The Economy Guy

There was REAL FEAR on the trading floor of the NYSE this morning.  No one knew what was coming.  The futures had priced in a 500 point decline for the opening of the Dow Jones Industrials Index.  The international markets had dropped precipitously on Monday, and had continued and accelerated downward today before our opening.  The Dow was down 18% from the October highs this morning – not bad, huh???

And THEN, the Fed dropped the FED FUNDS rate in a surprise move by 0.75%.

Pandemonium broke out, and trading began.  The Dow started down about 465 points, and slowly but surely worked its way up, and almost worked its way back to a breakeven position.  But, then it started back down, and ended at 128 points down.  Was this a good ending for the Dow???  Well, we’ll see!!!!  It was predicted at the beginning of the day, that if the Dow went up during the day, then tomorrow would be a big down day.  So, we’ll see!!!

Here what really happened today….

The Feds cut the Fed Funds rate by 0.75% —  today.  Today is the key word in this announcement.  Why didn’t they do it last Friday??  That is the question being asked by many of the financial experts around the world today.  It looks like the Fed acted AFTER the world stock markets started their meltdown.  That makes the Fed reactionary.  And, that isn’t what people want from our Fed.  It really looks like their timing stunk.

What about the amount – 0.75%?  That says we are IN A RECESSION.  The Fed is scared, and is working hard to minimize the downturn our economy has started into.  The amount was a surprise, but if it is really called for, the Fed is just plain scared.  Also (and here is an important point) the Federal Reserve Meeting is next week.  What could happen then???  THEY COULD DROP the RATE AGAIN.  That would be just amazing.

Can you personally profit from this action?  YES.  By refinancing your house and other real estate investments.  The 30 year fixed rate should be dropping like a stone over the next 2 weeks.

Why would the Fed encourage EVERYONE to REFI their real estate loans?  That is the right question, and the lesson for today.   The answer is fairly straight forward.  The Fed wants people to refi their loans, and get those fees into the banking system, and also refi some of those bad mortgages too.  So, the main purpose of this action (and possibly an additional future action next week) is to bail out the banks.  This is more help for the banks in addition to the “nearterm?” stimulus package being discussed in Washington.

What have we learned from these events???

When the US sneezes, the rest of the world catches a cold.  That is an OLD quote about how important the US economy is to the rest of the world.  Many analysts thought that the world economy had decoupled from the US economy, but NOT SO.  The US economy is so important to the economy of the rest of the world, that no one can ignore when the US economy is heading into a recession.

Another sign of the slowdown is that the cost of shipping across the high seas has gone down 40% in the past few months.  That means there is much less demand for shipping, and it is being reflected in the rates.  PS – by definition “shipping” means international.

When will the stock market stop going down???

That’s impossible to answer.  But, from a fundamental point of view, when the interest rate that you can get from bonds (which is going down in an economic slowdown) is exceeded by the interest rate you can get from stock dividends (which is going up as stock prices decline), people will get more interested in stocks.  This is a natural balancing act between stocks and bonds during large changes in the US economy – like recessions and inflations.  (Nice fundamental thing to remember.)

Here are today’s Numbers:
Dow Jones 30 Industrial – 11,971 (Down 128 points) – but was down 465 points in the morning.
10 Year Treasury Bond – 3.48% (Down 0.16%)
Euro – $1.4630
Gold – $890 (up $9)
Oil – $89.85 (down $0.72)
Gasoline – $2.28 (down $0.02)