Wall St Anxiously Awaits Word From Washington

Good Evening Everybody!

I hope everyone had a great weekend. The market was pretty blah today. The way I see it, the whole investment world is awaiting word on how the government plans on "saving" our economy. We all know how well this is going to work. Remember, when the government sticks their hand out and says"Hello! We're here to help you" you should immediately run as fast as you can in the opposite direction.

I mean think about it: How many government sticksave "fixes" have failed to date? At first we were told that subprime was "contained". This was followed by the famed Bear Stearns fix. The list goes on and on folks: Bush's "stimulus plan", AIG, Merill shotgun marriage, Citi/Bank of America bailout, and of course we can't forget the marvelous TARP.

These sticksaves appear to me to look more like plugs that are being used to clog the leaks on our sinking economic ship that is rapidly taking on water versus being permanent fixes. It seems the more the government "fixes" the economy the further stocks drop. Take a look at the stock market from September-October when all of these programs were rolled out and you'll see what I mean.

So here we are: The whole world is watching as we wait for the grandest sticksave of them all. Uhhhh...Does this make anyone else nervous? I know it scares the hell out of me. This outta be good for for a 3000 point drop on the DOW based on how well all the other sticksaves worked.

The problem here is the Fed and Treasury can't "fix" this. They cannot force a broke consumer to borrow and spend. Consuming represents 70% of our economy and as you can see below we aren't consuming anymore!:

A you can above, not only are people not spending they are finally starting to save! In fact the way I read this chart, it appears they are hoarding cash. Its about time! Of course the government hates seeing this because they can't turn this ship around without us spending like drunken sailors. The velocity of money is trickling to a standstill and this will not bode well for equities.

The Fed can't "fix" this recession like they did in 2002 because this current nightmare is a consumer led recession. Greenspan "fixed" our economy after the tech crash by dropping the FF rate to 1% which created the largest housing bubble in history. Thanks Alan!

This turned out to be the biggest blunder in economic history. Greenspan's legacy is now tarnished forever. He has gone from hero to goat in a matter of months. The only way this ever gets fixed is when the consumer pays or defaults on all of its debts. The consumer also must be able to go out and actually find a job. Lending can then resume and our economy will begin to recover.

The problem here folks is this process is going to take 10 years or possibly longer. A decade like the 1970's is probably the best case scenario here. A 20 year+ defaltionary scenario ala Japan is most likely. This will be a huge reality check for our "i need it now" society.

The way I see it the Fed's options are pretty limited here. The only way we ever get out of this crisis is by grinding through it and begin to start paying off our bills versus selling treasuries and continuing to dig ourselves deeper into debt.

One thing is clear here: We don't have enough money to bailout the banks. If they had the money the Treasury would have already rolled out the "bad bank" plan and RTC II would already be in progress.

The bond market sent a strong message to Obama and took yields significantly higher the day it was announced that this mess could cost $4 trillion on top of the $1 trillion economic stimulus that is currently about to be voted on in the senate.

The nationalization of our banks is key part in solving this crisis and the idea is starting to gain momentum. Paul Krugman is now on board:

"Feb. 2 (Bloomberg) -- President Barack Obama shouldn’t hesitate to nationalize the banks that need to be bailed out, Nobel Prize-winning economist Paul Krugman said.

“If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found?” Krugman wrote in a column in the New York Times published today. “But the Obama administration appears to be tying itself in knots to avoid this outcome.”

Lets hope Obama is strong enough to do this. We need to get the gangsters that created this mess out of Wall St so that confidence and trust can be restored.

Lets all pray that the Fed doesn't attempt to print out of this mess. We will be doomed by hyperinflation if he does. If we go that route, I suggest you go out and by a gun so that you can protect yourself because chaos will then ensue.

Bottom Line:

I am laying low on the trading side until I learn more about our latest and greatest economic recovery plan. I am hoping for a large bounce on the news. In fact, I hope they try the bad bank plan because it will probably result in an even larger bounce. This will create an even sweeter shorting opportunity.

This plan will fail and stocks will reflect it. I say this because the Fed will fail to realize the "unintended consequences" of their actions just like they always do. This in my view has been their biggest flaw. The Fed has been extremely short sighted and they continue to ignore the obvious and continue to kick the can down the road. The sad thing here is they all know what needs to be done. They are just afraid to pull the trigger and let the economy reset. Not allowing us to take the pain that is neccesary just delays beginnings of a real economic recovery.

One day the Fed's going to try and kick that can down the road and painfully realize thet its filled with cement.

I think that day is rapidly approaching.