Marketocracy General Forums

greenab

You're entitled to "strongly disagree", but I might point out that Mr. Ritholtz hasn't had a positive thing to say about the economy that I could find. The reason for that is because he manages a hedge fund which is probably leveraged up the kazoo on the short side. So take what he says for what it's worth, but when it flies in the face of all the positive economic realities try to recognize that the man just might have an agenda here.

Those realities are a strong economy. Maybe not as robust as the past few years but growing nonetheless. Corporate earnings growing and surpassing expectations quarter after quarter. A continuing low interest rate environment benefitting both the consumer and corporate sectors. Continued productivity and wage growth. Continued low unemployment rates, which if they began to trend higher would be a major concern. Numerous other factors all of which the Fed is surveying constantly in order to get ahead of any bumps in the road.

The Fed's mandate is to keep the economy healthy, not to prop up the dollar or the stock markets. Neither is it their responsibility to bail out corporations who may have used devious lending practices to lend money to individuals who had no right to the money in the first place. I feel that after examing the data they realized it was just simply time to put the whip to the mule and get things moving a little more. I don't believe they were reacting to any particular thing hanging over the economy, but rather many little nuances which could adversely affect growth if some sort of domino effect took hold.

Finally, I don't believe that the falling dollar is a major concern of theirs. Maybe years ago, prior to the emergence of the global economy, it would've attracted a lot more attention. Back when I started in the business you would flock to global corporation stocks as the dollar declined. Now, just about every corporation in America has global operations and they all benefit from a cheaper dollar. It simply helps the balance sheet and lends itself to continuing solid earnings growth. And that's the Fed's job, keep the economy healthy and growing.

In any case, if there was a major worldwide catastrophe which do you think most people in the world would rather have:

a) a suitcase full of yen
b) a suitcase full of dollars
c) a suitcase full of euros
d) a suitcase full of yuan

Here's one person who knew what he wanted.

http://news.yahoo.com/s/ap/20071001/ap_on_re_as/afghan_violence;_ylt=AhZBO.BD.b7PDXklDktsqQcBxg8F

bdavanzo wrote:

This is not the Greenspan Fed which probably created some of our present difficulties by staying at !% for far too long. The new Fed is showing its flexibility in light of changing economic factors.

strongly disagree.

they understand to sell themselves.
doing alot of talking but without real actions.

did you forget their "everything´s contained" talk from the beginning of the year?
now that the damag is visibly they finally adjust.

bernanke took over on feb. 1st 2006

shortly thereafter the fed that stopped publishing outofcontrol M3 money supply (march 2006).

and take a look at this chart:

http://seekingalpha.com/article/48041-fear-of-a-dollar-collapse-part-ii

The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures

the BERNANKE fed is pumping money into the markets, while the dollar collapses:

http://stockcharts.com/c-sc/sc?s=$USD&p=W&yr=3&mn=0&dy=0&i=t66522262963&r=5915

I agree that we look globally for the best returns.
But, I wouldn't act rashly and alter the asset allocation (40% domestic, 25% foreign), 25% in bonds, and 10% in cash. In this case less than 25% is better. I'm quite skeptic about investing in Eastern Europe , because there investors can get, maybe higher return but with higher risk, and also one of the most famous economic relationships: "law of diminishing returns" . Interestingly, there is no Fed in those countries, also.
So, like as Chopin's "One Minute Waltz" doesn't necessarily become twice as good if I play it in 30 seconds.

I don't feel the Fed felt pressured by the media or the powerhouses on Wall Street. The markets simply were experiencing a slight correction after pretty much easy sailing since March 2003. I believe they recognised that the economy was still substantially healthy and growing at a somewhat more tempered pace. Their action was, if anything, an attempt to stay ahead of any difficulties, such as the housing problem or erratic oil prices in the short term.

This is not the Greenspan Fed which probably created some of our present difficulties by staying at !% for far too long. The new Fed is showing its flexibility in light of changing economic factors. I don't believe this is the beginning of a round of rate cuts, but rather a one shot stimulous, which will allow them to examine the data over the next six months and then take the appropriate actions in the spring.

In the meantime, it has given them some time to allow mortgage rates to remain still near their historic lows and allow truly qualified individuals the opportunity to chip away at the the surplus of available homes.

Yeah...it looked like a stop gap. A Federal Home Loan interest spike, (If I see it right?) is in no ones "interest".
It must have been sthg like this, as the Fed is constantly digesting the most recent data and felt compelled to send a suppressive liquidy spike.

By the way, it wasn't the media or the stock market that scared the Fed, it was the FHLB draws and the fifty basis point spike in the Fed Funds market.

I have been thinking about this topic because in my personal case, it happens to be timely. I happen to be modeling long run money demand across currencies, or I am supposed to be over the next two weeks.

The commodities effect should be to inflate prices and this shift shouldn't take too long either. This does not mean there will be a lot of inflation, in the short run however. There have been quite a few periods in American history where there were sudden sizable shifts in the money supply, without immediate proportional inflation. Sometimes the excess liquidity flows into financial assets or real investment assets prices first, then the bubble pops and the inflation shifts into the goods market.

We do not have a lot of time periods of banking stress like this. Most of them occur outside the current banking regime and monetary regime. The Fed knows what it does not want to have happen and it is probably very conscious that its tools are quite weak.

The goal of the Fed was not to stabilize the value of the dollar, it was to prevent banking failure. Germany, the United Kingdom and the United States have all had bank runs either the big public runs like Northern Rock, or quiet ones like the one in the German money market system or the American Federal Funds market.

We are somewhat in the same position of American banks and Latin American countries in the 1970's except we are now Latin America and Germany is North America.

What should happen is that on average, prices should rise. The most flexible prices should react first and strongest, the least flexible will eventually catch up. This should cause an increase in bond interest rates and hence mortgage rates and investment grade bond rates. This should restrain the economy to the extent borrowers choose fixed rate longer term financing. It should make the yield curve steep. It should energize the part of the economy that relies on short term borrowing.

I see the issue with Valero as being the spread between crude and retail prices. It has narrowed compared to a year ago. I think crude will rise in price, I do not know if retail gasoline will increase as much. If the economy becomes restrained, domestic gasoline may narrow in markup, even if crude becomes globally more expensive.

We are also ignoring the ECB and the Bank of England. This is not an American phenomena, it is a developed nation phenomena, Japan excluded. Our real estate market has been more restrained than most nations. It does not automatically follow that investing abroad will be better.

Some firms should do well regardless, such as consumer staples, in fact, they should get a short term boost as they buy inputs at lower prices and sell at slightly inflated prices. It will catch up and go away though and it might not be enough to worry about.

The dangerous myth the culture has formed is that the Fed has real power. Its power is really swamped by markets so strongly that they couldn't move the economy for more than a month or so regardless of what they do.

We are, again, entering a period of difficult "prognosis". I m slightly bullish so far..but havent looked at all things thoroughly.

I ve noticed my failure since some time now to get back to gold stars. No wonder, with so much unpleaseant distractions.

I am reading Greenspan s book and wish I would have made similar decisions as he did. THis whole science thing has been dragging me down for too long now. THere is no future in science, only in business.

The more success in science, the more work
THe more success in business, the more money

On that happy note..
Greenab
It s all true and right with respect, but there are real lives and people in danger. THe house market burst is not an easy thing to deal with from the human toll. You may not tend to bail out the rich at Wall St, but consequence would be many many lower middle class people sitting on the streets. Nobody is served with an exploding homeless population

The FED did the right thing. As long as they dont overdo cutting rates. It would be prudent to make one or zero further rate cuts for some time to come

"makes me wonder if there has ever been a rate cut with the dow only down 5% off its all time highs?"
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1995 was the only time the stock market rallied ahead of FED changing from tightening to easing cycle, with the other 16 rate-cut cycles seeing stocks fall at least 20% ahead of a real, or false, recession scare. Of course, not all initial rate cuts lead to lasting rallies. remember all the failed rally attempts following the rate cuts moves in 2001 and 2002, when the FED systematicaly dropped rates from 6% to 1%?

wall street and the media did a perfect job of scaring the fed.

if you hear all day that everything is bad and the cramers and cudlows along with the goldmans and merrils press for rate cuts - well, one day you believe it´s better to act, cause you don´t wanna take the blame for a potential recession.

the only indicator that measures the health of the ecnomy - the stock market - got it right.

makes me wonder if there has ever been a rate cut with the dow only down 5% off its all time highs?

inflation?
the bernanke fed has proven that they don´t care.
all they do is talk. and they seem to be the only central bankers on the planet that see inflation heading the right way.

commodity and forex markets lost their last bit of respect, once the fed openend the gates on sep. 18th.

The question that pops into my analysis following the dramatic action the FED took is what is it they are seeing that the markets aren't? If the economy is so weak that it required such aggressive action, then why is the stock market holding up instead of falling to reprice in lower profits expected to land along with a slowing economy? If the economy isn't slowing, then why would the FED act at all, let alone open the door to a spike in commodity price, or worse, encourage yet another rampant speculative bubble with energy, gold, China, the expected new bubble targets of the hot money crowd? Only once out of 17 rate hike cycles in the past have we seen a rate cut matched with a breakout to new highs for stocks that did not come with either a 20%+ drop for the stock indexes, or an outright recession. Is 2007 destined to the second time complacent bulls were proved right? The action of stocks suggest "maybe," though a great deal of that depends on commodity prices, which may go a long way to determining what the FED does next. If commodities cool, then perhaps the Goldilocks crowd have it right and further rate cuts could be on our way to keep the economy humming along without inflation. If commodities rocket up from here, then the next FED move may be a surprise up, something the market is certainly not prepared for. Though all bull bets are off if the other shoe drops for real - the one the FED feared so much it spurred them to slash interest rates in the first place. Then the FED woud look impotent - cutting rates near a stock market and economic peak - leaving them to play catch-up as stocks dropped after completing a major double top ahead of a recession FED action had failed to forestall.

GreenAB: This is an open discussion about an article I wrote for MSN Money which you are welcome to join. I am aware that there are other similar discussions going on about the Fed. I read and rate those posts as well when they make points that are pertinent to the topics I write about for MSN.

If you want to respond to what I've written, post it in this forum. If you make a point that affects my thinking, I'll give you credit for it when I update the article on