Is the Fed a Paper Tiger?

Yesterday, we listed 7 concerns with the Fed’s confusing emergency 75 bp rate cut. We said we detected a “A Whiff of Panic . . .”

Amongst the other issues, our biggest concerns were twofold: That the Feds’ independence will now be questioned, as they appeared to be responding to markets and not economic fundamentals. It is not now, nor has has it ever been, the Fed’s responsibility to prop up market prices. Yes, insue the markets were functioning properly — but not provide a put. That nonsense was supposed to have left with Easy Al. Unfortunately, Bernanke not only inherited Greenspan’s mess, he inherited his Put also.   

Even more concerning is the possibility that the Fed is "Pushing on a String." That may be starting to come true. As I type this at 6:54am, the Dow Futures are off nearly 200 points.

Does this mean we will get another 25bps cut? How about Thursday? Or is backstopping the markets a one shot deal? Thank goodness I have a lot of math, cause thru the clever use of differential equations, I can calculate that the Fed has only four more Shock and Awe 75 bps cuts, plus a Shock (but no Awe) 50 bp left.

The Fed wasted alot of ammo yesterday — and what looks like for naught… 

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  1. Justin commented on Jan 23

    percentage wise, that drop yesterday morning was miniscule. I do feel that so much of this is inherent in our system – democracies produce cry-babies!

  2. SINGER commented on Jan 23

    1) Who says you can “stop” the downturn? Isn’t a recession or whatever you want to call it inevitable every so often?

    2) Has anyone else seen those headlines on Bloomberg TV “43 Major Benchmarks now in Bear Market, the definition of a bear market is coming down 20% from its highs”

    a. Is that really the definition of a bear market?

    b. If we are in a “bear market”, the only thing to do is sell
    any substantial rally…

    c. If this is “now” a bear market, it’s probably just the
    beginning of one…

    d. Another interesting thing: is there inflation or isn’t there?
    The CB’s seem to be in disagreement…

  3. Michael Covel commented on Jan 23

    I had a noted player say it very similar to me the other day. When the gears still touch, adding grease helps to ease friction. When the gears no longer touch, adding more grease makes a mess as it just goes everywhere.

  4. JTR commented on Jan 23

    The end is near. Hyper-inflation is just around the corner, and then national bankruptcy.

  5. Jim Haygood commented on Jan 23

    Trichet’s comment (quoted by Bloomberg this morning) is liquidationist in character:

    “Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility,” Trichet told the European Parliament in Brussels today.

    Holy sheet. Sell till the pips squeak; he doesn’t get it. U.S. Treasurys sure do, though. What an awesome, awesome panic rally.

  6. Chief Tomahawk commented on Jan 23

    That differential equations math looks a lot more like simultaneous equations from algebra I. Heck, even the rate o change in Fed rate cuts is excelerating, indicating the liklihood of less cuts because of more significant sizes using up more ammo each time.

    Now, if we’re going to talk about integration, well that might be most appropriate for the derivatives overhang… though I suspect that’s a lot of material which never is going to make it out from under the living room rug…

    Good luck with the Morning Call appearance today. CNBC must be calling out their A level guests given the recent market tumult. Heck, they’ve unveiled the “CNBC Edge” & have Jack Welch on now…

  7. Chief Tomahawk commented on Jan 23

    Oh, I forgot to add, hopefully they don’t stick you with having to talk Dennis Neale in from the ledge…

  8. SINGER commented on Jan 23

    The Yen’s getting very strong v. USD and futures plummeting back for a retest of yesterday’s lows…It will be amazing if we take out yesterday’s lows even though the FED cut 75 bps…

  9. jmf commented on Jan 23

    Moin from Germany,

    the next question will be if the Greenback is on the way to become the next source of the carry trade…..

  10. wally commented on Jan 23

    If the Fed’s job is to take away the punch bowl when the party get going, then what Bernanke just did was walk into the party at 3:00 a.m, see a bunch of blind drunks staggering around, and pour another fifth into the punch.

  11. Steelduck commented on Jan 23

    If the DOW follows European foot steps and closes down today, that would make it the 6th negative day in a row, a less than 1% probability.

    Also, since 1925, on the sixth day down, the DOW has closed down over 3% on only two occasions: 1932-04-07 & 1932-10-15 for -5% and -7.2% respectively.

  12. odograph commented on Jan 23

    Well, if we give him a little credit, and say that it wasn’t a put, what else could he know? What if all our suspicions about further waves of credit defauts (commercial real estate, credit card, etc.) were showing up on hs radar? If that looked ugly …

    You know, the press release said something about banks not releasing credit to small business. That’s something I’ve heard in these comments as well. Just askin’

  13. John Borchers commented on Jan 23

    The loss of equity value will be the remaining nail in the coffin for the next great depression.

  14. J commented on Jan 23

    After the German banks start to get bailed out in the next few weeks , we’ll finally see Trichet re-think his whistling by the Graveyard stance

  15. BG commented on Jan 23

    I think it speaks volumes that the ECB did not play along with the Fed yesterday! It seems to me,.. that in and of itself will exacerbate any financial imbalances of capital flowing to the US OR to Europe.

    If the ECB does not mirror the actions of the Fed, won’t that just make matters worse here in the US? I think the US is now in the early stages of some “tough love” from the rest of the world. It’s pay-back for all of the junk bonds we sold them in the 1st place.

    It’s amazing to me that we always bad-mouthed some “3rd world country” for not matching our level of financial sophistication when causing problems somewhere in the world; well, this time it’s us and we did a bang-up job.

    Check out Soros comments on Bloomberg at

  16. John Borchers commented on Jan 23

    The US market never would have crashed yesterday. People were waiting to pick up the pieces. But with the Fed intervention it was exactly what killed it.

  17. Jason G. commented on Jan 23

    I’ve believed for a while that Ben and company are most interested in an orderly decline if there has to be a decline.

    If that means shooting your wad to keep the markets from going into pandemonium, that’s what they’ll do. There is a history of this theory in academia, and… well… Ben used to be a professor. Ben and Hank and Dub are releasing info with all the market timing savvy of a good PR agent…

    The unfortunate side effect of being orderly is that it creates moral hazard, gives wall street insiders unnecessary advantage, and generally prolongs downturns.

    On the flip side, disorderly shocks create too much angst and strife. This is the greater danger that Ben & Co. are trying to save us all from — and they probably honestly believe they’re doing the right thing.

  18. Jim Haygood commented on Jan 23

    It’s very bad news to open down, the day after a heroic rate slash. Ben’s nightmare is that the Dow goes over the waterfall before next Wednesday, forcing him into an unprecedented second emergency cut in a week. The Fed’s credibility would be forever crippled.

    So instead, he will amp up the pressure on Trichet to cut. As long as central banks are singing different tunes, the markets have every reason to panic. It means that nobody’s in charge, even with the global grandees powwowing in Davos. I’ll have another heaping helping of Treasurys, thanks! *BURP*

  19. Ben commented on Jan 23

    I think your concerns stem more from wanting to be right about the stock market going down (which you have been, although you were quite early). If you step back, it is not good for the economy for the stock market or debt markets to be crashing. It raises companies cost of capital and is likely to dull businesses’ enthusiasm to invest. The Fed probably can’t do a lot about it anyways, as you point out, but the cut by Bernanke could be viewed as long overdue. As you’ve dilligently pointed out, the economy has been weak for some time. If he was going to have to do it anyways, why delay? Would you advise the fed to just stand by and do nothing while the economy crashes, potentially turning a recession into something worse? That’s what the Fed did in the 1930s…

  20. Steelduck commented on Jan 23

    I know this sounds crazy, but I think there is a real chance the FED will drop rates again sometimes today if the US market opens drastically down. Why?

    Because to be credible, the FED must be consistent. Since they supported the US equity market yesterday, they have to do it again today at the risk of having waisted 3/4 points. They HAVE to double down today, or Mr Bernanke will lose all credibility.

    The market already expects it; so what’s the point teasing an unstable market?

  21. suggs commented on Jan 23

    the put was wasted, sooner or later one of the economies is going to need real money to borrow, if you dont want sovereign funds buying you up lock stock and barrel, you need to slow down consumption get your people to save their hard earned wedge, low interest rates are a disincentive to save, to fund a new period of steady but sustainable growth we need cash not more leverage

  22. zero529 commented on Jan 23

    Edit: “Yes, ensure the markets were functioning properly ”

  23. Dogg commented on Jan 23

    Bernanke had to do the emergency cut, because it was Fed policy that had been crashing the market in the first place.

    He was pulling out billions as the market was crashing to defend 4.25%.

    That was stupid. He should have stopped defending 4.25% much more quickly, and then he could have cut less with less damage to the system.

  24. Contrarian commented on Jan 23

    The Bernanke Dow put has a strike of 8000.

  25. Guy M. Lerner commented on Jan 23

    I wrote this in my newsletter ( on December 17, 2007: “In either case, the primary tool of Federal Reserve policy – the rate cut – has been rendered ineffective. And this is the message emanating from the markets: despite 100 basis points in rates cuts over the past 4 months, the markets still remain on shaky ground.”

    Rate cuts haven’t worked yet and it appears their psychological impact is now confined to only a few hours of trading!

  26. Winston Munn commented on Jan 23

    The Fed only has four knobs it can turn, rates up, rates down, reserves up, reserves down. It amazes me that otherwise intelligent people can believe that this list of finite options can be expanded into infinite variables to fine tune something as complex as an economy.

  27. RichardN commented on Jan 23

    Trichet is right. Lowering rates 1.25% in a week is equivalent to forcing the country to take out a 10 year loan with a teaser 2% which resets in 6 months to 15% for the following 10 years. Unless we go into very, very, very deep recession, 09 inflation is going to be very scary due to the lag of these stupidly sharp changes.
    Looks like a single mandate is the way to go, since the fed will fail both of theirs.

  28. Michael Donnelly commented on Jan 23

    Down 200 pts to open, the Fed shouldn’t fight the market, let it readjust to where it should be, this is so different from 1987. Back then the economy was fine, now we are in a recession

  29. larry commented on Jan 23

    Noone controls the derivative market, so how is the rate cut going to address the bank, insurance failures due to derivative collapse? We need to address the issue of regulation in order to work our way out of this mess. The 5 yr treasury is under the rate of inflation, we have little transparency relative to derivatives, and approx 10 milolion homeowners with negative equity. Gee, is a 75 bps cut going to turn it around?

  30. Jim Haygood commented on Jan 23

    RichardN makes a great analogy with his “teaser of 2% which resets to 15%.” Clearly, a ‘Bubble III’ is going to be engineered.

    But the oldest mandate of central banking originated with Walter Bagehot in the 19th century, long before central banks got into macroeconomic management. Bagehot said that the central bank has to be the lender of last resort in a crisis.

    Effectively, the Federal Reserve’s rate cut says that we have a crisis now. The ECB’s refusal to cut says that we don’t. In a globalized market, the lack of coordination among the authorities (whether to hold the line against inflation, or to cut together) quite properly horrifies the markets.

  31. The Big Picture commented on Jan 23

    Media Appearance: CNBC’s Morning Call (1/23/08)

    This morning, I’ll be guest hosting Morning Call on CNBC, from 11:00am to 12 noon. On today’s agenda:- The unholy trinity: Slowing Economy, Credit Crunch, Financial woes – Yesterday’s emergency FED cut, and today’s opening drop, leads us to ask: Is the…

  32. Steve Barry commented on Jan 23

    This will be my only post today…note QQQQ again doubling market’s losses. Important to note also that so far, the 10 day put/call which closed yesterday at 1.19 has FALLEN to 1.16. IMO, it needs to get to 1.3 for me to sell my QID, so the bottom is not in sight.

  33. rjrj commented on Jan 23

    The Fed are ultimately just trying to make it cheaper to borrow money. That’s all our economy is built on and it’s how these financial companies made a ton of money over the past years.

    We need to focus less on this cut, and focus more on what are they going to do in the future and where the interest rate will ultimately end up in their support of these companies. Does anyone else think 1% by the end of the year if this cut and further cuts don’t produce the results the Fed intends?

  34. Peter Davis commented on Jan 23

    I incorporate Elliott Wave Theory into my longer-term forecasts. It is their opinion – and has been for quite a while – that Fed interventions NEVER save the market. In fact, once we’re in a bear, Fed interventions have historically been futile. They also argue that the Fed follows the Treasury markets and cuts rates in response to the dropping of yields in freely-traded Treasuries. Based on this theory, there are more cuts to come.

    My opinion, is that the Fed has become increasingly influenced by politicians and yesterday’s move smacked of it. So much for supporting the dollar, huh? While I respect that Bernanke has been left in a tough spot by his predecessor, he’s certainly not doing himself any favors.

    It’s remarkable how quickly Bernanke and Paulson have turned, as both are now calling for a quickly-enacted economic stimulus while saying that we’re not in a recession. Excuse me, fellas, then what the hell do we need a stimulus for?

    Of course, these two guys are the same geniuses who, just a few short months ago, labeled the subprime problem “contained”. Way to go, boys. You have once again renewed my faith in government.

  35. brbrown commented on Jan 23

    Why are all of the other central banks acting so responsibly, and ours is the only one that is willing to go into our CHILDREN’S piggie bank.

  36. Hank commented on Jan 23

    Trichet probably feels that this whole mess is the fault of the recklessness of Anglo-Saxon economic policy and would like to see the bubbles unwound and the perpetrators punished by the market.

    Only problem is it’s not just the US, UK and Spain in the sinking ship, he’s sitting in the same boat and if it sinks he’s going down to.

  37. Steve commented on Jan 23

    Not trying to defend the Fed, but how can they be pushing on a string and provide a put at the same time?

  38. Jdamon commented on Jan 23

    Can we discuss investing opportunities here? I am currently 20% cash, 10% short (SDS and QID) and 70% long a combo of Large Cap value/growth, Small cap (yes they have been trounced lately) and International (value and emerging markets).

    I have stayed away from the banks until now. Based on perma-bear Dougie Kass’s call on Kudlow, what do people think of buying BAC, WB, USB and/or WFC?

    Do we think these banks have more downside risk or are the potential for appreciation (as well as getting a nice dividend) make sense for any of you perma-bears?

  39. Estragon commented on Jan 23

    I’m a bit surprised we’re already talking the “pushing on a string” bit, but I guess yesterday’s move together with the expected move next week makes the “they’re behind the curve” discussion less fun.

    Anyway, this analogy to bullets or aspirins or whatever is sort of silly. The fed absolutely can prevent (nominal, aggregate) deflation. Bullets and aspirins are finite. US dollars are not.

    Instead of whether the fed can prevent deflation, the more important questions are whether the fed will prevent deflation, how they’ll do it, and the likely investment ramifications.

    The fed’s entire postwar history as well as recent words and deeds suggest they’ll certainly try. Given their well expressed preference for inflation risk over deflation risk, the odds are they’ll succeed, and if there’s any deflation at all, it will be very short lived.

    Reading Bernanke’s paper on the subject (circa 2002 IIRC) gives some insight into how it will be done. If they start running low on metaphorical bullets, they’ll bring in the other ordinance.

    As for investment ramifications, I’m still pondering that. Maybe a discussion around that would be more productive than chasing this pushing on a string meme?

  40. Stormrunner commented on Jan 23

    Winston said

    >> Fed only has four knobs it can turn, rates up, rates down, reserves up, reserves down.

    Just another example of ludicrous government waste, couldn’t they have done this with just two knobs!!

  41. Jdamon commented on Jan 23

    Steve Barry –

    Can you explain the 10 day put/call metric? Where do you find this info and why is it a good indicator of a reversal? I own the QID as well, so I am trying to figure out when to take my profits. I was thinking about riding it out until the first week in Feb. when we (at some point) have to rebound a bit off the worst January in market history…..

  42. Estragon commented on Jan 23


    I follow the put/call at stockcharts . The symbol is $cpc (which includes index products etc.) or $cpce for an equities only read.

    Presumably, the 10day referred to would be a 10 day simple moving average. If you pull up a “sharpchart”, you should see a couple of default moving averages. Just change one to 10 day if you want to see that.

    I highly recommend you let the QID (along with whatever other metrics or fundamentals you prefer) tell you when to enter/exit positions. Holding until some arbitrary point in time when you think “we have to rebound” has never worked well for me.

    Hope that helps

  43. Wayne Mulligan commented on Jan 23

    Too much, too late – continuous 25 bp cuts would’ve sent a better message had they started earlier. It seems like our fearless Chairman Bernanke is learning as he goes – doesn’t that just give everybody a warm and fuzzy feeling as we head into a recession.

    Great point about the Fed running out of ammo – they don’t have much left to work with here.

    Just to bring this back to the current Presidential bids – I’m not sure if a guy like Obama has a leg to stand on if he’s promoting taking money away from businesses right now. If they’re not making money and people aren’t keeping their jobs then how can someone reasonably justify making it harder for them to hire? This is reminding me more and more of the Clinton/Bush election of yesteryear.


  44. Nick commented on Jan 23

    Not true–the ECB showed them, there’s another set of knobs. They’ve used it all the time but never delinked it like the ECB has. Up Rates-Down Rates, Up Reserves-Down Reserves, Up Liquidity-Down Liquidity.

    Why can’t they just add huge sums without lowering rates? Repos, term repos, more to offer in the TAF). Yes, mopping it up can be a pain, but it helps to keep the yield curve from doing something silly and the markets from tying themselves in a right old knot.

  45. Lord commented on Jan 23

    I, too, wonder whether the Fed will have to take rates all the way back down. While lowering them will ease housing, it is not going to bring it back, and since there was little else buoying the economy, I don’t see much to replace it. Inflation should fade once people start losing their jobs. Not even emerging markets offer sufficient growth to make up for reduced domestic consumption.

  46. Stormrunner commented on Jan 23

    >>Why can’t they just add huge sums without lowering rates?

    My best quess would be, because this is not a liquidity problem but one of solvency

    Banks who borrow short to lend long need this spread to be able to continue to lend and not exasurbate the Credit-Crunch, and spiral of default only its not likely that the funds target the depreesed asset class. This is the fatal flaw in the prescription.

  47. ef commented on Jan 23

    Good OP piece here, with lots of charts:
    “Why the Fed’s Rate Cut Was a Mistake”

    The local news tack on yesterdays event was to interview a financial advisor, and the discussion was, it’s a wonderful time to buy, take out a loan,… The financial environment certainly hasn’t hurt the infomercials about buying homes and stocks, etc.

    The types of jobs being created, demographics, a war on the backs of our grandkids and foreigners, and boat loads of debt in general are concerning. Someone has to speak the truth. Wish there were more gutsy journalists. Nightline was on WS. It seems WS got what it wanted, and it wants more of it, and it expects it from the Fed. When is all trading going electronic? HHHmmm… We still really need people on the floor.

    If the big WS banks are in such terrible shape, why don’t the WS CEO/Execs, brokers, investment bankers, morgage brokers who reaped multi-millions/billions with bonuses and such (at the min. creating the environment for the problem), give something back and save their corporations, and evidently the financial industry.

  48. Unsympathetic commented on Jan 23

    Why is it that so few people check the slosh reports? Yes, it’s difficult to understand.. but it reveals fun facts about the way the CB’s are managing through this crisis.

    For example, there has been zero net liquidity added by either the ECB or the Fed since last March. The $700B you heard so much about weeks ago? Rollovers of existing TOMO. The TAF? Funded wholly by the scheduled redemption of T’s and not re-issuing them.

    Point is, when you hear the phrase “The Fed will ADD liquidity in a crisis” please understand that is a phrase intended to calm the markets because most people don’t care enough to investigate the truth. The NY Fed isn’t hiding their data, it’s openly published.

    If the Fed is a paper tiger, it’s because they have not properly regulated the creation of credit.

  49. Blissex commented on Jan 23

    «It is not now, nor has has it ever been, the Fed’s responsibility to prop up market prices.>>

    This is perhaps true in normal times.

    But the USA are running two wars and a half and it it is the patriotic duty of the Fed to keep the home front happy with ever rising asset prices, and that also keeps the cost of financing those very expensive wars low (and that it also keeps the Republican donor base happy is just a nice side effect…).

    The Fed cannot run against the official policy of the government and undermine the attempt of the USA to finance and support those wars.

  50. Winston Munn commented on Jan 23


    I don’t know much about Ken Fisher other than one thing he said that I believe is right – you have to look at what you believe to be true and determine if it is actually true.

    Point being, the huge liquidity injections we have heard reported haven’t really occured – rollovers have been pulling it out almost as fast as it has gone in. The net add has been virtually flat for a number of months.

    Besides, repos are one of the methods the Fed uses to manage the FF rate – and the TAFs have been going to desperate banks, not the investement banks who might use it in the markets.

    And finally, if all that liquidity had indeed poured into the markets, how could the indexes have fallen so far from their highs?

    And Stormrunner was right: 2 knobs, 4 directions.

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