Wednesday, January 30, 2008
Stagflation Fears Cut Short Post Fed Rate Cut Stock Rally
This Fed-cuts-rates-markets-rise-and-then-fall-again thing looks more and more like a nightmare Groundhog day scenario on steroids. So the Fed cuts rates, again, by 50 basis points, the markets rally 250 points and then promptly turn around and lose virtually all that gain. This is the exact same thing that has happened after every rate in the past few months.
FED rate cuts timeline: http://www.reuters.com/article/businessNews/idUSN2253740020080122
2008 Jan 30 - Cut 50 bps to 3.00 pct
2008 Jan 22 - Cut 75 bps to 3.50 pct
2007 Dec 11 - Cut 25 bps to 4.25 pct
2007 Oct 31 - Cut 25 bps to 4.50 pct
2007 Sept 18 - Cut 50 bps to 4.75 pct
I understand that learned and wise economists will have perfectly good, and differing, reasons to justify the failure of each of these rate cuts to push the market upwards and then keep it there. This time they say it's because of worries about the imminent collapse of bond insurers. Last time it was SocGen. On Jan 22, the DOW gained 600 points after the 75 basis point rate cut, balancing all the losses since Jan 17 due to worldwide markets crashing, essentially leaving it at the same position before Jan 17. In the five rate cuts since Sept 18th, not once has the market gone up and stayed up. Rate cut? Markets bounce. Citigroup and other banks declares huge subprime write-downs. Markets fall. Another rate cut? Markets rise. Countrywide Corp. near bankruptcy. Markets fall. Rate cut? Up we go. Home foreclosure rises....Down we go. The list goes on....
Word on the street is that the FED is willing to go down to 1%. If recent history is any clue, we're going to have at least a crisis or two each month through 2008, and if the FED cuts rates each time, that leaves room for 2 or 3 months more of rate cuts balancing out bad news. But is the economy willing to absorb these rate cuts?
Point being that what needs to be debated is the benefit of using rate cuts to stem the rot vs. extended rate cuts heralding stagflation. Because what we end up with is that the FED's rate cuts devalue the dollar and fuel inflation, with virtually no long-term impact on the market's downward spiral (which keeps going down in between the rate cuts), thus signalling increasingly weaker growth and an increasing fear of stagflation, which is inflation combined with weak growth. Articles in Businessweek and CNNMoney explore this growing fear, putting the blame squarely on the Federal Reserve.
FED rate cuts timeline: http://www.reuters.com/article/businessNews/idUSN2253740020080122
2008 Jan 30 - Cut 50 bps to 3.00 pct
2008 Jan 22 - Cut 75 bps to 3.50 pct
2007 Dec 11 - Cut 25 bps to 4.25 pct
2007 Oct 31 - Cut 25 bps to 4.50 pct
2007 Sept 18 - Cut 50 bps to 4.75 pct
I understand that learned and wise economists will have perfectly good, and differing, reasons to justify the failure of each of these rate cuts to push the market upwards and then keep it there. This time they say it's because of worries about the imminent collapse of bond insurers. Last time it was SocGen. On Jan 22, the DOW gained 600 points after the 75 basis point rate cut, balancing all the losses since Jan 17 due to worldwide markets crashing, essentially leaving it at the same position before Jan 17. In the five rate cuts since Sept 18th, not once has the market gone up and stayed up. Rate cut? Markets bounce. Citigroup and other banks declares huge subprime write-downs. Markets fall. Another rate cut? Markets rise. Countrywide Corp. near bankruptcy. Markets fall. Rate cut? Up we go. Home foreclosure rises....Down we go. The list goes on....
Word on the street is that the FED is willing to go down to 1%. If recent history is any clue, we're going to have at least a crisis or two each month through 2008, and if the FED cuts rates each time, that leaves room for 2 or 3 months more of rate cuts balancing out bad news. But is the economy willing to absorb these rate cuts?
Point being that what needs to be debated is the benefit of using rate cuts to stem the rot vs. extended rate cuts heralding stagflation. Because what we end up with is that the FED's rate cuts devalue the dollar and fuel inflation, with virtually no long-term impact on the market's downward spiral (which keeps going down in between the rate cuts), thus signalling increasingly weaker growth and an increasing fear of stagflation, which is inflation combined with weak growth. Articles in Businessweek and CNNMoney explore this growing fear, putting the blame squarely on the Federal Reserve.
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