Perils of Pauline on the Markets

What a night, like something straight out of an old Saturday morning serial. The U.S. capital markets are closed, the market crash is speedily following the rising sun around the globe, and then our hero arrives: the U.S. Fed.

Until now said hero had been fast asleep and otherwise occupied, but, newly awoken by the cries of a market strapped to the tracks with a train bearing down, the Fed swooped in for a rescue: doing a surprise rate cut of 75-basis-points, the first such such in more than 20 years.

Woo! Saved again!

Well, maybe, or maybe not. It’s a little soon to tell, with the Federal Reserve not unanimous on the idea — Bill Poole dissented — and with the market still tanking on the open, even if it has now cut its losses in half.

For sure, there is no question that Fed was behind the rate curve with respect to both monetary stimulus and the credit crunch, and this surprise cut gets it closer to parity, but such surprise actions can always be read two ways: What did the Fed know, and when did it learn it, that would take it from "wait and see" to "act now!" Is there more economic weakness than "this is only a financial event" think? I feel that way, and continue to argue we aren’t heading into recession, we’re in one, so arguing for compartmentalization on that point strikes me as wrong-headed.

Where do we go from here? Net-net, this is, on balance, massively short-term bullish, and it would surprise me none at all to see U.S. markets trim losses to small numbers by the end of day. Further, we could even see a snap-back rally over the next few sessions, especially in the financials where the sense will be that a good chunk of the pressure has been taken off. Medium and longer term, it gets back to earnings and the economy: Does the current Q1 downturn look like it will be a one-quarter thing, or are we going to see two quarters of negative growth?

More as the day progresses.

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  3. Staggering Data on Growth in Chinese Markets
  4. Universities and the Further Perils of Early-Stage IP Investing
  5. The Perils of VC Funding

Comments

  1. Simon says:

    I think it was hasty rate cute. Much to hasty.
    I think that the markets should have been given time to fall (if only to remove the frothiness) before the rate cut was announced. If nothing else it would have been a good spanking for various financial companies.
    I wonder if the Fed charter of providing inflation control and growth makes it schizo at times. Perhaps the charter should be amended to focus on price stability.