FIRE 1 :
T'S (NOT) THE ECONOMY, STUPID
By JOHN CRUDELE
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WHO'S in trouble? What's wrong? What is the Federal Reserve worried about?
Yesterday's stunning move by the Fed to cut interest rates by another quarter point, just weeks after the last reduction, was explained away by Washington as necessary to keep the economy moving.
Wall Street doesn't believe it. And neither do I.
You have to ask yourself. Why the cut? Why now? There has to be trouble out there, says one trader.
So those three questions above quickly made their way around the investment community in the wake of theFed's shocking move. Fingers were pointing up and down Wall Street - with each firm that's been gambling on exotic, risky securities products responding with a shaky not me.
We'll undoubtedly find out what this was all about very shortly.
The last time the Fed cut rates was back on Sept. 29. Hours later the markets found out that the Central Bank had been working feverishly for days to keep a hedge fund that was little-known at the time from exploding and possibly taking the entire financial system down with it.
Alan Greenspan isn't the sort of guy who likes surprises either. He doesn't like to get them and he doesn't like to give them.
So the Fed chairman's decision yesterday to feed another interest rate cut into the softening economy - especially with the downside that will result - had to be the result of something he knows (and didn't like). We'll find out later.
Maybe there are severe problems at one or more financial institutions. Maybe a big New York City bank or brokerage firm is in trouble.
Perhaps there's yet another hedge fund whose portfolio is bleeding because of stab wounds around the globe. Maybe the original problem child, Long-Term Capital Management, has already exhausted the $4 billion bailout from its peers on Wall Street and needs another advance on its allowance.
Bankers Trust and Lehman Brothers are the two names being mentioned as the most likely candidates for disaster. But Merrill Lynch's decision to lay off 3,400 workers this week, and the profit catastrophes at other Wall Street firms, makes the list of suspects considerably longer.
All financial institutions have been hurt by volatility in the currency markets, as well as in global stock markets.
You cannot have the kind of move you had last week in the dollar. It's just too big. You just can't have a big move like that without someone going under, says one trader.
Ironically, the Fed's action yesterday will further hurt the dollar, which has fallen about 19 percent in the last two weeks in relation to the Japanese yen.
Unless the Fed has finally found a way to control the massive currency markets, its latest rate cut is likely to have terrible repercussions. For instance, the drop in the dollar's value compared to the yen is already causing Japanese investors to pull their money out of U.S. government bonds.
Japanese investors have parked their assets in U.S. bonds for years because of the substantially higher yield they get here than they could achieve at home. But the risk of capital depreciation because of the recent plunge in the dollar now makes these bonds a bad investment that needs to be dumped immediately.
So, considering all the problems this rate cut is going to cause, why did Greenspan still think the move was a good idea?
One thing is certain. The Federal Reserve did not lower interest rates yesterday because it had nothing better to do.
The Dow was up over 100 points yesterday when the Fed announced its rate cut.
With this cut, Greenspan opens himself up to criticism for being politically partisan by trying to keep the stock market from fading any further before the Congressional elections next month.
The best bet is that another financial institution is in trouble. By cutting rates, a bank or brokerage firm can now get money from the Fed at a cheaper rate than it could on Wednesday. But the rates that banks charge their customers for, say, mortgages and consumer loans remain the same - resulting in an instant increase in profits.
What else might the Fed know?
As I said earlier this week, there has been some very suspicious activity in the stock market. Someone, perhaps the Fed or its agents, has been boosting stock prices through the opportune purchase of highly leveraged stock index future contracts whenever Wall Street gets into trouble.
What else could the Fed know?
Experts are telling me that the nation's economy is slowing considerably, and the Fed chairman would know the extent of the slowdown.
Suckers were lured into the stock market by yesterday's rate cut. Most pros weren't. As one veteran trader put it: I'm selling everything. I expect there's some bad news that's gonna come out. |
