Big Data, Big Fed Day

A: We got some mixed data today via a stronger than expected jobs report and a weaker than expected GDP report. What does it all mean? Besides a slowing economy, who the hell knows as both these reports are likely to get revised later on anyway. How does it affect the fed? Who the hell knows what helicopter Ben & Co. will do later today. All I know is, it's going to be a wild ride for a while.

I should clear up one major thing for readers here. The worries that I have and which I publicly discuss, are fueled by a national housing slump and the resulting fall in securities that come from it. Thats it. Should housing stabilize across the nation, inventories start to fall, sales volume pickup, and defaults/delinquencies go lower you will see alot of the problems we currently face go away. It's perfectly clear that the fed, the gov't and the private sector is doing everything they can to inject liquidity, aggressively ease monetary policy, push an economic stimulus plan and bail out the troubled institutions so that credit markets can operate normally again. Outside of housing, financial turmoil, and dysfunctional credit markets, the US & Global economies are fairly strong.

What remains to be seen is HOW housing, financial turmoil, and dysfunctional credit markets ultimately hit both our economy and economies abroad. Hence, the proactive stimulus. America's well known debt problem finally faces the fire and what we are dealing with here is a fuel (housing slump) that was leveraged up the wazoo! How will other debt classes be hit in the future and will the stimulus be enough to save us?

On to the economic data. Checking in on the jobs report, we got some positive news although future revisions can always occur later on. According to Marketwatch.com:

Employment in the U.S. private sector grew by 130,000 jobs in January, according to the ADP employment report released Wednesday. Adding in some 25,000 government jobs typically added but not covered by the ADP report, it suggests non-farm payrolls grew by about 155,000 in January. This is much faster than the 70,000 economists expected before the report.

The more important measure of how our economy grew in the 4th quarter, the GPD (advance) number came in well below expectations. According to Bloomberg:

The U.S. economy weakened more than forecast in the fourth quarter as housing sank deeper into recession and consumer spending cooled.

Economic growth slowed to an annual rate of 0.6 percent in October through December, half the rate forecast, following a 4.9 percent pace the previous three months, the Commerce Department said today in Washington. Residential construction dropped by the most in 26 years.

Housing slumped as subprime lending collapsed and financial markets seized up, putting the six-year expansion at risk. The economy was forecast to expand at a 1.2 percent pace, according to the median estimate of 77 economists surveyed by Bloomberg News.

The GDP number clearly was the more important number to the markets today. Now, the fed makes its decision on rates at 2:15, and I got to say there are wide thoughts on what may be done!

CUT 1/2 ---> Economy needs the insurance and aggressive ease to ensure that we do not fall into recession.

CUT 1/4 ---> Fed just cut 75 bps last Tuesday in an emergence rate cut that appeared as a panic move as global markets plunged. Turns out, the selloff was blamed on a rogue trader at SocGen. Yea right! No way he pulled this off by himself under the radar of top level exec's, but hey, its an easy way to move blame from bad bets to fraudulent trader.

NO CUT ---> Fed trying to regain control over the tradable markets. Site commodity inflation risks. Inflation gauge in GDP report showed a huge increase in core inflation from 2% to 2.7% in 4th quarter. Hmm, you mean today's world is more expensive than 5 years ago? I didn't notice! Ehh, lets just inflate our way out of this mess anyway.

I hate to say it, but given the weak GDP and fear that the markets will plunge on no cut, I think the fed will make a move today. I'm just not sure if it will be 1/4 or a 1/2. Your thoughts? I'm going with 1/4. Stocks will likely selloff with anything but 50 bps.

I still think we need to let a recession fix the problems we are in, let the private sector consolidate the financials and clean out the books, let the credit markets fix themselves, and let housing prices fall enough so that affordability kicks in bringing real buyers to the marketplace to bring brighter times ahead without inflation problems! My worst fear is that the fed over stimulates, re-inflates assets, the problems eventually turn out to be not as bad as feared, and then they will have to take back the rate cuts down the road to curb runaway inflation.