Fed Cuts, Stocks, the US Dollar, Gold, & Commodity Prices

NEW -> Contingent Buyer Assistance Program
If I had to guess, I would suggest that LIBOR is correcting because the BOE stepped in to help Northern Rock. So long as the other banks feel that their interbank loans will be repaid by someone, then the lower risk gets priced in to the rate.
 
It really depends on what other central banks around the globe do. If they continue to raise rates while we lower them, the dollar will fall.
 
I think we have showed him exactly why we think the dollar is going to continue to fall. Foreign rates are not following the FED, the Treasury has just asked Congress to increase the US Debt Limit, and we still have no assurance that Bernake and company aren't going to keep dumping massive amounts of USD into the financial system to help improve liquidity.





I am young but I don't recall ever reading an article or journal that has many similarities of what is currently going on in the US financial markets right now.
 
<p>The other problem with "proving" the drop in value with historical data is that the historical data is no longer applicable. The U.S. has dominated the economic scene for at least the last 50 years. U.S. led all other nations in consumption by a wide margin. Thus, in the past, if the U.S. economy falter, the global economy suffered. Prices for commodities dropped because the demand from the U.S. dropped. </p>

<p>Now, India and China's consumption of commodities and resources have driven prices previously unforeseen. The U.S. no longer has the control over the gas pedal and has to go along with the ride. If the value of the US dollar falls, commodity prices in the U.S. will go up because demand from other country will keep commodity prices high. Those holding the dollar will just have to spend more of it to pay for goods. </p>
 
>> I am young but I don't recall ever reading an article or journal that has many similarities of what is currently going on in the US financial markets right now. <<


>> The other problem with "proving" the drop in value with historical data is that the historical data is no longer applicable. <<





ding-ding-ding! exactly! this is the fundamental dilemma that economics will always struggle with. if i kick a soccer ball into a goal 8 times in a row, i suppose i can conclude that i never miss a kick. what if the previous 8 times there occurred on a mild day and next time there's santa ana winds? the context of the previous 8 kicks needs to be considered because its a far too small a sample to make any conclusions of my future ability.





unlike other scientific experiments where you can recreate an experiment as many times as you want, econometrics research is limited to the observations that have actually occurred. physicists, chemists, actuaries, and medical researchers would never dream of attempting to make conclusions from the small samples that economists are often limited to.





i'm assuming what oc-conservative is getting at is that we should <em>expect</em> to see the dollar, stock mkt, gold, commodity prices, etc go up. <strong>that's hardly a brain-busting conclusion because in theory, the rate cut is supposed to indirectly stimulate the economy in the long term. </strong> but there are far more things to consider than that, such as: what time horizon do we expect to see the effect of rate cutes?


why use 1-yr returns as opposed to 6 months or 3 yrs? are the results different if you use different horizons?


are we seeing statistically significant results on the inverse experiement, i.e. will 1-yr returns be negative following rate hikes?


what were other federal banks around the world at the same time?


where are real rates?


what are ALL the fundamental differences between the previous 8 cycles and the current one?





there's probably thousands of variables to consider, which is why there's so simple formula for timing the general direction of mkts and economies as a whole.
 
if someone really knows the "answer" to what the dow, gold, commodities, and us dollar will do in the next 12 months, they wouldn't be on a blog discussing overpriced housing. they'd be managing billions of dollars and live in a house so big and sick the last worry they'll ever have is what tract homes in irvine cost!





everything else is just speculation!
 
acpme - I am not sure, but am sure enough to be betting that way. The money supply has been increased logrithimically by increasing debt for the last few years, and debt can only increase for so long before the lenders want to get paid back. And the Fed is dead set against deflation. So ... what is the alternative? BB can say he is concerned with inflation until he is blue in the face, but his actions show that he will inflate, and inflate, and inflate. I will bet on the actions instead of the words.
 
awgee - if i understand correctly, what you're saying is that the latest rate cuts may or may not of its intended effects. in theory, the money supply should increase as a byproduct of the rate cut, but in this particular environment, its not a certain since the credit mkt is already overextended.


did i understand that correctly? if so, then i agree with you.
 
<p>acpme - Good call, you are really making me think and nail this down.</p>

<p>I am going to speculate, ( and this is how I have my bets placed ), that the credit market will not free up in any substantial sense, and credit will probably get tighter. The Fed will continue to lower rates and buy US treasuries, and the money supply will increase. The money will not end up in mortgages or incomes. The money will end up in whatever asset class benefits the member banks. Most likely equities. Precious metals will benefit even though an increase in the price of precious metals will not benefit member banks, but rather they will just be a safe haven for devalued currencies.</p>
 
mino - Darn you guys. Why are you making me get specific? I would much rather be vague.<p>


Of course, I have no idea what the Fed will do. All I can do is speculate.<p>


Gosh, I don't know, and the more I think about it, I don't care. I will speculate that as the credit markets and next the over the counter derivative markets continue to sieze, the Fed will use the only trick they have which is to inflate. I don't think it really matters how low or exactly on what dates the Fed lowers. I think for being able to profit from circumstances it is important to know what the Fed has historically done during times of economic distress.
 
<p><em>The money will end up in whatever asset class benefits the member banks. Most likely equities.</em></p>

<p>So the Fed lends banks money to stay liquid, the banks buy equities to stay solvent, and suddenly we are 'one bad day on Wall Street' away from a total and complete destruction of the American economy. That the 'bad day' could result from something we have no control over (terrorist attack, unexpected spike in unemployment, another country's exchange having a bad day, etc.) just makes our situation that more precarious. Thanks for giving me that warm, fuzzy feeling awgee.</p>
 
Nude - I am sorry. I did not mean to imply that the member banks would buy equities. I will try and be more clear on a subject on which I have an unclear and limited understanding. As I understand it, the Fed actually lends very small amounts and the banks actually do most of the lending to each other. (The banks were loaning at 4.85% before the rate cut.) The reason I think stocks might benefit from more monetary inflation is that the banks will loan to those institutions they feel are the most likely to pay them back which would be those instituions saying they are investing in equities or some other asset in which the banks have not been burned lately. If you were a bank, would you loan moner to a mortgage lender right now or a hedge fund which buys equities or corporate bonds or commodities such as oil, wheat, precious metals ?
 
<p>Awgee- given those two choices, I don't think I'd be lending to anyone at all. Until there is full disclosure by hedge funds on just how much their assets are actually worth they aren't an acceptable risk. This is what started the credit crunch in the first place and nothing has changed. While a couple of the larger companies announced their earnings, they have yet to fully disclose the amount of pure junk that they own.</p>

<p>But even if the banks begin lending to the hedge funds again, that still only places one degree of seperation from the scenario I outlined. Rather than one bad day having a violent and immediate reaction, it would take a few days/weeks/months for the news to come out. Essentially, this is what happened in July, and were followed by the FED's actions up to and including the latest rate cut. This cycle started with the creation of the credit bubble and, as you have pointed out, the initial role of the banks in providing the money has now been taken over by the FED. Handing that money over to the hedge funds again is just financing another go around until the next disclosure, followed by another credit crunch, followed by the FED pulling the trigger on another rate cut. But there are only 475 basis points left in that gun, and eventually the clip will be empty. What happens when interest rates can't get any lower, no bank is willing to lend money to any other bank, and the hedge funds have to sell off any equities they own to pay margin calls?</p>
 
<em>"given those two choices, I don't think I'd be lending to anyone at all."</em>





The banks feel the same. That is why we are having a liquidity crisis.


<em>


"What happens when interest rates can't get any lower, no bank is willing to lend money to any other bank, and the hedge funds have to sell off any equities they own to pay margin calls?"</em>





See <a href="http://en.wikipedia.org/wiki/Liquidity_trap">Liquidity Trap</a>. Also see <a href="http://en.wikipedia.org/wiki/Armageddon">Armageddon.</a>
 
The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
 
Interesting discussion about the dollar and the rate cut over at<a href="http://bigpicture.typepad.com/comments/2007/09/credit-from-abo.html"> The Big Picture.</a>
 
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