Ben Bernanke may in fact seem like the unassuming soft spoken professor who is well spoken and polite, and he is, but at the same time he is perhaps suffering from the greatest of the deadliest of sins, pride. I am translating pride into arrogance with Ben because it is essentially the same thing and the sin is identical. There is also no question that Ben suffers from the delusion that he s right and everyone else is wrong, which is how we can tell that he suffers from this disease of arrogance wich will be his ultimate downfall.
I am referring to an article I read this weekend from Reuters, which was reprinted on Bloomberg and various other news sources, where Ben announced that it was not the Federal Reserve’s wall of liquidity during the early 2000’s that caused the housing boom, and subsequent bust, but rather lack of regulation. First of all, he is wrong, because without the liquidity easy credit or the showdown securitization mortgage market simply would not have existed, that is obvious. What is not so obvious is the fact that his regulation argument is also an attack on himself. While Congress did encourage the GSE’s and banks to loosen credit standards, so did the Federal Reserve Bank and the Fed had some significant regulatory authority over these mortgages.
Am I the only one that finds it ironic that Ben, Man of the Year, Savior of the Economy, or whatever else we are calling him now, is the same guy saying that his wall of liquidity is not to blame and more regulation’s was the answer, when part of his job was to regulate the banks? Granted, the Fed’s job in regulating the banks is somewhat small, but are we forgetting Greenspan’s famous speech were he encouraged banks to get more inventive when it came to mortgage origination? This does not sound like getting tough with banks, in fact it sounds like it was a green light to do whatever you want to get homeowners into a house.
Essentially, the Fed gave its blessing to do whatever it took to get people to sign the dotted line on the mortgage application. Not only that, the Fed also provided the liquidity to encourage the lax lending standards. Having just one of those two things is bad, but both combined is disastrous, which we found out. However, our Savior still does not realize that it was the Fed at fault for this mess and I think I know why he is saying this now. He simply wants to be left alone. He figures with his reappointment a done deal, his Man of the Year award, and the magical 25% S&P 500 returns in the market people will get off his back as he built up some credibility, especially the audit the Fed people.
I honestly believe he thinks that his sins of the past can be forgiven because of his recent ‘accomplishments’ which were not really accomplishments. If anything Ben was merely picking up after himself, but with our money. To put everything into perspective on how Ben feels here is how the article ended, and what he thinks caused, I guess, the credit crisis:
“Bernanke pointed to adjustable-rate mortgages and overconfidence that house prices would continue to rise as the main culprits behind the catastrophic housing bubble.”
That is that I guess. He was partially right, but it was not just ARM’s that were the problem, not at all, it was a whole slew of mortgages that were problems. There were jumbo’s that trigger higher rates if the LTV slides below a certain value, there were sub-prime, there was the fact that the asset bubble from the Fed was not just in housing, but in commercial real estate and, well, everywhere. The question is why were people betting so heavily on housing prices to rise? Perhaps because the liquidity spigot was going full force for way too long and then when you went to turn it off the effort was meager at best. Regardless, the biggest problem now is with all types of mortgages, not just ARM’s and sub-prime.
The sheer arrogance of this man is just unbelievable though. The one thing about the deadly sins is that they are deadly and catch up to you, pride is always the one that kills the worst to. At first it was nice to see Ben apologize for the Fed’s role in the Great Depression, but how could we go from a guy who knows that his organization caused the Depression to him denying the Fed caused this problem. What happened over the last 4 years to Ben where he could state the obvious before only to deny it know? It makes no sense other than he suffers from the affliction of arrogance or pride. What I do know is what Ben is doing, long-term, will not work, because Ben has a terrible track record, and the Fed’s powers are on the verge of finally being reduced, which is a great thing as the system failed us greatly and it’s time for it to go.
No matter what Ben and Greenspan are to blame for a large portion of what happened. I am not saying that Congress is innocent, you know me better than that, and I am not saying that those who lied or bought houses they couldn’t afford are innocent either. However, legitimate fraud too place, even to reasonably intelligent people, the Fed let things happen that they should not have and Congress, well, Congress is just incompetent, what do you expect.
I can say with 100% certainty that I am not sure which way the markets will trade. What I do know is that perfection has been priced into equities and they currently trade at 130x current earnings and 26x future earnings. I know that only 25% of the S&P 500 has beaten earnings expectations with even fewer beating on the bottom line and estimates have been substantially reduced.
I realize that my bearishness has not paid off, well not totally at least. I called a top on August 7th and we basically have seen slightly higher prices over that close, but nothing to be jealous about. In fact, we are trading right in the area that I said was the top and we are on our way back down, kind of. Frankly, this is not the selloff I was looking for, but there are telling signs that I am correct. Treasuries had not sold off during this parabolic rally, which should make you nervous, and that is currently my largest positions, 2 year notes to be exact.
I expect treasuries will outperform in the near term as the dollar gains strength, although today we are seeing a weaker dollar along with weak stocks and weak commodities which is a bit odd. Perhaps we are seeing the decoupling of commodities from the dollar and stocks, but I do not think that is the case. What I do think is happening is people are taking profits from some commodities like gold and oil, both of which have done fairly well this year. However, industrial metals are fairing OK today with silver up 8 cents and palladium, one of my favorites, up over a dollar which is more than likely due to the weaker dollar, but it is possible people see these metals as the recovery play, which is what I am doing on a longer term basis.
Regardless, I do believe this is the beginning of the selloff which could be as little as 7-8% to as large as 20%, depending on who you listen to. I am in the camp of somewhere between the 8-20% range based on a severely overbought market and the underlying fundamentals. If we do not produce 4% GDP growth then there is simply no way equities can remain at these prices which mean there is a lot more pain for those who are not defensive at this stage. I do like corporate bonds which have only 2% GDP growth built into their prices which makes them much less risky than stocks.
I just finished reading an article on CNBC.com where they tell you that selling may happen in September, but you do not have to be the seller, which I found odd. Basically, it said that you should hold your stocks even though a correction could be coming (I thought we were over the buy and hold philosophy?). Frankly, I think that since we do not know how severe the selloff might, or might not, be one would be more inclined to reduce some risk now and be ready to buy when they think it bottomed.
Now, I sold all but about 7% of my equity holdings, which is my comfort zone, and am ready to buy when I think prices are right. I may or may not be right to do this, but so far I have done OK with this strategy and I do believe, based on what rising treasuries are telling me, that I am correct. I just do not see how one can be so completely bullish on the market right now, but that is what makes a market work. The only reason I can foresee strong equity prices is because the liquidity provided from the Fed is so great that there is no place to put assets, but even that philosophy is setting you up for disaster as the Fed could rein in that liquidity fairly quickly.
No matter what you may think I am sure you can agree with me on a few points. Nothing goes straight up and when AIG, Fannie and Freddie are the leaders in the market, up over 200% apiece, there is a problem. There is virtually no equity left in those firms and the government also indicated that they will replace Freddie and Fannie with something else in the future. As for AIG there is nothing there to really salvage as they owe the taxpayers some $130B, but for some reason the stock is parabolic. That type of leadership is not what you want to see in a market that is up some 50% from its lows.
For those reasons, plus slightly less bad fundamentals is why I do not want to risk capital at this stage on the long side. Being short is just plain dangerous as well mostly because of the massive liquidity, but the fact that you really cannot borrow shares to short is another major reason to not short anything, you can’t. The whole thing is just odd and anyone who thinks that it is not weird that the market never goes down is simply not thinking logical. Whether you agree with me or not you know that nothing, ever, goes straight up like what we have seen since July.
I suppose if I was a conspiracy theorist I would have a logical explanation like the Fed is buying stocks or some other government controlled entity. However, I am not that demented, I don’t think at least, but I do think something stinks to high heaven here. How long can we see stocks and bonds trade up in tandem? It just doesn’t make sense, period.
While I feel comfortable in my bearish position I am also willing to say that there is nothing stopping the market from going to the moon. Especially if you cannot short stocks or you make it so expensive that shorting the stock is not a realistic solution, which is not a conspiracy theory as we all know this is happening. Either way we will see what happens, but I cannot stress, based on the pure mathematics, not just my opinion, that there is just a ton of risk in stocks right now.
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