RSS
Fed Action - Too Little, Too Late?
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: January 24th, 2008 at 10:19 am EST
Post your thoughts about this article. Click here!
So far in 2008, the bears have won the battle. Relentless selling, day after day has punctuated activity. Certainly the markets won’t fall to zero (although some bears out there still see this as a possibility). Perhaps we’ve seen the start of a bear market…perhaps not. Historically, bear markets start with a catalyst….it’s very hard to change long term psychology. A more recent bear market was the result of excess speculation in tech stocks, exacerbated by the 9.11 tragedy. The Fed has come to the rescue of equity markets in the past, and has tried with effort this time around…but is their response tardy?
Shock the markets
Tuesday’s big move by the Fed to cut rates was initially shrugged off. In fact, Wednesday’s markets re-focused on earnings. The beneficiaries of the rate cuts? Most definitely the banks and brokers, who boasted large-sized gains…if not just short covering but some value buying. Clearly the expectation is for more rate cuts…likely under a 3% funds rate in coming months…or the market will be disappointed. They sent a message: we’ll wait to see whites of your eyes before firing shots…but only then. Is that good enough to manage psychology?
An Emotional Mess
One thing that drives markets is psychology. We can measure this sentiment in various ways, but the one that screams out is volatility. An increase in volatility shows investor angst or nervousness: ‘get me out, I can’t stand the pain no longer’. This shows itself quantitatively in the VIX and equity put/call, which we at Bigtrends.com cover for you each day. But how does the Fed manage psychology? Certainly with words and actions, and their so-called transparency. By this standard, I would grade them an F. Why so harsh? It’s clear the Fed has become reactionary…with moves being driven by market panic. Go no further than this last move, and the first one on August 17, 2007. The obvious message is they will act as a support mechanism, a put option…if you will. But, the Fed should be more proactive…and really make their moves when they see trouble on the horizon…not when the rest of the world catches up to it.
Futures Markets Bullish
Tuesday’s cut was large, no question. All told, 175 bp in cuts since September should be considered effective. The futures market expects even more action, possibly down to 2.5% by July (another 100bp). Outlandish? Probably not, if Fed history is any guide. Certainly Bernanke and Co. are trying to preserve some dry powder, but their plan is not working. Why wait for panic? Was yesterday any different than last week? Last month? Not at all. While the Fed will NOT save the markets from fear, anything short of an all-out assault will be complete disappointment, and away we go. To get in sync with the markets will require nothing less.
Post your thoughts about this article. Click here!
Bob Lang, Economics, Stock Market
Know someone who would like this article?
EMail This Post
Leave a Reply
|
StockWeblog.com Weekly Update Newsletter
|
One Response to “Fed Action - Too Little, Too Late?”
January 25th, 2008 at 7:06 pm
I shouldn’t want Bernanke’s job. He inherited the result of years of Greenspan excesses. They are dealing with stagflation now. Rates should be going up not down. Watch the inlation #’s now and multiply by 2 (at least) for the real answer.
The message they are sending out is it doesn’t matter how corrupt and greedy the financial world wants to be, or how ludicrously the consumer wishes to act, they will pick up the tab for it all. Try to avoid natural correction (punishment) at all costs.
What will they underwrite next? All our credit card debt I guess.
Truth be known, they have lost control. Rates will no longer be a weapon of effect.
Only one thing looms closer and closer. The wholesale disposal of US assets to the likes of China, India and the Arab emirates. That perhaps might bale out the US, and the UK for that matter.
Be happy everyone. Go spend your tax rebates like there is no tomorrow. Its too late now to think about saving.
A very old in the tooth trader.