The Bernanke Fed's Next Interest Rate Cut Will Be Its Last 16 comments
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From the time the FOMC began the most recent easing cycle, I have been talking about and demonstrating the direct correlation that existed between the stock market and the target rate - since the FOMC began offering the target rate in 1997. The references I have made, and the charts that I have provided, show that there has been a direct correlation between interest rates and market direction for the last 10 years. When interest rates trend higher, the market trends higher, and when interest rates trend lower, the same thing happens to the market.
Soon, I expect this correlation to break.
The FOMC is near the end of an easing cycle introduced to support a diving economy, but at the same time they are sacrificing control of inflation, and this is dangerous. Arguments on policy decisions aside, the recent cuts are clearly being made to foster an immediate positive impact on the market, even though rate cuts take about 6 months to gain traction. Maybe the rationale is purely psychological? Regardless, the FOMC will soon have a new problem to deal with: core inflation.
For the past 10 years the policy decisions of the FOMC were related directly to economic growth, and core inflation was a virtual non-issue. That has changed, and with that the direct correlation between the target rate and the stock market will change as well.
The interest rate cut coming this week will almost surely be the last one that Bernanke will provide to the economy.
Inflation is like a cancer which spreads rapidly through the economy. We all know food and energy prices are increasing exponentially, but now those are creeping into core prices too, and that's where it starts to spread like wildfire. The worst part of the current scenario is that the FOMC has relinquished control of inflation. We have already seen proof from the Airlines. The price hikes from United Airlines (UAL), Delta Airlines (DAL), American Airlines (AMR), and Northwest Airlines (NWA) are just the beginning. Shipping and other costs are going up for every manufacturer and those higher costs are finding their way to consumers and businesses. The next round of price hikes are likely to come from companies such as Federal Express (FDX) and American Express (AXP). From there, products offered by Proctor and Gamble (PG), 3M (MMM) and Johnson and Johnson (JNJ) are poised to increase too. There's no way to avoid this, and with interest rates as low as they are, companies can pass these costs along and increase core inflation measures accordingly.
The divergence between the target rate and market action will take place after the Fed begins to raise rates in the face of inflation.
After Tuesday's rate cut, the market will realize that the Fed is done, and when it does, the market will increase with the expectation that the need for additional intervention is over. In 1-2 months, some of the rate cuts will be reversed out of the economy to save inflation, and once that begins, the divergence between the market and the target rate will begin as well.
The take away: enjoy the next up move in relation to this correlation, because it will be the last of this correlation cycle.
My expectation is for interest rates to increase substantially over the next 24 months and for stagflation to be a resounding theme until the end of 2008, where additional aggressive declines are likely to result in an economic depression.
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This article has 16 comments:
Way to go, Paulie.
Can we have a "Do Over" on the vote for 2000?
Please?
EVERYONE is making that assumption, and despite its former positive implications the markets will use that strength to unload with a vengence.
If anyone is smart, they will watch oil and the usd off that rate cut announcement. Perhaps not much reaction that day. Wait till wednesday. If the market rallies Tuesday, that just bakes another layer of long money into the indexes that will be used to finance the next leg down. To make money nowdays, you must stop thinking in terms of the markets typical response to fed policy over the last 10 years.
Any fed policy is highly inflationary. The world markets know this. Thats why they have cornered oil and the usd. Tuesdays decision is the big showdown. If oil moves to 120 wednesday while the euro goes to 160/usd, it will be further confirmation that the feds ability to inflate its way out of this financial crisis has been utterly compromised. 120 oil does not make for a sound rally, neither does printing money like its going out of style just to save wall street since that solution is horribly inflationary.
The excesses have gone on for decades, went way higher than it should have, and now markets will correct way lower than most expect. This is the way markets work.
If the FED will start to RAISE rates to drive inflation back down, what was the point of LOWERING rates to save Wall Street in the first place?
Are foreign investors this stupid? Are we?
American giants are poised...or should i say circling...to raise prices. Prices go up...and having gone up...tend never to go down.
Altho my sinuses are clogged, do i smell conspiracy theory here? If a falling dollar was designed to generate foreign investment in the US and stimulate foreign trade...exactly what will a rising dollar do?
Who benefits? Who loses?
With that, the target indicator trends with notions that the Fed may begin a new leg int he cycle. IE, stop easing, or stop tightening. In this case, the Fed would stop easing after the next cut IMO, and therefore a sustained reversal would be reasonable.
The prior blips on fed rate cut news were short opps due to this same indicator.
My premiss is that this will be the last cut.
If that happens the Market mmay even fall first, but that will be a buying opp IMO.
If you want an update to the Investment Rate I'm having one on Thursday. You can clcik here if you want to listen in:
https://www1.gotomeeti...
Good trading.
THK.
Mom and pop are not traders but the broker/dealers are . Rigged you bet! JP morgan did it in 1929 and again today in 2008 .Why is our taxpayer dollar being lent to J P morgan to make this no compete merger? If they cannot afford it outright with their own cash they should not be allowed to buy it period! All the government is doing is creating another failure in the making at taxpayers expense. Socialize the risk and privatize the profits, SOLD TO YOU Again !
What I see is the need to creat new real wealth and I do see some slight movement in that direction. Utilities are beginning to plan for new nuk power plants. Wind power generation of electracity is not just being talked about but plants are being built and the goverment is subdizing them with transerfable tax credit. The pace of wind generated electricity is expanded rapidly. G E is at least considering the production of an electric car. Some garbage dumps are now producing methan at least one farmer is producing it from cow shit. I see cracks in the oil wall's dominance of the energy market.
The frantic rise in oil price may price them out of the market. Crisis does produce change. Let us hope that it will be a good one.
Hard money is best, we spend the rest.
PS I spent the money mom gave me for spelling lessions.
PT
I don't see a problem, I only see trends. I also see anomalies. I also help others see them so they won't get in a situation. I am not an advocate for anything, I do not support or refute any policies, and, you may not like this, I don't care. Because brokers don't advise on the downside, I benefit. Being an advocate for change is not what I get paid to do. I get paid to help people protect their wealth and to make money while they do it. I do this well. If there are people who get abused because they don't listen, that's their fault, and their resposibility to engage their brokers, not mine.
I try to do the same, but I don't have patience for those that don't listen, because there are too many others out there that will. For those that don't listen, good luck.