Thursday, January 10, 2008
Thursday, November 01, 2007 The Fed Got it Wrong! My prediction that the Federal Reserve would lower their target rate by 50 basis points was wrong, but in my judgment, they will see the error of their ways and continue to cut rates very soon. I do believe, however, that they missed the opportunity to stay out ahead of the unfolding worries in the subprime market. Notice the dateline. I am not speaking of the Thursday January 10, 2008, statement by Fed Chairman Ben Bernanke that, "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks." That was a good thing, a very good thing, and will ultimately lead to a bottoming in the markets. My dateline goes back to the Fed's failure to cut rates by 50 basis points in late October 2007, and Bernanke's subsequent statement before a joint session of Congress that the risks between inflation and recession were "balanced." Any seasoned strategist knew as Bernanke was giving his economics lesson to Congress, that he was wrong, and the reason they knew he was wrong was the way the market reacted to the October 2007 quarter point cut, and to his speech. The markets were saying that the economy was slowing faster than the economic data were suggesting. The Fed chose to trust their lagging data, and the economy and investors have paid for it, with stocks down more than a 1,000 Dow points since that time. None of us expect stocks to go up all the time, and none of us expect that the Fed will call it right every time, but if central banks around the world learned anything in the Alan Greenspan era, it was that you ignore the markets at your peril. Here's the reason: there are macroeconomic research firms around the globe that have economic measurement tools every bit as good as those of the Fed, and they operate in real time. They learned from Greenspan about how "on-time-deliveries," the price of scrap steel, and the sales of heavy duty trucks could give important clues to the "real time" economy. These economic analysis firms have also developed scores of measurement tools that include changes in the prices of securities in their economic projections. I give credit to Alan Greenspan for his sensitivity to the markets and the coaching he did when he thought that the markets were off base. The relationship between the markets and him became simpatico, and market volatility fell and markets prospered. The new Federal Reserve has now blown its first opportunity in crisis management -- in the sense of getting out ahead of the market and speaking boldly about the risks of the subprime meltdown and then to take the unmistakable lead in helping to solve it. When Bernanke spoke before Congress, I told our investment policy group that he reminded be of the smartest guy in the class, just before the biggest bully smacked him in the nose. I like Ben Bernanke, and I have every confidence that the Fed he leads can solve the financial ills that face our country. But for crying out loud, Dr. Ben, don't play professor with us. The bullies on Wall Street will beat you like a drum, and us with you. Nevertheless, thank you for taking charge today. You may win us over yet. I for one am hoping that you do.