Bill Fleckenstein

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Fannie and Freddie: Now Too Big to Regulate

Bill Fleckenstein

Editor's note: This column, which reflects market activity from the day before, originally appeared July 7 on RealMoney.com. To sign up for RealMoney, where you can read Bill Fleckenstein's commentary every day, please click here for a free trial.

Overnight, stock markets around the world blasted off by 2% to 3%, a theme that we ran with here this morning. After bolting out of the starting gate, the S&P and the Dow were up 2%, and the Nasdaq was up about 3% two hours into the morning. Suffice to say, the usual speculative leaders were going nuts, with the SOX up 6%, the bank stock index up a couple, biotech and Internet stocks on fire, and housing stocks firm as well.

Torrid Love Letters: B-U-Y: After the early-morning surge, we basically spent the rest of the day flopping and chopping near the highs, which is where we closed. Having said that about the major indices, a quick look at the box scores shows that the areas of speculation heated up all day, with the SOX leading the charge, up a modest 8%. Basically, it was a day of white-hot speculation, wire to wire. The only odd thing worth noting is the uptick in some of the volatility indices.

Away from stocks, the dollar was stronger. Fixed income was lower. The metals were mixed, with gold down 0.5% and silver up 1%.

Straining for a Spending Uptick: Turning to the news, three stories on the front page of today's Wall Street Journal offer a perfect microcosm for the current environment. Tech bulls who favor arm-waving over corroborating data will be heartened to read "Tech Supplier Senses [my emphasis] Businesses May Be Nearing a Spending Uptick." One might expect such a prominently placed story to back its argument with some facts, but because they do not exist, the story settles for something a bit less rigorous. To wit, Ted Warner, president of Connecting Point (which does a whopping $5 million in revenues) tells writer Grep Ip that "his salesmen are getting their calls returned more promptly." That's, in essence, the crux of the things-are-getting-better argument.

The arm-waving continues further into the story when Ip says, "The ratio of capital spending to depreciation -- which compares how much companies spend on new equipment with how much value their old equipment has lost -- is at its lowest level in more than 30 years, according to a J.P. Morgan estimate. Companies may have to start investing more, simply to replace what's worn out or grown obsolete."

Depreciated Desktops Put on a Pedestal: That's basically a non sequitur. Simply because you've depreciated a piece of equipment doesn't mean it can't still do a fine job. Everybody with a computer on his desk already knows that. The real problem is, there's just too much capacity, and businesses have what they need. Or, as Ip puts it, "Many of its [Connecting Point's] customers, like companies around the country, have delayed needed purchases for several years because they bought more than they needed in the 1990s [emphasis mine] ," and Mr. Warner is "himself holding off on purchasing the latest technology."

Nevertheless, the aforementioned anecdotes of hopefulness are deemed to be sufficient evidence on which to base a front-page story in The Wall Street Journal. This just goes to show what passes for supporting data, for what folks expect to see in the second half of the year. In typical Wall Street fashion, it's a case of feeding on bullish expectations, this time by publishing a much-ado-about-nothing article. If in place of this, the Journal had run a story about the companies that sell the things Mr. Warner would be buying -- i.e., Ingram Micro(IM), Tech Data(TECD), Anixter International (AXE), or any of a myriad of other companies (like Siebel(SEBL), which preannounced last Thursday -- it would be clear how absurd this article is.

Not Making Waves on the Potomac: Now for a look at the second Journal story, "Freddie, Fannie Dodge New Rules; Congress Fears Upsetting Housing." After reading it, I decided that the marketplace dictum "Too big to fail" should be tweaked to "Too big to regulate or rein in." We now have organizations that are not only too big to fail, but also regulators who don't want to hold them accountable to playing by the rules. It's the ramifications these lawmakers fear, which of course just postpones the day of reckoning, while ultimately setting up a much bigger calamity. Folks in a position of authority want to completely abdicate their responsibility, just to make sure the party continues. That's the moral of that story.

The Sting of Sobriety: Lastly, a Journal story called "As Fed Cuts Rates, Retirees Are Forced to Pinch Pennies" discusses a concern I have shared here: the plight of innocent bystanders of the bubble. This is filled with the personal tales of retirees trying to make ends meet in the wake of minuscule returns on their interest income. The following description was especially poignant:

"Low interest rates have always been a threat to retirees relying on interest income. But the relentless decline of the past two years, with no uptick in sight [that might be debatable], is taking a particularly hard toll on elderly CD and money-market investors. These are the people who tried to do everything conservatively with their money. For the most part, they didn't chase Internet stocks, and they didn't load up on debt. They sacrificed to pay off the mortgage while building nest eggs to leave their kids."

Of course, this is one of my objections to Alan Greenspan's series of experiments. It's one thing if rank speculators get destroyed, because if that's what you do, you deserve what you get. But there has been a lot of innocent victims, and a lot of them can count themselves among the unemployed. The Fed's motto is, in essence: "You save, you lose. We bail out the reckless." When you try to suppress the business cycle and stave off the downside, as Greenspan has been trying to do in various ways for the last 10 years, you wind up hurting far more people than you help, and the problems created only become bigger.