Magnificent Monday on Wall Street. Can it Last?

I read several news accounts describing the Treasury's new plan to rescue the financial sector by ridding banks of their "legacy assets." (While that sounds like priceless stuff you'd like to hand down to your kids and grandkids, the term its just a fancy name for the toxic real estate-related assets that have clogged credit markets for the past year or more.) The Public-Private Investment Program (I'll be the first to call it "Pub Pip") will apparently finance up to a trillion dollars of asset purchases by private investors and the taxpayers using $100 billion of already-authorized bank rescue money plus FDIC guarantees, Federal Reserve financing and what not.

(To tell you the truth I'm kind of tired of seeing the word "trillion" show up in every other paragraph of every financial news story of late. It just doesn't sound like a hell of a lot of money anymore. Pretty soon my wife'll come home one afternoon and tell me she just bought a dress on sale: "but hon, it only cost a trillion!" It would be nice if the next time I saw the term "trillion" it was printed on my 401K statement or the appraisal of my home's value. Of course the way the Fed is inflating money these days a trillion may not quite get me through next month.)

I read tax cheat Treasury man Tim Geithner's opinion piece in the Wall Street Journal today announcing Pub Pip. I'm pretty smart but I couldn't make heads or tails out of it, honestly. (I'm having a contest--if any one of my readers can tell me in 10 paragraphs or less how the plan works I'll buy him or her a free subscription to "This Week at American General," AIG's employee newsletter). But I guess the really smart guys on Wall Street liked it, because they sent the Dow soaring almost 500 points today. That didn't do me a whole lot of good since much of my net worth is now in cash.

But I'm happy for my friends and clients who saw their investments rise by 8% in one day, and I hope the rally continues. But I caution against what the now-discredited former Fed Chairman Greenspan called "irrational exuberance." The market rose almost entirely on sentiment and a sigh of relief that Mr. Geithner actually had a plan, not just a promise of a plan. (For a sobering reaction to the Treasury's new plan, click here).


The problem is that bear markets don't usually end with a bang. And bull markets don't usually start with one either. Bulls are built on a solid foundation of a strong financial system, a stable currency and a positive outlook for the political, regulatory and global environment. Bulls like a predictable tax system that at the very least does not punish risk-taking. Bull markets like government spending to be in the 20% of GDP range or less, not the 23% or 24% range it is fast getting to. And bulls sure don't like the idea of $9 trillion (oops, I said it again) in projected deficits over the next decade, 3 times the deficits racked up under the evil President Bush.

Bulls probably are not happy when the Russians and the Chinese threaten to introduce a new reserve currency because of America's rush to cheapen its own. Bulls look askance at protectionist policies like those that crept into the omnibus spending bill keeping Mexican trucks off our highways. Bulls shy away from economies in which entire sectors are under threat of government domination (financials; energy; health care) and those that are not face increased labor costs, taxes and regulation.


Bulls worry that the "quantitative easing" announced by the Fed last week (printing money to buy up government debt) will not work, and even if it does will result in massive inflation, thus throwing all deficit projections out the window. Bulls wonder whether any of this will inspire confidence in our trading partners and debt holders.


And finally, a bull would have to ponder whether our government's headlong rush to appease Iran, Hamas, Syria and other despotic regimes at the expense of our allies, particularly Israel, might lead to a bad end--bad for children, markets and other living things. It may be hard to predict what and when could go wrong, but its not hard to predict with confidence that if we sell out our friends to please our enemies, something unpleasant this way comes.


So have your fun with the market rally. I hope it endures long and profitably for those with the stomach for these sorts of things. I will probably wince with every uptick since I will not be benefiting from them. But until some of the systemic risk of the financial system is worked out, and until I am no longer frightened by the government's regulatory, energy, spending and tax policy, I will stand on the sidelines cheering.


I suspect I will know when its safe to come back on the field when my recurring nightmares featuring Barney Frank dressed as Nancy Pelosi finally cease.