Rescue Plan May Backfire

Have you ever felt manipulated by the stock market? While the stock market directly can’t be blamed, make-believe monumental news like the bank stress test results can actually point investors in the wrong direction. In fact, the misplaced hope in banks’ health and the government’s multi-trillion bank rescue program is certain to send stocks for another tailspin.

Admittedly, the government’s commitment to put the economy back on track is unprecedented; the situation in general, though, is not. About a year ago, ETFguide referred to Japan as our window into the future. Japan’s Nikkei topped in 1989 at 40,000. Over the next 19 years, the Nikkei declined over 80 percent to below 8,000.

Similar to the U.S., Japan’s economy was fueled by a real-estate boom and easy money. Tokyo’s administration tried to revive their economy with dozens of stimulus packages, none of which worked. Japan’s decline occurred amidst a global bull market. The global bear market accompanying the U.S. decline should make accelerate the search for the ultimate bottom.

A “beneath the surface” analysis of the stress test results and the Public Private Investment Program (PPIP), furthermore, reveals flaws that could render it ineffective, null and void. Some of the flaws, not visible to the public, contain twists that would make Monty Python proud. With the government’s support, Citigroup for example, was able to close a $35 billion capital deficit without having to spend or raise any new money.

In another example, the President of the New York Federal Reserve Bank, was considered to be free of any wrong doing since his “indiscretion” occurred while he was already at odds with the Fed’s policy. It seems like the “two wrongs make it right” principle is become the new standard on Wall Street and in Washington.