5 replies to this topic

[phil_hubb]

Fed's Dilemna Continues.... COMSTOCK.... While most of the stock market discussion is revolving around subprime loans, securitized mortgages, lack of transparency, the possibility of contagion and potential Fed action, economists and strategists are overlooking one basic fact. Even in more ordinary times before the current housing boom and massive buildup in all sorts of credit derivatives, major declines in home building have almost inevitably led to recessions. In the last 50 years there have been only seven occasions where housing starts were down 30% or more from a year earlier and six have been associated with a recession. The current instance is the eighth time, and the result is likely to be the same. The lone exception was 1966 when a recession was narrowly averted and the Dow plunged 25%. Historically the housing industry has served as the conduit through which easy or tight money has been transferred to the rest of the economy, and what is happening today is a result of the previous tightened policy acting with its usual lag. Since the current turmoil in the credit markets is particularly severe, it is hard for us to believe that this would be only the second time a major downturn in housing did not lead to a recession. The Fed remains faced with a serious dilemma. Bernanke apparently wants to stabilize the credit markets and prevent a recession, but in a potential change of policy from the Greenspan-led Fed, is trying to separate the two problems in order to avoid the perception that it is creating a "moral hazard". This seems clear for a number of reasons. On August 17 the Fed took the unusual step of using the discount rate mechanism in an attempt to add confidence to the system without lowering the fed funds rate. In addition, on the day before the cut St. Louis Fed president Poole said the subprime crisis did not threaten economic growth and only a "calamity" would justify an interest rate cut and that the best course would be for officials to review the economic data when they meet on September 18. This view was reinforced by Richmond Fed president Lacker the day after the discount rate cut. Lacker argued that a discount rate reduction was a good thing to do because it can supply liquidity without leading the market to misprice credit again. Hammering home his point, he stated "Sound discount window policy, I believe, should aim at supplying adequate liquidity without undermining the market’s assessment of risk." In addition the well-informed Greg Ip of the Wall Street Journal reported that "Fed officials were looking for a maneuver dramatic enough to shore up confidence while avoiding a cut in the Fed’s main interest rate, the federal funds rate. Mr. Bernanke was still not convinced that the economy needed a cut, and some Fed officials feared it might encourage more of the sloppy lending that led to the crisis." Ip added that Bernanke is making an effort to undo the "moral hazard" perceptions created by Greenspan. Al Broadus, former head of the Richmond Fed, said that he and some others were skeptical of the need for action during the 1998 Long Term Capital crisis. We note that Ip is a reporter, not an opinion columnist. He was likely given this information on background. Although it seems likely that Bernanke is making an effort to avoid a cut in the fed funds rate at or before the September meeting, the market may force his hand. First, continuing financial turmoil may make holding the line untenable. Second, a large number of stock market economists and strategists are screaming for a rate cut and the market is long way toward pricing it in. If so, the FOMC may have to cut if only to avoid a severe market collapse following the meeting. The problem is that if a rate cut is already priced in prior to the meeting, the result may still be greeted with disappointment. In our view, no matter what the Fed does, a major growth slowdown or recession is already baked in the cake as a result of the severe housing decline. Even with today’s 2nd quarter GDP revision, annualized GDP growth has averaged only 2.0% over the last five quarters, and this was before the credit crisis snowballed. In addition 2nd quarter consumer spending was up only 1.3% annualized while employment growth has been tepid. We are therefore faced with a softening economy that can only deteriorate further in the second half. We believe that the stock market rally since the bottom is purely technical and that much more decline is ahead.

[pdx5]

Thanks for posting this well thought out article

[Iblayz]

If that is Comstock Equity Partners....have they ever...I mean ever....been bullish?

[SandStorm]

All the power to those who can trade the wiggles. Otherwise, this is all you need to keep selling to the suckers who think we are so quickly back to biz as usual and to new highs. The tightening cycle of the Fed started when Greenspan raised interest rates. Given its usual lag time, we are just beginning to see its growth inhibiting power. Third and fourth quarter earnings will be horror shows.

Edited by SandStorm, 31 August 2007 - 02:22 AM.

[Trend-Shifter]

All the power to those who can trade the wiggles. Otherwise, this is all you need to keep selling to the suckers who think we are so quickly back to biz as usual and to new highs. The tightening cycle of the Fed started when Greenspan raised interest rates. Given its usual lag time, we are just beginning to see its growth inhibiting power. Third and fourth quarter earnings will be horror shows.

Earnings of multi-nationals should do just fine if the dollar continues down. Watch for earnings declines when the dollar firms for a six month or longer period.

[SandStorm]

All the power to those who can trade the wiggles. Otherwise, this is all you need to keep selling to the suckers who think we are so quickly back to biz as usual and to new highs. The tightening cycle of the Fed started when Greenspan raised interest rates. Given its usual lag time, we are just beginning to see its growth inhibiting power. Third and fourth quarter earnings will be horror shows.

Earnings of multi-nationals should do just fine if the dollar continues down. Watch for earnings declines when the dollar firms for a six month or longer period.

The multi-nationals should also slow down somewhat given that our economy is still on the driver's seat.