Fed steps up efforts to spur economy

The Fed plan to buy at least $300 billion in Treasury bonds (forecast in earlier blogs)and its increased support for the mortgage market, along with the wide array of Federal government stimulus efforts, will eventually soften the economic and financial pain. But, unfortunately, not for some time. The recession will probably not end until next year or even 2011. The recession is still worsening faster than government efforts to buoy the economy.

The Fed induced decline in Treasury bond yields will help bring mortgage rates down, thereby shortening the length of the housing recession. But there is no end to any aspect of the recession in sight.

Even the new three part Federal program now reportedly being prepared for announcement to buy bank toxic assets in conjunction with the private sector is not likely to be sufficient to turn the tide of progressive recession and financial strain. The new plan presumably will involve an FDIC backed fund to invest in a portfolio of loans along with public-private partnerships. The major problem in buying toxic assets from financial institutions remains deciding on their price. Too low a price that may be sufficient to eventually generate a profit for the new entity would create a loss for the selling institution that would reduce their capital and even put their survival in jeopardy. Too high a price that insures survival of the selling instution would produce losses for the new Federal buying institution. Mortgage-backed debts are threatened by the continuing and prospective decline in home prices. The rising unemployment rate, destined to top 10% or even 11%will create more housing distress, and much lower home prices, as will the continuing rise in foreclosures and huge overhang of unsold and unoccupied homes.

Until the plunge in home prices is arrested, there will be no end to the pronounced financial distress. The primary answer to the decline home prices is to find new buyers for the available overhang of unsold homes. A Federal program to buy vacant the homes, refurbish them and make them available on favorable terms to would be home buyers would help. Offering fast track citizenship to foreign investors who purchase homes would also help stabilize the housing plunge. These approaches would add new home buyers. A moritorium on foreclosures and an end to required bank sales of foreclosed properties would slow the rise in the inventory of unsold homes. As if the continuing residential real estate crisis were not enough, there is a rapidly deepening problem developing in commercial real estate, both in offices and retailing, that together with increasing credit card delinquencies and defaults, will significantly worsen and widen the credit crunch.

Despite the harsh economic and financial reality, the bear-market equity rally still has further to go. But it is not the beginning of a cyclical rise in equity prices. The recession is still deepening, inevitably bringing with it more reductions in earnings, more losses, and more cuts in dividends than the market expects.

Though stock market prices retreated on Friday, they still rose marginally for the week, not only keeping their strong prior week rally intact, but slightly adding to it. The equity market has been up for six of the past nine days. It is not surprising that the market gave up ground on Friday. There is always the risk of adverse market surprises over the weekend, which still far exceeds the potential for surprise gains. However, the market should add to its temporary rise over coming weeks,reversing its still oversold and excessively bearish extremes. But, once it returns to its 200-day moving average, with its decided downward slope, the rally is likely to end amid continuing negative market, economic and financial news. While individual investors put money into the equity market the past two weeks,it is a decided market negative that there is no parallel rise in companies buying their own stock.

The rise in near-term inflation concerns related to the broadening Federal deficit (stemming from the Federal stimulus)and Fed expansion is grossly overblown. Even with a US Federal budget deficit currently estimated at an astronomical 13.7% of 2009GDP and expected to rise further (versus 11.3% for the UK, 3.6% for China and 5.6% for Japan),the major near-term US and global threat is deflation. Inflation will eventially return as an over-riding concern. But not for a number of years. Timing in investment is everything. Despite bouts of inflation concerns, US Treasury bond yields will stay low for years to come. Though it is not sufficient, it is a necessary prerequisite to economic recovery. Thus, it is far too early to expect a recovery in commodities, the main focus and benefit of rising inflation concerns. There is a massive overhang of excess global productive capacity and labor that precludes it.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email address: philipbraverman@Gmail.com

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