Is the Fed a Paper Tiger?
Yesterday, we listed 7 concerns with the Fed's confusing emergency 75 bp rate cut. We said we detected a “A Whiff of Panic . . .”
Amongst the other issues, our biggest concerns were twofold: That the Feds' independence will now be questioned, as they appeared to be responding to markets and not economic fundamentals. It is not now, nor has has it ever been, the Fed's responsibility to prop up market prices. Yes, insue the markets were functioning properly -- but not provide a put. That nonsense was supposed to have left with Easy Al. Unfortunately, Bernanke not only inherited Greenspan's mess, he inherited his Put also.
Even more concerning is the possibility that the Fed is "Pushing on a String." That may be starting to come true. As I type this at 6:54am, the Dow Futures are off nearly 200 points.
Does this mean we will get another 25bps cut? How about Thursday? Or is backstopping the markets a one shot deal? Thank goodness I have a lot of math, cause thru the clever use of differential equations, I can calculate that the Fed has only four more Shock and Awe 75 bps cuts, plus a Shock (but no Awe) 50 bp left.
The Fed wasted alot of ammo yesterday -- and what looks like for naught...
Wednesday, January 23, 2008 | 07:19 AM | Permalink
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» Media Appearance: CNBC's Morning Call (1/23/08) from The Big Picture
This morning, I'll be guest hosting Morning Call on CNBC, from 11:00am to 12 noon. On today's agenda:- The unholy trinity: Slowing Economy, Credit Crunch, Financial woes - Yesterday's emergency FED cut, and today's opening drop, leads us to ask: Is the... [Read More]
Tracked on Jan 23, 2008 9:57:25 AM
Comments
percentage wise, that drop yesterday morning was miniscule. I do feel that so much of this is inherent in our system - democracies produce cry-babies!
Posted by: Justin | Jan 23, 2008 7:46:49 AM
1) Who says you can "stop" the downturn? Isn't a recession or whatever you want to call it inevitable every so often?
2) Has anyone else seen those headlines on Bloomberg TV "43 Major Benchmarks now in Bear Market, the definition of a bear market is coming down 20% from its highs"
a. Is that really the definition of a bear market?
b. If we are in a "bear market", the only thing to do is sell
any substantial rally...
c. If this is "now" a bear market, it's probably just the
beginning of one...
d. Another interesting thing: is there inflation or isn't there?
The CB's seem to be in disagreement...
Posted by: SINGER | Jan 23, 2008 7:48:34 AM
I had a noted player say it very similar to me the other day. When the gears still touch, adding grease helps to ease friction. When the gears no longer touch, adding more grease makes a mess as it just goes everywhere.
Posted by: Michael Covel | Jan 23, 2008 7:52:12 AM
The end is near. Hyper-inflation is just around the corner, and then national bankruptcy.
Posted by: JTR | Jan 23, 2008 7:54:24 AM
Trichet's comment (quoted by Bloomberg this morning) is liquidationist in character:
"Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility," Trichet told the European Parliament in Brussels today.
Holy sheet. Sell till the pips squeak; he doesn't get it. U.S. Treasurys sure do, though. What an awesome, awesome panic rally.
Posted by: Jim Haygood | Jan 23, 2008 8:09:58 AM
That differential equations math looks a lot more like simultaneous equations from algebra I. Heck, even the rate o change in Fed rate cuts is excelerating, indicating the liklihood of less cuts because of more significant sizes using up more ammo each time.
Now, if we're going to talk about integration, well that might be most appropriate for the derivatives overhang... though I suspect that's a lot of material which never is going to make it out from under the living room rug...
Good luck with the Morning Call appearance today. CNBC must be calling out their A level guests given the recent market tumult. Heck, they've unveiled the "CNBC Edge" & have Jack Welch on now...
Posted by: Chief Tomahawk | Jan 23, 2008 8:16:01 AM
Oh, I forgot to add, hopefully they don't stick you with having to talk Dennis Neale in from the ledge...
Posted by: Chief Tomahawk | Jan 23, 2008 8:18:14 AM
The Yen's getting very strong v. USD and futures plummeting back for a retest of yesterday's lows...It will be amazing if we take out yesterday's lows even though the FED cut 75 bps...
Posted by: SINGER | Jan 23, 2008 8:20:49 AM
Moin from Germany,
the next question will be if the Greenback is on the way to become the next source of the carry trade.....
Posted by: jmf | Jan 23, 2008 8:23:25 AM
If the Fed's job is to take away the punch bowl when the party get going, then what Bernanke just did was walk into the party at 3:00 a.m, see a bunch of blind drunks staggering around, and pour another fifth into the punch.
Posted by: wally | Jan 23, 2008 8:30:13 AM
If the DOW follows European foot steps and closes down today, that would make it the 6th negative day in a row, a less than 1% probability.
Also, since 1925, on the sixth day down, the DOW has closed down over 3% on only two occasions: 1932-04-07 & 1932-10-15 for -5% and -7.2% respectively.
Posted by: Steelduck | Jan 23, 2008 8:30:31 AM
Well, if we give him a little credit, and say that it wasn't a put, what else could he know? What if all our suspicions about further waves of credit defauts (commercial real estate, credit card, etc.) were showing up on hs radar? If that looked ugly ...
You know, the press release said something about banks not releasing credit to small business. That's something I've heard in these comments as well. Just askin'
Posted by: odograph | Jan 23, 2008 8:32:10 AM
The loss of equity value will be the remaining nail in the coffin for the next great depression.
Posted by: John Borchers | Jan 23, 2008 8:33:11 AM
After the German banks start to get bailed out in the next few weeks , we'll finally see Trichet re-think his whistling by the Graveyard stance
Posted by: J | Jan 23, 2008 8:33:13 AM
I think it speaks volumes that the ECB did not play along with the Fed yesterday! It seems to me,.. that in and of itself will exacerbate any financial imbalances of capital flowing to the US OR to Europe.
If the ECB does not mirror the actions of the Fed, won't that just make matters worse here in the US? I think the US is now in the early stages of some "tough love" from the rest of the world. It's pay-back for all of the junk bonds we sold them in the 1st place.
It's amazing to me that we always bad-mouthed some "3rd world country" for not matching our level of financial sophistication when causing problems somewhere in the world; well, this time it's us and we did a bang-up job.
Check out Soros comments on Bloomberg at http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aaqgpmbosZVM
Posted by: BG | Jan 23, 2008 8:34:45 AM
The US market never would have crashed yesterday. People were waiting to pick up the pieces. But with the Fed intervention it was exactly what killed it.
Posted by: John Borchers | Jan 23, 2008 8:39:19 AM
I've believed for a while that Ben and company are most interested in an orderly decline if there has to be a decline.
If that means shooting your wad to keep the markets from going into pandemonium, that's what they'll do. There is a history of this theory in academia, and... well... Ben used to be a professor. Ben and Hank and Dub are releasing info with all the market timing savvy of a good PR agent...
The unfortunate side effect of being orderly is that it creates moral hazard, gives wall street insiders unnecessary advantage, and generally prolongs downturns.
On the flip side, disorderly shocks create too much angst and strife. This is the greater danger that Ben & Co. are trying to save us all from -- and they probably honestly believe they're doing the right thing.
Posted by: Jason G. | Jan 23, 2008 8:39:48 AM
It's very bad news to open down, the day after a heroic rate slash. Ben's nightmare is that the Dow goes over the waterfall before next Wednesday, forcing him into an unprecedented second emergency cut in a week. The Fed's credibility would be forever crippled.
So instead, he will amp up the pressure on Trichet to cut. As long as central banks are singing different tunes, the markets have every reason to panic. It means that nobody's in charge, even with the global grandees powwowing in Davos. I'll have another heaping helping of Treasurys, thanks! *BURP*
Posted by: Jim Haygood | Jan 23, 2008 8:42:24 AM
I think your concerns stem more from wanting to be right about the stock market going down (which you have been, although you were quite early). If you step back, it is not good for the economy for the stock market or debt markets to be crashing. It raises companies cost of capital and is likely to dull businesses' enthusiasm to invest. The Fed probably can't do a lot about it anyways, as you point out, but the cut by Bernanke could be viewed as long overdue. As you've dilligently pointed out, the economy has been weak for some time. If he was going to have to do it anyways, why delay? Would you advise the fed to just stand by and do nothing while the economy crashes, potentially turning a recession into something worse? That's what the Fed did in the 1930s...
Posted by: Ben | Jan 23, 2008 8:42:44 AM
I know this sounds crazy, but I think there is a real chance the FED will drop rates again sometimes today if the US market opens drastically down. Why?
Because to be credible, the FED must be consistent. Since they supported the US equity market yesterday, they have to do it again today at the risk of having waisted 3/4 points. They HAVE to double down today, or Mr Bernanke will lose all credibility.
The market already expects it; so what's the point teasing an unstable market?
Posted by: Steelduck | Jan 23, 2008 8:55:20 AM
the put was wasted, sooner or later one of the economies is going to need real money to borrow, if you dont want sovereign funds buying you up lock stock and barrel, you need to slow down consumption get your people to save their hard earned wedge, low interest rates are a disincentive to save, to fund a new period of steady but sustainable growth we need cash not more leverage
Posted by: suggs | Jan 23, 2008 8:56:27 AM
Edit: "Yes, ensure the markets were functioning properly "
Posted by: zero529 | Jan 23, 2008 9:02:56 AM
Bernanke had to do the emergency cut, because it was Fed policy that had been crashing the market in the first place.
He was pulling out billions as the market was crashing to defend 4.25%.
That was stupid. He should have stopped defending 4.25% much more quickly, and then he could have cut less with less damage to the system.
Posted by: Dogg | Jan 23, 2008 9:10:19 AM
The Bernanke Dow put has a strike of 8000.
Posted by: Contrarian | Jan 23, 2008 9:21:51 AM
I wrote this in my newsletter (www.thetechnicaltake.com) on December 17, 2007: "In either case, the primary tool of Federal Reserve policy - the rate cut - has been rendered ineffective. And this is the message emanating from the markets: despite 100 basis points in rates cuts over the past 4 months, the markets still remain on shaky ground."
Rate cuts haven't worked yet and it appears their psychological impact is now confined to only a few hours of trading!
Posted by: Guy M. Lerner | Jan 23, 2008 9:32:21 AM
