Tuesday, August 5, 2008

The Fed today

Remember the story bandied about that the Fed was going to raise rates in 1/4 increments?

Where did that go? Did it go with the collapse in commodities?

All you had to do was check out the latest GDP figures for Q2. It was 1.7%. Anyone buy that? I suppose you do, when you estimate inflation was 1.1%! At a 3% rate, we report negative numbers.

The market is in a panic, because oil has cracked, and the market is worried that higher oil has caused demand destruction worldwide and now we are at the precipice of a worldwide recession.

That is partially true, but oil's fall has more to do with speculators being burned, than just demand destruction.

They say in a bear market, everybody gets burned. Who hasn't been touched by this bear market?

The oil countries.

But they've been spending money like drunken sailors, and now they need $85 oil, just to meet their higher infrastructure costs.

Oil's coming down, and stocks are going up. But oil is going down farther than what the pundits believe.

And that will carry over to every other commodity play that has been jacking up prices because of a "demand" issue.

But the pullback in oil, could help the Fed. In a deflationary environment, a 2% fed funds rate has room to come down. And a bit more expansion of the bank's margin would help them get healthier.

Just last month, we had Larry Kudlow and his ilk, begging the Fed to raise rates to "save" the dollar, and stop oil and commodity prices from galloping higher.

But we had a clue that this mess was coming to an end. Mr. Poole, who never saw the sub prime problem not being contained, repeatedly warned us last month of the inflation risks we were now facing.

Now the Fed has flexibility, and the only ones "boxed" in, are the oil speculators.

And these speculators, were the same ones with the bearish bets proclaiming Armageddon for the financial system.

They just wanted to hasten it's demise.

Instead, they are hastening it's recovery!

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