Accept That the Fed Exists and Move On

In case you were brilliant and went on vacation last week after raising 100% cash before Christmas, you may have missed the emergency Fed rate cut and the Britney Spears-like attention on a rogue trader who nearly crashed the global markets. An interesting debate has emerged as to whether the Fed pandered to the equities markets and cut to stop the bleeding caused by the rogue trader, or whether the Fed applied “too little, too late” after the US equities markets already lost all gains made in 2007 and housing persists in free fall.

A few respected market commentators opined the following:

John Mauldin: Fed had to cut pre-meeting to break up the abnormally large reduction in rates.

Barry Ritholtz: Fed pandered to the markets.

Joseph Stiglitz: Too little, way too late.

I tend to believe that all three perspectives played a role. Nothing is black and white, and managing global market action is one of the more complicated pseudo-sciences in existence. I say the Fed offered too little too late because they should have used legislation and regulation to stop the mortgage market from expanding into an unsustainable ether (i.e., issuing debt to those who could not service it). I say the Fed pandered to the markets because they may have stopped what could have been a major market crash. I say the Fed broke up their cuts because one huge cut is too extreme for our analytical brains to digest (and, therefore, subject to harsh reactions).

I also add that Monday morning quarterbacking of the Fed is near worthless banter. First, the Fed can do no right because the media needs to dramatize everything. Thus, if the Fed did not cut, the market may have crashed and the Fed would have been blamed (note Monday’s WSJ front page article about Bank of England Chief King and the criticism he faces for letting markets unwind freely).

Second, what the Fed should and should not do is a philosophical issue (and largely depends on your personal asset allocation, job, etc.). The more valuable approach is to accept that the Fed exists, the Fed affects the markets, and we must determine how to plan our investment action steps as the Fed alters the landscape.

In the coming weeks SmartGuyStocks will discuss how the Fed action and other events signal what we can expect for markets in the midterm. But for now, we are still recommending bearish trades, raising cash into rallies, and nibbling at rare exceptions such as Pet Med Express (PETS).

Until then, we also recommend entertaining yourself with a fun Hollywood version of this week’s rogue trader debacle. The movie, Rogue Trader, stars Ewan McGregor (Trainspotting, Moulin Rouge) and is based on a similar true story from the late 90’s (I guess that means rogue traders no longer qualify for the trendy label “black swan”). Enjoy!