Discussion in 'Wall St. News' started by TM_Direct, Jan 17, 2008.

  1. The Fed's actions...lowering rates even though there is inflation....will result in either:

    a) 1920's type depression

    b) Jimmy Carter era 18% inflation and mass layoffs

    interesting article that breaks it down in simple terms

    As the fall out of the sub prime loan fiasco continues, we are seeing and hearing more and more about the fed's responsibility to 'bail out the industry'. Respected pundit and Chief Investment Strategist of the world's largest bond fund recently told CNBC that the Federal Reserve should cut rates further to bail out the banking industry and that the fed should aim for 5% interest rates on 30 year mortgages. With all due respect to this very knowledgeable man, isn't this how we got into this mess in the first place? History has repeated itself over and over again and I can see the next big bubble emerging. Let's take a quick glance on how we got into this mess shall we? The stock market in the 1990's was on a tear and everybody and their aunt were jumping head first into the stock market with everything and every bit of cash they could muster. Everything was fine and dandy until valuations started getting a little out of control. Then Mr. Greenspan made a series of speeches that criticized the 'irrational exuberance" on Wall Street and made a policy switch at the Fed to basically take out the internet bubble. I whole heartedly disagreed with this principal because the stock market was not tied to inflation. A family in Des Moines did not need 100 shares of YAHOO to survive. Bread, Shelter and clothing? Yes. Shares of YAHOO? no.
    So as the Fed went on a rampage against Wall Street a funny thing happened…the bubble burst much to the delight of Mr. Greenspan…however Mr. Greenspan made a critical miscalculation in my opinion. You see, while he wanted to bring down the valuations on high flying dot com stocks with little or no profits, he did not fully understand that the largest names on wall street, the CISCO's, the Sun Micro Systems and even the Mighty Intel's and Microsoft's all had a stake in all these dot com companies that relied on stock in reserve to burn for their start ups. The result? All the major technology providers were cutting jobs and the economy went into recession. Right as George Bush was taking office it was obvious the economy was in the crapper. So what does Mr. Greenspan do? 4 months after his last interest rate hike in June 2000, he set about on one of the greatest rate cutting cycles America had seen. In other words, he went 180 degrees the other way and literally panicked and OVER CUT rates. That's right, he OVER CUT. Greenspan was so brazen that he even cut rates by a full .50 basis points the first morning the stock markets reopened after 9-11. The market was still down 600 points but that didn't stop him from OVER CUTTING rates. He was literally printing money for investors. Real estate, because of its kind leverage and low rates became the new day trading for speculators and all of the sudden by 2004, nobody was talking about their stock portfolios at cocktail parties, they were talking about how they owned millions of dollars worth of Real Estate. Hence, we replace one bubble with another, but I always remind people that when people lost it all in the stock bubble they blew up their IRA or 401k…while in this bubble they are losing their homes!.
    So now we have pain. The same pain we should have just allowed with the stock market bubble is facing us again. It's my opinion that the inventories have to work themselves out. The large firms on Wall Street have to bite the bullet and let shareholders know they messed up and over leveraged and every day Americans may be forced to go get an apartment for a couple years until they can get their finances back in order. Is it painful? Of course it is. But is it wise to cut mortgages down to 5% and allow bad speculation and over leveraging to be rewarded with a temporary reprieve? I would say not. The Fed recently cut rates once again even though inflation is lurking due to gas prices rapidly approaching $4.00 per gallon. Prices at the wholesale level jumped 3.2 percent in November — their biggest increase in 34 years — after a steep rise in wholesale gasoline prices, Yet the Fed Chairman lowered rates the day before?? At a recent meeting, the fed and the bankers all agreed to freeze variable rates that were set to rest at a higher rate in January. Is this helpful or are we merely putting a band aid on a bursting dam? I believe we should Let the cycle play itself out and lets not create a new bubble by trying to micro manage this blow up. No pain no gain, and in this case I truly believe it would only delay the inevitable anyway.