2006-07-21
Today’s Thought of the Day comes from John Succo at Minyanville.

Cajoling the Markets

The comparison of what Mr. Bernanke said to Congress…”the housing market slowdown appears to be orderly decline”…to what the CEO of DR Horton (DHI) said…”sales are falling off the Richter scale”…should say a lot of how the government attempts to cajole markets.

The company “senses there are three to four quarters of inventory adjustments ahead for homebuilders.”

From the flawed statistics they release to their subjective commentary, I can’t believe anyone still listens to them.

Government intervention and control of markets has a very negative cumulative effect. Easy credit allows unproductive companies to survive when they should not. It interrupts the system from cleansing itself which creates stronger growth in the future. Our economic growth becomes more and more dependent on speculation. All that stability investors “feel” is an illusion: the cumulative effect is actually very destabilizing.

There is much anecdotal evidence that investors have become very dependent on government to keep asset prices going higher. This is absolutely necessary for an over-levered economy so it can keep borrowing to consume.

This is where I differ from the bulls. They stay with shallow arguments that growth is this and earnings are that without looking at the why of it. The why of it is that speculation in asset prices is all that is driving growth (companies buying back stock with debt is helping earnings per share dramatically) and this is called a ponzi. It depends on the next guy paying a higher price.

When the next guy does not pay a higher price it falls apart. If asset prices like stocks start going down you will see how quickly growth stalls. Then all that leverage that the Fed has been trying to infuse will unwind. The markets that they have “controlled” will control them.

Thanks to John Succo and Minyanville for today’s thought of the day.

Mish Comment:
Look no further that this statement from the FOMC minutes today.
The Federal Open Market Committee intended in its last policy statement to indicate that rate hikes at future meetings was no longer “foreordained,” according to a summary of their closed-door deliberations on June 29-30 released Thursday.

Are we really supposed to believe that was their intention? They intended to say something but forgot? What a crock. It is obvious they pour over every little word with a fine toothed comb. Furthermore, if they really meant to say that, they have had 25 days to correct their intentions. Perhaps the collapsing housing market is “scaring some intentions” into them. It should be. But if that was the case why was Bernanke willing to call it an “orderly decline” during his Congressional testimony just yesterday? The answer is obvious. This nothing but another attempt by the Fed to cajole the public today.

Mike Shedlock / Mish/