Another Fed rate cut, another ill omen
The Fed's decision to lower interest rates to 1% on October 29th is yet another sign that the economy is going to get worse. None of the rate cuts over the last year have helped, and this latest one is unlikely to do any different.
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Comments
I am thoroughly convinced the psychology of the market is now completely out of sync with reality.
Actually, I think the world's stock markets have been acting quite rationally. Even with this week's rally we are still WAY below last year's highs. Keep in mind that the most gravity defying rallies ALWAYS occur in bear markets. The Dow saw incredible run ups for a week or two from 1930 to 1932. There were also huge short-term rallies in 2001 and 2002 prior to reaching lows.
Unfortunately, there are still a lot of people who think this downturn will be a short-term affair and are looking for good buying opportunities. Heck, I have colleagues who wax poetical about all the great stock bargains to be found!
Minid-numbing rallies are an essential feature of bear markets. The rallies serve as a way to pull all the remaining bulls out of the closet and give them a bloody nose, until they FINALLY realize that there is no hope. We just haven't reached that point yet. The vast majority of Americans are still contributing to their 401Ks. Mutual fund redemptions are still pretty low. The majority of people still believe in buy-and-hold (for the long term).
Today's reaction was especially odd to me.
1) The fed cuts their rate 1/2 percent, to 1 percent, meaning there is almost no wiggle room remaining before we end up like Japan where the fed is paying people to borrow money. This is bad.
2) Consumer spending was announced down 0.3% for July - September. For a country whose economy is largely driven by spending, this is also bad.
3) Apparently commercial paper transactions are up about 8%. This is a good trend.
Nothing else really happened.
1 + 2 + 3 should not equal a rally.
Of course, yesterday was plain silly.
Wait'll Black Friday. With the consumer tapped out, I expect the worst retail catastrophy in many a year - or decade.
We are already in deflation. The big question is just how much will everything actually deflate.