The Economy Guy

The stock market went rocketing up this morning, then fell like a rock this afternoon.  What made the difference?  The Fed Meeting Minutes.  How could some dusty ole minutes from October’s meeting cause that fall?  Well, the Fed stated that the last Fed Funds rate reduction was a close vote (in fact there was one dissenting vote in this “unanimous” body), and there was reluctance to drop the rate further in the future (read the next Fed meeting scheduled for December 11th into this comment.)

(After the market fell in the afternoon, it recovered to just above 13,000 at the close.)

However, the Bond market has already discounted the next 0.25% reduction in the Fed Funds rate.  I think the bond market is right, and here’s why.

The Fed last October saw the losses from the sub-prime mortgage meltdown as being already declared, and discounted in the market, so they couldn’t do much more damage.  However, as you know from this daily blathering, the financial market hasn’t told the world the truth yet.  In fact, it probably doesn’t know what the truth really is.  One thing that is crystal clear is that we haven’t seen all the losses yet.  

What do these losses mean?  It means that some money went to “money heaven”.  When that happens, it’s called deflation (the opposite of inflation).  If you remember, the cause of inflation is the increase in the money supply.  Deflation is the opposite; it’s a decrease in the money supply.  A decreasing money supply, or deflation, is a method that Central Banks have used for decades to slow a market down.  Unfortunately, as we appear to be heading into an economic “slowdown” or maybe even a recession, deflation is not the weapon of choice – as it only makes the problem worse.

Here is some news regarding the US housing market.

The direction of October home construction doesn’t suggest any change to the longer term trends.  Starts have plunged 47% since the January 2006 high and will continue lower given weak underlying demand (sales) and the large supply of unsold inventory.  Moreover, tighter mortgage lending standards now inhibit prime lending and the more risky sub-prime borrowers.  The outlook is bleak as new construction stability may be a year away.

The big news is that the dollar fell big time overnight.  Did you hear that in the news, or are those lousy news outlets keeping you in the dark – barefoot and poor.  The Euro set a new high above $1.48.  The Yen closed below 110 yen/$.  Thanks to my wife, our Swiss Francs are soaring to “never seen before new high.”

 

Gold and Oil did the logical thing and jumped up as the dollar fell down – sort of like looking at the two ends of a see-saw.

Here are Tuesday’s closing details:
DJ30 – 13,010 (Up 52 points)
10 year US Treasury Bond – 4.05%  (Down 0.03%) – it fell again.  This is very low.
Euro $1.4816 – a new high for the Euro
Gold closed at $791 per ounce.   (Up $13) – reaction to dollar fall
Oil Closed at $98.03 (Up $3.39) – Wow!!! – reaction to dollar fall
Gasoline is $2.45  (Up $0.07) – I hate higher gas prices.