Markets Need An Intervention / Great Quote
A: Okay, so the ISM # was awful, the economy is clearly contracting and stocks are hung over from all the drugs they did from their dealer, the federal reserve. Guess what. Stocks now want an inter-meeting rate cut and rumors are starting to spread. When will it end? For god's sake, someone give the markets an intervention!
How do I describe this other then "pathetically predictable". Stocks fall, market rumors swirl and traders beg for more rate cuts! Just one more hit Benny, pleassse, and I swear I'll get out of my positions!
I seriously hope the fed exercises some monetary discipline! After the last 50 basis point cut, and subsequent market drug induced rally, the talk was that the fed did what they needed to do! One week later, reality sets in that the economy is slowing and now the markets ask for more?
The economic reports should be expected to come in weak, I discussed this only 12 days ago in my post, "First Stock Shock; Second Economic Data":
We must be prepared for how this cycle will likely play out. Now that stocks adjusted, with the help of a very aggressive 3/4 point inter-meeting rate cut by the fed, the economic reports (jobs, gdp, inflation measures) are going to be coming out and the news is widely expected to be sobering!
...there is a lot coming that we will need to digest and trust me on this one, if these reports do come in on the disappointing side, the chatter in the media will change from whether we will go into a recession to how severe will the recession be!
Well it came today with a very weak ISM #. Here is what I was talking about in that post, as the recession talk now gets serious. According to today's CNN Money article titled, "Recession is here - economists":
A growing number of top economists believe that the U.S. economy has now toppled into recession. Alarm bells were set off Tuesday by a grim report on service businesses, which make up the majority of the U.S. economy. The Institute of Supply Management said that activity in the service sector declined for the first time in nearly five years. This report also indicated that employers are cutting staff.Anyone with a clear head and not phased by the powerful curtain of denial, can see that there are red flags waving. But to start with the cries for more rate cuts, and talk of an inter-meeting cut as stocks fall, is so damn played! Was I dreaming, or did we not just get 125 basis points of fed easing in the past 4 weeks? Now they want more and fast?
When will they learn that fed easing is only a week long fix for stocks, is the strongest ammo the fed has to stimulate growth, can only go 0% (hey Japan, how YOU doing?), and STILL won't fix the problems we face! Just bring on the damn recession, stop your whining, take the losses, consolidate & regulate, clean the books, take the medicine, and lets move past all this. Thats the only way.
There are major downsides to fed easing:
a) pipeline commodity inflation
b) moral hazard; bailing out risky bets encourages future behavior
c) re-inflating an asset bubble that was inflated by fed easing in the first place; delaying and worsening the inevitable correction
Right now, the hope is that the slowdown will fix the inflation problem by itself and put a floor on how severe any recession may be. But to re-inflate an asset bubble with more hot air, without allowing it to correct itself, will likely push off and worsen the eventual pop! The markets need to realize that the short term jolt they really are wishing for via fed easing, is not the answer to our problems! To see this simply look at today after such aggressive easing in past 4 weeks! Amazing. We have become a society that fears slowdowns, instead of embracing them for what they truly are: short term disruptions in economic growth usually brought on by unsustainable asset bubbles. As the recession occurs, the risky bettors are punished, shareholders and corporations feel pain, there is consolidation in the industry, the books are cleaned out, pain is embedded deep in the minds of investors, and change occurs to protect the industry from future re-occurrences.
To stop this process is to not allow the markets to fix themselves! Let it happen!
I would like to end this post with what I thought was a great quote by a commenter on Barry Ritholtz's blog The Big Picture, which depicts a great image of what is holding up our economy:
"There is no business cycle. Don't you know that the price of housing and stocks only go up? Recession bad. Perception of strong economy good. Savers bad. Spenders good."
Obviously sarcastic, but for an economy with an obvious debt/spending problem, it seems we like to punish those who save (low savings rate & inflation) and reward those who were on the wrong side of extremely risky bets. Now I know its not that simple and this is a very general comment, but seriously, we need to let the recession cleanse these problems; NOT a fiscally irresponsible fed.