Sunday, September 9, 2007

NO WAY OUT!

A recession, and not one of those tepid kinds either, is coming soon to our shores. In fact, a recession is likely already here. The BLS stats are so doctored that when the numbers turn definitively weak, as they did according to last week's official release, one must assume that the employment picture is far worse than advertised. This is just one piece of evidence pointing to an impending recession, but there are far more.

I am not one to crow, well maybe a little, but so far my prognostications from a few months back have been spot on. And since the conditions that informed those predictions have not changed, but rather intensified, I must expect a continuation of events whereby the dollar and the stock market fall, and precious metals, especially Gold, do the opposite. Oh, there will be lots of volatility along the way down, which might serve to fool some folks, but don't be fooled, as a steady deterioration is in the cards for the greenback and for shares.

What seems increasingly clear to this observer is that the Fed can do little if anything to salvage the situation, so those hoping for a rate cut to buoy stocks and other financial instruments really ought to prepare themselves for the worst. In fact, the most recent comments made by the Philly Fed Chief (see link below) seem to be telegraphing that a rate cut is not in the cards when the Fed convenes in roughly two weeks. What would you do if you were a Fed governor, cut rates and risk a run on the dollar with all that entails, or let rates stand pat and watch the equity scene, among others, turn to liquid excrement faster than you can say sub-prime sinkhole? Ultimately the Fed will be forced to cut rates because a depression is more to be feared than hyper-inflation. And while the inevitable rate cuts probably won't have the desired result, one still has to try.


http://www.bloomberg.com/apps/news?pid=20601087&sid=aun1ssvumPyM&refer=home

6 comments:

DED said...

That's interesting because so many of the talking heads on the telly are saying a 25 basis point rate cut is definite at the next meeting. A few have argued that a 50 basis point cut is needed. If the Fed doesn't cut rates, then I suppose Cramer will blow a gasket and others will be calling for Bernanke's head.

Edwardo said...

It's the dollar or the markets/economy, or so the prevailing wisdom goes with respect to rates. It's a false dichtomy (a false economy) though. When the dollar accelerates into it's death spiral, we will be into the world of capital flight and that means higher rates to attract that capital back to these shores.

Higher rates will wreak havoc on the economy. Having said all that the Fed will likely lower rates
because they can, and they do not want to be accused of not taking action. And of course, as you suggest, Ben Bernanke would like to keep his job if at all possible.

The markets are going to rally right into next week's Fed meeting.

DED said...

The whole strong dollar - weak dollar debate has always struck me as odd. The weak dollar proponents seem to be holding sway these days, claiming it makes exports more affordable, though they don't seem to mind the risk of inflation or its ripple effect in commodities, especially $70+ oil. And with the yuan pegged to the dollar with only minimal fluctuation, it keeps Chinese imports affordable, thus perpetuating the killing of American manufacturing jobs. It also cheapens debt, does it not?

I'm trying to think of a drawback to a strong dollar, other than the risk of less exports. I'm still a novice at economics. Care to educate me on this one?

Edwardo said...

Drawbacks to a strong dollar? There aren't any in a country with little to no manufacturing for export.

The dollar must retain some measure of strength in order to maintain its world reserve currency status which gives this nation enormous advantages, particularly with respect to acquisition of such precious and essential commodities as oil and gas. And while the onset of Peak Oil is bad enough, when the petrodollar regime is sundered that is going to be a dreadful all by itself.

DXB said...

most likely the Fed will reduce the discount window lending rate by 0.5% or 1%..

For full description of the discount window.

The media has not really discussed that possibility (and that doesn't surprise me). They'll start expounding on it Tueday night, pretending they knew all along this was always an option.

DED said...

Drawbacks to a strong dollar? There aren't any in a country with little to no manufacturing for export.

Ok, then. So why are there mutton heads out there that want a weak dollar? Do they think that our remaining exports matter?

The dollar must retain some measure of strength in order to maintain its world reserve currency

Oh yeah. That's stuff I know about. Which is why I can't understand why anyone "in charge" could stand to see the dollar get beat up year after year.