Tuesday, October 30, 2007

The World Waits With Wonder

Well, we don't wonder. The Fed will lower rates on Wednesday and we think 25 bps is a Goldilocks number. The market would allow 50 bps or more and when we say the market, we mean the Treasury bill market. Since the T-bills are trading just below 4%, the Fed can move down to 4% giving the Fed room to move 75 bps. In fact, even the 30 year Treasury bond is trading below the 4.75% fed funds rate.

What we are saying is that market is allowing the Fed to do whatever they want, short of raising rates. They can justify a little patience in following the market if they want but if they don't lower rates on Wednesday the Stock market will be in revolt. We don't know if that would be the Fed's motivation to lower rates but we're pretty sure they don't really want to test those waters right now.

What we want to try to understand here is the level of the global markets against the backdrop of the Fed now lowering rates. Even some indexes in the US stock markets are at or near highs and still the Fed is lowering rates. We think the stock market has rallied on something that is in contrast to the liquidity problem that the credit markets seems to be in.

Normally the Fed acts in times of financial stress, something the stock market would be warning about by dropping. Currently, the stock markets around the world are too busy going up to worry about the minor liquidity freeze ups occurring in the credit markets. We have a difficult time trying to balance these two facts. Our premise our the housing market bringing down the economy is unfolding before our very eyes but the stock market is Not paying any attention to date.

While the stock market is waiting for their Halloween Interest Rate Treat from the Fed, the economy seems to be slowing. The consumer keeps spending because it has the credit to do so. In a CNN Money article, the joys of consumer credit are discussed. The article talks about the $915 billion of credit card debt that has piled up.

When the housing market was booming and people were using their homes as ATM's, credit cards could be pumped up and then paid off with a visit to the local mortgage outlet. We suspect that the mortgage genie will not be able to help much with the current build in consumer Debt.

We agree that the consumer credit problem is The problem but it includes mortgage debt. Let's also get this straight--the word is Debt, not credit. People will have to pay off their debt at some point. The article points out that in some countries, people are paying their mortgage payments with their credit cards. We wonder if anyone would have enough room on their "credit" card to transact a mortgage payment.

In the news on Tuesday, the consumer confidence number was quite low and, as the WSJ puts it, "stirs worry ahead of holiday season." Yes, combined with the the "credit" (can we even say debt?) problems and the declining home prices, the consumer confidence number should stir worry and we're talking stir with a big spoon.

See you 25 bps points lower, that would be Wednesday evening.

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