The Fed's desperation move

By Jon Markman

Lost in the euphoria over the slashing of short-term interest rates to 0.25% last week was the reason for that astonishing step: Despite rates that were already the lowest of the post-World War II era and the federal backstopping of all kinds of corporate credit, business activity worldwide is terrible -- and it is getting worse in ways that imperil big companies' very survival.

The Federal Reserve's action and statement suggested our central bankers have read to the end of their user's manual without finding a way to force banks to lend and consumers to buy. Now they're winging it by moving on to the handwritten "quantitative easing" appendix that I described earlier this month. After already buying tens of billions of dollars' worth of toxic assets from banks that have virtually zero recovery potential, and accepting tin cans and spit as collateral for loans as well, the Fed's next idea is to team up with Obama administration planners to simply print money and dump it onto America's broken sewers, lumpy roads and green-energy-research labs.

In a moment, I'll make a suggestion on one health care stock that might help you stop the pain in your portfolio, but first let me just interrupt the rally monkeys who are pushing the market higher to observe that the real problem is that we are engulfed in a worldwide conflagration of capital that the central banks have little power to stop.

It's only getting worse

It's hard to understand where the Fed gets the confidence to proceed, considering its efforts so far make Bernie Madoff look like Manager of the Year. Just look at the latest data on housing starts, building permits and house completions, all out this past week. They were the worst numbers produced in the residential construction crisis so far after three long years, suggesting that the problem is actually accelerating, not plateauing, even with mortgage rates near multiyear lows. Credit spreads, which measure institutional investors' fears far better than do stock prices, widened out to historic levels last week even as stocks rose.

• Play the video on the right to hear Steve Forbes' views.

Housing starts were off 47% year over year in November, which was a lot worse than the 38% figure in October. Building permits fell 48.1% year over year last month, compared with 38.2% in October. And house completions were down 22.5% and heading lower.

The composite picture suggests this key engine of economic growth is still lurching toward oblivion and has not been helped one bit by all the bank capital injections and lending programs.

If you want to believe that cutting short-term target rates under 1% will make much of a difference in January, you are welcome to do so. Just keep in mind that even though 30-year mortgages were down to 5.2% last week, it's hard for anyone without high credit scores to get that rate. And perhaps no rate is really low enough when 300,000 people a month are being axed from high-paying jobs.

A week ago, China reported that its industrial production had fallen sharply, to 5.4% growth year over year, and electricity output had actually fallen at a 7.1% annualized clip. According to economist Jim Walker of research firm Asianomics, it was the first time that has happened since data have been collected. He believes the numbers actually have been inflated by fretful bureaucrats and that in any case they show that China is already suffering its first capitalist recession.

Over in Japan, the past three quarters have produced the worst economic results and expectations in a decade, with the latest forecast for first-quarter business conditions twice as bad as last year's weak numbers. Money is cheap, but companies have no interest in borrowing because customers aren't buying. Quips Walker: "If torpor weren't a word already, it would have to be invented to describe the Japanese economy and Japanese industry." With no demand pull from the rest of the world, he expects Japanese growth will remain in negative territory throughout 2009.

At times like these, in olden days, investors would turn to soap, soda and soup for slow but steady profits, because even in recessions people tend to wash their faces and eat at home cheaply. Yet even these companies don't seem to be getting much traction, as stalwarts such as Procter & Gamble (PG, news, msgs), Coca-Cola (KO, news, msgs) and Campbell Soup (CPB, news, msgs) have lost 15% to 20% of their value in 2008.

Gain in pain

So how about drugs -- surely people are still taking their meds? Well, yes and no.

In a research note to clients released last week, a team of UBS analysts noted that hospital visits had "declined precipitously" in November, with year-over-year declines in the 4%-to-6% range. This built upon a 1% decline in October and a 0.5% decline in the third quarter.

Continued: A structural change may be at work

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