Thursday, October 30, 2008

So how is that rate cut helping you?

Good evening folks!

Today was an interesting day. Stocks were choppy throughout the day before ending the day with a nice bounce. We got a negative print on the GDP of -0.3 which was better than expected:

"Oct. 30 (Bloomberg) -- The economy suffered its biggest decline since 2001 in the third quarter, ushering in what may be the worst recession in a quarter-century and boosting the chances of Barack Obama and fellow Democrats in next week's elections.

Gross domestic product contracted at a 0.3 percent pace from July to September, according to a Commerce Department report today in Washington. The decline was smaller than forecast and stocks rose. Even so, the economy may be in for a larger drop this quarter after the record two-decade expansion in consumer spending came to an end.

Consumer spending dropped at a 3.1 percent annual pace, the first decline since 1991 and the biggest since 1980, after President Jimmy Carter imposed credit controls. The median forecast was for a 2.4 percent drop."

Quick Take:

The market seemed to focus on the fact that the 0.3 drop was better than expected. What they should be focusing on is the fact that consumer spending dropped 3.1% which was the biggest drop since 1980. Remember folks, the consumer represents 70% of the economy. If they fall off a cliff, the economy is toast. Consider this drop in Q3 to be a very ominous sign of whats to come.

Rate cut

So let me ask you a question. How is yesterday's rate cut helping you? Answer: Its not. It does of course help the bankers. What a shock right? The proof is in the charts. Think mortgage rates will drop following the rate cut? Think again:

Now lets take a look at the 10-year today a day after the rate cut:

Final Take:

Thanks for the help Ben! Now its even more expensive to buy a house. Gee, I am sure glad you got another chance to make your banking buddies even more rich after cutting rates for them! What a putz.

These cuts will do nothing but help Wall St's balance sheets. Rate cuts will no longer help mortgage rates because banks are scared to death to lend right now because they are insolvent and have no desire to lend to a tapped out consumer.

The metioric rise in the 10-year over the last few days is something to take note of. If this trend continues, mortgage rates are going to rise considerably. It appears the bond market is starting to rumble. What I find interesting in this trend is the 10-year is going up on days when the market is down. The exact opposite should be happening because investors should be flying to the safety of treasuries on down days.

Think the Fed is done cutting? Think again:

"Oct. 30 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the central bank may cut the benchmark interest rate close to zero percent from the current 1 percent level should the economy remain weak.

``We would do it because we are concerned about weakness in the economy,'' Yellen said today after a speech, responding to an audience question about the impact on the economy should the Fed reduce the main rate to as low as zero. ``I think we could, potentially, go a little bit lower than'' 1 percent, she said in Berkeley, California.

Recent data on the U.S. economy is ``deeply worrisome'' and the government should consider new ways to help homeowners and stem foreclosures, Yellen said in the speech."

Bottom Line:

If you have ever had a desire to visit Japan, I advise you that you wait because the USA is going to look just like it very soon. Why waste the money on flying there when all you will need to do is look out the window in a few months to see what its like over there?

Folks I say this because it appears we are following the Japan deflation playbook to a tee. Japan ended up with zero interest rates and zombie banks after their deflationary spiral. Sound familiar? We are only 1% away from being right there with them. The economy is detiorating rapidly. The consumer showed signs of collapsing in the third quarter. Its going to be a grinch style Christmas this year!

Company after company are announcing massive layoffs. Hell, even the US postal service announced they are going to layoff 40,000! The situation looks to be getting more dire by the minute despite the recent stock market rally. Yellen's speech above tells me the Fed is scared ****less.

There are reprocussions to zero interest rates. Money markets lose their profitability. Consumers on fixed income will become paralyzed and may not even be able to pay their bills as their return on equity vanishes.

The stock market continues to act erratic as hell. "Sybil" continues to beat to her own drum. Its almost impossible to predict whats going to happen on a day to day basis. Day trading at these levels is basically gambling at this point. We can rise and fall hundreds of points in a matter of minutes. Albert Einstein couldn't come up with an accurate short term trading thesis in this trading environment.

Long term its pretty easy to see how this is all going to end in a disaster.

Stay Tuned!


ZMonet said...

Thanks for the continued interesting write-ups Jeff. Inflation, deflation, inflation, deflation...It seems like this battle rivals the volatility of the stock market. I tend to agree with you and other commenters that we'll have a dosage of deflation and then, when the government isn't able to act quick enough, right into a good doage of inflation. In the mid-term, I got back into QID today at $64/share right at the market close. We could go sky high from here, but I needed to put a hedge back on, especially because I think we're due for a selloff.

Avl Guy said...

I feel for folks who convinced themselves, mentally, that they're absolutely 'helpless' and 'unable' to deal with this Global Debt Unwind and all the un(?)intended consequences of the Hank-n-Ben Show, and who ptay, chant and expect Obama (or McCain) to 'Rescue' them. January thru March are going to be a dreary drum roll of lay-offs and reduced spending, while January also brings the dreary corporate earnings reports better reflective of the collapse in comsumption after the 10-day market dive of Oct1-10.
It's going to be a dreary winter , Jeff, for anyone on a fixed income or tight budget.
And have you noticed the magical math on 'stimulus' from low gas prices? The Delusionists run the math as if the gas spike lasted a full year (and hence we happily now have a full year of $$ 'stimulus') instead of basing it off of the # of weeks the price spike actually lasted.

Jeff said...


Your welcome!

We are due for a pullback in equities so QID could work nicely tomorrow.

The inflation/deflation arguement has been a heated one on the internet. I think both camps now realize we are going to get both!

Jeff said...


Well Said

I am afraid we might see a huge GDP drop in Q4. 5% retraction perhaps? I totally agree with you that early next year is going to be just as bad

The gas stimulus was always such a joke to me too. Like that extra $100 a month in your pocket is going to matter when you are in debt up to your eyeballs.

Larry "goldilox" Kudlow likes to call it the great tax cut. Where is Goldilocks now Kudlow? I think she is outside on her knees puking because she had too much to drink!

Jeff said...

JApan cut the Yen less than expected and is now strengthening versus the dollatr

Nikkei took a huge dump at the close. Down 450+ points.

Currency trader on Blomberg expects the Yen to be at 90 versus the dollar. This would produce a massive yen/carry trade unwind.

Tomorrow could be an interesting day. Currencies are bouncing all over the place.