CROSS-CURRENTS

Gentle Ben proclaimed yesterday that the recession is just about over in a technical sense (whatever that means) and today with upward trending economic numbers the Dow surged ahead by 108 points bringing all the other indexes along with it. The dollar, however, fell to a yearly low against the Euro and a 7 moth low against the Yen causing, in the mind of a lot of experts, gold to roar ahead to $1018 an oz. Commodities, including natural gas which has been so low that my gas bill last month was below $20 (it's a big house as well) were soaring. Sentiment is so bullish that there seems no end to this and the Fed seems firmly locked into a belief that it can maintain the flood of cheap (no cost?) money that many credit to be the salvation of the economy. I guess the theory is that if inflation shows up the Fed has a lot of things it can do to knock it down and the Euros will maintain a historically more conservative monetary stance thereby insuring the dollar/euro exchange rate. And away we go.

My problem with all this is the fundamentals are all messed up. At some point this scenario has to end and if the euphoria we have seen in the past couple of weeks is based on a set of conditions that are impossible to remain in place, what happens when folks start wondering whether this is Nivarna or fairy coo-coo land? A long, long time ago some people were actually believing that the housing boom was real and not a bubble. The answer then was go until the day the music dies and when it does, don't be caught without a chair. This is beginning to look like deja view all over again. At the same time there is a coming convergence of a couple of competing macro conditions that I would just like to touch upon as briefly as I can.

All of this discussion regarding banking regulation cannot be expected, should various idea come to fruition, to result in anything less than a continuing of the tight credit conditions that exist in the market place today. Whilst the results at the money center banks and the newly-created bank holding companies such as Goldman and Morgan Stanley are remarkably good, the result mainly from trading profits and as we have pointed out if you can't make huge amounts in this trading environment you are surly without a beating heart. Remove or begin to limit the Fed's free lunch coupled with increased regulatory oversight and prohibitions profits will surely slip and lending will decrease from today's dedacted levels. Taxes will rise next year, the deficit is heading to the stratosphere. the body politic is at one another's throats. commercial real estate is yet to be dealt with and no one is predicting a dramatic improvement in the employment outlook. Mr. Bernanke is a hell of a lot smarter guy than I am, but it just seem to me that there are a lot of conflicting parts to the present state of our economy that just may run into each other at precisely the wrong time with no one in a place of omniscience capable of directing traffic. I hope I'm wrong. Back tomorrow with more on the regulatory issues...promise.