|
|
 |
The First Cut Is The Deepest
Posted on 09/20/2007 21:36:44 | Link | Post Comment
|
Issue 35: Thursday, September 20, 2007
The First Cut is the Deepest
|
|
Today's comment is by our guest currency commentator, Chuck Butler. Chuck is the President of EverBank World Markets and writes about currency markets in his "Daily Pfennig." You may have met Chuck at our Total Wealth Symposium in Panama last May, or read his comments in the Wall Street Journal, MarketWatch, USAToday, the Chicago Tribune and many other publications. We're very excited to share his expert thoughts with you in My Two Cents.
Dear Currency Followers,
Well, as widely expected, the Fed Reserve cut the Fed Funds and Discount Rates. What wasn't expected, except from me, was how large the cut would be...50 Basis Points (BPS)! And that's what the Fed did on Tuesday: 50 BPS!
Borrowing a line from the Cat Stevens song, later made popular by Rod Stewart and Sheryl Crow, the Fed decided to make the "first cut is the deepest." Or maybe Big Ben is a fan of the Rocky and Bullwinkle show, and decided to imitate Bullwinkle..."hey Rocky, watch me pull a rabbit out of my hat!"
Did they panic? I believe so. But then they could have opted for 50 BPS to be "one and done." I did three interviews Tuesday afternoon after the rate cut, as business writers wanted to know what I thought about the size of the cut.
I told the roving reporters that the Fed had hit the panic button. I would rather they kept their eye on the inflation ball, than come to the aid of the markets. But I also think the Fed cut 50 BPS thinking that they would detour around a recession.
The Wheels Are Already Spinning
It's too late baby now, it's too late. The wheels are already in motion for that major slowdown / recession. And there are a few things that really scare me about this rate cut, but I'll get to that in a moment.
First, I have to tell you that the currencies went hog wild after the news of the cut. The euro jumped up one cent, the Canadian dollar ("loonie") jumped over a cent to come within spittin' distance of 99-cents! And the high yielder's, now knowing that their positive interest rate differentials had opened up like the Red Sea, rallied like there was no tomorrow!
I received a couple emails yesterday from people telling me that I was wrong to say the dollar would get taken to the woodshed once the Fed began the rate cut cycle, because in 2001 that didn't happen.
Well let's consider that. To do so, we need to take a trip back to 2001. At the time, the only economy that was worth investing in was the United States. Also, the world was basically attempting to get out of their own respective recessions, so their rates were low.
Does that sound anything like what's going on now? Not exactly. We have strong global growth, higher interest rates than the U.S. around the world, and our Current Account Deficit now accounts for over 6.5% of GDP. Back in 2001 it was around 4.5% of GDP
|
|
Advertisement
|
|
What's Scary about this Rate Hike
Okay, enough of that. Let me tell you what scares me about the 50 BPS rate cut.
- It doesn't do anything to help the liquidity / credit crunch.
- It allows inflation to take hold even more.
- Stocks had better start kicking some tail to attract foreign investment, because our deposit rates aren't going to!
The things I like about the rate cut? Well, as evidenced by the move yesterday, the currencies are stronger. Gold is higher. In fact, gold soared right after the rate announcement!
I had written that I thought the Fed would come back next month with another rate cut and then one in December to finish the year. The wording of the Fed statement has me reconsidering that thought. But then, as we go forward, if we begin to see data that indicates the economy is eroding further, the markets will undoubtedly second guess the Fed. And the Fed will react.
What Ticks Me Off About this Fed Move
What really ticks me off about the Fed cutting rates is all right there in black and white. The Fed stated that, "some inflation risks remain." Well if risks remain, then why are you cutting rates?
Anyways, as the dust settles on the rate cut this week, we'll have all the usual suspects giving their opinion on how they see the whole shootin' match. Of course I didn't have time to digest the news, as I was called to do interviews with my opinion immediately after the rate cut announcement! But, I doubt I would have said anything different.
So, there you have it. The big question now is: Was this really a "one and done" rate cut? We won't know that for sure until we move along into October and see the color of the data here in the United States. I'm thinking that it will continue to disappoint, and the Fed comes back to the rate cut table, but then I don't have any information that you don't. It's just my opinion!
Have a Wonderful Thursday!
Chuck Butler, EverBank
|
|
Advertisement
Will you know where to look for it when it comes?
Will you know what to do when it hits?
Find out how to turn these devastating market shocks into spectacular financial gains.
Click here to learn more.
|
|
Making "Cents" of the Headlines
Heads I Win, Tails You Lose
What Happened:
The Federal Reserve announced its much-awaited decision on interest rates on Tuesday. And as pundits expected, the Bernanke Fed followed in Greenspan's well-worn footsteps and cut rates. Only the Fed decided to cut rates by 50BPS, instead of the expected 25BPS.
How Markets Reacted:
You could say the big players on Wall Street were pleased. The Dow soared 300 points. But predictably currency traders sold off dollars with a vengeance, and dropped the buck to a 15-year-low. Meanwhile gold and the "black gold," oil soared to fresh highs.
What We Say:
A half-point cut puts the U.S. firmly at the forefront of the easing cycle of G7 monetary policy, and further reduces the buck's charm over the medium term.
When the sub-prime crisis started, the USD benefited from its traditional safe-haven status and staged a rally on the back of heightened risk aversion. It was also thought that the sub-prime crisis could be contained to the financial sector.
Now, however, early evidence indicates the contagion has spread to the real economy. While housing markets in countries such as New Zealand and the U.K. are arguably more overvalued than the U.S. (and U.K. mortgage rates are already creeping higher on the back of the sub-prime crisis), the consensus is that the impact will be felt greatest in the U.S., the origin of the problem. It is hard to see the USD rallying against such a backdrop.
Of course, the USD can't sell-off for ever: the USD index (the USD compared against a basket of currencies) is already bouncing around 15-year lows, while EUR/USD is hitting fresh all-time highs, with newspapers printing stories about how expensive it has become for Americans to travel to Europe. Thus, we would warn against buying into stories of a precipitous collapse in the greenback. For the time being, however, it does look like things are going to get worse before they get better.
|
|
World Currency Watch
98 S.E. 6th Ave, Suite 2
Delray Beach, FL 33483
Phone: 1 800-682-1472
Fax: 561-272-5427
Email: info@worldcurrencywatch.com
(c)2007 Sovereign Offshore Services LLC. All Rights Reserved. Protected
by copyright laws of the United States and international treaties. This
Newsletter may only be used pursuant to the subscription agreement and
any reproduction, copying, or redistribution (electronic or otherwise,
including on the world wide web) , in whole or in part, is strictly
prohibited without the express written permission of Sovereign Offshore
Services, LLC. 98 South East 6th Avenue, Suite 2, Delray, Beach FL 33483.
|
|
|
|
<< My Home | The FX Markets Blog Home