20 September 2007

Rate Cut Post Mortem

As you know I have my own feelings about Helicopter Bens's rate cut. In case you haven't been following along, I think it was an extraordinarily bad decision and each member of the FOMC should be strung up by their balls. I've been dieing to comment from a bush economists point of view (and have been ranting and raving offline), but really wanted a more professional opinion for this blog.

As usual, Mick Shedlock delivers the goods with some excellent analysis in Bernanke's Bullet Misses The Mark. Here is a synopsis taken directly from the article:
List of What's Changed
  • Perception has changed.
  • Any perception of the Fed as being concerned about inflation went out the window.
  • Any perception of the Fed as being concerned about the dollar went out the window.
  • Bulls are happiest they have been in months.
  • The stock market is higher.
  • Gold is higher.
  • Oil is higher.
  • The Prime Rate dropped 50 basis points.
List of What Hasn't Changed
  • Mortgage Rates. (Actually mortgage rates rose since last week as the chart below shows).
  • Auto Loan Rates. Nearly identical to last week.
  • Home Equity Loan Rates. Nearly identical to last week.
  • The outlook for jobs. (If anything the outlook is weaker judging from the Fed's panic).
  • Credit Card Interest Rates.
  • The foreclosures outlook did not change. It is still bleak.
The Fundamentals Have Not Changed
  • Massive numbers of foreclosures are still going to happen.
  • Banks are going to be stuck in huge numbers of REOs.
  • Home inventories are still rising.
  • The economic ship is still sinking
  • The jobs market remains grim
Please read the whole article as it makes a whole bunch of sense.

As expected & noted, there has been movement in the markets; The USD is taking it up the ass, and Metals, Oil and other exchange rate sensitive markets are flying. The really curious movement to me was in the long bonds, both in the US and Europe. Since the rate decision, the contracts I follow closely and trade, The Euro Bund and The 10 Year T-Note have been down strongly and in fact accelerating today in big one day moves.

If you don't happen to know what this means, it means that longer term bond yields, which mortgages and other long-term are priced off, ARE RISING, as indicated in the 10 year YIELD chart on the left.

I am on record as holding the view that rates should in fact be rising and I think that once liquidity is normalized somewhat, Bernanke will be forced to raise again. But on the long end of the yield curve at least, the market is doing what the Fed doesn't have the balls to do. Those who have painted themselves into a corner in the housing market won't be getting any relief and nor should they. (Though I do feel sympathy for how the market and mass psychology have compelled them to make unwise decisions. The psychology used by vested interests is very strong.)

In conclusion, the shipwreck is still on course, a .5% cut proves it. The only area where I remain bemused is why equity traders are bullish.


The ASX Gorilla said...

At least on the XAO August was still a positive month. Many people are going to feel as invincible now as ever, "see honey, the financial planner was right, it's just a little correction...its what I've been saying all along, these things will happen, it's not about timing the market it's time in the market...a balanced portfolio of Australian and International Equities"...blah blah blah.

They'll be bulls until they can't be bulls. Seems like a good solid structural reason why they can't be bulls wasn't found in time for the Fed to do their thing and solve the problem outright...or at least be preceived to have done such.

Mish's problem is he's too smart :)

Wayne said...

Yeah, what's that old saying?

Perception becomes reality?

As you say, until is doesn't. :-/