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FED RATE CUT ONLY DELAYS THE INEVITABLE
First the Fed cut rates by three quarters of a percent. Now they cut them another half percentage. But even after the second back to back cut, the stock markets ended up virtually unchanged.
Swiss America CEO Craig R. Smith is conducting Talk Show interviews saying that the Fed cuts are a temporary fix that will only delay the inevitable of the markets dropping.
Says Craig, “Instead of messing with the markets, just leave them alone!”
The following is an article by Craig Smith on this topic.
LET FREE MARKETS STAY FREE AND THEY WILL FIX THEMSELVES
By Craig R. Smith, CEO of Swiss America Corporation
Between government stimulus proposals and Federal Reserve rate cuts of ¾ of a percent, followed by another 1/2% drop, the market is trying to get everyone's attention.....STOP! The market has some problems to work through and left alone to do so will.
Look at the facts. Last week the President and the Congress floated stimulus proposals that would refund $800 per taxpayer while possibly cutting corporate and personal taxes for some period of time in order the “save” the economy. This was in response to testimony given by Ben Bernanke to the Congress. The stimulus Bernanke would welcome would be “timely, targeted and temporary”.
So the geniuses in D.C held press conference and the market reacted by dropping the next day.
The following start of business overseas Monday was met with panic selling. Mumbai down 11%. Heng Seng down 8%. London off 5.5%. The international markets were in free fall. Markets know full well the government can do nothing in a “timely, targeted and temporary” way.
Then the FED announced a ¾ point cut in Fed Funds rate in order to avoid what clearly appeared to be a 600 to 1,000 point drop evidenced by a 600 point pre market decline. The DOW opened down 400 and recover with a loss of only 128 by the end of business on Tuesday.
The market opened Wednesday with a 300 point sell off only to recover at the end the day with a point 285 point increase. Volatility has been so extreme even the most seasoned traders are grabbing for the Maalox. 500 point swings have become an everyday occurrence. Buyers returned when they identified value. Markets work. Left alone we watched a 600 point rally. No Fed announcements. No Congressional promises. Just traders and investors trading the market.
So what can be surmised from this activity? The market is trying to tell the Government and the FED to “leave us alone”. The markets always get things right and this time will be no different that past market events. Bonds are setting interest rates. Buyers and sellers are establishing real estate values and stock buyers and sellers are moving markets.
There is no doubt that banks and insurers talking to regulators as well as raising fresh capital to work through these problems have had a major impact on market activity. But business knows better than the government how to raise, invest and use capital to make profits.
In 1987 we experienced a virtual meltdown in stocks. The DOW lost 37 % of its value overnight. Within 20 years however the DOW rose from 1738 (after crash low) to a high of 14,164 in 2007. This was during a time when the FSLIC that insured our Savings and Loans went broke and the Resolution Trust Corporation sold billions of dollars of distressed real estate at the end of the 80's at pennies on the dollar costing taxpayers billions of dollars.
Within years, as the market and the banks got a handle on the losses and worked through the problems we experienced unprecedented grow in both equities and real estate. And while the U.S. Dollar dropped in value against all world currencies investors who hedged portfolios with currencies and gold did extremely well. This cycle will be no different than past............. unless......the Government gets involved.
I am a firm believer in markets. They work. They have to work because markets are rewarded for performance and punished for lack thereof. Government on the other hand never works. It is slow and costly and is much like a supertanker. It can carry a lot of weight but takes forever to turn.
My one wish for the current market is that it be left alone to work out it's problems without the so called help of the government or the Federal Reserve. The government can't take the garbage out efficiently and the FED is always ahead or behind the curve. Markets know how to fix markets.
The moment that the market is allowed to drop or increase without artificial stimulus the sooner we will see a real recovery. Any tampering will just postpone the inevitable. Debt can be used like a drug to instill a false sense of well being on this market. However until the underlying structural problems are addressed and strategies employed to worked through those problems, fixes will be temporary.
Much like drugs. The pain may go away but the disease will not unless treated properly.
It seems nowadays we look to government to fix all the ills of the world. However it is the height of insanity to rely on congress to fix a 14 trillion dollar corporation called the United States of America when they can't even balance a budget or stop spending money on bridges to nowhere. Government don't create anything other than partisan chaos.
The move to Democratic socialism in this country can be some up in the words of Ronald Reagan when he said: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. –Ronald Reagan (1986)
It is time for the country to allow kids to be kids, adults be adults and markets to be market. If our markets are truly “free markets” that let them be free and they will fix themselves.
ABOUT CRAIG SMITH…
Craig R. Smith is the president and CEO of Swiss America Trading Corporation, one of the largest and most respected investment-grade U.S. gold and silver coin firms in the nation since 1982. He’s been featured frequently on Fox News Channel, CNBC, MSNBC and CNN.
The following article may be used for reference for show prep:
THE NEW YORK TIMES/ January 30, 2008
Fed Cuts Rate by Half-Point; 2nd Reduction in 8 Days
By EDMUND L. ANDREWS
WASHINGTON — The Federal Reserve reduced short-term interest rates on Wednesday for the second time in eight days, meeting widespread expectations by investors on Wall Street for a big rate cut.
In lowering its benchmark Federal funds rate by half a point, to 3 percent, the central bank acknowledged that it is now far more worried about an economic slowdown than rising inflation, and it left open the possibility of additional rate reductions.
“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the central bank said in a statement accompanying its decision. In addition, it said, recent data indicated that the housing market is still getting worse and the job market appears to be “softening.”
Taken together, the back-to-back rate cuts totaling 1.25 percent amounted to the Fed’s most aggressive effort in years to head off a recession. By comparison, the Fed under Alan Greenspan reduced the overnight rate by only a half-point after the terrorist attacks on Sept. 11, 2001.
The news on Wednesday sent stocks higher on Wall Street. Within minutes after the announcement, the Dow Jones industrial average, which had been down slightly in early afternoon, was up 100 points.
Hours before the Fed announced its decision, the Commerce Department estimated that the nation’s economic growth slowed markedly in the fourth quarter of 2007 to an annual rate of just 0.6 percent from 4.9 percent in the third quarter.
The slowdown was sharper than the already-gloomy forecasts of most economists on Wall Street, where the consensus estimate called for fourth-quarter growth of 1.2 percent.
The Fed’s move on Wednesday came after it electrified investors on Jan. 22 with an even bigger surprise rate cut — three-quarters of a point — at a rare unscheduled meeting.
The Fed cut dovetailed with efforts by Congress and the White House to pass a fiscal stimulus bill that would inject at least another $160 billion into the economy this year in the form of deficit-financed tax rebates for individuals and tax breaks for businesses.
The House passed a measure earlier this week, after reaching agreement with the Bush administration. The Senate Finance Committee began work Wednesday on a bill that would add more money for unemployment benefits, food stamps and potentially other government spending programs.
Though House and Senate lawmakers are expected to haggle over the precise shape of the fiscal package, there is a broad political agreement between Democratic leaders in Congress, President Bush and the Federal Reserve on the need for a stimulus package of some kind.
Taken together, the fiscal package and the Fed’s own rate reductions would amount to a one-two punch aimed at jolting the economy enough to keep it out a recession — or at least mitigate the effects of any downturn that might develop.
Since the Fed reluctantly began reversing course in August, when credit markets abruptly froze in panic as a result of soaring default rates on subprime mortgages, the central bank has slashed the overnight federal funds rate by almost half in a total of five actions thus far.
But policy makers faced difficult questions about how deep to cut rates, and there was widespread uncertainty about whether they would reduce them by a half-percent or by only a quarter-percent.
On Wall Street, where the clamor about a recession remains at a fever pitch, investors had betting heavily on a bigger cut and were poised to send stock prices sharply lower if the Fed moved more cautiously.
Even with the Commerce Department’s preliminary estimate on Wednesday of extremely slow growth in the fourth quarter of last year, the evidence of an impending recession is mixed.
Indeed, many economists estimate that the economy may have added about 100,000 jobs in January — a big improvement from the nearly stagnant pace in December of 18,000 jobs.
Indeed, the ADP monthly survey of job creation, released on Wednesday, estimated that the nation added 140,000 private-sector jobs in January. Though the ADP survey often clashes with the Labor Department’s monthly employment report, which is due out on Friday, the results prompted many economists to raise their estimates of job growth in January.
The Commerce Department reported on Tuesday that orders for all durable goods — big-ticket items like commercial aircraft and auto parts — jumped 5.2 percent last month. Excluding orders for transportation goods, which are volatile from month to month, orders climbed 2.6 percent, the first increase since September.
Ben S. Bernanke, the chairman of the Federal Reserve, and other Fed officials are already under fire from two directions. Many analysts on Wall Street complain that the central bank has moved too slowly in response to signs of a faltering economy. They point to a plunge in housing that does not seem to have hit bottom, slowing growth in retail sales and tight credit.
But a significant minority of economists argues that policy makers have let themselves be unnecessarily alarmed by panicky swings in the stock market. If the central bank props up the economy with easy money, they warn, the result will be higher inflation in the future.
Richard DeKaser, chief economist at National City Corporation, a Cleveland bank, is skeptical that the economy is headed for a recession, despite the common assumption that it is. “Few seem to take seriously the prospect that we are not going into a recession,” said Mr. DeKaser, who cites the latest labor market data, showing fewer weekly claims for unemployment benefits and encouraging layoff numbers, which suggest to him that the nation has added a hefty number of jobs in January.
And despite the huge losses and write-offs stemming from subprime mortgages, he added, many business borrowers have yet to face a credit squeeze.
Members of the central bank’s Federal Open Market Committee, which decides interest rates, have shown clear signs of disagreement among themselves.
Fed officials acknowledged earlier this month that they had lowered their forecasts for economic growth this year, even though their previous forecast had already assumed a slowdown in the first half of this year.
Mr. Bernanke acknowledged on Jan. 10 that the housing market was still in a free fall and that the turmoil in subprime mortgage markets had shaken the broader credit markets.
When the Fed surprised investors by cutting its overnight rate at an unscheduled meeting on Jan. 22, officials left little doubt that they would lower the rate yet again at their regularly scheduled two-day policy meeting this Tuesday and Wednesday.
Fed officials acknowledge that psychology and expectations are playing an important role in the financial markets. To the extent that investors remain fearful about credit risks, markets for mortgage-backed securities are likely to remain dysfunctional and banks will be forced to write down even more of their loan portfolios.
But analysts say Mr. Bernanke faces a difficult challenge in trying to manage expectations. On the one hand, they say, the Fed wants to act decisively enough to reassure investors and the public that it will prevent the economy from sinking. On the other hand, they say, Mr. Bernanke does not want to be seen as panicking in response to a plunge in the stock market.
Copyright 2008 The New York Times Company
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