Home > Blogs > That is Correct(ion) Sir

That is Correct(ion) Sir

Posted January 25, 2010

Topics: Global Business, Finance & Investing

Stock Market Trend: Market in Correction, Watch for Bearish Downtrend

In my previous weekly post, I urged extreme caution in the market until the question of whether the market was at the beginning of a correction had been resolved. This last week, with the American stock market taking its worst set of consecutive losses since bouncing off the March lows, we got our answer. The market is definitely in a correction.

The next question is whether this will be a brief and mild technical correction or the beginning of a longer term bearish downtrend signaling a dreaded double dip recession. We are going to have to watch this situation very carefully, but the Obama administration is certainly not helping investors now.

I don't buy into the conventional buzz that President Obama "caused" the markets to drop last week with his latest heavy-handed regulatory initiative to downsize the big banks. That certainly didn't help financial stocks, but this was a market ripe for turnover for more fundamental reasons.

I especially don't buy the argument that the rising probability that Federal Reserve Chairman Ben Bernanke will be fired likewise contributed to the market's downturn. You can certainly make the case that firing Bernanke would be better for Wall Street. Here's why I have been advocating that Bernanke should be fired since last October in this newsletter.

To the argument that Bernanke helped rescue the financial system at its darkest hour so he should be reappointed, it is important to remember that it was Bernanke's actions that helped get us to that darkest hour. In particular, first as a board member of the Federal Reserve and then as its chairman, Bernanke helped perpetuate the low interest rate environment that fueled the housing bubble which caused the crash. (The analogy that the astute CNBC economist Larry Kudlow uses is: Bernanke should not be credited with fixing the window, because he's the guy that broke it.

Now here is why Bernanke should be fired. First, he truly and mistakenly believes that the Federal Reserve can save the US economy simply by maintaining ultralow interest rates. All that belief is doing is swelling the Fed's balance sheet and creating conditions for a severe bout of future inflation.

Second, Bernanke's ultra-easy money policies are debasing the dollar and thereby creating havoc with the global economic recovery. The dollar is falling not just because of the low interest rates per se. Bernanke has also spawned a pernicious carry trade in which speculators borrow dollars at low interest rates and then go invest those dollars globally in commodities and emerging markets.

Moreover, as the dollar falls and drags down the Chinese yuan with it, this dynamic erodes the competitive advantage of countries around the world with respect to both the United States and China and thereby slows down their export growth and economic recovery. It is beggar thy neighbor on a grand scale.

Finally, Bernanke has sought to turn the Federal Reserve from a central bank entrusted with maintaining a sound currency and economic stability into a regulatory octopus. In doing so, he has undermined the credibility of the Federal Reserve and created an enormous political backlash.

The politics of this are particularly interesting. Several months ago when I began my anti-Bernanke campaign, Bernanke merely faced some Republican opposition. Now, with Senators like Barbara Boxer of California and Russ Feingold of Wisconsin jumping the Bernanke ship, his nomination is in deep doubt. This is as it should be. We do not need a Federal Reserve chairman with a 30% approval rating who got us into a mess and whose prime qualification seems to be that he sort of helped us get out of it -- when we're not out of it at all. Enough said.

In summary, at this point, cautious investors may want to be trimming positions and moving to cash. For those with an appetite for risk, my favorite strategy has been to use TWM, an exchange traded fund for ultra-shorting the Russell 2000 index. To gamble is human, to speculate is divine.