The Fed, Infallibility and the Titanic

Many mainstream and independent economic journalist are using words like mini-crash and crisis when describing the action of the market over the last three weeks. They rightly point out how some of the hourly rises and falls have been breath taking.

Yet, when one stands back and looks at what has happened in the market from a more distant perspective, the hyperbole seems unwarranted. A market that has been up 8 out of the last 16 sessions does not seem to be in a precipitous fall. A market that is down only about 6% from its all time high does not seem to be in the throws of a market crash.

Once again when the smoke clears we are just one strong week from setting all time highs in most of the major US indices. The Fed and the mainstream press have been very open about the liquidity injections and Fed interventions to help prop up the stock market.

We can now be assured of many articles being written emphasizing how the recent volatility has left many stocks undervalued. We will hear how the mini crash has been based on irrational fears spawned by perma bears and pessimists. We will also hear how the market correction has been overdone and that a snap back rally is likely. And still others will point out how the market always climbs a wall of worry.

So, where are the markets in fact headed?

Will the Feds apparent triumphs at stabilizing the markets and preventing a market crash cause investors to continue to view the US economy and markets as infallible? Will investors see last weeks volatility as just another false alarm and pile back into the market in an effort to not miss the next leg up?

Will the Fed be able to launch another rally by once again stating how the economy is growing, and inflation is under control? Will they be able to assure investors that they have taken care of the soft patch in the financial industry and that the problems in real estate are once again contained and not a threat to the overall economy? Will Wall Street once again go into a feeding frenzy over the prospects of the Fed lowering rates?

Based on recent history the answer to all these questions is "possibly".

By Friday afternoon I began to see the Titanic as a metaphor for the immanent catastrophe in financial institutions. While watching the market soar and swoon I thought to myself, "the men are getting in the life boats, while giving boarding passes to women and children". This was not meant as a slam to women and children, but just a way to highlight the fact that the big money seemed to be exiting the market while the Fed and hucksters were trying to show that the coast was clear for new passengers.

The image of a burning skyscraper also came to mind. In this instance I pictured a fire on the bottom floors of the building and the people inside the building running up the stairs to avoid the flames. Though they are able to out run the fire, each floor they climb makes the inevitable leap that much more dangerous.

With the help of the Fed and the mainstream press enough money can be coerced back into the market to have us out run the flames and take the stock market up to new heights. We would quickly hear how the market is infallible and how it is different this time. We would hear how the fire is about to be put out and soon we will be able to safely exit the building.

Many market historians and experts such as Prechter point out how quickly market optimism and greed can turn into pessimism and fear. It's a shame that the real decider of the future of the stock market has more to do with perception than reality.

I personally feel that pessimism and fear are about to become fashionable and take this market down. Many years of economic history show that our economic short and long cycles are crying out for a significant correction and fall. Yet, I must admit that from a perceptual point of view, the "this time is different camp" has something to hang their hat on.

In no time in history has a society been better positioned to manage the perceptions of its citizens (now known as consumers). Near a century ago the field of social psychology was born, and since that time our government and business world have funded many of our best minds in refining their methods of social influence and propaganda.

I believe this next week or two will tell us if a true correction has begun or if the spin machine has succeeded in spiraling the specter of economic crisis back into deep space.

At some point reality would seem to overcome perceptual spin, but we may not be there yet.

Jim Guido
guidoworld