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The Fed Translated….

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.   That’s the lowest that it’s been since June of 2004.  If you recall, former Fed Chairman Greenspan is being blamed, in part, for causing the credit crisis by leaving interest rates too low for too long.   How low?  1%.  For how long?  From June of 2003 to June of 2004.

The pace of economic activity appears to have slowed markedly,  that’s a nice way of saying that the economic reports we’ll see for October are much worse than what they were for September owing importantly to a decline in consumer expenditures the consumer finally is realizing that they can’t do like the government and consistently spend more than they make. Business equipment spending and industrial production have weakened in recent months this isn’t just a housing problem any more, it’s spread much further, and slowing economic activity in many foreign economies our economic problems have spread all over the world is damping the prospects for U.S. exports when other countries are in bad economic straights, we can’t export our way out of a recession . Moreover, the intensification of financial market turmoil is I don’t think it’s a mistake that they use the present tense (is) rather than the past tense (has) – the turmoil is ongoing likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit Yes, I think I know what you’re thinking – aren’t all of these bailout programs supposed to get lenders lending and make credit easy again?  More on that later.

In light of the declines in the prices of energy  I saw $2.61 a gallon for gas this morning – but very few people are talking about why they have come down – because of lower demand due to slumping economic activity and other commodities and the weaker prospects for economic activity there’s a brilliant statement – weaker prospects?  Gee, I think my high school junior could see that! the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.  I think they’ve been saying that they expect inflation to moderate like that for months and months.

Recent policy actions, including today’s rate reduction I heard it described this morning that a rate cut won’t hurt but probably won’t help either, coordinated interest rate cuts by central banks we aren’t the only ones doing this, extraordinary liquidity measures the money printing presses have been running so much we’ve had to buy more ink!, and official steps to strengthen financial systems we’re trying to figure out how to put Humpty Dumpty back together again!, should once again, the Fed never uses words by “accident,” I think it’s no coincidence that they said should rather than will. help over time to improve credit conditions and promote a return to moderate economic growth but do they say when?. Nevertheless, downside risks to growth remain that’s a nice way for the Fed to say that it could get worse.  The Committee will monitor economic and financial developments carefully good, I’m really glad to know that Hank and Bernie will be watching CNBC and will act as needed as needed?  Has anyone asked the question of whether the Treasury and the Fed really have the tools to fix this mess? to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.  At least it was a unanimous vote, that makes me feel better.   :-)

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.

In case you couldn’t tell, the bold printed items are mine.   Now a couple more thoughts on what the Fed did and said today:

1. The Fed has now officially acknowledged that things aren’t pretty.   I think that when you read what I’ve translated, you can see that they aren’t painting a very pretty picture of what’s happening right now.

2. They are doing everything in their power, but how does the saying go?  “When all you have is a hammer, every problem is a nail.”

3. The markets are not behaving according to normal fundamentals.   Commodities are moving in the same direction as stocks (when they usually move in reverse).  Look at what the stock market did yesterday – up 900 points?  And why?  Apparently it was because GE sold some commercial paper (loans, not actual paper).   Normally there is a .5% difference between the 30 year fixed and the 15 year fixed but today that’s only .125%.

4. Whereas the bailout programs are “working” in that banks are getting money, they aren’t “working” in the sense that the banks are turning around and loaning the money out yet.   Why not?  Because they are still, and I believe rightfully so, concerned about the state of the economy and they are afraid that if they take the money and loan it out, they’ll still go under.

All of this is a sign that the markets are “conflicted” and until the markets get back into some sort of normal market, we’re going to see moves that don’t seem to make sense and we’re going to see nauseating volatility.   If someone could invent motion sickness pills for investments, I think they could make a good mint off them right now.

I’ll stay in touch, stay tuned.  Oh, by the way, the fat lady isn’t even in the auditorium yet.

Tom Vanderwell

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  • 13 comments

    13 Comments so far

    1. David Shafer October 29th, 2008 2:01 pm

      Tom,
      Please explain how the banks make money if they don’t lend? And how not lending keeps banks from going under??

    2. Sean Purcell October 29th, 2008 2:54 pm

      Tom,

      Another well done analysis. You translate “Fed speak” like it’s a second language! :)

      I have seen some graphs lately that belie the idea that commercial spending is not happening and I find it very curious. I don’t know how to put a graph in comments so I will try to get it up on my site and backtrack. I would definitely appreciate your opinion on what it means.

      Also, you said “When all you have is a hammer, every problem is a nail.” This is paraphrased from Baruch’s quote: “If all you have is a hammer, everything looks like a nail.” I know this may be picky, but the two conclusions are markedly different; unfortunately our fearless leaders only see your construction. The difference comes down to this: Every problem is NOT a nail, they only begin to look like nails. Our government continues to bang away, however, missing the nuance altogether.

    3. Tom Vanderwell October 29th, 2008 5:09 pm

      David,
      Long term, you are absolutely right, but from the inside, I’ve seen decisions that show that the people who are making decisions are looking at long term as the next 3 months. With banks right now, it’s all about accumulating cash. Do they make money by sitting on the cash? Only in as much as they earn in investments.

      Cash is king because cash allows them to absorb future losses and cash allows them to keep the doors open (and keep paying the big wigs their big bonuses). If they don’t loan out their $25 Billion that they got from the Fed, then they won’t go under. If they loan out their $25 Billion and they experience mark to market and actual losses of something similar to the Lehman portfolio, they’d be out $23 Billion (round numbers) and be back at the Fed trough for more. Does that make sense?

      Tom

    4. Tom Vanderwell October 29th, 2008 5:21 pm

      Sean,

      E-mail me the graphs, I’ll throw up another post with some thoughts about it.

      I’m familiar with the original quote, I purposely “paraphrased it” to illustrate my feelings about our government. They are dealing with problems of a variety of flavors. Liquidity, solvency, profitability, credit tightening, bad economic reports, deflation, stagflation, declining house prices, rising delinquencies, falling dollar, rising dollar, falling commodities, rising commodities, rising oil prices. All are problems we’ve faced and or are currently facing. The answers are essentially two that the Fed is giving us:
      1. Cut rates
      2. Print money

      They’ve got two hammers so all of the problems are nails…..

      Tom

    5. David Shafer October 29th, 2008 5:45 pm

      Yes, your explanation makes sense. Now does the strategy make sense? no! Well if they don’t loan money to dead beats (sub-prime) and don’t insure credit default swaps (see my latest post) then they should do fine with loaning money. Right now I see them purposely driving good companies into bankruptcy some of which friends of mine own. So, I am not in the mood for seeing their side of things!!!!!

    6. Tom Vanderwell October 29th, 2008 5:56 pm

      David,

      I’m not defending their position, I’m merely explaining it.

      I had a local Realtor tell me that he appreciates my work but because of decisions my bank has made that have (according to him) cost some of his clients their companies, he’s not real inclined to do business with me. My response:
      1. These are times that none of the bankers that are currently living have ever seen before.
      2. I don’t agree with all of the decisions that have been made.
      3. I believe that when the dust settles, there will be a lot of decisions that will be looked at in the rear view mirror and it will be said, “What in the world were we thinking?” (The family version)

      Once the paranoia settles down (and we’re a long way from that) then we’ll be able to see some common sense true cash flow underwriting and lending.

      Tom

    7. Sabrina Smith October 30th, 2008 1:51 am

      Great post. Very informative and very unique..thank you for the tips

    8. David Shafer October 30th, 2008 5:29 am

      Tom, not blaming you for this. Only, trying to get a rational answer, where there is none!!! The question is, are the banks playing possum to take advantage of the government throwing money at them? Because that is what I am beggining to conclude. I was very ambivalent about the bailout, and this would just confirm my fears!

    9. Tom Vanderwell October 30th, 2008 5:37 am

      David,

      I know you aren’t blaming me, I’m not nearly high enough up the food chain to have that kind of impact.

      I know what you are saying in terms of the playing possum, I’ve heard others who have speculated as well. I’d be hard pressed to believe that the top bankers (Jamie Dimon’s “equals”) would be calloused enough to out and out say, “Let’s stop lending so that we can get more government money.”

      I think it’s more along the lines of “Holy smokes, this is really ugly, we better hang on to all of our cash so that we can hopefully make it through!”

      I too am very ambivalent about the bailout. I firmly believe that we are going to look back (once this is “over”) and say, “Wow, that was really ugly and we should have done it differently.”

      Unintended consequences is a phrase we’re going to hear more and more of.

      Tom

    10. Thomas Johnson October 30th, 2008 7:37 am

      My view of the bankers in aggregate is that when Paulson forced them to take the govt. preferred deal, it locked everything down.

      The bankers have seen that the biggest most successful players in their industry just had their shareholders equity positions diluted by 20%-25% coupled with an unforeseen demand on future cash flow due to the preferred dividend imposed by Paulson’s special preferred. At some point, the big nine could be forced to suspend all common dividend payments, which would probably have no small effect on share price(and executive stock options). You have Sarbanes-Oxley out there and I do not recall it being suspended for the big nine when they were forced to dilute their shareholders, the owners of the company. So they sit earning 1% with a 5% obligation to Paulson. This is just the latest gyration. Nobody knows what the offshore assets look like(is that Tier 3 assets?).

      It’s like that Laurel and Hardy scene where they are trying to go through a door at the same time “After you, no after you” Only everyone is just avoiding the door altogether. Where are the Marines or the NYFD when you need them? They would charge through the door for us…

    11. Sean Purcell October 30th, 2008 7:38 am

      David,

      I am beginning to agree with you. I am not a conspiracist – I generally believe you need only follow the money to understand most issues – but this entire “meltdown” and the implied world economic collapse is becoming more and more illusory to me.

    12. Tom Vanderwell October 30th, 2008 7:55 am

      Sean (and David),

      I’m going to sound like Bawld Guy when I start talking about my Grandpa, but I have a distinct memory of when I was in 2nd grade they came to visit us (we lived near Chicago at that point). We took them to the Sears Tower and it was a beautiful clear day where you could see for miles. We got off the elevator at the top, my Grandpa walked to the window, took one look out, turned as white as a ghost, went over to a chair by the elevators, sat down and never moved again.

      How is that like what’s going on in the markets? Was my Grandpa in any danger? Nope, he was as safe as could be. But he took a look into the abyss and the idea of falling 104 floors to his death scared him half to death.

      I think that’s what has happened in the markets. They got a glimpse of the abyss (some were closer to the edge than others) and it scared the common sense out of them. But this time, rather than railings and 3 inch thick windows keeping them in, it’s just a single handrail. Some of the people who saw into the abyss leaned over for too good of a look and fell in. Others ran shrieking in horror before they got even within 100 ft. of the abyss.

      I think the danger was and is there, but I believe the financial world is so complex that even the most educated of us can’t fully comprehend it.

      Does that make sense?

      Tom

    13. Scott Hack October 30th, 2008 7:57 am

      All that bold text is making my eyes bleed!