Monday Morning Quarterback: Are Rate Cuts the Answer?
The Fed can pump money into the system but if they can't churn it around, it'll be all for naught.
"When I came to the Patriots," Randy Moss said of the trade that rescued him from his humbling two-year experience as an Oakland Raider, "I said that I wanted to showcase my talents again. And I think I did that today."
The NFL season kicked-off on Sunday as winners and sinners began to separate. For many, like New England, it was an opportunity to showcase their snazzy new roster additions. For others, like my beloved but lowly Raiders, it was a sad reminder that we're not yet ready for prime time.
A similar dichotomy extends to Wall Street as Bulls and Bears battle it out in the trenches. Early last week, the former had the wind at their back and fans in the stands only to fumble the ball into Friday's jobs report. The ursine uglies returned the squirm 250 points downfield as time ran off the weekly clock.
The Matador crowd is quick to offer that the flaccid report is proof positive that the Federal Reserve would step in to save the day. Indeed, heading into the weekend, the markets were pricing in 100% probability that we'll get a 25 bip snip by September 18th and 45% odds that we'll see fifty basis points of easing.
The bears, meanwhile, are quick to thumb through their trusty dictionary to find the textbook definition of stagflation. To wit, Merriam and Webster agree that "persistent inflation," "stagnant consumer demand" and "relatively high unemployment" are the tricky tri-fecta necessary to appease the academics. They would also offer that by the time we get economic validation, the market, as a leading indicator, will have already priced in the problems.
Which leads us to our next thought: Will rate cuts serve as a panacea to the price action? We've discussed how the past, while not an absolute prologue to the future, often offers valuable reminders, such as how the market reacted after the first rate cute in January 2001. I believe that's an important context to keep in mind after the initial, requisite rally.
The other important elements, and again, these are dynamics that we've discussed, is the elasticity of debt and the velocity of money. While the former storm is coming to bear, the latter matter is seemingly scarce. The Fed can pump money into the system but if they can't churn it around-which is why they're engaging Fannie Mae and Freddie Mac-it'll be all for naught.
There was a fair amount of debate over the weekend, including a constructive scribe by Ben Stein in the Sunday New York Times.
Interestingly, he touched on a thread that I've been talking on a while-that we all shoulder blame in the current credit conundrum-although he was quick to suggest that we should always look on the bright side of life. (Sorry, I saw Spamalot Saturday night and I can't shake the tune).
While I agree with him that there were benefits to sub-prime housing (the American dream is to own a home) and further concur that this mess will take time to fix, I scrunched my nose when he began his effusive praise of the Federal Reserve. In looking at them for solutions, he failed to note that they were the causation of the very same imbalances we are now fighting.
Further, the crux of his argument is predicated on the notion that the percentage of those in default is fairly small-10-15% of sub-prime, which is 10-15% of overall mortgages. That assumes that the worst is behind us and, while he might be right, that's a fairly aggressive assertion if the credit bubble, 20 years in the making, has only just begun to pop.
- For the first time since that fateful day, I was able to watch footage of 9/11 last night. The segment, on Sixty Minutes, discussed how recent studies found that firemen who were at ground zero lost "12 years of lung functionality" after being told, by the EPA and city officials, that the air was safe.
- I couldn't help but draw the parallel to the previous stream of assurances that sub-prime was safe and current calming voices that the "financial foundation" is safe.
- According to various banks, there's between $114-$140 billion of commercial paper that needs to be refinanced by the end of next week. This is the heart of the matter, Don Henley, so keep it on ye radar.
- Say hello to my little friend! Bond buyers currently view the nation's largest securities firms as no safer than taking a flier on sub-prime mortgages. Bond yields show that Lehman is considered more risky than Colombia, where the government has been waging a four-decade war with drug-funded rebels and one in 10 members of the workforce is unemployed.
- On the calendar, we've got Big Ben speaking in Berlin tomorrow, Texas Instruments mid-quarter update after the close tomorrow, the beginning of the Jewish holidays (Rosh Hashanah is Wednesday night and Thursday) and the FOMC (9/18), along with major brokers, reporting next week (Goldman Sachs is September 20th).
- Actions speak louder than words? Maybe- I took the trade on my S&P puts on Friday, effectively flattening out into the weekend. I still harbor concerns (see the VXO breakout), but I'm "making 'em to take 'em" and playing with a tighter risk bat. We'll chew through the dew in real-time, as always, on the Buzz & Banter.
- On the "just so you know" front, I'll be out of the 'Ville Thursday (holiday with the fam), traveling Friday (to celebrate Adam Katz's best trade ever) and on a left coast business trip next Monday and Tuesday (returning on the red-eye for the Hump).
Good luck Minyans, let's hit 'em hard!
Daily Recap Newsletter