Monday, January 14, 2008

On Going Issues

1) On Thursday Bernanke started to use the kind of language that I was hoping he would use. Hints that the FED would be highly responsive to further deterioration. Thats the kind of assurance that helps smooth the non-linear waters of the market. Sometimes, a big move or the potential for a big move can have a stronger effect than several smaller moves of equal total magnitude.

2) We'll get retail sales tomorrow. Thats the last piece of the January data set I expected to justify strong action. If retail sales is as ominous as I suspect we should start talking about 50 bps with a strong bias towards cutting.

I am also not completely and totally immune to arguments that push 75bps. Though I would have substantial hesitation on many fronts including the risk of spooking the market. I don't think we have seen a cut above 50 bps since the early 1980s.

3) I have mixed feelings about the increasing realization that subprime was just the canary in the mine shaft. Alt-A mortgages, credit cards and CDS on corporate issues are next. There is some sense vindication in that this is turning out not to be a housing bubble but a credit bubble all around. However, of course it would have been better to be wrong.

12 comments:

Paul said...

One of the key issues that few are talking about is that the money supply has not grown in the two years since Bernacke took office.

All this talk of easy money now is overblown. Maybe from 2003 to 2005, but not now. Futhermore, as the Fed has restricted credit the price of gold has soared.
The question is why?

I think there are a combination of reasons.

One, in times of turmoil, investors seek the safe haven of gold. Russia, Iran, Venezuela and the Islamofascists want to undemine the World Economic Order based on Capitalism. They are purposely creating chaos, particularly relative to the oil markets. They seem to be threatening a worldwide energy shutdown, so investors are getting more than a little nervous. Even more nervewracking, has been the wimpy response so far from the Bush Administration and the absolute denial of any problem by the Democrats.

Second, the world economy has doubled in the last five years so there is considerably more demand for raw materials and commodities.

Third, America has so hamstrung itself with its psuedo-environmental regulations to the point that America cannot ramp up its supply sufficiently for the production of products and commodities to meet demand. For example construction costs have approximately tripled over the last eight years due largely to increases in those products like lumber, steel, plywood, drywall, piping, etc that can be sold like commodities on the world market. In the industsry, the reasons given for the increases has been "shortages", yet those shortages never appeared like this in years past when there was a construction boom.

Leaving the market to works things out or costricting credit further would only exacercate our problems and leave us more vulnerable to attack from the Islamofascists and their friends.

The true source of these economic problems I don't believe are financial, they are elsewhere.

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