Navarro's Big Economic Picture

After a 10% stock market correction, we were “treated” to one of the best rallies of the last few years. Two big factors shaped this rally.

First, the Fed once again proved that the “Bernanke Put” is alive and well. Every time it looks like the economy is headed for the abyss, Bernanke loosens up monetary policy and the stock market eats it up – if only for a few bullish days. For this reason, it is really hard to make any money on the short side even though, in my view, the market is in a downward trend. So, on this reason alone, I recommend a heavy dose of cash in your portfolio until further notice.

The second impetus for the market rally is the most stupid socialistic idea I’ve heard of since that well-known communist sympathizer Richard Nixon slapped price controls on the 1970s economy. This time the proposal is to freeze rates on targeted segments of the sub-prime market.

The sub-prime deep freeze is being sold by bedfellows as strange as Hank Paulson and Paul Krugman as a way to prevent a flood of foreclosures in the coming months as the exploding ARMS reset at substantially higher interest rates. With violins playing in the background, we are all supposed to support this mess so hundreds of thousands of people won’t lose their homes.

Hey, I’ve got as big a heart as anyone, but the devil is always in the details and this particular plan is simply unworkable. The major reason is that the freeze can’t possibly be applied to all homeowners saddled with subprime mortgages – that’s too costly. So the proposal is to identify only those people most likely to lose their homes if help doesn’t arrive. Well good luck with that!

Consider that one criterion being floated is to only help people who have already missed a mortgage payment or two? The obvious problem is how do you distinguish between people in legitimate trouble and speculators who are bailing because housing prices are falling and their gamble just doesn’t pencil anymore.

The bigger problem with this approach is that it creates an even bigger kind of “moral hazard” than the bailout itself. In particular, there will likely be a lot of people who can still afford to pay their reset mortgages who are going to figure out it would be a lot better to miss a payment or two and let Uncle Sam come to the rescue.

My ultimate beef with all of this is the housing bubble itself. For years, I warned about the Fed’s easy money policies coupled with Chinese currency manipulation (which recycles dollars back into US bonds and keeps mortgage rates low) working in league with sleazebag real estate appraisers who would set the price of a house at any level needed for someone to quality for a mortgage – no matter if they had the income or not. And then throw in all the lenders who suckered all these people into exploding ARMS – while you render the immortal words of WC Fields “you can’t cheat an honest man.” And presto, you’ve got a housing bubble sucking the life and capital of the American manufacturing economy.

Well, enough of that rant. You get the picture and it’s an ugly one.

Far better that we let the free market work on this one, cleanse the market of its gamblers and speculators, and start fresh with asset prices that truly reflect the sad, sorry state of a US economy that needs a far better group of leaders than the Greenspan-Bernanke-Paulson put option and corporate welfare artists.

This Week's Big Market Movers

The big report of the week will be the jobs report. While there has been lots of recessionary warnings, the data still doesn’t back the “R” word up. Let’s see if there is any softening signaled in the jobs report.

AND keep you eye on the sub-prime freeze deal to see if it gets signed, sealed and delivered.

The International Scene - Technical Take

We see a lot of longs in the column BUT virtually all of the long are undergoing significant technical deterioration. Methinks the international worm is about to turn.

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.”
 -- If It's Raining in Brazil, Buy Starbucks

The Market Edge Market Summary from www.marketedge.com 

CONTACT INFORMATION
Peter Navarro
Irvine, California USA
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DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.