Wednesday, January 30, 2008

The Twilight Zone

As we ponder the frightening, almost parallel-universe absurdity of the Federal Reserve aggressively cutting interest rates with oil recently at $100, the dollar in the middle of a de facto devaluation, and gold staring at $1,000, this part of the Fed's statement today sums things up nicely:
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.
See the order in which the Fed listed its concerns? Market newbies might not realize how much of a leap this represents. Even during most of the Greenspan years, the Fed was loathe to admit it even knew the financial markets -- particularly the stock market -- existed. Of course there were very good reasons for that; the Fed realized the danger of getting caught in a market-supporting feedback loop. But that was back when financial markets were merely a passive reflection of underlying business conditions and not an end in themselves. Decades ago, the Fed was so averse to financial market tail-wagging that it wouldn't even formally announce whether it had raised or lowered rates; everyone would wait to see what the big banks did after a Fed meeting, and for Salomon's Henry Kaufman to interpret things for the masses.

A couple of things to watch from here. I suggested a few weeks ago that if the Fed continued to cut, there might very well be a dollar-support plan in place. We'll get more clarity on that scary possibility soon, I'd think.

Also, regular readers know I've been bullish on gold since the inception of the blog (and well before that, actually). Take a look here at how the silent sentinel continues to watch, take notes, and act accordingly. It's seen this movie before and knows the ending word for word. Remember, it's extremely rare for monetary policymakers to tell you what they intend to do to the value of your savings. This is one of those times.

Finally, as Washington makes it clear it will do literally anything to prevent the natural economic cycle from playing out, keep in mind that Abdullah and his widget machine get increasingly annoying and inconvenient.

5 Comments:

Anonymous goldhorder said...

I suggested a few weeks ago that if the Fed continued to cut, there might very well be a dollar-support plan in place. We'll get more clarity on that scary possibility soon, I'd think.

Not much doubt about that

1/31/2008 9:26 AM  
Blogger Grodge said...

Great article on Abdullah's widget maker, TCR! Very concise and educational. (And thanks for the Worldcat link for Fergusson's tome.)

For goldhorder or TCR:
One (dumb) economics question: how would the gov't "support" the dollar? Do they simply take some currency out of circulation? How does a 125 basis point fed funds rate cut square with that? Can these be mutually exclusive events?

I'm a relative newbie to economics, and just trying to get a better understanding.

(BTW, my GLD, SLV, FNARX and FSAGX have been doing quite well-- Thank you. If you gents ever need any professional information/ opinion on obstetrics or gynecology, I would be honored to reciprocate with my expertise someday... or I guess I could buy you a drink or something more useful.)

1/31/2008 3:57 PM  
Anonymous Mr. Hedley Bowes said...

"The possibility of direct intervention in the stock market has been the subject of much debate in the financial community. Some believe that the government—either the Federal Reserve, the Treasury, or a proxy—has intervened in the past to prop up the stock market. If that’s indeed the case, a national debate about it should take place. Government-sanctioned intervention in the stock market would have serious implications, including the use of public money to buy stocks while corporate insiders are selling, select Wall Street trading desks profiting from knowledge of the intervention, and the ability to boost the market prior to an election or other event. We know from the past few years that much can be justified when a nation is “at war.”

This article embellishes suspicions I've had for the last 7 years, but lately I've had the feeling that it's about much more than keeping the markets aloft. If you're trading short with knowledge of massive injections of liquidity, and understand the timing (easy to see if you follow the daily trends) and know the natural market trends are downward, then you're in the cat bird seat. All you'd have to do is mark the market and collect as all that new liquidity falls out.

That makes the market a laundering mechanism for insiders. Not good.

Thanks CR. I'm finally getting it.

2/01/2008 3:20 AM  
Anonymous goldhorder said...

It is OK for the US to have a laundering mechanism for insiders as long as we can maintain world confidence and retain our status as reserve currency. I don't think the ECB really minds...our Japan and Korea for that matter. They have been in on the scam for a long time. The central banks (or equivalents) of China, India, Russia, and the oil producing middle eastern countries are getting increasingly annoyed with us. See TCRs great column in the American Conservative. We can't print oil. How does the scam artist retain the confidence of his mark? Especially when repeatedly making moves that undermine his position! Let us look to the foreign press for some insights (God forbid the US pravda discuss such things).

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/07/ccview107.xml
It is OK for the US to have a laundering mechanism for insiders as long as we can maintain world confidence and retain our status as reserve currency. I don't think the ECB really minds...or Japan and Korea for that matter. They have been in on the scam for a long time. The central banks (or equivalents) of China, India, Russia, and the oil producing middle eastern countries are getting increasingly annoyed with us. See TCRs great column in the American Conservative. We can't print oil. How does the scam artist retain the confidence of his mark? Especially when repeatedly making moves that undermine his position! Let us look to the foreign press for some insights (God forbid the US pravda discuss such things).

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/07/ccview107.xml

Ahhhh a 2008 New Deal! Many countries in the past have gotten in very bad trouble taking a “hands on” approach to managing their economies. A country always runs the danger of facing a loss of confidence. Since we are running a confidence scheme...imagine what a loss of confidence would do. Things take on momentum...taking liberties with Chaos theory...complex systems built up on rational practical rules and laws eventually build up enough momentum that the practical rules and laws don’t matter anymore. The thing has a momentum of its own so to speak. As the old rules and laws that built up the system are broken...and nothing bad happens...more and more of the old rules and laws that used to be followed are no longer followed. Then the momentum changes...in order to try to keep the old system going...the rules begin to be followed again out of desperation...but you see the thing has momentum now! Going in the wrong direction! At this point there is nothing to stop the system from reaching a complete breakdown. My belief is that until we reach that breakdown point you are playing Russian roulette investing in US bonds and stocks. I’m completely rambling and off topic but I’m in a funny mood today. LOL.

Speaking of funny and the plunge protection team. The mogambo guru on the market price of dog turds. Great way to answer your question!
http://www.atimes.com/atimes/Global_Economy/IJ25Dj01.html

Here is another interesting rant by my friend Richard Daughty
http://www.dailyreckoning.com/Writers/Mogambo/DREssays/MG071907.html

2/01/2008 9:43 AM  
Anonymous goldhorder said...

Don't know what the deal was with that post?!? Oh well. Hey Grodge, do you live in Kalamazoo? No way...I was born there. My mother still lives there. Be careful what kind of invitations you send out...you never know what kind of degenerate will take you up on it!

2/01/2008 9:51 AM  

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