Tuesday, September 18, 2007

 

Did the Fed just save the market?

The short answer is that it might have. The unwinding of the asset bubbles in stocks and housing really depend on the collective psychology of all the debtors and creditors. If the Fed's 40 basis point cut in the Fed Funds rate was the tonic that the market needed to stem the tide of panic then perhaps the Bernanke Fed has pulled off another save just like his predecessor. It is just too early to tell but I am not ruling it out. I've been burned enough by false breakouts which were quickly retraced and this might be the same.

Of course each bailout has brought more leverage and higher indebtedness. At some point the Fed is going to run into the same situation as the Bank of Japan. You can cut rates but that won't make anyone want to buy assets that they believe will decline in value in the near future. So keep this is mind about this rate cut: they are trying to instill confidence in our financial system which will keep people from panic selling. The rate cut actual means very little. 0.5% is not much of an incentive to buy a bundle of sub-prime mortgages.

Something else to consider. The Fed has an inflation problem which they are choosing to ignore for the moment but the markets won't. From now on the price of oil, gold, and all other commodities as well as the consumer price index will be very important because any sign of inflation will hit long term interest rates very hard. Also, the dollar has been falling. (It's at 1.40 to the Euro, right now.) Lower interest rates do not make your currency more attractive. So Ben Bernanke has a much tougher enviroment than Easy Al. A lot of plates to keep spinning in the air.

With all of these potential problems, including the slow rolling disaster in the housing market, there is much for the American investor/consumer to ignore. I am just not ready to pronounce us more afraid than not. Perhaps if we stay under 14k.

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