Not too long ago I posited some specific ideas on what’s happening now, and what might happen just down the road a bit. Since then I’ve been watching, like you have too, no doubt.
What I’ve been noticing is the eery way things seem to be going. There are some parallels to what played out beginning in 1998 with Greenspan at the helm of the Federal Reserve. We don’t have to go through everything involved there, but today there are a few similar circumstances. And I mean similar as in the furrows of a freshly plowed field.
Everyone thought Greenspan was late in lowering the Fed Funds rate back then. They were sure it was too little too late. They were wrong. There are many who are today skeptical of Bernanke’s move last week to lower the Discount Rate by 50 basis points.
Also, Greenspan significantly increased the money supply, while trying, (in my opinion) to get folks to believe he wasn’t really doing much of it. Recently, the Fed has been printing money like they’re losing at Monopoly and the banker is ignoring them. In both cases Wall Street was doing everything but waving flash cards on TV, to get the message to the Fed Chairman — cut rates now, and while you’re at it, why don’t you make it a trend.
I’m not talking here about whether Bernanke should or shouldn’t, and if he did, how much and how many times. Though I’ve been saying I thought he was gonna have to cut rates soon for weeks now, that’s for another post. I’m just wondering out loud if a few rounds of Fed Funds rate cuts are in our immediate future. If Bernanke does the usual dance with Wall Street as he watches the market respond to his every facial expression, this script could come to pass. Wall Street these days is acting (maybe understandably) like a very nervous dance partner, waiting to be led.
I remember what Max Whitmore said recently about the immediate future (3-4 years) of the stock market. If we didn’t lose more than half of the latest 3,000 point run-up, he thought the current bull market could very well end up in the stratosphere. That would’ve taken us below 12,500 on the DOW, which didn’t happen. It went below 13,000 then rebounded on the news of the rate cut. It’s about 13,090 now.
Let’s try to connect the dots.
The sub-prime crisis hits the fan, causing the expected negative ripples. 40 banks allow a previously negotiated $11.5Bil line of credit to be triggered by Countrywide. The stock market reads its lines flawlessly, falling fast. Other lenders begin to show signs of eminent failure. (some in fact have) Along comes the Fed and
cuts slashes the Discount Rate by 50 basis points.
The financial community then sings, right on cue, ‘Take me Out To The Ball Game’ they’re so relieved. The DOW is up over 13,000 again. The bulls are again pawing the ground. Some very experienced and respected stock market experts, (read: advisors) have been saying out loud that’s it’s time to again become a buyer. What? A buyer?
It’s light years away from being a Wall Street consensus. But if Bernanke cuts the Discount Rate again in say, the next two weeks, and then in the third week of September cuts the Fed Funds rate, we might be seeing the beginning of a movie we’ve already seen. It was written and directed by Greenspan, and began its run in 1998.
Does this mean I’m implying we’re gearing up for another real estate boom? Not in any way, shape, or form am I saying that. That thought is silly on its face. What I am saying, is if the Fed does follow this script, our troubles will at least have turned the corner, headed toward resolution.
It also helps to know a little about who Bernanke is. I asked a well known S & P guy about him yesterday. Though I will protect his privacy by keeping him anonymous, he’s been around since the days of LBJ. He laid out the differences he sees between Greenspan and Bernanke. He sees Bernanke as more of a Milton Friedman type who will help the market, but not to the extent of bailing out the perpetrators of this credit problem. In other words, he’ll do what he can to stop the beating, but the bad guys can survive, or not, on their own. Furthermore, he’ll use the money supply hammer to motivate banks to go back to common sense lending — and not only in real estate. He wants common sense applied also to credit cards, and the predatory practices aimed at lower income to stop.
The Bernanke approach will still take awhile. But I just don’t see how moving huge money supply increases into the system, lowering the cost of money to banks, while keeping lending rates for real estate historically low, isn’t a recipe for hanging an economic U-Turn. If it happens this way, and we don’t see the beginning of that turn, it’ll be the first time ever.
And once the beginning of that turn is perceived by Wall Street and the public, the normal correction will then run its course. Only instead of moving at a snail’s pace, it will pick up speed. By picking up speed I don’t mean we’ll be post-correction by this Christmas. Not even the most optimistic, rose colored glasses could manage to see that happening. Heck, I don’t even think David Lereah would put that thinking in writing — at least not in public.
But I think if we come anywhere close to shouting distance of this scenario, we just might be smiling on New Year’s Eve as we drink our champagne. Knowing that at least the U-Turn had begun will make it taste that much better. Just the thought of only another year or so of cleaning up this mess is nice, if only to contemplate.
Again, in my thinking, this is analogous only to Lassie beginning to think she’s getting the tiniest hint of Timmy’s scent. If she’s right, we all know how the movie ends.
Whatever the script is about to be played out people, know this — we’re all playing the part of Timmy.