By Denise McCosh
September 22, 2008
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This is primarily to answer a question from a reader. (John, thank you for challenging me)
"What do you think will be the effects of the government moves, so far?
I give the efforts one to six months until reality sets back in and gains will be erased...
Looking at the charts, they seem to read that fundamentals drivers have been discarded, and sentiment had been replaced as the market driver.
My view is that this is typical bear market behavior.
A Bear market will trend down and along the way experience spikes due to counter trend rallies. I have cautioned on this dynamic before.
Short term, big market moves are fueled by fear & greed. We have seen plenty of both in the past week and right now it is Greed.
Greed that a bottom has been hit. Before it was fear.
Hmmm, which is it, Fear or Greed?
Where do we place our retirement money and savings? Should we truly be afraid and hold cash or gold or be truly euphoric and buy now - at the bottom?
To answer that we have to ask, "Have the Feds solved all problems?" Quick answer, NO!
They just bought time for a slower unwind of the risk.
Has one problem been substituted for another? What will happen to all of the toxic financial instruments that the Fed absorbs?
What does it cost the financial institutions to allow them to dump financial instruments that nobody wants to the American public?
Surely they can not pass it on to the feds for free?
What does it cost the tax payer to support our government's cost to hold, manage and somehow liquidate these toxic weapons of mass destruction?
Does the creation of the "new" Resolution Trust Corporation (RTC) become a real reason to confirm optimism that the Feds have made it all better by being the depository of all worthless assets" OR should this confirm that our worst market fears have come true, now that the Feds have extended their authority to a level never before seen in history to save the global markets.
What does it mean to you and I that our government has loaned dollars (hot of the printing presses) to financial institutions in exchange for worthless assets no one else wanted to buy?
I am no rocket scientist, but that does not feel right, it will cost us something, somehow. And yes, it is probably less painful than a global stock market crash, like 1929 to the tenth power.
I want to know at what price - how much is that going to cost me the taxpayer- surely it's not free?
Over the longer term, fundamental market and social economic forces will prevail.
Fundamentally, we need to de leverage and reduce private, public and commercial debt.
Whether or not risk becomes properly valued by free market forces or by socialized forces such as the newly created "resolution trust corporation" risk has to be re-priced.
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