The Fed 'Gets It'; Wall Street Doesn't

Sober 'kahunas' dominated as the Fed knew something we argued consistently - that they could not and would not get a 'handle' on the credit crunch merely by radically cutting interest rates; since that changes nothing with lending policies, it for sure doesn't help mortgages tied to the Libor, particularly, nor does it obviate the large number of 'mainstream' (typical 5-1 ARM and so on) mortgage resets separate, and in fact apart, from the focus on subprime that dominates most public discussions of late.

The Fed is perceived by most observers as not seeing this seriously enough; we beg to demur - they see it... they just believe that the danger will worsen if they cut more but the markets don't respond, which we have suspected would be the likely outcome. They are regaining control their way, not by market and Street pressures to 'bend'.

We have argued these points for some time; others have grasped or even embraced them of-late and there is something key to all of this: you can't provide responsible or prudent oversight of the monetary structure by caving-in to the unrealistic whims of (largely) the very crowd that perpetrated the core problems in the first place. I am not suggesting cutting off one's nose to spite one's face; just recognizing that the overall macro slowdown cannot be discounted entirely until you have the slowdown.

There did not need to be more draconian cuts now, since doing so clearly would not provide more than ample systemic (as opposed to credit addiction) funding while it would have reduced the 'cushion' available to cut more later when needed. Of course some will say if they cut now then we wouldn't need it later, but we say they're wrong.

It is that simple; you don't have a choice of a hot or hotter economy as there's not going to be a revival of the 'games' of the first few years of this decade irrespective of what occurred yesterday; hence they would increase the forward risk had they cut now, and had that proven to be nothing more than 'pushing on a string' in retrospect later.

I find it curious how many retired Fed-types advocate all-out war to prevent recession. I suspect the Fed knows they can't prevent the slowdown, so they might as well hold it up a bit later, by not doing what won't matter now anyway. Why aren't others saying it is open to question? We suspect it's because they have little or no experience with what happens in recessions; which means that the Fed did essentially the right thing.

Yes it will be convenient now for permabull (irrational) global extremists to 'blame' the slowdown on yesterday's failure of the Fed to go to nearly (inflation-adjusted) 'zero' rates while I ponder what response they'd have if the Fed plundered our currency further by caving in to the crowd by doing what wouldn't in our view have mattered anyway. We felt the Fed should do less than the Street's call as it's about time to leave something on the table for later and not accommodate the perpetrators more than maintaining systemic liquidity.

The Fed does 'get it', perfectly. They are not hopeful as such; they are realistic. How so? Again; pushing on a string would be the outcome in our opinion, not a resolution that cheerleaders believe would be the case. That is not possible given the probability of defaults and failures occurring anyway. The Fed knows this is so big, in contrary to the perception that the Fed thinks it's milder. The Fed in fact knows the magnitude of the mess (how magnanimous for a Wall Streeter to say or suggest the Fed doesn't 'get it', when actually they probably don't 'get it' in respect to grasping the reality that 'pushing on a string' forestalls an ultimate recovery not the other way around).

Our growth is already slowing and would slow considerably irrespective of another larger move by the Fed. The Fed is not excessively optimistic as the pundits say; just the other way around. They know how dire the situation is;, so they withheld action for the most part that would have been irrelevant (other than interim psychology) anyway just as how the so-called subprime rescue are small bandaids on large festering wounds.

Summary

Waging a war to avoid a recession is underway; striking before the forces are trained or armed to invade enemy territory sufficiently could amount to a financial Dunkirk (reference to youngsters of the British beachhead, that had to be evacuated, under Nazi attacks, because England tried valiantly but prematurely to push-forward to liberate the yoke imposed upon Europe).

Because of wounds from a premature assault, retreat to and evacuation from Dunkirk was necessitated. Europe's liberation was delayed by four years, in part because of the premature effort to 'hold-the-line', and that's the analogy we're making. In our thinking, recovery from recession to renewed growth as well as prosperity is expedited, not delayed, by Fed skirmishing with the enemy, rather than rushing headlong without well-thought-out plans into the jaws of an enemy juggernaut. That's untenable, huge debt along with impossible-to-maintain economic growth, needing an historical normal pause. Understanding history mitigates initial hysteria to well-founded Fed moves.

Any further romp in the Dow Industrials or S&P would have been untenable anyway, and definitely not fundamentally warranted. Now we have orderly resumptions of the primary trend, as all the Dow rally was doing anyway was masking risk offloading. It remains notable that China increased reserve requirements while the U.S. was asked to cut them by some on the Street. Instead, the Fed restores confidence by being a responsible overseer, rather than inflaming fears by premature irrelevant stimulation.

Comments

[CrossProfit]

This last 0.25 cut was "caving-in to the unrealistic whims of (largely) the very crowd that perpetrated the core problems in the first place", however, the way it was done signaled that this was the last time that Wall Street would dictate policy.

The Fed has taken back control and Wall Street now understands that the broader economy is what the Fed is focused on. We should expect some serious 'Big Ben' bashing over the next few weeks; hopefully Big Ben will hold the line.

CrossProfit