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Monday Morning Quarterback: What Now?


Government has openly stated that public enemy number one isn't Al-Qaeda or Bin Laden - it's deflation.


Greetings as I fire up my turret for the first time in a week. Someone once said that the best time for a vacation is when you feel like you absolutely "can't" take one. I put that theory to the test last week and enjoyed some serious nothing following the frantic frenzy of 2008.

There were, of course, some notable happenings last week as the market waits for no man.

The Federal Reserve cut their interest rate target to zero, evoking imagery of an economic flat-line.

The Madoff scandal widened, sucking in all sides of our societal spectrum while grinding any remaining regulatory credibility and faith in the system to dust.

The Falcons and Cardinals both made the playoffs. Now there's something you don't see very often!

Through it all, there is much to discuss and lots to ponder. We live in interesting times and the path ahead will be equally arduous yet ripe with plentiful opportunities.

The trick to the trade-something I often say but seldom do-is to remember that the purpose of the journey is the journey itself. By the time we all get to where we want to be, the trip will already be over.

Sometimes it takes a step back to see it but it's never too late to remember it.

The Revenge of Jack Bauer

I couldn't shake the visual. Kevin Bacon, Julia Roberts, Oliver Pratt and Billy Baldwin hunched over an operating table hoping that the red horizontal line didn't portend Kiefer Sutherland's demise.

As I read the headline "Fed Cuts Rates Near Zero in Historic move" last week, I envisioned policy makers standing over a monitor with the same ominous concern.

Surely a shock would twitch the patient-as evidenced by the 500-point rally from Tuesday's low to Wednesday's high-but could they actually succeed in the reanimation of dead tissue?

Indeed, by the time investors pulled the plug on the week, it was all the mainstay averages could do to hold onto... yep, the flat-line.

To be sure, interest rate policy is symbolic at best. I remember a similar situation following the tech crash when Alan Greenspan tried to squeeze my grandmother back into the market. I talked her out of investing in hedge funds at the time, which eventually proved prudent although she missed a sweet upside trade before the wheels fell off the wagon.

So, the question is-will these efforts again put wind in the bovine sails before another perfect storm arrives? To be clear, I'm not referring to rates, I'm talking about everything else... the "all available tools" Ben Bernanke alluded to, the alphabet soup of inventive conduits and auction facilities designed to pass our largesse to future generations.

The answer is-most probably, but we must keep it in perspective. The government has openly stated that public enemy number one isn't Al-Qaeda or Bin Laden-it's deflation.

I'm reminded of the many debates I had last year arguing that recession was healthy and the fact that it was considered anathema was in and of itself frightening. The question was posed in September 2007.

"If recessions are part of the business cycle, the very same one that we learned in college was a natural economic progression, why is the Federal Reserve trying so hard to avoid one? Isn't that the very same behavior that brought the credit bubble to bear in the first place?"

I would argue that Sisyphean mindset is again in play as all roads lead to deflation and debt destruction. Just as a broken clock is right twice a day, however, some rallies are bound to stick. Along those lines, I would draw your attention to the four higher lows currently in place since the 2008 nadir during Thanksgiving week. Respect, but don't defer.

Click to enlarge

In the end, the market will do what the market always does-find a natural equilibrium through the process of price discovery. The current effort could well prove profitable for an upside trade but longer-term, these actions are akin to standing on the beach and furiously blowing at an incoming storm.

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