I think its a real mistake for Fed to cut rates. I believe we are already in a bear market and even if there is a POP on a rate cut I think it will actually cause a selloff. (line of least resistance is down) of course if they don't then we will sell off because they didn't cut rates.
The synthesis position here seems to go something like this: This is not a true bubble in terms of equities valuations, but the extent to which some sectors have been stretched has been a function of excessive and sustained super-liquidity, and so, is now a sharp double-edged sword. So, while it's not hardly the retail/speculative bubble we saw in the late nineties, current future estimates may be based on a world-view that looks set to shift starkly as both financial and consumption-based sources are threatening to troph. And then there's the dollar. When the dollar is strong, we have the flexibility to cut rates and shift models back toward the type of forecasts that really drive a bull market when we face a scenario like this. And in 2000 we had a very strong dollar, which ran lower sharply through the trend in rate cuts for the next couple years. But now the dollar (index) is testing all-time lows territory right as we face the need to lower rates. One bit of buffer is that foreign central banks won't want to ruin the dollar because they all hold such large reserves. But the downward pressure will make everyone want to diversify those reserves whenever possible. The fed knows that, so they would seem to be somewhat handcuffed. The only proactive strategy would seem to be to cut soon and hard. The worst case scenario would be a drawn out period of multiple cuts. But I am not at all convinced that this whole stage can result in a world that works the way this one has over any time period. Can the US become an export economy? Seems like a real evolutionary transition is underway.
1) Export economy of SERVICES for the USA is acceptable. Major manufacturing - forget it. Doesn't fit in with geopolitical plans. Rotating basis of production to developing countries to a) keep them politically stable, b) allow for competition to keep prices of goods low and c) avoid environmental disasters in the first world. 2) Current 'export economies' have strategies based upon competitive devaluation of their own currencies. I suspect this will be more difficult to achieve in the future. Do you really want to spend your hard earned treasuries on supporting the USD when it is clear that its own monetary policy makers no longer wish to? 3) I have no idea what Bernanke will do. Perhaps 'helicopter ben' was a cruel joke and we now will meet 'vaccum-cleaner ben' who soaks up liquidity like a sponge? Very challenging time to be in the markets IMHO. I keep reducing risk and going into cash/currencies but who knows how that will work out.