by Larry Levin
Tomorrow is the big day - the day where the Fed cuts rates again, probably another stunning .50-points. According to the Fed Funds futures at the CBOT, the chance of a half-point cut tomorrow is 86%, with only 14% odds on a quarter-point. That half-point rate cut would bring the Fed’s benchmark rate to 3.0%, which is well below the year-end 2007 CPI headline-inflation rate of 4.2%, giving those few that try to save money absolutely no reason for doing so going forward.
Savings rates on bonds and at your local bank will continue to plummet, forcing all Americans to spend everything they've saved and what they currently earn, lest they simply lose it all to inflation. Helicopter-Ben is making good on his promise to "drop money from a helicopter if need be, to get Americans to spend" (loosely quoted). The difference is, however, he hasn't physically printed money to drop from his helo, Ben is "dropping money" on the economy by forcing you to spend everything you have.
Helicopter-Ben hasn't learned a darned thing from his predecessor Allan-BUBBLES-Greenspan and the problems he created. Some believe Ben will follow "Bubbles'" playbook all the way down to a rate of 2.25%. If this happens, like Greenspan's ridiculously low 1% rate, we will once again experience negative real interest rates of nearly 2%.
Negative real rates are "a substantial danger zone to be in," said Marvin Goodfriend, a former senior policy adviser at the Richmond Fed bank. "The Fed's mistakes have been erring too much on the side of ease, creating circumstances where you had either excessive inflation, or a situation where there is an excessive boom that goes on too long." This is akin to forcing more alcohol upon a tipsy employee at the corporate Christmas party: it only gets worse.
You can't really make people wealthy by resorting to Banana-Republic economics. A society grows rich by producing things...and saving money. Cheaper credit won't do it. More consumption won't help. Printing money, and dumping it from helicopters, is a losing proposition.
But that doesn't matter to our economic leaders. The elephant-led White House and the jackass-led Congress applauded themselves during last night's State of the Union speech when G.W. mentioned the agreed upon "rebate" plan. The US is already running a $200 billion deficit, so how could there be a "rebate?" And many of these "tax rebates" are said to be going to people who never paid taxes in the first place. So let's call it what it truly is: An income redistribution plan. Still, the elephants & jackasses are going to send out 117 million checks at a cost of some $150 billion. This is Banana-Republic economics at its finest...if you don't have money, just print it.
Our friends on the hill always want to get the response of the Fed chairman regarding spending and taxes, so the Income Redistribution Plan was no exception. When asked, Bernanke endorsed the concept but cautioned that the money must be spent correctly: "You'd hope that [consumers] would spend it on things that are domestically produced so that the spending power doesn't go elsewhere."
Doesn’t go elsewhere?
AAAAaaahahahahahahaaaaaaaaa(gasp)AAAAAaaaaaha-ha-ha-haaaaaaaaaaa, oh mercy...that was a good one! The truth is that consumers spend most of their money on foreign imports, and as I have said before, any so-called "stimulus" package probably would be "stimulating" foreign economies rather than our own. Imports, for example, account for 92% of our non-athletic footwear, 92% of audio video equipment, 89% of our luggage and 73% of power tools just to name a few.
And our friends at the Fed aren't much different. The organization is a one-trick pony: when in doubt, cut rates. Any crisis that came along for Alan (bubble blowing) Greenspan seemed to be solved by lopping off a quarter point here, a half point there. Tech bubble? Rate cuts. Terror attack? Rate cuts. Bond crisis? Rate cuts. LTCM failure? First orchestrate a bail out for your friends, then rate cuts. The market was not allowed to work its way through any of these problems on its own; the Fed "knew better." And today's problems can be squarely laid on the shoulders of Easy-Al's rate cutting machine.
Tomorrow is Helicopter-Ben's turn to answer today's turmoil with another cut...but we know this. So the question is - how will the market react? Since the S&P futures have nearly reached the level I postulated days ago, I do not know from here. However, since Wall Street wants a rate cut to ZERO, with a tightening bias, it should be safe to assume a cut less than the demanded ½-point will be greeted with selling.
Real Time Trading Signals*for
Trade Date: 1/29/08
E-Mini S&P Trades*
(before fees and commissions):
8:38 B/A Buy 64.75 = -1.50 all
8:54 FT Buy 58.00 = +.75, -.25, -.25
9:08 ID VA BUy 56.00 = +.75, +2.00, +2.50
10:22 EGN Sell 63.00 = +.75, b/e
1:14 ID VA Buy 56.75 = +.75, +3.25, +2.25
E-Mini Russell Trades*
(before fees and commissions):
1) Buy @ 8:31am at 705.8 = +1.0 & +.5
2) Buy @ 8:42am at 706.1 = -.3 (1 lot)
3) Sell @ 9:10am at 698.2 = -1.1 (1 lot)
4) Buy @ 9:34am at 702.0 = b/e (1 lot)
5) Buy @ 9:48am at 700.2 = -1.2 & -1.2
6) Buy @ 11:08am at 702.8 = +.9 & -.8
7) Sell @ 11:28am at 701.3 = -.2 & -1.0
8) Buy @ 12:59pm at 703.3 = -.7 (1 lot)
9) Buy @ 1:23pm at 703.8 = +.5 & b/e
10) Buy @ 2:12pm at 705.7 = +.6 (1 lot)...-$300
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