Having missed badly on my forecasts of the stock market in the eight weeks starting October 1st, I have to admit my forecasting skills seem to be unquestionable - unquestionably bad, that is. None the less, I continue to boldly forecast where no rational man has forecast before. This week has indeed looked a lot like a bear market rally, also know as a "sucker rally" or a "dead cat bounce." For the last couple of weeks the market has dropped down significantly nearly every day in the middle of the day, yet managed to recover and finish the day up. This is a bull market "climbing a wall of worry."
I expect the market to continue to go up next week on a lack of more bad news, and on the news that a compromise has been reached on a small Detroit bailout. Barney Frank, a congressman that I particularly dislike, endearingly said "If we are lucky we will come out with a bill here that nobody likes, because any bill that any individual liked couldn't pass." The compromise will be to give Detroit about half the $25B that the Department of Energy has, supposedly to support the development of green cars. Democrats didn't want to touch this money, Bush wouldn't have it any other way. Pelosi said they'll just restore that money in a more comprehensive auto bailout bill to be passed in February. As the Emperor put it (just before he got tossed into the green flames) "Everything is proceeding as I have foreseen."
The big question in my mind this week is how we will pay all this bail out money back. Last week you may recall I said I had lost count, but I thought the bailout was up to somewhere in the $4.5T - $5T range. I was quite wrong in that. Below are more accurate figures. To put this in historical perspective, in the last three months we have spent as much money as we did total on the 13 most expensive projects in the history of our country.
|Term Auction Credit||900|
|Discount Window Lending||139|
|Loans to buy Asset-backed commercial paper||662|
|AIG (allocated minus Treasury 40B)||113|
|Bear Stearns initial loan to JPMorgan||30|
|Term Securities Lending Facility||225|
|Money Market Investor Funding Facility||540|
| Commercial Paper Funding Facility ||1800|
|Term Asset-Backed Securities Loan Facility||200|
|GSE MBS Program||600|
|Treasury Asset Relief Program||700|
|Exchange Stabilization Fund for money market funds||50|
|Treasury direct purchases of MBS since Sept.||27|
|Guarantees for Banks||1900|
|Federal Housing Administration||3000|
|Fannie Mae/Freddie Mac||350|
|Automakers loans for green car development||25|
Cost in $ Billions
|Gulf War I||98|
|Race to the Moon||237|
|Savings & Loan Crisis||256|
|The New Deal||500|
|Gulf War II / War on Terror||597|
|NASA Cumulative, 50 years||851|
|World War II||3,600|
Most of this money is loans, and I expect most of that will be paid back. However, we're going to be paying ourselves back eight months of gross domestic product in the next couple of years. Paying this money back will be an extreme drain on any recovery - credit is going to continue to be in short supply for at least three years, possibly more. This is leading the Fed to get very worried about deflation - the opposite of inflation, an extended period when prices continually fall. It's been said that for a capitalist economy, inflation is like a bad cold, and deflation is like cancer. In a deflation consumers sit on their money, as waiting means you will get a better deal. We've watched Japan struggle with deflation for 15 years now. In the 80's it was widely believed that Japan was an unstoppable economic force that would wind up owning the entire world. Their economy has basically not grown a single dollar since 1990.
Oil continues to drop with no bottom in sight, currently below $41 per barrel, less than a third of the cost four months ago. This returns oil to prices last seen in 2004. Although there has been much posturing by various OPEC member nations, in fact demand continues to contract and supply continues to grow. No rational person would forecast that oil will continue to drop to, say, $10 per barrel, but no one has any idea where the current drop will end or what will stop the fall. I'm watching this with some entertainment: the lower prices are good for the world economy, and very bad for the blow-hards like Hugo Chavez, the president of Venezuela. A lot of oil exporting countries allowed themselves to get addicted to expensive oil, and their withdrawal will be fun to watch. By the time the economy and oil demand are recovering, in 2010 or so, we're going to see a lot of people buying electric and hybrid cars, and we're going to see cellulosic ethanol start to hit the market at something like $1 / gallon. It's very unclear that we're going to see $150 per barrel oil again anytime soon.