The FED Has A New Tool
Stocks crumpled again today, down 508 points. The reason? – complete lack of faith in the financial system – and worry about further shoes to drop. The market was right again today – very hard to believe – there will be more shoes dropping.
Most other markets went sideways as stocks took took center stage. Oil was up slightly, and gold went up a little too.
In the news today….
The FED announced it is going to purchase “commercial paper.” That’s what companies write to get very short term loans to keep themselves going. No one was purchasing it – so the FED will purchase it for the first time in history. What happens if any of that paper defaults – the FED and I would like to thank you for propping up the economy – you just paid for it. In a decent economy, the FED would make money (the interest) on this deal – but this is not a decent economy.
Having said all that, the FED is taking action that needs to be taken. What I want to know is WHY didn’t the FED say they were going to do this BEFORE the $700B Bailout Plan was passed? Doesn’t this go to the heart of illiquidity? Wasn’t Paulson saying that companies couldn’t make their payroll because they couldn’t get loans? Well, this is going to fix that problem. I feel duped.
Bernanke was on the TV today saying that the economy is going to get worse and inflation won’t be as bad as he expected a few months ago, AND he gave a big hint that the FED was going to drop the FED Funds Rate. (An unusual foreshadowing of a FED action.)
The Bond Market is betting that the FED Fund Rate will be 0.50%, rather than 0.25% drop. It could be a whole 1.0%.
Tonight’s Dinner Conversation….
A rumor hit the stock market today that the deal between Morgan Stanley and Mitsubishi to purchase 25% of Morgan Stanley was falling apart. Morgan Stanley denied the rumor, and their stock fell 22% today – what a great way to make money. Just state a rumor and sell your shares short. But, you can’t sell “naked” shorts – ie without having the shares in your hand – so WHO owns Morgan Stanley shares? WHO would gain from short selling, in other words. That is for you to figure out tonight.
Here are Today’s numbers:
Dow Jones 30 Industrial – 9447 (down 508 points)
10 Year Treasury Bond – 3.51% (up 0.08%)
Euro – $1.3591
Gold – $882 (up $16)
Oil – $90.06 (up $2.25)
Gasoline – $2.06 (no change)
My sense is that no matter how many tools the Fed creates, the underlying problems remain. Too much debt exists and the FIs don’t trust each or businesses enough to lend to them. That will create serious deflation.
Think about this conundrum.
How can we have deflation with a fiat currency?
The answer to your conundrum is fairly straight forward. If more money goes to money heaven, than is being created by the FED, there will be a disinflation, and therefore a deflation in the amount of money around.
Right now a tremendous amount of money is going to money heaven – just from the stock market – much more than $1Trillion in the last week.
So, we’ll see.
Tom