Sunday, October 28, 2007

"To a Man with a Hammer, Everything Looks Like a Nail"

"To a man with a hammer, everything looks like a nail."-Mark Twain


The major market event of the week is the FED meeting and Wednesday rate announcement. Larry Kudlow is calling for a repeat of the prior 50bp "shock and awe" rate cut. If the last one was so great, why is another needed Larry? If you have to ask, it isn't shock and awe! Consensus is for a 25bp cut. Both the dollar and Gold say a cut is on the way. Economic Disconnect says a cut of 25bp will be delivered, with the wording of the statement to include a market helping "we will do all that is necessary" thrown in.

In Friday's post, I presented the annoying CEO of Countrywide Financial Angelo Mozillos's statement that if housing continues to deteriorate (it will and he knows that) he fully expects the FED to aggressively cut rates. All the talking heads are calling for rate cuts. I see rate cuts being asked for by local graffiti in my town (just kidding).

The mindless call for rate cuts shows that market participants have no context on the economy. With Oil over $90 a barrel and the dollar at an all time low, more rate cuts could do serious damage. Rate cutting cannot exist in a vacuum. I wonder why not one analyst on the CFC conference call asked Mozillo how far he expected the fed to cut rates, given the oil and dollar picture. If CFC is banking (pun intended) on rate cuts, how many do they need? What are they expecting in their business model? All good questions, but you do not get a job as an analyst and get to ask questions on a conference call if you ask those kinds of questions.

The title quote of this post fits the situation this week very well. Credit problems? Rate Cut. Massive foreclosures? Rate Cut. Ridiculous loan losses? Rate Cut. If the FED would only cut rates, global warming would be reversed! Whatever the problem, a rate cut will make it go away. It reminds me of the elixir salesman in the film "The Outlaw Josey Wales". The salesman keeps listing all the problems that his elixir can heal or fix, and Josey Wales spits on the man's coat and says "How's it work on stains?" I do not think anyone should spit on any of the people calling for rate cuts, but at least a little spittle might wake them up.

The problems facing the US economy and in particular the banking industry are:
  • A housing price collapse
  • Record foreclosures
  • Record home inventory
  • Record loan defaults

The housing bubble was enabled by the low rates and cheap money of the 2001-2005 span. Observers would have you believe that a return to those rates would reignite housing demand and keep losses and foreclosures from continuing. If loan rates were the only issue, that might even have worked. The problem is the macro situation for housing will not respond to lower rates. The main issue is not the FED rate anymore. The issue is that the silly risk that was inherent in the vast majority of loans made over the last 3 years is now coming to the surface. The prices that various entities are going to charge to buy the crappy paper, to insure crappy loans, and to extend more money into the mortgage market is now going to be well above historical prices no matter what the FED is going to do.

Fed rate cuts cannot really help the situation, but can give the appearance of helping I guess. The market today is made more on sentiment and psychology than fundamentals anyway. That is a major statement, and I stand by it. If people see rate cuts they will keep on keeping on. Can the FED cut rates if oil is over $100 a barrel? What if the dollar falls below 70 on the dollar index? What if the bond market revolts against the rate cuts and they make no difference on mortgage rates? Are rate cuts still the answer?

Unfortunately our elected officials in the US government are not the pick of the litter if you take my meaning. Whats worse is that the folks in charge of monetary policy and in the banking system are no better. The massive and pointless over investment in housing over the last few years has robbed the US worker and economy of any chance of being competitive in a global marketplace. The trillions of dollars wasted on granite counter tops, travertine tiles, and million dollar Las Vegas condos could have been used in so many ways it makes me sad to think about it. The selfish US "get rich quick" donkeys have wasted time and resources on a housing bubble that returns absolutely nothing to the economy save Home Depot sales and commissions for realtors and the states. In time, I believe this moment will be seen as a turning point for the US as a whole. I know this post seems a little bitter, but I am extremely disappointed with what has gone on the past few years. What a waste of time and money.

As of writing, the New England Patriots are crushing the Washington Redskins. The final is in, 52-7! So much for the 4th ranked defense in the NFL. The matchup with the Indianapolis Colts is set for next week. The winner will have home field advantage for the playoffs, and a probable a trip to the superbowl. Next week's game is so big on so many levels. I have waited for this game since the end of last years AFC title game. I will likely post a bit on the game all week. Sorry in advance to any readers that hate football.

Have a good night.

20 comments:

Anonymous said...

Well I fully agree with your sentiments.

I think you're close but off a tad. I actually think the Fed DOESN'T WANT TO CUT but now feels pressured by the markets to do so. So I think it MAY NOT CUT, but more likely, will cut 25 bps and included a statement THAT IT IS PROBABLY DONE, not that it will provide more if needed (although it would if things totally fall apart). The sad truth is that this FED is DANGEROUSLY CLOSE to losing control of effective FF rates, the result of which would be FINANCIAL ARMAGEDDON. You may need to change the title of your blog to that in the very near future.

jbr

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