EconomicCrisis.US

We’ve always been impressed by David Einhorn, the young manager of Greenlight Capital. Einhorn made our Ten To Watch list this past August for his prescient shorting and outspokenness about the shenanigans going on at Lehman. (His fund had been up by more than 20 percent in the first half of this year, fueled by his bearish bets; he had almost no long positions. Wonder how he is faring these days.)

In a speech to the Value Investing Congress yesterday (the speech was called, “Liquor Before Beer, in the Clear”), he paints a dim view of our financial system and the government’s role of enabler. Einhorn didn’t use the word bankruptcy, but he thinks the stimulus package is a “black hole” that, in the long run, will not produce long-term economic value. It’s all short-termism, so that elected officials can say they are doing something—and seek reelection.
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Federal Reserve Chairman Ben Bernanke called Monday for the United States to whittle down its record-high budget deficits and for countries like China to get their consumers to spend more.

Bernanke said those moves would help reduce “global imbalances” — uneven trade and investment flows among countries that contributed to the financial crisis.

The Fed chief’s remarks to a Fed conference in Santa Barbara, Calif., came after the government said Friday that the U.S. budget deficit hit a $1.42 trillion deficit for the 2009 budget year that ended Sept. 30. The previous year’s deficit was $459 billion.
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When it comes to the economy and financial markets, good news has far outweighed bad news in 2009. Just about every piece of economic and financial market data is tracing out a V-shaped recovery. One would think that this would lead to a little more optimism from the conventional wisdom crowd, but it doesn’t. With unemployment at 9.8% last month and the economy still losing jobs at an elevated pace, people are worried. Many fear a W-shaped economy, otherwise known as a double-dip recession.

These fears are overblown. The only double-dip recession of recent decades happened in the early 1980s, when the country was in the grip of “stagflation” and the Federal Reserve ran a roller-coaster monetary policy. The federal funds rate more than doubled—to 17% from 7%—between 1978 and 1980, putting the brakes on inflation but causing the first recession. The Fed then cut the funds rate to 9% in 1980, causing a 12-month recovery, and raised it back above 19% in 1981, causing the double dip. No one in their right mind expects Ben Bernanke’s Fed to hike then slash rates anywhere near those extremes.
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This was an old quote I used to hear the great PBS announcer make regarding the equity markets on TV in the late 1970s and early 1980s when I first started watching the Nightly Business Report.

Yesterday’s market action reminded me of that adage from Mr. Kangas. The stock market turned violently lower late in the day yesterday following the Fed’s statement release. The sharp turn lower stands out because earlier in the day the markets had surged.

The large question looms… As the bulls and bears went at it again, is this the start of a normal correction or the start of a new bear market?
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