Market Votes “No” – Not Enough Government Rescue

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Stocks were mostly lower this week, although the more speculative indexes like NASDAQ and small caps advanced slightly. The lack of a significant cumulative move, however, masked considerable volatility intra-week. Coming off Sunday’s election which rejected the anti-bailout party in Greece, stocks bounced Monday and Tuesday, as investors regained confidence that Greek bailouts would continue–at least for a while longer. On Wednesday, attention turned to the Federal Reserve’s announcement after its two-day meeting. The Fed promised no QE3, which Wall Street had hoped for, offering only a token extension of Operation Twist. The market’s initial reaction was negative. But as stocks fell, German Chancellor Angela Merkel stepped into the breach indicating that European rescue agencies “might” buy sovereign bonds of faltering Eurozone members. And to help keep confidence afloat, Ben Bernanke assured investors that, if necessary, the Fed stood ready to do more. While those actions halted Wednesday’s decline, confidence was fleeting with stocks falling aggressively on Thursday. The week closed on a low volume upmove as many traders squared positions going into the weekend, with another European mini-summit scheduled. Rumors circulated about a possible grand bailout announcement. Most fundamental data releases made unpleasant reading throughout the world. Governments and central bankers have learned, however, that they can keep investors from turning more aggressively bearish through a constant drumbeat of possible future rescue actions and a schedule of high level meetings. Never before in my 44-year investment career have I seen such an orchestrated attempt to keep investors from focusing on underlying fundamentals.

In his press conference following the Wednesday Fed announcement, Chairman Bernanke reiterated the purpose of lowering interest rates by buying up the majority of long term treasuries – to force investors to buy riskier securities. Should there be huge losses if interest rates eventually rise aggressively and/or if stock markets fall, who will then bail out the retirees who reach for those riskier securities to maintain yield? One wonders whether Ben would urge his elderly retired relatives to invest in such riskier assets, knowing what he knows about the U.S. and world economies and about overindebtedness around the world. It’s much easier to prescribe such actions if you don’t have to deal with the repercussions on a personal level.

Central bankers seem to accept that there is little reason not to keep stimulating if inflation is not currently dangerous. Very few are commenting on the growing danger every time central bank balance sheets are increased. Each increase in debt is a bet that puts future generations in greater peril. It’s instructive to remember that the problems governments are wrestling with today are the product of excessive debt. Instead of solving those problems, debt-producing central banks are exacerbating them. Trying to solve them with austerity has been talked about in this country and implemented in such countries as Greece, Spain and Italy. Not surprisingly, austerity has been extremely unpopular. Politicians seeking reelection and central bankers wanting reappointment have quickly perceived that advocating austerity fails to garner wide support. As a result, most opt for continued bailouts, which offer hope for at least temporary relief from financial pain. Unfortunately, such actions are increasing the potential for worldwide financial upheaval.

Counterintuitive as it is to try to solve a problem of excessive debt with more debt, is there any reason to believe that these wise men and women see a solution not apparent to us mere mortals? It should not instill great confidence when one recalls that these central bankers failed to see or appreciate the excesses that have been building up and now undermine the very existence of the banks they were regulating. Why should we believe that their insights today are any more perceptive?

Ultimately, I choose free markets with intermittent pain over central planners and their flawed promise of perpetual prosperity.