Market Talk

If I hear one more person say double-dip recessions are rare, as a reason for why we won’t have one, I may have to find a small porcelain statue to break.

You know, they were 30 cents last week.

Ben Bernanke, and Alan Greenspan before him, always present this calm demeanor, no matter what they’re saying. Housing market imploding? It’s well contained. Banks exploding. Those are just market pressures. United States on the verge of the abyss? “The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.”

How do you think the world would react if the Fed did exactly the same things it’s done, but explained it like Sam Kinison explaining world hunger? Think that’d cast their actions in a slightly different light?

The point is that the Fed’s done some really, really radical things, but because they always sound so in control, people assume they’re in control. This is a very real debate. How much control does the Fed have over the world’s largest economy, a $14 trillion annually machine that’s driven by and feeds 300 million plus people? And one that’s tied to the hip of the global economy?

Well, certainly a lot. But after two years and a trillion or so thrown on the fire, the Fed is still contending with its darkest demon, one that just apparently won’t really go away. And the closer the Fed gets to wrapping up its mop-up operations, the more this demon’s shadow is going to haunt Bernanke’s sleep.  It’s not a polite word to say out in the open, or at FOMC cocktail parties, but it’s still out there. I’m talking, of course, about deflation.

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- Record low new-home sales don’t deter surging stocks. “New home sales are far more important for the economy than existing home sales, and new home sales will remain under pressure until the overhang of excess housing inventory declines much further,” Calculated Risk says. “Obviously this is another extremely weak report.” Still, Dow rallies 91 points.

- Supplementary Financing Program, the Treasury’s program for assisting with the Fed’s balance sheet, is making a sudden and dramatic comeback, James Hamilton writes.

- “The Volcker rule is following the tried and true path of all Obama ‘reforms,’ meaning an idea announced with great fanfare is being whittled back to meaninglessness,” Yves Smith says.

- Martin Wolf offers quite the depressing economic outlook, predicting a sovereign debt crisis on the horizon. “This, in turn, would surely result in defaults, probably via inflation,” he says. “In essence, stretched balance sheets threaten mass private sector bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two.”

- Princeton economist Paul Krugman adds his two cents: “”What we really need now is… higher spending and lower trade surpluses in surplus nations, China especially but also Germany,” he says. And “some big driver of investment, such as green technology. Absent those things, it’s hard to see how we get a durable recovery.”

- Drop in bank lending truly is “epic.”

- $15 billion jobs-creation bill seems to have some limitations, Time’s Curious Capitalist blogger notes.

- Washington Post’s sales slump improves, sort of. “As always: remember what the economy was like a year ago when you think about these year-over-year comparisons,” Peter Kafka says.

- Consumer confidence data falling ten points has only happened 21 times since Conference Board began its monthly survey in 1977. “Almost every such ten-point drop can be attributed to an unusual market-moving event,” Jim Bianco says. “This is not meant to imply a cause and effect relationship, but is certainly something worth watching over the following months.”

- Critics rip new short-sale rules. “This puts a government thumb on the scale of stock prices,” says legendary short seller Jim Chanos. “Efforts to prop up stock prices where the fundamentals will not sustain them will inevitably fail.”

Fed Chairman Ben Bernanke is set to do his semiannual seance number on Congress this morning, calmly explaining how the greatest expansion of the Fed’s balance sheet in its history has righted the ship that is the American economy, and how he’s the steady hand at the tiller that will bring it safely home to port. We hope he’s right, but like they say, hope isn’t a very good strategy.

“Nothing seems less likely,” the FT’s Martin Wolf writes. The private sector is spending less and saving more, despite massive, huge, unprecedented fiscal largesse on the part of central banks. Attempting merely to put the world back may succeed temporarily, or fail, but in the long run that policy would be a failure either way:

Unhappily, the result of what I call success would probably be a still bigger financial crisis in (the) future, while the results of what I call failure would be that the fiscal rope would run out, even though reaching the end might take longer than worrywarts fear. Yet the big point is that either outcome ultimately leads us to a sovereign debt crisis. This, in turn, would surely result in defaults, probably via inflation. In essence, stretched balance sheets threaten mass private sector bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two.

The only real exit strategies, Wolf says, would come from a surge in private investment in the developed world (which would result in higher incomes that could service all that debt,) or a surge in demand in emerging countries. “Exploiting such opportunities would involve radical rethinking,” he says. “Unfortunately, nobody is seized of such a radical post-crisis agenda.”

Meanwhile, the V-shape camp keeps expecting things to go back to “normal” any day now. They may be in for quite the disappointment.

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