The Case for a 50bp Fed Funds Rate Cut…

By John Galt

October 29, 2007

A long time ago, in a galaxy far, far away…….

Wrong story, but the theme song fits our current situation in more ways than one will ever know. This week that just ended on October 26^th saw a tremendous fortune wagered that the Federal Reserve has to cut rates again this upcoming meeting. I find this discussion fascinating since in reality, the box that Greenspan built I still quite solid and has all of the governors trapped inside it (Can you imagine the smell by now!). The reality of the situation that is beginning to sink in is that the Federal Reserve must destroy the dollar to save the election, not the economy. In this editorial, I’m not going to take a super firm conviction on either side of the discussion as the unpredictability of where we are at in history is obvious. But for the sake of having a good time on the internet and for discussing the upcoming week’s economic events, this is the “pro” side of cutting rates deeply at this meeting presented below…..

1.                  There is no indication of an actual strengthening in domestic consumption when the numbers are dissected. The Fed realizes that the consumer credit numbers are increasing not with the purchase of goods and services that are arbitrary, but for basic needs such as medical, energy and worse, making the house and tax payments. The Fed should lower rates to ease the credit card rate increases flying into the system and enabling the shopper to participate in elective shopping decisions.

2.                  Jingle Bells, Jingle Bells…..  That’s right gang, it’s less than 90 days to Christmas and the Grinches in Shanghai could care less if you buy lead coated widgets or poisoned dog food. Just send them the money! However, the Fed cares deeply because if the Chinese Communist manufactured garbage can not be resold through our retail system and the inventories sit, the risks of a minor recession going deeper will multiply instantly. If we can not keep the cash flow moving to Beijing, they have no reason to hold our worthless garbage paper. And what scares the banksters and D.C. liars club more than a summons to Congress is the idea of not just government paper being dumped, but the wholesale liquidation of all the MBS we hogjawled them into buying on the open market. So if the Chinese Communists only got 5 cents on the dollar for say, oh, some Florida BBB paper they got stuck with, what would that do to our boys from Bubblevisonland.

3.                  Adding on to the Christmas nightmare, if they don’t cut in October, there is no way they can cut again until December, far too late for the shopping season. They have to do it now or the Grinch passes the lumps of coal out. And if they don’t cut then have one of their famously rumored “emergency” meetings in November, that spells p-a-n-i-c and the world freaks out. No winners for the banksters, no way, no how.

4.                  The market expectations are somewhat over rated, but the tin ear on the Helicopter hears all of the whining, bitching and moaning. Bernanke knows he has to take some action and with 25 basis points already priced into the market, that might just be received as a deflating bowl like announcing to a 4 year old that Santa wasn’t real. The hedgies have priced 25 points into the market and made some rather bold gambles on 50 points. Should those gambles backfire, and they are unable to rake enough profits in the last one hour and forty-five minutes of trading to cover year end redemption requests, then that leaves selling things that matter; like S&P 500 stocks and bonds.

5.                  The final reason is the ongoing real estate crash. No, this cut will not help the average schmuck who is about to get reset into bankruptcy but it could help the arbitrage players who are raking in huge profits playing the currency markets. The banksters are hard pressed to make any large money in the safety of government securities so by using their brokerage divisions they are fulfilling their addiction to high yields by playing other unregulated and off the books markets. The derivatives markets for real estate might well be a disaster but other instruments are still in play and they need these yields to offset their losses and stop the bleeding. As long as the government lets them play Donkey Kong with your retirement, this game will continue. Of course as Jim Sinclair has so eloquently stated “this is it” and  once the first gambler screams “no bid” on the wrong instrument the music stops and the banksters will be out of chairs.

So while there is a myriad of reasons to justify such a strong rate cut, I am sure that anyone can come up with hundreds more, both pro and con. Thus……