Open Thread II: What happens when the Fed cuts?

Excellent conversation last night — no politics, great debate and lots of varied (i.e., Bullish/Bearish) opinions. It has emboldened me to take another whack at it.

The equity markets look much better this week than last. This raises several worthy questions:

How much of a Fed cut is built in already? 25, 50 or 100bps?

What happens to equities when the Fed cuts?

Are there good parallels to other rate cutting periods? 1998, 2001, or… ?

Once again, a few provocative articles might color the discussions:

Must Stocks Rise Following a Cut in the Fed Funds Rate?  (Hussman)   

The Hunt for Black October (

Paulson Hedge Fund Trounced Competitors, up 300%; Goldman Fund Falls 16%  (Bloomberg) 

What say ye?



please steer clear of politics and ad hominem attacks . . . Please play nice!

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What's been said:

Discussions found on the web:
  1. bjk commented on Sep 13

    What about ad Hussman attacks? Are those permitted? Because if your goal is to miss out on a great four year bull market, Hussman’s your guy.

  2. johntron commented on Sep 13

    my non-committal guess is that a lot of peeps are lining up at the quarterly redemption window, which will pressure all asset classes regardless of what the Fed does.

    Ideally, that should form a solid bottom a la Oct 2002.

    that being said…whatever happens trade the screen.

  3. shirt commented on Sep 13

    The hunt for Black October? Shamefully, I like that. Unfortunately, Black October will find us.

    BTW: Oil prices are not going up, the DOLLAR is falling! It’s a fact. Mon, it’s a fact…

  4. m3 commented on Sep 13

    i don’t believe in the “pricing in” of anything. it’s just more EMH psycho-babble.

    but if the market has priced in a cut, it’s been pretty pathetic. we all know the cut is coming, and this is the rally we get? where’s the volume?

    also, rate cuts don’t work their way in to the economy 6-12 months after they happen. why everyone gets their panties in a bunch over this stuff is beyond me.

    we’ll get a spike in the dow, then we’ll retest the lows we had earlier. that’s the make or break moment, not the 18th.

  5. m3 commented on Sep 13

    i don’t believe in the “pricing in” of anything. it’s just more EMH psycho-babble.

    but if the market has priced in a cut, it’s been pretty pathetic. we all know the cut is coming, and this is the rally we get? where’s the volume?

    also, rate cuts don’t work their way in to the economy 6-12 months after they happen. why everyone gets their panties in a bunch over this stuff is beyond me.

    we’ll get a spike in the dow, then we’ll retest the lows we had earlier. that’s the make or break moment, not the 18th.

  6. johntron commented on Sep 13

    Or the bottom could be like Sept 01…..with a surge into the 2008 Olympics and then a world of hurt next fall. Ouch.

  7. mhm commented on Sep 13

    My (folly) forecast for the Cut Day: the US stock market will track the FX market.

    – dollar sell off -> global meltdown.
    – in any other case the US stock market will go up.

    If I was a large institution (I’m not) I would have a large carry position at the ready, in cash.

    – if there is a .25 or no cut at all I’d jump into the stock market.

    – a larger cut may cause a dollar sell off and I’d close my carry position. If not I’d jump into the stock market.

  8. Henkel commented on Sep 13

    Hi Barry,
    I’m writing you from Venezuela. I’m a regular reader of your blog, which, I think, it’s fantastic. A lot of data, good and supported arguments…
    I think from here that the FED is going to cut 25 bps. In fact, as Greg Mankiw pointed out in his blog, the average Fed Funds rate for August was already 5.0%, so the real situation is not going to be any different. I’m also in line with Nouriel Roubini’s position… This rate cut won’t help the U.S. economy, as the insolvency problems will keep developing. For equities, I expect very quite days (tomorrow, Monday and Tuesday morning), a sudden pop just after the rate cut announcement, and then a retreat by the end of that trading day, starting a heavy sell off for the rest of the week.
    Just my thoughts from a far place…

  9. David commented on Sep 13

    It’s a quite day thoughtfulness, maybe Uncle Ben will give us rest from our toil.

    I think 25bps!

    “O, here Will I set up my everlasting rest And shake the yoke of inauspicious stars”
    William Shakespeare

  10. Crush Da Bears commented on Sep 13

    What happens when the Fed cuts? Hmm… Lets ask the Fed.

    The Fed: “Changes in short-term interest rates will influence long-term interest rates, such as those on Treasury notes, corporate bonds, fixed-rate mortgages, and auto and other consumer loans.

    Changes in long-term interest rates also affect stock prices, which can have a pronounced effect on household wealth. Investors try to keep their investment returns on stocks in line with the return on bonds, after allowing
    for the greater riskiness of stocks. For example, if long-term interest
    rates decline, then, all else being equal, returns on stocks will exceed returns on bonds and encourage investors to purchase stocks and bid up stock prices to the point at which expected risk-adjusted returns on stocks are once again aligned with returns on bonds. Moreover, lower interest rates may convince investors that the economy will be stronger and profits higher in the near future, which should further lift equity prices.”

  11. Ross commented on Sep 13

    Fed has already cut. Look at Fed Funds rates. Fed follows markets. Fed is irrevelent.
    Greenspan says “I didn’t see subprime problems.” Classic defination of “amiable dunce.”
    If I recall correctly, Greenspan left the street with ‘only’ about $20 million banked. He has to save his rep here.
    He attended Ayn Rand’s funeral. The chief flower arrangement was carnations in the form of a dollar sign. He must have taken that as a sign of the death of the dollar because he devalued it more than all who came before him. I suggest we pool our copper pennies and when Al goes, we buy a dollar sign flower arrangement only backwards and with a big X on it.

  12. Rob Dawg commented on Sep 13

    Fed will formalize the already extant 25bp cut. The string having been duly pushed without looking too much like Kramer’s puppets the first words of the talking heads will be whether they’ll have to call an emergency meeting for more cuts.

    The dollar tanks after a serious head fake.

  13. Stuart commented on Sep 13

    50 bps is factored in.

    The fed will either cut 25 bps and indicate more cuts are in the works or they cut 50 bps and indicate they are done for now as they remain vigilant against inflation. They are watching the dollar IMO and even though Bernanke all but tabled his acknowledgment that the dollar must fall to correct current account imbalances he does not want it to plummet so he will be careful about his wording.
    If its 50 bps the markets will initially rally some more, but then fade. If its 25 bps or even none, head to the bunker and stay there. In the past when the Fed has cut the markets have continued to slide I believe looking back to the 2002, 2003.

  14. bablin’fool commented on Sep 13

    Ok, here’s just some thoughts. Intellectually we can talk about what “should” happen and what will happen. In some ways, I think that is the main thing that causes bears so much trouble; recognizing and profiting when they’re right and then being able to be pragmatic enough to “know” that outside powers will do all they can to “fix” it. Instead they continue to rant about what should happen. Bears get upset at the thought of outside intervention, but there is no rule book preventing it, right or wrong. It is frustrating, but the way it has always been. Not fair, not right. There will alway be those who take undo risk, and just when you think they’re getting their just dessert, the get saved.

    All the internal indicators that I follow on the Dorsey Wright website indicate “the offense has the ball”. All the index charts look pretty constructive. If we break through these resistances, they’ll become floors that will embolden people further.

    Now, what if he does nothing?? (Is there ANYONE who thinks that is a possibility other than me?) I put better than 50% that he does nothing until more data indicates he should. ALL the old school guys are using the futures reading to guide their opinion that it is obviously a 25bp cut, and possibly a 50bp cut. I don’t think Bernanke plays that way. His academic arrogance would view that as the tail waggin the dog. He is trying to “re-train” Wall St. You get what you get, not what you want!

    So, Nothing done:

    All the build ups sell off, more disfunction in the fixed markets, and the remaining September is nasty. But the good news is probably an intermeeting cut…

    25bp cut:

    Sell off minor because I think 50bps is built into the equity market. Failed attempts to move higher on all news justifying further cuts.

    50bp cut

    Rally day of, then mini sell off into Friday expirations with recovery the following week. Markets are relatively numb to subprime and cp news, so unless something new develops any “shocking” news about subprime or cp will be non-events… Look how the markets shrugged off Countrywide going for more money, Goldman’s Alpha blow up, KKR postponement of FDC paper due to poor terms….

    If Bernanke doesn’t cut, there are no parallels. If he does, it’s like David Byrne said, “same as it ever was, same as it ever was, same—as– it—ever———was!”

    Something tells me he likes the power of having the most powerful Wall St begging on its knees. Did someone put his resume in the circular file in his distant past? Or did one of the wirehouse boys give him a swirly in his school days?

    I think a wise thing would be to buy way out of the money puts on some financial relateds one the off chance he does nothing….

  15. mlnberger commented on Sep 13

    I think the Countrywide line of credit today was quite significant — I don’t know where the money came from — I am guessing that it originated in the Fed and was passed through to Countrywide — but that is the sort of sleight-of-hand I think Bernanke wants — low key, behind the scenes, no reward for risky behavior, no jivin’ the equity indexes, but somehow getting credit flowing again —

    If the fundamental problem is pricing all these complex derivatives, then the pricing becomes easier if people think default rates are not going to continue to rise at a steep ascent — so I still think whatever happens on Tuesday (I am not going to be surprised if there is no change, but would be stunned if it is more than 25 bp) is but a small, quite public, but small part of the solving the problem of all those resets and the pricing and unloading to those burgeoning junk dog private equity funds of the stuff already out there.

    Plus, it is an election year.

  16. Shah commented on Sep 13

    I don’t think the Fed should/will cut. If banks can already access funds at 5%, why cut and risk having the dollar “melt” down as some state. The dollar will not melt down; depreciate a little is a different matter. But we are still in a bull market as long as the world’s central banks keep injecting liquidity into the global economy.

  17. techy commented on Sep 13

    i would like to ask the question, sorry if i am repeating it.

    what will we do save the economy, if we were the FED??

    i have very limited knowledge of economics/markets etc..

    but i am getting a gut feeling that there may be no rate cut on sept 18 unless there are more shocks like big banks/institutions failing.

    but FED knows that the only way out of this mess is recession with deflation….which will be very painful or INFLATION and slow growth.

    i will wait for comments from people who know more.

    what will you do if you were FED? (dont try to save the shorts…ignore the market, think about economy, jobs and common man)

  18. Johnny V. commented on Sep 13

    What will happen is that the Cotton-king, Percy Thomas (aka Alan Greenspan) will charm you into bankruptcy. Beware, Bill Gross…..

    Re-read your Reminscinces of a Stock Operator and try and tell me that Alan Greenspan isn’t Percy Thomas. Can’t be done.

  19. Shah commented on Sep 13

    Just another thought. What if the Fed doesn’t cut, everything melts down? I don’t think so, we keep correcting slowly but surely.

  20. Crush Da Bears commented on Sep 13

    Hussman Funds: “Since 1955 there have been 11 periods where the Fed lowered rates at least once after raising them multiple times. Average returns have been strong during these periods. Following the first interest rate cut, the S&P 500 has advanced at annualized rates of 23.9% over the following 6 months, 18.3% over the following 12 months, and 18.7% over the following 18 months.”

    This is all you need to know from history.

    With all due respect, the rest of Hussman Fund’s cooking the historical data is garbage (a guy with a PhD should know better that you cannot make any conclusions based on 2 out of 11 events). Because he is using a small number of historical events the results could not possibly be statistically significant, might have occurred by chance. Give me a break Haussmann! What are your P-Value (probability that findings are not due to chance) and Confidence Interval (a range of possible outcomes)?

    In addition, the guy had conveniently subdivided the data into periods with P/E greater than 17 and less than 15, conveniently omitting 15-17 range. Moreover, the guy does not say what P/Es he used, GAAP or Operating earnings, TTM or Forward. Current Q307 S&P 500 P/E is 15.7 (operating) and 16.8 GAAP. Why did he exclude this range out from his analysis?

    Doing the same analysis, only subdividing the data into periods of P/E greater than 17 and less that 17 would place us into the best possible group (P/E less than 17 and YC inverted):

    Historically, in this period (P/E less than 17 and YC inverted) 6-month, 12-month and 18-month returns (annualized) following a first-time cut by the Fed were 56%, 28%, 27% respectively.

  21. corky+mr clean=jeff macke commented on Sep 13

    “I think the Countrywide line of credit today was quite significant”

    even more significant and below everyone’s radar is this: “Newcastle Investment Declares Quarterly Dividend of 72 Cents Per Share, Payable Oct. 30” a CDO,MBS,ABS manager posting excellent results (this puppy’s yielding over 15%) yet all i hear on these boards is the 2nd coming and the imminent USD implosion, lol talk about missing the forest through the trees, you guys are losing out. notice DXY up today? think any rate cut has already been factored in? hmmmm?????

    this puppy’s yielding over 15%

  22. Paul commented on Sep 13

    The average (I said average) IQ of Wall Street is slightly higher than a used car salesman –
    Or the average Lawyer (we’re not talking greed factor – just intelligence factor)

    Bernanke is being bullied by Wall Street, The Business Media (CNBC – the Maria’s of sheen)
    to up the rates. Actually he has been applauded and schmoozed by them since he took the position.

    There are 2 options as I see it:
    1. No change – the healthiest in the long run – as markets sort themselves out better without a hypodermic injected
    2. 1/4 point – the popular “spin” impregnated in the populous mind like $90 oil as we got sucked in from $55, $60, $70
    $80…Like walking into the gas chambers and being told “this won’t be so bad”

    As for the markets the best statement:

    “…that being said…whatever happens trade the screen.” – johntron

    The Screen and the tape will provide the best “handle” on the ebb and flow of the storm to follow – any decision.

    Since many of you know “Technical Analysis
    is useless” (Cramer – “It’s only right when it’s right”) It will be the only way to read the tape and the screen – it’s all about volume and price – and follow up.

    la grande poussée

  23. techy commented on Sep 13

    am i missing anything, this company market cap is around 900mil, does that not say about the companies size? do we even care??

    i notice that they have a ton of debt but they prefer to pay dividend? is this the right thing to do?

  24. Justin commented on Sep 13

    The U.S. consumer leads everything, and what leads him are his wages. We are only at the begining of a very significant inflationary period.

  25. Aaron commented on Sep 13

    I think it is too the point now where too many people think that automatically when the Fed cuts stocks will rise. This could very well cause the exact opposite to happen. I do think that a 25 basis point cut with hints of future moves would be the best result for the market.

  26. Adil commented on Sep 13

    Fed cuts 25. There is no solid economic reason to cut yet but the skewed employment report at least gives Bernanke some cover. Real reason for cut is the credit markets, but things have calmed down so 50 would be overkill. Bernanke would never be able to be a credible inflation fighter if he did 50, especially with oil at 80. 25 with tough language that they are monitoring the situation. 50 pts on the discount rate.

    Markets sell off a little on Tuesday and huge selloff Thursday into Monday the 24th, as the shorts finally don’t have to worry about the Fed, as the Fed will not do an emergency move in the same week as the FOMC(they could move the wk of the 24th). Fear of an emergency move has kept the shorts from pressing their bets, based on the October 1998 scenario. The August and March lows break and then the June 2006 lows are the next target. BKX falls apart.

    Almost everyone is bearish on the USD, so it will rally huge against all currencies except the Yen and Swiss. Gold falls as a knee jerk reaction to the upper 600s (but gold will ultimately go higher late in 2007). The rush to pay US debt will support the dollar and send all the dollar shorts scrambling. The Yen will rise as the carry trade is unwound.

    Regardless of 25 or 50, fight the Fed as in 2001! This is not 1998 as there is too much debt regardless of interest rates. Margin calls, hedge fund blowups, bank loan losses, deals falling apart, etc… This will get ugly into October. Also, no one is contemplating the long bond falling. It is also overbought and will not benefit from this scenario as in a true credit crunch, even the safe US long bond will go down. All money will go to the US treasury bill market and short term government paper.

  27. Short Man commented on Sep 13

    I agree with the general views here, market has baked in a series of 25bps cuts before the end of the year.

    If we get 25bps on Sept 18, it will be status quo and the mood of the market will be determined by the wording surrounding the release and other news during the day. In the absence of other bad news, might be enough to rally back to 14,000 so hedgies can unload. Remainder of Sept action will be determined by the amount of hedge fund cash flowing out of the markets based on August redemptions — I don’t have a good handle on the magnitude of this number other than rumors…so it could be big or could be small if they have found enough new money in the last rally to replace it (doubtful).

    If no cut — wild volatility, gold def’n down. Equities will certainly fall right away but if later supported by enough news of credit easing and other positives, market may actually give Bernanke some benefit of the doubt that he is on top of things and recover losses.

    50 to 100 bps — I can’t see this in the realm of possible actions based on what we know. Would def’n cause a dollar and equity sell off, gold $800, oil $90+….would be inconceivable for someone like Bernanke whose actions are so carefully measured to do something this irresponsible to the dollar.

    Opportunities may or may not present themselves but regardless I’m going into next week with close to 50% cash in case such opportunities arise. Although the VIX around 25 is historically quite high, it probably understates the volatility expected over the next 30 days.

  28. NoFate commented on Sep 14

    I think Hussman’s analysis is flawed, but for different reasons than previously stated.

    – At high valuations it is much more likely for stocks to rally over the next 6-18 months and at low valuations the opposite is true.

    – When the yield curve is inverted there is a much higher chance of recession than when it is not.

    – These two things are true regardless what the Fed does. Interest rate cuts are far less likely to have an impact than the other two variables.

    Back to the original question though …I think the problem with Bernanke is that no one knows what he will look at, because he hasn’t cut before! And even worse …he has the evidence to support whatever choice he wants. My guess is no cut or 25 bp, but who knows?

    Final Note: The S&P is 4% off the July highs as of this afternoon …I find this odd and rather insane. Can someone explain this?

  29. Gary commented on Sep 14

    Perhaps Bernanke is focused longer term – like on the current account deficit. In a speech a couple of years ago ( he said:

    “In the longer term, however, the current pattern of international capital flows–should it persist–could prove counterproductive. Most important, for the developing world to be lending large sums on net to the mature industrial economies is quite undesirable as a long-run proposition.”

    And this…
    “Basic economic logic thus suggests that, in the longer term, the industrial countries as a group should be running current account surpluses and lending on net to the developing world, not the other way around.”

    And finally…
    “Other changes will occur naturally over time. For example, the pace at which emerging-market countries are accumulating international reserves should slow as they increasingly perceive their reserves to be adequate and as they move toward more flexible exchange rates.”

    a fed funds cut:
    * makes the dollar weaker
    * stimulates exports
    * creates more profits via exchange rates
    * makes overseas crap more expensive so maybe we buy less and/or buy more of our own crap
    * or just slow down the insane consumerism
    * make oil more expensive perhaps stimulating alternatives

    Just a thought ’cause I don’t think Bernanke cares much what the market itself does

  30. David Merkel commented on Sep 14

    We had an unusual period where the market rose (even financials) where the Fed was raising rates. I don’t know what will happen if the Fed cuts, but it wouldn’t surprise me if the market reacted badly.

  31. The lurker commented on Sep 14

    RE: NCT — it’s a REIT, is it not? If it’s a REIT, it has to pay most of its income in dividends…

  32. John F. commented on Sep 14

    Given the recent slide of the dollar in (choose your currency, including gold or oil), anything more than 25bps would be criminal. The stock market’s reaction to either 25 or 50 will be limited, and inconsequential in the context of nasty headlines that will surely come in the months again.

  33. Pool Shark commented on Sep 14

    Short Man’s got it;

    The fed will cut 25 bp, which the market is expecting. The markets will react more to the news of the day rather than the cut (though I don’t see the Dow getting anywhere near 14,000). But, depending on how Ben’s language is parsed, there could be volitility if any new ‘funky phrases’ eminate from the fed. (I loved that “Global Savings Glut” comment! What a wacky guy!)

    I personally feel that if Ben is half as qualified as everyone gives him credit for, he must know that a 25 bp (or even 100 bp) cut won’t have any affect on fundamentals; it’s just to make everyone feel better; that the fed is doing ‘something.’

    Ultimately the consumer will determine where the markets head in the coming weeks and months, and right now things don’t look too good…

    In either case, the fed will do what central banks always do over the long term: inflate, inflate, inflate. Long term it’s the only way we can hope to pay off our creditors (not to mention all those unfunded federal mandated programs). What better way to pay the national debt (and social security for all those retiring boomers) than with dollars from thin air.

    Who cares if the dollar has lost 97% of its value since the creation of the fed; we all feel richer because we make more than our parents did!

    btw, the $USD is heading to 60.00.

    By next spring, the Canadian dollar should be worth more than the US dollar. (How’s that for a paradigm shift?)

  34. Eclectic commented on Sep 14

    —No FF cut—Discount window still open and active—Bias still tending toward concerns about inflation—A nod to worsening housing with a reliance on markets—

    The stock market will suffer a somewhat stinging set-back, and the bond market will actually favor the move. Within 1-3 days of a failure to cut FF the stock market will rationalize the decision and the overall effects will be muted.

    Anything else would be irrational at best for Ben Bernanke, after all he’s said and written since taking the position of Chairman. Of course he doesn’t have the only vote, but I’m guessing that Poole would easily be on board with that, and Bernanke’s spirit mentor, Milton Friedman, would be as well were he living now and a voting member.

    My guess is that Bernanke has got the authoritative leadership to call this shot, probably unanimously, although in this special case a minor disenting vote (not more than 2 disenting) would probably reduce the volatility of the reaction to a failure to cut the FF rate.


    1)- Inflation is a monetary event, with or without Mr. Mishkin’s deus ex machina.

    2)- Oil and gold are heading to the moon, both largely because USD is heading toward the bottom of the tank.

    3)- The Fed is still free to conduct open market operations (including via the discount window) to effect a desired level of liquidity regardless of the stated FF rate.

    4)- Employment is still quite good. The Baby Boomer tendency toward retirement will only accelerate its self-same tendency to absorb increases in unemployment as a neutral dynamic offset. It’s a once-in-a-multi-generational sweet-spot regarding this dynamic. Baby Boomer MEW will continue and accelerate the income damper to GDP.

    5)- The housing event/debate will move slowly but surely to a reliance on markets and rational work-outs, probably case-by-case, probably eventually requiring some type of resolution entity that might be actively supported by private markets.

    6)- Equity markets and debt markets both depend on stable financial systems for a)- the allocation of risk and b)- the rational estimation of the marginal efficiency of capital expenditure. If both of those elements are not satisfied, markets break down. Volcker’s experience from his appointment by Carter until approximately the mid-1980s is likely to present a rebuttal against cutting FF that looms large enough and recently enough in the consciousness of all members as to have some sway.

    I realize I’ve tossed 2 cards down and I’m drawing for an inside straight, but I’ll be here Tuesday and we’ll all show our hands.

  35. ECONOMISTA NON GRATA commented on Sep 14

    I hate to make bets on the basis of what the Fed will do or not do.

    However, having said that, I do believe that the Fed will accomodate the market and yield to political pressure as well. They will cut 25bp and announce that they will provide liquidity as needed and be vigilant of inflation. In other words they will do nothing and satisfy everyone.

    I anticipate further declines in the dollar and higher gold and oil prices regardless of what the Fed does. As for equities, I’m anticipating that we will probably stay in a trading range of 1500 to 1430 basis S&P… Closer to 1500 on Tuesday and near 1430 by Thursday’s close, all other things being equal.

    I do not think that we’re so much in a bear market as some would argue, That’s not to say that we’re not in a transition to a bear market…

    Best regards,


  36. Winston Munn commented on Sep 14

    Since August 10, System Open Market Operations have averaged 4.96%, so the rate cut has already occured. This is what has driven down the dollar, not speculation about a p-o-s-s-i-b-l-e rate cut but an actual working rate cut.

    As the Federal Reserve has already ratified the 5% rate with its operations, it is a given that those rates will be made official Tuesday – however, the markets will not react favorable to a “measley” 0.25% cut and will drop sharply.

    The Federal Funds rate will drop 0.25% as will the discount window rate.

    The dollar may actually rally short term on the news as a larger cut was not made.

    And for looking for the next shoe to drop, it won’t be in banking or housing – look out for commercial property troubles with falling lease prices causing falling building prices causing defaults on all sorts of over-priced, over-hyped, over-leveraged properties, including office buildings and malls.

    This house of cards built on the sand foundation of loose credit permeated virtually every asset class, and while subprime was the first to show its true colors, the end of the road is still far, far away, as the credit crisis spreads causing more falling asset prices.

    That is the endgame for a credit binge; a collapse of asset prices when credit expansion can no longer sustain rising values.

    In a credit-based economy, inflation is not a monetary event. Is is a debt event; as is deflation.

    The truly sad part is that with over 50% of the U.S. debt held by foreign countries, the U.S. no longer controls its destiny – if foreigner keep buying, the U.S. can keep inflation moderated, but GDP must slow over time as inflation (debt expansion) is necessary for growth; if the foreigner stop buying, the U.S. must either deflate or hyperinflate.

    Either do or no do. There is no try. – Yoda.

  37. ECONOMISTA NON GRATA commented on Sep 14

    re: Hunt for Black October

    Mon. 10/19/87… Went to Windows of the World after the close with friends, opened many bottles of Champaigne, went home, packed bags, gave upper East Side Apartment to girlfriend, sold company to employees for $1.00, moved to South Beach, retired at 35, and never looked back.

    It’s feeling like DejaVu all over again…. However, this time it’s just me and my best friend “The BUG”…. ;-)

    Best regards,


  38. Wishful thinking commented on Sep 14

    I think the Fed will raise 100bps. They are going to tank the housing sector while trying to save other sectors. They may even raise it to 150bps to save the dollar. At least this will shorten the life of our upcoming recession.

    Wishful thinking

  39. Estragon commented on Sep 14

    The fed has a pretty weak case for cutting.

    Retail sales seem to be holding up, as do tax reciepts. Credit and forex markets appear to be stabilizing. Equities have stabilized near record highs. LBO deals are getting done, albeit at higher rates. Commodity prices are broadly near record highs.

    Employment may be softening, but as the fed (and regular readers of this blog) are well aware, the NFP numbers have issues. There’s an apparent failure to create jobs recently, but the household (unemployment) and claims series lend credence to the notion that the failure to create jobs may be a function of a lack of available and properly skilled supply, rather than a lack of demand. If that’s the case, there’s a risk (and some evidence) of accelerating wage costs.

    Inflation expectations seem contained based on tips spreads and survey data, but that’s likely a function of expectations surrounding the efficacy of fed policy and could change quickly.

    Equity markets appear to have priced in a cut of .25% and a neutral to accomodative statement. Anything other than that is likely to be sold initially. An “as expected” result may be bought on the basis of generally positive macro data combined with an accomodative fed.

    Looking at it from the fed perspective though, there may be more risk in cutting than not.

    If they don’t cut at 2:15 on Tuesday, they still have the ability to cut at 3:00, or Wednesday morning, a month from now, or whatever, based on more compelling evidence of a slowdown. Waiting for evidence isn’t likely to make much difference to the real economy, only to bipolar equity markets.

    If they do cut on Tuesday, it will be clear that notwithstanding rhetoric to the contrary, they’ll cut at the first sign of pain and the Greenspan put lives on.

    The “provocative” link to October87 is interesting, but panics are by nature unpredictable. We may be able to find similarities, but the nature of panics is such that they happen spontaneously. If they’re anticipated, the anticipatory selling itself prevents the panic anticipated. A couple of particularly interesting elements of the story though are how the collapse of information flow feeds the panic, and also how formerly stabilizing factors become destabilizing beyond some indeterminate event horizon.

    I don’t think there’s a good modern precedent for what we’re seeing now. The closest I can think of is that of Britain around the turn of the last century. Obviously, that period was different in many ways, but there may be lessons in the mercantilism and globalism of the age.

  40. NJ commented on Sep 14

    I believe the market is already pricing in a cut of 25 basis points so if that is what the Fed cuts the market will sell off, but depending on the lanuage a 25 basis point cut won’t screw up a year end rally. A 50 basis point cut will be most welcomed and will mark the beginning of the year end rally. No change in rates is not priced in and if that is what the Fed decides to do I would expect a major sell off so bad that it would force the Fed to do an emerency rate cut to prevent a spill over into the economy.

  41. Estragon commented on Sep 14

    Crush da bears,

    Interesting points wrt Hussman. I’d point out though that this cycle will be the first in which the long end of the yield curve is determined in China, not America.

  42. Estragon commented on Sep 14

    techy – “think about economy, jobs and common man”

    In that case, the fed should do nothing. A cut may ease the pressure on some weak-handed lenders and speculators, but do little for the “common man”. It’s like curing cancer with a shotgun. The tumour may be gone, but the quality of life of the patient could be better.

    A better solution might be to, for example, implement an apprenticeship program whereby variably forgivable loans are given to apprentices working on private sector affordable multifamily residential projects in areas with low vacancy rates and high foreclosure rates. That way people getting foreclosed have somewhere to go, construction skills are retained through the slump, and the lenders and speculators still learn how to spell risk.

  43. jrasp commented on Sep 14

    It isn’t the mandate of the Fed to prevent recessions, which should be a natural part of an economic cycle. It isn’t in their mandate to prevent 10% or 20% drawdowns on the market.

    If Bernanke follows his words, it’s nothing done. The data probably doesn’t warrant a cut. Now, that’s very rear view mirror, and by the time the data does show need, he may be required to do more, but don’t you think he’s trying to ween Wall Street off of Moral Hazard saves? Don’t you think there are different agendas in place? Haven’t the pundants been WAY off in gauge what Ben will do? It’s like their looking at the Patriots playbook and trying to predict what the Colts will do? Right, makes no sense whatsoever…

    He’s been pretty wysiwyg with his actions. It’s the street and the media trying to “game” and parse his language that don’t get it—he’s not Greenspan. In fact, he might respectfully disagree with most of Greenspan’s policy actions at some point in time should he get comfortable with the position…

    In his mind, inflation is in the “sweet spot”, one data point on unemployment doesn’t make a trend, and most other things they look at are benign… No further action needed at the moment.

  44. calmthewaves commented on Sep 14

    The decision boils down to “what is the most important market to defend?” Since we are relying heavily on the liquidity of foreigners, and the dollar has already taken a substantial fall, we must assure the world that the dollar has integrity.

    Any move by the Fed, I think most of us agree, is more symbolic than practical. The decision will reveal what their true concern is.

    My prediction: the Fed makes no change but issues a strongly worded statement. The stock market retests its recent lows, (rather quickly I suspect) as people realize the situation is much more serious than ’98, ’01 or ’87. The dollar rallies, gold falls and stock markets have a meaningful correction.

  45. techy commented on Sep 14

    we are all over the place…lets define the issues ailing the economy….and i guess we can then state any remedy to fix those (of at best keep the patient alive for 1.5 years).

    i see:
    1. housing and credit markets
    2. jobs
    3. capex
    5. inflation in food and energy
    6. consumer debt

    i strongly feel that cheap money can cure most of the above… comments please?

  46. Stuart commented on Sep 14

    For those suggesting no rate cut or no hike. While I generally agree that rate cuts are tantamount to the “pushing on a string” metaphor, the housing numbers going forward are going to be truly horrendous. I think people are going to be shocked what’s going on along (or down) the coast lines. The political pressure to relieve strain on the homeowner, consumer and ergo the general economy, well, Bernanke’s balls are going to get so squeezzzzzed so hard, I don’t think he’ll have any choice.

  47. UrbanDigs commented on Sep 14

    I believe 50 basis points is priced in right now and future cuts AFTER that!

    I do NOT think you can compare to 2001, because at that time the equities markets already corrected big time and were experiencing the after effects of a misleading, unknown, revolution type of investment bubble. Not so today.

    If fed cuts 1/4 or no cut at all, markets selloff. If fed cuts 1/2, markets rally.

    Its backwards. Because if fed cuts 1/2 that is because the economy is obviously worse off than we think. However, the statement also plays a role.

    If fed cuts a 1/2 as a preventative measure and signals no future cuts, well, who knows what will happen.

    Statement is going to play a big role here because this is Bernanke’s first cut action and we need to see what guidance, if any, he provides for future policy moves.

    My bet?

    60% – 1/4 cut
    40% – NO CUT

    I think they will cut discount window again too. I dont think 1/2 point cut is likely at all.

  48. michael schumacher commented on Sep 14

    What if they raise rates??

    Everyone (and their brother’s brother) has figured it all out with a rate cut. While very few people have even mentioned a raise.

    My money is on a raise on 25bpts to shut these asshole brokers up who have no clue about cycles and the fact that at some point you can actually loose money. Now there’s a concept…actually losing money…seems like Goldman needs a little help as the fund that has lost over 22% has to make almost an 80% return in order for them to start collecting the 2/20 that they waived recently.

    No mater what the Fed does…..Hank’s committee stands ready to act should the Dow actually look like it was about to be affected by gravity and reality.

    Seriously we get a modern day run on a european bank (northern rock) and we just shrug it off as ok. Thanks alot China


  49. Armchair Fed commented on Sep 14

    1. The dollar is on the brink of destruction.

    Macroeconomics outweighs market panic over hyperinflated fears of a recession; meanwhile, every other government bank is raising rates to fight the VERY REAL inflation occuring globally.

    2. Greenspan readily admits he didn’t know what the hell he was doing in his new book.

    Thank god he’s not the Fed president anymore. You can thank him when we slide into 3rd world country status.

    Have we all forgotten that we are a capitalist nation? When did we start relying so heavily on the Federal Reserve to give us comfort and take away our own collective accountability for (list everything people blame the Fed for – a pretty astounding list)? Why does everyone look to the Fed as our financial savior from the mess we’ve put ourselves into? Throwing more dollars into the equation is not going to save us — it’s going to make things far, far worse.

    If the Fed cuts rates – even by a quarter point – we will only push further and faster the continuing decline of our dollar. The Fed should stick to its macro data and ignore both Wall Street and Congress, two parties completely in bed with each other who seem to care less what our dollar is worth to everyone else so much as how many of them they can keep for themselves.

    Wall Street is the last place I’d look for leadership with respect to macroeconomic prudence, since they’re capable of happily trading whatever position we put ourselves into.

    If this keeps up, I might have to move to Canada – just so I can live in a country where the currency still retains value.

    Barry – I hope the next thread you start is “what if the fed RAISES rates?” or something along those lines…

  50. trip commented on Sep 14


    Could you find/work up a chart with oil in euros? (I know you fuss at people when they ask these questions, but I just don’t have the resources)

  51. Clayton commented on Sep 14

    Not rocket science… holding all things equal if interest on a certain good falls, the value of the good will also fall. Money is no different. Rate cuts reduce the value of money vis a vis goods, which is inflationary.

    The influx of money and unanticipated inflation temporarily support the economy but, by stimulating artificially high expectations, prepare us for another precipitous fall. Eventually, the Fed will have to reign rates back in and no amount of political pressure (or economic weakness) will stop the Fed if inflation has floated up to 3-4%.

    Given the return on captial (physical but then indirectly financial) internationally, real capital is flowing there and not here. Slower capital accumulation leads to slower productivity growth, slower wage growth, and a slower economy. This is the “equilibrium state”. Until we “get it”, we’re just gonna create more problems.

  52. stormrunner commented on Sep 14


    Sorry for the repost but this article fits this thread it also seems to corroborate your thesis which I happen to agree with and posted as such in The RE Thread , any comment with regards to the deflationary ramifications of the extended use of said discount window?

    A poster over at Mish’s site left this.

    It elaborates on rule changes to the discount window and the ability of the FED to accept many instruments as collateral including MBS. Also note the removal of stigma related to borrowing in this manner.

    “In a situation in which the Fed exposed itself to significant quantities of iffy collateral and multiple institutions refused to honor their obligations, the Fed would be required to sell massive amounts of treasures in order to withdraw unbacked cash from the financial system, in the process drastically reducing the money supply and making an already precarious situation worse.”

    Can you say deflation !!

    If this were to occur sometime in the medium term future Rate cuts would probably have less inflationary consequences and the DEBT —poooof???

  53. Karl Smith commented on Sep 14

    First, the interesting thing will be if and how the FED addresses the issue of the drifting effective funds rate. Will they speak to this when they meet?

    The effective funds rate traded significantly below 5.25% for much of August. There is some debate over how much extra liquidity this really represents but I don’t think its nothing.

    Secondly, I think we have 50 bps priced in. 25 bps and a strong change in the bias might be enough to quell the markets but I find it hard to believe there won’t be some selling on anything less than 50.

    Longer term I look more to the bias than the actual rate for market performance. The key issue is whether the FED signals that it cares about what the market cares about. Can the market expect the FED to respond to signs of general slowdown or is the FED fixated on unemployment.

    This goes to the heart of the FED risk premium relationship. To what extent does the FED buffer the market from systemic risk. Much of the bullishness that we have seen I believe is in the hopes that the FED is still in the business of decreasing systemic risk.

    I tend to think the FED is drifting more academic, more Taylor rule based and less interest in asset markets. As that becomes apparent increasing weakness in equity markets is likely.

  54. Estragon commented on Sep 14

    Techy – “everywhere i read, its written that a rate cut will lead to lower mortgage interest”

    The long end of the curve, and by extension fixed rate mortgages, is set in Beijing, not Washington.

  55. Bob A commented on Sep 14

    and the Fed is cutting… why?

    Because the S&P is 3% or so off it’s highs and chances are at least 50/50 it’s about to break out to new highs?

  56. Hedge Fund Crash commented on Sep 15

    1. I think most traders have been acting on the assumption that a 25 bps cut is given.

    That means the risk is two-fold:

    • no cut, and a new paradigm is introduced — No more Fed Chairman Put
    • 50 bp cut, and the stagflation talk that was so popular with the MSM in 2002 becomes popular again


    The dollar is going to rally regardless of what the Fed does simply because it is to easy to make money by shorting the greenback.

  57. bold’un commented on Sep 15

    How much of a cut is built in already? Looking at the difference between September 2007 Eurodollars and the March 2008 contract on the Chicago Mercantile Exchange, that would be 100bps in 6 months.

    Looking at the difference between Fed funds and Eurodollars: (September 2007 = 50bps, March 2008 = 12bps) the market also expects the current squeeze on LIBOR funding to end.

    If one of these two market predictions is to be disappointed on a six month view, I rate the risk on the second as worse.

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