Perhaps Old News, But Let's Discuss

Let me offer you an excerpt written by a famous economist back in 2002:

"As I've repeatedly said in this column, the arguments of the double-dippers made a lot of sense. And their story now looks more plausible than ever.

The basic point is that recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession, the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off...

But wishful thinking aside, I just don't understand the grounds for optimism...And while I like movies with happy endings as much as the next guy, a movie isn't realistic unless the story line makes sense."

I ask, dear reader, whether you think the above excerpt implies any endorsement of a Fed policy that would encourage consumer spending, with hopes that it might generate a bubbly outcome in housing? The writer flatly denies it. But, to help you along in your own analysis, let me offer up another much more recent quote (August, 2011) from the same economist in a different context. After reading, hopefully you'll understand why I have chosen it:

"Which people am I talking about? Money managers, obviously; they may know a lot about individual markets and companies, they may have lots of experience, but now that we're talking about macro issues of a kind not seen since the 1930s, those talents are a lot less relevant than usual. Pimco used to have Paul McCulley, who was very good on the macro, but with him gone, they seem to be making up theories on the fly."

The reference point is Paul McCulley, and the continued intimation is that he knows what he's talking about. Thus, when he's mentioned in the 2002 piece, it should be rather clear that the author does not believe that McCulley is offering up a dangerous idea. If anything, he seems to be agreeing in the assessment of what needs to be done, although he's skeptical that the Fed can successfully pull it off.

Therefore, with all of the above out of the way, should it concern you that so many people still pay attention to this guy today? Even worse, he tries to credit himself for coming out in 2005 and writing "Wait a minute! There's a housing bubble! Beware!". The way I look at it, if you helped to poison the patient, you're not a hero for then diagnosing the ailment. But, in the world we live in, these are the types of folks who help to shape the narrative and the "solutions" that are tendered. And we all get to pay the price.

A Healthy Dose of Skepticism

Perusing my regular assortment of econ and finance blogs, I take great comfort in the prevailing sense that the gold bubble has at last burst. I'm pretty certain that most of these folks missed the other recent bubbles -- you know the real bubbles -- but, this time, they should be applauded for their perception (and conceit).

I mean, it sure doesn't look like other bubbles we've seen...and the general masses didn't really get caught up in it...but, sure, they got it right this time.

In the regular parlance, and with hiccups like this past week along the way, I believe it is called a wall of worry. And we continue to climb it.

Updated Chart Read

So, the S&P seems to be holding that 1120 level in trading (even though the futures dipped below). With gold, I didn't think the gap (formed between 8/7 and 8/8) was necessarily going to be filled, but now it is getting pretty close. That move coincides with a nice trend line that dates back to earlier this year (late April) and that scales the peaks of the congestion area that formed right before the gap in question. I haven't done anything yet, but the correction is starting to play out in a way where I am debating adding to my position.

UPDATE (4:28pm): Well, gold really got the snot kicked out of it today. Watching the last two days is exactly the reason that you don't want to try and catch a falling knife. There were support levels on the way down that could have been potential buying spots...and they were breached. This is why I try (and you need) to have a little patience before jumping in, if the instinct is to buy. And, not to buy your whole position all at once. If I were guessing, I don't think the slide is over until next week, but I'll let the action over the next few days confirm that for me. Why the drop? More sellers than buyers I guess :)

Funny or Scary?

Operation Twist was announced yesterday. Interesting back story -- there was a study put out in 2004 by three Fed heads to determine whether the first iteration in the 1960s served any meaningful end. The conclusion:

"Operation Twist is widely viewed today as having been a failure, largely due to classic work by Modigliani and Sutch."

Here's the punch line -- one of the three authors: Ben S. Bernanke.

Ouch, baby. Very ouch.

Well, the past two days have been bad. Other than treasuries, there is seemingly no higher ground to run to. Well, I guess cash probably would have been a good option by the close on Tuesday. But, be that as it may, I thought I would offer my take on the technical picture.

Starting with the S&P 500 -- the key support is around 1120-1125. That level held today. But, if I am to stay consistent with the view that I expressed earlier this week, I don't expect that it will indefinitely. Nevertheless, I am not going to play it, because (again, to remain consistent) I fully expect Bernanke's hand to be forced and for a further response and intervention. And I don't want to be caught flat-footed when that happens. There are certain individual positions I own that look really tempting at these levels, so I may dabble with those. But, to be clear, these are ideas that I think about in terms of years, not days, weeks or months.

As for the gold chart, it also got beaten up pretty good, but it looks much healthier to me. For starters, it bounced right around the level I was expecting. (If you want to play along at home, pull up the gold chart, connect the lows on 8/8 and 8/25 with a line and keep going east -- see what I'm talking about?) The other part is that gold's decline is solely a US dollar story. Check it out in just about every other currency -- the buyers are there globally. For the moment, the fast money/hedge fund crowd is puking up everything, as the computer trading programs flash "SELL, ASSHOLE!". But, that too shall pass.

Anyway, that's how I see it for the moment. We'll see how it plays out.

I Sometimes Moonlight as a Soothsayer...

With about 24 hours to go until the Fed announces what comes next, I figured I should put myself on record with a prediction. Given that it will be based on nothing more than tarot card readings, the above title is entirely appropriate.

Operation Twist (the sale of shorter-term securities to buy longer-term securities) has gained traction as the most likely outcome right now. I think that means it has probably been priced in already. And if you look at a daily of the S&P 500 for the past two months, you could make the argument that the discussion of Operation Twist simply created a consolidation pattern (following the market crash that started on July 25th) before the next leg down. It certainly looks like a double top is forming, at a minimum.

Thus, I think the Fed will need to be bold, and probably will be bold, since the market has become a key metric by which it takes the economy's temperature (to borrow from David Rosenberg). And (to borrow from Bill Fleckenstein), whether I'm right or not, the Fed probably will be forced into something meaningful anyway, because the market will tank if there isn't a new program of easy money rolled out tomorrow.

Fiscal Stimulus...The Side Effects

An interesting anecdote from the comments section of Scott Sumner's blog:

"The Obama stimulus sent $350 million to New York City's Metropolitan Transit Authority to fund construction of the infamous Second Avenue Subway.

This while the Transit Workers Union, a hugely politically powerful government employees monopoly, was negotiating its next contract and threatening an illegal strike, as always. The Democratic politicians kicked the contract dispute to mediation with a pro-union mediation board (headed by the previous head of the union). The board found $350 million of excess funds available in the MTA's construction account -- excess because they weren't in the MTA's original construction plans, and money is fungible -- and used them to give the union an 11% pay raise.

This happened while the MTA was so broke that it was not only raising fares but also being bailed out by a new state-leveled employment tax imposed on workers in communities up to 80 miles away from the nearest subway station.

So at the height of the Great Recession, with unemployment going up to 10%, the union got an 11% pay raise paid for with stimulus money.

Net result: Zero new construction, zero new jobs, and when the stimulus funds run out the MTA will have no means to finance the permanently higher wage level (except more fare hikes and bigger tax increases) which will be the base from which the next demand for a raise is made ... all at the mere cost of $350 million added to the national debt."