I love when a bunch of disparate views and data points combine to give some insight into what’s going on. Its often like an intriguing puzzle; none of the pieces mean much by themselves, but put them all together and . . .
The most recent example of this is the Fed’s reaction to Tuesday’s plunge. While some people have talked about the "Plunge Protection Team," I find little evidence the PPT can ever do much more than delay the inevitable. For proof of this, just look at the 78% drop in the Nasdaq from 2000-02. (Without the PPT, I guess we would have seen an 80% drop?)
Besides that, the Fed is aware that inflation is above all a monetary phenomena. The way they could avoid a meltdown is by flooding the system with liquidity — and we know how that always turns out. The Fed did this during the 2001-03, and the resulting rampant inflation, unaffordable housing boom, $75 Oil and $750 Gold is what they have to show for it. Inflation, thought moderating, is still elevated. I suspect the Fed will be somewhat reluctant to open the spigots again anytime soon, as Bernanke knows all too well that there is no Free Lunch.
Despite this — and all the bullish protestations of a strong economy, a soft landing, a goldilocks scenario — Tuesday’s selloff wasn’t even in the books before the pleading for Fed cuts had begun. This morn’s WSJ notes that "Federal-funds futures contracts on the Chicago Board
of Trade — bets about the future course of rates — reflect a
near-100% chance the Fed will cut the federal-funds-rate target by a
quarter-point in August from its current level of 5.25%. Late Monday,
expectations for an August easing were about 40%."
Indeed, the nature of this economy and the market’s cyclical rally since 2003 reflect a system overly reliant on the Government largesse. Not organic growth, but ultra-low interest rates, ginormous tax cuts, and huge money supply increases are the basis of our post-crash economy. Its no wonder the Bulls are always begging for more; They are all-too-aware of what will happen when Daddy Warbucks proclaims No Mas!
I continue to think that hopes for a cut are misplaced. If we are to believe the Fed’s jawboning, it is inflation, and not stock prices, that has the Fed most worried And that concern is not misplaced, going by the recent Core CPI and core PCE data. Oil, medical care, food prices, all remain quite lofty.
Soothing words will have to suffice from the Fed, because any action — i.e., an imminent rate cut — is doubtful.
Here is our round up of "The Soothing Fed Balm" (soon to be available in lotion form):
This is self explanatory:
The Federal Reserve stands ready to lower interest rates if a financial crisis erupts, said Tim Geithner, the president of the New York Fed, on Wednesday. "As always, central banks need to stand prepared to make appropriate monetary policy adjustments if changes in financial conditions would otherwise threaten the achievement of the goals of price stability and sustainable economic growth," Geithner said in a speech about liquidity in financial markets to a business group.
Geithner said his remarks were general in nature and not related to "the specific conditions of the moment" where the stock prices plunged around the world.
Geithner said liquidity, like market confidence, is very difficult to measure and a reversal of both liquidity and confidence play a critical role in leading to financial shocks. Geithner said financial regulators have a difficult time in predicting when liquidity may reverse. The best way to limit the risk of crisis is shock absorbers in the financial system. "These shock absorbers are substantially stronger today that they have been even in the relatively recent past," Geithner said
2. Fed Injects Short Term Liquidity:
Via COWEN INTERNATIONAL, this commentary was circulated at: 2/28
It’s a short-term liquidity underpin but it’s also the first sign of
concern – and possibly significant concern from the
Firstly, the Fed have had 2 Repo announcements today. This happens on most
Thursday (because of settlement) but never on Wed – at least that I’ve seen in years
watching this stuff.
2ndly, the amounts "submitted" for Repo are low – not in itself a -ve, but
when combined with an extremely high "acceptance" rate (which is what we
have today) it’s usually a VERY bad sign (I call it the Pushing on String
indicator, as it illustrates a keen desire to add liq’y when it isn’t
demanded (and typically happens around crisis events – before, as well as
3rdly, the disribution is heavily wgt’d to MBS (and Agency), accounting for
> 80% of the
Again, this is a v. short-term liq’y underpin for mkts (no doubt supporting
the bounce today), but it also reveals a high degree of concern from the
3. Bernanke’s Congressional Testimony:
All is well, nothing to see here: In the
Q&A portion of Bernanke’s Capitol Hill appearance, he reiterated his views about the long term fiscal challenges of the US. The Fed head said he thinks the economy may strengthen over the rest of
the year, and does not believe the subprime problems will spill over to the rest
of the economy. That’s about as short and sweet as it gets . . .
Bottom line: For now, the Fed is all talk no action. Expect that to continue for some time.
Fed ready to act if
financial crisis erupts: Geithner
MarketWatch, 9:08 AM ET Feb 28,
Mankiw’s 10 principles of economics, translated for the uninitiated. Presented at the AAAS humor session, February 16, 2007. Transcript and additional details can be found here. Print version: Mankiw’s Principles #1. People face tradeoffs. #2. The cost of something is what you give up to get it. #3. Rational people think at the margin. #4….Read More