The Fed Panics and Cuts Rates 23 comments
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For one thing, the move suggests that policymakers are worried - really worried - about the state of the economy, despite repeated assertions to the contrary. That is likely to force a rethink by nervous bulls in corporate America and elsewhere who have reluctantly accepted the party line that all is well.
The abrupt shift in stance, following meeting after meeting where policymakers expressed concerns over the pace of inflation, may also signal that thinking has become muddled at the Fed. Or that monetary policy is now in the hands of investment bankers and hedge funds. Some might even start wondering whether Bernanke & Co. have lost their way, at least in the near term. Not exactly a reason for optimism at a time when credit markets are under siege and risk is being dramatically repriced.
Clearly, the bears were caught off guard by the surprise cut. However, while a burst of short-covering and speculative buying can heighten the drama and paint a picture of benevolent central bankers riding to the rescue, it will also add to confusion about where policymakers stand. What happened to the new, more transparent Fed? Worse still, is this a sign that we returning to the bad old bubble-blowing days of the Greenspan era?
Finally, although equity markets have been under a great deal of pressure lately, the S&P 500 index is still basically up on the year. What’s more, the latest reading on gross domestic product signaled to many that U.S. growth remained on track. The big risk in shooting off a round of monetary bullets this early in the game is that the effect doesn’t last very long. In that case, the mood is likely to be even uglier during the next round of liquidation and de-leveraging.
All in all, today’s move, while positive for sentiment in the short run, is unlikely to represent anything more than a temporary shot of adrenalin for wounded markets. Once the injection wears off, the bearish disease will likely be back in force.
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This article has 23 comments:
The smartest guys in the rooom, viz. Goldman Sachs, are not so smart but are certainly politically connected. America, where someone with the right contacts can make millions doing nothing and do stupid things without penalty.
Did I hear someone say they wanted the Fed, President, Politicians, Bureacrats, etc. to "Manage the Economy". If that were true most of the industries we have today would never be as the government would be financing the losers.
Cramer and Kudlow: Free market economy with government supporting Wall Street fat cats. Hypocrits!
The smartest guys in the rooom, viz. Goldman Sachs, are not so smart but are certainly politically connected. America, where someone with the right contacts can make millions doing nothing and do stupid things without penalty.
Did I hear someone say they wanted the Fed, President, Politicians, Bureacrats, etc. to "Manage the Economy". If that were true most of the industries we have today would never be as the government would be financing the losers.
Cramer and Kudlow: Free market economy with government supporting Wall Street fat cats. Hypocrits!
The smartest guys in the rooom, viz. Goldman Sachs, are not so smart but are certainly politically connected. America, where someone with the right contacts can make millions doing nothing and do stupid things without penalty.
Did I hear someone say they wanted the Fed, President, Politicians, Bureacrats, etc. to "Manage the Economy". If that were true most of the industries we have today would never be as the government would be financing the losers.
Cramer and Kudlow: Free market economy with government supporting Wall Street fat cats. Hypocrits!
The smartest guys in the rooom, viz. Goldman Sachs, are not so smart but are certainly politically connected. America, where someone with the right contacts can make millions doing nothing and do stupid things without penalty.
Did I hear someone say they wanted the Fed, President, Politicians, Bureacrats, etc. to "Manage the Economy". If that were true most of the industries we have today would never be as the government would be financing the losers.
Cramer and Kudlow: Free market economy with government supporting Wall Street fat cats. Hypocrits!
I also view the extreme pessimism in the original article as a positive contrarian indicator.
The rate cut was in the discount rate. This has no effect on mortgage rates or any other interest rate taken by business.
To sum-up a complex topic in a few words, what the fed has done is lowered the risk premium that banks pay in order to cover their books. In other words, when a bank has to borrow money in order to increase reserves due to a reassessment of its obligations (meaning; higher defaults = higher risk = higher reserves), the Fed lowered the borrowing costs. That is all. You and everyone else do not see any benefit from this rate cut.
CrossProfit
Any thoughts?
Going forward, I believe that further development of technology will continue to increase productivity, especially nanotechnology, which is an industry that is still in its infancy. Very few pure plays exist presently, but Harris & Harris (TINY) does come to mind. It would be better to own a field of these names, and Newbridge provides a pretty good list of nanotechnology names. Alternative energy, with strong government sponsorship (though hopefully this does not last forever), is another interesting area that attempts to address a serious and obvious problem. In the near term, the best plays here are the pic and ax stories that will supply the entire industry such as WFR, KDN, and Roth & Rau (R8R.F). Finally, infrastructure is decaying around the world as much of it was put in place decades ago and lots of spending is needed. As dull as this sounds, utilities will be the key benefactor of infrastructure development, with ITC, VE, and SZE as my favorite names.
In the last few years the entire market had been fueled by cheap money. The increase in interest rate has finally derailed the momentum, The first casualty is the US housing market. Next, come the credit crunch. If interest rate remain at this high level, the momentum of the economy will die out very soon if no additional fuel is added to stimulate growth. Lets see if this first drop of fuel (interest rate cut) is sufficient to bring back some momentum in the market....
Jim Cramer was correct in his comments that the Fed was not listening. But his comments were two days after the crunch began on Aug. 1.
I agree there will be a slowdown in housing starts, sales and loan originations. And this may push the economy into recession for a year or two. Very healthy after 6 years of strong growth.
CPI is increasing at an annual rate of 4.8%.
In an credit crunch panicky environment
Inflation is still tying Mr. Bernanke’s hands.
Real Retail Sales is at .9% indicating a weak economy.
The weakness in the US will have repercussions in the
stronger overseas economy.
CPI will end 2007 at around 3%. Core at around 2%.
With a slowing economy and decelerating inflation, Fed easingis a close call. The perception of a "benign" Ben will be accentuatedand this could cause loss of credibility.
In the end the average guy and small business needs credit or we will have a even greater disaster in housing and the economy.