Apparently Ben & Co. are faithful visitors to our website. It took less than 2 business days for them to follow our advice.
For those who missed it, yesterday The Fed announced a new term auction facility.
They agreed to accept from primary dealers mortgage-backed securities as collateral for 28-day loans of Treasury securities. In addition, they committed to this action for an indefinite period of time.
To put it plainly, The Fed will take questionable securities off the books of the banks in exchange for Treasuries which are as good as cash. Is it any wonder that financials was the sector that was up the most in yesterday’s 416 point Dow rally?
We wrote that The Fed’s plan to cut rates would be a loser’s game. Money is available and is plenty cheap. Banks simply don’t want to lend.
This new Fed strategy will shore up bank balance sheets and create a market for unmarketable mortgage-backed securities. Banks facing smaller write downs and stronger balance sheets will now be free to lend.
This doesn’t mean the end of Fed rate cuts. We’ll still get 50 bps next week, possibly 75 and an outside chance of 100. However, this does mean The Fed’s first meaningful action since the beginning of the “credit crunch” goes a long way to resolving some of the biggest issues facing our economy.
We’re still going to see market volatility. There will still be plenty of doom and gloom headlines. None of this will go away anytime soon.
What should happen over time (and that time has drawn closer with The Fed’s new strategy) is diminished fear, pricing based on fundamentals and an end to rate cuts.
This should shore up the Dollar, curtail inflation fears, drive down the price of gold (seen as an inflation hedge) and stem the rise in the price of oil.
Why oil? Consider that oil is priced in Dollars. The falling Dollar erodes the purchasing power of the petroleum-producing countries. They demand more Dollars for their oil to make up for the decline in purchasing power. A stabilized Dollar should address rising oil prices in the short-term.
So hats off to Ben & Co. for taking substantive action. We’re glad they enjoy our website and hope they continue their frequent visits! (Hey, we can pat ourselves on the back every now and then, can’t we?)
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