Aug

16

 Ben Bernanke gets a big test only one and a half years into his tenure. The risk of an unscheduled rate cut is appearing to kowtow to Wall St, soon before a likely party change in the White House. But when Main St. gets hit (i.e., all the poor credit borrowers likely to decide the election) is that a real test of apolitical FED CFC B/R?

The 10,000+ absolute return operations must have mostly been leaning long in prior four years. Those in trouble who throw in the towel on 10% decline are less likely to be successful in future OPM endeavors than those who wait for big boys to fail alongside. Lehman? Bear? GS? The latter scenario seems the kind that could mark a bottom.

James Lackey writes:

I find it hard to believe that in 2000 if the Fed would have lowered rates after the NASDAQ broke in March, rather than raise them another 50bps, the markets would have gone back to NASDAQ 5,000. I find it hard to believe if rates are lowered to the current four percent 90-day rate, that subprime house flippers and Cape Coral FL home prices will rise anywhere near old highs much less a new high in the next many years.

The damage is done and that game is over, similar to the 2001 Laurel Kenner and Victor Niederhoffer report on the death of day trading. The rates went from over six percent to one and back to five percent before stocks acted anything like the prior period. It took more than five years even though the markets or index went from 775 back to 1500. It was in retrospect a slow grind up, which is funny as that is now looked at as bad because people were accustomed to low volatility.

Yet it’s the other side of a big cycle. Whenever the banks lose their ability to profit from lending — in 1999 tech didn’t need the regulated banks’ money; they went to the markets and IPOs. And in 2005 home owners didn’t need banks; they went to mortgage brokers backed by the markets.

It is my guess that it’s the Fed’s job to return the business back to their clients, their regulated banks. 


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