So, why wasn’t Wall Street impressed?

In a speech today the Federal Reserve Chairman said they stand ready to continue to lower interest rates to prevent a recession. Should be really good news to stock market speculators, right?

Yet, they seemed unimpressed. The markets did not react the way the clueless pundits expected. Sure, we saw a small bump but not the kind of rally many expected with a comment like that from Bernanke.

Now, it doesn’t make any sense to try to figure out what anything as psychotic as the stock market will do in any given situation. But, just hours before Bernanke said they stand ready to prevent a recession, investment banker Goldman-Sachs says we are already in a recession.

Lowering interest rates is not going to prevent a recession nor will it pull us out of the recession we are most definitely in right now. The reason is this recession is unlike any we have seen since the 1970’s and many of the pundits and decision makers are too young to remember the 1970’s and unwilling to study the history lessons it offers. Therefore, we are likely to repeat many of the mistakes we saw in the Ford and Carter administrations.

Stagflation.

With stagflation you see small reductions in the GDP or the GDP remaining essentially constant with rising inflation. It happened then because of fuel costs and it seems to be a surprise to the pundits that fuel costs are driving inflation today.

No, I’m not trying to debate whether food and fuel should be in the core inflation numbers or not. Because at the end of the day it does not matter. Fuel costs affect every product and service you buy. For those who pay a private company for garbage collection look at your bill, have you seen a fuel recovery charge yet? If not, you likely will. Fuel costs affect everything, it is just a matter of how long it takes for the effects to be seen and felt.

A period of stagflation sees wages remain the same or even decrease while the costs of living increase.

So, the real question is how do you kick an economy enough to get rid of stagflation? Simple, get out of the way, you can’t engineer a “soft landing” for the economy.

Investors who have prepared for this are going to do just fine. Those who bought into the crap from guru types of easy and guaranteed money are suffering. They are going to suffer more in the coming months.

The best data I have seen says either the third or fourth quarter of 2008 will see a small turn-around. Then in the second or third quarter of 2009, no matter who occupies the Whitehouse, the recession will return for round two.

This isn’t bad news for investors, it is devastating news for speculators and those carrying large amounts of variable interest debt because we are going to see the prime rate shoot up despite the efforts of the Federal Reserve.

History is a really great teacher, if you are willing to listen.