings down $93 billion. Now, the Fed has announced they're going to buy $100 billion of the agency securities (I learned that from Art’s article). I've already started buying agency securities in expectation of the move.

So the Fed is literally printing $550 billion to finance the buying of mortgage bonds. Mortgage bond rates are going to continue to go down because nobody wants to buy the houses right now. By buying the bonds now people know that in the future they're going to have to raise taxes later to pay for it. In this situation the herd is knowledgeable enough to know they're going to have to pay for this eventually. It's the biggest lack of confidence in our leadership that we've seen.

The Fed's also began the process of printing $540 billion to special purchase vehicles to buy money market assets from mutual funds. They think that doing this will improve money market investors' liquidity positions and make them willing to buy commercial paper. And don't think they're done yet. They’re going to do T bill redemptions. They're planning on expanding their balance sheet without borrowing money from the treasury.

How do they do that?

They print money and the monetary base goes up.

The only reaction Art and I have is shock.

What You Need to Do, What They Need to Do, and How to Do It

Right now people are looking at the stock market and asking, how can huge companies worth billions, if not trillions, of dollars have stock prices at $8? How can fertilizer companies, making 60% profit, be selling for 2 years worth of profit and the price is dropping?

Do you get it? It means it’s not low enough.

So what does that mean?

I know everyone’s saying this is about confidence (and it is), so here’s what it means.

We all lived through the late 70’s during Carter’s presidency. Now Carter was a good guy and meant well, but he wasn’t up for the presidency. He didn’t have the personal strength to handle it and was totally overwhelmed. When Iran and Soviet Union backed him into a corner, he just couldn’t handle it.

The truth is, right now nobody knows ANYTHING right now. All the TV pundits and politicians are talking like they know EXACTLY what’s going on, but the truth is that nobody knows anything right now.

As human beings, however, we have a need to feel that SOMEONE knows what’s going on, that’s someone’s in charge. It’s simply human nature. Right now Paulson, the government, the President, they’re all throwing their hands up, no idea what to do.

Dr. Laffer was screaming a year ago for Bernanke to do one thing to help stave off this situation. It was simply to let the monetary base to grow. They all knew that money was too tight, that money needed to flood in, not trickle. Lowering it a little at a time makes people wait to borrow money. Think about it. Would you borrow at 2% today if you knew you could borrow at 1.5% two days from now? Neither would anyone else!

So we wait and people starve.

Now the government, Paulson, the President, every day they’re changing their mind about what is needed to fix this situation.

Bush is AWOL right now and nobody knows what Obama’s going to do when he takes office. With all the indecision, nobody knows what to do and we’re at a stand still.

If they would just buy the bonds like they said they would, buy with conviction. Who cares if it’s right or wrong? We won’t know for a long time. So what if it’s wrong? How wrong could it possibly be? You buy the bonds and sell it later.

This situation isn’t, at the core, about bonds. It’s about a lack of mastery, a lack of competence. THAT’S why we’re circling the drain.

Obama’s staying out of it out of respect for President Bush. So right now President Bush needs to suck it up, act like the President (even if he’s a lame duck), invite Obama into the White House and work it out. That’s all you have to do.

The minute you have someone who looks like they’re in control the stock market will rebound. Remember, this isn’t about fundamentals. Stock prices are WAY too low because people have discounted that nobody’s going to take charge, and nothing is ever going to get done. Now we know this isn’t true, but it’s the impression we get right now.
We have a president who won’t do anything and a Treasury Secretary who can’t make up his mind. So I repeat my request to them, “JUST DO SOMETHING!”