The markets were just loving the Fed today!
It was an interesting day overall as we started off the day with a not too scary GDP report that showed 3.9% growth in Q3. The markets ran with the news but, like all good scares, the report was pretty creepy if you look under the covers:
Government spending jumped 3.7% (this is how our government pumps numbers before an election and this is why Bush is so pissed the Dems won't give him more money to toss around) – that number on it's own added 0.7% to the GDP. Exports added 0.9%, not because the economy got better, but because our dollar is now worth less than the toilet paper we export. Inventories added 0.4%, that's stuff sitting around that no one is buying and it's value is increasing because of inflation – that's not really good…
Wages were up 0.8% for the month, one would think a 9.6% annual pace of wage increases is inflationary but not our Fed – they don't believe in the inflationary Boogie Man (or more accurately, they worship at his altar). Meanwhile our friends at MA were very busy taking candy from strangers and charging them an average of 18.8% interest to do it. Even at those terrifying rates, credit card receivables are up over 30% from last year with $14.33Bn added in October alone! "Obviously, the U.S. consumer is under some level of stress. But it is not a severe stress," said chief financial officer Chris McWilton in an interview with The Associated Press. He added that weakness in low-end and middle-range retail spending has been offset by strong spending among the affluent.
A 3% rise in consumer spending (apparently on credit cards) contributed a full point to the GDP but, unfortunately, ALL of that extra money was spent on food and energy – the same food and energy that cost 3% less in the quarter before (but, according to our government, was not inflationary). So this 1% of our GDP added no jobs, but did push consumers 30% further in debt than they were last year (cue spooky music). That's 1% of our GDP spent on inflating necessities, 0.7% spent by Bush on whatever, .09% spent by foreigners taking advantage of a weak dollar (is that sustainable?) and 0.4% added by increased inventories for a grand total of 3% of our 3.9% GDP growth coming from sources of dubious benefit.
Woo hoo – Party on America! Like I said on Monday, the MSM is yadda yaddaing the bad news as the media zombies tell you to BUYBUYBUY because, without your money, they may have to finally face up to whatever's hiding in their closet. CFC's Angelo Mozilo, who originated 7% of the scariest of all financial instruments, the sub-prime loans, says there may be monsters in his closet, quite an admission from a guy who lost $1.2Bn last quarter and dropped his stock 60% (but not before executives sold $842M worth of their own shares). MER opened their closet and found $8.4Bn worth of things so horrible that they closed the door (admitting there might be more scary things inside but no one wants to look) and they fired the guy who got them there.
Who knows what other horrors will reveal themselves as the year winds down but the real Halloween slasher event is what's been done to the dollar, which hit new record lows as the Fed worked hard to appease everyone and ended up pleasing no one.
Our currency has been gushing blood all year and rather than address this issue the Fed has decided to cut away, knocking another 5% off it's value since August. It is the Fed's charter to "Maintain the stability of America's financial system" and to "issue the Federal Reserve notes that make up America’s entire supply of paper money." Well they got it half right – the Fed has been printing money like it's going out of style
Add to that the monstrous yen carry trade, that's been flooding the global economy with speculative money all decade and we have one of those scenes by the lake where all the kids are having a wild make-out party while a killer (that could be almost anything in our fragile economy) observes from the woods, circling closer and waiting to strike. Just like any classic horror flick, several people (MER, CFC, C… ) have to actually fall victim before any of the other kids even notice there's a problem. Then they call the cops (Paulson and Bernanke) who look at all the blood and the severed body parts and then say: "Oh, it's probably just some kids on dope." Usually, it's a long time before anyone takes the psycho killer seriously, and by then it's way too late!
The Wall Street Journal summed it up nicely: "Of course, the reaction out of the equity market wasn’t all that bewildering. After all, allow a six-year-old child to eat all of his Halloween candy, and one can’t be blamed when he’s bouncing off the walls a few hours later. After all, the stock market got what it wanted, which was its candy, as the Fed apparently was swayed by the market’s expectations, which basically amount to worrying that something worse was going to happen (even with stocks near record highs and oil closing in on $95 a barrel, but never mind all that). “There have been numerous recessions and market crashes caused by credit going from being too loose to too tight,” notes Charles Rotblut, chief strategist at Zacks Investment Research. Fear was enough — the Fed fearing the markets. So the Dow industrials finished 136 points higher, a gain of about 50 points from the pre-Fed rally, as investors gobbled up whatever they could by taking the “it’s all good” approach to analysis of the Fed statement. That is to say, the economy is doing well but could slow, which is still good, because more rate cuts! And if not, no worries, hey, look, candy. "
