While Ben Bernanke may be feeling quite proud of himself at the moment, the financial markets are pondering his next move. In the latest Barron's, Randall Forsyth spends a whole article pondering Donald Kohn's jawboning and its affect on fed-funds futures. Apparently, they are pricing in lower probabilities of further rate cuts.
Obviously, that market's complete failure to predict interest rates so far this year doesn't discourage Forsyth from wasting a whole column on it. For more insightful news on this topic, perhaps we should take a look at this article in last Friday's Financial Times. Pay particular attention to the line where Mr. Marrano, global head of mortgages for Bear Stearns, says "We need another 100 basis points," in reference to moving loans and securitisations off that bank's balance sheet.
Jim Rogers appeared recently on Bloomberg TV. In response to a question as to where he thought the Fed would go with interest rates, Rogers stated he didn't care what the Fed did. The Fed was "irrelevant" in his view because the Fed follows the market. Hearing the truth stunned the silly anchorwoman into a stupor -- her next question: "Well, why do you think the Fed is irrelevant?" Rogers: "I just told you why. Because the Fed follows the market." Hilarious.
The Fed cut 50bp, despite moral hazard and despite the damage it would do to the US dollar, because the Federal Reserve is, first and foremost, a bank. Their first priority will always be to preserve the banking system. In their view, saving the banking system is saving the economy, housing and stock markets be damned. Any talk about helping the housing market was pure window dressing -- long-term mortgage rates went up, not down as a result of the Fed's move and don't you think they knew that would happen? While the American public is pretty clueless, I can't imagine all those distressed homeowners taking out another ARM loan after this mess so higher fixed-rate mortgages will only exacerbate the housing crisis and increase the risk to the US economy.
So why do it? In this case, the major banks had hundreds of billions of dollars worth of LBO loans they desperately needed to move and no demand. Pile this on top of the collapse of the structured securities market and the deep freeze in the commerical paper market and it's clear that Jim Rogers is right: the financial markets dictate to the Fed, not the other way around. So administer a financial laxative in the form of 50bp and voila, bond offerings get done, the First Data deal gets moved, hopefully the pipeline will flow again and the banks are granted a reprieve for now. "Our boy [Bernanke] did the right thing."
Will it last? Who knows? But if you want to know what the Fed's next move may be, pay close attention to what comes out of the bankers. However, you may want to pay even more attention to Jim Rogers, who made his fortune the honest way (well at least more honest than printing money). He advises Americans to get out of the dollar now and preserve their wealth before the Fed dilutes it away.
I overweight gold, oil and overseas earnings in my portfolio. The pundits are predicting a pullback in commodities and hopefully they'll be right this time as I would use any good pullback to build more positions. The Fed is irrelevant. Paul Volcker is gone and his policies are not coming back. Listen politely to the Fed's jawboning and then load up on inflation-proof assets when they're priced cheap.