So let's see: inflation hits 4.1% in 2007 after a 5.3% increase in M2 supply the previous year. Now increase M2 by 5.8% in 2007, combine that with anemic GDP growth, let higher grain prices work their way into meat and dairy products, let $3 gasoline percolate through the economy, and don't we get a 6% inflation in 2008? Now add in all these countless new loans to troubled banks, spruce that with $150 bln that Bush's bancrupt government does not not have and that must come from Bernanke's printing press, and will not 7% inflation projections look conservative? [more]
Several unlikely developments occurred in the past 30 days. [more]
Now, I'm going to make a politically incorrect prediction. There will be no recession in 2008.
So Bernanke decides to cut rates to zero, and investors react by getting into bonds? I'm not talking about inflation-adjusted bonds, I mean the ordinary bonds that now pay you 3.43% or something of the sort? What kind of idiot wants to invest for 3.43% when inflation was 4.1% before the rate cuts and before the grain prices percolate through the economy? Is there some bond fund investing in 30-year treasury slime so that I could short it?
Bernanke's decision to cut rates by 0.75% is very noteworthy, in a way. Indeed, think of this: cutting rates to inflate housing is nothing new. Cutting rates in response to a 1987-style market crash is also a common practice. But announcing a huge rate cut in an urgent meating one week ahead of schedule in response to a most ordinary stock market correction should raise eyebrows. The last emergency meeting was seven years ago. Not even the Dow 7000 by the end of 2002 was deemed critical enough to call up people in the dead of the night with the message that Asian stocks are falling and then summon the sleepy board members for an emergency meating before markets opened. No big news from housing were hitting the wires. The macroeconomic environment was about the save as six weeks ago, when Bernanke thought that inflation was too high to choose a 0.5% cut over 0.25%. So what has changed? Is the Fed now in the business of protecting shereholders against the most ordinary volatility? There is only one possible answer: the correlation between stocks and housing has become so important for this market that the Fed sees no way to inflate the one bubble if the other is allowed to deflate. Stock equity has become such a major part of financing a home purchase that even when housing is well able to recover on its own, any serious setback when the Dow retraces 10,000 would twart that recovery and make both asset classes collapse at once. Has the Fed studied the situation and concluded that the system will fall apart unless stock investors are given the same guarantee of steady appreciation and protection from rough patches that until now was the exclusive priviledge of homeowners? If this was indeed the case, the implications will be serious. Do you see ahead of us a government-controlled stock market run on the basis of an implicit social contract where one invests with the understanding that the Fed's job is to keep the floor under the market a few points below the current price? [more]
This could change the picture dramatically. [more]
I'm still processing information for the last two weeks, but one thing is already clear to me: 2008 will be the year of buyer capitulation. When the interest on a 15-year mortgage falls below the official rate of inflation, even the most stubborn permabear will run to the bank and fill out the application. And on the supply side, the inventory will simply vanish to be relisted later at new asking prices: with the ARMs resetting to mere 5%-5.5% - below the current fixed rates, and that not counting the future Fed cuts, the Casey Serins of this world will have the last laugh. [more]
A surprise. I was expecting a 0.75% cut, but thought I could wait till the end of the month. Darn!
To boost my Caps score, I think I need to close temporarily my "safe havens" like JNJ because they will rise slower than small-cap junk that will be skyrocketing in a monstrous rally. When we're back to Dow 13000, I can greenthumb them again.
Added to my real-money NVR position at $497.
OK, I'm back. When I went on vacation, I was wondering what the upcoming seloff would do to my score, given that most of my positions were long. Turns out, not much. My accuracy rating is up to 69%, the highest it has ever been, and my the numerical score is actually up 300 points. Looks like you can still earn points in Caps as long as you are going down slower than the rest. Of course, lots of things have happened meanwhile. I'l now need at least a few hours to read and digest all this new information. [more]
OK, I'm going to hibernate for 2 weeks. After today's action, it will be a pleasure to sit under a palm tree, forgetting about recession, depression, inflation, stagflation, Dow signals, Fed minutes, fiscal and monetary policy, etc, etc. Relax, close your eyes and imagine that your portfolio is growing.
AP reports that Bush is considering new stimulus package for the economy, which would include new tax cuts. Considering the formidable intellectual challenge involved in perfecting something as perfect as Bush's first stimulus package, and in view of the persistent rumors that Bush's CPU is showing signs of overheating, this Fool would like to propose his own plan that he feels would really fit the bill to a T. [more]