Four years ago, an academic economist named Ben Bernanke co-authored a technical paper that could have been titled “Things the Federal Reserve Might Try if It’s Desperate” — although that may not have been obvious from its actual title, “Monetary Policy Alternatives at the Zero Bound: An Empirical Investigation.”
Today, the Fed is indeed desperate, and Mr. Bernanke, as its chairman, is putting some of the paper’s suggestions into effect. Unfortunately, however, the Bernanke Fed’s actions — even though they’re unprecedented in their scope — probably won’t be enough to halt the economy’s downward spiral.
And if I’m right about that, there’s another implication: the ugly economics of the financial crisis will soon create some ugly politics, too.
To understand what’s going on, you have to know a bit about how monetary policy usually operates.
The Fed’s economic power rests on the fact that it’s the only institution with the right to add to the “monetary base”: pieces of green paper bearing portraits of dead presidents, plus deposits that private banks hold at the Fed and can convert into green paper at will.
When the Fed is worried about the state of the economy, it basically responds by printing more of that green paper, and using it to buy bonds from banks. The banks then use the green paper to make more loans, which causes businesses and households to spend more, and the economy expands.
This process can be almost magical in its effects: a committee in Washington gives some technical instructions to a trading desk in New York, and just like that, the economy creates millions of jobs.
But sometimes the magic doesn’t work. And this is one of those times.
AP
JPMorgan Chase Funding Bear Stearns
Friday March 14, 9:32 am ET
JPMorgan Chase, With Federal Reserve Bank of NY, to Provide Funding to Bear Stearns
NEW YORK (AP) -- JPMorgan Chase says that in conjunction with the Federal Reserve Bank of New York it will provide temporary funding for Bear Stearns.
The funding will be provided as necessary for up to 28 days. During that time, JPMorgan Chase will also help Bear Stearns find permanent financing.
Bear Stearns says its liquidity significantly deteriorated over the past day and the temporary funding will help it continue operating normally. The investment bank added there is no guarantee any permanent strategic alternatives will be successful.
There has been speculation this week that Bear Stearns was struggling with liquidity problems.
Bear Stearns shares spiked in premarket trading but then fell back on the news.
Joined: 08 Jun 2006 Posts: 3979 Location: Cyberspace
Posted: Fri Mar 14, 2008 10:12 pm Post subject:
Just remembered, Bear Stearns is a clearing house for many hedge funds. This news of possible liquidity problems with this bank probably sent a lot of hedge fund managers packing, sending the DOW down 200pts in a matter of minutes....
Joined: 05 Jun 2007 Posts: 1078 Location: Bacoor, Cavite
Posted: Fri Mar 14, 2008 11:38 pm Post subject:
Last night I was already happy to see a bounce at 11861 (it was a bonus that it closed green). That line is giving some support but since that line is in downward bias, that line is crossing today at 11780.
Our critical support is the 11740. In an upward bias, today it will be crossing at 11742. For as long as this line is not broken, we are on our road to recovery and the possibility that we have already seen the bottom.
Joined: 05 Jun 2007 Posts: 1078 Location: Bacoor, Cavite
Posted: Fri Mar 14, 2008 11:53 pm Post subject:
The way DOW is behaving, it will try to move up the fibo line. It's trying to hold above 11962 (Feb 27 and Mar11 high) and will try to take out 12212 (Feb27 and Mar12 high).
Personally, Countrywide, Carlyle, Freddie Mac, Fannie Mae, ngayon ko lang nadinig mga yan eh kaya nung sila maba bankrupt isip ko maliliit lang mga yan BUT Bear Stearn? Wow this I've read pa even during my college days. Tsk tsk tsk
It's known to technicians everywhere as a death cross, and it is happening on the Shanghai Composite Index. That's the index that has jumped by over 450% during the last two years--a sure sign of a speculative bubble.
A death cross is formed when the 50-day moving average of a stock falls below (crosses) the 200-day moving average. It indicates that there are currently more people selling than buying the stock. It is as bearish as it gets.
And it's not the first time the exchange has seen the "death cross," either.
As you can see, the death cross came twice on the index over the last five years, first in 2003 and later in 2004. Each time, of course, the index dropped dramatically, culminating in a 50% decline over all.
And while a third death cross hasn't actually completed yet, the Shanghai Composite continues to drop even as a Bernanke-inspired rally pushes the Dow higher. The index actually lost nearly 3% on the same day the Dow rallied 440 points.
Between February and October of 1945, the Dow Jones Industrial Average advanced 21.3%. Must have been a time of prosperity or a bubble, right?
Nope. Would you believe that this performance occurred during a recession? With the "recession" buzzword floating around these days, it's worth reflecting on what that uncharacteristic behavior can teach us.
A recent BusinessWeek article reveals the stock market performance both during and one year following several American recessions.
Recessions aren't "bad"
Contrary to popular media opinion, not every single recession is bad for the investor. In the 1945, 1953-1954, and 1980 recessions, stock market returns behaved as if they were in a period of prosperity. As mentioned, during the recession of February to October 1945, the market actually jumped 21.3%.
Investors who are quick to head for the exits simply because there is a recession looming are forgetting one very important fact: The principal goal of an investor is to focus on acquiring strong businesses selling at attractive prices -- regardless of the market environment.
While you might experience a little volatility or find yourself waiting a period of months before any capital appreciation, that's the nature of the markets. Markets go up, markets go down, and markets go nowhere.
Market timing is useless
Before researching this article, I was not aware of the strong performance that occurred during some of these recessionary periods. Of course, the advancing markets were outnumbered by declining ones, but the notion that recessions simply destroy returns is not necessarily the case.
Sure, some companies behind consumer luxuries may be squeezed. If the economy is tough, penny-pinching consumers might cut back on their Starbucks (Nasdaq: SBUX) trips, or they may delay buying an iPod or iPhone from Apple (Nasdaq: AAPL). Indeed, that's part of the reason why these stocks have been hurt over the past few months.
The economy, though, still needs to function at some level. People will still need to eat, do laundry, brush their teeth, buy medicines, etc. This bodes well for dividend-paying consumer-staples powerhouses such as Procter & Gamble (NYSE: PG), Johnson & Johnson (NYSE: JNJ), and Kraft Foods (NYSE: KFT). Even Wal-Mart (NYSE: WMT) is a candidate to weather a recession; with consumers paying closer attention to their pocketbooks, the retailer's "everyday low prices" give it a leg up.
Recessions develop over time. There is no set formula that reveals to us when a recession begins and when it ends. By some accounts, we are currently in a recession. Others are predicting an upcoming recession. Waiting for the "end" will often lead to waiting until it's too late and missing out on a great buying opportunity. So the key, again, is to buy quality issues for cheap and be patient.
Invest in the company first, not the market cycle.
It's not the end of the world
What's most important about recessions is at some point, they cease and things pick up. You'd never guess that during a recession -- there's too much noise pronouncing doom and gloom.
But the facts speak for themselves. Not only do they end, but investors who exhibit patience are rewarded in the following year. Those who wait it out on the sidelines -- until the headlines provide a cheery consensus -- later come to realize that they joined the party shortly before midnight.
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