The Economy Guy

Issue: 9/19/07 Wednesday

By Global Economy Guru, Tom Harvey…

It’s time to re-camp and look exactly at what happened yesterday with the Fed’s cut of 0.5% in the Fed Funds rate. The Fed surprised the majority of people in the market. That means there will be some winners and some losers. The losers will be very unhappy. Who could be a big loser? Well, do you remember that terrific volatility in the market for the 3 weeks leading up to the Fed meeting yesterday? The stock market is driven by buying, and the buyers were elated and rewarded by the 0.5% interest rate cut. The winners were “buyers” in the market. The losers were the “seller” in the market. The sellers caused the big drops in the market, and the boogie-man in selling are Hedge Funds. I wonder how many share were “shorted” in the weeks before the Fed meeting? Those positions must be unwound now because those losers know that the Fed is on the side of the winners. The losers must cover their shorts, so they will be buying those shares back, and driving the market higher. That’s what happened yesterday. That’s exactly what happened today. I bet it’s not over yet.

So today you saw the stock market go up 76 points. You also saw the dollar lose ground against the Euro, and Gold go up, and Oil/Gasoline go up. All these 4 moves were consistent with a weakening dollar. The bond market even lost ground with the 10 year note closing at 4.52%. The bond move was also consistent with the US currency not being a “safe haven” right now – no need to run to US investments and gold. So, all the markets were SANE today.
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Treasury Secretary Henry Paulson told Congress on Wednesday that the federal government will hit the current debt ceiling on Oct. 1. He urged quick action to increase the limit, saying it was essential to protect the “full faith and credit” of the country, especially at a time of financial market turmoil. The current debt limit is $8.965 trillion. Unless Congress votes to raise that ceiling, the country would be unable to borrow more money to keep the government operating and to pay debt obligations coming due. The United States has never defaulted on a debt payment but the decision on whether to raise the debt ceiling often sparks a prolonged political battle in Congress.

So did you get those numbers??? Our debt limit – which we just hit – is about 9 Trillion Dollars. We owe that money sometime, somewhere, to someone. The awesome threat is that we can’t pay our bills without borrowing more money!!!!!!! Naturally, good people pay their debts. What type of insanity is this????
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Consumer prices in August fell for the first time in 10 months, as another big drop in energy costs offset higher food prices. The Labor Department reported Wednesday that its closely watched Consumer Price Index dipped 0.1 percent last month, slightly better than the flat reading that had been expected. It was the first decline in consumer prices since a 0.4 percent fall in October 2006.

Consumer prices fell – when you included the volatile energy and food. Well, gasoline is now increasing in September, so that reported gain against inflation has now disappeared. Don’t celebrate too soon.
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Here are Today’s closing details:

DJ30 – 13,816 (Up 0.55%)

10 year US Treasury Bond – 4.52% (Up .04%)

US Dollar - $1.3974/Euro. It’s close to the magic $1.40, but the nay-sayers say the dollar is strong and stopped short of that barrier.

Gold closed at $730 per ounce. (Up $6)

Oil Closed at $81.93 (Up 0.42) Another new high today.

Gasoline is $2.09 Gasoline is following oil up.