Opening Position
March 2008
With the events that unfolded on January 22, 2008 -- that is, an emergency rate cut of 75 basis points and the introduction of a US fiscal stimulus plan -- I had to think hard about whether these actions were in line with a true free market system, which is what I believe the financial markets are. What was the Federal Reserve Board's rush in doing this? The board's regularly scheduled meeting was only a week away, so should we expect another rate cut when they meet then? Personally, I feel they should have waited and let the market correct in an orderly manner before intervening. After all, the markets were overbought and due for a correction.
So did the Fed really do the right thing? Are their actions really going to help the US economy? The financial markets do have a role in the financial system of any nation, but whether it is a good measure of economic activity is debatable. The real issue here is that there are flaws in the system, many of which were brought to light with the subprime crisis. Although there is speculation about an oncoming US recession, nobody will really know whether there will in fact be one until a negative Gdp number comes out. And even then, we all know there is a lag when it comes to economic numbers. Even if there is a recession on the way, we're going to need more than a 75-basis point rate cut to prevent that from happening.
And if these questions weren't enough, two days after the rate cut we were greeted with the news about the rogue trader scandal that resulted in a loss of $7.2 billion at French bank Société Générale. Did this unwinding of funds have anything to do with the panic selloff that took place in the last few trading days? If so, and if the Fed didn't know anything about it, they were just making actions on a misleading market move. If they did know about it, then their actions weren't really in response to the weakening in the markets but rather to the actions of a rogue trader.
There are just too many questions without answers and whether they will
be correctly answered is questionable. But there is one thing that is certain.
When you look at a chart of any of the broader indexes, you can see that
a correction was due and you can get an idea of how much of a correction
could have been anticipated. So what this intervention did was really throw
all the charts out of sync with meaningless price swings. And that's why
we have to keep a wary eye on the markets.
Jayanthi Gopalakrishnan,
Editor
Originally published in the March 2008 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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