June 23, 2003
The Circus is in Town this Week

The much anticipated ‘Baghdad Bounce’ in the U.S. and global economy has lasted all of zero seconds. As such, and unless Greenspan and company want to risk sending the stock markets into a death spin, they will give the markets a rate cut this week.  The size of this rate cut – either a ¼ point or ½ point – has been a topic of intense debate for months.  However, since long-time Fed watcher, John Berry, suggested that the Fed may move by a ½ point last week there has been a pick up in the cut-debate drama. 

Although impossible to quantify exactly what ‘investors’ are thinking, the U.S. stock markets appear to be chanting for a ½ point (as of last Friday half of the so called ‘primary’ dealers expected the Fed to move by a ½ point).  As such, you get the ‘feeling’ – is today’s marketplace driven by anything else? – that investors will be disappointed by only a ¼ point cut. 

Incidentally, the word ‘investors’ should be used lightly. To be sure, stocks have rallied since May even as the expected economic recovery has failed materialized.  Moreover, this rally -- sparked by fresh inflows into equity funds, desperate fund managers chasing performance, and some short covering – is supported by expectations of successful high wire act by the Fed. With the circus in town this week, and stocks likely to crash if the Fed does nothing, can gambling on Greenspan be called investing?

As for short covering, last week the NYSE reported that short interest actually increased for the month ended June 10. Surprisingly, there are still plenty of shorts that could be squeezed should the markets convulse higher.

The Fed Feeds the Bubble

As the Feed has picked up on repeatedly, if the Fed cuts by a ½ point many money market funds will begin yielding negative returns.  As Fleck notes, in an article entitled ‘The Fed is Out of Control’, such a rate reduction would equate to ‘unelected central bankers 'taxing' your savings if they deem it necessary.’  

Regardless of common sense – that the Fed is playing a dangerous game by punishing savers - supply-siders believe that big problems require BIG solutions. Will this weeks Fed cut be the BIG solution to what ails the US economy?  Is beating every alternative to stocks to death more important than beating Saddam?

These questions are not easily answered. Moreover, they can only be speculated using timeframe perspectives.  To be sure, if the U.S. economy picks up momentum in the second half of 2003 Greenspan will be applauded for his deflation fighting prowess (whether deserved or not).  Yet any such pick-up – possibly fueled by a continued drop in mortgage rates and the stock market rally – could eventually have an outsized* negative impact on the U.S. economy. 

* ‘Outsized’ in the sense that the housing market has been supporting the U.S. economy for more than two-years, and if interest rates rise the pitch of the decline in say refinancing activity will be much sharper when compared to the increase in refinancing activity over the last two years. 

The old saying ‘give a man a fish and you feed him for a day -- Teach a man to fish and you feed him for a lifetime’ is worth remembering.  Is not true that the Fed is simply handing out cheaper money for a day? Was it not universally understood that money was already at historically ‘cheap’ levels when the Fed rate cut in November 2002 failed to inspire an economic revival?

In short, making money cheaper has not yet proved a remedy to the softening U.S. economy, and with the Fed’s rate cutting days numbered it may soon be time for circus goers to start worrying about whether cheaper credit has created a lifetime of problems. That said, when the Fed cuts by a ¼ point later this week (my speculation) many ‘savers’ will immediately have to start worrying…As Greenspan feeds proverbial bubbles, he hopes that these savers will continue to do is bidding.
 

Date

ET

Release

For

Briefing

Consensus

Jun 24

10:00

Consumer Confidence

Jun

85.0

85.0

Jun 24

14:15

FOMC (1st of 2-day)




Jun 25

08:30

Durable Orders

May

1.0%

1.0%

Jun 25

10:00

Existing Home Sales

May

5.90M

5.80M

Jun 25

10:00

New Home Sales

May

1000K

1030K

Jun 25

14:15

FOMC (2nd of 2-day)




Jun 26

08:30

GDP-Final

Q1

1.9%

1.9%

Jun 26

08:30

Chain Deflator-Final

Q1

2.5%

2.5%

Jun 26

08:30

Initial Claims

06/21

425K

NA

Jun 26

10:00

Help-Wanted Index

May

36

35

Jun 26

14:00

FOMC Minutes




Jun 27

08:30

Personal Income

May

0.3%

0.3%

Jun 27

08:30

Personal Spending

May

0.4%

0.2%

Jun 27

09:45

Mich Sentiment-Rev.

Jun

87.2

88.0





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