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Why was the lowering of the fund rates so powerful?
- Thread starter aaronk321
- Start date
Quote from azukar:
What do you expect from journalists and long-only fund managers? Then once they get the cut the mantra will be "don't fight the fed", and this is where it gets funny, at least if you look at the last few cycles which are shown on the attached chart.
I have to apologize for the crudeness of this chart because I couldn't locate the proper symbol in eSignal, and after considerable searching I gave up and patched this one together. But as you can see, if you went short when the Fed started easing & went long when they started tightening you would have done extremely well for yourself over the past 10 years.
Will this time be different, or will it end up a "be careful what you wish for because you just might get it?"
This is an interesting point and points o the heart of the matter. What drives the market. Certainly, the fed doesn't - it lags the market. So, my stance on market reaction following any Fed cut would be:
1) Relief rally with short term opportunities.
2) Another down move as the reaction "hey, things are so bad even the fed's panicking" or "that confirms that things really are bad".
So, the Fed have to act for structural economic reaosns (that is their job), not to dampen market volatility. To do so would be folly and would likely induce an opposite reaction to that intended.
And my final point is this. There are indications that consumer spending may be weakening. That has the potential to make a down move in the market quite protracted as it is consumer spending that really drives the market.
Trouble in the credit markets combined with a drop-off in consumer spending may well lead to a recession. Quantifying the magnitude is impossible to say though I don't expect anything too severe.
One way or another, a drop in the discount rate isn't the end of this. As Churchill once said, it is perhaps the end of the beginning. Just some food for thought...
Regards,
Dave
Quote from hbiawos:
no one can afford to buy a house and this furthers exacerbates the glut of houses on the market----> far greater supply than demand---->dimnishing value of homeowners' net worth----> reduced spending---->further corporate weakness, etc., etc., etc. ..... The Fed funds discount window rate cut was an emergency measure to restore some semblence of normalcy in bank-to-bank business, but that's it.
I agree with you. I have a neighbor who earns stacks as a VP with large fortune 500 company. He cannot get a jumbo mortgage for his new home he has just completed building after 9 months with a construction loan......interest rates on jumbo loans are through roof even if he could get the loan. I think he will have to liquidate some of his stocks and retirement fund to get the loan below $417k.....so more downward pressure on the market when you multiple this nationwide.
I expect Fannie Mae and Mac to be allowed within two weeks to take on conforming (prime>$417k) jumbo loans to take the pressure off the banks and brokers.
I think some of your guys are missing a fundamental point about the money market and the Fed. THE FED MUST CUT RATES; if not now, eventually, and sooner rather than later. The Money Market is telling them that the economy is slowing, and at a rapid pace. For the Fed to wait for lagging economic data to show them what the Money Market is already telling them in real-time would be ridiculous. Bond investors, through the treasury market, are become risk adverse and are cash hoarding . This illustrates what's happening now in the economy, and implicitly, what is expected.
Risk adverse investors and high multiples on stock averages don't mix. The wealth is shrinking, so the Fed has no choice but to add the liquidity in the pot at a lower rate.
The lower of the discount rate is the first step, and the quickest, in this new liquidity cycle. Banks must meet their reserves, therefore, by lowering this rate, it enables member banks to maintain reserve requirements. Bullish for the market because more credit= more consumption and production provided the leverage is positive.
Risk adverse investors and high multiples on stock averages don't mix. The wealth is shrinking, so the Fed has no choice but to add the liquidity in the pot at a lower rate.
The lower of the discount rate is the first step, and the quickest, in this new liquidity cycle. Banks must meet their reserves, therefore, by lowering this rate, it enables member banks to maintain reserve requirements. Bullish for the market because more credit= more consumption and production provided the leverage is positive.
Quote from brettman9:
GS note on Friday morn smacks of a calculated attempt to add umph to the squeeze on the discount ease so they could deal a chunk of exposure...after their monday report on the GA/GEO/NEO losses, probably got swamped with redemption requests into the wed deadline
imagine we will be on hold while most others get back to a tightening bias.
I agree with above and also with foodjunkie, trendytrader, hiawos, and Dr. Greenback (with reservations). Please see also my remarks concerning Friday's action at the end of thread here:
www.elitetrader.com/vb/showthread.php?s=&threadid=101589
Also, in the FWIW department, if you have access to the FT, there was a depressing article in Tuesday's FT Re: comments from the US Comptroller General (Mr. Walters) on the economic future of the US. Walters' comments should be headed as he is supposedly a political neutral.
Quote from Dr.Greenback:
I think some of your guys are missing a fundamental point about the money market and the Fed. THE FED MUST CUT RATES; if not now, eventually, and sooner rather than later. The Money Market is telling them that the economy is slowing, and at a rapid pace. For the Fed to wait for lagging economic data to show them what the Money Market is already telling them in real-time would be ridiculous. Bond investors, through the treasury market, are become risk adverse and are cash hoarding . This illustrates what's happening now in the economy, and implicitly, what is expected.
Risk adverse investors and high multiples on stock averages don't mix. The wealth is shrinking, so the Fed has no choice but to add the liquidity in the pot at a lower rate.
The lower of the discount rate is the first step, and the quickest, in this new liquidity cycle. Banks must meet their reserves, therefore, by lowering this rate, it enables member banks to maintain reserve requirements. Bullish for the market because more credit= more consumption and production provided the leverage is positive.
Fed cut rates; slanty-eyes and others pull out $$$ from the US; and we're back to square 1.
Fed raises rates; market doesn't do so well
Fed does nothing; people panic and market doesn't do so well.
Seems like it's a loose-loose-loose.