Wednesday, November 21, 2007

Cut Rates Now !!!

I carefully read articles about the Fed's minutes and extended forecasts. They forecast 2008 growth as 1.8 to 2.5% real growth, while expecting headline inflation to be 1.8 to 2.1% and core inflation as 1.7 to 1.9%. Unemployment is forecast as 4.8 to 4.9%. The current overnight Fed funds rate is 4.5%, which is 2.7% over the midpoint of the core inflation forecast for 2008. In Note A below from a variety of data I educe the range of reasonable "neutral" real interest rates as 1.5 to 2.5% with 2% as the central neutral level.

The inflation forecasts of the Fed itself show they have won the war on inflation: price levels are forecasted in the zone of stability - the "Comfort Zone".

The core PCE is now 1.8% year over year and the Fed midpoint forecast for 2008 is the same. So the "neutral" Fed funds rate is 3.8%. But why should the level be at "neutral" ? The Fed's own forecast shows subpar growth for 2008 and higher unemployment. So they are violating their mandate to maximize employment with stable prices. The Fed should be maintaining either below neutral real interest rates or at least a real rate at the low end of neutral, viz. either at 3.3% or lower.

Mirabile Dictu !!! Ms. Market concurs !!! The two year Treasury note is trading at 3.06% !!!

So why can't the FOMC figure this out ? Surely Ben Bernanke is as smart as his college classmate, Bunkerman. Maybe the FOMC members are still fighting the last war - inflation - and still shooting though they admit they've won. Some Fed big mouths do say that. Or it's something else. Hmmm, what could that be ? From the screeching of the press and some politicians, it's the dollar ! They are afraid the dollar will drop considerably more. Grrr, they have no statutory authority to support the dollar.

How many common men must lose their jobs & homes to support the dollar ? I'd like to hear Barney Frank ask Ben that in sworn testimony.

Let no common man be crucified on a cross of dollars ! *[see note C]

Cut rates now at least 125 bps ! Or cut 50 bps and signal continued cuts !

**********************************
NOTE A - REAL INTEREST RATES
There is a range of Fed interest rate levels due to error and inaccuracy in knowledge. So accepting the core PCE inflation level of 1.8% [which corresponds to the recently released Fed "central tendency"], what range of real returns should be put onto that for overnight money ?

I remember learning in B-school that a 0% real return for T-bills was the empirically mean over long periods of time. Adding 1% for a bank risk makes sense. And I know that current Treasury inflation indexed notes give around 2-2.25% for multi-year money. And I know that old gold notes have long term rates of around 2-3%. So suppose a reasonable range is 1-3%, midpoint 2%. Let's take the range and divide by two to get a core centroid: (3% - 1%)/2 = 1% core centroid which is + or - 0.5% on the midpoint, viz. 2% real rate plus or minus 0.5%.

So higher math gives a neutral real interest rates as between 2% + or - .5%, viz. from 1.5% to 2.5%, midpoint 2% for overnight bank lending.

NOTE B - $10 words
For definitions of educe, adduce and conduce, see blog post "The 'duces" for November 19.

NOTE C -
Reminiscing the famous "Cross of Gold" speech of the "Great Commoner", William Jennings Bryan, whose only vice was an inordinate fondness for a third plateful of food :-)) [I think that's a quip from H. L. Mencken - I saw saw it a few years ago & saved it.]

"Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."

Source: William J. Bryan, _The First Battle: A Story of the Campaign of 1896_ (Chicago: 1897), 199-206.

25 comments:

Bunkerman said...

Yesterday as a new "Day 1" for a potential rally as the sharp reversal ended green from much lower levels. Volume was up, too, but volume is not required for a "Day 1".

So we wait again for a confirmation day, viz, a gain of at least 1% in a major index on higher volume. This preferably needs to be on Days 4 to 7.

Bunkerman said...

Burger King to offer $1 double cheeseburger, to match McDonalds.

Whither inflation ?

Bunkerman said...

DE good numbers. Whither recession ?

Bunkerman said...

Jobs data OK. sighh. reality vs. perception - a philosophical discussion perhaps is needed.

Bunkerman said...

I sent Michelle C-C on Babblevision an email pointing out the errors in her Dow Theory commentary. I'll post any reply.

Frosty said...

Bunkerman...fine post this morning...the fed needs a heads up as well, they are dead wrong on the dollar...the common man is doomed.

Frosty said...

paulson needs to step to the plate and get in the game...what is he doing? or better, what should he be doing?

Bunkerman said...

Thanks to mfl59 for getting me to re-analyze the data re Fed cut. The data the Fed gave out yesterday helped a lot, too.

Bunkerman said...

I think they should be hammering for greatly expanded FHA program plus some relief for the low income dupes (not the speculators) who will be defaulting.

A good program would make the mortgage investors take the loss and re-fi the loan at a disount thru FHA to let the homoeowner (really a tenant as had no equity ever) stay home.

A bit of populism is needed.

I doubt if jawboning servicers will do it, but it helps some.

Bunkerman said...

A partial reason for dollar weakness is all these fears of 2008 recession. That's wrong in my thinking, but the fear is there, no doubt.

Bunkerman said...

By the way, that fine old movie, Inferit the Wind, shows Bryan at the famous Scopes Monkey trial in 1923. Gene Kelly plays H. L. Mencken and Spenser Tracy plays Clarence Darrow. I recommend it.

Bunkerman said...

whole lotta European selling goin on.

I think this S&P cash cancels yesterday's Day 1.

endless bearishness. ugh !

Frosty said...

Bunkerman...the day isn't over yet...what if we close strong, for some strange reason.

Bunkerman said...

a strong close will be another Day 1, the third one in the last couple weeks.

Bunkerman said...

I am selling nothing, if anyone wondered. I am looking 12 months out, maybe 24 months.

This feels like August 2006 when I was the last bull standing in another forum.

Frosty said...

doug kass is calling a bottom in the fins today...he is behind the curve, you did that with the 100% commitment...the bearish tone is thick as a bric...get it, bric :)

Bunkerman said...

lol good one frosty.

Frosty said...

Bunkerman...took GS 208.5...in the belly of the beast now.

Bunkerman said...

lol ... or in league with the devil ;-)

Spin-em said...

tossed out my unlucky pen...broke out a new one..fear not boys

Frosty said...

Bunkerman...the speed and force of this correction is directly related to the lack of an up tick rule...you know my stance...we get where we are heading very quickly going form manic to panic in a flash...it cuts both ways...any good news and this tape will rip and I mean rip city.

Besides, spinny and a new penny, comfirmation indeed.

Frosty said...

GM with some good news...if they have figured a way out of this mortgage mess out, anyone can.

Frosty said...

Bunkerman...hoping you and yours have a great holiday...thanks for all you do for the common man, your ok.

Bunkerman said...

Happy Thanksgiving, frosty & all !

I hope all have an enjoyable holiday. There are many thing more important than stocks: friends & family especially. This holiday we should spend some time with them and give thanks for all we have.

mfl59 said...

Yes well said Bunkerman...I can only help but get smarter reading your thoughts as well those of another grizzled veteran-Frosty...