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Kass: Bernanke Can't Bail Us Out

More housing fallout remains likely, and there's nothing the Fed can do to stop it.
Author:

Bernanke Can't Bail Us Out

This blog post originally appeared on RealMoney Silver on Sept. 17 at 7:51 a.m. EDT

.

Over here,

Countrywide Financial

(CFC)

is suffering and was most recently "bailed out" by

Bank of America

(BAC) - Get Report

and others. Over there, in England, mortgage originator

Northern Rock

is

facing its own ruin

. (

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The Wall Street Journal

article in its entirety.

)

The bullish crowd now views

Fed

Chairman Ben Bernanke as the market's sine qua non, here to come to the aid of a credit crunch, the hemorrhaging mortgage businesses at home and abroad and the many hedge funds and financial intermediaries that hold mispriced investments -- a residue of the aggressive search for yield/returns.

Tomorrow's reduction in interest rates, whether it's 25 basis points or 50 basis points, will do little to resolve housing's depression and little to reduce the probability of a 2008 recession as the record level of unsold homes, the pace of mortgage resets, the likely deterioration in coming jobs reports and still-stretched affordability issues suggest that the inherent supply/demand imbalances will continue for some time despite government intervention.

Every recession since 1960 has started with a decline in home construction; the recession of 2008-10 will be no different.

For housing and those industries that depend on construction, it won't be such a wonderful life for several years to come.

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It is for these reasons and others that I would sell/short either move by the Fed on Tuesday -- especially if there is strength following the announcement.

Importantly, I expect in the days and weeks ahead not only for U.S. growth expectations to be reduced but also for a downgrade in European growth forecasts. Accordingly, I added to my European index shorts last week.

This blog post originally appeared on RealMoney Silver on Sept. 17 at 7:36 a.m. EDT

.

A Long, Painful Recovery

Inside, on the trading desks, the days have been so very nice as equities have rebounded from the brink and the lows of July. Main Street, however, tells a different story.

The story of whether the summer of 2007 was a bump in the road (euphemistically called a midcourse correction) or an important economic inflection point that will grow ugly will not be known for months. What we do know for sure is that it will take some time to get the sand out of the gears of the easy money machine and that more (perhaps spectacular) fallout remains likely.

I recently

dismissed

the

Fed's

likely impact on financial institution balance sheets and income statements (and their willingness to lend) and disagreed with the developing bullish consensus on a number of other

fundamental grounds.

It seems logical

not

to expect the multiyear surplus of cash, which had led to a shortage of sense in the quest for yield and return, to be favorably resolved in short order by a combination of market forces and Fed intervention.

Home prices are in a downtrend, and the recovery in housing seems several years away. The consumer is weakening under the burden of the negative wealth effect of housing, a levered balance sheet and an eroding jobs outlook. Mortgage equity withdrawals have slowed to a crawl and seem destined to bump along the bottom as mortgage credit remains limited.

Retail sales are fading fast, while the price of oil threatens real incomes. Also, an explosion in mortgage resets in the coming two years suggests further pressure on personal consumption. Finally, the improved chances that the Democratic Party will recapture the presidency in 2008 raise the specter that the consumer will be "taxed" even further.

It also seems logical that, with equities only a few percentage points from their multiyear highs, the pendulum of excessive optimism has not shifted anywhere near excessive pessimism. Most sentiment measures -- such as the

Investors Intelligence

survey or expectations from leading strategists -- seem to remain bearish for stocks.

As I am usually cynical and cautious, I see no need to spoil that reputation in such uncertain times.

At time of publication, Kass and/or his funds were short CFC, EWG, EWQ and EWU, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.