Where will we go after the Feds cut rates?

[Old_Bob]

They cut it by 0.5! The EUR/USD hit new hights tonight. What do you expect? I guess 1.4 will be hit by the end of this week (Maybe it was hit while i'm writing this post) For the cable, the way is open to 2.0600- 2.0800.
I think the USD will be declining against all pairs from now until january 2008.

 

[Hoggums]

They cut it by 0.5! The EUR/USD hit new hights tonight. What do you expect? I guess 1.4 will be hit by the end of this week (Maybe it was hit while i'm writing this post) For the cable, the way is open to 2.0600- 2.0800.
I think the USD will be declining against all pairs from now until january 2008.

I think we'll see a lot of gains in the markets for a short while now - until the next bank crisis hits.

 

[Splitlink]

I think we'll see a lot of gains in the markets for a short while now - until the next bank crisis hits.

Yes, this is a warning signal. The Americans have cut rates to help the markets, probably they should be making money more difficult to borrow. That means that the financial sector is worrying them.

I'm a dunce at reading financial signals but there should be more regulation IMO. Management of banks and large companies is too ambitious and greedy.

 

[jacinto]

Yes, this is a warning signal. The Americans have cut rates to help the markets, probably they should be making money more difficult to borrow. That means that the financial sector is worrying them.

I'm a dunce at reading financial signals but there should be more regulation IMO. Management of banks and large companies is too ambitious and greedy.

hi split,

i think they just were affraid of paying the cost of bursting a bubble. i also think they took a gamble. on the other hand, they may want to avoid a full blown recession, but i stick with the first sentence though.

i am affraid they ended up delaying the inevitable. watch the 10 year treasuries to get a signal of what happens. i am affraid they have created the conditions for inflation.

regarding the UK, wonder if BOE will follow suit

 

[Atilla]

hi split,

i think they just were affraid of paying the cost of bursting a bubble. i also think they took a gamble. on the other hand, they may want to avoid a full blown recession, but i stick with the first sentence though.

i am affraid they ended up delaying the inevitable. watch the 10 year treasuries to get a signal of what happens. i am affraid they have created the conditions for inflation.

regarding the UK, wonder if BOE will follow suit

I think they did what they had to do. However, I think 50 bp was too much. Ofcourse they may have / know stuff we don't. Perhaps it is a lot worse than what has been reported.

I still hold the view Monetary policy on it's own will get any economy into a spiralling mess. Rising oil, easy money will mean more inflation for sure. Nothing will change until the administration changes the democrats come in and start taxing.

I'm always amazed why nobody looks at fiscal policy to cool the economy.

 

[Splitlink]

I think they did what they had to do. However, I think 50 bp was too much. Ofcourse they may have / know stuff we don't. Perhaps it is a lot worse than what has been reported.

I still hold the view Monetary policy on it's own will get any economy into a spiralling mess. Rising oil, easy money will mean more inflation for sure. Nothing will change until the administration changes the democrats come in and start taxing.

I'm always amazed why nobody looks at fiscal policy to cool the economy.

Taxes are unpopular and don't get votes. What I fail to understand is why the government fails to see rising inflation before we do. It has to be obvious that inflation has to shoot up with the rise in energy prices. It can only be that they do not want to admit that it is taking place. Yet, they allow the Chinese to peg their currency at a low level by letting their junk (because that is what most of it is) into the country, thereby getting the nation into debt to that country. The Chinese have so much of our Western bonds that we are frightened that they may start unloading them onto the markets and rock our economies.

What a mess we are leaving for our grandchildren.

I can honestly say that I have seen this mess coming and I have been writing posts in this vein for years, now. If I can see it, so can our leaders.

 

[jacinto]

think this is a good analysis of yesterday's move.

and it pins very well not only the risk of a bubble but also how from one game it has started a new game. the new game is called:

credibility as an inflation fighter.

http://www.ft.com/cms/s/0/4bb9f1d6-6602-11dc-9fbb-0000779fd2ac.html

 

[neil]

Jaco's view in the "House of Pain"

They cut it by 0.5! The EUR/USD hit new hights tonight. What do you expect? I guess 1.4 will be hit by the end of this week (Maybe it was hit while i'm writing this post) For the cable, the way is open to 2.0600- 2.0800.
I think the USD will be declining against all pairs from now until january 2008.

Here is a view on the Dollar from a full time trader on another site:
(Read the posts by "Jacko.")


http://www.forexfactory.com/showthread.php?t=27286&page=58

 

[SAINT]

I think they did what they had to do. However, I think 50 bp was too much. Ofcourse they may have / know stuff we don't. Perhaps it is a lot worse than what has been reported.

Good point. I think that we can assume that it is a lot worse beneath the surface. For the Fed to cut 50bp from the Interest rate AND 50bp from the discount rate, modifying their months-long policy of inflation focus is a huge move.

In terms of the economy, I think with most recent inflation having cooled slightly in the U.S. they are using the opportunity to bail out Hedge Funds and Banks from some precarious positions. I think it's safe to assume that this decision was influenced by others outwith the Fed also and it's clear that the underlying economy is having to take a short-term backseat to the stability of markets.

 

[Rhody Trader]

One thing that probably factored in to the FOMC action is the pending quarter end. The guys I work with who cover fixed income, and particularly the money markets, have been talking about a new round of credit/liquidity issues as banks and funds dump holdings from their balance sheets ahead of the end of their fiscal quarter. This is something that always happens anyway (like mutual funds doing window dressing) but in an already tightish situation it is likely to exaserbate things.

I think it's pretty obvious that the market reaction was one which concerned itself with inflationary issues. Long rates rose, while short ones dropped, steepening the curve. Gold and Oil moved higher. The Dollar came under further pressure. The Fed did mention, if not harp on, inflation. They actually went back to a neutral stance after the rate move.

It's my job to watch the stock market, but even if it weren't, I'd be watching it closely over the next few weeks. That's the reaction I'll be curious to see. If the S&P keeps rallying as it has done, I would actually get worried.

Speaking to a couple of points made in this thread:

Splitlink: To your suggestion that the US "allow the Chinese to peg their currency at a low level", it's not like the US can force the Chinese to change the policy. That said, the fact that the US cut rates actually helps to make the current peg increasingly untenable for the Chinese. They are already having inflation pressures and being forced to raise rates (real interest rates in China are negative, which is encouraging stock market investment). As that rate differential widens, the currency pressure is going to build to an extreme. When that snaps, look out!

Atilla: Cutting government spending would serve the same fiscal purpose as increasing taxes (both reduce money supply). That said, how do you figure the US economy needs to be cooled down? It's already sluggish compared to the rest of the world.

 

[_coda]

Splitlink: To your suggestion that the US "allow the Chinese to peg their currency at a low level", it's not like the US can force the Chinese to change the policy. That said, the fact that the US cut rates actually helps to make the current peg increasingly untenable for the Chinese. They are already having inflation pressures and being forced to raise rates (real interest rates in China are negative, which is encouraging stock market investment). As that rate differential widens, the currency pressure is going to build to an extreme. When that snaps, look out!

Hi Rhody

Given that interesting times may be upon us, how does one factor such a snap into ones trading?

Get out all together? Go conservative and minimize exposure, e.g. with maybe only one trade going at a time? Or do a Buffet and say your trading should be such that it is immune to any such event?

rgds

 

[Rhody Trader]

Given that interesting times may be upon us, how does one factor such a snap into ones trading?

Get out all together? Go conservative and minimize exposure, e.g. with maybe only one trade going at a time? Or do a Buffet and say your trading should be such that it is immune to any such event?

The snap I referred would, presumably, be a revalution of the Chinese currency to a higher value. As such, one would want to be holding assets denominated in that currency. This isn't a trade, though. Who knows when that revaluation might happen. You would have to be able to hold a position for a while, and be holding assets which wouldn't depreciate in the meantime, wiping out whatever currency gains you might make.

That's if you want to actively try to play for such a move, though. If not, just avoid Yuan exposure.

 

[_coda]

Hi Rhody

That's if you want to actively try to play for such a move, though. If not, just avoid Yuan exposure.

Won't Yuan exposure affect just about everything actively traded? Sorry if that's dumb, I'm not economics literate. I get the impression that everything is interconnected nowadays.

rgds

 

[jacinto]

Hi Rhody



Won't Yuan exposure affect just about everything actively traded? Sorry if that's dumb, I'm not economics literate. I get the impression that everything is interconnected nowadays.

rgds

mind the yen .......kind of used as a proxy for the yuan

 

[Rhody Trader]

Won't Yuan exposure affect just about everything actively traded? Sorry if that's dumb, I'm not economics literate. I get the impression that everything is interconnected nowadays.

Everything is interconnected, but some connections are more distant than others and therefore less directly impacted. Also, your timeframe has an impact. If you're a short-term trader not dealing in longer terms position trades, the Yuan thing is not something that will likely create much of an impact on what you do.

 

[Rhody Trader]

mind the yen .......kind of used as a proxy for the yuan

I would actually tend to disagree with that. There are probably much better proxies. The Yen is still driven by the carry trade, low interest rates, and poor economic growth. Inflation is not, to my knowledge, a problem. Quite the opposite, I believe. Meanwhile, China has rising rates, strong growth, a booming stock market, and inflation at an 11 year high.

 

[Atilla]

One thing that probably factored in to the FOMC action is the pending quarter end. The guys I work with who cover fixed income, and particularly the money markets, have been talking about a new round of credit/liquidity issues as banks and funds dump holdings from their balance sheets ahead of the end of their fiscal quarter. This is something that always happens anyway (like mutual funds doing window dressing) but in an already tightish situation it is likely to exaserbate things.

I think it's pretty obvious that the market reaction was one which concerned itself with inflationary issues. Long rates rose, while short ones dropped, steepening the curve. Gold and Oil moved higher. The Dollar came under further pressure. The Fed did mention, if not harp on, inflation. They actually went back to a neutral stance after the rate move.

It's my job to watch the stock market, but even if it weren't, I'd be watching it closely over the next few weeks. That's the reaction I'll be curious to see. If the S&P keeps rallying as it has done, I would actually get worried.

Speaking to a couple of points made in this thread:

Splitlink: To your suggestion that the US "allow the Chinese to peg their currency at a low level", it's not like the US can force the Chinese to change the policy. That said, the fact that the US cut rates actually helps to make the current peg increasingly untenable for the Chinese. They are already having inflation pressures and being forced to raise rates (real interest rates in China are negative, which is encouraging stock market investment). As that rate differential widens, the currency pressure is going to build to an extreme. When that snaps, look out!

Atilla: Cutting government spending would serve the same fiscal purpose as increasing taxes (both reduce money supply). That said, how do you figure the US economy needs to be cooled down? It's already sluggish compared to the rest of the world.

I appreciate governments (politicians) are more interested in popullarity and getting elected than doing the right thing, but to suggest cutting expenditure instead of increasing taxes is pure republican/monetarist doctrine which is the reason why we are here in this place right now.

Question should be what is the right thing to do given our unique set of problems. The pensions and health of millions of people need addressing. This requires expenditure on social services and to reduce excess liquidity raising taxes.

Whitehouse admin has the opposite and worse - cut taxes and expenditure on infrastructure and social services and instead spent expenditure on war. I would simply reverse those policies. Why not have a windfall tax on the oil industry? If Brown can do it here in Great Britain our cousins can do likewise in little ol USA.

In fact I would add Gordon's stealth taxes extracting money from an over heating economy in the UK has helped with the growth and sustained pressure on demand coupled with low wages with the immigrant influx.

I hold the view US economy is facing stagflation and I would maintain that sluggish economy and contain the onslaught of a recession. With oil at $80 inflationary pressures likely to continue along with excessive war expenditure.

I'm afraid there is a lot of pain for US citizens. There is absolutely no way of correcting the twin defecits without a lot painful adjustment. Best thing is for an equitable distribution of suffering. Tax the rich and give it to the poor so they can spend it on the products of the rich keeping them employed and off the streets where they don't belong so we can all continue as we were/are. :cheesy:

US keeps barking about the the low Yuan exchange rate. I would agree US has no control over China so just as I don't interfere telling my neighbour how to run his household I wouldn't expect China to be telling US to address it's twin defecits so that the dollars I hold, I can spend elsewhere and get more for my cent.

This is what infuriates me about US and it's conduct. "The World Is Not Enough!" for this obese beast plundering the globe - dumping it's lard on anywhere and everywhere it takes it's fancy.

Economics and leadership is not about worrying what the competition is doing but how I can develop and improve my products. Let the competition worry about me. US should concentrate on it's technological leadership and superior goods.

 

[jacinto]

I would actually tend to disagree with that. There are probably much better proxies. The Yen is still driven by the carry trade, lot interest rates, and poor economic growth. Inflation is not, to my knowledge, a problem. Quite the opposite, I believe. Meanwhile, China has rising rates, strong growth, a booming stock market, and inflation at an 11 year high.

you are very right on everything except for the peg. once there is a peg, the market always looks for a proxy. and the proxy is the yen (IMHO).

 

[Splitlink]

One thing that probably factored in to the FOMC action is the pending quarter end. The guys I work with who cover fixed income, and particularly the money markets, have been talking about a new round of credit/liquidity issues as banks and funds dump holdings from their balance sheets ahead of the end of their fiscal quarter. This is something that always happens anyway (like mutual funds doing window dressing) but in an already tightish situation it is likely to exaserbate things.

I think it's pretty obvious that the market reaction was one which concerned itself with inflationary issues. Long rates rose, while short ones dropped, steepening the curve. Gold and Oil moved higher. The Dollar came under further pressure. The Fed did mention, if not harp on, inflation. They actually went back to a neutral stance after the rate move.

It's my job to watch the stock market, but even if it weren't, I'd be watching it closely over the next few weeks. That's the reaction I'll be curious to see. If the S&P keeps rallying as it has done, I would actually get worried.

Speaking to a couple of points made in this thread:

Splitlink: To your suggestion that the US "allow the Chinese to peg their currency at a low level", it's not like the US can force the Chinese to change the policy. That said, the fact that the US cut rates actually helps to make the current peg increasingly untenable for the Chinese. They are already having inflation pressures and being forced to raise rates (real interest rates in China are negative, which is encouraging stock market investment). As that rate differential widens, the currency pressure is going to build to an extreme. When that snaps, look out!

Atilla: Cutting government spending would serve the same fiscal purpose as increasing taxes (both reduce money supply). That said, how do you figure the US economy needs to be cooled down? It's already sluggish compared to the rest of the world.

I think I was taken a bit out of context or, perhaps, I did not express exactly what I meant.

The West has condoned the Chinese policy of pegging their currency at a low level, thereby encouraging Western consumers to buy Chinese junk products at prices far below what they would have cost if manufactured in the West. This has created a false impression of an inflation free society with the end result that we are now in debt to China and other Asiatic producers for trillions of dollars. A debt caused, in the main, by unnecessary products, i.e. toys, which by personal experience with my own grandchildren, last a few days and then get binned. Another example, in the gym a friend told me how his wife had bought six sweatshirts at one euro each. We have become heavily indebted because of an insane attitude to getting goods on the cheap and the Chinese cannot believe their luck, or our stupidity.

Refusal to trade with China at a ridiculously low exchange rate would have made them change their policy.

Now the latest on Mettel is that they have apologised to the Chinese for insulting their manufacturers! That is what happens when your source of cheap imports dry up and you have nowhere else to go. I would not be surprised, in the slightest, if the White House had leaned on Mettel because they are the main importers of junk toys.

The British government, or the bank, a few days ago said that underlying British inflation was still around 2-3%. That is an outright lie! Even the biggest fool can tell you that supermarket prices have risen by alarming amounts over the past 12 months.

In the BBC's "The Farming World" yesterday we were told that farmers had seen their milk rise from 19p to 27p recently.

Split

 

[chump]

A credit boom such as we have seen over the last few years has an inevitable counteraction.
Had the Fed done nothing asset prices would have fallen off a cliff ,because at this point fewer institutions would lend to each other ,or to a lot of would be retail borrowers. That's a signal for a cashflow brickwall and anyone who didn't have the cash to sit it out would be technically bankrupt.Given the level of savings rate in the US and indeed some other countries, corporate savings etc...then production and consumption would have dropped through the floor with bankruptcy on a huge scale. Forget moralistic ,dramatic feelings that this is what should happen to cause Joe Bloggs to take his pain and learn his lesson..it would still have been chaos effecting the majority savagely. I think it was the wrong measure to take although they could still convert me by taking the right measure later having bought themselves some time.

That's what all this is now about...buying time for cashflow to unlock and disperse. For risk levels at default to be thinned out.
Lending practice is still going to get overhauled and there's enough anecdotal evidence to suggest it is so that means cashflow is still going to contract ,savings/reserves are going to built back up (to what level I don't know) ,but existing blockages will be untied and risk will be more evenly dispersed into those assets areas not yet subject to confidence issues. That is , commod's ,metals , currency etc. Rationalisation for that will be inflation based for hedging purposes ,but it presupposes that buying demand will stay in place...however ,in a post credit contraction it won't , demand from punters will drop and indeed the moneyflow for punters to use will drop also...that is what a credit boom contraction is all about.
Injecting and increasing moneyflow has been interpreted to be expansionary/inflationary...it isn't when the pressure on price from dwindling buying demand is greater. No action here would have seen price pressure dropping off the measuring scale...expansionary action offsets that ,but does not necessarily remove it altogther. Risk is just in the process of being transferred and mostly it is going to those countries who grew fastest and inflated the most in the last bull cycle .....china just imposed price controls , S Korea have implemented 8 property laws , Iran are still trying to control prices of fuel as are others etc etc...price controls don't work except to defer a problem so watch those fast growing countries like a hawk.
Buying demand sets prices ...in a money contraction enviroment you might be thinking of what happens to buying demand.