Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Uncle Frank who wrote (43924)	6/26/2001 9:19:01 AM
From: t36	Read Replies (2) \| Respond to of 54805

this is from Michael Sivy who writes a newsletter..thought everyone here would enjoy reading this esp after what this week is starting to look like..!!! they cant get the downgrades out fast enough..): Pushing on a string Why aren't the Federal Reserve's interest-rate cuts working? And should investors be worried that they aren't? Chances are that the Federal Reserve will lower interest rates again this week -- for the sixth time so far this year. Normally, the economy begins responding to rate cuts about six months after they start. And since the most recent series of cuts began in early January, you'd expect that we'd be seeing the first hints of an upturn by now. But there's no sign that the current slump is ending. If anything, it seems to be getting worse, with the economy teetering on the brink of an outright recession. So it's perfectly natural for investors to be worrying that the rate cuts aren't working. The Fed is concerned, too. Its big problem right now can be described with the old saying about monetary stimulus being like pushing on a string -- or as I find it easier to visualize, the reins on a horse. Pull on the reins, and the horse has to slow down. But loosen thereins and the horse doesn't have to start running. Instead, he can just stand there and let the reins go slack. In other words, the economy can simply fail to respond when the Fed lowers rates. Why might that happen? Because businesses have excess inventory and are afraid of making commitments to capital spending, because investors with big losses are scared to invest and because banks are saddled with lots of bad loans that make them hesitant to finance economic expansion. The important thing to realize is that all of those problems are temporary or self-correcting. Companies use up their excess inventory and eventually have to reinvest in their businesses. Once the stock market shows signs of picking up, people start investing again. And banks write down their bad loans so they can resume lending. Other key economic trends will also be helping to boost the economy before year-end. The refinancing trend is already under way and will likely pick up as interest rates work their way lower. As homeowners refinance mortgages, households will have an extra $100 to $200 a month to spend. Tax rebate checks will help too, giving most households a one-time bonus of $300 or more. And energy costs are expected to ease over the next 12 months. In short, an economic upturn is already baked in the cake. It may be weaker and take longer than usual because of the damage that the tech wreck did to businesses, investors and banks. But the relationship between short- and long-term interest rates is a virtually infallible guide to the economy's direction. And that indicator is pointing the right way. When short-term rates are higher than long-term rates, as they were late last year, savers can earn generous returns on safe, liquid investments such as money-market funds. As a result, money is sucked out of the economy, and it has to slow. But when short-term rates fall, many people start switching their money into long-term bonds and stocks that offer higher returns. That shift isn't merely an indicator of an economic upturn. The flow of money into long-term investments actually finances the next round of economic expansion. Once short-term rates have fallen at least a half-percentage point below long-term rates, the flow of money becomes expansionary. After the past five rate cuts, that spread is nearly two full percentage points -- normally very bullish. And that spread will get even more bullish if there's another rate cut this week. So worry about the timing and strength of the next economic upturn. But don't question whether it will come -- it's already on the way.