Market Clears 50-Day

Yesterday’s post-Fed bounce took the major market indexes over their 50-day moving averages. That’s a nice short-term positive, and one that many technicians had been looking for in the bear market rally.

The Fed’s decision yesterday to adopt essentially a zero interest rate policy (ZIRP) is a big deal. We’re now entering Japan territory, as that policy has been its central bank’s stance for the better part of the past two decades. What has it done? Created zero interest in Japan’s economy, as in nobody wants to invest in it. The country has been in a 20-year recession, and people have just adjusted to living that way.

Here’s to hoping the U.S. isn’t heading there. The Federal Reserve is much more proactive and on-the-ball than Japan’s bank, which has been frozen in amber for most of its lifetime. It went to ZIRP and then stared stunned as it didn’t work, but never bothered trying anything else.

The Fed said yesterday that it’s moving beyond the use of interest rates to goose the economy. Forget about rates; think about quantitative easing:

The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Prior worries about inflation have turned to worries about deflation, so the former enemy is now our friend. Small wonder people are flocking to gold and other hard assets. The dollar is already worth just 87 yen. When I moved to Japan seven years ago, it was worth 130 and as recently as June 2007 it was worth 120. People spoke of 100 as the absolute rock bottom support. Now, I’m hearing 50.

Nope, not a lot of cheer to go around. A new poll shows 63% of people think the U.S. is in a “long-term economic decline,” up from 49% 10 months ago. Sixty-three percent have been financially harmed by the recession so far. Only 46% say they’ll have enough money to retire.

We’ll get what we can out of the bear market bounce, then lock it in and prepare for what comes next.

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