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The Fed Rate Cut Aftermath


Every rally we see is index-led: Insiders in general are selling, not buying.

As stocks climb to new highs, let's look at what the Fed's rate cuts have really done.

30 year mortgage rates before the cut... 6.375%. 30-year mortgage rates after the cut... 6.625%. Stocks' reaction... priceless.

Forget about 5-year ARMs and interest-only loans. Those are priced completely differently now and are bones in the sand. A mortgage broker at a big bank tells me business is down significantly with no signs of picking up.

But stocks discount the future right? They must see something that we mortals do not see.

Well, that is what Wall Street tells us. But are not stocks just the amalgamation of investors' opinions? I have commented before that every rally we see is index-led. Insiders in general are selling, not buying. A healthy rally is built stock by stock where insiders see good future fundamentals. That is the forward-looking part. Index buyers are just putting money to work because in today's relative world you don't hold cash.

How about this scenario? Banks are taking the liquidity the Fed is forcing out there through the discount window and repos. After using it to shore up the declining value of their assets, they have excess to lend out. Finding no traditional borrowers that want to buy a house or build a factory, the new rules the Fed has set forth allows the banks to pass this liquidity onto their broker dealer subsidiaries in much greater quantities. These broker dealers are lending thus to hedge funds and margin buyers who are speculating in stocks.

Remember, the Fed is powerless unless it can find people to borrow the credit it wants them to spend. By definition, the last ones willing to take that credit are the most speculative.
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