In a very expected move, the Fed decided to cut interest rates all the way to 0.25%. They have essentially made it free to borrow money from the Federal Reserve. Somehow, they have forgotten what got us here, cheap money. Not only did they do that, but they pledged to buy all sorts of assets including Mortgage backed securities and U.S. Treasuries. This now empties the gun of all the things the Fed has done, at least all the things that we can rationally expect. God forbid if they come up with something more.
The saddest part of this all is that this is not going to work. In fact, it will make the situation worse and prolong our problems. Now, I have no doubt that we will see a small bump in the market. In the short term, all this free money will have some positive effect on the economy. But printing money never solved any problems and it will not solve this one. How do I know?
The problem right now is not that there is not enough money out there. The problem is that nobody trust the markets. I am the Fed's target. They want people like me to start deploying the capital I have on the sidelines. I have no skin in the game right now. I do not own a house and I have lots of cash on the side. It will not help to move the economy for people upside down in their house to just stay upside down in their house. They need new demand to come to the market. However, there is no chance that someone like me, someone who has had as much patience as I have till now, to come into the market anytime soon.
You see, I cannot get involved with a market that just wildly swings about. The 5% move to the upside we saw today was just ludicrous. Sane markets do not behave like this. One of my larger positions in in UYG, the Double Long Financials. It was up 20% today. You would think I would be jumping up and down with joy but I am not. As fast as it came today, it can go just as fast the other way, and there is no way for someone like me, someone who cannot sit in front of the computer all day, to safely get into this market.
All the Fed is doing is making it more difficult to trade. They fired all their bullets early in the game and we still have a few innings left. Now what happens when the next wave of bad news crosses the wires. Believe me, there is more bad news coming, I have NO doubt about that. There are more foreclosures and more job losses coming, more than most people expect. The fed cannot cut rates anymore nor can they really buy any other asset class that will make any difference. The dollar rally is now shot to hell and soon, foreign countries are going to lose interest in treasuries. Then what? Maybe the fed can just throw the gun.