Well, after a few awful days the markets made a stylish comeback yesterday.
The Dow Jones Industrial Average positively rocketed, leaping 2.6% (its best percentage gain of the year so far) to 13,289. Meanwhile, the FTSE 100 had a similarly strong showing, jumping 2.7% to 6,306.
So what was behind all this jubilation? You guessed it – the Federal Reserve hinted that it might cut interest rates…
Don Kohn, vice-chairman of the Federal Reserve, delivered some relief to investors yesterday as he said that the Fed would be “flexible and pragmatic” in dealing with the squeeze in financial markets.
Up until now, investors had been worried that the Fed actually cared about the collapsing dollar enough to perhaps try to avoid cutting interest rates any further. But this put paid to that.
As Jeffrey Kleintop of LPL Financial Services told Marketwatch: “Now you have Kohn pointing out that the Fed can take action to offset what is happening in the financial markets; it does suggest that the Fed is being responsive and is not just focused on inflation.”
But as Lex points out, it’s surprising that “the markets rallied so much, when all Mr Kohn did was state the blindingly obvious. The Fed is of course going to be flexible.” We would go so far as to say that the Fed will bend over backwards to keep Wall Street happy, and it is indeed a surprise that anyone doubts it.
Given the choice between recession right now, or inflation now and a worse recession later, Ben Bernanke has continually made it very clear which side he backs. He will always sacrifice the dollar and US citizens’ purchasing power in favour of trying to squeeze just one more bubble out of the economy before the day of reckoning arrives.
The US housing market is dead in the water
The trouble is, the Fed can do what it wants, but the US housing market – which has been the core driver of the US’s consumer-lead economy in recent years - is now well beyond the point of resuscitation. The National Association of Realtors reported that sales of existing homes fell 1.2% in October, while the supply of homes for sale hit a 22-year high. The median sales price fell by 5.1% in the past year (to $207,800), the worst decline on record, while sales were down 20.7% in the past year.
If the housing market is indeed, as the bulls over here always like to say, a simple case of supply and demand, then to put it politely, the US housing market is dead in the water. And if, as we think, the price of houses is more to do with supply and demand of credit, then – well, it’s still dead in the water.
If subprime has managed to cause so much trouble already, we dread to think what will happen when bad debts start rising among all those people with prime mortgages who suddenly find themselves in negative equity when they try to sell.
The funniest letter of the week
After that glum prognosis, you may need a laugh – and prize for funniest letter of the week has to go to Meg Hillier MP, who writes indignantly in this morning’s FT, responding to an editorial on ID cards: “Sir, I was bemused by your call for the National Identity Scheme to be abandoned.” Among other things, her letter notes that “the rising threat of identity fraud cannot go unchallenged.”
Has she been asleep for the past week? Or perhaps on a jaunt to the Antarctic? Because of course, anyone who was actually aware of the fact that the government has just lost half the population’s intimate financial details, could never have the audacity or the arrogance to complain about press scepticism over ID cards.
Should any publicly-spirited readers out there feel inclined to write to the forgetful Ms Hillier and remind her of why we can’t trust the government to organise a raffle, let alone an Aladdin’s cave of personal data, then you can find her email on her website: www.meghillier.com.
Oh, and before I forget – with the markets so volatile at the moment, you might be looking for some guidance on where to invest. MoneyWeek is currently offering membership of all three of our e-mail investment services – James Ferguson’s Model Investor, Paul Hill’s Precision Guided Investments, and Tim Price’s The Price Report – plus a subscription to MoneyWeek magazine at a massively discounted rate. But you need to hurry - the deal closes in a couple of days. Check out the advert at the top of the email for more.
source-Money Morning