Bernanke’s testimony to Congress this morning, and in fact most testimonies to Congress, often have the quality of an old fashioned sideshow act at the circus. Come see the world’s fattest woman! Feast your eyes on the man with four arms as he wrestles a tiger with no tongue! Watch the Fed Chairman as he drones on about softening in the credit markets and a weaker economy, as if we didn’t know!
This morning, Cramer made the comment on CNBC that Citigroup and Merrill Lynch just might be bankrupt today if it weren’t for a few of the world’s sovereign wealth funds investing much needed capital. He also made a nice point about the fact that these sovereign wealth funds aren’t necessarily free marketers. In many cases, they are government owned entities with ties to communist and — for the conspiracy minded — possibly even terrorist regimes. It’s amazing what some very bad home loans can do, isn’t it? My mind is racing with philosophical mush and potential story lines for a new Clive Cussler novel.
Once again, the markets have been all over the place today. The leading decliners are those that have been propped up by the explosive growth of the world economy. Energy and materials stocks are getting hit on the chin as are utility companies, derivative plays of the commodity theme. Today’s market is certainly telling us that the world economy hasn’t decoupled from ours, but is still very much a vibrant part of it.
There is no reason that the entire U.S. economy needs to be in a recession. Psychology, however, plays a big role in the process, particularly at this stage of the game. Mindsets at the margin determine whether or not we’ll spend that additional dollar, hire that new employee or make a layoff. Great coaches can influence the mindset of their players by making awesome speeches during halftime that can turn the momentum of the game. At least that’s how it works in the movies, anyway.
The point here is that expectations are important. If we’re feeling uncertain, all bets are off and the mindset can become a self-fulfilling prophecy. Perhaps that’s why they called the mother of all recessions the Great Depression. No one would buy anything even though prices were in a deflationary free fall. It was a mindset fueled by a Fed that was moving in the wrong direction.
To be clear, the Fed isn’t moving in the wrong direction now, they’re just not moving fast enough. Mortgage rates have finally started to fall, about 50 basis points on the 30 year over the last four weeks. That’s the kind of thing that can make a difference for consumers, for you and me. But we need more of it.
Now is no time for circus sideshows; the Fed can’t wait for the Fat Lady to Sing.
