A Firehose to A Flood

I'm here with my fire hose....Point me to the flood.


I know, yesterday I told you that the World would cut interest rates. Well, only the Aussies came through today with a full point cut. And the market tanked another 500 plus points. Should you be upset with the Bullet? Well, any cut would be a short lived pop, that's it.

Should we really be surprised that the world did not come through with the cut? Probably not. Considering with the Fed moves Monday paying interest to banks on required reserves it was a stealth cut. And the Fed also is pouring money into the system through Lending Facilities of all types and kinds.

So if the world is awash in cash, which it is, why is it not working? Would you bring a fire hose to a flood? The issue is not the money, it is trust between banks is non existant and debt destruction.

Put it this way...I come to your house and give you $500 dollars and ask you to please lend this money to Dave, charge his interest. Then you can give me back the money later.

You don't trust Dave. He has a gambling problem. But even if you trust Dave, His brother Freddie and his sister Fannie, well they suck and who knows who Fannie and Freddie do their business with.

See the problem? If you can't trust your lending partner, or who else your lending partner is working with too...then you can't trust you're going to get paid. Blame Lehman and AIG. Since their failures, the wheels have really come off.

It will not matter what the Fed does with rates, until banks can trust each other we are stuck in this mess. I'll talk about what really has to happen either tomorrow or whenever I feel like it.

Thoughts on the Fed

There were plenty of things that I wanted to write about when I wasn't posting, but I wanted just to take a break. Sure, my traffic has basically died.

One of the things that kept jumping into my mind is how the market is always reacting to old news. Of course, that is the only news that we can get. But that is one of the main issues facing the Federal Reserve in the next few months and over the next year. They are trying to gauge whether to further stimulate the economy by cutting rates, stay the course and do nothing, or try to finally apply the brakes and start raising interest rates.

It has to be one of the most difficult and frustrating aspect of their jobs. I blame Greenspan for so much of this current mess. Many have voiced their frustration that his Fed held the rate at 1% for too long. And when they did start raising the rates, they did it too slowly. The problem was that they didn't want to apply the brakes to soon and squash a fledgling recovery. And they had to make their decisions, good or bad, with old news. But from what I remember, he was cheered at the time. And remember that when they started raising rates, hoping that long term rates would start to follow along, they didn't. Treasury bonds stayed low fueled by foreign investment.

So be ready. Ultimately, there is no doubt that the current Fed will hold rates too low for too long and will overshoot. It is an unfortunate side effect of using the idea of finding the "perfect rate" for the economy using data that is outdated. I don't know if there is a better way to do it. I'm frankly not that smart.

Ben Brings the Pain

Note: Bronchitis is no fun.

So, Ben dropped the news on Congress...we may see a bank fail. This sent shock waves, along with the disappointing news on GDP and unemployment, that sank the market today.

But should we really be shocked by this statement? I don't think so. You saw Northern Rock bank in the UK basically fail and the government stepped in to prop it up. A company as large as Countrywide, which has it's own bank, basically went under if not for B of A stepping in and picking up the pieces.

So news that banks failing should not be big news. Banks are just like any other business out there and sometimes they fail. It is disturbing, no doubt. Nobody wants their money being held by a failing bank. But this is not something anyone should really be worried about.

A) The most likely bank to fail would be a small regional bank that has heavily invested in sub-prime mortgages or other off balance sheet instruments. B) You will probably see a bigger bank come in and buy out the smaller rival that is struggling and will never have to worry about the run on the bank. C) You are insured up to $100,000 by the FDIC or NCUA (credit unions) which covers that fast majority of it. So if your bank fails and a bigger rival doesn't buy it you would get a check cut for your money within 48 hours.

It is big news that the Fed would acknowledge the depth of the problems in the banking industry but it should surpise no one.

Another Reason Inflation Won't Moderate

With President Chavez doing some saber rattling yesterday we say the price of oil surge and the price at the pump took a nice jump today right along with it.

Also there is news that OPEC will help control supply to help keep the cost of a barrel of oil around $90.

So much for inflation moderation.

We also see commodities, anything from gold to Minnesota wheat having a giant bull market.

The ECB has still been making it's stand firm that it will continue to fight inflation.

And this bit brought a smile to my face and my thoughts to hypocrisy.

The White House warn about legislation regarding mortgage reform.

This statement caught my eyes:

"Markets naturally self correct, rewarding good strategies and punishing bad ones. Government actions may be less effective at differentiating between the two and may prevent markets from creating products that benefit consumers," the report concluded.

No kidding? Then why oh why are is the Federal Reserve tampering with the markets every step of the way with their rate cuts. The cut before the market opened after President's Day was made to try to prop up the stock market. That was it. The full effects of the cut will not be felt for months. But the White House and Congress fully supports the actions of the Fed.

Now, I am not a financial historian, but it seems to me that Mr. Ron Paul may be right that the Federal Reserve needs to be disbanded. Open manipulating of the markets cannot be a good thing and the price to pay later on will be severe.

Market Falls Based on Inflation News

Ok, so there was a lot of news that pushed the market lower today, when it should have rebounded to some extent from the knee-jerk reaction to the ISM report yesterday.

Those included:

Merrill Lynch possible downgrade by Standard & Poor's because of their involvement in the sub-prime mess. To me, this is overdone also. Merrill has already written off billions of dollars and have changed their CEO. That new CEO (John Thain) will write down even more in billions trying to clean out the old guard.

Goldman Sachs downgraded GM & Ford, citing consumer spending slowdown. Like that is a surprise. Car sales have lagged for the last few years based on the change of consumer wants (no SUV and more high MPG cars) and a move by the companies away from high incentitives.

But to me, the big one was Mr. Plosser's speech on the economy. He mentions his concerns that inflation is not going to moderate even in the face of a slowing economy.

This is big. The market took this that the Fed won't be cutting rates until at least March. Boy, it breaks my heart to disappoint the market like that. 1.25% in two week wasn't good enough. Bill Gross from Pimco stated that his expectation for the Fed rate to hit 2.5% from it's current 3%. I still believe that it will not go below 2%.

Inflation is here to stay. This will keep the Fed bankers on their toes, even more than a slowing economy. Slowdowns are natural and a necessary part of every open economy and it is about time that the Fed and the rest of our government take a honest look and realize that all growth all the time is not necessarily the best for the future. There is always a price to pay when the Fed starts dropping rates and it is always inflation.

I Like That Ben Guy

I like that Ben Guy

This is not Alan Greenspan’s Fed anymore. Ben Bernake & Co. hit a home run today, by doing nothing. With the market pretty much evenly split on whether the central bank should lower rates to give some support to the fixed income sector or keep the rates at current levels or higher due to the risk of inflation (and not to mention those tired of bubbles), the Fed did nothing and pretty much appeased both sides.

What Ben & Co. has been saying for over a year is that inflation is their biggest concern. Pretty much every analyst was certain the rate would not move today but were looking forward to what the Fed had to say about the mortgage mess, and the financial market. Many analysts were expecting the Fed to say something along the lines of that downside risks were now equal to the risk of inflation. If the Fed had made this statement, they tip their hand too much and scream, “Next move, DOWN!” The stock market would have shot straight up and treasury bonds would have been pummeled. If the Fed made no mention of the condition of the financial markets or made a firm statement that no change was coming, you would have seen a flight to quality in treasury bonds and the stock market sink.

What the Fed did was pretty slick. Here is the exact statement:

"Although the downside risks to growth have increased somewhat, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

So think of it this way. The Fed holds the keys to both in “Increase” door and a “Decrease” door. They have been holding the “Increase” door open for 17 straight increases and a year’s worth of doing nothing. The “Decrease” door has been shut and locked up tight. The Fed kept the “Increase” door open but the have unlocked the “Decrease” door. It’s not open, but at least there is a chance.

At first the market reacted negatively to the statement with the Dow sinking more than 120 points in the first few minutes of the statement being released but then the market rebounded and gained. The market ended the day relatively flat. The same can be said about the treasury market.

So in a day that could shape the future of the economy for the next few months, the Fed did nothing, and nothing happened to the markets. Which is exactly what the Fed was hoping for.