---Harvard Economic Society, October 19, 1929
Posted on 09/15/2007 3:59:55 PM PDT by shrinkermd
IF FAITH IS A STAUNCH BELIEF THAT requires neither proof nor evidence, then the stock market has it in spades.
All of that faith lately is placed in the government's monetary policy. Come Tuesday, investors believe, quite fervently, that the Federal Reserve not only will cut interest rates, but will lower borrowing costs enough to breathe new life into the ailing U.S. economy.
So resolute is that trust that it remains unshaken in the face of yet more worrying signs. U.S. industrial production ticked up just 0.2% in August...,market continues to slip.
But economic weakness can only appeal to the Fed's benevolence, and the aging but still-hopeful bull market chooses to dwell not on the malady, but on the relief the medicine might bring.
Rate-cut hopes lifted stocks last week, and the market recouped all the losses suffered Sept. 7, when a shocking government report showed employers cutting payrolls last month for the first time in four years...
... There is, of course, reason for the market's faith, since historically stocks have rallied when the Fed begins to cut rates. Since 1970, the S&P 500 has risen by an average of 5.5% in the three months after the central bank first cut rates
...Cutting a quarter percentage point off benchmark rates of 5.25% will leave a horde of crestfallen traders and trigger short-term selling. A half-percentage-point cut, served up with the promise of further leniency, will help bulls feel that their faith is being rewarded, and that could encourage another round of buying.
(Excerpt) Read more at online.barrons.com ...
Yawn - To this author (along with 95% of the MSM) the U.S. economy MUST be ailing whenever a Republican is in the WH (regardless of facts). Reality is we are in the 6th year of expansion coming out of the Clinton/Greenspan caused recession.....
The Fed should cut rates this Tuesday.....and I suspect they will. That does not mean our economy is bad.....It simply means rates are too high (and our productivity as a nation allows for lower costs of money....without inflation).
I think the timing of Greenspan comments are to calm the market. Soon they will bring out Abby Joseph Cohen. Rates to stay unchanged in my honest opinion.
I think Bernake pees in the cornflakes of the market and rates hold steady. He correctly defends the dollar and holds off inflation. There is no liquidity issue. It’s a bubble, and the solution is just time. Time required for all of the mortgage backed stuff to reprice itself.
When we have $80 dollar oil and the dollar at an all time low against the Euro, it is not the time to lower interest rates.
As my friend Ben Stein says, when people panic, buy, when people are greedy, sell.
Wouldn’t hurt if the Fed rate drops a quarter to 1/2 percent. The rate increased rather rapidly.
If there is a rate cut - market sells off modestly. The market has been rallying for days in anticipation of the cut. It's ALREADY priced in. After the announcement, there's nowhere to go but down. However briefly, or however long.
September and October have historically seen the biggest market sell-offs. They don't come around that often, but they sure are historical when they do.
As to if either event will be a buying opportunity or a selling opportunity is your call.
I’m not sure Bernake has as big an ego and Greenspan nor as legacy conscious as of yet
Thats what I’m hoping the Fed does. The only ‘liquidity’ issue out there is with the mark-to-model tomfoolery. All the mark-to-market stuff is fine.
Yeah, the hedge funds will take it in the shorts, but that is their problem. They failed to account for reality. All the hard asset funds will do well. Companies on the market are on solid ground. P/Es are a little high, but that will shake out with the normal course of business.
Now if only the consumer will follow... Debt is okay within reason, but debt for debts sake is dumb. People have to realize that they aren’t corporations, and live just below their means, saving just a tad for the rough times the Dems seem to want to bring with increased taxes.
Productivity has nothing to do with interest rates. We are have 300% of GDP in debt and the debt has swamped productive investment. People speculate in houses and speculate in the market (the companies they invest in speculate in CDO's which is debt).
While the US citizens remain productive, the US government (The Fed and policitians) have turned the country into a debt basket case. Now the Fed can lower all they want and people are no longer going to borrow to speculate anymore. Now it's time for plan B which is pure inflation.
“Buy American Can and sit on it.”
Debt for speculative purposes is dumber and debt to fund consumption of inported goods is dumbest of all. The consumer is not going to borrow, nor are corporations. Consumer debt is too high already and corporations are factoring in a recession. That leaves the govt and they will borrow even more, but in the long run it will never be paid off without major entitlement cuts and/or inflation.
And productivity does have plenty to do with inflation (and countering it occurring). The Fed rate was foolishly increased to much by Greenspan.....a full 1-2% should be cut over the next year -
Our deficits today are less as a % of GDP than in much of this nation's past.
Should the FRED spoil the (RINO) fun?
Yes...
yes, and...
YES again.
It is mostly priced in, but when it is finally announced it will provide a modest boost to the market.
“Now the Fed can lower all they want and people are no longer going to borrow to speculate anymore.”
“Now it’s time for plan B which is pure inflation.”
I think the first sentence is wrong. I have faith in people to spend money they don’t have.
I agree with the second sentence. I see inflation coming (really already here) to devalue the US debt.
Once BB starts inflating, productivity will decrease since it relies on real investment, not speculation or extra purchasing made in anticipation of inflation.
I partly agree that they would borrow and spend, but what people won't do anymore is borrow to buy a speculative piece of real estate. That party is over.
Now it’s time for plan B which is pure inflation.
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I think you’re right with that ... I am debt free except for my home mortgage so I won’t gain by having my debts inflated away but I will be in the market leveraged to the max taking advantage of it... The only other possibility I see is bringing LOTS of industry back to the states through implementation of the FairTax and growing our way out...
We are in 100% agreement here -
However, I don't believe we will see either big inflation numbers....nor will we see a huge devaluation of real estate (outside of a few select regions).
The same dire doom and gloom views you have on debt, deficits, inflation has be touted since the mid 80's..
An economy of our size and fluidity can't save itself out of debt.....It has to grow itself out. The old a rising tide lifts all boats theory....
Best regards,
---Harvard Economic Society, October 19, 1929
I partly agree that they would borrow and spend, but what people won’t do anymore is borrow to buy a speculative piece of real estate. That party is over.
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Actually that would be a good speculation (outside of overbuilt areas such as Miami , LV etc.) in a 1970’s type environment as home valuations would rise with inflation and you can get in for a fraction of the full cost.... of course I wouldn’t expect to see “flipping” but buying a fixer upper to live in while you bring it up to speed is a good thing..
The U.S. dollar is tanking against every other major currency because the rest of the world knows damn well that the U.S. government is in the process of a deliberate campaign to inflate the dollar -- to pay off our delusional pipe-dreams.
Yep, Bernanke told them that 5 years ago before he was appointed Fed chairman (see link in my previuos post). How anyone can ignore a message that obvious is beyond me.
What I don’t understand is why people view deflation as a bad thing. What deflation does is return the currency to a more sustainable position. There are cycles to business and currency, and to try to defeat them is in itself self-defeating.
Yeah, everyone wants to live in an era of economic prosperity, but when you resort to chicanery to keep it going...
What I don’t understand is why people view deflation as a bad thing.
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Ever heard of the Great Depression?
http://www.shambhala.org/business/goldocean/causdep.html
Another unusual aspect of the Great Depression was deflation. Prices fell 25%, 30%, 30%, and 40% in the UK, Germany, the US, and France respectively from 1929 to 1933. These were the four largest economies in the world at that time.
http://news.minnesota.publicradio.org/features/199803/18_smiths_depression/
Americans today remember the Great Depression, but there was another dramatic period of deflation worth recalling, an era in which Americans fought an intense battle over the very value of money.
At the end of the 19th century, America lurched into a deflationary tailspin. Collapsing railroad companies helped touch off the crisis in the early 1890s. The resulting depression hit hardest in farm country, where commodity shipments depended on railroads and where the bulk of America’s population still lived. Bank failures and farm foreclosures swept the landscape.
It is only a bad thing when it goes to that type of extreme... which was caused by extreme inflation. Many people think that we were on the gold standard then, when we were actually on the fractional reserve system (6% reserve), like today. (Incidently, the government increased the money supply by 100% between 1930 and 1934. Hardly the classic definition of deflation!)
The Great Depression only was such because the government meddled with the market correcting itself. If todays problems are allowed to shake out, we will be fine. Deflation counters inflation, bringing balance to the system.
I was not aware of the money supply increasing, I just heard from my parents about prices dropping through the floor and burning corn rather than selling it. It makes you wonder where that money was going while it didn’t bring prices up?
I am just reacting because in 1999 I was in a commodity trading company and as the prices of all commodities metals, gold, petroleum dropped (mine was molasses) world wide, I lost my job and so did hundreds of people in the New Orleans-Texas oil patch (99 cent per gallon gas).
Remember how Clinton had no deficit and was starting to run a government surplus? It seemed to me that the government sucking those dollars out of the economy ultimately was deflating the economy and it was ugly. Remember that Japan has struggled with deflation for over a decade.
Balance is good but deflation can be pretty devestating.
I tend to agree. And I think they'd need to chop interest rates a whole lot to get people to take risk to borrow, invest, spend, etc.
What the problem was is one of the things Keynes was right on. Namely, liquidity sinks. What we have today is liablities far in excess of available cash, via hedge funds and SIVs, so most of the monies the central banks have pumped into the market has vanished. The Fed has pumped 200 billion dollars in, the ECB 500 billion. They have extracted some of that back, but most of it vanished, covering mark-to-model liabilities. That is a 500 trillion dollar liablity in that market. That is 11 years worth of worldwide GNP. It verges on the incomprehensible!
The “old” economy brick and mortar industries are still sound, and will remain so. They aren’t formed from smoke and mirrors. But alot of financials will expire, and drag alot of jobs with them.
I have zero faith in the Fed - our communist central bank - and the self-interested socialist thieves on the fed board.
Maybe next we can make up a Fed shoe board, that will dictate how many left and right shoes will be manufactured, what color, heel height, width, where in the market to ship them and at what price.
I can hardly wait for the Fed’s bogus pronouncement on how the inflated fiat supply hasn’t affected the price of goods at all.
The Fed house should be constructed of bullsh*t with the Jolly Rogers skull and bones flag flying at the entrance.
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