I get it - the dollar is really a derivative ...
We're up to our eyes in debt, with roughly $3.50 owed for every dollar of GDP. That'll mute the effect of cheaper money in a profound way
TODD HARRISON
Putting Bernanke's testimony in perspective
Commentary: What Fed chairman faces after four years of U.S. going nowhere
PrintE-mailDisable live quotesRSSDigg itDel.icio.usBy Todd Harrison
Last Update: 12:01 AM ET Mar 28, 2007
"The battle of wits has begun. It ends when you decide and we both drink, and find out who is right ... and who is dead."
The Princess Bride
NEW YORK (MarketWatch) -- They say that fairy tales rarely come true. For Goldilocks, this particular chapter may have a particularly prickly ending.
Last week, as most of you know, the Federal Reserve announced it was adopting neutral bias on interest rate policy. While inflation remained FOMC members' predominant concern, they wanted to remain balanced in their approach to the economy and the next steps they would take.
That's entirely fair, given the conundrum that we collectively face. On the one hand, we've got inflation in things we need to power, educate and feed the world. That's evident when looking at an equal- weighted CRB, which is one sharp rally away from all-time highs.
On the other side of the equation, we have the specter of slowing global growth, a debt-laden consumer and cracks in the sub-prime mortgage market which, while isolated, is tied to the global machination through an intricate maze of derivatives.
Viewed through that lens, it's entirely understandable why the central bank would want to remain balanced. For purposes of proactive profitability, we must ask ourselves why they would need to lower rates.
Conventional wisdom is that a rate cut will be a boon to equities. This has been floating around for the past year, just as it did on the front end of the dotcom bust. The bulls have been leaning against this perceived catalyst, as they did then, anticipating that an easier policy will provide a much needed stimulus to global growth.
There are a few points of parliamentary procedure that must be noted. First, there is no historical correlation between interest-rate cuts and higher stocks. Anyone who bought equities in front of the first rate cut in 2000 can speak to this point. Second, and this is particular our current juncture, the DNA of today's tape is drastically different than it was during periods past.
We often say that to appreciate where we are, we must first understand how we got here. There is a difference between legitimate economic growth and debt-induced demand. A simple snapshot of our screens won't tell the entire story. One must juxtapose the U.S. dollar, which has declined 30% since 2002, against the appreciation in stocks.
Viewed through that lens, we've gone nowhere fast for the past four years.
Alan Greenspan, who is widely credited with navigating our markets through turbulent times, hasn't done us any favors. He rode off into the sunset claiming victory, leaving consumers with adjustable-rate obligations while warning of recession as the dust settled behind him. Make no mistake, he left Ben Bernanke and the rest of us in a pretty pickle.
We're up to our eyes in debt, with roughly $3.50 owed for every dollar of GDP. That'll mute the effect of cheaper money in a profound way.
Once credit demand and supply start to decline after a massive credit-based inflationary boom, a deflationary credit contraction becomes the most likely resolution. This isn't a popular statement, nor is it fun to fathom.
Still, as we weigh the landscape and prepare to listen to our Fed chairman, it's a necessary context with which to absorb his vernacular.
Trading, in its purest form, is capturing the disconnect between perception and reality. I'm not smart enough to know when the collective mindset will wrap its arms around this prickly pear but I want to stay nimble and manage my risk
Opportunities are made up easier than losses, we know, but that's a typically a lesson that most will need to be reminded of.
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