-- Posted Tuesday, 18 September 2007 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Tuesday, September 18, 2007
“Phenomenally accurate forecasts”
Place your bets, folks! We’ve heard good arguments both for and against a Fed easing today but think the odds favor the doves. One of our regular correspondents, Erich Simon, actually expect the Fed to tighten – a very distant longshot, in our view – and we have reprinted his comments at bottom. One middle of-the-roader is Don Luskin, an acquaintance from our PSE options-floor days who now runs a company called Trend Macroclytics. Don had an op-ed piece in the Wall Street Journal last Thursday headlined “The Greenspan Myth”. Expecting the essay to come down hard on the former Fed chairman, we were disappointed to see that it merely attempted to refute the implication that Mr. Greenspan should be viewed as a hero for helping to prevent various crises of the recent past from turning disastrous: Long Term Capital Management, Mexico, the 1987 Crash, Russia, 9/11.
Don made a pretty persuasive case that Mr. Greenspan in each instance was too late with too little, but the essay was less convincing in concluding that Greenspan’s overrated heroism should not be invoked to push his successor, Mr. Bernanke, into an unwarranted easing. Don sees the U.S. economy as too robust at the moment to warrant Fed intervention, and on that point we would differ sharply with him; for nowhere in Don’s tally of the U.S. economy’s supposed strengths does he even acknowledge the grave troubles that currently beset the real estate sector.
Greenspan to Blame
Immediately below is the response we sent to Don. As Rick’s Picks readers would expect, it eschews the genteel politeness toward Mr. Greenspan that writing op-ed for the WSJ requires. We dispense with such niceties not only because Mr. Greenspan’s theoretically challenged brand of economics is an embarrassment even to the Dismal Science, but because we are convinced history will hold the man directly responsible for the collapse of the global economic system. Here’s the letter:
“Greetings, Don, from your old PSE acquaintance. Speaking as a loose cannon from the subterranean newsletter world, I wanted to let you know that those who believe Greenspan to be either a fool or a liar, or a combination of both, are legion. How else to explain why a guy with an MIT degree in economics would speak of a capital investment boom at a time when household savings growth was negative? It gets worse: Championing the crackpot notion that inflated home prices constitute real wealth, the man emboldened household borrowers to venture beyond mere recklessness toward the pale of metaphysicality.
Why Deflation Is Irresistible
“Austrian-school theorists are too genteel to characterize Greenspan and his successor in the way that I and my not-yet-ready-for-prime-time colleagues would, but Richebächer et al. had an oblique way nonetheless of making the point by calling us back to the logic of Hayek. Ironically, a weakness of the Austrians is that they have trouble choking out the word ‘deflation,’ especially during such cosmic credit inflations as we’ve just experienced. But for me, at least, a ruinous debt deflation has by now become all but unavoidable, since it will be drawing its power from an as yet ‘unactualized’ derivatives-bubble whose notional value is currently estimated by the BIS at close to $500 trillion.
“In the meantime, the rapidly metastasizing mortgage crisis -- the mention of which would have undermined the logic of your op-ed piece -- is reason enough for us to expect such countermeasures as a 25 to 50-basis-point easing [on Tuesday]. I could be wrong about this, but if I am, it will probably be because Bernanke understands that a reaction perceived by Wall Street as half-hearted – i.e., a fleeting short-squeeze of the DJIA – would fatally give away the game. If the Fed does ease, though, and an unimpressive short-squeeze results, I’ve advised my subscribers to short it till their heads cave in.”
Erich Sees Tightening
And here’s that hawkish letter from our erstwhile bird flu correspondent, Erich Simon:
“For all of the reasons I've enunciated, I continue to hold fast to a rate increase. I've been doing my nightly rounds of the Asian press for the H5 Juggernaut and have uncovered even more evidence that there will be no rate cut on Tuesday.
“Never mind Tuesday's being down days to shake out the Puts on Option's Expiration Weeks, especially significant this triple witch, and more free money for crony corrupt capitalism. I have been losing money every expiration for years now and have cut my exposure in that arena to just about nil. But my last remaining contracts appear to be set to expire worthless, and it will take some time (on the short side, but maybe not that long the way things are shaping up)before I recoup and begin a new out-of-the-money strategy in preparation for The Big One.
“I am not alone in my analysis, joined by the few remaining diehard bear realists. But I feel confident as one of the last of the breed that now, with all the short side money depleted, the Fed has no more favors to grant to its greedy, belly-stuffed social circle, while the balance of Amerika (sold over the years, part and parcel to foreign interest) goes down in flames.
“Most telling, Paulson is telegraphing that the ride is going to get bumpy. Greenspan is out telling of his misgivings and credit inflamed maelstrom now come home to roost. Bernanke is keeping a respectful distance, ready to drop the hammer. Greenspan is even waving the inflation card! Given this concerted game plan, why on earth would any rational market observant think that there is going to be a rate cut... (and then a hike?), especially when any 'salvage' operations can be accomplished through the discount window, foreign bank/currency support of the dollar, and the old stand-by, going into the bond pits and buying long bonds to inject liquidity. Also, these markets are now so distorted with their high PEs (a replay of March 2000) made all the worse by the ever growing telegraph of recession, so much so that a rate cut would be laudable!
“A rate cut now would invite the worst of the worst, the failure of what little structure remains of this global incongruity.”
***
Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2007, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 18 September 2007 | Digg This Article | Source: GoldSeek.com
