On June 9, Bernanke had this to say at the Bank of Boston's 53rd Annual Economic Conference:
Despite the unwelcome rise in the unemployment rate that was reported last week, the recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly. Indeed, although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so. Over the remainder of 2008, the effects of monetary and fiscal stimulus, a gradual ebbing of the drag from residential construction, further progress in the repair of financial and credit markets, and still-solid demand from abroad should provide some offset to the headwinds that still face the economy.
This prognosis caused short term rates to rise, with Fed futures pricing in a 3/4 point increase by the end of the year. That trade has now unwound.
And so has Bernanke. Today he gave a much more sobering outlook:
The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth.
We had a semi capitulation in stocks; but more importantly, we now have capitulation morphing into panic in our government leaders.
That's the capitulation we need.
We also had capitulation by the long only mutual funds. David Tice, of Prudent Bear, sold his short fund to Federated for $43 million, and a possible $99 million earn out.
And our President, who only stopped filling the SPR on the first of July, now wants to drill everywhere after he discovered that gas is $4 a gallon.
But Bush said prices would come down because drilling "will change the pyschology."
Today oil was down $7. Anyone besides me think Bush made a deal? Remember how smug Trichet was when overseas markets were collapsing and he remained cool while Bernanke cut rates 75 basis points? Trichet knew SocGen needed to dump $73 billion of futures acquired by the "rogue" trader, while our Fed was out of the loop.
Bush appeared the same way with his "psychology change" on oil. And oil never bounced today. It just sold off and never rallied.
The government changed the rules on the GSE's and nothing happened. They changed the "rules" on naked short selling, on the GSE's and the stocks sold off. (Either enforcing what is already on the books, or preventing the I-banks from using their exemption--I think Cox was more concerned with his hair color than his script). Bernanke and Paulson tussle with Congress and the stocks sell off. If you are a bear, you have to be emboldened.
But it's option expiration week, and Bernanke and Bush don't want to look impotent. But a big drop in oil would change market psychology again.
Remember Paulson's analogy about the squirt gun in your pocket or a bazooka on your back? The market will test the squirt gun, but they'll back away from the bazooka. That was his "psychological" pitch.
Cox's "psychological" lob was the short selling rules on the GSE's.
Doesn't all this "psychological" talk seem peculiar? If you got a bunch of government officials in a room, would any of them really be tuned in on the problems in the economy? Of course not. They are too isolated. They would consider it to be just "psychological."
Aren't consumer confidence numbers just a reflection of gas prices?
Wall Street, however isn't buying any of this Dr. Phil stuff. But INTC had good earnings, and if oil was cracked again tomorrow, then that would be something real.
This market is now getting scrappy in a real wrestling match. And the blonde bomber, Meredith Whitney, married to pro wrestler JBL, sucker punched Wachovia, with news we knew on June 30. The stock took the punch.
Let's say we have a tag team match between Einhorn and Ackman, and Bush and Paulson.
Who's going to play dirty in this match? The one that has the most too lose.
Heck this Fed could even ban short selling for 30 days! I wonder if that would be a MAC for David Tice!
But if they hammer oil again tomorrow, I think we'll have a trading rally on Bernanke's capitulation on the economy, and Bush's capitulation on oil.