Tuesday, September 18, 2007

Headfakes and Credibility

Ah, to be so wrong is a wonderful thing...and something the Fed will likely have to experience as well after the election.

So what is it then, a "calamity" as Mr. Poole said a little over a month ago? Something else? Who knows?, and that is the problem.

After the Fed has preached a new era of "transparency", after it has enumerated the importance of headline vs. core measures of inflation, even after it has reminded us it holds an "infaltionary bias" time and time again, we now have a 50 basis point cut.

And, adding insult to injury:

"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..."

"Forestall"??? The fed has now jettisoned its "data dependent" stance (which obviously is an ex-post determination) for a shiny new machanism called "forestalling" What does this mean and how do they do this? What credibility does the Fed now have?

Predictably, the dollar has been "adversely effected" by this and will likely have its worth month in perecentage terms in 30 years.

Oh, and lest I forget, all commodity metals closed limit up today.

Everyone who reads this column should keep a very close eye on 3rd quarter GDP figures, if they come in hotter than expected, more fireworks to follow.

Thursday, September 13, 2007

Fed Funds

Notwithstanding the housing markets, LIBOR, and related credit/financing difficulties, how can the Fed raise when:

1. CPI annualized at 4.5 percent
2. Equity prices still up for the year
3. Chinese import price increases
4. Dollar weakness
5. ** ...adding to GDP via increased exports
6. Commodity prices increasing...fast. Oil, gold, etc.


1. Shift from "core" to "headline" as starting point for inflation expectations
2. Bernanke's awareness of Miller in 79 pegging to the inflation rate and not above it to contain inflationary exectations
3. Needing the housing market to calm things down to acceptable levels
4. The geopolitical situation in the middleast subsiding somewhat...less incentive for oil importing countries (Japan, China), to subsize out security outsourcing services by buying our government debt. (I have no doubt that the recent move by the Saudis was precipitated by Iran's newfound diplomatic cooperativeness...)
5. Possibility of lates employment figures reflecting demographic changes, and unemployment too "low" (from Phillips curve and other "useful rule-sets" that the Fed "considers")

Most economists predict a rate cut...but then again most economists (who respond to polls taken by business publications) work for institutions where that would be a beneficial outcome. Then, if the Fed stands pat, as I think, they will express shock at the Fed "going against expectations". Inflation expectations formed by the consumer are VERY different than the expectations garnered from economists.

Wednesday, September 12, 2007


The dollar is declining yet again on participants acting on the future direction of interest rates as implied by the futures markets...and I will playfully throw in "Yen carry trade" to complicate matters on the cuasation of dollar depreciation.

Bernanke will have his hand firmly on the inflation expectations machine, and the price of oil is not helping the cause. I have said several times on this blog that HEADLINE inflation figures (which includes energy and commodity costs) are the Fed's new preferred mechansism for measuring inflation in this current market regime...and if that is the case, then a rate cut is not in the cards next week.

I also think that, in light of LIBOR rates, which have increased heavily due to it being the only viable financing vehicle for longer-term debt obligations and the now-frozen CDO/SIV/MBS markets, Bernanke might well refuse to move on rates at all. He must pay attention to rate differentials.

All that being said, I am watching U.S. fiscal position (i.e., the budget deficit) ever more closely at the moment, as this is the key to understanding dollar strength and money supply. The following article is an excellent essay on that subject:


Friday, September 07, 2007


Bernanke is being pressured from just about all sides to cut rates.

From Greenspan to Congressmen, he is being pressured to cut rates.


However, it is extremely difficult to put the inflation genie back in the bottle once its out. Money supply figures continue to drift higher, and common inflation figures are still running a bit hot for the Fed to gravitate from its stated position that Headline inflation is its concern.

But then we have the troublesome second edict of the Federal Reserve: (the first being "price stability)


So today's print of 4,000 net jobs added to the economy only fuels the calls for cuts. This is a very difficult exercise in timing, and Bernanke is going to have to commit himself to a position rather than simply say his job is to facilitate price stability AND full employment. This decision has to come soon.

Tuesday, September 04, 2007

Talking your own book...

..this is a somewhat pejorative term that some traders and investors use when it is obvious a proponent of a certain investment strategy has a position in same. The spectrum of human behavior is sufficiently narrow to ensure that this happens so often as to consider it an afterthought. Still, on some occassions, it still behooves one to practice this exercise in assessing when a "well known" economist or bank pundit has a decided interest in the outcome.

Case in point below. Mr. Feldstein is a director with AIG, which holds massive amounts of sub-prime debt securities...now why would he take the view that the fed should cut when just last year he thought inflation was of paramount concern to the fed? It is unfair to single out Mr. Feldstein as it seems every Wall St. bank also wants the Fed to cut for what is surely sound economic reasons having nothing to do with their own funding difficulties and financing prices...

Feldstein Warns of U.S. Recession, Urges Fed Rate Cut
2007-09-02 10:31

By Scott Lanman
Sept. 2 (Bloomberg) -- Harvard University economist Martin
Feldstein said the U.S. housing slump threatens a broader
recession, and the Federal Reserve should lower interest rates.
``The economy could suffer a very serious downturn,''
Feldstein, head of the group that charts America's business
cycles, told a Fed conference in Jackson Hole, Wyoming,
yesterday. ``A sharp reduction in the interest rate, in addition
to a vigorous lender-of-last-resort policy, would attenuate that
very bad outcome.''
Feldstein made a case for lowering the overnight lending
rate between banks to 4.25 percent from 5.25 percent to cushion
the economy from the fallout of defaults on subprime mortgages.
Chairman Ben S. Bernanke told the same gathering on Aug. 31 that
the Fed will do what's needed to stop the past month's credit-
market rout from ending the six-year expansion.
Lowering interest rates may result in a ``stronger economy
with higher inflation than the Fed desires,'' a situation that
Feldstein described as the ``lesser of two evils.''