Don't Uncork the Champagne Just Yet
By omitting a few key words from their most recent statement, the Fed led Wall Street to the premature conclusion that the next move in interest rates will be down. With the economy clearly headed for recession, there is no doubt that the Fed would like nothing more than to do just that. However, given that it wants to pretend otherwise, and considering the damage it would do to the already shaky U.S. dollar, an actually rate cut seems highly suspect.
Rather than offering a true assessment of the current economy, the official statement that follows Fed meetings has become a political farce used primarily to placate markets. For the bond market and the dollar, the Fed pretends that inflation is still under control, and that the Fed remains poised to snuff out any inflationary sparks should they appear. For Wall Street, the housing markets, and the economy in general, the Fed pretends that the economic expansion will continue, but shows mild concern that growth might falter.
If the Fed were to admit that the economy was in trouble, the stock market would sell off, led lower by a collapse in the dollar and a potential spike in long-term interest rates. With its parsed language, the Fed preserves the pretense that all is well while simultaneously allowing for the possibility of future easing. So by validating the goldilocks scenario, but holding the door open to future rate cuts, they can have their cake and eat it too.
One of the biggest bones the Fed threw to the markets in its last statement was its failure to directly mention the problems developing in the mortgage market. This omission suggests that the Fed is not overly concerned with the subprime crisis, or the possibility of that weakness spreading into the broader mortgage market or the economy in general. In other words, a problem isn't a problem until the Fed says it is. This ignores the fact that the Fed is reluctant to actually identify a problem, no matter how severe; for fear that such recognition alone might spark an even greater panic.
So with the apparent blessing of the Fed, Wall Street can now borrow a page from the Las Vegas promotional playbook and claim that "what happens in sub-prime stays in sub-prime." Unfortunately, like an out of work showgirl with a folder full of embarrassing photos, the problems with subprime will soon show up on everyone's doorstep.
Think of the Fed as a juggler trying to keep five balls in the air simultaneously. Those balls are the stock market, the bond market, the dollar, the housing market, and the economy. If the Fed tells the truth, all the balls will come crashing down. So it says what it needs to say to keep them all in play. However, my guess is the first ball to fall will be the dollar, which sold off immediately following the release of the Fed's statement. Compounding the problem is a recent report that China may no longer be willing to expand its foreign exchange reserves. This means the dollar ball is about to get a lot heavier. Once the dollar breaks down the bond market ball will be that much more difficult to keep aloft. Once it falls, the rest will soon follow.
The bottom line is that waiting
for the next rate cut is going to be a lot like waiting for Godot.
The Fed wants everyone to think one is coming, but will likely
never deliver the goods. If I am wrong and the Fed actually does
cut, expect the easing cycle to be extremely short-lived, as
an embarrassed Fed will be forced by the bond and currency markets
to quickly reverse course.
For a more in depth analysis of the U.S. economy and why it is in so much trouble, read my new book "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.
More importantly, make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com, and subscribe to my free, on-line investment newsletter.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange