The Outcome of the Fed’s Interest Rate Cuts? History is the Best Oracle.
January 28, 2008 -
The most accurate oracle regarding the effects of the rapid U.S. Federal Reserve interest rate cuts is history. The Feds have taken this path before and the results have never been pretty. Not one single time. Though the sentiment on the street seems to be that the Feds may not be inclined to cut interest rates significantly in a couple of days given their emergency rate cut of 0.75% a week ago and the revelation that Societe Generale exacerbated the plunge of European stock markets by recently closing out all open positions maintained by rogue trader Jerome Kerviel. Still, given the Fed’s foolish reactions to every economic problem in recent history, I would not be surprised if they caved to Wall Street interests and cut interest rates by another .50% in a couple of days. However, even if they only cut interest rates by 0.25%, this would still produce a cumulative 200 basis point reduction in the Fed Funds rate in just the past four months. Those are huge rate cuts no matter how you slice it. But no matter the “dead cat bounce” that the Feds are attempting to manufacture right now to provide stability to the markets, their plan will ultimately fail. History tells us so.
Historically Comparable Scenario to today: 2000-2007 U.S Economic Timeline - Dot com crash, U.S. Federal Reserve manufactured real estate bull, subprime mortgage fallout….Next? Real estate bear and depression??
The dot com bubble collapse caused the U.S. NASDAQ index to plummet from a peak of 5,038 in March, 2000 to 1,114 in October, 2002– a decline of 78% in less than three years. Runaway valuations and frenzied buying of a hot sector caused the tech market to collapse as investors and venture capitalists threw money at tech companies, inflating the value of companies that had never declared a single dollar in revenue or profit. Even though revenues, earnings and cash flow were all absent, this didn’t seem to make a difference as a rapidly rising index provided a rising tide that lifted all boats regardless of the missing components of quality or fundamental soundness. Read more …
1 comment January 28th, 2008
