CONSENSUS SENTIMENT: POSITIVE
(Bear Market Indicator)
In one of the most eagerly awaited economic non-events in the
past 6 weeks, Benny and the Fed, surprises the Consensus and pushes the envelop
by cutting interest rates 50bp and discount rate by an additional 50bp.
Consensus Watch’s Take: While the cut was not a
surprise, the aggressive move to cut 50bp was. At the end the move crystallized
several concepts:
- The
Fed has admitted that the U.S. economy is weak if not in recession.
- The
greenback is on it’s own. Inflation is no longer the prime focus.
- It’s
OK to make bad investment decisions because you will get a “get out of
jail free” card.
The gut reaction with the rate cut was a surge in stock
prices. The reality is that the lowering of rates officially means the dollar
is going to tank, and subsequently gold and oil will start moving fast. It also
takes a year for Fed actions to be felt, so if the economy is in recession
right now, it will likely continue for a while. The cut was the coup de grace
in getting the Canadian dollar to parity.
The lowering of rates will also provide less incentive for foreign
creditors (namely China, Japan, and the petro-countries) to hold US bonds. Why
bother when you can get a better rate in Euroland, Canada, or New Zealand. This
is why we find it hard to believe that the Fed can actually lower rates. The
U.S. is not in a fiscal position to provide cheap money. Ultimately the lower
dollar is going to make their exports cheaper, but it will make the cheap
imports it is addicted to, more expensive. Consequently long-term rates will
have to trend up to attract the capital it desperately needs to fund its
current account deficit, which will unfortunately, extend the housing market
and economic malaise. It just doesn’t get any better. So yes, the rate-cut will
smooth things over for a while, but long-term, Gentle Ben has delayed the hard
medicine. What to do? Well gold is looking better and better. From a Canadian
perspective, the biggest and best run US companies will be going on sale. As
this adjustment progresses, opportunities to take small positions will abound.
So if you are planning to do some cross-border shopping this weekend, save a
few loonies for some good quality American stocks as they will likely be on
sale.
AKR
