Tuesday, December 16, 2008

Fed Fires All Its Bullets ... And Misses

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.


  1. You think sitting on the sidelines with cash will protect you? The Fed has a great tool to steal from you, whether you put your money in the market or not ---Inflation. With all this free money being handed out, inflation is going to have to kick in at some point.

    Maybe they're hoping to cause sooooo much inflation that everything else comes in line with current housing prices. Then, nobody would be upside down in their loans any more. Of course, this would also mean that the fed would have wiped out all the savings in this country. But since nobody in this country has any savings (well except for you), it'll just make all the debt (that the rest of us currently have) meaningless.

    Let's just leave it at the 27 seconds of bliss we will feel when we've wiped our debt away through inflation. The ensuing economic and political armegeddon that this would cause is just too depressing to think about.

  2. Oh, believe me, I have no illusion that I'm safe with my cash in the bank. I fully understand that the Fed is eating away at my savings every day.

    So yeah, I probably am in the same boat as a lot of others out there :)