Jan 08 2009
A Few Random Musings
The Recent Fed Rate Cut
In my opinion the cut in interest rates is less significant than what the Fed is doing with the creation of money. Sure, it may have some psychological benefits but what difference does it make if the rate is 0.25% or 0.75%. It’s the availability of money that’s more important as this will help dissolve the credit freeze.
Money Creation
The Fed has been running full steam ahead with its aggressive expansion of the money supply. Talk about historic! Normally that would create a massive growth stimulus and it probably will, however, we don’t know when. Historically speaking, it typically takes a 12 month lag for monetary policy to be visible on the street level.
Inflation
I don’t anticipate this being a problem (at least for now). We have the current psychological fears to deal which are deflationary. However, when confidence recovers and the velocity (the rate at which money changes hands) increases, there is the threat for high inflation.
Market Volatility
The volatility is down from what we witnessed months ago but investors are still hiding and the day-to-day market environment appears to be dominated by traders. If investors ever start coming out of the closet, I expect we will see some serious upside in the market. The bargains are clearly there but the public is so scared that another emergency is on the horizon so they stay out of the market.
Strength of Companies
Recently I read this article saying that there are more than 2200 companies around the world “offering profits to investors for free.” That spells a classic panic. Companies as a whole are far healthier than what we witnessed them to be in past bear markets.
Gold
The metal has been so manipulated that it is hard to come up with a true free market value. Gold closed out 2008 at $867. This is well below the $1011 price we saw back on March 17 which is still well below January 1980 high when priced in inflation adjusted dollars. Over the course of last year we saw gold-mining shares fall due to the deflationary collapse. When the dollar takes a severe nose dive, gold should increase in value and could shoot past $1000 again very easily.
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