This morning, I’ll be debating about the upcoming Fed cuts on CNBC’s Morning Call at 11:20am.
My arguments are quite simple: Since the Fed cut the discount rate
on August 17, 2007, here is what has occurred:
– The CRB
index is up 32%;
– The US $ Dollar index is down 13%;
– S&P500 is off more than 10%;
– Fed Fund Futures are now pricing in 100% chance of a 100bps
– Generated high level chatter of a coordinated global, multi-national, currency intervention;
What the Fed is accomplishing by cutting rates is stimulating inflation, debasing the dollar, punishing savers, and making travel abroad exorbitantly expensive for all but the wealthiest Americans.
I believe that the FOMC should "man up," show some backbone — cut rates by "only" 50 bps. They might find out what its like not to be at the Market’s beck and call (girl). That should stabilize the greenback, and perhaps send food and energy prices lower (earning Ben the appreciation of consumers through out the country).
A little restraint would go a long way . . .
UPDATE: March 18, 2008 11:57 am
click for video
To Cut or Not to Cut?
Wall Street expects a big rate cut, with Barry Ritholtz, Fusion IQ; Carl Weinberg, High Frequency Economics and CNBC’s Trish Regan
What is the probability of that Barry? Zero?
I submit that the Fed does not exist “for the appreciation of consumers” in the US, but instead for the “appreciation of bankers” on Wall Street.
I wouldn’t bet real money on it (say, no more than Bear Stearns’ current share price), but I would wager it will be smaller than 1%. Partly, just because the market is so positive in the outcome.
You couldn’t write a better script than today……
interest rate cut combined with GS “earnings”
people are stupid if they think that writing up values of bonds while writing down values of “bad loans” is a strategy to accumulate wealth…
I guess it is today though….
and let’s just continue to add to level 3 assets while we are at it.
No one seems to read anymore.
sickening that this market has been hijacked by this administration and no one seems to do a thing about it. Of course all under the guise of free markets…..only if the direction is up.
LEH’s and GS’s numbers are such a farce.
Barry, Barry, Barry. You belong to the school of “Oh, if only wishing could make it so!!”
This just in: itdoesn’t.
Cat’s out of the bag. For the Fed, certain things are short-term irrelevant. Inflation. The dollar. Commodity and energy prices.
No, what matters now is liquidity and orderly de-leveraging.
But take heart. You’ve gotten your bear market. And it’s not over.
That’s why I’m selling call credit spreads into every decline. And there are going to be more declines.
I’ve been saying the last week (ever since I saw a Fed board member give an interview saying the market shouldn’t expect a large cut because they were going to address the liquidity issue through other, more creative venues) that we’ll only be getting 50 bps.
I told my dad this and he said “But the market will crash if they do that.”
And my reply was, “Yes, that is fake money. Real money is the bondholders, and if they get mad (either through the debasement of currency or inflation) then the actual foundations of the financial system are screwed.”
They aren’t that stupid are they?
It makes no difference long term whether they cut 50bps or 150bps. The dollar is toast.
Personally I would LOVE to see a decline in certain commodities. I will the back up cinefoz’s boat and load up.
One thing I guarantee you that the Fed, Congress, and 97.5% of Americans DO NOT care about is how much it costs you to go have an espresso in Rome.
The other signs of inflation though should concern them (and us, but hey, I’m up to 20% gold).
Never happen, that Fed could care less about inflation, or the box of corn flakes
Trashing the value of the dollar punishes savers. Do we have any savers left in america?
The 6 dollar/gallon gas and 7 dollar/gallon milk, the message is simple and absolutely clear! Well said, Barry
You know what they say in this adminstration, “anyone can go to Bagdhad, real men go to Tehran”.
And, “Anyone can cut 50bps, real men would cut 125”
I think our real men will settle for 100 today. They told you last week that there was no inflation in Feb. (insert whatever that stupid booyah think cramer says here!)
Fed SOP: don’t stop until you go too far.
These guys only have a few months left in which to finish looting the treasury. The more wracked the system, the easier it will be.
Positive conf calls from both LEH and GS this morning. The FOMC implicit credit line really does change the game for these firms. They successfully scared the FOMC into giving them the holy grail.
Both talking about using the cheap Fed borrowings to “grow the biz” which means the balance sheet.
Ummm… why is BSC trading at $7 (+45%)right now?
how is that any different than where the TAF monies went????
That the spreads kept increasing while the Fed was “providing liquidity” tells me that is what they have been doing all along.
They have been doing this for more than 6 months.
oops… make that 8 (+65%)!
Yes we have savers. They are called pension funds, insurance companies, etc. that must align investments with liabilities and are one cause for this mess, as they reached for yield. Public pension funds are woefully underfunded and they cannot earn asnything on their assets unless they get into “speculative” areas. This bomb will burst in a few years and you will hear a chorus of “whowouldathunk”.
Barry it’s too bad most people you debate on their are either idiots or can’t back up the reasons they disagree with you with good numbers.
To that idiot who said the dollar going down is good because it increases imports, you should have reponded by asking how much the increase in imports has been offset by the increase in commodities prices etc. Would have been great if you actually knew the numbers to that too. (I don’t either)
While we’re dreaming,the Fed should really throw the bitch off its back and increase rates by about 125 bp.
Then the stock market could find a bottom. Housing could find a bottom. The dollar could find a bottom, etc. and so we’d get the pain, but quickly, and then it’d go away, clearing the path for growth.
Instead, they’ll probably go 100 down, and like death by a 1,000 cuts, the dollar will continue it’s inexorable slide to oblivion, until the fed really really has to jack up rates to get control of hyperinflation, or alternatively, the fed itself goes belly up, and we get the fourth United States Bank.
Come to think of it, it’s a good thing we’ve still got nukes. That may be the only thing that will save us.
Well I watched the video and what I learned is that our evil laws are preventing the Fed from buying all the bad debt and saving us.
spreads will probably continue to increase although I personally believe that we have put in a near term bottom.
Sure these firms may all turn into zombies a la Japan but it won’t be for lack of funding and it won’t happen overnight
I still think most financial firms will need to raise at least one more round of capital. So this maybe an orchastrated pump ahead of those capital raises to boost investor confidence.
Maybe the FED is trying to annihilate China. They peg to the dollar, and they already have 7% inflation and ~5% interest rates, imagine if the dollar keeps goin’ down. It’s cold war!
BTW Nice hair piece on the bottom of the video capture ???
Did it speak up too???
RE: BSC. Short covering. When Air Canada are-structured a few years back, its shares, while rendered utterly worthless, traded up and down around a few bucks for months and months, puzzling analysts. It turned out that there were so many shorts and many addicted gamblers refused to let go and kept trying to squeeze out 25-50 swings. The stock merely became a trading vehicle, completely dislocated from any form of fundamental value. Many stocks are in this same position as trading vehicles, detached from fundamental valuations.
You definitely made more sense than either of the other two–one day your views will be vindicated, even if it means the free lunch bill comes due.
And Stuart–look at what’s happening w/ CFC these days–bouncing around $7.00 for a while, now about $4, next who knows? I wonder if its like the Air Canada thing or if something really is happening that we don’t know about.
Paul in NYC wrote..
Ummm… why is BSC trading at $7 (+45%)right now?
Could it be…lemme see, what’s the concept I’m looking for?…oh yeah, that’s right…
Could it be that Bear Stearns is actually WORTH more than $2.00 per share??
Apparently what many of the gloomster/gold buying/depression longing/deflation loving posters on here fail to realize that the Fed prevented [i]a run on the bank.[/i]
For more information, see the movie, “It’s Wonderful Life.”
BSC’s assets, believe it or not, actually have VALUE. If everyone who has money gets together and says, “Gee, I don’t trust you, give me my money back” well, that doesn’t mean the assets aren’t worth ANYTHING, but that no one is willing to be patient any longer and finance those assets.
This fundamental concept escapes many on here who think that because some portion of the assets have little value, therefore ALL the assets have no value.
For more information, see Logic 101.
Interesting idea Bucket. We have created a new, non-nuclear version of Mutually Assured Destruction.
China needs to keep taking our dollars and buying our debt, or we go in the tank and so do they………..
by the end of the week it will be ‘free market this and free market that’.
nothing will be learned.
like a punk who had the foot on his neck, gets up and says, ‘come on, I’m just gettin’ started.’
Hey Barry, I really enjoy reading your blog and it makes a change to see somebody speaking their mind, instead of regurgitating all the usual stuff wall street spews forth. I had to chuckle to myself after watching your CNBC appearance though. I was trading the Bund Future this morning, Bloomberg was asking for comments about the forthcoming Fed decision. Yet another nutball came on asking for 100 Bps and I said to the dealing room, while your about it, just go to zero and send more dollars in the post. Your expression during the CNBC interview summed it up really. Prudence calls for 50 bps, anything more would be fool hardy.
My personal instinct is that uncontrolled speculation is the biggest problem we face today. Given that, it would be my urge to pop any speculative bubble wherver I could… whether stocks, oil, grain, house prices – whatever.
I’s like to see the Fed say that the current problem needs to be dealt with in ways other than cutting rates, then to hold steady.
Once the air was out of the balloon, their liquidity efforts would be much more effective than they have otherwise been to date. Also, future rate cuts might be more appreciated as boosts to the economy, not fixes for stock addicts.
“BSC’s assets, believe it or not, actually have VALUE. ”
No doubt this is true, but no one has any idea what that value is and therein lies the problem…
Interesting times indeed.
When has prudence come into play with anything related to this administration and this Fed?
Alot figuring on 100 bps. To me that would convey a cry of desperation, something the Fed doesn’t want. 75 bps more likely, if not 50. If they cut 100, the dollar circles the toidy big time IMO.
wally: THAT is the truth; banks, ibanks, and hedgefunds should not be allowed nearly as much leverage as they use. Letting them invest in things such as commodities with 30:1 leverage is just asking to screw society. Ie, greed, 30:1 leverage and no personal responsibility (no negative bonuses) will lead to persistent pump/dump behavior….
Gee – maybe the big boys ALREADY know what the FOMC is going to do?
Retrogrouch previously posted… Speaking of the Kudlow show – you have to watch this- Laffer debates Shiff on recession prospects on Kudlow & Co. in August 2006. Someone needs to make Laffer pay off his debt. He was the emblematic neocon new dynamics voice.
Retro, the video was yanked off of YouTube, but there’s still a copy available up there at this link. It was REALLY worth a watch.
It’s no wonder Kudlow loves Art Laffer so much. They are two clueless peas in a pod. How could somebody who is SUPPOSED to be knowledgeable about the economy not understand back in Aug ’06 that there was a real estate bubble and it was artificially inflating wealth?
What mail-order houses did Art and Larry get their degrees from? Billy Bob’s School of Economics and Taxidermy? Or did the GOP simply remove parts of their brains?
Am I the only one that is slightly concerned that even yesterday the VIX and VXO didn’t get into sheer panic territory? I mean sure it potentially got to the short term bottom before resuming the trend territory, but nothing even close to the Jan lows.
And the way it’s fallen so much today even though it is a Fed Tuesday is surprising.
“What mail-order houses did Art and Larry get their degrees from? Billy Bob’s School of Economics and Taxidermy? Or did the GOP simply remove parts of their brains?”
I want full 100 points.
I also want Ben running into a supermarket naked.
BTW, Trish is quite a beauty
Art and Larry graduated at the top of the class. Billy Bob should be proud. Mericas nummer one!
You were spot on–a voice of sanity–drowned out by sponsors of corporate welfare. Next time you’re on the show, why not bring up the cost of Iraq–and how withdrawal would certainly help the economy. For some reason, our going into debt for this war gets lost on business shows.
it looks like a medium term bottom is being put in place – just look at the chart of SPY – textbook double bottom.
Today could be a 500+ day on the DOW.
If the FED wants a rally…today is the day for it.
But the question is how long the rally will last and how far will it go.
We’ll see what happens when the FED delivers their version of rocket fuel to the markets this afternoon.
you have a nice smile.
why dont you smile more often?
Why is Bear Stearns (BSC) up nearly 70% Tuesday, to a price about $6 a share above its $2-a-share buyout agreement with JPMorgan Chase (JPM)? Two groups are piling into the company’s stock so they can vote in favor of the deal, a trading source tells Fortune’s Roddy Boyd.
The first group is the hedge funds that were selling so-called credit default swaps that protect the purchaser against a possible bankruptcy at Bear Stearns. Spreads on Bear Stearns CDS soared to 1,000 basis points Friday – meaning it cost $1 million to insure against a default of $10 million face value of bonds. Those spreads have since narrowed to around 350 basis points, or $350,000 per $10 million in insurance, in light of the prospect that JPMorgan Chase will take over Bear’s obligations. So a seller of a Bear Stearns credit default swap on Friday, having taken in $1 million in premium, can now turn around and protect himself against a default in Bear Stearns for $350,000. That translates into a $650,000 gain -and the potential profit stands to get bigger as the close of the transaction approaches and Bear spreads move more in line with JPMorgan’s, which are around 115. Those dynamics give hedge funds a big incentive to make sure the deal goes through.
Beyond the credit default swap trade, there’s another group interested in making sure JPMorgan winds up owning Bear Stearns. Holders of Bear Stearns debt want the deal to go through so they won’t end up fighting with other creditors in bankruptcy court over the remains of the firm – the likely outcome if Bear shareholders turn the deal down. And Bear Stearns bonds that recently traded as low as 80 cents on the dollar could soon be worth 100 cents if JPMorgan goes through with its purchase.
So while taking a loss on the stock makes little sense on the face of it, buying at $7 to get cashed out at $2 can pay off if you’ve bet enough money elsewhere.
Barry, or anyone else,
Since it seems to be accepted as an indisputable fact by you and in the comments here that cutting the Fed funds target rate necessarily causes higher inflation.
What is the causal chain supposed to be through which a lower Fed Funds target rate has the effect of a necessarily higher inflation? I don’t see it.
excellent analysis–thanks. I wonder if it also applies to CFC’s gyrating stock price (about $5 now, strike price is $7)
Inflation is everywhere and always a monetary phenomenon–it is too much money being created relative to the output it represents. When the fed lowers interest rates it does so through the mechanism of buying securities on the open market, thereby increasing demand such that it pushes prices for the securities up and their interest rates down. Each time it buys a security from a commercial bank, the cash generated by that sale appears as an asset on the commercial bank’s balance sheet, and in fractional reserve banking, it can thereby lend out a portion (greater than 90%, usually). The cash from the sale thus increases the money supply once, and if further lent out, many times. If the increase in money exceeds the increase in real output of goods and services the money (fiat currency) is intended to represent, you have inflation.
The fed gets its money to buy securities from–well it is the entity that prints money–so although it’s not quite that simple, it gets its money from the printing presses it alone operates when it decides to buy securities to push its fed funds target down to where it wants it.
Hope this helps. Any others see a correction, don’t hesitate.
Donkei I’d just like to add an addendum that the money right now is most likely not being used to do what it’s supposed to be used for (giving out more loans to help with productivity) because of risk about solvency and a large down turn. Instead it’s being used to chase commodities and other necessities (the idea being that demand for those things are relatively inflexible) and helps explain the huge increase in food prices and other things.
blin: it’s not a textbook double bottom until it breaks the middle of the W. My chart has that at around 1325.
I second Donkei, and mikkel.
I would add another factor though. The massive amounts of US Federal Government Debt also contributes to the entire pile of increasing money supply.
The Federal Government gets its money to pay its employees, projects, and programs from the Federal Reserve. It’s essentially the same thing that happens with banks, except it is with the Federal Government.
Donkei, Mikkel, Shane,
Thanks. However, I am not convinced. If the inflation rate were determined by the increase in the monetary base according to Fed’s monetary policy both variables should be correlated. They aren’t. Hussman has a figure in one of his weekly comments at his website. It shows the absence of a correlation between the change in the monetary base and the inflation rate:
Hussman also argues in his article that inflation is first a fiscal policy phenomenon, but not due to monetary policy.
Or, if you look directly at the Fed’s data series of the monetary base:
If you click at the year-to-year change option under the figure you will see that the yearly increase in the monetary base has decreased in recent years from almost 10% to nearly 1%. Thus, inflation rate should be around 1% currently, if the amount of new money printed by the Fed determined the inflation rate, which isn’t the case, obviously. You also can add a second series to the figure, i.e. the CPI-series. If you compare the year-to-year changes you will see: no correlation, generally.
To those questioning Barry’s reasoning, I suggest the following exercise.
Run a report from Feb 4 from
See that the total amount of sloshing REPOs bottomed the first week of February at 15B, mostly backed by Treasuries. On Mar 12 they reached 77B, 55B of which were backed by MBS (Mortgage BS?).
Then look at price charts of WTI, gold and the euro. All three bottomed the first week of February. (”Bottomed” is a way of saying. $86, $888 and $1.44 are not exactly deep bottoms.) And everyone knows where they are now.
Clearly the injected USDs are increasing the price of the growth-limiting physical resource, and the exchange rates of a currency that cannot be printed (*) and of currencies that are perceived as being printed at a lower rate.
(*) To those arguing that gold is not a currency, I remind them of the well-studied phenomenon of dollarization (see papers by Feige), whereby residents in a country turn to other country’s currency when their own is being printed recklessly. First it is for the purpose of store of value (asset substitution), and then as medium of exchange (currency substitution). The point is: gold is to the dollar now what the dollar was to the pesos 20 years ago. This issue is covered in Benn Steil’s article in Foreign Affairs of April 2007 “The end of national currency” (section “Privatizing money”) and its deeper paper at