Stocks soared yesterday on the very bold assumption that the credit crunch is over, but don’t think the dimwits who were doing the buying have cornered the market on stupidity, no sirree. It would appear that they have good company over at The Wall Street Journal, which haughtily took our beloved Hillary Clinton to task the other day for suggesting that the U.S. was flirting with Japan-style deflation. The editors purported to give her a history lesson, alleging that Japan’s central bank waited too long to ease, and that when it finally did ease, the rate cuts were too small. Of course, nothing like that could ever happen here: “There’s little sign the U.S. is facing a similar danger today, given that the Federal Reserve has been dropping rates quickly as the economy has slowed,” the editorial noted. “If anything, the problem is the opposite, with the Fed risking future inflation by putting rates into negative real territory and devaluing the dollar.”

Would that the Fed were so successful at creating inflation, since that has been its obsessive goal all along, a desperate attempt to keep the housing sector from capsizing.  Despite the effort, eight million home “owners” reportedly are underwater now, and some of the biggest builders in the country are struggling to avoid bankruptcy. Just ask them how worried they are about a resurgent inflation. Praying for it would be more like it. And the banks are praying right along with them, since it appears they may have loaned out quite a bit more mortgage money than the underlying homes are worth.

Keynesian Quackery

Now, we have no problem with the Journal attacking Hillary’s $10 billion “Rebuild America Plan” or whatever other Keynesian quackery she and her fellow politicians would inflict on taxpayers. But for the newspaper to assert that the Fed has got things under control  is just a bit much. While the banking system’s newly fattened reserves might make lenders look solvent on paper for a short while, we won’t believe the credit crunch is over until we see borrowers line up to draw on those reserves. Nor will we take seriously the editorial opinions of any newspaper that thinks the fundamental health of the U.S. economy can be managed by manipulating short-term interests rates. 

In the meantime, Wall Street’s ostentatious sigh of relief yesterday reminds us of the scene from Dr. Strangelove when a squadron of U.S. bombers is miraculously recalled after being ordered by an insane general to nuke the USSR. Panic in the War Room quickly dissolves into a moment of prayer, summoned with great fanfare by Gen. “Buck’ Turgidson (George C. Scott).  But it turns out that one of the bombers has reached its target after all, triggering a Russian doomsday defense designed to destroy the world.

Is there a chance that Wall Street’s unmitigated outburst of hubris will prove to be similarly premature?

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15 Days Till Seminar

There’s good news if you’ve wanted to take the Hidden Pivot course but have been unable to attend on weekend mornings, when the class has typically been held.  In mid-April, I’ll be conducting the six-hour class over two consecutive evenings – Wednesday and Thursday, April 16-17, from 6 p.m. to 9 p.m. MDT.  Click here, and then on the “Upcoming” tab to register; or here if you would like more information as well as a detailed description of the Hidden Pivot Method and a free Hidden Pivot calculator.