Punish Savers and Force Speculation
I just caught the beginning of Jim Cramer's show "Mad Money" before starting this post. Cramer was all smiles after the big rate cut. He opened the show with a mile wide smile and made the statement that with the FED now cutting rates like madmen, anyone in cash is now forced to do something with their money. He was almost orgasmic with the idea that low rates of return in basic savings accounts will force people to put money, you guessed it, into the floundering stock market. I find it a perfect commentary on the basic problem facing this economy that a system that forces holders of cash to speculate in order to preserve capital is seen as a positive. Want to sit tight and save a few bucks? You can't! Inflation will eat it all up, so go buy some Google stock already! Sick and sad but it is what it is.
The FED Cuts the Cheese in a Panic - Also Known as "Gambling and Losing"
From Wikipedia on Flatulence:
"Nerve endings in the rectum usually enable individuals to distinguish between flatus and feces, although loose stool can confuse the individual, occasionally resulting in accidental defecation also known as "wet farts", "sharting", "varting", "gambling and losing", "Leaky Pete" or "following through"
In last nights post I commented on the truly ugly futures market as well as the global stock meltdown. Tuesday certainly looked like it could be the day that a reality truck ran over the market and then backed up a few times to make sure the point was made. I offered that a meltdown may well be averted if the FED panicked and cut rates aggressively before the market open. Well what do you know, from Yahoo Finance:
Stocks Dive, Then Rebound After Fed Cut
Tuesday January 22, 6:23 pm ET By Madlen Read, AP Business Writer
Stocks Drop, Then Rebound, After Rate Cut -- but Long-Term Recovery Could Be More Difficult
NEW YORK (AP) -- The opening bell hadn't even sounded on Wall Street when the Federal Reserve announced an emergency interest-rate cut. The Dow Jones industrial average fell 465 points -- including 300 in the first minute -- then rebounded to finish down a more bearable 128.
Before trading began, the Federal Reserve moved to slash its benchmark federal funds rate by 0.75 percentage points, to 3.5 percent. It was the widest cut since 1990, the beginning of what the Fed says is a comparable period in the way it handled the rate.
The Fed cut the discount rate, the interest rate the Fed charges banks directly, to 4 percent, also a three-quarter-point cut.
Many traders had anticipated a rate cut, but it was unusual for the Fed to make the call between regularly scheduled meetings of its policy-making Open Markets Committee.
The next meeting is a week away, and even then, most traders were expecting a cut of only a half-point.
The global markets were a mess. The futures here were a mess. The FOMC meeting was a impossible week away. What could the FED do? Panic of course! In an effort to prevent a market route, the FED cut interest rates and in effect cut the cheese in a nervous maneuver. The wiki entry noted above can attest to the fact that sometimes you can get a little surprise when you cut things in a panic!
What does this rate cut mean for the outlook going forward? Both allot and a little. Here are some of my observations:
- If the FED cut rates at 7am, that means they were up at night watching the global markets and watching the futures here. If the FED is monitoring things on such a massive scale, what does that tell you about their thoughts about the economic fragility of the US?
- The FED deemed waiting 1 week too long a time span to delay an emergency cut. How come when inflation is running rampant they can patiently sit back and wait for "inflation to moderate in the coming quarters" but when Wall Street is getting smacked 1 week is too long a haul?
- With rates at 3.5% now, there really is not too much further to go down. It is still JANUARY.
- The FED has no choice now but to cut again next week. The markets will see to that.
- 30 year fixed rates have been within 1% of 6-7% for 3 years. Cutting rates would only help the ARM mortgage market, which is exactly what caused all the problems to begin with. Now with lending standards tight, the rate cuts will do nothing to stop foreclosures rising.
The FED is in full panic mode. The US government is in panic mode. The efforts to prop up the stock market are a direct attempt to stop the average person from entering panic mode. Will it work? Dunno. I expect another 75bps cut next week, and that will leave rates at 2.75% heading into February. Again, not leaving much room to make moves going forward. I have a new poll up along this line, please vote!
Why doesn't the FED just drop rates to 1% or even 0% and be done with it? Why the charade of "emergency" cuts followed by regular meeting cuts? I have no idea. If you have an idea, please leave it in the comments section!
My overall take on the action today was that the FED was able to stave off a stock market run, but that trick is getting old. The markets still closed solidly negative, which is pretty rare in an era of "The FED will save us" kind of thinking. It would not surprise me at all to learn the PPT was buying solidly all morning to stop a collapse. When they stopped buying however, nobody else stepped up to keep it going. Not a good sign. The rest of the week will bear (pun intended) watching as speculation about the NEXT cut takes over the market. I hope BernanSpan and company have fresh undies going forward. Wild times.
Have a good night.