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

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From the article above:


<em>


"I like this quote from Christopher Wood, chief strategist at the broker CLSA:</em>

<p><em> “This is not a sub-prime crisis. Sub-prime has merely exposed the bigger scam of structured finance; a scam that is about pretending that bad credit is good credit.”</em></p>



<p><em>That's as good an explanation as any of the others that have has been proferred so far . . ."</em></p>
 
<p>Oil at $82.11, Gold at $744, Euro at 1.409, the Yen at 114.34, Canadian dollar is even with the U.S. dollar.</p>

<p>Heck, even the Czechs are kicking our butt </p>
 
Check out the ten year note on which so many mortgages are based on. Wasn't the rate cut supposed to help homedebtors?
 
<p>The Canadian Dollar has actually caught up to us. I guess I won't be going to Whistler anytime soon.</p>

<p><a href="http://www.bloomberg.com/apps/news?pid=20601082&sid=awhVMIymbX0w&refer=canada">http://www.bloomberg.com/apps/news?pid=20601082&sid=awhVMIymbX0w&refer=canada</a></p>

<p> </p>
 
I never thought I'd see the day when the price of a book at the Borders would read:


USD 3.95


CAD 2.95


but it sure is heading that way isn't it?
 
Here are the negatives:





1) Imported goods are more expensive and we import a rather large amount of the goods we use


2) Higher costs for imported goods can lead to inflation (high prices) for gas, food, toys, etc


3) Inflation in gas, food, toys, belgian chocolate, etc can lead to cost push inflation in wages


4) Cost push inflation in wages can lead to lower labor productivity


5) Cost push inflation generally leads to higher interest rates to dampen inflation and restore confidence in the currency


6) Higher interest rates drive down stock prices, reduces investment in capital goods, and reduces the value of real estate (negative wealth creation -> less consumption)


7) Travel abroad for Americans is more expensive when converted to dollar terms


8) Imported machinery for factories becomes more expensive
 
<p>Dependence on foreign oil. The country needs to dramatically cut its per capita energy consumption while maintaining its economic output. Good luck with that $100/bbl oil, USA. </p>
 
Good luck China on that score. China in particular has been growing in a very energy inefficient manner. If you really want a dire picture imagine if everything in Walmart was 12% more expensive. You could easily see that in a year if the analyst reports on the dollar i've seen are accurate. Would the Fed respond to even 8% inflation with higher interest rates? I have a suspicion the answer could be yes. If interest rates rise does the interest expense on the national debt rise? Would the government follow fiscal prudence and cut expenses or raise taxes? Or would they run large budget deficits in the hope that Social Security can be eliminated at any time or the benefits can be inflated to effectively zero in real terms.
 
<p>Check out ticker UCR.IV and UCR if you want dividends. Thank you again professor Shiller. I bought UCR.IV at $70 and I don't plan on selling any time soon. I just wish I had invested more so I could buy a natural gas civic in cash. By the way oil closed at $83.42 today. </p>

<p>As for some good things about a low dollar is our exports will increase. That means our deficit will start to shrink, manufacturing production will increase and it will keep the GDP from an absolute collapse. Other than that it just sucks for everyone else. I hate that it keeps postponing my plans to go to Europe.</p>
 
<p>Now that Canada's currency is at parity for the first time since 1976, and since we also need all their oil, I say we drop out of Iraq and invade Canada! We'll start with Quebec, their stubborn determination to remain "french" should ensure a quick surrender. Once the rest of Canada realizes that they will no longer have to wait six months for an x-ray if we take over, the war will be over.</p>

<p>I think this has been Bernake's plan all along </p>
 
<p>bishie -- let me see if I have it right. Lowering interest rates leads to a weaker dollar, which leads to higher cost of imports, which leads to cost inflation, which leads to higher interest rates...</p>

<p>To sum it up, lower interest rates leads to higher interest rates.</p>

<p>A bit circular, don't you think?</p>
 
<em>"To sum it up, lower interest rates leads to higher interest rates.</em>

<p><em>A bit circular, don't you think?"</em></p>

<p>Perhaps, but it is an accurate assessment.


</p>

<p>The only way to combat inflation is with higher interest rates. In the past when we lowered our interest rates, most of the rest of the world did the same, so we did not have major inflation worries. This time, we are going it alone, and it will lead to inflation and ultimately higher interest rates.</p>

Of course, the government could decide to bring back hyperinflation like we had in the 70s. In that case, interest rates could stay low for as long as they like.
 
Higher inflation may help to alleviate the large disconnect between payments for debt and incomes and will increase exports. That perhaps is the path that Bernanke is seeing. If by cutting interest rates he can diminish somewhat the number of people losing their homes while seeing some of the bad actors go under that would be ideal. I think most of us with an economics background expected a cut but many of us were surprised by the depth of this cut. As IR knows if we expected true hyperinflation we should be buying as much RE as possible. What really falls in value in an inflationary period is human capital and debt investments. Inflation helps spenders not savers.
 
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