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January 22, 2008
Will It Work?

U.S. stock markets are set to open lower this morning following a crash in global stock markets over the last 48-hours. Along with the margin calls and an increase in investor fear, selling is being fueled by the death of ‘decoupling’; investors around the world have, suddenly, concluded that a U.S. recession would be bad news for everyone.

Realizing the dire situation in the financial markets, Bernanke and company cut the Federal Funds rate by 75 bps this morning.  After the crash of 1987 Greenspan soothed the markets with a 1-sentence statement. Apparently Bernanke hopes to stop a crash before it happens with the following:

“The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.  While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.”

A more honest and perhaps even more confidence building statement would have been, ‘the markets are not going crash on my watch!’  After all, if futures were not indicating a massive 500+ point decline in the Dow the Fed would have waited until next week rather than cut rates intra-meeting.

Some of the news tidbits adding to the negative sentiment in the marketplace are that Chinese banks are about to see more red thanks to the U.S. subprime crisis, and that with Ambac’s downgrade last week a monoline crisis may be imminent.  Also of note is that fact following the worst week in U.S. stocks in 5-years President Bush’s stimulus plan fell on deaf ears to end last week.

Interestingly, gold has failed to attract safe haven flows as stocks plunge and the dollar rallied (pre-Fed rate cut) strongly versus many of the majors, although gold did catch a bid following the Fed’s surprise announcement this morning.


So, will the Fed’s actions spark a turnaround in the markets?  My speculation is that over the short term maybe, but over the longer term today’s rate cut is not that big of deal. Needless to say, there are more questions than answers at this point, as risk taking across the planet is thrown into question. As a quick example, immediately following the Fed announcement the Yen surged from roughly 106.3 to 107 versus the dollar, but as of this moment the Yen is back below 106.3....

 

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