OT: Y2K, Interest Rates, the Fed, and the Direction of NASDAQ and a little BRCM for good measure.
Hi Roger and Threaders,
If banks are required to have more cash on hand, then will that mean that less is available for loans and a subsequent increase in interest rates?
The cash that the banks will have is considered 'vault' cash and the only real impact will be that the banks will have slightly less capacity to play in the overnight repo markets. This may have a slightly negative impact on the profitablity of the bank for one quarter, however, it will certainly have only a negligible impact on loan origination and overall interest rates.
The interest rate is overwhelming set by the mood of the bond market as to the outlook for inflation. And right now the market mood is that we will be seeing more inflation moving forward than we have for the last two years. A pretty reasonable assumption, based on the exceptionally low rates of inflation we have experienced since '97. With Asia in recovery, prices might just perk up a bit, and with full employment, wage pressures will undoubtedly start to arise here in the US.
The Fed's role in all this is to thread the needle and keep the party rolling with moderation being the key. Greenspan knows this better than anyone and has been masterful at avoiding the mistakes of past Chairmen who allowed the economy to swerve by means of excessively loose or tight money controls. Keep in mind that as Greenspan and the Regional Presidents try to jawbone the bond market into a 'tighter' interest regime, at the same time the discount window is pumping liquidity into the system and allowing the wheels of commerce to continue spinning. Why the bond market doesn't react to the reality of Fed actions in equal measure as it does to mere talk is probably a worthy topic for either an economics or psychology Ph.D. dissertation.
How does this relate to BRCM?:
Greenspan's most recent commentary to Congress was very gratifying to me in that, in addition to the usual balloon-bursting commentary about the valuation of the Internutz, Greenspan has a very big clue as to the importance of e-commerce going forward. As is the case with Congress, the Clinton Administration and the FCC, the Fed has wisely chosen to take a hands-off policy to the communications revolution.
Should the Fed choose to raise the Fed Funds rate by 25 basis points, the market very likely will have a relief rally. The activity in the bond market this past week is based on the rumor that the Fed will raise by 50 points. If that is the case, I believe it will have a very negative effect on the stock market. Why? Because it would signal a huge break with the recent methodology of the Fed. Remember last year when the LTCM fiasco threatened to cause a crisis in the world's financial markets, the Fed reaction was to call in the banks, set a policy to contain the damage and in a series of three quarter point moves, rectify the damage that had been done to the stock market. The key point is of course that 50 basis point rise would clearly indicate panic on behalf of the Fed. And for reasons which are unknown to the general market. And uncertainty is the number one reason why markets move down. BRCM will not be spared, as its recent P/E is twice the Nasdaq 100 average. So, I guess we will know more next Thursday.
BTW, isn't it amusing to see the rumor mongers move the bond market? These guys were doing the same thing in the 1870's, you'd think Mr. Market would catch on by now........
Technical Question to the Experts on this Thread:
Can anyone explain Fast Fourier Transforms and how they relate to QAM in layman's terms so that a non-techie like myself can get some idea of how this technology works? Any FAQs, URLs or commentary would be appreciated.
Best, Ry |
