Friday, March 14, 2008

More Collateral Damage from the Fed's First Helicopter Drop

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The impact of the Fed's September 18, 2007 rate cut was not limited to the panic sell off in the dollar and the incipient bubble in gold, silver, oil, and food commodities. The lower rates that were supposed to help the housing market didn't materialize. By the end of the month, mortgage rates were actually higher than they had been before the Fed's action. Instead of helping the beleaguered housing industry and homeowners , the Fed's rate cut was actually ineffective at best and did nothing to decrease costs for those struggling to deal with ballooning mortgage debt.
Of course, in reality it was the big banks and broker-dealers that were stuck with increasingly worthless securities backed by subprime loans that were the real target of the Fed's beneficence. It would prove to be too little too late however. By October, the first of a series of multi-billion dollar quarterly write offs would start - $5.5 billion for Merrill Lynch, $3.4 billion for UBS, $3.3 billion for Citibank, and $3.1 billion for Deutsche Bank. As bad as these write offs looked at the time, they were not nearly as bad as what was to come.

The Fed cuts also gave the Wall Street Pollyannas ammunition to game up the market, since Fed cuts were traditionally bullish for stocks. The financial media had wall to wall coverage of talking heads urging viewers to buy stocks now because they were at fantastic bargain prices (of course at a real bottom no one appearing in the media urges viewers to buy stocks). Any experienced trader looking at the market rally that ensued knew something was terribly wrong however. While the market had sold off in heavy volume in late July and the first half of August, it rallied on light volume and then hit new highs on even lighter volume. Trends on low volume are usually soon reversed and the September rally would prove to be no exception.

Next: The U.S. Government Goes from Lying with Statistics to Just Lying

Daryl Montgomery
Organizer, New York Investing meetup

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1 comment:


Money is falling from the sky.