Investors reverted to their worrisome ways yesterday, taking stocks for a rollercoaster ride after seemingly contradictory statements about the Fed’s intentions were made, respectively, by Alan Greenspan and Jack Guynn, a member of the Open Market Committee. I won’t try to deconstruct either guy’s words here, since that might run afoul of the Fed’s modus operandi of sowing confusion whenever the second-guessers grow too brazen.  No more rate hikes after June? That’s what the buzz has been predicting for the last few weeks. But the Fed chairman evidently has other ideas, and it’s even possible that he used Guynn as a straw man to help make the central bank’s intentions perfectly unclear. Given yesterday’s gyrations in the stock market, it would appear that he succeeded. But Guynn had the final word -- “My view is that we’ve still not reached a neutral policy stance” – and that’s probably why shares finished the day on the downswing.

Speaking of sowing confusion, a poison-penned lurker from Saskatchewan, Dennis P., sent me an unprintable message execrating me for my bullish/bearish two-step over the last couple of days. On Monday I reiterated a forecast for a tediously bullish summer; then, yesterday I warned against a possible swoon over the near term. I see no contradiction whatsoever between these two predictions, only the disquieting implication that summer could produce no more than fleeting satisfaction for bulls and bears both – but no epiphanies for either. It’s hardly inconceivable that stocks could dive soon but still recover and then some by summer’s end. In fact, that’s what I expect, based on the stochastic evidence presented here over the last two days. We can always change our minds if a modest rally over the next few days alters the menacing trajectory of this indicator, but as I noted, a little bit of weakness could turn it surly in a hurry.

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Rust Belt Dreams

Here are two more interesting letters I received in response to my recent essay about the decline in lending standards:

“I happened on your essay by way of a link from Rense.com. I am a 44 1/2 year old, factory-employed exponent of old rightism, with special stress on Austrian marginal- utility economics as observed in Centerville, Ohio, a pretentious affluent suburb of Dayton. When the housing bubble pops here it will deservedly hurt like blazes, since people have been acting for some time as though money comes from a space warp or something. Meantime, I live miserably within my means and wish for the twenty-five-thousandth time for the job my high school home ec teacher talked about – the one that will pay me enough to live well.   Twenty-six years later, I still wonder where that infernal job is. Oh, I forgot -- I have been living in the heart of the rust belt all my life. Except that it didn’t visibly start to become the rust belt until I began junior high school. I was apprehensive about this as early as 1967, when a friend of my grandfather’s complained about high taxes, a problem I naively believed the American Revolution had solved.

“Anyway, my monthly housing costs exclusive of property taxes are high, and it’s possible my  standard of living peaked in my pre-mortgage days. So I much appreciate the hard dose of reality provided by your recent essay. That rampant corruption of the financial sector has caused you to become risk averse is unexcusable, especially considering how proficently you do your job. I am similarly rankled by the knowledge that, in a true laissez faire economy – one with less-burdensome taxes, inflation and bureaucracy – I would be living far better, with more discretionary income and savings. Well, here is vainly hoping for the best, sir. Happy decoration Day regardless of the side of the war of northern aggression wherefore your forbears may have fought. Signed, Steven S.” Thanks for sharing your experiences with us, Steven. For the record, I grew up in New Jersey, a few miles south of the Mason-Dixon Line.

How Do You Spell Bubble?

And here’s a note from a reader who sees only trouble resulting from an ebullient real estate market and easy credit:

“Upon reading your article, I have some added thoughts: We clearly have a b-u-b-b-l-e in motion.  The standard deviation for home prices in LA, Las Vegas, and other markets is twice the norm. How do you spell b-u-b-b-l-e? The U.S. Government allows a tax-free capital gain on property of $500K for people living in a residence for two years. Again, spell b-u-b-b-l-e.

“The Fed has doubled the FRN supply since 1994 – inflation, as classically defined. Credit is seeking its highest return, and the Fed has demonstrated time and again that there is no b-u-b-b-l-e it will not underwrite.Just look at the Mexican Bolsa, Asian Contagion, LTCM, Y2K, and post-9/11 easing. All of it had to go somewhere --- and housing, by default, was the recipient after the stock market crashed. The Fed and the Freddie/Fannie family are the perpetrators of this b-u-b-b-l-e -- and fraud.

“The U.S. debt market aggregates to around 40%  of GDP, meaning we are literally cannibalizing ourselves. With manufacturing contributing only 10%, we are sliding into oblivion.  The US is suffering from the Esau syndrome --- giving up our birthright for a warm meal. We are living beyond are means and there is no way to check the imbalances --- except for a crash to occur. When the masses become impoverished, they will look back in amazement as China dominates the world.

“It is this lunacy that has helped driven the bubble to such lofty heights. The Fed cannot keep this b-u-b-b-l-e inflated in perpetuity. It will ultimately burst, and when it does there will be a sizable blood-letting.”