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Greetings Sports Fans! --
Ok, so the credit market hasn't exactly recovered yet. Not even close.
Personally, I believe there's a lot more dirty laundry that will be scrubbed before this situation is cleaned up. In fact, our own U.S. Treasury Secretary Hank Paulson seems to also endorse this view. According to a piece from The Financial Times earlier this week:
The crisis of confidence in credit markets is likely to last longer than previous financial shocks of the past two decades, Hank Paulson, Treasury secretary, warned on Tuesday.
He said the uncertainty in credit markets would last longer than the turmoil that followed the Asian crisis and the Russian default of the 1990s or the Latin American debt crisis of the 1980s.
Mr. Paulson said the likely duration of the turmoil reflected the difficulties of financial services companies in valuing complex assets tainted by mortgage-backed securities.
I couldn't agree more.
Now where does that leave us? Can we expect sub-prime fallout to infect the broader U.S. economy? After last Friday's U.S. Jobs report it would sure seem that way. (In case you didn't hear, economists were blindsided by a loss of 4,000 U.S. jobs after forecasting an addition of 100,000 jobs for the month of August.)
So assuming (like the majority of market watchers are doing) this credit crunch will only exacerbate the weakness that's dancing around the U.S. economy, a Fed Funds rate cut is right around the corner and is destined to save the day - right?!
"Yeah, uhh, well, I'm just not sure about that right now..." as Bill Lumbergh so confidently states in the movie Office Space.
Big Ben the Bailout Man
Next week, the spotlight will shine brightly on the Federal Reserve's main man Ben Bernanke. He's got the joyous task of delivering their monetary policy decision on September 18th - a much anticipated decision.
Predictions from around the marketplace would have you believe a cut in the benchmark Fed Funds rate is a done deal. It's not a question of "if" they'll cut, but by how much. Traders are all asking "will it be between 25 and 50 basis points?"
This is obvious from recent market action - the price of gold is soaring on the idea of a rate cut. Everyone is expecting a cut would further undermine the U.S. dollar; so of course, the euro, Australian dollar and Canadian dollar have all rocketed higher on this same idea.
Have a look at the euro's recent move ...
But what if the Fed surprises the markets just as much as jobs did last Friday? After all, we're talking about Bernanke's Fed, and not Greenspan's Fed.
Bernanke, the "academic" that he is, shows more discipline in following economic models and simulations. Greenspan acted a little more from his gut.
Greenspan rushed in to slice down the Fed funds rate many times during his tenure, driven by his market instinct. Were his actions always warranted? Tough to say. I guess we'll have to read his new book to find out. Mr. G's whirlwind tour starts Sunday night with a stop at CBS's 60 Minutes. Do you suppose it's coincidental that Greenspan's book tour just happens to be during the same week as the most important Fed rate decision in a long time?
Bernanke has been firm with monetary policy, almost as if he's trying to make a statement that this is a new era of Fed decision making - no rolling over just because markets would prefer it.
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