Tuesday, January 13, 2009

Bernanke Rambles On, Trade Deficit Shrinks

The trade deficit shrank to $40.4 billion in November from $56.7 billion in October.  November exports declined by $8.8 billion from $151.5 billion while November imports fell by $25 billion from $208.2 billion.  Calculated Risk points out that most of the decline was due to the plummeting price of oil which should continue to impact December's numbers as well.  Oil prices aside, a sharp decline in US imports is sobering news for those countries that expect the US to keep buying their products.
Meanwhile, Bernanke is running off at the mouth about the current state of the economy.  To summarize his comments:  Blah blah blah, we need fiscal stimulus, blah blah blah, but stimulus won't be enough, blah blah blah, we need to further stabilize the financial system, blah blah blah, government may need to inject more capital into banks ("Hello Ben?  This is Vikram Pandit calling again.")  blah blah blah, let me explain why what we are doing is different from Japan, blah blah blah, we have many more tools in our arsenal that we have yet to tap and we're certain that these will definitely work, blah blah blah, let me refer you to chapter seven of my book on the Great Depression.  Alphaville has more on "credit easing versus quantitative easing" for those interested in a longer read. 
President Bush is seeking the rest of the $350 billion in TARP funds so that our new President Obama can use them the second after he is sworn in.  Does that make you nervous about the state of the financial system?  Investors who chose to pound shares of Citigroup, Bank of America and various other financial institutions are definitely betting that the government will have to step in and dilute shareholders again.  The new administration has already stated that the terms of the new bailouts will be far more strict and will be monitored closely.
As the crummy economic and earnings news rolls in, the government will attempt to counterbalance it with announcements of bigger and broader stimulus attempts.  I believe that this year will be the year of Bad Economy vs. Big Government Spending.  That is why it is so hard to make predictions about the direction of markets (although really, is it ever easy?) When the rules of the game can change every day based on the whims of our elected leaders, it is difficult to draw a line in the sand and say that the market is going lower because of bad fundamentals.  It is equally as difficult to believe that everything will be fine just because the Government is guaranteeing everything when the fundamentals are so horrible.  Consequently, one grand prediction I have is that of continued volatility, maybe not the kind we witnessed in October, but certainly the markets will be on a roller coaster ride until we figure out which force will win the battle.  The good news is, for those with a strong stomach, roller coasters can be a fun and interesting ride.     

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