Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
The dollar is way down, oil is way up, consumer confidence is down, foreclosures are up, and heads of major US investment banking firms have less job security than Joe Torre: what’s a Fed to do on Halloween?
The ghosts of moral hazard are lurking everywhere — or at least in the rather extraordinary performance of the equity markets in the face of all the seemingly bad news — not a case of “the worst is over” psychology, but more a case of “the Fed is going to bail us out” perhaps? Surely a (finally) really good quarter from Microsoft is not the whole reason the market made a leap on this Friday.
Equities in fact seem to lurch from precipitously down days that seem a cry for help from the Fed (it worked before!) followed quickly by a couple of up days driven subconsciously by wish-fulfillment fantasy — i.e., the Fed has heard our cries and will act accordingly!
But that does not mean the fantasy won’t come true; it merely defined the parameters of “trick or treat”{for the Fed’s October 30-31 meeting. “Trick” would surely be no rate cut — either of the discount rate or the Federal funds rate. The market for “treat” probably wobbles between a 25 and 50 basis point cut, with some money on the proposition that a cut of 50 would really be a trick in disguise, suggesting that things are even worse than we fear because the Fed knows something (awful) that we don’t.
Speaking of the “unknown unknowns” — market psychology has not really been helped by the latest emanations from the banking/US Treasury subprime laundry — the SIV holding tank (really a subprime septic tank) for parking now under collateralized paper that the banks don’t wish to mark to market but which their accountants won’t let them “mark to model” — the latest version of the scary accounting shenanigans reminiscent of the old savings and loan industry as it finessed its way to oblivion in the 1980′s, unsuccessfully hiding the true face of their financial situation with custom-made accounting “costumes”. Frightening things tend to happen when you borrow short and lend long.
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