Maestro Memoirs

Caroline Baum had an interesting take on Greenspan's new book "The Age of Turbulence" in Memoir Shows Dangers of Irrational Book Advances.

For someone who made headlines with his every utterance -- even if no one could agree on what he had said -- Alan Greenspan offers few newsmaking moments in his eagerly awaited memoir, "The Age of Turbulence".

Sure, his criticisms of the Bush administration (for its "out-of-control spending"), Republicans in Congress (they "lost their way," "swapped principle for power" and "ended up with neither") and the Iraq War ("largely about oil") provided weekend fodder for the media.

While Greenspan calls his book a detective story, there isn't much in the way of suspense. Greenspan's words are as measured as they were in his communications as Fed chairman. Now as then, they seem designed to create an effect rather than to unveil the wizard behind the curtain.

Greenspan, who reportedly received an advance of more than $8 million for this memoir, seems eager to stave off criticism for keeping short-term rates too low for too long in 2003 and 2004, stoking a housing bubble in the process. He was aware of
reduced credit standards on subprime mortgage loans, he says, "but I believed then, as now, that the benefits of broadened home ownership are worth the risk."

For someone who supposedly believes in the free market, except of course when it comes to the Fed itself, that quite a statement. The criticisms of Bush, the Republican budgets, the war over oil, and his belief in subprime loans all smack of attempts to lay the blame elsewhere for the credit debacle that is about to unfold.

More interesting than the book, however, is Greenspan's whirlwind promotion tour of it. On the Today Show Greenspan says U.S. not headed for recession.

Former Federal Reserve Chairman Alan Greenspan said on Monday the United States appears set to weather the bursting of a housing bubble without falling into recession.

But in a separate interview with CNBC Television, he warned that the Fed has to be careful to avoid stoking inflation with any future policy moves. "It's very clear that the trade-offs between inflation and growth have altered," he said. "The Fed has to be more careful about inflation now than it did when I was chairman."

Greenspan, in an interview in the Dutch newspaper NRC Handelsblad on Monday, warned inflation will rise to about 5 percent in Europe and the United States.

[Mish comment: Price inflation is a lagging phenomenon]

"The normal inflation level is closer to 5 percent than the current 2 percent," Greenspan said, adding that the 5 percent level fitted an economy with a "paper" standard where the currency is not linked to gold.

[Mish comment: That is an incredible statement. There is absolutely no such thing as a "normal inflation rate". Inflation is an expansion of money and credit and one reason money expands is the government spending hundreds of billions of dollars more than it collects in taxes. There is nothing "normal" about spending more money than you make for decades. When consumers do it they eventually go bankrupt. When the government does it, the Fed willingly prints more money.]

The memoir has already drawn attention for the comment the Iraq war is "largely about oil." He said on Monday his comments should not be seen as questioning President George W. Bush's emphasis on Saddam Hussein's arsenal as the justification for invading.

"I'm not saying that they believed it was about oil. I'm saying, it is about oil and that I believe it was necessary to get Saddam out," he said.

[Mish comment: This is another incredible statement. How can the war be about oil if those who started the war did not do so over oil? The statement makes no sense. But yes, the war was about oil, and revenge, and ideological stupidity.]

Greenspan is a Contrary Indicator

After warning about irrational exuberance in 1996, Greenspan embraced the "productivity miracle" and "dotcom revolution" in 1999. Mid-summer of 2000 Greenspan fell in love with his own analysis and was worried about inflation risks. Shortly thereafter the Greenspan Fed embarked on an incredible campaign slashing interest rates to 1% in panic over deflation.

Greenspan is now trumping up the idea that credit conditions are like 1998. I talked about this in No Greenspan, Conditions are NOT Like 1998.

On May 21,2006 Greenspan said housing prices won't fall nationally. That prompted me to write Greenspan Predicts Housing Bust.

History shows Greenspan was worried about Y2K problems (slashing interest rates and adding fuel to the dotcom bubble). Y2K went off without even minor glitches.

In 2001 Greenspan pleaded with Congress to adopt Bush's $1.35 trillion tax cut. Greenspan's rationale was the government would run huge $5.6 trillion surpluses over the subsequent decade after the cuts. It's right here in the Testimony of Chairman Alan Greenspan Before the Committee on the Budget, U.S. Senate January 25, 2001.

The key factor driving the cumulative upward revisions in the budget picture in recent years has been the extraordinary pickup in the growth of labor productivity experienced in this country since the mid-1990s.

The most recent projections from the OMB indicate that, if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-budget surplus of $500 billion. The CBO reportedly will be showing even larger surpluses.

The sequence of upward revisions to the budget surplus projections for several years now has reshaped the choices and opportunities before us. Indeed, in almost any credible baseline scenario, short of a major and prolonged economic contraction, the full benefits of debt reduction are now achieved before the end of this decade--a prospect that did not seem likely only a year or even six months ago.

Greenspan has been wrong at every critical juncture in his career. So now when Greenspan is warning of inflation just as he was in Summer of 2000, fears should be anything but inflation.

But if inflation is the fear, then why is Bernanke on a shock and awe campaign surprising the markets with half point cuts first in the discount rate and second in the Fed Funds rate, during options expiration week in consecutive months?

Greenspan on the Comedy Channel



Click here to see Greenspan and Jon Stewart.

Kevin Depew on Minyanville had this interesting take on the show.

Alan Greenspan's whirlwind book promotion tour finally landed him on Comedy Central. We particularly enjoyed this quote:

Greenspan: "I've been dealing with these big mathematical models of forecasting the economy, and I'm looking at what's going on in the last few weeks. … If I could figure out a way to determine whether or not people are more fearful or changing to more euphoric, and have a third way of figuring out which of the two things are working, I don't need any of this other stuff... Forecasting 50 years ago was as good or as bad as it is today. And the reason is that human nature hasn't changed.

• Yes, if only there was a way to model transitions in social mood from euphoric to fearful and from fearful back to euphoric... if only.
• Greenspan's unwitting acknowledgment that if he could "figure out a way to determine whether or not people are more fearful or changing to more euphoric" then he could throw away his other models is precisely why those models he, and other economists, rely on are powerless at predicting future outcomes.
• When social mood supports credit expansion, as it has for the better part of two decades, then the kind of central bank policy practiced by Alan Greenspan indeed looks "Maestro"-like.
• When social mood no longer supports credit expansion, however... well, just ask Japan.

What Greenspan is admitting is the Fed has no idea what it's doing. As a result the Fed always seems to be chasing its own tail in a sequence that keeps creating bigger and bigger bubbles.

Here is another interesting exchange from the Daily Show:

Stewart: When you lower the interest rate and drive money to the stocks, that lowers the return people get on savings in a bank.

Greenspan: Yes, indeed. Yes, indeed.

Stewart: So they've made a choice -- we would like to favor those who invest in the stock market and not those who invest in the bank; that helps us.

Greenspan: That's the way it comes out but that's not the way to think about it.

Stewart: It seems to me that we favor investment but we don't favor work. The vast majority of people work and they pay payroll taxes and they use banks. And then there's this whole other world of hedge funds and short betting and...it seems like craps. And they keep saying, "No no no, don't worry about it, it's free market, that's why we live in much bigger houses. But it really isn't, it's the fed, or some other thing, no?"

History Will Be The Judge

History will not be kind to Greenspan. He was wrong about every critical pronouncement for his entire career and no amount of whitewashing can change that. So forget the book, just play the video. You won't waste $20-$35 bucks and the latter will be far more entertaining.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Buyout Bingo Reversal Continues

PHH was among first of the LBO deals to collapse. The action was described in Buyout Bingo In Reverse. Yet another deal collapsed on Friday.

The Associate Press is reporting Equity Firms Back Out of Harmon Buyout.

Two private equity firms on Friday backed out of their $8 billion buyout of upscale audio equipment maker Harman International Industries Inc., marking the latest such deal to sour amid tightening global credit conditions.

Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc.'s private equity unit told the company they are under no obligation to complete the merger because "a material adverse change" in its business had occurred, Harman said in a statement.

Harman, whose audio equipment brands include Infinity, JBL and Harman Kardon, said it disagreed, but did not make clear what action, if any, it would take.

Investors punished the stock all day long as word dripped out that KKR and GS Capital Partners were attempting to nullify the deal. By the end of the day, Harman shares had plummeted by more than 24 percent.

While KKR on Friday had success in attracting investors to a $5 billion loan used for its acquisition of First Data Corp., the company originally planned to raise $14 billion but faced reluctance by Wall Street.

Cerberus Capital Management in July had to inject more equity into its takeover of Chrysler Group from Germany's Daimler. More recently, Home Depot lowered the sale price on its wholesale supply unit by 17 percent to complete its sale to private equity firms.

The Harman deal's collapse comes a day after SLM Corp., commonly known as Sallie Mae, issued a statement saying it expects the investors seeking to buy it for $25 billion to honor their commitments. The Sallie Mae deal includes a $900 million breakup fee compared with a $225 million termination fee in the Harman transaction.

The credit crisis caused four of Wall Street's top investment banks to report this week that they wrote-off some $4 billion of loans during the third quarter. In some cases, the banks weren't able to find funding for the loans -- or they plunged in value as investors retreated.

There also has been a number of reports that major investment and retail banks have approached private-equity firms about calling deals off. The banks have offered to pay the breakup fees to keep the large loans off their books.

Harman International Industries Inc. (HAR)

(click on any chart for a crisper image)



SLM Holding Corp.



FDC - First Data Corp.



Buyout Bingo Scorecard

• PHH - Burnt Toast
• HAR - Burnt Toast
• SLM - Odds 50-50
• FDC - Deal appears to be on

I suspect the SLM deal will fall through.
I doubt that FDC is a sure as the 100% that is priced in. I also suspect that if KKR goes ahead with FDC they are going to regret it down the line, even more so the people that provided the funding.

None of these deals made any real economic sense but the deals did pad the pockets of the underwriters like Citigroup (C), Merrill Lynch (MER), Goldman Sachs (GS), Lehman (LEH), etc, with lucrative fees at least up until now.

With buyout bingo in reverse, underwriters are paying breakup fees to keep the large loans off their books. As long as investors were willing to take on risk (buy junk at insane prices), the underwriters danced the tune.

It's telling that Citigroup, Goldman, etc, do not want the deals if they have to provide the funding themselves. Not only do they not want them, they are willing to pay breakup fees to get out of them. That should be enough to tell you who has been and remains the sucker in the deals that do go through: hedge funds and individual investors that buy into them. After all, if Goldman and Citigroup don't want the deals or the debt, why should you?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Yield Curve Bear Steepener?

Minyanville Prof. Bennet Sedacca is writing about the Bear Steepener.

Don't look now, but the bear steepener is on. And it is on big. How big? Well in the chart at the bottom, you will see the spread between 3 month bills and 10's. The spread now? 92 basis points. Yes, this is much steeper than the inversion we were used to.

Previous steepeners go to 400 basis points over the past 15 years. Considering all the global dislocations and the dollar, and a Fed that is insistent on blowing bubbles, 400 may be be a bit conservative.

Welcome to the bear steepener.
(click on chart for a sharper image)

Ways The Yield Curve Can Steepen

• 1-Yields on the short end drop with long term yields flat
• 2-Yields on the long end rise with short term yields flat
• 3-Yields on the short end drop faster than yields on the long end
• 4-Yields on the long end rise faster than yields on the short end
• 5-Yields on the short end drop and yields on the long end rise
  

Let's discuss the relative merits of the above 5 options and see how we come up with a 400 basis point steeping.

1 - Depending on where one starts measuring (let's assume 5.25 for the sake of argument) a steepener accomplished solely on short end dropping with the long end staying flat would take the short end down to 1.25.

2 - Option #2 is achieved if Bernanke is done cutting yet after one move, yet yields on the long end continues to rally . I suppose it is possible if the market were to force Bernanke to stop cutting, but this option does not seem very likely.

3 - The problem with option #3 (assuming one is looking for a 400 basis point move) is that Bernanke will run out of room. Interest rates won't go negative.

4 - Option #4 suggests Bernanke is about to start hiking. With weakness in housing and worries over financial contagion, this scenario seems unlikely unless you buy the Goldilocks mid-term cycle correction theory with everything coming up roses. I don't buy that rosy outlook for numerous reasons.

5 - If one starts measuring from the first rate cut then option #5 is what has happened so far. Long end yields have risen as Bernanke did a shock and awe campaign during two consecutive options expiry weeks. But with the continued spillover in housing, if the long end yield rallies as the short end drops, Bernanke might be forced to stop his rate cutting campaign. Again, this option does not seem likely.

Struggling Job Market and Falling Consumption

To help resolve which one of the above is most likely one must ask: Are the conditions now more like mid-cycle 1994, late-cycle 1999, or more like 2001 when Greenspan slashed and burned rates to 1% in a panic move to stave off deflation?

Chris Puplava writing for Financial Sense Fill 'Er Up, Please is looking at the jobs market and falling consumption as the tell.

When looking at the figure above, it’s hard to go along with the mid-cycle slowdown mantra when the two above indicators look nothing like they did in the mid 1980s and mid 1990s mid-cycle slowdown periods. In the mid 1980s period, retail sales bottomed near 5% with the change in employment dipping below 100,000 only slightly and briefly before both reaccelerated. Both employment and retail sales were even stronger during the mid 1990s mid-cycle slowdown with a recession averted. However, the three month moving average for the current change in monthly employment is 44,000, declining sharply from last month's reading of 108,000 and retail sales on the verge of falling below the 4% level with a current reading of 4.14%. If both trends continue we may enter a recession as early as the fourth quarter of this year as recessionary risks increase.

Well stated Chris. That is a compelling rebuttal to the mid-cycle correction thesis. But let's also take a look at the yield curve from 1999 to present to see what clues we can find.

Yield Curve 1999-Present



(click on chart for a sharper image)

Does anyone remember Greenspan's Conundrum? He was puzzled as to why long term rates barely rose in the face of 17 consecutive hikes on the short end.

What about a Reverse Conundrum? Why can't the long end barely budge relative to the short end when Bernanke continues his shock and awe campaign. I think that's likely, which is the scenario presented in option #1.

I just somehow doubt we see 400 basis point but at least the overall idea seems plausible. If so, I would expect the long end to drop somewhat (just not much compared to the short end), and certainly not enough to help because the problems are with mortgages on the long end. For more discussion why rate cuts won't help, please see Will Rate Cuts Save The Economy?

Several people Emailed me about Bernanke's Bullet Misses The Mark. An objection presented was that Bernanke hit his mark, because his mark was bailing out banks. Yes his target was in reality banks (and the stock market) and I have said before that "banks, banks, and banks" are his top three concerns. So yes I was aware of it. Thus a better way of saying things is Bernanke missed the mark in helping those who need help most (cash strapped consumers).

Prof. Scott Reamer addressed that very idea as well as the moral Hazards of the Fed in his latest missive: Bernanke Stumped by Representative Ron Paul. His post is as of this writing sitting in the top spot on the DollarCollapse Best of the Web list. Prof. Reamer's post is well worth a read and deserving of making that list.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Price Stability & Top Secret Missions

In what I believe will be the financial post of the week anywhere, Prof. Depew Hit one out of the park in today's Five Things. Here is point #1 in case you missed it.

1. Federal Reserve's Joy Division

She's lost control... again... she's lost control.

• Before today the overwhelming majority of those who either observe or participate in financial markets presumed the Federal Reserve retained some sort of control over price stability, financial markets and, to a degree, even certain asset prices.
• Let that myth now be shattered.
• DOLLAR FALLS TO RECORD LOW AGAINST EURO - (BN)
• CANADIAN DOLLAR RISES TO $1 FOR FIRST TIME SINCE 1976 - (BN)
• GOLD RISES TO 1980 HIGH AS DOLLAR FALLS - (BN)
• CORN RISES 3% IN CHICAGO - (BN)
• WHEAT RISES 1.8% ON CBOT - (BN)
• SOYBEANS RISE 1.6% - (BN)
• TREASURY YIELD GAP WIDEST SINCE MAY 2005 - (BN)
• These are important moves because each of these instruments - dollar, gold, Treasuries, commodities - relate directly to price stability. Directly.
• Meanwhile, we just wanted to point out this fancy, well-designed quote from the Fed's Overview at their website:
  
  
  
• "Over the years, its role in banking and the economy has expanded."
• Indeed. Just take a look:
• Today the Federal Reserve's "duties" include:
  - conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
  - supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
  - maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
  - providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system
• Honestly, what isn't the Fed responsible for?
• Anyway, the illusion of control was nice while it lasted.
  

Price Controls

But the "Joy division" does not stop there. Sometimes things get so out of control that Central Bankers resort to tactics that have failed every time in history, like price controls. The Financial Times has this report Beijing imposes price freeze.

China is to enforce a freeze on all government-controlled prices in a sign of Beijing’s alarm about rising popular anger over inflation, now at its highest rate in more than a decade. The order freezes a vast array of prices still under the control of government in China, ranging from oil, electricity and water to the cost of parking and park entrance fees.

“Any unauthorised price rises are strictly forbidden . . . and in principle there will be no new price-raising measures this year,” the ministries said.

Prof. Depew also discussed China's implementation of price controls in point #5 today. I would like to add these comments:

• Price controls are absolutely 100% guaranteed to fail. They have failed to work 100% of the times they are tried.
• The Chinese economy could easily crash over this.
• Hasn't anyone learned anything from Nixon, or for that matter Zimbabwe?

U.K. Top Secret Missions

But the insanity does not stop there. Occasionally, like now, Central Bankers need Covert Actions to "ensure price stability". Finfacts Ireland is reporting Bank of England needs covert actions to prevent panic.

Bank of England Governor Mervyn King said today that British and European Union laws complicated plans to rescue Northern Rock Plc and prevented the Bank from acting covertly to prevent a panic. "The interaction between different pieces of unconnected legislation made it almost impossible for us to act as a lender of last resort in the way that I would prefer."

What way does Mervyn King prefer? Covertly of course. The Bank Of England does not want anyone to know what it's doing. (For that matter neither does the Fed). This is interesting because just a week ago Governor King said it was a moral Hazard to bail out Northern Rock. I guess there is no moral hazard as long as it can be done on a top secret mission and no one knows.

U.S. Top Secret Missions

Back in the U.S. Bush needs top secret wiretapping, secret prisons outside of the U.S., etc, etc. Bush Even went so far as demand records from search engine providers like Google. What for? Who knows? What we do know is that it is an intrusion into private lives of citizens by the unbelievably paranoid. Fortunately, (for now anyway), Secret Requests For Search Records Through Patriot Act Ruled Unconstitutional.

A US district court judge has ruled that it is unconstitutional for the US government to send secret letters demanding search records from search engines. A provision of the Patriot Act has allowed for such letters to be sent to search engines, ISPs and others by the Federal Bureau Of Investigation -- and made it illegal for companies getting such FBI demands to even reveal the requests at all in general. Today's ruling found that violated free speech rights.

Totally Out Of Control

As you can see, things are totally out of control in the U.S., the U.K., China and scores of other places including the EU. We are not just talking about "price stability" either but rather stability in general. More secrecy will be requested to keep things stable.

There is only one way to stop these government intrusions that I can think of. Vote for Ron Paul. He is the only candidate who wants to get rid of IRS and the Fed. He is also the only candidate who voted against the war in Iraq and he is the only candidate that stands a chance of making the role of government smaller. The latter point is crucial. I added a small Ron Paul banner to my Global Economics Blog today.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Bernanke's Bullet Misses The Mark

Inquiring minds might be wondering what's changed since the 50 basis point cut by the Fed.

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.

That's really about it. But what was the reason for the panic cut? Asset backed securities received no bids, the commercial paper market was in the dumps, and this all started with a mess in subprime mortgages that spread to mortgages in general, and foreclosures are now soaring. The jobs market is also very weak with huge mass layoffs by financial organizations.

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 above chart is from 2007-09-19 with thanks to Bankrate.Com

Bernanke's Bullet Misses The Mark

So did that 50 basis point cut help anyone? Yes, it helped (temporarily) those in the stock market. It helped (again temporarily) bail out Bernanke's banking buddies by providing more short term liquidity. It helped those short the dollar and long gold.

But did it do anything to address cash strapped consumers in way over their heads in houses they cannot afford? The answer to that is no.

Borrowers Lose Home At Record Pace

Bloomberg is reporting Subprime Borrowers to Lose Homes at Record Pace as Rates Rise.

As many as half of the 450,000 subprime borrowers whose mortgage payments increase in the next three months may lose their homes because they can't sell, refinance or qualify for help from the U.S. government.

The number of borrowers whose mortgage payments jump in the next three months will be the second-highest ever for a quarter, according to Credit Suisse Group, Switzerland's second-biggest bank. Twenty-seven percent have already missed a payment, said First American LoanPerformance, which owns the largest database of U.S. mortgages. That makes them ineligible for the Federal Housing Administration bailout proposed last month by President George W. Bush.

There's no lifeline in sight for subprime borrowers, who face an average increase of 26 percent, or $400 a month, according to CoreLogic.

"There are a number of people who have mortgage debt that's more than the value of their house, and a lot of those people are going to walk away," said David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland. "That will put more homes on the market, which already has too many."

"There is no silver bullet from Washington that will prevent home prices from falling further," Laperriere said. "A lot of people are operating on a mistaken impression."
The myth here is that the resets have been the driver of payment delinquencies, but the fact is if the borrower can't afford the teaser rate payments, then they can't afford to ever pay back the loan," he said.

The article also mentioned the plight of a homeowner who admitted he "didn't pay enough attention" when he took out a five-year adjustable-rate mortgage in 2002. Noting that the Fed pumped $62 billion pumped into the banking system on Aug. 9 and Aug. 10 the homeowner asked the Fed to do the same for him. "If they gave us that money, we'd be able to be out of this predicament".

Everyone wants "free money" from the Fed because they weren't thinking. And so far Bernanke seems willing (not to provide money but rather to provide liquidity) regardless of the moral hazards of doing so.

For a nice summation of who's to blame, Minyanville professor Vitaliy Katsenelson hits the bullseye with his missive: Pointing the Housing Blame at a New Target, the Homeowner.

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 (see Righting The Economic Ship?)
• The jobs market remains grim (see Moonbats Active Again in Massive Jobs Disaster)

But Bernanke has pulled out his pistol and is firing bullets praying that one will hit a target. It's a misguided effort and the wrong medicine as well.

While the Fed can attempt to provide liquidity, the Fed cannot dictate where that liquidity goes, if indeed it goes anywhere at all. And if liquidity does go anywhere this time around, I suspect gold is as likely as anything be the beneficiary. If so, that will bring little comfort to cash strapped consumers out of a home and out of a job.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Dollar Holders Punished

I received an interesting Email tonight from a friend about punishing dollar holders. Here goes, from Conor:

I sat at my desk 30 minutes before the FOMC release wondering what the Fed would do. And then they cut 50bps. So that's how it's going to be, eh Ben?

What followed was what you'd expect . Stocks were up strongly, with the S&P up 2.9%, homebuilders up 6%, bank and brokerage stocks up huge, gold up $15 to a new 27-year high, gold equities up 4%, crude up again to close over $82, and the dollar weaker, finishing at a new 15-year low. I don't suspect that today will get a chapter in the eventual tome on the fall of the dollar, but it certainly merits a footnote. When gold and crude are making near-record highs and the dollar is making near-record lows, I think prudence dictates rate hikes, not rate cuts -- as Marc Faber and Jim Rogers pointed out today -- but cutting rates 50bps instead strikes me as insanity. Nonetheless, these are the cards we have been dealt, and now we must bet accordingly.

The conclusion is obvious: the Fed is telling us that it will punish dollar holders. And like the oldest adage in the book goes, "Don't fight the Fed." By holding dollars in cash/savings, you will be earning less and less on your money, and be losing as the dollar declines in value relative to other currencies, paper assets, and commodities.

Was this a "one and done" cut? Hardly. GDP growth is likely to remain sluggish for several quarters, dragged down by housing and probably employment as well. These excesses don't go away with a snap of the fingers and a 50bps rate cut. That's what's so perplexing -- odds are the economic data will be no better, and probably at least a bit worse when the Fed meets at the end of October. They're going to have to cut again. And where will already-trending gold, oil, and the dollar go with more rate cuts?

The bottom line is the Fed's mandate has shifted from price stability and filling the needs of business to full employment and low inflation to its current form, which is preventing asset deflation/credit contraction and recessions. If we think we can use the Fed to foster booms and at the same time prevent the after-effects of those booms we are sadly mistaken.

Thanks Conor. You are correct. The Fed is indeed "Hell Bent On Punishing Dollar Holders". That is the plan. I have been telling people for months that the Fed does not give a hoot about the dollar.

The top three Fed concerns are as follows:

• Bailing out their banking buddies
• Bailing out their banking buddies
• Bailing out their banking buddies

Stops Cleared

Was the rate cut move was telegraphed in advance?



I am actually surprised given all the PPT theories floating about that no one has commented on this. But I have been watching FOMC announcements every meeting for years. A general rule of thumb is that the first move on the announcement is the fake move. Not always but usually. But in years of watching, this is the first meeting I have ever seen the fake move begin before the announcement.

Because of the magnitude of the reaction, the scale masks the preceding move. But anyone trading or watching futures has to know what I am talking about. Roughly 30 seconds to 1 minute before the announcement, the fake move came. At the time I actually thought the announcement came and Bloomberg was late in reporting it. But a sudden spike in price and volume 30 seconds before the announcement is just not normal.

Was there a leak and stops run in the opposite direction?

Perhaps many are thinking that I am complaining because I was short. That's not the case. I was long gold headed into this announcement and I was short nothing. In addition, I am in a mortgage that will benefit from this rate cut immediately even though I was not in favor of it. Thus I benefited twice from this cut with no negative consequences.

To the numerous people who have been Emailing me recently telling me to "Please give Bernanke the benefit of the doubt". What say ye now?

My call was that Bernanke would make a 50 basis point cut on the basis of the recent jobs report. (For more about jobs, please see Moonbats Active Again in Massive Jobs Disaster). But no, I did not say go long. So as far as my FOMC calls go, it was a mixed bag.

And even though I was on the sidelines, I have to say I was surprised by the strength of this move. But here we are in yet another options expiration week and I am quite confident the Fed was aware of it. They pulled a surprise move in the August expiry as outlined in Futures Fireworks and Moral Hazards, so why should anyone be surprised one month later with this 50 basis point cut?

The Fed's move was not so much a surprise as the market's reaction to it. For those on the sidelines it was no big deal. For those looking the wrong way, it was. Still others are no doubt cheering like the CEO of Toll Brothers who proclaimed "Our boy has righted the ship". Please see Righting The Economic Ship? for a discussion of that idea.

But "Punishing Dollar Holders" has it limits. And Mr. Practical summed up the situation nicely in a recent missive entitled Minyan Mailbag: The Fed's Limitations. Yes, there is a limit. But no, we do not know in advance what that limit is. What we do know is that once the limit is reached, the result will look like the housing debacle only orders of magnitude worse. What's really amazing in all of this is everyone cheering Fed intervention in the free markets, when Fed intervention in the free markets is the root of the problem.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Righting The Economic Ship?

Well the Fed made its choice and anyone who thought the Fed cared about the U.S. dollar found out otherwise. The U.S. dollar fell to a record low against the Euro, gold is breaking out to a 27 year high and oil is at another new high as well, up 33% or so on the year.

Following is the FOMC statement.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Obviously the Fed is a lot more worried than they are letting on. This is yet another panic move by Bernanke. The first panic move was a cut in the discount rate 50 basis points (See Futures Fireworks and Moral Hazards). And more panic moves can be expected when the economy does not respond to these cuts. The stock market may be excited today but the bond market was unimpressed to say the least.

Curve Watchers Anonymous is back watching the Yield Curve.



Once again the pivot point is the 5 year treasury and there is a selloff on the long end and a rally on the short end.

I was listening to Bloomberg and a comment from the CEO of homebuilder Toll Brothers (TOL) was repeated over and over. "Our boy has righted the ship". But the above yield curve shows how little this cut is going to matter to anyone in a mortgage tied to the 10 year treasury. Mortgage rates are still far higher than teaser rates of 2-3 years ago, there is a distinct possibility of a revolt on the long end starting today, and/or mortgage rates may continue to disconnect from treasuries as they have done now for quite some time.

NAHB Wells Fargo Housing Market Index



The traffic of perspective buyers sits at 16 and the overall index at 20. Anything under 50 shows contraction.

Bank of America (BAC) and Wells Fargo (WFC) both lowered their prime rate to 7.75% from 8.25%. In other words they have given up 100% of benefit of the drop in rates by passing it all on. But how many qualify for the prime rate, and more to the point who really wants to borrow in a clearly slowing economy unless they have to?

It's going to take a lot more than 50 basis points to "right the ship". And the ship I am talking about is the economy not just homebuilders. besides, the medicine is wrong. It was panic moves by Greenspan (with Bernanke voting with Greenspan every time), that created the credit bubble. Panic moves to lower interest rates can hardly be the cure. Bernanke has proven the inability to distinguish problem from solution. I talked about this in Bernanke Proves he is a Complete Fool.

Micromanagement by the Fed in response to every economic ill just creates bigger and bigger bubbles until it all blows sky high. It's high time to abolish the Fed an give the free market a chance.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/