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This Week: Sugar High

Posted December 23, 2008

Topics: Global Business, Finance & Investing

Note that this will be the last newsletter before the New Year. I do hope everybody has a great holiday -- the financial and economic turmoil notwithstanding.

As I indicated last week, cash remains king in this turbulent economy and sideways market. I do wish my loyal readers would stop challenging me on this issue after every bump up in the market. Another case in point occurred last week when the Federal Reserve slashed rates to historic lows and, at least for a day, the bulls got their sugar high. Of course, by the end of the week, the Dow had turned negative while the NASDAQ and S&P 500 indices eked out a small gain. Remember: the market stall recover until investors believe the economy will recover.
More broadly, it continues to puzzle me as to what goes on in the head of Ben Bernanke. For a Princeton professor, he seems just flat out stupid. All he has accomplished in his tenure in office has been to help wreck the financial system and almost single-handedly debase the currency.
Now here's an idea: how about if President-elect Barack Obama engineers a trade with Europe in which Bernanke is shipped off to run Europe's Central Bank and America gets the current head of the European Central bank, Jean-Claude Trichet. Maybe Obama can throw Manny Ramirez in the deal just so that the deal gets done.
Unlike Ben Bernanke, Trichet has conducted a much more careful monetary policy. Bernanke must drive Trichet nuts, however. Every time the United States lowers its interest rates, it puts more pressure on Europe to do the same. Because Trichet see the chess board better than Bernanke, he's very resistant to being dragged along by the Fed's helicopter monetary policy.
Now, one of the other things I've been saying in this column for many months now there but which is not properly being heard is that California is likely to take the United States economy down another peg because of its severe budget crisis. A number of small cities in California have already gone bankrupt. Gov. Arnold Schwarzenegger announced recently that he going to cut the pay of state employees by 10% -- a contractionary shock. And, in general, the California economic train is careening wildly and will soon be thrown off the tracks.
Now, I would like to respond to an e-mail from a reader who wondered how I would reconcile the seeming contradiction between my support for a government bailout of the auto industry and my concern that Obama's proposed fiscal stimulus will backfire. The reconciliation is easy: Obama's stimulus will be in the range of $700 billion-$1 trillion while the bailout for Detroit is a relatively small ticket item in the range of $15-$20 billion. That relatively small amount of money is well worth spending to save a significant chunk of what's left of our manufacturing base. On the other hand, the Obama stimulus is going to be very difficult to finance without causing higher interest rates or inflation above.
I received a similar e-mail from another reader who wondered how I could reconcile my support for providing homeowners with foreclosure assistance with my concern for the Obama fiscal stimulus package. Again,the reconciliation easy. The Treasury Department is already spending close to $1 trillion trying to shore up the credit markets. My beef is that this money is not being spent in the best possible way, and I believe that more of that money should find its way into the task of mortgage relief – a necessary component of stabilization. On the other hand, with the Obama fiscal stimulus, we are talking about a whole new set of expenditures, many of which will likely be made long after the recovery is in progress.
Last take:
Check this blog out by a gentleman who rightly describes himself as the "Worlds Greatest Consumer Advocate" (with his tongue always in cheek).   http://michael.shames.name/nfblog/?m=200812.     The blog focuses upon the deficit of effective regulation by the Bush Administration and on how some greater scrutiny of consumer financial services as well as some microfinance via the SBA may offer a ray of hope to many of homeowners and property owners caught in today's bubble ramifications.
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