Sunday, September 21, 2008


I'm going to go through the chain of blunders the FED has made over the last 8 years. Well actually Greenspan started all this in 1987 when he found out he could just cut rates and print money to alleviate any crisis. This worked all way up to 2000. Thus was born the phrase "dont fight the FED"

However something changed in 2000. If you followed the rule of never fighting the FED you just guaranteed that you rode your losses all the way down. Oops ! As you can see Greenspan sacrificed the dollar to avoid a recession and halt the bear market. As I said it didn't work. The 2002 4 year cycle was a left translated cycle and it finished it's run into the 02 low despite the FED's best efforts to halt it.

All the FED really accomplished was to make the problem much much bigger. By holding rates at 1% the FED created not only the real estate bubble but the credit bubble. Oops! This was the point where monetary inflation was still fun, as a matter of fact it was the greatest party the world had ever seen.

However we already were seeing warning signs as commodity prices were on the rise. Oops! By 06 the economy was starting to falter. Well that wasn't acceptable for an election year so a little rejiggering here and there with weightings in Goldman's commodity index and we get a massive sell off in oil. The 4 year cycle which should have bottomed in 06 was avoided. As you will notice this coincided with another steep devaluation of the dollar.

The end result was a final parabolic run in the markets. However a cancer was already growing as the housing bubble had already burst and the credit bubble started to leak. Oops!

As usual the FED's response was to print more and more dollars faster and faster. This time however those dollars just went straight into the commodity markets especially oil. Big Oops! That was the straw that broke the camel's back and the world tipped over into recession.

Now the government is at it again. It's election time and the politicians are crying for a fix. So the powers that be are now using taxpayer dollars to artificially prop up the financial and real estate sectors. They continue to make the same mistakes over and over. The cure is to let the system cleanse itself. Japan already tried this approach and it led to an 18 year recession. Oops!

The end result of all this meddling will be much higher taxes and most likely a hyperinflationary depression. It's simply not possible to legislate or print the credit bubble away.

Artificially propping up housing prices just means that housing remains unaffordable. Oops! That means inventory remains high. Throwing trillions of dollars at the problem just means taxes will have to rise and inflation will heat up again. Just what you want as unemployment continues to rise. Oops! If inflation starts to rise again interest rates are going to move higher. As subscribers know I think we saw the end of a 28 year bear market in bond yields last week.

Combine ever rising interest rates with housing prices that are not allowed to correct and you get the ingredients for more foreclosures and ever larger inventory. Oops!

Now the powers that be have decided that short selling is the root of all evil in the financial sector. It has nothing to do with banks being insolvent of course. So by making shorting illegal the SEC has taken away a very powerful supply of buyers from the market. When the next leg down in financials finally comes there will be no shorts to cover and put a floor under the banks. Oops! The next leg down will probably only be halted by making it illegal to sell financial stocks. Imagine that, you won't be allowed to sell stock in a bankrupt company.

I know it sounds ridiculous but then who could have dreamed in Jan. that shorting would be abolished. If the FED's meddling had been aborted back in 2000 we would already be through this and on to much better times. Instead we are looking at years and years of tough times ahead. Oops!