Replies to post #142283 on Zeev's Turnips Patch-No Politics (ZEEV)

[mlsoft]

Newly2b...

Consumer spending is the key to a recovery in the economy for reasons I have stated many times. The bond market was crucial to both the Gambit and the economy as long as it was providing the primary source of additional funds to keep consumer spending at high levels. The saturation point was reached, though, to where virtually everyone who was willing to drain the equity from their home in order to buy "stuff" had already done so, and once that point was reached there was little incentive for AG to keep bond rates at abnormally low levels.

Seeing that the housing/re-fi source of consumer funding would soon be reached, Greenspan had to create a new source of funds to keep consumer spending at high levels. He had exhausted the market bubble as a source of fuel when the equity markets began collapsing in 2000, and now the housing/re-fi engine was quickly running out of gas. The only new source that Greenspan could directly influence was to return to the original source of fuel -- the equity markets. If he could reflate the market bubble of 1998-2000, it could supply the spending capital needed to keep the consumer afloat. Greenspan's only choice to avoid a serious recession, deflation, and possibly worse was to drive the equity markets sharply higher in an attempt to reflate the equity bubble. He has done a remarkable job so far by using huge liquidity inflows which have gone directly into the markets and direct intervention and has made progress toward that goal, but he still has a long way to go.

I do not think he can do what has to be done and believe the Gambit is quickly running out of gas but it is not over until it is over, as Yogi used to say. As long as volume remains low Greenspan can continue to control the markets, but when enough folks decide to lock in profits the Gambit will end and the markets will turn down -- I think we are very close to that point. Once the markets turn down, they will reinforce the inherent weakness in the economy and we will rapidly descend into a recession, which will be global in nature. Europe is further along that road than we are, but once reality sets in for this market and valuations start to the downside, our economy will quickly follow.

mlsoft