Today, the Fed left its key rate on hold at 5.25 percent.
Most interestingly, the Fed statement indicated that the Fed now apparently recognizes what we have been telling our readers for some time: That core inflation (CPI, excluding food and energy) is unrealistic and that "real" inflation is higher.
As our readers know, it is this "real" inflation rate (way above the published CPI), combined with protection of our dollar from a damaging freefall, which are the two reasons that we have long called for a hike in the Fed rate to 5.5 percent or even 6 percent.
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The key problem facing the Fed is that, at this time, such a rate hike risks causing a financial panic.
No one could have envied the Federal Reserve Open Market Committee (FOMC) at their meeting today. In balancing risk, they were between a rock and a hard place.
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Today, there is growing evidence of contagion in the credit markets and of a serious slowing in our economy.
It is this evidence which has caused me to reassess my position to one favoring a "cut" in the Fed rate, even a temporary one, to allow time for cooler heads to adjust to the so-called "re-pricing" of risk.
It is said, by some, that a cut in the Fed rate would itself be seen as a sign of panic. I believe that, on the contrary, a Fed rate cut could provide a life-line in an increasingly desperate situation and could have been cloaked in appropriate reassuring and "non-panic" terms in the Fed's accompanying statement.
Don't get me wrong. I am not in favor of letting greedy hedge funds, speculators or lax bankers off the financial hook they have created for themselves.
But equally, I am strongly opposed to the harsh, insensitive monetary discipline that was applied in the late 1920s and which precipitated the Great Crash.
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There are times when medical patients need an operation. However, there are also occasions when a patient can be in such physically bad condition that short-term "survival" has to take precedence over a long-term "cure".
I believe that the U.S. consumer is in just such a condition. Faced by massive "real" increases in the price of mortgages, real estate taxes, energy, food, and services, including health, on the one hand, and by a falling median income and increasing risks of unemployment, on the other; the great American consumer may cut down on discretionary spending.
A downturn in consumer spending may also be accompanied by a downturn in corporate spending and face us with a very serious problem. A situation so serious, that it should make the Fed think of short-term survival.
Briefly, my reasoning is as follows.
As we have long forecast, the housing bust will prove both far deeper and wider spread than many so-called experts and politicians were telling us.
The AP carried an item which said, "The investment-grade corporate market has ground to a halt, making it difficult for companies to access capital and hard for investors to find a place to put their money to work."
So the crisis is getting pretty deep.
Meanwhile, Bloomberg put up an item indicating that Shinsei Bank Ltd. of Japan said, "Losses on subprime loans reached $30 million and it has more than six times that amount of U.S. mortgage-backed securities that may be affected."
More evidence that the problem is very big, not restricted to the United States, and has been accumulating slowly, silently, and surely.
As we said recently, a growth economy needs increasing credit to continue growing.
With the current credit crunch, we believe that economic growth is now seriously threatened.
The early stages of a market turn are often accompanied by confusing economic indicators and volatile financial markets. Today, we see both.
There is now accumulating evidence that the U.S. economy is slowing. If it does indeed slow down, stock markets will tumble. In this environment of uncertainty they could plummet.
This threatens all those investors who have been tempted to remain long of stocks, particularly those on margin.
Wall Street "players", until recently, have reveled in the cheap, easy money liquidity boom that has financed our heady markets. Today, they have been vitriolic in their appeals for our Fed to bale them out of the effects of their greed, with a rate cut.
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On Friday, August 3, Jim Cramer made an impassioned appeal, on CNBC, for the Fed to cut rates. Some observes described it as a "meltdown"!
I felt that Jim Cramer, who has many personal contacts on The Street, provided a rare and vivid picture of just how bad the position really is felt to be amongst the normally quiet "players" of Wall Street. We were given a rare glimpse of how perilously near we may be to a market panic; a panic that could wipe out many highly leveraged investors.
Cramer indicated a prospect of this near panic in the "real" markets and that Fed Chairman Bernanke was merely "an academic… who has no idea" of the reality on the Street and that he is "asleep" at the switch.
This was strong stuff, but clearly reflected a passion that smelled of the panic that I feel now risks happening in a flash in the stock markets if our economy turns down, as we feel it is already poised to do later this year.
Fed Chairman Bernanke is said to be "an academic who is forecast driven."
Normally, this is acceptable. But in times of near panic, it has a major downside.
The problem with forecasts is that they are usually based upon "lagging" or past information.
It is like trying to predict the road ahead by looking in the rear-view mirror. While such a practice may confirm a hill, it will never predict a precipice.
We feel the present situation is grave and unfolding very fast. It is far different to the conditions of "normality," when mere "tweaking" may suffice.
If we are honest, we are now facing a possible financial panic!
This is not a time for meekly looking at tea leaves and forecasting.
It is a time for facing reality and for firm leadership and direction.
An example of just how quickly things are happening is shown in chart 1, taken from the business section of today's New York Times. It shows vividly just how fast and dramatic has been the fall-off in both high-yield and investment grade corporate debt issuance.
We feel that other important economic and financial events are unfolding in an equally fast and dramatic manner, but largely unseen, until the historic date is published.
It is both the size and the speed of the current crisis that persuades me that, despite the long-term risks of an inflation/dollar crisis, I feel that our economy is in desperate need of a courageous lead from the Fed and a cut in rates.
Instead, what we witnessed today was a timid FOMC conclusion that appeared to say, "Don't panic, do nothing, but just continue to talk calmly."
Of course, as we have long reasoned, a rate cut would invite the awful specter of stagflation. But at least it would allow for the "survival" of our vital growth economy.
We feel that a stalling of the U.S. economy, will affect the world economy.
We have accused our Fed before of being timid.
Today, I believe our Fed has been guilty of cowardice and has faced our economy and financial markets, as happened in the late 1920s, with the prospect not merely of stagflation or recession but of depression!
It is a most serious position and it makes me very skeptical of the present price levels of both stock and non-Treasury bond markets.
Most of our conservative readers will have accumulated large positions in cash, short-term Treasuries and gold. I believe this is good. Those who wish to continue holding equities should rotate them towards defensive stocks in consumer staples and utilities. Some may also look at ETFs that are short the markets.
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