Bear Stearns, Bernanke and the Economy

Dear All, it’s been a while since my last input but I did forecast this meltdown didn’t I as we bounce around from one crisis to the next. This crisis since August 2007 still has some way to go already some experts predict we are at the bottom of crisis but I say no way we still have a way to go investors are spooked and fortunes lost. Banks simply are not lending to each other fear of the unknown is the main factor right now plus the Federal Reserve stoking inflation flooding the market with liquidity is one thing but what the Fed is not providing is capital and boy do some of these banks need capital as the Sovereign Wealth Funds sit back and survey the inflation problem the Federal Reserve is creating. Yes the markets love the rate cut and rallied but this is a false dawn. Last week we heard Bear Stearns was in trouble and the Fed injected $200bn of liquidity the markets responded well and we were told all is well at Bear Stearns, well the rest is history, today the market again rallied but this is short term all the Federal Reserve has done is stick a band aid on a huge wound which won’t stop bleeding it’s simple folks it’s all short term what about the long term who is going to take all these assets bought by the Fed? Simple the tax payer but this is only part of the story the total the Fed can hold on it’s balance sheet is $800bn, it has already pumped into the system $400bn so what about the next crisis? The Fed has limits and can only do so much right now inflation is not its major concern but they are storing up problems for the long term.

Has JP Morgan Chase stolen Bear Stearns? Did the Federal Reserve force Bear Stearns to accept JPMorgan’s all share offer of $2 per share at a rock bottom price. Whatever the reason JP Morgan Chase have them selves the bargain of the century. The deal will cost JP Morgan in total around $6bn this is made up of severance pay and retention to waves of litigation and asset writedowns. But my concern is that Bear Stearns wanted a $30bn loan from the Federal Reserve over 9 months but as the Fed were in control of the situation they forced the merger of Bear Stearns with JP Morgan this has opened up investigations by the SEC that some funds shorted Bear Stearns and circulated the rumour of liquidity problems, Bears could not sustain the run on the bank over 3 days and went hand in cap to the Fed.

Things were already bad at Bear Stearns they were heavily exposed to the troubled US mortgage market and unlike many of its peers; it had no deposit business to offset its losses. The bank also was a heavy lender to hedge funds, some of which have collapsed in recent weeks after losing money on mortgage-related investments. Senior managers made mistakes and should have sought capital injections earlier but whilst dealing with the Chinese for capital inflows talks took longer than expected.

So what now for the US economy do we have another bank on the verge of collapse?

My concern now turns to the currency markets with the dollar at all time lows against major currencies and these sovereign wealth funds sitting on huge dollar reserves it is only a matter of time before they start dumping the dollar stating enough is enough as they themselves import inflationary pressures. Bush’s fiscal tax stimulus won’t take affect till the summer and even then consumers will probably pay down on debt and not spend as expected, Bernanke risks higher inflation and a weakened dollar however at the back of his mind must be zero interest rates will America follow the path taken by Japan and enter an era of deflation?

Federal Reserve Fueling Inflation

Its official The Federal Reserve under Ben Bernanke has made it clear the priority is to "support growth" by cutting interest rates as needed at the expense of rising inflation in the US economy. So the Fed has weakened the US dollar, printed more dollars to fund the Iraq war which has led to an increase of the money supply added to this Bush's fiscal tax cut, and a President out of step with reality as the consumer is hit with high energy prices and rising food costs. The Dollar this week has taken a pounding due to the dismal economic news coming out of the economy, the dollar against the Euro has for the first time breached €1.50 to the greenback also the Yen is at a three year high. The weakened dollar may help the trade deficit but it is storing up problems for a pro-longed down turn in the US economy as inflation takes hold.

My major concern as aired before is that the US is headed for a period of Stagflation this was backed up by a report in the FT dated Feb 20th. Also the "Market Oracle" has this to say,

"The Bernanke Fed's aggressive rate cuts have doing more harm than good for the US economy, by leaving the US consumer with slumping home prices on the one hand, and soaring food and energy prices on the other hand, otherwise known as the “Stagflation” trap. According to Bill Gross, chief investment officer at Pimco, the Fed's rate cuts of 2.25% since September have not brought mortgage rates lower, with the Fannie Mae 30-year mortgage rate stuck at 5-3/4 percent. “Here is the startling point, the markets that the Fed is trying to affect haven't changed,” he said. Gross thinks the housing downturn is still in its early stages, and expects a 20% decline in total. “A 20% decline in housing prices is confidence destabilizing, its credit imploding,” he added. And how long can US Treasury yields stay under the exploding rate of inflation, or negative rates of interest?

Commodities investment guru Jim Rogers said on Feb 25th, “the Fed is printing money and are trying to prevent the recession, they are putting on Band Aids,” he told an investor conference in Dublin, Ireland. Rogers added, “as long as the US central bank and the federal government keep making mistakes, you will have a longer period of slowdown, and it will be perhaps, one of the worst recessions we have had in a long time in America,” Rodgers predicted.

Put simply the printing of money then having that money injected into the money supply will cause inflation, but with falling house prices, a weak currency and consumer confidence at a all time low we need to be prepared for this recession, Stagflation and then possibly deflation to be around for some time. Reckless economic policies by the Bush administration is at the core of this major crisis. As Bernanke lowers interest rates the credit markets tighten lending it has a knock on affect to all corners of the economy. If you are smart enough to see what's going on you will sense that the inflation rate as published by both the US and UK central banks is a lot higher to what's being said. We can feel it in our pockets every time we shop at Tesco's or Sainsbury, transport costs have also risen is UK inflation really 2.1% I think not.

UK Banks have announced they have written off over £6.8bn in individual household debt as families struggle to meet repayments also mortgage loans approved in January 2008 totalled 74,000 the second lowest since 1999.

As Gold edges to $1,000 oz it shows investors are truly worried about the world economy and inflation, Oil was up this week as high as $107 a barrel, Platinum, Wheat, Soybeans,and Iron Ore .

I am worried that neither Hilary, Barack or Senator McCain have a clear plan for the US economy, as many will be looking for a leader to announce clear and concise plans of how to get back on track.

I expect the BOE and ECB to keep interest rates on hold as inflation this side of the Atlantic is a major concern.