But wait... the fundamentals haven't changed. Am I the only one taking crazy pills? The markets are going Zoolander on me, they have only one move! it's "blue steel!"
Krugman in the weekend edition of the NYT, warns of "partying like it is 1929", money shot:
The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.
Housing is still in free-fall per the latest numbers (8% fall yoy in median price in Feb). Mortgages will reset en masse for the rest of 08. Bank losses due to subprime so far amount to a declared 125B with another 100B minimum to go. Demographics say housing is not going anywhere. Credit contractions are picking steam. M2 deleveraging means less aggregated demand. The run on the shadow banking system continues (hedges, CDO, MBS, credit in general ex-treasuries). The swing in equity mirrors the swing in commodities making me suspect we are seeing "vases communicants" across asset classes.
Meanwhile, the FED is everywhere, doing all it can, putting its finger in every dam, and is taking it from behind with stoicism on the reneg of the Bear/JPM deal, "noblesse oblige". The rough "laissez faire" cowboy image of the finance industry takes a "coup de grace" with this most undignified of bailouts.
End of story.
Let's not forget that the US economy runs on one thing and one thing only:
If we all clap our hands hard enough, and long enough, tinker-bell will come alive again! and it just might!
Maintaining optimism, at any price, is therefore the TRUE role of Govt and the FED. It may not be a bad thing, in big-boy economics it is called "confidence".
Demographics and deleveraging are a bitch but sometimes suspension of disbelief defies the gravity of the black-hole called realism. Poetry gets a temporary reprieve from Mathematics. And I am not sure it is a bad thing, either.
After all isn't reality but what we make it?