On a Fed Day You Can See Forever
If things are so dire as to require such an aggressive stance, why did the FOMC have to wait for a scheduled meeting?
"Did you do it for love?
Did you do it for money?
Did you do it for spite?
Did you think you had to, honey?"
-The Long Run (Eagles)
On the occasion of economist's Milton Friedman's 90th birthday Ben Bernanke made the following remarks: "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
On Tuesday, Boom Boom lived up to his name and his "promise" with a double-barreled boom boom in both the discount and fed funds rates.
So this is the price for avoiding a massive deflation or even worse? But it didn't work in Japan in 1990 on and it didn't work in the U.S. in the early 1930's. The question posed by history is can cycles be avoided? What happens when the natural ebb and flow and purging by the system is not allowed to occur? What occurs when excess is not expunged and simply more excess is piled on?
Bazooka Ben took the Street by storm yesterday surprising the staunchest of bulls and the grizzliest of bears. But, you have to wonder, if things are so dire as to require such an aggressive stance, why did the FOMC have to wait for a scheduled meeting? Maybe it didn't want to, uh, panic the markets? Just askin'...
So much for the idea of the market panicking if it looked like the Fed was panicking with a 50 basis point cut. Instead, stocks panicked on the upside as hedge funds lifted the dark side leg and under-invested mutual fund managers chased the sunny side up.
However, as always follow through is key. No doubt about it, you can't fight the tape and you certainly can't fight the tape-worm. You can try to fight the tape, but you can't fight city hall. But this certainly reminds me of the spike into July options expiration. The point is what will happen after a few hours or a few days now that the Fed has taken its best shot? The chorus of celebration could quickly turn into "What do we get for an encore? For sure, what do we get for the entree?"
Read up on yesterday's Fed rate cuts in Professor Shedlock's Righting the Economic Ship? and also in yesterday's Market Recap.
The Monthly Swing Chart turned up on trade above the August high of 1504.90. Recently, I showed a chart with a channel suggesting that even a rally to this level would not in and of itself change the trend. However, the S&P traded meaningfully above this level on Tuesday reaching as high as 1520. Be that as it may time is more important than price and the behavior the few days following a turn up of a big wheel of time such as the monthly chart will dictate whether this spike defines yet another high or whether this is early in the new innings of a brand new ball game for the bulls. Trade back below the 1504 pivot would be the first chink in the bullish armor.
The Fed took its best and last shot to break the back of panicky psychology on Tuesday. In a nod to its banking constituency its move underscores how bad things actually are. The prevailing question is what happens in the six to nine months it takes for a policy shift to wash through the system?
To quote Bernanke on Friedman:
1) Monetary expansion works by affecting the price of all assets, not just the short-term interest rate.
2) Monetary ease lowers interest rates in the short run but raises them in the long run.
In hindsight, it appears the market was talking when the pattern diverged from the 55 day panic cycle into September 11/12. I guess if you put a couple of Harvard alums in a room together they can count to 55.
The Street for the most part was shocked on Tuesday. The bears were, in a word, obliterated. But many bears have been waiting for the Fed to take its best shot and will be sharpening their claws on any genuine loss of momentum.
Perhaps there will never be another bear market and we have reached a permanent plateau. It will be interesting to see how the rest of the world votes on dollar-denominated assets in the long run.
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