30 OCT 2010, Saturday

• Think the market is waiting for the election and the Federal Reserve Meeting?
• Naaah!  That's just silly.
• Cartoon at the bottom...must be just how Bernanke feels.  I think he has gotten himself into a trap.  
• Consider two possibilities regarding QE2 and the economy....
•      1)  Fed commences with QE2...the extra money just winds up in the commodity markets which shoots prices up even further (including oil, gas and foodstuffs) for the end user.  This pinches consumers / businesses even further and tips us back into recession.  Remember, $150 barrel of oil and $4.50 gallon of gas???
•      2)   Fed commences with QE2...the extra money goes nowhere, has no impact (just like QE1) and you get another trillion dollars of debt on the Fed's balance sheet.  What?  Don't even get a t-shirt out of the deal?
• Regarding QE2 and the stock market's reaction...very possible that all good news is priced in and the announcement, post-election to boot, may turn into a "buy the rumor, sell the fact" event.  We'll see!
• Just a reminder, everything the Federal Reserve is doing is an experiment.  Got that?  An experiment based upon Bernanke's thesis from the early 2000's.  He seems pretty confident it will work.  I think he's already proven that it won't!!!  Since QE1 failed, why double down on QE2?  When a car is stuck in the mud, more gas equals deeper in the mud.  Do something different?  (Hit link for 1922 Depression below).
• Although, Chairman Bernanke wants you to believe in his presumed magical powers...NO ONE, not one single person including Bernanke himself, knows how any of this is going to turn out!
• Thus, I would like to put forward a simple thought for consideration by average investors attempting to tangle with current markets...this IS NOT an ordinary business cycle recession that you experienced throughout your investment life (tapping the gas pedal...lower rates, etc...works for those).  Instead, it is a credit deleveraging recession (jamming the gas pedal down just makes it worse...longer and harder to get out of it).  This type of economic environment (ie, U.S. 1922 and 1930's) requires time and clearing bad debts out of the system through servicing them or defaulting on them through bankruptcy.  The frightening thing is Japan has been mired in a similar mess since 1989...that's right kiddies...20 years and still stuck in the mud since they have yet to stop hiding the bad bank debts and, instead, recognize and clear the debts.  While working through this process, history indicates that market volatility will be higher and more frequent recessions will occur.  
• Psst...to the President, Congress and Federal Reserve....piling more debt into a system that is actually trying to delever from debt is counter productive.  That will only PROLONG the economy's low and slow performance and result in higher deficits.  So, knock it off!  Let's get to the "recognition and deal with it" phase and get this over with now!  Sure, it will be painful.  The only part we control is how long do you want the pain to last?  Face it and deal with it and it will be harsh but over quickly like the 1922 Depression.  Continue on our government's current choice of "delay and pray" and, instead, get a repeat of the Great Depression of the 1930's which we only escaped through a war (not necessarily a good idea). 
• Those are the simple facts which can be found through study of financial history.  It is what it is!
• Doesn't mean that you can't place some trades...I just believe that it's always best to be aware of the environment you are in when you make your choices.  This is not a buy and hold environment.  More like "choose wisely, make it, take it, and scamper off to safety...repeat."
• Good luck!