The Fed is in a box......

So, we went from the country being in absolutely in the worst economic shape in its history to everything is hunky dory, all in the course of three months. WOW! The stuff they can do with modern financials these days!!

Ever since I got my arms wrapped around what was really going on in regards to the housing situation, I had always believed the Fed was in a box. On one hand they needed to cut rates and cut rates drastically in order to alleviate the housing mess so people could refinance and the economy could keep on growing. On the other hand, they had to be watchful of inflation and the dollar. In theory they tried to walk this fine line. In actuality they could give a rat's ass about inflation and all they cared about was growth. Bernanke has written how a Japanese style deflationary recession (like the one in the 90's) would never happen here. (You know, the whole dropping bills from helicopter thing.)

Now your average American can tell you about how stagflation is just raging in this country, but the Fed, the keen eyed observer they are, are just starting to realize it. So, what are they going to do about it? The market sure thinks that they will announce on April 30th a quarter more point and that's it, they are done. I am not so sure about that.

Interest rates have already spiked dramatically making it, shall I say almost impossible for those who don't have stellar credit, at least 20% down, and outstanding character to get a mortgage. If you want to refi, you need all that and a ton of equity in your house. The days of sub prime, ALT-A and liar loans is over. So, how is this going to help the housing situation? It's not, it's going to make it that much worse. Oh, but wait, housing is priced into the stock market, right?

So, if the Fed pauses, housing deteriorates even more, credit will dry up, banks won't lend, and the consumer recession will get much, much worse. So, obviously, not cutting rates won't work.

But over the last few days the bond market has been getting absolutely routed, so isn't that telling us the rate cuts are coming to an end? IMO, no. It could be the bond market confirming that inflation is already way out of control and that's why Bank of America had to float $4 billion of preferred with a coupon of 8.25%. This time last year they would have floated it at 6% or below and folks would have sucked it up. The other day, Regions Financial had to float preferred at 8.75%. Does this sound like money is becoming easier? Won't the Fed have to keep cutting. This could be interest rates finally trying to catch up to the inflation rate.

Now the other side of the coin shows us all the stimulus (cuts, various loan programs) the Fed has given us, is already very inflationary. (look around, I don't have to tell you). This is why the Fed has been jawboning about this over the last couple of weeks, they are concerned even though, IMO, they will do nothing about it. This is how the Fed is in a box. Don't cut, and growth slows dramatically, cut, and inflation gets even more out of control. My money is on them cutting and shredding the dollar.

But you are prolly asking yourself, what if they stop cutting but not raise, wouldn't that stop inflation? NO! There is simply too much money in circulation already. Reconstructed models of M3, show it to be off the charts. The only way to control inflation is to raise rates, and this Fed, no matter what they say, ain't raising rates. This isn't your Father's Fed, with Paul Volker at the helm.

But what about the commodity massacre and stock market rally over the last couple of weeks? Corrections in raging bull markets happen; nothing goes straight up and some of the commodities were going parabolic. $2600 Platinum wasn't going to last, rice and wheat had to come in. (BTW, the rice hoarding in this country is a joke. There is no shortage in the USA, it is not a staple of our diet. COST and Sam's Club news, made it a story). Gold is coming down because everyone believes the Fed is done. (That and the usual market manipulation of course--you think that IMF story about selling wasn't a well conceived plant?).

As far as the stock market rally goes, people want to believe the worst is behind us. Hell, Bill Miller says it is, who is going to argue with him? So couple some good economic good news, that is if you want to call a decrease in the weekly unemployment number good news, along with the constant barrage from CNBC, and you have the makings of a good ol' rally. Just as the sharpest sell offs happen in the context of a bull market (commodities) so do the sharpest rallies happen in the context of a bear market. I find it hard to believe the great market crash lasted all of three months. There are too many economic problems in this country to be wished/washed away by the Fed going on hold.

My guess is next Wednesday, they cut .25 (but I wouldn't rule out .50) and say they are going on hold, but they will be here if we need them. We will need them when the next crack in the system shows itself.