Wednesday, June 07, 2006

Could there be a 50?

It's been interesting to watch the market lately. It seems like the thought of cheap money disappearing is putting a big hurt on share prices. What's interesting to me is all the "Fed Talk" by various officials about unacceptably high inflation. It is a little bit strange. Oil prices haven't changed for a while, gold has come down by more than $100/oz, housing prices have leveled off, so what gives? Is the fed trying to inflict pain on the market? Are they really trying to mop up the liquidity? When the minutes of the last fed meeting came out, I was astonished to hear that they were considering a 50 bp increase in rates. Well, back then, they were not talking about inflation with nearly the same intensity as they are now. So the question begs itself. If they considered 50 bps in May, why not consider a 50 now? The dollar is under a lot of pressure, so increasing the spread will certainly keep the dollar attractive relative to other currencies. Want to raise risk premia? Bring out the hammer and squeeze out the marginal speculators. Ultimately I don't believe it matters. We have such a highly leveraged, indebted society that over time, even a fed fund rates of 5.0% is too high. As the fed has been raising rates in baby steps, it gets closer and closer to producing a "market event". Something has got to give. Will a large hedge fund blow up a-la LTCM? Will it be a major bank incurring huge loses through it's derivatives trading? Will the stock market crash again? At some point, we have to stop being an asset economy and start being a real economy again. So I say just do it. Pop the bubbles, heal the wounds and lets move on.

6 Comments:

Blogger Rob said...

You are right. They need to pop this bubble to remind the masses that there is no such thing as a risk free profit.
Hopefully people will begin again to honestly evaluate the risk/reward of a potential investment. Of course, the masses have short memories, so that will only last a few years until the next speculative craze.

www.calgary-housing.blogspot.com

6:30 PM  
Blogger njdoc said...

Rob,

Hopefuly, the fed has learned it's lessons on manias.

5:38 PM  
Blogger Metroplexual said...

I am just as confused. Economics these days, ever since 9-11 and fundrates of 1% has put us in unusual territory. But as to 50bp, I think it is not out of the question. I believe it is war on the bubble over at the Fed.

10:54 AM  
Blogger njdoc said...

metroplexual,

I tend to agree with you. I think "inflation" has become a buzz word for the fed to do what it wants. Now that Greenspan is out, perhaps the other fed members are using this as an opportunity to adress asset misprising.

2:49 PM  
Blogger David said...

Ben does not have the guts to do a 50bps.

9:10 AM  
Blogger njdoc said...

David,

I agree with you, however there is definitely an increased "talking down" to the market. I think the fed is trying to adress asset mispricing. Furthermore, I don't think Ben has the autocratic control that Greenspan had, so I think other members will have more of a say in policy. Regardless, the stock market obviously doesn't want any more rate hikes. So, perhaps the fed is trying to save the dollar and thus sacrifice asset prices. I haven't done the calculations as to what would cost more to our economy, a dollar bust or an asset bust. But perhaps it is in the agregate less expensive for asset prices to drop than for the dollar to collapse. I am sure the government has done such calculations.

5:17 PM  

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