The Fed Got it Wrong/Market Meltdown

It never fails. I go on a business trip and all hell breaks loose in the markets! Oh my, where do I begin. Folks, we are in some serious trouble. The Fed really screwed up yesterday. The market is rapidly losing confidence that the Fed is acting in an appropriate manner. The way I see it, the Fed has officially lost what little control they had on the markets.

As a result, stocks got pummeled today. The DOW and Nasdaq were both down over 3%. Bloomberg reported that this has been the worst June on the DOW since the Great Depression.:

"June 26 (Bloomberg) -- U.S. stocks tumbled, sending the Dow Jones Industrial Average to its worst June since the Great Depression, as record oil prices, credit-market writedowns and a slowing economy threatened to extend a yearlong profit slump."

I want to highlight some of my biggest worries:

The Fed

So why the big selloff today? I blame a lot of it on the Fed's actions and their statement yesterday. The Fed held interest rates, and then came out with a wimpy wishy washy statement that was not nearly hawkish enough on inflation.

We should have raised rates yesterday guys. I realize this puts us into a serious recession but it HAS to be done. The bond market is going to do it for us if the Fed doesn't. They should have just pulled the trigger and taken the hit.

The way I see it, the Fed looked very weak in the eyes of the world as we held rates and basically ignored inflation. Our currency weakened as a result, and the speculators ran wild in the oil markets as oil hit $140 a barrel.

The world is starting to see how vulnerable we are right now. I think many countries would love to see us take a big bite of humble pie after so many years of prosperity and arrogance. We are needed by many countries because of our massive wealth as a consumer. However: Inflation, our declining rate of consumption, and globalization is starting to make us less of a player in the global market.

Because of this, I believe the world will start taking some shots at us. There are signs of it already happening.

The ECB is going to raise rates at their next meeting despite the fact that several EU countries are in bad shape economically. This is the proper move as inflation runs at near 4% in Europe. However, don't think for a second that Trichet and his crew aren't trying to show up the Fed right now. Raising rates and watching the Fed squirm puts a little smile on each of their faces.

The rest of the world isn't helping either. Libya announced they would be lowering their oil production today. OPEC has done nothing to really help us with our oil problem. Lets face it, we are not well liked in the world and these potshots will continue throughout this downturn.

The dollar

Where in the hell is the dollar going to be after the ECB hikes rates? If the dollar crashes, all sorts of frightening scenarios are on the table as far as I am concerned. Here is a good example of one although I am not a believer in Hyperinflation.

The way I see it, a depression is possible if the Fed doesn't take a U turn and raise rates. I don't agree with some of that article, but 15% interest rates are a distinct possibility IMO. If this happens, housing will be absolutely destroyed. However by doing so, it takes hyperinflation off the table because it will force a deflation of all assets.

Now you may ask why would rate increases prevent hyperinflation? Because it would drain the liquidity out of the economy and allow us to reset the value of assets back to affordable levels. The debt bubble would be deflated and we could start working on recovering from this tragedy.

Buffet fears Inflation

Warren Buffet is singing a similar tune on inflation.

"Buffett, the billionaire investor behind Berkshire Hathaway (BRKA, Fortune 500), fingered "exploding" inflation Wednesday as the biggest risk to the economy. "I think inflation is really picking up," Buffett said on CNBC. "It's huge right now, whether it's steel or oil," he continued. "We see it everywhere."

Indeed, the prices of gasoline and milk have shot past $4 a gallon, and Dow Chemical (DOW, Fortune 500) has announced twice in the past month that it's raising prices to offset soaring commodity costs.

Yet Bernanke's Fed signaled Wednesday that, after nine months of interest rate cuts and expansive lending to the financial sector, it isn't eager to reverse course and push rates higher to try to tamp down rising prices.

Why? Because the Fed remains skeptical that high commodity prices will ripple through the economy, leading to broad price hikes and big wage increases.

"The committee expects inflation to moderate later this year and next year," the Federal Open Market Committee said in holding the fed funds rate steady at 2%, though it did note that "uncertainty" remains high and suggested inflation concerns could rise."

Final take:

What in the hell is wrong at the Fed? How can they not see the exploding inflation that is flattening the consumer? Inflation will be moderating? How does inflation moderate with a weak dollar and wild speculators taking prices higher as a result? Recall one of my old posts where a friend told me steel prices had gone from from .28 a pound up to .64 a pound in 6 months.

THE FED CANNOT IGNORE THIS INFLATION CRISIS!

This is not the time for the Fed to be making mistakes. One bad step and we could be heading right back to the 30's. I am extremely concerned about what I am seeing right now economically.

Bottom Line:

Today was ugly and no one wants to own stocks right now. Goldman really got things started today with this downgrade on a few banks. They also cut GM to a sell warning that they will need to raise capital as the automotive industry continues to take a beating. Gm hit a 53 year low today folks. A 53 year low!!! Unbelievable.

I am at red alert when it comes to where we are in the economy. The debt bubble is about to blow and its not going to be pretty.

I had been thinking that this wouldn't happen until after the election. After this week, I don't think we are going to make it through the summer.