A Bernanke Blink or a Move of Genius?

My week is packed but I had to write a few things.

WOW!! 50 bips and 334 points later and my guess is Bernanke and company are sharing a bottle of scotch patting each other on the back somewhere in New York City.

I was probably surprised as much if not more than anyone about the 50 bip cut compared to the 25. Surprised is not the right word, shocked may be. I am a value guy which means I tend to worry more than most and there are several worrying things about all of this.

First let me review how wrong I was on many fronts. 1) That the FED cared about the dollar. Maybe Volcker did but it is apparent that this FED does not. 2) Bernanke had more backbone than Greenspan. This shows signs of panic not strength. 3) Bernanke lets his yes's be yes's and his no's be no's. Grant it new data can can change viewpoints but John Kerry's Flip Flop Flip Flop may be applicable. 4) We would at least test the lows again set back in August before we set new highs. Still not a done deal but it looks like new highs may be in the cards. We shall see. This was conventional thought (probably why it hasn't worked out that way). I am sure some of you can expand this list.

Let's look at the good and the bad.

First the good.

1) Look at the markets. We are way up. By definition doesn't that mean good?
2) Psychologically it could change some things. This is the potential biggest bonus from today's move. The markets need to function and so much of that is trust. This should help on that end. In fact my hope is that is what Bernanke is thinking. I even mentioned this a couple of days ago to a friend. That he will cut by 50 bips firing as much ammunition at once in a huge gamble that it will solve things at least on the psychological fronts. If this is what he indeed bet on and it works it will be stroke of financial genius.
3) Should help on the margin to lower the cost of borrow especially for corporations rolling over commercial paper.
4) It helps the richer get richer. Definitely gives a shot in the arm for potential Wall St. bonuses.
5) ........ maybe you can think of another one.

The bad
1) The dollar - strong move down after the announcement. This really could get ugly.
2) Leads to inflation - look at oil and gold after the announcement. WOW
3) Despite the Fed's strong words, the Fed has shown words are cheap.

``It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions,'' Bernanke Aug. 31

To quote another blog "They have instead shown they have become Wall Street's bitch."

4) Maybe this was the right move. Does the FED know something we don't?
5) This really doesn't change much for the housing picture. In fact the cost of long term borrowing went up. Any one notice what the 10 year and the 30 year did after the announcement? Price down, yield up. This is saying inflation could be a problem.

Who knows what the market is going to do over the next few months. I cannot see how this good for America long term unless the FED knows a bunch more than what they are letting on. Instead it seems to be a panicky move by Bernanke. http://www.minyanville.com/articles/BAC-WFC-housing-treasuries-TOL/index/a/14142 Remember he was along side Greenspan voting for the FED cuts who started all this. I guess I should not have expected anything differently.

Once again long term, actions like this are bad bad bad. http://www.bloomberg.com/apps/news?pid=20601087&sid=aYBOOiT5mAO0&

This quoted Jim Rogers and Marc Faber (before the rate cut) both who are have been around the block once or twice. Few excerpts.

Faber and Rogers, who both spoke today before the Fed decision on rates, said the central bank should raise borrowing costs to quell inflation and support the U.S. currency.

Hmmmm - didn't head that advice.

``They should do something to stop inflation as soon as they can,'' said Rogers, the 64-year-old chairman of Beeland Interests Inc. ``If you don't do something now, if you don't nip it in the bud, it gets much worse down the road.''

That has been my fear.

``It's suicidal to cut interest rates"
Well we committed suicide times 2.

At this point the market could go up another 1000 points in the short term. Analysts will probably hit the streets tomorrow pointing out how cheap stocks are with such a friendly FED. Looking at history again it is very hard to bet against the markets after the Fed started cutting interest rates. 2001 being the blaring exception. Also looking at history we may be setting up for 1998 -2002 all over again. Massive formation of a bubble as a result of huge injections of liquidity followed by a massive crash. Where would the bubble be this time? Commodities and emerging market, they have a ways to go though before in my opinion they are in bubble territory.

I really need to get working on my speech tomorrow. So I will leave it here. It is easy to be pessimistic. For today we probably should take it for what is is and enjoy how our portfolios look after today for most of the people in the United States. Alot of people feel richer. Someday you have to pay the piper and though I did not live through it, I have read enough to know that inflation is a horrific nightmare to try and fight once it gets started. At almost any cost it is better to feel some short term pain than experience long term inflation. I hope Bernanke does not lose sight of this.