What a day.  Checking in on the markets around noon Central time, I was wondering if we’d seen the top of the bear market rally. There wasn’t much positive price action in the equities I’ve been watching, and gold (GLD: chart, web, Y!) wasn’t making any great shakes either.

Then Bernanke went on a shopping spree.

When I checked back in around the close, nearly everything I was watching not only reversed course, but went into overdrive.

The Fed committed to buying up to $300 billion in long-term Treasurys over the course of the next six months, as well as nearly double the purchasing power of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, totaling $1.25 trillion (remember, trillion is the new billion).

To top it all off, the Fed also doubled the amount of debt it committed to purchase from the inept mortgage lenders.

Effectively, this action is much akin to chopping interest rates even further; when you’ve hit bottom on the interest rates, the next best thing to do is buy the debt.  In a round about way, this increases the leverage on the banks side allowing them to borrow money at an even deeper discount.

Corner Office Comments

While all this sounds good on paper, and the market surely agrees, long term I’m not convinced this move was well thought out.  What is the Fed going to do with all this debt in the long term?  There was no exit strategy revealed.

Further more, anyone holding long term debt when inflation kicks in is going to get chewed up and spit out like something rotten.  The Fed included.  As the value of the dollar decreases, as readers of this blog remember I’m laying a significant amount of chips on some massive inflation, it’s going to take more of those dollars to service the debt the Fed is absorbing.  The fact that gold and petroleum products rallied on the Fed statement seems to reinforce that position.

This move seems to spread much of the financial strain in localized sectors of the economy, more broadly the financial sector, further out over the entire economy.  No longer are nearly worthless mortgage backed securities held by Fannie or Freddie, they’re held by the entire populous of the country (you and me).

From my standpoint Bernanke is throwing up his arms and wiping bad assets of public companies balance sheets, letting them start over, and forcing you and I to eat the bad tasting financial slop.  Things will look rosy for a while, until inflation starts creeping into play and the government will need to print even more money to service the debt.

Any further upside to this rally should be used to capitalize on gains and readjust into a hedge against inflation, in my opinion.

Economics, Finance bernanke, Economics, Fed, Inflation, treasury

On Monday the Fed dropped interest rates by a full 0.75% out of the blue. Unprovoked, unannounced, and unexpected, both in scale and timing. Sure, The Street had predicted a rate cut, but no one was predicting three-quarter basis points, and few were predicting an unscheduled cut.

There is something strange about this move.

Big Ben Bernanke has been fairly slow to react to economic data, and has at most taken a half basis-point chunk out of rates at any one time. So why the big bite all of a sudden?

I suspect that there is more to this interest rate cut than pure economic data. If economic data were the driving factor behind a proposed rate cut, the decision to cut interest rates could have waited until the next Fed meeting. After all, it takes months for the effects of an interest rate cut to trickle down to the driving forces behind the economic health of this country: the common Joe’s like you and I.

I suspect there was something much more critical behind this move. I believe that some major financial player, one that helps stimulate the economy, was on the brink of failure. Nothing demands more immediate action than running out of money.

I don’t know who it was, but it was a financial company who is worth more to this economy alive than dead.

Only time will tell who it was.

Economics, Finance bernanke, Economics, Fed, interest rates

It’s really no surprise that the Fed dropped rates by another quarter point yesterday. In fact, The Street figured it was a 90% sure thing that it would happen.

So now I can expect my Emigrant Direct savings account rate to drop accordingly, just as companies like Proctor and Gamble are issuing statements that they’re worried about consumer spending in the next few months (and when they indicate publicly they’re worried about it, don’t count on financials being all that great next quarter).

With the second rate cut totaling 0.75% in six weeks, it’s clear the Fed is trying to give the economy a shot in the arm to by lowering borrowing costs.

The FOMC minutes indicate that the Fed committee is well aware that the economy is slowing, but in not so many words, they think “they’re on top of it”. Yeah right. If the Fed were truly on top of the economy, would we be in the credit crunch we’re currently in? How about the housing market? Seems the Fed wasn’t quite “on top” of those sub-prime scams that helped inflate housing.

So how all powerful is the Fed… really?

I’m starting to believe that the Fed doesn’t have the reigns quite as tight as they’d like to think they do. To be honest, the rate cut really doesn’t help me out financially, at least directly. It will lower the return on safe investments, and force a guy into more risk, through either the stock market or other risky avenues. Indirectly it may help lower prices of goods and services, but not immediately.

I’m a believer in financial cycles. Economically, we’ll have peaks and valleys that the Fed can only exacerbate. Interest rate changes only increase the amplitude of the wave, and while good intentioned, intervention and artificial manipulation only reinforces the true power of supply and demand.

Economics, Finance Economics, Fed, interest rates, rate cut