The Fed took what amounted to a “baby step” today in it's policy action. It will take proceeds from mortgage backed securities they bought and re-invest them into bonds, apparently around 7-10 years in maturity, a small step to hold down interest rates. With rates already near zero, another cut would be like a drop of water in a swimming pool. Given the mounting evidence and even admissions from the Fed that this economy appears to be “possibly” headed for a double dip recession, their actions today were almost of no consequence, yet the bond rally that took place immediately after the decision as I showed in IEF, seems to have been forehand knowledge of two things. One the slight accumulation on a 5 min chart, but really nowhere else of consequence shows they were ready for a quick knee-jerk reaction in bonds. However, their failure to commit more capital to the bond trade (smart money I'm talking about) apparently shows that they understood that this was action of little consequence.
The policy action, in my view is out of lock step with the economic situation on the ground. The numbers are pouring in worse then anticipated. Everything the Fed and the government did before to get 1 quarter of 5% growth and a steady decline from there was 1,000x more aggressive then this step. This makes me think that they are resigned to doing what I said needed to be done way back in 2007 when I did a 5-part video series on economic bubbles and our latest one. I recorded these videos as people were still bullish and talking about the Dow at 20,000. I also gave a target that is substantially lower then where we currently sit. What I said that was important was that our economy had the equivalent of food poisoning and when I'm sick, the last thing I want to do is to lose my cookies so to speak, but that is indeed what this market needed to do to recover, it needed to lose it's cookies, get out all of the bad, take the hit and start anew. It seems the Fed may be resigned to that fact as well. The administration has gone back to aggressively blaming the Bush White House recently for the economic mess, but nearly two years into it with unprecedented spending and debt, it's clear this administration has its share of the blame to take as well, but they don't want voters thinking that simply because they know as we all know, this economy has about a 0% chance of showing signs of real recovery that the administration can take credit for, before the midterm elections, so apparently the Obama White House is also resigned to this fact. There may be some vote buying measures released, especially as it relates to foreclosures, but foreclosures are just 1 part of a much bigger problem.
Mark my words, the next set of troubles for this economy is going to come in the way of deflation, wages will fall, more people will lose their jobs and the cost of goods will have to fall with it. So I would assume there will be some near term downgrades with regard to guidance from a lot of companies.
The world economy has been out of the spotlight for a bit, but it isn't getting much better either. China is now seeing slowing internal demand for imports. Auto sales for instance in China fell by nearly 12% in July. Obviously not a help to any nation's economy. The Chinese have taken other steps to cool their economy to PREVENT a bubble. One of the trades that may be worth looking at is commodities and multinational corporations, especially those that do robust business with China. This would obviously put the Dow components into the cross-hairs. Australian exporters, especially those that export raw materials-perhaps say coal, are also likely to feel the pinch. Keep an eye on the Baltic Dry Index-it's linked at Trade-Guild under “Resources and Concepts”. These are some obvious plays to be on the look-out for.
The bottom line... The White House sold us on something that never materialized and Christina Romer was one behind the economic stimulus plans-of which there were three. Her most ambitious plan of 1.2 Trillion dollars in stimulus never made the cut, apparently Larry Summers knocked that one off the list. However, what was interesting and I always wish I paid more attention in hindsight, was her notice she gave on Thursday, a day before the jobs report. I guess Wall Street doesn't miss these little details for whatever reason. She's headed back to Berkley and the unemployment rate is headed higher. We probably could have made some solid assumptions on that one, but 3C caught it in any case. It's funny, it's little things like this that you have to watch for-(to make money, you must see what the crowd missed). In any case, the Fed obviously wasn't prepared for this, this is not how they saw things developing and now we are looking at a world-wide crisis with the US falling apart every month even more. You would think if they were committed to fighting this, they would get in front of it aggressively. I think the Fed is resigned to finally let the market be what it will be, unless of course Congress has something up it's sleeve? However, it seems to me they are simply looking for “orderly fashion”.
And on that note-pay attention to the market the next few days. I'd like to see one last blast to new highs and then a failure of that run, it would set up a quick fall in the right shoulder of the H&S top, perhaps though the Fed doesn't that kind of thing happening.
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