8am. Today we await the Fed rates decision. As the effective Fed funds rate:
is pretty much around 5% for the last couple of weeks the small 0.25% cut is guaranteed. But at the $80 earl and $730 gold we can’t expect more than that.
5pm. I would never ever imagine that they will go that far – not just 50 bp Fed funds rate cut, but also 50 bp discount rate cut! It’s pretty much beating all expectations of the market.
Feds are very smart people, and I think they perfectly understand that things are very bad in the economy. This helicopter cut means that very, very aggressive rate cuts are ahead of us. We will see 1% rate not far away.
Up to now it was a game to save the dollar, to hold rates as long as possible to prevent the dollar meltdown, as the dollar index is very close to historic lows which we must not break.
But we are very lucky. The “Northern Rock” bank run in London was such a big blow to Europe credentials that dollar is not in a big danger anymore. Now we can cut as we pleased.
Now the market melted up, and it’s probably a maximum before a big impressive bear market
10pm. Comparing today cut with the previous similar cut, which happened at January 3rd 2001 I should point at the differences:
- Back then Greenspan didn’t have to prove his anti-inflation credibility, while Bernanke has very short track record
- Back in 2001 earl and gold were not at record highs
- Dollar was not record low
- Back then it was a 50/25 cut, now we got 50/50 cut
- But back then it was an unscheduled meeting, today it’s scheduled
- But we already got an unscheduled cut last month, so the discount rate is already 100bp lower
- The reason for 2001 cut was “weakening sales, production and lower consumer confidence”. That’s it? You must be kidding me!
- This time we already have all this and on top of it “disruptions in financial markets” and “tightening of credit conditions has the potential to intensify the housing correction”
Conclusion: the situation today is far more grave then in January of 2001
11pm. The rate cut back in January 2001 was an amazing shorting opportunity. Especially considering that back then it was totally clear that the market will tank