Archives: 2007 September

The long awaited decision from Ben Bernanke and the Federal Reserve FOMC meeting was released at 2:15 PM this afternoon. The Fed in it’s infinite wisdom and with more than a touch of panic cut the Fed Funds Rate by 50 basis points as well as a 50 point cut in the Discount Rate.

Ben’s Wall Street friends certainly liked the Fed’s decision as the Dow rallied more than 100 points in a matter of minutes and is currently up about 246 on the day at about 13,650.

However, this was probably the last push that the US Dollar needs to go right over the edge. A Dollar collapse will not in the long run be good for anyone in the US , including the Wall Street gang, but from today’s action seems to be underway as I write.

Just as inflation is making a huge comeback Ben Bernanke and company signals in a big way that it is of little concern. In order to try and prop up a faltering economy the Fed has signaled that it will pump out increasing amounts of money at lower rates. This may well help to prop up the housing market for a short time but don’t bet on it.

The round of ARM resets coming up in October and through the middle of 2008 will in my view swamp the Federal Reserve action taken today. A few million more Americans are going to be facing much higher monthly housing mortgage payments just as inflation kicks in. It will be a grim situation.

To cut rates or not to cut, that is the question that Ben Bernanke and his fellow associates at the Federal Reserve must still be mulling over as the September 18, 2007 highly anticipated FOMC meeting looms ever closer.

There is ample evidence that a good dose of inflation, like an ill wind, is headed our way. For example take a look at this Commodity Research Bureau (CRB) Spot Index Chart that plots the index of 23 industrial commodities.

Then consider that we have wheat at record price levels. Gold is trading at over seven hundred Dollars an oz. There are record prices for crude oil at over $80 a barrel. Milk is at record levels as is the price of beef. I could go on but I’m sure that you get the inflationary picture.

If Ben Bernanke and company were to focus simply on the inflation outlook, the real inflation outlook, not the watered down official government one that excludes energy and food prices, they would not dare to cut interest rates at this time.

However, it is not as simple as that. The trouble originating out of the sub prime mortgage lending market and the resulting infection of troubles throughout the US housing market must be deeply troubling. With housing foreclosures already at record levels and with housing such an important part of the US economy some rate relief would seem to be in order.

The markets seem to have already priced in a 25 basis point reduction on the federal funds rate. Some analysts think that the discount rate will also be cut by 25 basis points. Others think a rate cut of 50 basis points is in order.

Clearly it doesn’t take a genius long to figure out which way the US Dollar has been headed for the past year. The sad fact is that if the US Dollar Index chart were for a longer time frame and showed the history of the Dollar for several more recent years it would only be more of the same.

Many analysis consider the 80.00 level on the long term chart as the critical level. A close below 80.00 would signal an acceleration of the trend. That close has just occurred.

There are definite signs that the rest of the world is getting tired of absorbing surplus US Dollars. As a fiat currency there is no sound backing for the tremendous number of Dollars now being printed by the US government.

China has hinted that they may not be so eager to keep purchasing US Treasury Bills and Notes. Russia is shifting out of Dollars into a more balanced foreign exchange portfolio. A Japanese oil company has started to pay for oil imports in Yen, not Dollars. The Iranians now want Euros for its oil, not US Dollars.

The list is growing. And why not? No one or no nation wants to keep absorbing at their risk an asset like the Dollar that is headed South.

Watch out for the acceleration of the downtrend. That will destabilize world financial markets and possibility drive the world economies into deep recession or worse.

See this chart and many others such as the S&P 500 and the CRB Index at Ino.com

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