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  • moses_on_wall_street moses_on_wall_street Aug 4, 2007 12:20 PM Flag


    A FED rate cut at this juncture becomes an action much akin to rearranging the deckchairs on the Titanic only taking time to mop during the process.

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    • I never implied that a FED CUT will be a fix-all, it may very well be too late, and if FED cut does occur, will it be enough, I agree that 3/4 to 1 pt is needed. If Bernanke tries to calm the markets with talk, this will have a lasting effect of about 15 minutes and markets will continue their spiral down.

      So here is what we know:
      Banking and certain financial institutions are in serious trouble. AHM announced bankruptcy, 3 hedge funds went south and though sub-prime has been a serious concern for about the last 18 mos, all this financial ruin occurred fairly quickly (past few months).
      What we don't know is how many other banking and financial institutions are bordering on risk of massive default or bankruptcy protection.
      If we see further announcements, those solvent banks will raise interest rates on Jumbo loans (Wells Fargo bumped up over 1 full pt to 8%, and others will follow suit).
      So here is worse case scenario but not as far fetched as one might think given the circumstances:
      More banks will fall to the bad paper no one is willing to pick up, panic could spread and people may start making a run on their banks (regardless of how solvent or insured the banks are)...when fear becomes widespread and out of control, people do crazy things...if this happens, liquidity will dry up instantly, some rumors already floating that banks may freeze giving out long term loans altogether to protect themselves. If the former occurs, there will be no money for banks to lend out anyway, and if the latter occurs, same effect, there will be no one to buy those homes on the market, ...
      so think about millions of homes flooding the market (for sale) and no buyers, or buyers unable to obtain financing.
      If rates rise, those with flex loans will be effected, too late now to lock into fixed rate. The Home Builders will be under same situation, no buyers, they will start declaring bankruptcy, home prices will plummet...if your house plummets in value by 50%, tell me where is the inflation in that scenario?
      The two biggest problems is 1) we don't know how big the problem is in the first place, those companies which are teetering on bankruptcy are not going to make a public announcement, they will keep their mouths shut and hope they can recover. If we new how big this problem is, I think all of us would be a lot more fearful then we are right now. 2) Since the problem has been going on for almost 2 years, FED cut may not be in time. Too much damage may already have transpired to reverse the flow of bad debt. FED cut will certainly help and prevent further issues but we may already be at the point of no return.
      As to the US greenback, FED does not care about the strength of the dollar, they haven't for quite sometime, when the gold standard was abolished, so was the buying power of the US dollar.

      • 3 Replies to daviebri
      • FED owned by member banks cares about it's own interests. In case of depression Elite will benefit by taking properties for cents on a dollar. Laws can be passed that desperate people will accept which they wouldn't under different scenarios.

        Transfer of wealth has already occurred as much of manufacturing has moved to 3rd world. Public has been taught to embrace debt as a friend and savings in 1st world nations are close to negative - if I remember correctly US has negative savings. Banks make money off the interest they collect not from the money they lend out as much of the loans are based on fractional reserve anyways.

        US is a debtor nation that is dependent on China and should be thankful that Chinese don't move Yuan to trade on open market right now or that they don't rearrange the basket of currencies where USD is a dominant currency.

        If Fed cuts rates it might slow down the onset of recession but the USD will fall (true they don't care about that) and inflation should be more apparent. - Question is what will China do as they see their buying power decrease due to having they currency almost pegged to USD. Will they re-balance their currency quicker and make the inflation in US more apparent quicker?

        If Fed raises rates this will stabilize the fall of USD and allow China to continue support US debt and inflation will not be so apparent. Outcome will be sooner state stagflation if not depression.

        IMO there is not real solution without bringing back jobs already lost to US which would help the economy, help the budget and so forth. But who's bringing back manufacturing back to States???

        At present the fed will hold the rates and say the same BS as they've done for some time now, allowing the debt problem work itself out without creating more problems. But if they were going to move rates I believe they would raise them. Also have to think of treasuries and how that plays when interest rates are falling and USD is falling, will China support US government's debt? If China abandons support of the debt the Fed will at the cost of the public. This should lead to higher taxes as government will need the money from somewheres.

        Final note is that US is not the only nation in trouble but is at the center of debt problems as it's currency is the reserve of CBs and the world. And how the fall of USD will affect global economies and global banking is yet unknown. How the bankers play their cards will be interesting but to be in high debt now is nuts!!!

      • Those who think US dollar's slide needs intervention from the FED (raise rates) are dead wrong on this one. So there you have it, don't mean to paint a picture of "doom and gloom", but one other important key fact you have to remember, these types of events often prelude a market top. The chart pattern for the DOW is "very bearish"...if anyone familar at all with chart patterns, look at a 5 yr chart going back to 3/02 to present. Very easy to draw the upper and lower trendlines.
        Now take a look at, SHLD, MA, CLX (which have traced out same rising diag and have dropped percipitously), GOOG, AGN, FWLT are prone to same decline. These are just a few, but the point of this exercise is where you can spot a few, there are many, and with these many stocks charting out the same thing, the market will take a big hit.

        So here is my scenario, FED will cut (will still be unexpected surprise), massive short squeeze sending the markets higher, buy programs kicking off, adding to the buying frenzy, new money coming in (thinking this is the next bull leg), etc, etc...DOW makes new highs (14335), and that's it. More bad news (some catastrophic news will surface) and DOW jones will roll over. Looking for under 11,000 by end of the year.
        Some specific sectors may still do well or individual stocks, I still like the metals and will hold my long positions unless they fail to move up with rally in the metals. The US dollar decline will cause metals to spike, gold and silver may find additional support as a safe haven, with dollars and real estate going into the tank, along with markets, indexes, there is not a lot of options remaining to park your pm prices rally, this will get the attention of a lot of traders / investors and they will be buying either futures or physical bullion. As to the DOW, not the end of the bull market but a correction in the realm of 50% (since the 7200 bottom)...this shake out is necessary and actually healthy...

      • I suspect that they realise that only a perceptually manipulative cut of .25 is doable, but they may slide a second cut of the same amount to bouy any support that the first engendered.

        A cut the magnitude of which you've suggested would mean the failure of the dollar nearly overnight. Even the minor cuts may do that, but it'll appear to be a calculated thing and not a panic based reaction which strategically I'd guess they would want to avoid at all costs.

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