Wednesday, April 1, 2009

The World Changed On Wednesday, March 18, 2009

I've had 2 weeks to think about this, and I've come to the conclusion that on Wednesday, 3/18/09, a watershed event occurred. Markets, like history, don't always recognize game-changing events. Such a change, I submit, took place on 3/18 when the Fed (finally) announced its plan to pump more than a trillion into the economy by the purchase of $300 billion of long-term US Treasury securities and an additional $700 billion or so into FNM and FRE guaranteed mortgage-backed securities and other debt.

This is the beginning of a financial surge by the Fed that not only will bolster the economy by bringing long-term rates down, but also augurs well, in my opinion, for stock prices in the months ahead. Much of the despondency that both the economy and stock market have found themselves in was attributable to the timorousness and fecklessness of the Fed's policy response to the unprecedented crisis in the financial system, as I have been thinking and saying out loud since about 9/07.

The switch at the Fed has been flipped; one can expect far more aggressive purchases in the future to reliquify the financial system, particularly in longer-maturity corporate securities, where punishingly high interest rates threaten the future of many firms seeking to roll over debt. I believe this is crucial in beginning to stem the tide of job losses still washing over us.

Concern seems - FOR THE MOMENT - miscast over the Fed's printing new money and thereby creating inflation and weakening the dollar. In the intermediate future, the Fed WILL need to be nimble, but looming deflation is now the enemy. FED BUYING IS THE ONLY GAME IN TOWN RIGHT NOW, in the wake of the seize-up in private credit markets and the huge wealth destruction that has taken place in both the corporate and consumer sectors. Now, at least, there's some hope for both the economy and the stock market. AND IT'S ABOUT TIME.

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