You're logged in as Account
Wednesday, April 7, 2010 as of 11:14 AM ET
Published August 09, 2011
| FOXBusiness
Traders like patterns in the markets. Creatures of comfort, they like their sense of reassurance, they like any Garmin driving system pointing a roadmap forward out of this mess.
That's why the markets have operated nicely in an air pocket since 2009, blown comfortably wider on Federal Reserve Chairman Ben Bernanke's soothing promises the Fed will be there to lead them, as his calm demeanor slows down a market whose inner core increasingly spins faster than its outer core.
But in this skittish climate the market can rapidly swing into emotionally wide trading ranges when the Fed lets go of its hand.
Which the central bank did today, in violent triple digits before and after Bernanker spoke.
The markets retraced 429 points higher, even though Bernanke wasn't so reassuring today, as the Fed again slashed its economic outlook, and said it would keep rates low through 2013, indicating it may cut back its massive balance sheet at that time, an easing which expanded by Treasury purchases in a bid to keep rates low.
No more Fed stimulus, which helped stocks rise 30% after it last enacted easing.
That's because the Fed is now not pushing on a string, it's pushing on thread, given its three-year long battle to stop the downturn, which saw it take on an unofficial third mandate, reflating asset prices, the other two being employment and stable prices.
So it's best now to turn to the economists like Carmen Reinhart and Ken Rogoff, who turn to economic history showing a coterminous credit and a housing crack up, which the U.S. just endured, are exceedingly rare economic events.
How they lead to bank, then household, then government balance sheet meltdowns.
Love for the comfort of patterns is why you hear talk of the current market meltdown as a Lehman 2008 meltdown redux. But it is not. We're in a slow motion recovery, not an immaculate recovery as some in D.C. had applauded. That's the perspective needed now.
The markets fell through the looking glass and lost its footing in a 635-point sickening plunge on Monday on Standard & Poor's downgrades of the U.S to AA+, and downgrades of Fannie Mae, Freddie Mac, (which could stall privatization efforts), as well as 10 Federal Home Loan Banks and 10 insurers to AA+.
It also lowered the AAA ratings of thousands of bonds in the $2.9 trillion municipal bond market tied to the federal government, including housing securities and debt backed by leases. More than six dozen bond funds, exchange-traded funds and hedge funds were also hurt by downgrades.
But S&P's downgrade of the U.S. to AA+ did not break the buck at any money funds, because S&P kept the U.S.'s short-term debt at its top-notch level. Money funds hold short-term debt, that's why they held fast after the downgrade.
That's unlike September 2008, when the $64.8 billion fund Primary Reserve Fund broke the buck because it held $785 million in short-term IOUs, called commercial paper, issued by Lehman Bros., which filed for bankruptcy protection. Investors lost on paper about $1.8 trillion in equity value in the recent downdraft, versus the $9 trillion in equity value vaporized in the 2007-2009 downturn.
Still rushing for political cover, there's now talk in Washington that the Senate Banking Committee plans to investigate S&P's downgrade of the U.S.'s credit rating--even though all the credit-rating companies were the subject of major hearings just a month ago.
State and local governments could get into the act too, particularly as S&P cuts ratings on dozens of municipal bonds in the wake of the federal downgrade.
So could officials from the Federal Home Loan Bank system, the low-cost lending pipelines into local banks for mortgages and small business loans. S&P downgraded to AA+ ten of the FHLBs, two having already been downgraded, Chicago and Seattle.
Even so, it's not clear whether the downgrade will have any impact on Fannie and Freddie's borrowing costs, or mortgage rates, since investors are flooding into Treasuries, driving yields down towards 2.5%, historically low levels.
With unfair talk of the "Downgrade President," the Administration is now slamming the S&P for a $2 trillion "math" error, when it really is not an error but a difference of opinion, making U.S. politicians sound more like elected officials in Portugal and Italy every day, blaming the messenger for stating the self-evident. Meantime, S&P's downgrade doesn't even take into account health reform, Social Security, and Medicare, all set to blow out the balance sheet.
The Administration has pumped talking points into the Beltway echo chamber, rebranding S&P's move a "Tea Party downgrade," when the Securities and Exchange Commission says it has not yet registered the Tea Party as a credit ratings agency.
S&P says it used a conservative 5% spending growth rate on government discretionary programs. It also said government borrowing costs will be higher by 2015, estimating the ten-year note yield could rise to 6.25% by 2015, as a worldwide bond glut vies for a dwindling pool of savings.
Higher rates make a world of difference, because borrowing costs will rise as government spending soars, since politicians can now get the Treasury Dept. to borrow at teaser rates now.
But the government hollered back at S&P that it should use the lower rate CBO reckons for 10-year yields, a lower 5.5% by 2015.
The Administration also stamped its feet that S&P should instead use a 2.5% growth rate for spending over ten-years.
And it waved in S&P's face the caps in the debt ceiling deal on spending and the cuts from the new debt super committee.
But a new supersonic intergalactic Marvel Comics Justice League supercommittee won't work. It is essentially a way for Congress to pass along more gridlock, when we've already had a Biden Commission and a Simpson-Bowles Commission to come up with cuts that everyone, including the President, ignored.
Knowing all that, and more, S&P then came back and said, forget it, political gridlock and your history of poor cash management won't get you to at least $4 trillion in cuts over ten years which will bring the government to fiscal health.
It said the government is on course to have debt at a dangerous 79% of GDP by just 2015. And it said we will still drop you to double A in six months to two years time if you don't get on the stick.
First, consider that discretionary spending has grown at rates higher than the conservative 5% S&P used.
S&P effectively didn't believe Congress would adhere to the debt ceiling deal's spending caps, and why should it, given Congress has hiked the debt ceiling 106 times since 1940, the government has balanced its budget only five times in the last half a century, the Senate hasn't submitted a budget in 825 days, and the president's budget in February asked for hundreds of billions dollars in more spending, a budget which the nonpartisan Congressional Budget Office couldn't even score.
Meanwhile, even all of the Senate Democrats voted against President Obama's budget. Just as all of the Senate Democrats voted against the House-passed budget authored by Rep. Paul Ryan (R-Wisc.).
And the House only could only muster votes for a cut-cap-balance bill that came in less than the full two thirds Congressional majority required to send a balanced budget constitutional amendment to states for ratification (which is really an open door to a European-style VAT anyway, in this environment).
And while S&P said no backloading in the latest debt reduction deal, the White House went ahead and signed off on a bill that backloads spending cuts and tax hikes until after the next election--knowing that the President has already signed into law large tax hikes in health reform, $438 billion, many of them hitting the middle class.
A big two-thirds of promised cuts are back loaded to 2017 and 2021, just a third are scheduled for the next five years.
Do you trust Congress to act on cuts in 2016--especially to big programs like Medicare, when politicians feel they can't cut, survive, and live to tell about it even now?
Meanwhile, the White House and Congressional Democrats promise tax reform to fix the deficit.
But do you trust Harry Reid or Charlie Rangel to fix the tax code? All this, as the Administration had pushed for raising the debt ceiling once again as re-election approaches, as US GDP growth has ground to a halt, at an annual 2% stall speed, as current stimulus vanishes and joblessness sticks stubbornly high at 9.1%.
Economic policy is now consistent with the re-election schedule, the Administration still wants more stimulus spending, which is like raising blood alcohol levels to stop drunk driving, as a cartoonist recently wrote.
When the better stimulus for the President is to stop with the Jimmy Carter defeatist rhetoric, stop with the President's bear market hug to nvestors, where chief executives fear that he thinks every businessman is hot molten evil.
The trouble is this Administration and this Congress fail to acknowledge in the first instance the severity of an historic housing and credit crackup, as they barreled ahead reforming three huge sectors of the U.S. economy, health care, financial, and energy sectors, stranding businesses in traffic.
When jobs in this rare economic crackup should be the number one priority.
Would you build a factory today or hire workers if you knew taxes and regulatory costs will eventually rise, but had no idea by how much and which ones?
Yes health reform.
But you can't have health insurance without jobs. You can't have welfare without wealth creation to pay for it.
Yes energy reform. But you can't have energy reform if it crushes job growth, jobs which create tax revenue to pay for new energy endeavors.
Read Full Article »