Perma-Bulls always cling to the theory that someone or something will come to the rescue to save the economy and prevent a recession. Why shouldn't they feel this way? Easy Al Greenspan was always there to save the markets and inject the necessary liquidity to keep the markets going higher. Long Term Capital Management Bust...No Problem! Tech bubble burst...No Problem! September 11th...No Problem! Recession...No Problem! Now that Ben Bernanke has taken over, he seems to be "playing ball" with Wall Street but he is running out of ammunition with all the rate cuts that he's already used up.
Michael Shedlock wrote a great article today entitled Bulls Cling To Misguided Hopes which addresses all the dashed hopes and dreams of Bulls hoping to fend off the inevitable recession.
It is a MUST READ!
Highlights:
Containment Theory Escalation
-Problems are contained to subprime.
-Problems are contained to subprime and Alt-A.
-Problems are contained to residential housing.
-Problems spread to Canada, Norway, Europe, UK, Japan and anyplace else dumb enough to buy US asset backed commercial paper.
-Paulson creates Super SIV bailout proposal.
-Super SIV bailout proposal collapses.
-Containment spreads to corporate real estate.
-Realization containment theory failed.
The containment theory was followed by the "Fed Will Save The Day Theory". Let's take a glance at the progression of that theory.
Fed Will Save The Day Theory Escalation
-Fed does surprise discount rate cut.
-Fed cuts interest rates to 4.75 to 4.50 to 4.25
-Fed cuts interest rates in surprise move to 3.50
-Fed cuts interest rates again 8 days later to 3.0
-Fed will likely cut to 2.5% in March
The Decouple Theory
In conjunction with the Fed Theory we had the Decouple Theory. The idea behind the decouple theory is simple. It is a global extension to the "It's Well Contained Theory". The refinement hung on the misguided belief that problems will be contained to the United States. This theory was shattered in a Global Equity Selloff and a virtual lockup of bond markets in Europe and the UK.
The Sovereign Wealth Fund Theory
The other day in response to a reader query about sovereign wealth funds, I made this statement: "Those dollars will eventually come home to buy US assets. A piece of Pfizer, Citigroup, Goldman Sachs, Exxon Mobile. How exactly does that cause "inflation"? "
Walking Away
People are walking away from houses for two reasons
-Some because they can afford them but don't want them
-Others because they have to
Bernanke will not succeed at containing that sentiment change. The Fed can only exaggerate the current trend it cannot change the trend.
Points of Failure
-Banks are unable or unwilling to extend credit
-Consumers and businesses are unable or unwilling to borrow
We are seeing both sides of this equation now, unwillingness to lend and unwillingness to borrow.
