No Pain No Gain

For those of you old enough, you may recall the federal funds rate hitting 20% in 1981, with the prime rate rising to 21.5% that year. I remember being happy to get a 10.5% three year ARM when I bought my first home in 1991, a mere decade later. Rates like these tend to emphasize just how easy the money was in the years leading up to the housing bubble.

Well the person we have to thank for the federal funds rate hitting 20% was Paul Volcker. And I do mean "thank." He was not always popular at the time but he had a horrendous inflation rate to fight and he did what he had to do. The CPI approached 15% in 1980 and Volcker knew he had to risk a nasty recession by increasing rates to fight inflation, and increase he did. We did go into a long hard recession and Volcker had to fight Congress to stick to his guns. At one point the Brick Layers Union sent him a load of bricks with a note saying they did not need them anymore thanks to the Volcker induced recession. But we survived and the country was much stronger for his unyielding ways.

Well, Paul Volcker is a special economic adviser to Obama and he is warning that the medicine is not going to taste any better this time, although it will be a different prescription. Hold your nose for this one; he thinks America has to start living within it means!! Within our means!?!? Is this lunatic for real!?! Whatever will we do? Well, I guess we will live within our means.

And for those on Wall Street, he is no big fan of the financial engineering of late. He will certainly be seeking to take us back to financial times of old when companies actually had a pretty good idea of what risks they had on their books, where government actually cared what risks companies took on, and where you got credit when you deserved credit. God forbid!

Mind you, Volcker will have no direct power in his new position, aside from the power of persuasion, so there will be a limit to what he can achieve, but he does have Obama's ear, and that is just about as much power as he needs.

http://www.latimes.com/news/nationworld/washingtondc/la-na-volcker8-2008dec08,0,108304.story

http://www.buyandhold.com/bh/en/education/history/2000/paul_volker2.html

So what happens when you have the President-elect saying we have not yet reached bottom and his special economic adviser saying there will be lots of pain ahead, with America's spending habits needing to undergo a fundamental change? The markets go up, that's what. Wait a minute, our leaders are talking more doom and gloom and the market goes up? What's up with this, you say.

Well Bloomberg thinks it is due to Obama's pledge to support a massive public works program. They could be right.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aaXccqvUzCPM&refer=home

My own personal view is that we finally have some leaders who are willing to call it like it is and the world knows it. Credibility has been incredibly lacking in the current administration, not to mention in corporate America. If I had a nickle for every time this year a politician or CEO said everything is fine, we are near the bottom, our capital structure is sound, the American economy is strong, and the like, I would have a sound capital structure myself.

I don't support everything that Obama is announcing economically, but I like most of it and, most of all, he seems to be showing the leadership flair the world is direly needing at the moment. That as much as anything will help us to get through all this. I don't intend to make this a politically oriented blog, but I think I have bipartisan support for the notion that George W. did not show the charismatic leadership necessary to lead us to recovery. People need hope, and I think Obama can supply it.

I guess Chicken Little just shed a few feathers. Did I mention that I consider the current rally to be a dead cat bounce? I strongly suspect we will retest the lows next year, but this could be a pretty nice run in the short term. We will see.

For those that understand charts and use them to predict bullish or bearish trends, you may want to visit Mish. He sees the temporary trend as quite bullish. Note his statement, however, on the long term outlook being nasty.

http://globaleconomicanalysis.blogspot.com/2008/12/bullish-looking-charts-s-500-nasdaq-bkx.html

Can you mod my mod?

Comptroller of the Currency, John Dugan, has noted that over half the loan modifications done in the first quarter this year were delinquent again within six months. The same held true for those done in the second quarter. Delinquency rates continue to go up, with the largest percentage increase in the prime category. Actual foreclosure starts are down in the third quarter just a tad because the number of loan modifications has gone up, nearly double the number in the first quarter. In other words, the increase in mods is causing a decrease in foreclosure starts. Of course if half or more of these modifications go into default again, the high rate of modifications in the third quarter is only kicking the can down the street a bit.

http://www.occ.treas.gov/ftp/release/2008-142.htm

Market Forecast

Okay, here is a market forecast that I feel fairly confident about. The DOW will move over 2% tomorrow. You get to pick the direction.