Now that the currency traders have weighed in on the Fed Cut, perhaps a rate cut is not the salve many are hoping / begging for.

With Oil breaking $80 today, and Gold scoring higher, the question before the house is as follows: What are the repercussions of more rate cuts? If the Fed does take rates down to 4.25%, or even 4.0%, what happens to the following:

-US Dollar, Euro, Yen

-Oil

-US Treasuries

-Gold

-Real Estate (global)

-US Equity Markets

-Soft commodities (Wheat, Corn, etc.)

Two articles might be relevant in coloring your discussions:

Forecasters Increase Odds Of Recession Over Next Year (free WSJ)

Oil Rises to Record $80.18 on Larger-Than-Expected Supply Drop (Bloomberg) 

What say ye?

>

>

please steer clear of politics and ad hominem attacks . . . PLAY NICE

Category: Commodities, Energy, Federal Reserve, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

71 Responses to “Open Thread: Falling Dollar, Rising Gold, Oil, Inflation”

  1. Barry,

    In my opinion, if the Fed cuts its pushing on a string.

    The dollar will continue lower and we’ll be in a recession by next year.

    The stock market will end 2008 lower. And investors will be surprised that the S&P 500 will close down this year too.

    Half the 12,000+ hedge funds will go out of business, because the vast majority of them are not adding any vale.

  2. Eclectic says:

    I’m sorry, but it’s impossible without goin’ after Ed Homminem. Where is ‘at sumbitch, anyway? He owes me some money.

  3. Mike M says:

    No matter what the Fed does, stocks fall badly. It is very likely that consumers will cut back, possibly in a substantial way (aren’t they already doing so?). Rate cuts will not help. Gold, oil, softs drop too if a recession is severe. The dollar may actually strengthen and long treasures do well.

  4. Danny Chapman says:

    The answers to all are in the book!

    I was re-reading “Financial Armageddon” by M. Panzner last night and was shocked at how closely (so far) he has hit the mark. I think we are now in Chapter 6 (“Systemic Crisis”) working into Chapter 7 (“Depression”.) Even if only small bits of Chapter 7 become true, we are in for quite a ride…

  5. Caravaggio says:

    On the one hand the Fed cuts aggressively and the USD turns into a funding currency and is sold short.

    On the other hand, the Fed doesn’t cut as expected, and this raises the prospect for a hard landing. Again the USD sells off.

    Look out EUR/USD 1.40.

  6. KP says:

    The rate cuts will not solve any problems. They will only make it “look” like the Fed is trying to help. It will further kill the dollar; oil and gasoline prices will rise, commodity prices will inflate further…the consumer will be further pinched, recession probabilities will be reality. But Joe Sixpack is not sophisticated enough to connect rate cuts to the dollar to gas prices to xxxx. Don’t look for the MSM to do the work for him either. Bernanke knows he can’t save anyone. The storm was created and set in motion years ago. All we can do is ride it out, and hopefully avoid making the same mistakes again. I anticipate that he will NOT go as low as Greenspan did. He will make slow, small cuts when people start to cry loudly enough, but he won’t stomp the gas.

  7. David says:

    Berry-

    What’s more frightening recession or inflation? I think Stagflation is! With the new accelerating of import prices and along with a slowing or no growing economy = Stagflation and it “Will Be Back”. Not our father’s stagflation of the past, but a new foreign imported stagflaton.
    The Federal Reserve spiking the punch bowl again to restart the old ways, will not work.

    With economic growth slowing at the same time real everyday life inflation rising, this unpleasant alignment will pose a tough puzzle for the Federal Reserve.

    Maybe a Larger Bank Reserve Requirement will absorb the blow.

    “But it is no matter. Let Hercules himself do what he may, The cat will mew and dog will have his day.” William Shakespeare

  8. JohnnyB says:

    Seems to me that the reasonable thing is for Gold, Oil, and Commodities to rise and the dollar and equities to fall in the scenario that is laid out….Is it me or is everyone expecting this?

    I visit more than a few blogs and market forums and frankly it feels like the majority (if not all) of blogosphere and forum posters are all expecting all the same things. Maybe I am just bumping into all the same people in these different forums but I have never seen a consensus on the market, gold and dollar more in lockstop as I do from John and Jane forum poster.

    Can all these things happen at a time when the average joe poster expects it?

    Can it be possible that this is the one time that Wall Street is left the holding the bag and won’t be able to pawn off to main street?

    Maybe this isn’t accurate.

  9. Leisa says:

    I think that increases in oil hit people all about the head and buttocks (with a punch or two to the kidneys and nads) with higher gas and higher food prices. If rates are at historically low levels (as the bulls have been telling us for so long), then leave them be. I’m astounded, utterly astounded at the prices at the food store. The problem is not that interest rates are too high, but rather that greed was to high and the excesses need to be paid for. I say, gird your loins and take your medicine like a man.

    So what if stocks fall? Stocks are not held by the folks that are hurt most by rising food and gas prices. Also, they rent–so they don’t have to worry about mortgage interest. If we are cutting rates to offset teaser rates, then shame on all of us. Those teaser rates were offered to earn fees up front. It was always going to be somebody else’s problem to assume the risk.

    The folks calling for rate cuts are those that have been feathering their beds by unsustainably low interest rates. Let’s not make them even lower. I didn’t realize how pissed off I am about all of this until now. Thanks alot Barry (wink!).

  10. snowdahlia says:

    Analyst: Fed rate cut won’t help markets
    Lower interest rates will not bring in money but instead send dollar into a tailspin, says Punk Ziegel banking analyst.
    September 10 2007: 8:44 AM EDT

    NEW YORK (AP) — A widely watched banking analyst said late Sunday the best solution to the crisis plaguing financial markets is to let cash-strapped borrowers default and their lenders go bankrupt, rather than slashing interest rates.

    Punk Ziegel & Co. analyst Richard X. Bove wrote in a client report the hoped-for cut in interest rates this month will do nothing to bring money back into the U.S. financial markets. Instead, Bove said, lower interest rates will send the dollar into a tailspin and wreak havoc in the job market.

    Many investors believe the Federal Reserve will cut its target for interest rates next week by at least 25 basis points, from the current benchmark 5.25 percent federal funds rate.

    Investors have clamored for Fed Chairman Ben Bernanke to cut rates to stabilize financial markets, which have been in turmoil since July amid decaying credit quality and a flight to safer investments like Treasury bonds.

    Bove cautioned that cutting rates will not lure investors back into troubled markets. Investors and banks already have the cash to buy risky loans and investments, he said.

    “There is no liquidity problem, but a serious crisis of confidence,” Bove said. “In a financial system where there is ample liquidity and a desire for higher rates to compensate for risk, the solution is not to create more liquidity and lower the rates that are available to compensate for risk. … (The Fed) cannot reduce fear by stimulating inflation.”

    In fact, cutting interest rates will only encourage investors to borrow dollars at the lower rate and bring the cash to places like Europe, Bove said.

    “It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value,” he said. “By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets.”

    Bove said the solution to this crisis is to allow people who cannot repay their debts to default and allow the companies that issued bad loans to fail.

  11. Robert says:

    I am split right down the middle on the likelihood of a September rate cut. On one hand, the dollar hit a 15 year low on the .DXY today. The FED does NOT want a dollar fire sale, which has the possibility of hurting the economy far more than a housing caused recession. On the other hand, the problems in the housing market are far too ominous to ignore. I am of the belief that a slow and steady decline in the dollar is actually good for the US. A weak dollar has the effect of boosting exports and stemming imports, thus reducing the US’s vast trade deficit (which Ben spoke of in Berlin two days ago), while reducing our national debt in relative terms. A slow, steady drop in the dollar allows US businesses time to ramp up their exports and gives them a domestic advantage over importers, thus making our economy stronger overall. However, a fast drop in the dollar would leave our general economy unprepared for a quick rise in the price of nearly everything we buy, and could be just enough of a shock to send us into a recession, even before the full impact of housing is felt (which is probably going to get much, much worse). Since the dollar has already fallen through key support (80), I think the likelihood of a rate cut is much lessened – However, the price of oil is another factor. Obviously, high oil is bad for the economy, which, combined with the housing monster, may just be worse than a dollar drop resulting from a 1/4 point rate cut. I guess is comes down to just which one is worse, which comes down to how currency traders would react to a 1/4 point cut. Would a fire sale ensue, dropping the dollar to 30 year lows (or lower), or has a rate cut already been largely baked into the price of the dollar? Since I have no experience trading currencies, I have no idea, hence I am split 50/50 on the likelihood of a cut… Anyone with FOREX experience care to chime in?

  12. Owner Earnings says:

    Fed cuts rates to 4% (Very Unfortunate)

    Dollar goes to 1.50 vs Euro 1.07 vs Yen

    Oil goes to $95

    Gold, who cares about gold. In the long run gold will NEVER work out.

    Real estate only declines globally by 15% on average because people are so slow to move off of it and the fed props it up by lowering rates.

    This whole cycle will take 5 years starting from 2005. (The lower the fed goes the longer it takes)

    Treasury’s will outperform stocks for a 10 year period for the first time ever.(starting in 98,99 or 00 take your pick)

    S&P 500 will finish at 1,600 in 2010. PE on the S&P 500 will be the same as today at 16-18, but the profit margins will be about half what they are today. (4-6%, NOT 11%)

  13. mlnberger says:

    It is my impression the credit markets have frozen in part because of the rising levels of delinquent mortgage and rising defaults and that the coming tsunami of ARM readjustments will kill the housing market. It seems to me further that interest rates must stay low as part of any solution if we are to somehow cap or limit the imminent flood of delinquencies — and it is an overlooked political reality that large numbers of people losing their homes in an election year is simply unthinkable. But I also think Bernanke is aware of the danger of appearing to bail out Wall Street — thus I think he will lower rates, but gradually, certainly only initially by 25 points next week. I do not think he intends to save the dollar — indeed, such a collapse will help rectify the “global savings imbalance” by making imports simply too expensive as well as boosting exports. I think in this age of nationalism, the Fed will work to protect America first and the rest of world will have to figure out how to consume China’s goodies themselves. The government working with the Fed will do all they can to prop up asset values, and will succeed to a degree until after the election. Then its Katie bar the door — or Katie put the bars of gold inside the door.

  14. Ralph says:

    I was just discussing all of this, this morning with another friend who is a very successful trader.

    Conclusion was that the Fed is irrelevant as far as equities.
    If they cut 25 points, this is already priced in and so no change.
    If they cut more than 25 it will indicate that things are worse than they seem and the markets drop.
    If they don’t cut the markets drop because 25 points is already built in.

    I don’t know that any of us are knowledgeable enough to know what effect a rate move has on the dollar. There are a lot of things that influence the dollar and Fed rate is a only tiny portion of that weighting.

  15. bsneath says:

    My Take:

    1) $ down, Euro up, Yen – not as much
    2) oil, gold, commodities up
    3) US Treasuries – about the same (they are already down)
    4) global growth strong & will disengage from USA
    5) USA consumption down for long haul
    6) exports up, imports up – but not as much
    7) Equities – export-based and multi-nationals up, consumer-based and financials down.

    I think we are finally going to see a move towards equilibrium in the global markets and this will mean that the dollar will fall in order to generate exports and encourage the substitution of domestic goods and services for foreign goods and services. At 1.40 to the Euro, the $ has fallen quite a bit already.

    Japan has a declining population and on trend will continue to see declining domestic consumption (forever!) This places the Yen in a unique situation. Declining consumption = low interest rates = continued Yen carry trade & capital outflow in search of higher returns = lower Yen valuation. (with the exception of credit crises of course)

    USA domestic consumption is down and out for two reasons:

    First, the housing-equity ATM game is over and will not come back for a long long time. Housing equity has been playing a role in consumer spending for at least the past decade.

    Second, the huge pool of baby boomers, now between 40 – 62 years old, many of whom are either leaving the work force early (if financially able) & reducing consumption or will begin to save in earnest now that they understand that their homes no longer can be relied upon to finance their retirement years.

    I believe the global economy is so strong today that it will weather a substantial drop in exports to the USA. This in fact may be a good thing since many economies are beginning to overheat (e.g. China) and could use some headwinds.

    The key to equity investing will be to understand where the USA will have a comparative advantage in a globalized economy that is reverting to a state of equilibrium. I am guessing technology, software, pharma, agriculture, oil services.

  16. Si says:

    Leisa, best comment in ages, nothing more I could add to that.

  17. Armchair Fed says:

    The only thing I’m cutting is the cheese.

    Nobody seemed to react when the British version of the Fed told the financial markets to suck it, which I find remarkable considering the number of debt issuances tied directly to LIBOR.

    “””
    Bank of England Governor Mervyn King said Wednesday that financial markets are undergoing a desirable and overdue repricing of risk, and signaled he has no intention of standing in the way of that process.

    While the turmoil in financial markets is likely to have some impact on the economy more broadly by pushing up borrowing costs for households and companies in the short run, it should not threaten economic stability in the longer term, he said.

    “””
    This is the message I intend to carry through Tuesday, unless I gag on another Dodd-Paulson sandwich between now and then.

  18. Alfred says:

    IN the tradition of Keynes, Friedman and Greenspan, trying to micromanage the economy, the Bernanke Fed will accept inflation over recession. If it is not clear if we headed into one they will opt for a save approach: Cut by 25bp, cut discount window and be data dependent.
    Regarding USD European authorities have stated that 1.45 is the breaking point, at which level we will need another Plaza accord. I am not sure how this can work out.
    The Us economy proved resilient so far: 2QGDP 4pc, durable goods and manufacturing are holding up, the consumer is still spending.
    If the statistics are weakening The Fed does not have much of a choice but to cut rates aggressively.
    We are possibly at the end of the road.

  19. Winston Munn says:

    It is obvious that the house of the U.S. economy has been built on a foundation of sand – it is totally credit/debt dependent.

    We are well past the point of spurring the economy with a rate cut – and the pleadings heard for a rate cut only reinforce how dependent is the U.S. on credit expansion to survive. How can we know this? Simple, actually. On what is interest charged? Borrowed money. What is the entire purpose of an interest rate cut? To stimulate more borrowing.

    Yet we seemed to have placed ourselves in this awkward position by encouraging excessive borrowing – how will encouraging more solve any ills?

    The biggest risk in all this is a collapse of the dollar, causing it to be abandoned as the world’s reserve currency – without a demand for dollars, who is going to pay for all that debt?

    S-T-E-L-L-A!!!

  20. Christine says:

    ML’s David Rosenberg had a thorough piece on what might happen if economy heading into recession:

    Past examples: Episodes of Fed easing coupled with negative economic growth can be found in the early 80s, 90s and 2001

    In these phases, the Fed cuts the funds rate, and cuts it hard. On average, it is down 215 basis points in just the first three months. A year later, the funds rate is still 100 basis points lower than it was at the start of the cycle.
    · The curve steepens — the 10-year note yield rallies 90 basis points in the first three months, though that is where most of the rally takes place. A year out, the yield is actually 25 basis points above where it was when the Fed began to cut. This is in part because the economy, at that point, is out of recession. Keep in mind that the bond market leads the Fed; therefore, much of the rally out the bond curve occurs ahead of the rate cuts and in that first three-month period. This is a time to be reducing credit exposure as the Baa corporate spread widens an average of 15 basis points in the first three months; though a year out, it ends up narrowing by 9bps — again, because by then, the recession is over (they last 10 months typically). This is one reason why limiting the analysis to ‘what happens in the coming year’ is dangerous because you miss out on a lot of the action in that first three-month period after the Fed cuts.
    In those first three months after the Fed cuts rates, but it’s too late to save the economy:
    · the dollar drops 0.8%; and is down 1.6% six months out.
    · Gold as a result is firm, gaining 11% in the first three months and rising 17% six months after the first cut.
    · Oil is down 3.0% and 5.5% respectively over those time intervals
    · CRB index is down 3.0% in the first three months and remains down 3.0% in the first six months. Outside of the dollar induced rise in gold, commodities are to be avoided.
    · VIX index surges an average of 28% in those critical first three months. So, buy vol but sell after that third month because it begins to recede as the Fed moves aggressively to dampen the recession pressure.

    Equities:

    · the S&P 500 is flat, the Russell is down 4.5% and the NASDAQ is off 5.3%, so this is a move to quality, large-caps and defensive names for the most part in that three month period after the first rate cut. Utilities, drug retailers, food products, and tobacco are the places to be. In contrast, tech, especially semiconductors, industrials, restaurants, and the banks do not fare very well over that initial three-month span.

    In these periods of Fed ease and recession taking place in tandem, the asset mix in that crucial three months after the Fed went was bonds>stocks>cash. Between that third and sixth month, the equity market begins to discount the recovery and the optimal asset mix shifts to stocks>bonds>cash. A year after the Fed cuts, and usually the economic downturn is behind us by then, the asset mix that typically worked best was stocks>cash>bonds. This is why it is not good enough to just look at what happens a year later — there is constant rotation that takes place, or should take place, along the way.

  21. chris says:

    I found it very interesting that the price of oil was unaffected by the OPEC announcement the other day that they would increase production by 500,000 bpd.
    Peak oil, anyone? Some people think we’re there. (pardon the language)
    http://www.kunstler.com/mags_diary22.html

  22. peanut says:

    It’s crushing to watch Bernanke destroy the dollar. Deflation may be painful to an economy, but inflation is the destroyer. Bernanke cuts –> dollar spirals down, inflation reigns, treasuries fall as interest rates spike, US equities collapse as foreigners dump and shun dollar backed assets and the economy struggles with stagflation. Bernanke defends dollar (no cut) –> recession, bear market in equities for a year, U.S. takes its medicine but things stabilize.

  23. Si says:

    My reading of the dollar situation is that its gonna be hit pretty hard this time around. The FED is simply unable to live in the real world. No one said capitalism was perfect, it has its ups and downs..you know those things called recessions. However over the long haul its a winner. The currency markets look at the Fed and I think they see a weak body of policy makers who are simply too much of a political animal, they are unable to do whats needed. They have essentially become bail out artists. Why under that situation would anyone hold assets in US dollars unless they have to. The worse thing about this situation is they are essentially bailing out a gob full of greed and speculation which kind of only makes them look even worse.

  24. mhm says:

    I’m no FX expert but I expect large moves in the USD if the Fed cuts by more the a quarter point. Not so much fundamental play, but speculation from Russia and China.

    Now, large moves may force liquidation of carry trades in the USA and Emerging markets (remember the meltdown in late July).

    Russia, because they can and they are used to the game (GBP recently).

    China, because the CNY/USD is fixed they can do as they please. And their internal market is closed to foreigners.

    I’m not sure what I should do to protect my investments and the clock is ticking…

  25. Antoine says:

    Everything is wrong – Real Estate, capital markets, debt, dis-savings, leverage on and on it goes.
    What I find particularly interesting is that when food stuffs and commodities (energy) are both rising Inflation is a terrible force. last night wheat was over $9 a bushel, up 82% YoY.
    I firmly we are in a re-inflationary cycle, remember the dis-inflationary cycle just ended after a 22yr and 11 run from ’82 to recently. What I’m saying is that Inflation is BACK and whatever the ants do is largely irrelevant other than a volker(ism). The great bull market of long bonds is equally dead. For instance the returns for long bonds the 20yrs prior to 82 was awful, after 82 almost double the returns of the S&P. the Next 10-20 is going to be equally awful for long bonds…..just in time for those useless boomers retirement(was that ed Homminen?)…:)
    Anyway, it doesn’t matter what the monkey’s do the results are baked into the cake.

    Regarding Oil, it’s funny you know Oil has only appreciated equall to the depreciation of the USD! think about it, the USD is down like 30%ish and Oil is up a bit more, all Oil is doing is rising with the fall of the USD, cause no one wants accept a falling premium for there product. It seems so simple yet so many people fail to ascertain that. Oil in Euro’s or C$ is actually fairly reasonable! I think Oil will appreciate as the USD falls.

    Regarding the USD, well I’m torn, as much that the FED cannot lower interest rates too much for fear of pissing off the US’ creditors…….and screw ‘em! On the other hand depreciation does achieve certain tangible benefits re: exports up, reduced imports, breathing room for greedy bastards etc, etc.

    The Yen is an interesting situation, I understand that during the day it is highly coorelated to the S&P; this makes sense if one considers that the enormous carry trade has effectively equitized the Yen!! which would/could be an incredibly violent thing! yes?

    Oh well, who knows what gonna happen other than all these imbalances are going to be rectified one way or another, and in doing so it will be painful for a lot of people.

  26. The US dollar and will likely weaken further. Many seem to believe that there is a linear relationship between interest rates and currency exchange rates. But that is really not the case. For instance, the Bank of Canada is holding its benchmark currently 75 bps below the US Fed Funds Rate. Yet, the Canadian dollar is going through the roof!
    More important than interest rates are flow of funds and money in combination with supply and demand.
    Along those lines, there are plenty of US dollars. Junior’s little Middle East adventure and some other government expenditures along with tax cuts appear to be funded by running the printing press.
    In Canada by contrast 2 minority governments (one liberal, the current conservative) have run government surpluses year after year. Even the provincial government of Ontario (largest population) is running surpluses now. Some of the surplus money (the politicians did surprisingly wasted only some of it) has gone towards paying down debt. That essentially reduces the money supply. Demand for Canadian dollars is high, because of the oil sands and other natural resources.
    All major currencies are fiat currencies. Investors need confidence in a country’s leadership for its currencies to rise.

  27. rickrude says:

    the canadian $ is only going through the roof in anticipation of cuts on the USD by the Fed and no cuts by the canadian side.

    Either way, no matter how you manipulate
    the USD, Oil is a hot world commodity, and
    it ain’t going to become plentiful for the
    US citizen because of the FED fine tuning
    with the interest rates and money supply.

  28. ilsm says:

    -US Dollar, Euro, Yen Yen stays at 113 plus, BoJ will keep this,with BoC, they hold too much dollar stuff. Euro is already too high will hold near to 1.40.

    -Oil, the margins are so high I think oil will suffer more inflated $’s. They already made their adjustments to inflated $’s.

    -US Treasuries; BoJ and BoC are bought in, stay about here.

    -Gold- Let them eat gold.

    -Real Estate (global), I will continue to rent.

    -US Equity Markets– Whatever the money guys want, no game for real people. Lower rates will make the 36000 dow a bit less fantastic.

    -Soft commodities (Wheat, Corn, etc.)– See oil.

    Unless someone pulls out one of the cards……..

  29. KnotRP says:

    If the Fed cuts FFR, the dollar drops, and all non-FFR governed borrowing rates rise, inducing a serious recesion along with expensive imports.

    If the Fed doesn’t cut the FFR, the dollar rises a bit, and all non-FFR governed borrowing rates stay put, making for a less serious recession.

    Either way, we get a recesion.
    It’s just a matter of whether we also trash the dollar or not.

  30. m3 says:

    i think a bigger question is what happens to the spreads on international rates.

    the ECB, BOJ, BOE, among others, were all on rate hiking sprees, up till now. today, they’re all on hold. their economies are visibly slowing as well; it’s not just the US. that implies rates are coming down just like here.

    not only that, it’s slowly dawning on the british that they had a housing bubble there too; only ARMs were used more often there than stateside. (uh-oh)

    so i can see a situation where central bank rates come down globally. that should keep the spread between falling US rates and the heretofore rising int’l rates in check. which will keep the dollar from totally imploding.

    china is the wild card, b/c of surging inflation, which will keep upward pressure on their interest rates.

    in the end, this is supportive of non-industrial commodity prices, bad for the dollar, neutral for treasuries, bad for real estate in developed markets, and bad for high beta equities.

  31. KnotRP says:

    One more thing — housing is going to reconnect with incomes no matter what the FFR is, lower or not, and since wages aren’t going to inflate (even if the dollar drops) home prices are headed down toward “normal” (like a shock absorber that bottoms out, I suspect).

  32. REW says:

    BR,
    You left out (or I missed) a key part of the question: timeframe.
    Given that the FFR is at 5.25% today and the current FOMC likes gradualism, I’ll assume that the drop to 4% in your question takes six months. This is key to the prediction, because it means several of the items you listed won’t see much impact in the first six months of rate cuts (global real estate and soft commodities).
    The big picture here is that the Fed Funds Rate is too high, never should have gone to 5.25% and lowering it will have positive impacts. Lower rates will spur economic growth at the margin. This new activity will soak up the current excess liquidity and the extra supplied (if any) as a result of the rate cuts. The net result will likely be a stronger USD and lower gold and oil. Conventional wisdom here is dead wrong.I expect:
    - the USD, Euro, and Yen to all be higher compared to gold. The USD will rise the most, then the Euro, then the Yen, so the USD gains against the Euro and both gain on the Yen.
    - Oil to be lower, I guess in the $60s/bbl range.
    - Treasuries will be a mixed bag. The curve will steepen.
    - Gold will fall against the USD, to say $600/oz
    - Real estate will be little changed from today (not enought time for an impact)
    - US equities go above 14K on the dow, but not much higher
    - Softs are mostly unchanged as a result of the cuts.

  33. Aaron says:

    Purge. We need it.

  34. Stuart says:

    None of the above matters about the FOMC rate cut. Financing the unfunded liabilities is a absolute guarantee of the fiscal deficit blowing off the chart and the dollar diluted to monopoly money. Hyper inflation is baked in the cake by the end of the next President’s 1st term. This stuff going on now, rate cuts,…pushing on a string. But to address the short term, re:

    -US Dollar, Euro, Yen (dollar down, Euro & Yen up in terms of dollars)
    -Oil (long term up, peak oil believer here)
    -US Treasuries (world will be gagging on them soon, so you know where prices are going…………….eventually down)
    -Gold (alot higher)
    -Real Estate (global) – higher
    -US Equity Markets (LT higher, short term flat to down)
    -Soft commodities (Wheat, Corn, etc.) – supply and demand will push higher, but lets not start from $9 wheat, ok…

  35. Sue says:

    Yesterday Bernanke was talking about the current account deficit, I think the dollar has to go lower to fix the account deficit, unless the Democrats do something first. Treasury rates will move lower because the Chinese will continue chasing US assets, the Euro will move higher.

    Doesn’t matter if rates go lower, the Chinese central bank has to park their 2 billion a day somewhere in US assets, maybe that’s why stock prices are still up….

  36. Sharif says:

    What makes everyone so certain that there will be a rate cut? Bernanke is not Greenspan.

  37. Sleepless in NY says:

    If the Fed did cut the rate to 4.25 or 4.00%:

    A) Inflation would go up.

    B) The dollar will fall faster as foreigners look for bigger returns elsewhere.

    If we get inflation with no growth, isn’t that stagflation?

  38. Warren says:

    I think that the previous posters have overlooked one main ingredient in the mix here, and that’s what happens if the Congress, via Sen. Schumer, is…um…”persuaded” to buy up all those funky loans that the real estate tycoons wrote up during this recent “boom”.

    In effect, the Congress will have either Ginnie Mae or Fannie Mae or Freddy Mac give the lenders the money and put the public–US–on the hook for the whole fiasco.

    Of course, the whole thing will be couched in terms of “helping out the homeowners” when in fact it is the miscreant lenders who will make off with the money.

    Sorry for the political angle, but it can’t be divorced from this problem.

  39. sanjosie says:

    -US Dollar, Euro, Yen
    Dollar value declines, it’s up to the Asian’s to defend the dollar. Japan will competitively devalue the yen. Euro will face the problem of being too strong.

    -Oil
    Geopolitics are too dicey for oil to decline much. Demand outstrips supply. Decreases in demand due to recession/lower-growth do not lead to supply surpluses.

    -US Treasuries
    Unloading of foreign holdings accelerates, counteracting the Fed’s rate cuts. Euro denominated sovereign bonds are much sought after.

    -Gold
    Gold heads higher as currencies lose value.

    -Real Estate (global)
    Greatest source of wealth destruction.

    -US Equity Markets
    Doesn’t matter, dollar loss in value reduces absolute value of stocks even if they trend sideways (best case).

    -Soft commodities (Wheat, Corn, etc.)
    Volatility due to weather patterns. Big Chinese demand will see large purchases with adroit timing during these cycles. (In the ’70s, Russian purchases riled US markets and consumer attitudes)

  40. KnotRP says:

    Well Warren…if congress has the taxpayer eat the losses, that’s more debt on top of $9T already which won’t be good for the dollar, but we’ll get another big bubble in something else for sure.

  41. Schnauser says:

    forex is not the only market to have priced in a Fed rate cut. gold, oil, wheat, even the financials have all shown strength based on nothing but a Fed rate cut that won’t even solve the problem. buy the rumor, sell the fact. the market will be going down anyway, if it pops (upward) on the rate cut “event” then that’s just a gift to sell some more. but isn’t it sort of obvious that the buying of the past few days is all based on the coming “rescue?” give me a break. it is times like these that the little guy actually has the advantage over the professional/institutional types because there is no career risk involved in “missing” the boat if the market does move up from here. the risk/reward is asymetrical. good friggin’ luck!

  42. Marcus Aurelius says:

    Lots of turbulence.

    Housing is pretty much a foregone negative (the ramifications aren’t yet clear, but the damage seems to be pretty large in value and extensive in scope – involving a loose international conglomerate of buyers, banks, mortgage originators, ratings firms, and hedge funds, and negatively impacting employment, available credit to individuals and financial institutions, liquidity/solvency of individuals and financial institutions, and the value of the dollar).

    The dollar is dropping against major currencies with the never before encountered specter of a competitive world currency (Euro). A devalued dollar might spur manufacturing and exports, but we don’t export products – we export raw materials. We manufacture hamburgers.

    We are the world’s largest consumer of oil – we need it to feed our culturally ingrained method of transport. Its’ hard to believe that 100 years ago, automobiles were a rare novelty. Our dependence on this dwindling commodity has led to war and instability – ample proof that we’d rather fight than switch. Alternative energy would seem to be a national priority and a natural growth opportunity for business and industry. A couple of years ago, you could buy a Hummer and write it off. It’s Detroit vs. Green Weenies: Who ya’ got?

    Skilled labor has moved overseas more quickly than could have been imagined (nice focus on foreign language education, America). At the same time, lower wage, blue collar workers are supplanted by a wave of illegal immigrant workers 20,000,000 strong. The American middle class is being squeezed out of existence by the emerging world middle class.

    Can’t say what’s going to happen, but it ain’t lookin’ too good for the home team.

    Owner Earnings | Sep 12, 2007 8:41:40 PM says that gold never works out. Seems to me, gold in-hand is currently a better bet than most other commodities (unless you own a farm, outright).

  43. Crush Da Bears says:

    Wow, everyone is so bearish here. The bears are everywhere nowadays.

    I am betting against the bears. The Fed will cut. We rally on Tuesday because 42% (dumb money) are betting against the cuts and will be forced to cover.

    The dollar will be just fine and actually it will go higher after the cuts (extremely oversold and shorted in anticipation of the cuts)

    US economy accelerates in 2008, low inflation environment, the bears getting crushed and we have the greatest secular bull market of 21st century.

    God Bless America!

    Yahoo Sentiment (10K responded so far)

    When the Fed meets, what will it do?

    Lower rates – 58%
    Hold rates – 38%
    Raise rates – 4%

  44. sk says:

    Barry,

    I watch you on Larry Kudlow ( and I respect that he invites and “plays nice” and gives adequate airtime to people whose views are far more different from Larry’s than yours) – the conundrum for me is that the official mandate for the Fed ( to summarize: stable prices and full employment ) says nothing about the US$ exchange rate, about oil prices, about gold prices…

    In particular, the exchange rate is specifically the responsibility of the US Treasury. So why would the Fed care about the result of their actions on the exchange rate ?

    Of course there are no time limits set in the Fed mandate ( i.e. inflation must be in spec for 95% in any 60 month period ) nor are there any metrics about what inflation IS ( i.e. headline CPI, core CPI, PCE deflator ) and they have played fast and loose ( not lose !) with their metrics anyway so the end result is that IMO the mandate is a load of bollocks – the Fed does what is politically expedient in some overall political class consensus sense at that time..

    My problem is that I can’t see what the political class wants.. I can read the runes from Paulson.. I can read the runes from the shameless whores and endless touts that appear on CNBC – but who’s the master of this all as Alice ( well, the Queen anyway ) said.

    I’m betting on Paulson – and the debt we owe the Chinese trumping the Wall St. touts i.e. politics trumping pure Mr. MoneyBags.

    -K

  45. M.Z. Forrest says:

    I say no rate cut this meeting. The regionals have been pretty insistent that it isn’t needed. There may be a consensus on Wall Street, but there is also seems to be one with the regional presidents, and they are saying no rate cut. The dollar will continue to depreciate.

    Corn prices are driving food inflation. That is being driven by ethanol. I don’t anticipate anyone touching the ethanol standards during an election year.

  46. Warning to da bears about getting crushed in the process of fighting the Fed (from the Fed).

    “The Federal Reserve sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. The challenge for policy makers is that tensions among the goals can arise in the short run and that information about the economy becomes available only with a lag and may be imperfect.

    If the economy slows and employment softens, policy makers will be inclined to ease monetary policy to stimulate aggregate demand.

    Lower interest rates in the United States will lead to a decline in the exchange value of the dollar, prompting an increase in the price of imports and a decline in the price of exports.

    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.”

    http://www.federalreserve.gov/pf/pdf/pf_2.pdf

  47. pj says:

    What I cant figure out is what happens to the carry trade. Assuming the simple carry trade has been leading to invt in (of all places) US treasuries. A 50 bps cut should logically imply a reduction in returns of an order of around 9/10%. This is equivalent of Yen moving to around 100 at current interest rates. Now this seems way too violent.
    What am I missing?

    Secondly, just cant get what these guys (Ben, paulson etc) can do to get out of this hole. They will be doing something definitely, as the game is plain rigged and bears have to be crushed. But just cant figure that one out.

  48. Ron says:

    Bsneath wrote something funny, that the baby boomers would stop spending now that they are approaching retirement. I read that quite a bit and find it to be hilarious. Since when did these self-centered, materialistic boomer jackasses ever spend less? Waa waa waa, we were at woodstock! Now we drive beemers!

    Those clowns will keep spending more til they die. Remember, they inherit all that $$ from their parents starting soon…

  49. m3 says:

    crush da bears-

    wow, i respect a guy crazy enough to be a bull up in here.

    but the key flaw in that argument, re: rate cuts support equities, is that it only applies to long term interest rates. the quote you provided states as much.

    the fed funds rate doesn’t mean much at all.

    mr. hussman blows your theory out of the water right here.

    it’s the long term rate set in the market that supports equities… not the fed.

  50. Frankie says:

    Fed CUTS rates…Prime rate falls, and the dollar RALLIES, just like in 1995. Stocks rip higher.

    Bears say “WTF…it’s a conspiracy I tell ya!”

  51. VJ says:

    chris,

    I found it very interesting that the price of oil was unaffected by the OPEC announcement the other day that they would increase production by 500,000 bpd.

    That’s because it’s well acknowledged in the industry that OPEC cheats by routinely producing 1,000,000 bpd more than their stated production output. Therefore, they could move their stated output up by 500,000 bpd without their actual production changing by a single barrel.
    .

  52. chris says:

    Hmm. Thanks, VJ.
    Must read more.

  53. Justin says:

    Barry, it would be great if we could get rid of the redundency, but then I guess some of the finer points might be missed?

  54. bold'un says:

    The fed’s primary goal is to maintain credibility i.e. not to look stupid! They would not want a rate cut to be followed by a new high in the Dow Jones, especially if accompanied by an uptick in inflation. The other risk of looking stupid is if the bond market comes to disapprove cutting the fed funds rate (why should a foreign holder of Treasuries accept 4.6% for 10 years on a declining currency?): if the bond market tanks, up goes the mortgage rate, which is not going to help the subprime mess overmuch…

    On the positive side, through European eyes at least, US property prices look very attractive (like 50% below South East England). Anybody any idea how to arbitrage that without emigrating?

  55. bsneath says:

    “Since when did these self-centered, materialistic boomer jackasses ever spend less? Waa waa waa, we were at woodstock! Now we drive beemers!

    Those clowns will keep spending more til they die. Remember, they inherit all that $$ from their parents starting soon…”

    Ron – I am a MBJ myself. I’m still pissed that I missed out on Woodstock (too young). I don’t drive a beemer, but my wife drives a Lexus (does that count?)

    I do not disagree with your comments.

    Many have expected the boomers to rachet up their savings for years, Yardini made a cottage industry out of this theory back in the early 80s.

    The propensity of MBJs to seek immediate material gratification has been greatly under estimated. (As is their ability to be outrageously hypocritical e.g. – “GM is an evil American corporation, so I bought this over priced imported Beemer SUV because I want you to know that I am really cool.”)

    Some will inherit $$$$ and continue to live in McMansions, own second homes and take annual sojourns to Europe (first class of course for they want you to know they are important as well) to mingle with other “cool” people and apologize for Bush’s failure to ratify Kyoto.

    This group however is a relatively small percentage of the boomer population. (thank goodness)

    It may not be readily apparent if one lives in a high PCI area such as NYC, Greenwich or DC, but out in the heartland and the south, many folks have been living large by using their home equity ATMs and credit cards.

    Their mommies and daddies will not be bequeathing to them a summer home in the Hamptons to go along with the trust fund.

    These are the folks who are most affected by the current housing deflation. They are the folks who will need to ramp up saving and cut back spending.

    All that being said, I do see a possibility that those wealthy few at the top will continue to spend and consume enough to keep the economy moving forward (aka “trickle down theory”).

  56. bsneath says:

    Ron – I forgot to address one other reason why consumption will fall. It is empirically more significant then all of the babble above.

    Quite simply, people, even rich people, consume less when they get older. They buy fewer cars, drive much less, travel less, eat less. It costs a lot to be “cool” and being cool is no longer as important. (would rather take a nap)

    Statistics show that age 46 is on average the age of greatest consumption, after which consumption falls in EVERY expenditure category except two: health care expenditures and hard liquor (I am not making this up).

    The average age of boomers today is about 50 – 52. So why has consumption continued to roll on for the last 5 or 6 years? Two reasons: 1) The housing bubble and home equity ATM phenom, and 2) Very high rates of immigration and the resultant demand for housing, autos and everything else material.

    In fact one analyst predicted years ago that immigration would extend the “consumption phase” of the economy from the year 2000 to 2006. (I need to find this article and start following this analyst’s other recommendations because it looks like he was right on target.)

    I suspect that the clamp down on illegal immigration, coupled with the restrictions on HB visas and the housing bust will all result in much lower levels of immigration in the future. This will mean the loss of yet another demand driver for our economy.

  57. Greg0658 says:

    crush D B – I suggest start using the magic word … please. Don’t assume your automatically blessed anymore.

    and was it Stuart (read post last night) thanks for the FC (ficticious capital) posting … legal transfer (hum) of real assets from entity to entity

    I am wondering just what is the big picture thats playing these days? I’m scared that the world has to many people, making to many problems, and birth control is out of the question.

  58. teraflop says:

    Hyperinflation has been my mantra. Hard assets like real (real) estate, Gold, autos (depreciated), will rise in value substantially. Official inflation will still lag and have a factor applied to reduce real inflationary effects.

    I consider the Euro to be substantially at risk thus depressing effects of the USD devaluation. So once some of the sub-junk Euro-bank liquidity (wednesday’s auction still shows weakness) is alleviated, watch for a further decline in the Euro/USD rate.

    In the medium term, I consider us reaching a saturation point by which traditional levers (repos, discount rates) will have only a sluggish and delayed effect on desired outcome. In non-financial systems this can lead to run-away conditions. Watch for the hockey stick along some of the metrics (Oil, Gold, FX) – the setups (and forward volatility) are typically unseen (untrumpeted) until you’re ramping.

  59. Greg0658 says:

    final thought, refreshing you memory … blessings come from giving till it almost hurts

    but take care of yours’ first

    the fine line between those 2 statements … keeps you modest

  60. The Dirty Mac says:

    Short-term – recession and inflation – possibly pretty bad.

    Long-term – few people have gotten rich betting against the United States.

  61. Stock Roar says:

    The dilemma for the FED is that if they lower interest rates, it will cause a dollar weakness which will cause a sell off in the bond and broad market. Overseas investors will deposit their money elsewhere at higher returns.

    http://www.stockroar.com/2007/09/11/the-us-dollar-inflation-and-gold/

  62. The US Dollar, Inflation and Gold

    On Sept 18 Fed

  63. Short Man says:

    “On the positive side, through European eyes at least, US property prices look very attractive (like 50% below South East England). Anybody any idea how to arbitrage that without emigrating?”

    - – - -

    Bold’un – How about I propose to trade you the deeds to five detached 1,5000 square foot homes in South East Michigan in exchange for one 1,000 square foot flat in South East England? I’ll take anything in zone 1 of the tube built less than 200 years ago.

    In reality though, UK home prices are starting to look equally vulnerable. Just look at Spain.

  64. mddwave says:

    It seems if the Fed now drops to 4 or 4.25, it is after fact. The market has peaked last July and is going down. To support the lower rate, inflation is coming. This rally is helping those get out in time, before October.

    It won’t help the subprime home owners, they couldn’t afford the homes to start with.

    It won’t help businesses in a slowing economy. Who would invest when you have to lay off people?

    It won’t help those poor banks. The mortgage loan demand isn’t there any more to support the thousands of mortgage officers.

    It won’t help the subprime loans that have been derivitized and sold to the whole world. (I guess that is what free trade is about. The world is free too take our debt! The world might not like USA as much when our paper is worthless.

  65. Antunes says:

    The markets rarely (crashes) goes up in a trend like this one and reverses immediately: it needs to go sideways before changing this 4 years trend.

    So, don’t be so bearish, at least for now. ;-)

  66. The USA cannot solve its own economic decline without reference the rest of the world.

    If the Fed drops rates to appease bad borrowers and negligent lenders, it will pay the price of the USD sinking further against the EURO and GBP. So what you may say?

    Well OPEC prices in USD – and they are pissed. Every time the USD sinks lower they get less on conversion. They want to price in EUROS – so do the Russians and Chinese. If this happens (and the US like most of the West has no manufacturing to fall back on) the USA will suffer far more than a recession – more like a deep depression. No wonder OPEC keeps holding back on supply.

    Chinese Inflation has yet to creep thru, but it will as inflationary pressures are immense, and when it does rates will have to go up to control inflation – unless inflation is deemed to be a good thing. Ask those who live in Zimbabwe or Venezuela?

    The Fed, ECB, BoJ, BoE et al cannot act in isolation as risk is now spread globally.

    If they do act in isolation, which appears to be the case, then capital will fly to quality.

    And this quality will not be geographical.

    It will be Gold and the EURO.

  67. Ames Tiedeman says:

    In the U.S. interest rate are going lower, Gold is going higher, Oil is going higher, inflation is going higher, the dollar is going lower. What is wrong with this? Everything! At some point the FED is going to have to raise rates bigtime. We are in a very, very, precarious situation at the moment. I think Gold will tripple to over $2,000 an ounce when the market finally wakes up and sees the real inflation. Last I checked a lower dollar = higher import prices. There is no inflation deflator here. With commodities on fire you can forget about that. Bernanke should have never lowered rates last week. However, the Fed might be doing something that few have talked about. Maybe the Fed has abandoned the dollar to crush the trade deficit. Good luck, it will take 20 years to correct our 6% of GDP trade deficit and move it back to under 1% of GDP, unless you want to seriously disrupt the global economy. We are in for tough times people. Very tough! The FED will not be able to save housing with lower rates. We are in for a 10 year decline in home prices. It is called a cycle!

  68. John says:

    Having a online home business is great for retirees who would like to supplement their retirement pay and or social security income. They could also bring a lot of knowledge to their online home based business, that would help them to become truly successful. http://advancemagnumcash.pixieinfo.com/

  69. Sue says:

    What is wrong is that we borrowed to build
    houses and buy cars, not to build companies
    to build products to market. Now we seem
    like a third world country, just grains and
    coal to sell. I believe the next thing we
    will see will be massive disconnections of
    cell phones, internet connections. Everything points to a lower standard of
    living in a world where commodities are
    more and more expensive to produce. This is
    an age where values developed during the
    Depression will reemerge. It is now an age
    of frugality and fear, an age that balances
    out our past drunken optimism and shopoholic
    status driven tendencies. We will learn to
    cook, not to eat in restaurants. We will
    learn to eat beans, and skimp on chicken.
    It will be a quieter life. It may go on for
    years, but we will formulate new values
    to guide us as we now see the world framed
    by scarcity and react by saving, rather
    than abundance fueled by credit.

  70. “I found it very interesting that the price of oil was unaffected by the OPEC announcement the other day that they would increase production by 500,000 bpd.”
    That’s because it’s well acknowledged in the industry that OPEC cheats by routinely producing 1,000,000 bpd more than their stated production output. Therefore, they could move their stated output up by 500,000 bpd without their actual production changing by a single barrel.

    prefabrik