Expect Surprise Fed Rate Cut
A: I'm going with my gut on this one. I think the credit crunch has matured to the point where we could see Ben Bernanke & Co., surprise with an inter-meeting cut. I know, I know, this goes against everything I said only a week ago when I didn't want the fed to cut. Fact is, I don't! We have enough problems with pipeline inflation, weak dollar, and rising commodity and energy prices. But there is a big difference between what I want, and what will happen. I think the credit crunch is getting so bad, that it wouldn't shock me to see the fed use the element of surprise before years end to try and restore some confidence via a stimulative inter-meeting rate cut. 
The problem is the rate cut will not be a cure, it will only dampen the effect that the credit crunch has on the overall economy in the months to come.
Here are my concerns:
a) Nov. 15th accounting change; level 3 assets set stage for more widespread write downs
b) Citigroup & Merrill announce pain & management shakeup
c) Mortgage insurers whacked; should insurance availability for CDO's & CMO's shrink or outright disappear, or claims can't get paid out, we'll have major problems for those holding these bad assets
d) Ratings agency downgrades will lead to more credit pain
e) Nationwide housing slump continues; foreclosures & delinquencies rise predicted by ABX Indices
Again, I think the best way to get out of this mess is for our economy to go through a nasty recession that penalizes those that made these bets, without aggressive easing by our fed that may cause a moral hazard, weaken our dollar further, and buildup pipeline inflation. The recession itself will flush out the problems, clean off the balance sheets, and help ease inflation pressures. But, I doubt the fed will stand idle and let this scenario play out like that. They will most likely take action and cut rates to limit the severity of any recession, at the expense of:
a) bail outs; creating a moral hazard
b) weakening our US dollars further
c) rising energy prices
d) rising commodity prices
e) pipeline inflation
Thoughts?
Posted by Bertrande
Mon Nov 5th, 2007 10:07 AM
Hi Noah.
Great post, and I agree with your concerns. What are your suggestions on how to stop this sort of thing from happening again? It seems like the common person in the US has actually little to no power, and the middle class is being destroyed by plunging dollar value, subprime mortgage type situations, and general gentrification.
Has anyone thought about the true long term effects of such things, and if our economy will in fact, weather this tumult even when the recession ends in a few years?
Honestly, I have never held in high esteem, Wall Street-centric and trickle down approaches to the economy and finance markets, but I don't see that ever changing. It's easy to get caught up in how this will effect the NYC market, but we can't forget the long term effects on US society, as the income gap becomes ever greater thanks to this sort of thing.
Again, great post, and thanks for keeping the Street honest, or at least trying to!
Posted by Noah
Mon Nov 5th, 2007 10:14 AM
Bertrande - thx. Not much the little can do. I feel helpless which is why I blog about how I feel. Best I can do is learn what policymakers do, the effects it have, so that I can best invest in the future when similar environment pops up. Problem is we havent seen problems this deep in a while, and no one knows how deep the rabbit hole goes.
Uncertainty is king here, which is why I expect fed to suprise with inter meeting move at some point.
I watch wall street and macro so closely because if markets do flounder, confidence/negative wealth effect will restrict buyer pool here in NYC and we could see inventory fundamentals reverse course. We did decline in inventory some 30% in past year, so these changes will have an effect on reversing that trend if it happens. Worth discussing and watching.
Posted by Michael
Mon Nov 5th, 2007 11:19 AM
Interesting call, Noah. I hope you're right. I think Benanke is the bomb! All the talking heads go on and on about what life was like with Greenspan and don't have a clue as to how Bernanke thinks. We're in good hands with Ben!
Posted by Noah
Mon Nov 5th, 2007 01:15 PM
well im not the biggest Bernanke fan because I think aggressive easing will build a bigger problem down the road. Ben & Co right now are going to start favoring slowing growth over inflation, and that will fuel commodities and energy prices, and weaken our dollars, which is inflationary.
They are in a very tight spot.
Posted by WW
Mon Nov 5th, 2007 03:59 PM
U think that emergency rate cut rumor caused the reversal today? That was a wild swing.
BTW, great read lately about rate cut etc., keep on the good work. this story is here to stay
Posted by Noah
Mon Nov 5th, 2007 04:50 PM
WW - just got back! didnt even see the swing, but if it was on rate cut rumor, how timely was todays post!
Prob not though, as that rumor is played. I think you will see some short covering and bottom feeders lead to some rallies here and there. Overall tone is def down, so Im shorting rallies, but don't make any aggressive moves unless you are experienced to do so! Anything can happen, and an unexpected story, move, news, whatever is just what the market needs to pop up a bit.
I just think the depth of the credit crunch is not known, so all we know, is that we dont know shit!
Posted by ww
Mon Nov 5th, 2007 05:09 PM
Haha, scio me nihil scire, thats what i learnt in skool back then too.
@ rumors: How often did they play the warren buffett story lately? No need to invent new ones. But you are right, the 1490 is just too hard to go with only 4 attempts, but go it will.
Next story to unfold, as you rightly pointed out, are the $915B credit card debt outstanding. I dont want to know how much they were used for mortgage payments lately.
ww
Posted by drtomaso
Tue Nov 6th, 2007 12:29 AM
Minyanville has a post up about Citi being potentially insolvent. If they dont give them the permission to pull an Enron with this super-SIV, Citi may very well cease to exist.