What happened to gold, oil and commodities yesterday?
If our theory is right, when Mr. Market was knocking the stuffing out of stocks…gold and oil would get beaten down too, but not as much. What happened was that gold fell $25…and then bounced back. At the end of the day, it was ahead $8.60 cents…closing at $890. Oil held at $89.
So far, so good.
But what will be the effect of the feds’ attempt to stop a recession and reverse the bear market?
We expect the bear market on Wall Street to continue, almost no matter what. But the recession is another matter. Surely consumers could be encouraged to spend more? And surely, enough consumer spending would stop a recession. Currently, the U.S. Congress is considering the alternatives. At the top of the list – at least among Democrats – is the curious idea of giving tax “rebates” to people who never paid taxes in the first place. The nation already has plenty of circuses, say the deep thinkers in the imperial capital; what is needed is more bread. And the people most likely to consume their bread are those who have the least of it. Barely half the people in the United States pay any taxes anyway…so it is not hard to find non-taxpayers. And it’s not hard to encourage them to consume. Most live hand to mouth; just put something in their hands. And if you put enough bread in their hands, would not a recession be averted?
That’s what most people think.
But where does the manna come from? Ah, there’s the rub, isn’t it? Yes, a recession could theoretically be sidestepped. But it would be like dodging a bicycle…and stepping in front of a bus.
Colleague Dan Amoss sent these words of advice yesterday:
“Emotion – not rational decision-making – is driving the selling this morning, so don’t panic with the crowd and sell quality stocks when they are cheap. This is not 1987. Thirty-year Treasury bond yields are not spiking toward 9%, as they were in the months leading up to the 1987 crash. Instead, they have been plummeting toward 4%:
“The Fed’s emergency 75 basis point cut sparked a late morning recovery, but it’s more of a psychological move than anything. Investment banks must still take losses on toxic mortgage-related securities that they had assumed were covered by bond insurers MBIA and Ambac. It remains to be seen whether these companies will be able to pay claims as they arise.
“But those banks with access to the discount window now have access to Fed credit that’s nearly a percentage point cheaper this morning and will get even cheaper in the coming weeks. The yield curve is still flat after this rate cut, but it will eventually become positive. Inflation is coming down the pike, but right now, the market is fearful of unknown financial sector write-offs.
“I do recommend, as I have for the past year, that you avoid stocks with overstretched valuations and stocks in the financial and consumer sectors. The puts I recommended in the beta issues of the Strategic Short Report have performed well, and I expect to find several similar ideas in 2008.”
And Byron King sends us this:
“‘I’m just a broken down old disc jockey,’ said Jim Quinn this morning on his Pittsburgh-based radio talk show. ‘I’ve been spinning records and running my mouth on the radio for 45 years, so what the hell do I know?’ he asked.
“‘But even I can tell you that cutting interest rates is the exact last thing that the U.S. economy needs right now.’
“Quinn was reporting the news that Fed Chairman Ben Bernanke had just announced a cut in interest rates of 75 basis points. ‘Most of the problems of the U.S. economy have been caused by too much easy credit,’ said disc-jockey Quinn. ‘And the solution to the problem is not to pump out even more easy credit. The Fed ought to just let whatever is going to happen, happen. Let things run their course and clean the rot out of the whole system. If people are going to get foreclosed and lose their houses, then that kind of stuff happens. It is what happens when you take on too much debt, and bet the wrong way in life. But no, the Fed and the Washington politicians are just going to drag this whole thing out. Instead of a sharp correction over a period of months, they will drag this thing out so that it lasts for years.’
“Not bad analysis for a broken down old disc jockey,” says Byron.
*** On the home front, everyone is hard at school. Elizabeth is at the Sorbonne, taking exams for the equivalent of a master’s degree in history. Sophia is studying nutrition here in London. Henry is studying hard to pass his exams for his final year of the French equivalent of high school. And Edward is studying off and on, too, in order to move on to the 10th grade next year.
But here at Markets and Money headquarters we are doubters. We do not share the public’s great appreciation of formal schooling – at least, not in the usual sense. It is true that certain subjects lend themselves to formal, disciplined study. Building a bridge involves knowable formulae, measurable quantities, forces and distances, proven components, reliable circumstances and precise numbers. You can learn to build bridges by studying these things in a structured way.
Most of life, on the other hand, does not fit to an engineer’s discipline. And trying to learn about it in an artificially bounded and organized way could lead to misconceptions and false precision. Economics, sociology, psychology, literature, poetry, film, politics, finance, and business…in fact, most of what people study…are better learned as they are lived, in our opinion. The ground shifts…perceptions are twisted…rules are broken…and people always come to believe what they want to believe when they want to believe it. No use in dressing them up as though they had the stiff discipline of a marine lieutenant. They are all unruly misfits…disorganized personalities…and social deviants. Better to observe them up close…in the hurly burly of real life. You’ll have a much more realistic picture of what they are really like.
Markets and Money