US..Market Wrap - Revision, Recession, and Interve

Wed Market wrap
"What these economic restatements reveal, and what so many other corporate revisions show, is the economy and corporate profits have been much weaker than expected. They point to one of the worst profit recessions in decades and an economy that is plagued by many imbalances. It also points to a day of reckoning that will be ominous when it occurs. The economy is heavily dependent on foreign capital to finance burgeoning trade and current account deficits. The US is taking in and consuming about 75% of the world’s savings. Between US foreign investment outflows and trade and current account deficits, the US needs to take in capital inflows of around $900-$1,000 billion per year. The trade and current account deficits require about $450 billion. Add to it the outflows of US capital, and it isn’t too hard to conclude a dollar crisis of a magnitude never seen before lies directly in front of us.

What must be keeping Fed officials up at night is they are seeing their credit bubble turn into their own worst nightmare. The economic numbers show an economy that is once more heading back into recession and a credit crunch that is developing in the credit markets. The Fed however, is caught in a Catch-22 of its own making. If it lowers interest rates again to combat a weakening economy and flood the financial system with money to combat a credit crunch, it risks losing its credibility. Lower rates could send a signal to the markets that the Fed is losing control. On the other side is the plunging US dollar, which may require raising interest rates to keep foreign money invested, which in turn could damage the economy. Moreover, raising interest rates would pop the Fed’s latest bubble in the housing market. Rising interest rates would abruptly end the consumer-refinancing boom that is helping to prop up consumption as homeowners extract more equity out of their homes. Once the housing bubble bursts, there will be nothing left to prop up the economy besides deficit spending by the government, which has taken on a new dimension"


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