Fed Ease Means Dollar StrengthRate
Increases have rarely constituted “tightening” when it comes to restoring the greenback’s value.
By John Tamny & Paul Hoffmeister
The Federal Reserve’s change in bias last week toward cutting the federal funds rate, along with its half-point cut in the discount rate, offers an opportunity to test the widely held belief that rate cuts weaken the dollar while exacerbating existing inflationary pressures. In truth, the opposite is typically the case, since dollar-demand shifts when the Fed acts.
Last week, the market response to the Fed’s new course was profound: Gold began a new short-term downtrend. The dollar adjusted for gold started a short-term uptrend compared with the euro adjusted for gold. The 30-year Treasury yield began a short-term downtrend. And the Russell 2000 Index — comprising small-cap companies and arguably the most sensitive equity index to monetary policy error — ended its recent short-term downtrend.
Overall, lower gold prices, a stronger dollar against the euro, lower long-term bond yields, and rising equity valuations are indisputable hallmarks of a disinflationary environment — not a resurgence of inflation........
Full Story Link Here
Monday, August 27, 2007
Wednesday, August 22, 2007
Fed Needs to Finish the Job - Part 2
Joseph Mason, an economist at Drexel Univerisity, discussed today why the Fed's Discount Rate cut is only a short term bandaid at best...............
Mr. Mason’s comments:
Let’s be direct. While markets may have been temporarily assuaged by Friday’s Discount Rate cut, the problem at the heart of current credit difficulties is over-leverage. Structured finance conduits (like subprime) are failing because they sold too much high-rated credit and not enough risky credit. That is, they over-leveraged. CDOs bought those over-leveraged structures and then leveraged the structures some more. Hedge funds bought the CDOs and then borrowed to buy more, leveraging themselves 10 or more times over in the process. Over-leverage is a condition of over-borrowing. While discount window lending to insolvent institutions as a broad based bailout policy was attempted in the Thrift Crisis and the Great Depression in the US, and many times elsewhere, it has never once meaningfully addressed industry-wide problems of over-leverage or help restore banks to solvency.
The point is, over-borrowing has not once been reconciled through more borrowing, whether through the discount window or elsewhere. Here are two relevant articles. One is the Federal Reserve Bank of St. Louis’ Homer Jones Memorial Lecture given by Anna Schwartz (Milton Friedman’s co-author on the Monetary History of the United States) in 1992, and one is authored by myself, published in 2001. Both show the frivolity of discount window lending in cases of industry-wide difficulties. Discount window policy will help the industry weather a few weeks of transitory market difficulties, but discount window policy is unlikely to help in the long term. Given the magnitude of interest rate resets increasing well into 2008, more meaningful policy geared toward providing transparency toward RMBS, CDO, Hedge Fund, and Mutual Fund holdings needs to be developed in the few weeks we have bought with the discount window policy. Financial panics tend to happen in the fall, and that time is soon upon us.
- From WSJ Real Time Economics Blog
Blog Link Here
Mr. Mason’s comments:
Let’s be direct. While markets may have been temporarily assuaged by Friday’s Discount Rate cut, the problem at the heart of current credit difficulties is over-leverage. Structured finance conduits (like subprime) are failing because they sold too much high-rated credit and not enough risky credit. That is, they over-leveraged. CDOs bought those over-leveraged structures and then leveraged the structures some more. Hedge funds bought the CDOs and then borrowed to buy more, leveraging themselves 10 or more times over in the process. Over-leverage is a condition of over-borrowing. While discount window lending to insolvent institutions as a broad based bailout policy was attempted in the Thrift Crisis and the Great Depression in the US, and many times elsewhere, it has never once meaningfully addressed industry-wide problems of over-leverage or help restore banks to solvency.
The point is, over-borrowing has not once been reconciled through more borrowing, whether through the discount window or elsewhere. Here are two relevant articles. One is the Federal Reserve Bank of St. Louis’ Homer Jones Memorial Lecture given by Anna Schwartz (Milton Friedman’s co-author on the Monetary History of the United States) in 1992, and one is authored by myself, published in 2001. Both show the frivolity of discount window lending in cases of industry-wide difficulties. Discount window policy will help the industry weather a few weeks of transitory market difficulties, but discount window policy is unlikely to help in the long term. Given the magnitude of interest rate resets increasing well into 2008, more meaningful policy geared toward providing transparency toward RMBS, CDO, Hedge Fund, and Mutual Fund holdings needs to be developed in the few weeks we have bought with the discount window policy. Financial panics tend to happen in the fall, and that time is soon upon us.
- From WSJ Real Time Economics Blog
Blog Link Here
Tuesday, August 21, 2007
CNBC says Silicon Valley Housing Sizzling
I've been posting about the strong bay area and silicon valley economy since Q3 last year, and it's continuing to show up in the housing market...........
Here is a very pertinent special report in video form from CNBC:
Link Here
Here is a very pertinent special report in video form from CNBC:
Link Here
Monday, August 20, 2007
Fed Needs to Finish the Job
Cutting the discount rate was a nice gesture, but the market needs a a dramatic Fed Funds rate cut immediately. To wait is only to deepen the chance of a recession and create more uncertainty in the market. As I mentioned Friday, I can only attribute this lack of action on the Funds rate as to stubbornly protect a flawed Fed forecast just weeks ago forcing them to admit they have been out of touch with the real world.
Fed may have to cut federal funds rate
Most economists believe Fed will cut at or before its Sept. 18 meeting
WASHINGTON (MarketWatch) -- U.S. credit markets remained extremely fragile Monday, and observers said the Federal Reserve may have to lower its federal funds target rate to inject permanent liquidity into the market and provide investors with more assurances that the central bank will act to keep the economy growing.
Yields on short-term Treasurys plunged on Monday, evidence that fund mangers were parking their cash in the safest and most liquid assets rather than risk them in any asset backed by mortgages or even in the normally sedate commercial paper market.
The yield on the three-month Treasury fell more than a full percentage point at one point, finishing at 3.09%, down 66 basis points on the day and down about 150 basis points in a week. It was the largest decline since the day the market crashed in 1987.
By Rex Nutting, MarketWatch
Last Update: 6:03 PM ET Aug 20, 2007
Full Story Link Here
Fed may have to cut federal funds rate
Most economists believe Fed will cut at or before its Sept. 18 meeting
WASHINGTON (MarketWatch) -- U.S. credit markets remained extremely fragile Monday, and observers said the Federal Reserve may have to lower its federal funds target rate to inject permanent liquidity into the market and provide investors with more assurances that the central bank will act to keep the economy growing.
Yields on short-term Treasurys plunged on Monday, evidence that fund mangers were parking their cash in the safest and most liquid assets rather than risk them in any asset backed by mortgages or even in the normally sedate commercial paper market.
The yield on the three-month Treasury fell more than a full percentage point at one point, finishing at 3.09%, down 66 basis points on the day and down about 150 basis points in a week. It was the largest decline since the day the market crashed in 1987.
By Rex Nutting, MarketWatch
Last Update: 6:03 PM ET Aug 20, 2007
Full Story Link Here
Friday, August 17, 2007
It's a start..............
This is a start, but I don't understand the stubbornness of not lowering the fed funds rate.........
Fed OKs Reducing Discount Rate on Loans
Friday August 17, 9:52 am ET
Federal Reserve Approves Half-Percentage Point Cut in Discount Rate on Loans to Banks
WASHINGTON (AP) -- The Federal Reserve approved a half-percentage point cut in its discount rate on loans to banks Friday, a dramatic move designed to stabilize financial markets roiled by a widening credit crisis.
The action had an immediate positive impact, sending stocks soaring on Friday right at the opening bell. The Dow Jones industrial average surged by more 300 points at the start of trading.
The decision means that the discount rate, the interest rate that the Fed charges to make direct loans to banks, will be lowered to 5.75 percent, down from 6.25 percent.
The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year. Friday's move was not expected to have an immediate impact on consumer borrowing...............
Friday August 17, 9:52 am ET
By Martin Crutsinger, AP Economics Writer
For rest of article click here
Fed OKs Reducing Discount Rate on Loans
Friday August 17, 9:52 am ET
Federal Reserve Approves Half-Percentage Point Cut in Discount Rate on Loans to Banks
WASHINGTON (AP) -- The Federal Reserve approved a half-percentage point cut in its discount rate on loans to banks Friday, a dramatic move designed to stabilize financial markets roiled by a widening credit crisis.
The action had an immediate positive impact, sending stocks soaring on Friday right at the opening bell. The Dow Jones industrial average surged by more 300 points at the start of trading.
The decision means that the discount rate, the interest rate that the Fed charges to make direct loans to banks, will be lowered to 5.75 percent, down from 6.25 percent.
The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year. Friday's move was not expected to have an immediate impact on consumer borrowing...............
Friday August 17, 9:52 am ET
By Martin Crutsinger, AP Economics Writer
For rest of article click here
Wednesday, August 15, 2007
C'mon Ben....This is getting ridiculous
Ok, Ben Bernanke is going to transform me from Dr Brightside to Dr Evil. I'm just going to chalk it up to stubbornness and rhetoric, I suppose. I heard Steve Liesman of CNBC make a great point this morning about Big Ben; he descends from academia so until he can touch and feel the data he's going to sit on the sidelines, that he's not going to look at what's coming until it's here. I find that quite frustrating, but I have to imagine pressure is mounting hourly and the Fed will be forced to cut rates soon or they will be losing any real credibility that they are worried about inflation. They have a looming financial crisis on their hands that they can relieve and allow the underlying relatively strong U.S. economy keep it's momentum.
Just the facts to state my case
-The Fed should follow the markets, the 91 day treasure closed today at 4.038% down nearly 100 basis points in a week. This is an incredible turn of events.
-The headline CPI is moderating nicely gaining only .1% . Also the chain weighted 12 month core CPI is at 1.8%, well within the feds comfort zone, so I believe this gives the Fed room to duck and cover and cut.
-Liquidity in the financial markets is almost frozen. Commercial paper is not trading as it should thus not allowing many institutions to meet their daily obligations. This is despite the Fed's various attempts in the last few days to inject liquidity.
Saturday, August 11, 2007
We are what we believe
The reason for birthing this blog is my contention the main stream media has been overtly negative about our economic situation the last few years and that there needed to be a counterbalance, even if it's a grass roots effort of one person and one blog at a time(read the mission statement above). I understand glorifying news to sell papers and advertising, but the last few years the negative slant has been ridiculous. If find alas, the artful prose of Brian Westury in a recent WSJ Op Ed piece describing the business that is economic news.............
Fair but Unbalanced
How the media promote false pessimism about the economy.
BY BRIAN S. WESBURY
Not that it needed any help, but the already energized debate about journalistic bias was electrified when Rupert Murdoch, owner of the "fair and balanced" Fox News Channel, struck a deal to buy The Wall Street Journal.
I have no desire to take sides in this debate, or question anyone's integrity, but my role as a business economist gives me a unique view of this subject.......
.......For example, the most recent Wall Street Journal economic forecasting survey, from July, shows that 49 out of 60 forecasters expect real GDP to grow at an average annual rate of 2%, or faster, in 2007. Of the remaining 11 forecasters, only two expect growth of less than 1%, and only one expects a recession. For 2008, the forecasters are even more optimistic, with none expecting recession......
.......Despite this, an NBC News/Wall Street Journal poll taken in late July found that 68% of Americans thought that the economy either was in recession already, or would experience a recession sometime during the next 12 months. Interestingly, this is not much of a change from the past. This same survey question has been polled at least five times since September 2002. Each time a robust majority of between 65% and 85% of respondents thought a recession either was under way or would occur within the year. Americans have been bearish on the economy for quite some time.
In short, over the past five years, forecasting economists from academia, consulting shops, financial services and industry have a perfect 5-0 record against a random sample of American citizens. It's important to understand that economists are not always right. Some even say that economists were put on earth to make weathermen look good......
For Rest of Story and Link to WSJ click here
Fair but Unbalanced
How the media promote false pessimism about the economy.
BY BRIAN S. WESBURY
Not that it needed any help, but the already energized debate about journalistic bias was electrified when Rupert Murdoch, owner of the "fair and balanced" Fox News Channel, struck a deal to buy The Wall Street Journal.
I have no desire to take sides in this debate, or question anyone's integrity, but my role as a business economist gives me a unique view of this subject.......
.......For example, the most recent Wall Street Journal economic forecasting survey, from July, shows that 49 out of 60 forecasters expect real GDP to grow at an average annual rate of 2%, or faster, in 2007. Of the remaining 11 forecasters, only two expect growth of less than 1%, and only one expects a recession. For 2008, the forecasters are even more optimistic, with none expecting recession......
.......Despite this, an NBC News/Wall Street Journal poll taken in late July found that 68% of Americans thought that the economy either was in recession already, or would experience a recession sometime during the next 12 months. Interestingly, this is not much of a change from the past. This same survey question has been polled at least five times since September 2002. Each time a robust majority of between 65% and 85% of respondents thought a recession either was under way or would occur within the year. Americans have been bearish on the economy for quite some time.
In short, over the past five years, forecasting economists from academia, consulting shops, financial services and industry have a perfect 5-0 record against a random sample of American citizens. It's important to understand that economists are not always right. Some even say that economists were put on earth to make weathermen look good......
For Rest of Story and Link to WSJ click here
Friday, August 10, 2007
I told You So
I've been asking the Fed to cut rates since the birth of this blog. In Bernanke's stubborness to show is monetary manhood he's overtightened and held on too long causing a freeze up in the credit markets. Memo to Bernanke, it's much easier to lower the Fed Funds rate than to continually pump daily emergency liquidity into the financial markets..............
U.S. Rate Cut Looks More Likely
Central banks pumped money into distressed markets for the second day to relieve strains in money markets, while investors concluded the Federal Reserve is increasingly likely to cut rates soon and that rate increases in Europe and Japan may be deferred.
Explaining that it was "providing liquidity to facilitate the orderly functioning of financial markets," the Fed injected $38 billion, following Thursday's $24 billion. The European Central Bank, saying that its "liquidity-providing fine-tuning operation" was aimed at assuring orderly market conditions, added $83.56 billion following the $130 billion it injected to euro-zone markets Thursday.......
........Futures markets place high odds on the Fed cutting the rate target to 5% at its Sept. 18 meeting, and some possibility of a cut before then. The decision turns on how conditions in credit markets develop in coming days. If they don't improve, officials would probably be inclined to cut rates to offset the negative impact.
By JOELLEN PERRY and GREG IPAugust 11, 2007 - WSJ
U.S. Rate Cut Looks More Likely
Central banks pumped money into distressed markets for the second day to relieve strains in money markets, while investors concluded the Federal Reserve is increasingly likely to cut rates soon and that rate increases in Europe and Japan may be deferred.
Explaining that it was "providing liquidity to facilitate the orderly functioning of financial markets," the Fed injected $38 billion, following Thursday's $24 billion. The European Central Bank, saying that its "liquidity-providing fine-tuning operation" was aimed at assuring orderly market conditions, added $83.56 billion following the $130 billion it injected to euro-zone markets Thursday.......
........Futures markets place high odds on the Fed cutting the rate target to 5% at its Sept. 18 meeting, and some possibility of a cut before then. The decision turns on how conditions in credit markets develop in coming days. If they don't improve, officials would probably be inclined to cut rates to offset the negative impact.
By JOELLEN PERRY and GREG IPAugust 11, 2007 - WSJ
Stealth Rebound
It's always darkest right before the dawn.....................
U.S. MBA's Mortgage Applications Index Rose 8.1% Last Week
By Shobhana Chandra
Aug. 8 (Bloomberg) -- Mortgage applications in the U.S. rose last week by the most since January, as cheaper borrowing costs encouraged more Americans to seek loans for home purchases and refinancing.
The Mortgage Bankers Association's index of applications to buy a home or refinance a loan jumped 8.1 percent to 656.5 from 607.1 the prior week. The group's gauge of demand for credit for home purchases gained 7.4 percent, while a measure of refinancing increased 9.1 percent.
A resilient labor market and lower home prices may support sales and eventually help reduce the glut of unsold properties, economists said. A report last week showed Americans signed more contracts to buy previously owned homes in June, a sign the weakness in the housing market may not get much worse.
``We're at the bottom right now in housing,'' said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. ``The biggest declines are over.''
For Bloomberg Link Click Here
U.S. MBA's Mortgage Applications Index Rose 8.1% Last Week
By Shobhana Chandra
Aug. 8 (Bloomberg) -- Mortgage applications in the U.S. rose last week by the most since January, as cheaper borrowing costs encouraged more Americans to seek loans for home purchases and refinancing.
The Mortgage Bankers Association's index of applications to buy a home or refinance a loan jumped 8.1 percent to 656.5 from 607.1 the prior week. The group's gauge of demand for credit for home purchases gained 7.4 percent, while a measure of refinancing increased 9.1 percent.
A resilient labor market and lower home prices may support sales and eventually help reduce the glut of unsold properties, economists said. A report last week showed Americans signed more contracts to buy previously owned homes in June, a sign the weakness in the housing market may not get much worse.
``We're at the bottom right now in housing,'' said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. ``The biggest declines are over.''
For Bloomberg Link Click Here
Monday, August 06, 2007
Place Your Bets
Ahead of tomorrow's Federal Reserve meeting the Dow had it's biggest daily gain in four years. What does this mean? Maybe investors are hoping the Fed will get back out of the way of the ongoing U.S. prosperity and cut rates to a more "market" rate level. My guess is the Fed will acknowledge more of the slowing its lagging monetary tightening has produced, but still keep rates unchanged and remain "vigilant" on inflation.
I've been saying ad nauseam this year that the Fed should let prosperity run and cut rates.
And Merrill Lynch Agrees............
"Still, there were some who did expect movement from the Fed, if not now, soon. Merrill Lynch put out a report predicting that the Fed funds rate would be at 4.50% by the end of the year, from 5.25% now. "Not only do we see the Fed cutting rates sooner than the consensus and markets currently expect, but we see the cuts being deeper, with the Fed eventually lowering the funds rate to 3.75% by mid-year 2008," they wrote."-courtesy WSJ.
With the core rate nicely in the Fed's "comfort" zone and decelerating it will be only stubborness and flexing of inflation fighting Bernanke manhood muscle that will allow him to beat the vigilance drum. Soon the beat will tire and cooler heads will prevail.
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