The Fed Should Not Be The Hedge Funds’ Insurance Agency
On July 26 I wrote the following:
I think stocks are being sold, bonds are being bought and yields are dropping precipitously in anticipation of something we “average” people don’t see yet; some economic news which eliminates any possibility of the Fed raising interest rates (not that there is such a possibility right now anyway), and in fact points to the possibility of lowered rates. That would only happen as a way to increase liquidity in the face of some severe, “unexpected” developments.
Now we have the story that the illustrious James Cramer is pleading for a Fed “rescue”.
I’ve written repeatedly over the last couple of years about how our economy’s best hope was for growth strong enough that the Fed could comfortably raise interest rates back to, or even better, above historical norms in order to contain that growth and its accompanying inflation. A strengthening dollar which would give China room to revalue its yuan without crashing our economy or bond market. I felt, and feel even more so now, that such strong growth lies somewhere between highly unlikely and impossible.
I wrote that the alternative (tepid growth in spite of low interest rates- and mortgages still under 7%!- and in spite of an extremely weak dollar) would paint the Fed into a corner and leave them with no wiggle room to do anything but start lowering rates back towards zero to try and re-stimulate our irresponsible debt- and- spend binge, the cycle which has gotten us to this point in the first place. Lowering from here (the lofty 5.25% level!) would cause the dollar to go into a spiral. The Chinese and Japanese would have to buy massive quantities of U.S. Treasuries to try to keep their currencies cheap relative to ours. I believe the current figure is that China is now up to about 1.3 trillion dollars worth of… us. At what level do we start referring to them as “lord”? When their ownership exceeds our GDP (about 10 trillion right now)?
The hangover we’re just beginning to feel is a very intense one, built up starting with the Greenspan-Bush delay of the 2002 “recession- which- wasn’t” by flooding the economy with unprecedented liquidity, resulting in the explosive increase in prices (stocks, homes, etc) we’ve subsequently seen. Milton Friedman would be proud. Not.
It’s not unlike drinking a fifth of whiskey to avert the pain we brought on by sucking down a 12-pack yesterday. We have not averted the pain, we have simply delayed it… to be paid later, with interest. And what Cramer is calling for is the equivalent of yelling, “Bartender!“. The problem has developed over years, and will resolve over years. It’s why I laugh when I hear silliness like, “Do you think the housing slowdown is over?”… it’s not a slowdown, it’s a drastic reversion to the mean, and at best, we’re at the “end of the beginning,” with the fun part yet to come. This stuff takes time.
Let’s hope the Fed does not “rescue” the billionaire parasites until their bleeding begins to threaten the entire economy (admittedly, that won’t take too long). For the long-term good, let’s fess up, take a couple of aspirin, and get ready for our hangover.
ken said,
August 4, 2007 @ 2:24 pm
I totally agree with you, and this blog’s author here: http://alephblog.com/2007/08/04/the-fomc-as-a-social-institution/
So, it’s natural that I totally disagree with this blog’s author in my comments to his blog entry, and of course, Cramer:
http://www.tradersnarrative.com/hell-freezes-over-pigs-fly-i-agree-with-cramer-1233.html
You’re absolutely right about the billionaire parasites. Sadly, the poor would suffer a lot more than these social insects if the situation would get much worse and affect the whole economy.
The Fed has always come to the rescue of these bloodsuckers, thus they kept feeding the non-stop cycles of their irresponsible, excessive speculation (or rather, gambling and greed.)
The “Greenspan put” must be left resting in its own grave. If revived, it would signal to these bastards, once again, that despite their irresponsibility towards society and economy, despite their selfish greed and financial recklessness, they’d always be bailed out by the Fed, at the great expenses of the under-privileged classes.
del said,
August 4, 2007 @ 3:01 pm
Preach it, brother! It’s too bad we didn’t learn this simple concept two bubbles ago.
LP said,
August 4, 2007 @ 6:19 pm
Will: I think you are on point with this. It’s time to accept the hangover is here and just deal with it. Let not try to pretend we can go forever with out a correction. This upcoming recession is just that, a correction on the yearly charts (do they even make those). While it maybe painful, it’s also good in the long run. My wish is that the dollar increases in value as the price of Greek, turkish or Italian yachts may drop in price.
Will said,
August 4, 2007 @ 10:37 pm
I definitely think that any (falsely, through excessive intervention) skipped trough in the economic cycle will be added to the next one, increasing its depth and duration. Like one of those little control-line airplanes, which when you over-correct on the way down, it climbs too steeply, then dives even farther the next time.
LP- regarding those yachts, how about we exchange a few million dollars for a basket of other currencies, then if the dollar ends up at $3/pound and $1.75/euro, we could trade ‘em back and “Buy American” nice and cheap!
Maybe Cramer DOES get it? said,
August 6, 2007 @ 10:58 am
[…] Re: Maybe Cramer DOES get it? I really think no one should take Cramer for anything more than entertainment value. Occasionally he does make insightful remarks, but I’d hate to see what the ROI would be basing your investment strategies on his show… yikes! For the most part he is shill for the listed corporations and hedgies first, and a honest adviser for the retail trader second. If the objective is supply a short term solution solution to stabalize market and bail out the financials with total disregard to the compounded future cost, then yes, he gets it. I have to disagree with that strategy though. There is a much larger implication though, and that is continued and even steepened unstable growth and over extension. Instead of some manageable downturns in the near future we could experience a economic nightmare. Nothing is with out cost and CPI effects all of us. I really agree with this linked post, though I have nothing against hedgies per se. The Fed Should Not Be The Hedge Funds’ Insurance Agency • dummyspots.com […]
LP said,
August 6, 2007 @ 12:18 pm
Will: Hmmmm…by golly I think you are right…lets do it…the only problem is that by the time we make the money…we may not be manufacturing anything in America any more…matter of fact we may not be manufacturing anything at all currently…So we may have to come up with a more complex strategy…like buying a boat manufacturer after we make the yacht money…
Good to Go Pile . . .2nd Round Monday « Trading for the Masses said,
August 6, 2007 @ 8:30 pm
[…] The Fed Should Not Be The Hedge Funds’ Insurance Agency […]
Alex said,
August 7, 2007 @ 7:46 pm
Very well said. What we are in now is worse than a bubble. We’ve floated to quite an altitude and when this one pops it’ll be a LONG way down to firm ground.
Will said,
August 7, 2007 @ 11:36 pm
I’m wondering at what point we stop expecting the next downturn in the economic cycle to be “just another recession” and begin to discuss the possibility of something worse… He Whose Name Shall Not Be Mentioned who last visited us in 1929. It would go down in history as being triggered by “the failures of highly-leveraged hedge funds” or “the Chinese crushing our treasury market” when in reality it would be what it is– the upshot of our collective greed and lack of fiscal discipline for many decades now.