Posted At : April 1, 2009 8:56 AM
Reasons to be cheerful, Part 3. I’ve been dying to say that and thankfully the market has given me the opportunity. This is of course from the Grand Master Flash hit. However, we have had a number of new developments for our economy. In essence, all the kings’ horses and all the kings’ men certainly can put Humpty back together again….with an unlimited budget! The Fed showed brave action by throwing yet more money at the fiscal crises. Last week’s $1B mortgage infusion and this week’s $1B toxic asset purchase plan lives up to helicopter Ben’s reputation. Bernanke got the rep by making a claim that if we ever went through a period like the Depression, he would drop money out of helicopters.
For the short term, this is great news. It’s hard to fathom that all this money will not have a positive effect on the economy. Looking back at history we can see how the markets and economy reacted when this was tried before. In 1932 the Fed began aggressively buying government securities: the economy responded and actually expanded by 9.5% from 1933 -1937. And the stock market in 1933 had its second best year on record, with the Dow Jones Industrial Average gaining +66.7%.
Naysayers could easily respond by pointing out the big gain in 1933, also followed four years of huge losses, which would be accurate. But also keep in mind that during the first four years of the depression the Government kept interest rates high and the money supply fell by 25%, the wrong policy. That is not the case today. We learned from that lesson and have jumped ahead to applying what worked then, monetary expansion.
For those believing that the worst is yet to come, consider this: the broad indexes were as far below their 200 day trend as they had been at any time since 1938! It is very common for indexes during an ongoing bear market, to fall, only to rally back to their downward sloping 200 day moving average, before falling again. Most of the indexes would have to rally from here +25% to +40% just to get back to their 200 day moving average.
I’m purposely not going to ruin the party and talk about the possible problems longer term, so don’t think I am not aware of potential hyper inflation, devaluation and currency devaluation. I’m tired of being Dr. Doom, so let’s see what happens first.