Pull up Allan's 1930s weekly plot. Look at the rally off the bottom. Darn thing went straight up, with corrective activity virtually absent. The move was corrected eventually, but if you weren't immediately out of the way, you would have been slaughtered.
I don't think we find ourselves in a similarly dangerous position here. We are NOT that oversold, we are NOT at undervalued levels, and we are NOT at decade lows. The thing that has always frightened me about this is fading the Fed. I know that the Fed doesn't always have things go its way, but when it hasn't, it has usually been visible in lack of money supply growth. The explosion in money supply has been a constant nagging concern.
Do I think it really matters? Probably not. I keep asking myself: what would happen if the Fed mandated a 2:1 split on all US dollars? Well, it certainly wouldn't pull the economy out of recession. It wouldn't cause the layoffs to stop. It *would* double the price of houses, gasoline, electricity, food, and everything else. And it might, for a fleeting instant, double the prices of stocks. But when the bond market caught a whiff of the inflation, yields would soar and stock valuations would plummet.
This is all the Fed is doing: a 2:1 split on our dollars. The only twist is the deflation caused by all the overcapacity. And if Greenie prints enough Clownbux, the carry trade will return, with folks borrowing short to buy long and grab the spread.
Ultimately, lowering rates here is like trying to help an alcoholic by giving them another beer. It's the source of the problem, not the cure. I just hope that we can do the cure before the problem has a chance to compound much further. I really don't want another Depression...
BC |
