|
March 16, 2008 - 10:30 PM
Did The Fed Just Unleash Hell?
Cutting the discount rate by a quarter point and announcing another new lending scheme to ‘improve the ability of primary dealers to provide financing to participants in securitization markets’, the Fed wasted little time adding some drama to what should prove to be an interesting week. The dollar tanked on the Fed announcement, falling below 97 Yen, and the Euro moved smartly above 158 versus the dollar. While it is rare for the Fed to enact policy actions on a Sunday, let alone days before a regularly scheduled meeting, Bernanke and company clearly want to take a stand against illiquidity in the marketplace. Unfortunately, every time the Fed takes this stand – which they are doing with greater frequency – they fail and the U.S. dollar tumbles. At the risk of hyperbole, monetary intervention since this crisis started in August 2007 has rushed in a period of dollar uncertainty the likes of which have never been seen before. At the time of this writing the U.S. dollar’s major competitor – GOLD! – is up by $26 an ounce. Expect even higher prices in precious metals if the Fed continues to attack disruptions in the financial markets independently of other major central banks.
The Fed’s surprise announcement came on the heels, as within hours, of it being announced that JP Morgan will take over Bear Stearns for $2/share. To give an idea of how stressed Bears’ financial position was/is, BSC shares traded as a high as $70/share last week and closed at $30/share after the announcement of a NY Fed and JP Morgan bailout on Friday. The $2/share takeover price – which works out to about $236 million – is really a token amount. Clearly JP Morgan was compelled to finalize some form of a takeover before the markets opened on Monday.
In summary, two important events this Sunday kick off what should prove an interesting week. The cash heavy investor with some exposure to precious metals will be able to sleep well tonight, while many other speculators will not. The big question is how long will the dollar keep falling? The answer, at least for the moment, seems to be until Bernanke and company stop trying to save Wall Street and start trying to save the dollar. How hot things get before this major shift in Fed focus arrives is anyone’s guess…
|
