Perspective Unlimited

Wednesday, September 19, 2007

Where Has the Exuberance Gone II?

Clearly, I spoke too soon. The exuberance is not gone from the market, it is in fact being stoked by the Fed ("Cheering Greets Fed Announcement"). I find myself to be a rather curious situation. I personally want a significant interest rate cut because it will be good for my portfolio, but I am against it in principle. I am probably not the only one feeling really mixed here. Even as the markets record the highest one-day jump in years, 2/3 of Financial Times readers are against the half-point cut.

Poor Growth or Poor Policies?

Over the past decade, the Fed has given the impression that it fears economic slowdowns more than it fears bad policies - a willingness to stomach all kinds of economic imbalances to promote growth. In 1998, it cut interest rates and organised a bailout on LTCM. In 2001, it slashed interest rates aggressively to contain the fallout from dot-com bubble.

Listen to what the Fed actually said - "Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."

The disruption in the financial markets stemmed from the burst of the US housing bubble, a real problem created by excessively low interest rates and excessively high liquidity. Yet, in a reverse of logic, we are now hearing the Fed say that the interest rate cut is necessary to prevent the financial markets from hurting the real economy.

Whatever the problem, the solution is always the same: interest rate cut (the so-called Greenspan Put). It does not matter what the root of the problem is, such as excess liquidity in the housing sector. The Fed solution is always the same - more liquidity to ease a problem created by excess liquidity.

I am neither monetary economist nor central banker. But a Fed that has lost its stomach to take an economic slowdown is increasingly one that the markets have no respect for.


  • Bart,

    I concur with your idea there was a "Greenspan put". I guess now there is a Bernanke put.
    There is a trade off between having a stable sustainble economy vs a fast growing one.

    The amount of debt the Americans have taken on is incredible. PIMCO's Bill Gross said the US need to maintain a sufficiently fast growth to just service the debt and a slowdown is simply disastrous. Corporate profits have reached a record high as a % of GDP but wage growth has been relatively slow. Where did the demand and corporate profits come come from? Consumer debt, remortgaging of houses...etc. A slowdown is not just going to be a slowdown, it will be a disaster. They simply can't stomach this slowdown...prefering to keep the imbalances growing...the lesser of the 2 evils?

    I noticed Gold has hit 27 year highs, US$ is at a 15 year low and oil is now $81. The stock market is rising for now but the whole situation does not look healthy - there will be inflation and we are going to have $65 mooncake next year.

    The stock market is going to rise and speculation will re-appear, I MUST get out when it is high, I wrote that on my wall STI=4000-4200 start selling and get out. They can't keep pumping money and creating creating one bubble after another ( then housing now the DOW?). Wealth for America can't be a matter of just printing more money....I got a bad feeling about this....tell me when you decide to sell too....

    By Blogger LuckySingaporean, at 5:54 am  

  • Haha, I am not as greedy as you, I am not waiting for STI to reach 4000. Since I bought in on the 17 Aug when STI fell below 3000, I have been winding down my portfolio exposure as the market recovers. I am content to walk away from the last 10-15 per cent of gains in order not to take on the risks.

    Every thing jumped on the rate cut - gold, oil, stocks (and also Chinese inflation). USD fell, and very soon, there will be price pressures in the US again. I totally agree with you on the inflation bit.

    Back in June, every one was saying that the stock market was frothy. Then came the sharp correction in July-August. Now? Back up there again. STI closing in on 3600 as I write. If it was considered frothy back in June, it surely is worse now since the macro environment has deteriorated.

    Fed is giving me a hangover headache.

    By Blogger Bart JP, at 6:38 am  

  • The environment has deteriorated....inflation. But along with gold, mooncakes, and commodities, the price of stocks is going to inflate least will corporate profits.

    I think I'm going to hold...I'm not greedy, just don't want to kick myself for selling too early.

    By Blogger LuckySingaporean, at 8:04 am  

  • Remember 1987: 20% down in 1 day!

    By Blogger Bart JP, at 10:19 am  

  • Bart,

    Don't scare me leh. You stumbled on one of my all time fav topic, the crash of 1987.

    The 20% was due to portforlio insurance?.....I like this explanation better ..the 1987 crash was due to traders' psychology playing out the 1929 crash because they started to see similarities of the conditions between 1929 & 1987 - both happened in October, both crashed 20+%, both happened on Monday,..etc. Many years ago, I read that George Soros got out because someone showed him a chart of 1929 superimposed on 1987, there was a 1 for 1 matching of each turn in the market.

    Hopefully I can avoid the crash of 2007 by staying alert.
    See this report:

    By Blogger LuckySingaporean, at 11:12 am  

  • Thanks Lucky, the article is interesting. But it is really just saying how psychology might affect the market, which I accept.

    We are heading into Oct already . . . I am bailing out before that.

    By Blogger Bart JP, at 11:49 am  

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