Fed is in Trouble

Wanted to post a few more thoughts on the Fed and the dollar. Stop reading now if you are sick of reading me write about it. :)

The Fed is in trouble and anybody who thinks it is a forgone conclusion that the Fed will do this or that needs to reexamine their analysis. On one hand you have the well rehearsed credit crunch and the horrible residential market. You now have all kinds of signs pointing to a potential severe commercial construction slowdown.
http://www.law.com/jsp/article.jsp?id=1189501361395
http://www.nytimes.com/2007/09/12/realestate/commercial/12mall.html?_r=1&oref=slogin
http://www.chicagotribune.com/business/chi-tue_landlords_0911sep11,0,3939268.story
http://www.latimes.com/services/site/premium/access-registered.intercept

On the other hand you have the dollar crumbling and a surging commodity boom. In the last month the soft commodities have been on a tear, soybeans are up close to 20%, corn up around 8%, wheat up almost 30%. Not to be outdone hard commodities in the last month have followed suit with copper up over 10% and gold up almost 8%. Then lets not forget about energy with oil crossing $80 and gasoline sure to follow. Then as I have been saying for awhile now the China deflation story seems to now be over (Look at "ahead of the tape" in today's WSJ. It does a good job of discussing this reversal) and inflation in imported goods may be the new norm. Looking at all of this, the Fed would normally be looking to maybe raise rates.

Anyway if a gun was forced to my head and I had to guess I would wager that the government made sure the employment numbers last Friday were negative to enable to the Fed to save face and give them maximum flexibility in what they are going to do. (I tend toward conspiracy to much) Either way though the Fed has to be looking at all of this and shaking their head. They are in trouble if they don't and in trouble if they do.

The hope at this point is that a 50 bip cut is already priced into the dollar and anything less will actually cause a rally in the dollar. This may in the short term help stem the rally in dollar denominated commodities but whether they cut by 25 bips or 50 bips it does not really solve anything? Even if it helped it will take at least 6 months to work through the system. The hope is that the world growth will keep the U.S. from a recession. I have to wonder though if that occurs what the price will be. Rules will have changed. Instead of us leading the way others will be. In the past if we had an economic slowdown the world was going to follow and we could lower interest rates and save our brothers and sister who made poor investments in housing or whatever. Not any more. If we enter into anemic growth or even a recession and worldwide growth simply slows but continues at a strong pace we cannot respond as we have in the past and cut rates and save ourselves with the dollar just getting puked. Can you see us lowering interest rates to 2.5% while interest rates are 5% overseas and world growth continues? Talk about a true dollar crumble!! Talk about inflation!! Of course our ego centered socity will not see this and that we do not control the world and those in Washington will be mud slinging and screasming and doing flips saying we need to do something not realizing that we are the ones who have created all this.

Once again the Fed is left with the hope they can manipulate the psychology of investors and ensure a slow decline versus a fast decline that tends to be much more destructive. I am not talking about the stock market but the needed decline in housing prices and the needed continued adjustment to the risk premium. If this is your only hope and your the Fed, you have got to be nervous.

Well I am out for the weekend. I probably won't be back until Monday. Everyone enjoy the weekend and remember.....stick to fundamentals.