On the "mother of all rate cuts"
thestreet.com
There's nothing quite like it, is there? Seeing every single stock you own gap up on the same day.
Coming at the start of what should have been a good month anyhow, given the end of December's tax-related selling, the Fed's surprise rate cut may have ignited the mother of all January effects.
Unfortunately, that's probably all it is.
Interest rates, this time around, are neither the problem nor the solution. I went through some of the reasons for this in my Dec. 6 column, and all of them are still valid.
So instead of repeating them here, let's get philosophical. Because that's what economics is, really, a philosophy of human nature and behavior. And after a century of trial, error and more error, it's clear that the business cycle is a hard-wired part of the human psyche, rather than some act of God, like an earthquake or flood.
We are adaptable animals, capable of both caution and recklessness, depending on our experience and the environment. In good times, the risk-tolerant side of our nature is rewarded, so the people willing to take what would have previously seemed like insane chances become the New Economy's folk heroes. The rest of us, seeing these nongeniuses getting rich, gradually buy into the zeitgeist and start making career and financial choices that, like I said, would have seemed crazy before the mania began.
In the resulting speculative orgy, money gets lent that can never be repaid, and the longer the process goes on, the bigger the eventual imbalance becomes. Go back through U.S. financial history and you'll see this happening every decade or so. A booming economy leads to a system-wide debt binge, and usually, a buying frenzy in a supposedly revolutionary new investment: railroad stocks, radio stocks, 1960s tech stocks, the Nifty Fifty of the early '70s, junk bonds in the 1980s. Each time, it took a recession to wipe the slate clean.
Seen in this light, the Fed's repeated rescuing of the economy in the late 1990s wasn't the brilliant move it appeared at the time, because it allowed the leveraging process to continue way beyond its normal stopping point.
Since 1998, liabilities of the U.S. tech and housing sectors have exploded, while consumers have maxed out their plastic on imports and gas for their SUVs. Lower interest rates will let us borrow more. But what good will that do if we can't pay off what we already owe?
Among the many parts of the economy that won't benefit from the Fed's generosity, four stand out:
The million or so dot-coms that raised money in the glory days, but have business plans that clearly won't work, no matter how low the Fed funds rate.
The telecom companies that borrowed billions to fund fiber and next-generation build-outs, which won't pay off for several more years, if ever.
Health care costs, which are starting to spike again. According to the Bureau of Labor Statistics, HMO premiums are now rising at an 8.5% rate, which is enough to pretty much offset the coming year's profit growth at many companies.
The dollar, which is the key to the coming inconvenience, in my opinion.
Here's a possible scenario: Sometime in the second quarter, after the Fed has cut interest rates yet again, we realize it's not helping. Corporate earnings are still weak, layoffs are accelerating and stock prices have plateaued. Meanwhile, the dollar is falling against the euro, gold and maybe the yen, raising the price of imports and putting the Fed in a bind. Does it cut rates to help the economy, or raise rates to prop up the dollar?
Panic ensues when we realize it really doesn't matter what the Fed does, because either way we're in trouble.
The final leg of this bear market kicks in, with the Naz dropping to 1500 and one or two big-name companies filing Chapter 11. And only then, when the risk-taking side of the American psyche has been seriously slapped around, will the fun start again. |
