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Prieur's Perspective: Holiday Cheer for Markets?


Economic outlook heading into Christmas.


"Americans have always been able to handle austerity and even adversity. Prosperity [greed!] is what is doing us in," said James Reston, former New York Times journalist and Pulitzer Prize winner.

Another chapter in the current economic crisis was written on Tuesday, when the US Federal Reserve announced a no-holds-barred set of measures to fix the broken credit machine, revive economic activity and stem the deflationary tide.

According to The Federal Open Market Committee's (FOMC) policy statement:

"The Fed will employ all available tools to promote the resumption of sustainable economic growth ... In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the Fed funds rate for some time."

Although the FOMC slashed the Fed funds rate to a target range of 0 to 0.25% -- the lowest on record -- the Fed was in fact simply aligning its target rate with the effective rate, thereby pushing the US into an era of ZIRP - a zero-interest-rate policy like that used by Japan for 6 years in its own fight against deflation.

The Fed also said:

"The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level."

The statement discussed specific actions that would move the Fed further towards a quantitative easing approach to monetary policy.

President-Elect Barack Obama told reporters the fact that the Fed had no more room to cut rates underscored the case for a big fiscal stimulus. "We are running out of the traditional ammunition that's used in a recession, which is to lower interest rates," he said, according to the Financial Times. Word circulated that Obama may ask Congress next year to approve a stimulus plan of about $850 million.

Investors' concerns about the outlook for the global economy deepened on the back of the Fed's announcement, as seen from government bond yields plunging to record lows and a sharp sell-off in oil prices (despite the announcement of the largest supply cut in OPEC's history). Furthermore, the dollar also tumbled on worries about the US's public debt expansion and the potential inflationary implications of the "printing press," although a relief rally did take place on Friday. (See Greenback Down for the Count?)

As far as stock markets are concerned, investors have again been shrugging off bad news - a pattern seen since the poor manufacturing and payrolls data of more than 2 weeks ago.

"The newspapers may be giving us a parade of bad news, but the stock market is beginning to march to a different drummer," said venerable newsletter writer Richard Russell (Dow Theory Letters.) This is evidenced by the MSCI World Index (+2.4%), S&P 500 Index (+0.9%) and the MSCI Emerging Markets Index (+5.5%) all improving for a second week running.

The scamster Bernard Madoff's Ponzi scheme also vied for a place in the history books, causing more billions to evaporate - yet another example of how greed clouded the minds of people during the halcyon days. (Click here to track the fallout from the fraud.)
No positions in stocks mentioned.
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