I apologize for the hiatus. I took some time to explore the natural beauty of the United States. In the meantime, judging by the level of the stock market, everything seems to be OK in the financial world. Corporate bonds are tighter as are MBS, although both are still ridiculously cheap on purely a historical basis. Munis look better, although, here again, still look like a good value. Treasuries have backed off their "Get me in at any price!" levels, but there is still room to move there. Even Bill Gross went on CNBC on Wednesday exhorting individual investors to call their broker and buy preferreds (of course, that means he is looking to develop a bid for the securities he bought when the market was 10-15% lower). All in all, to steal a non-word from President Harding, the markets are returning to normalcy.
Months ago, I made the case the case that the Fed should have left rates alone. I would still make that case. The lowering of Fed Funds hasn't really helped. Real rates where actual borrowing occurs hasn't dropped that much. HELOCs are lower, but the people that would access that type of facility have little or negative equity in their homes. Lower rates should have helped banks make money, but I don't think observed experience bears that out. Banks have been helped much more by the other Fed actions than a lower Funds rate. Lower Fed Funds should have drawn more money out of money funds, but with the uncertainty around markets and the continual economy bashing going on in the media investors have been reluctant to do so. Maybe with more certainty which leads to greater confidence that will happen, as is normal in a rate cutting cycle. What lower rates have caused is less interest income to people that could use it, less incentive to invest, especially in housing as buyers wait for lower rates and price bottoming, and the acceleration of a trend out of dollar assets and into foreign currencies and commodities. Now that the Fed is done (hopefully), the rate cuts can have the stimulative effect.
The commodity price inflation was helped along by Fed actions, but they weren't the cause. Just because demand somewhere or in aggregate is 10% higher does not justify 100-400% increases in raw commodities. Supply at the margins isn't that bad regardless of how many experts are paraded on TV saying that this is the cause for high prices. These are the same that benefit from the increases: commodity traders; commodity investors and commodity producers. It is really a masterful propaganda job; Goebbels would be proud. Speculation is the cause of high prices, pure and simple. Take the speculative bid out of the market, and prices mover back to real levels. Everyone was up in arms when it was disclosed the Bear Stearns was levered 30 to 1. Commodity speculation is even move highly levered and quite easy to do. The more people investing allows the relative small futures market to be easily propped up. Hedgers are the major players anymore., it's hedge funds. Changes need to be made as how this market operates. I would suggest having the same margin requirements as they do in the equity market. This alone would bring prices back to reasonable levels.
This sounds like some kind of left wing drivel along the lines of "Workers of the world, unite!". It isn't. Rules are necessary to maintain some kind of order in markets. When market problems spill over into the real world, that is when disaster strikes. The Crash of '29 and subsequent Depression were started by an overlevered equity market that fell apart (leading to margin rules against it) and bad decision making later on that helped it along. The commodity price spiral could push the world into the same type of bad decision making that would be ugly. Better to do the right thing now than to forced into action later.
