It's a beautiful, long holiday weekend. I've been celebrating Thanksgiving with my family, and I'm sure many of you are also busy with relatives and friends. So I'm going to keep this week's column short.
Specifically, I'm going to highlight three big questions we should all be thinking about — and offer up my best answers. I feel these are the most important three questions to ask right now because the answers will determine the next big moves in the market and the U.S. economy.
First, is the Citigroup rescue the end of the financial crisis?
We gained 494 points in the Dow Jones Industrials a week ago and another 397 points on Monday. The dollar also gave back some of its recent gains, and the large rally in Treasury bonds petered out. Clearly, Wall Street greeted the bailout of Citigroup with a big sigh of relief.
Will the rally stick? I hate to sound jaded. But haven't we heard after EVERY SINGLE ONE of these bailouts: "This is it. This will put the floor under the financials. Now is the time to buy, buy, buy?"
We heard it after Bear Stearns was rescued.
We heard it after Fannie Mae and Freddie Mac were taken under the government's wing.
We heard it after AIG was bailed out.
And we heard it when the TARP plan was originally rolled out. In fact, this rally so far looks A LOT like the one we got on September 18 and September 19. The Dow surged 410 points on the eighteenth and another 369 points on the nineteenth after news of the government's TARP plan first leaked.
But just like every other short-term rally before it, that rally quickly failed — and the market soon set new lows. So forgive me if I sound skeptical about this being the "end" of the financial crisis. It's more likely just another way station on the road to lower stock prices.
Second, will an economic stimulus plan work?
President-Elect Barack Obama's revised stimulus plan looks a lot more aggressive than what had been talked about previously. It's also much larger than the tax refund plan that was put into place in the spring. So it's definitely worth paying attention to exactly how the plan — and the prospects for its passage — evolves.
But is the stimulus plan a reason in and of itself to get bullish on the market? I don't think so.
Several hundred billion dollars is a lot of money. But the economic challenges we face as a country are extremely large. And the losses our financial institutions are piling up — both here and abroad — are much larger.
This plan could buy the economy some time, keeping it stronger than it would otherwise be. Still, if the underlying economy can't heal ... if the credit market problems don't get better ... then we'll be right back to square one when the impact of the stimulus wears off.
Indeed, the very real risk is that NO amount of stimulus can prevent the de-leveraging process from running its course.
Japan's experience in the 1990s is instructive. The government there passed repeated "bridge to nowhere"-type infrastructure plans, and the central bank slashed interest rates to zero in an attempt to help the economy recover from twin busts in the stock and real estate markets. End result: The economy struggled through a "Lost Decade" anyway.
Third, how in the holy heck are we going to pay for it all?
My daughters are three and six. They wouldn't know Treasury Secretary Henry Paulson or Fed Chairman Ben Bernanke if they ran into them at the grocery store.
But the decisions that Paulson and Bernanke are making today are going to bury them ... and maybe even THEIR children ... under a mountain of debt the likes of which the world has never seen.
Do you know how much we have committed as a country to rescue the financial system and credit markets? How does the number $7.8 TRILLION ... half the country's GDP ... sound to you? That's the price tag The New York Times put on all the bailouts and credit plans recently.
Included in its tally:
• The Fed's $2.4 billion program to buy commercial paper,
• The $1.4 trillion commitment from the FDIC to backstop interbank lending,
• The $29 billion bailout of Bear Stearns,
• The $306 billion in guarantees of Citigroup assets,
• The Term Auction Facility,
• The Money Market Investor Funding Facility, and
• All the other programs the Fed and Treasury have implemented.
It also includes yet another pair of programs just announced this week. The Fed has agreed to buy up to $800 billion in Fannie Mae and Freddie Mac bonds, mortgage-backed securities and securities backed by credit cards, auto loans, and small business debt.
I simply cannot figure out how we're going to pay for it all without borrowing an astronomical amount of money — and sticking future generations of American citizens with the bill.
For now, flight to safety buying is bolstering Treasury bond prices. But that effect will fade at some point. And when it does, you will likely see the price of Treasuries tank — and interest rates surge — due to the nation's profligacy.
So be sure to keep your head when investors around you are losing theirs. I do NOT think the answers to these key questions are as clear-cut as the bulls would have you believe. And I DO think focusing on safety remains the best course of action.
