Jim Cramer’s forecast of the house price bottom in June 2009.

Foreign Exchange Currency Outlook :

The consensus is coming down on the side of the Fed not cutting rates today. The FT says “An emergency cut would risk dividing the committee, some of whose members regret backing big cuts at the time of the Bear Stearns crisis in March. However, Fed hawks might rally behind a position that held out the prospect of a cut later if needed, sending a signal of unity at a moment of crisis.” In contrast, Bloomberg reports that Fed funds futures are now pricing in a 90% probability of a cut.

Who to believe?

We say the Fed is in a win-win situation. It would get good marks for holding fast in the face of Wall Street, which will look like a form of resisting moral hazard since Wall Street is always crying for rate cuts under all circumstances, and it equally would get good marks for a cut on the grounds that the Fed has the ability to be nimble and flexible in the face of a crisis.

Until we get the decision and statement at 2:15 pm today, other data will get less than full attention. Of the data on the schedule today, we favor the Treasury capital flow report at 9 am. The release tends not to have a market-moving effect, but it’s the only data-based indicator of overall confidence in the US economy and financial system. We like to see the capital inflow roughly match the outflow from the trade deficit.

The other big factor remains the assumption that the US and global economies are sinking into recession due to credit contraction arising out of the current crisis, and as a result, commodity prices will continue to drop, especially crude oil. We are more willing than before to concede that recessionary tendencies logically should start to appear, even if technically the two quarters of negative growth do not. But doesn’t the falling crude oil price give a boost to growth that offsets other negatives?

Also taking this stance is IMF Deputy Director Lipsky, who says “there is still no obvious reason to expect the global economy to go into recession,” according to Market News. “Lipsky told Financial Times Deutschland that housing prices might now be experiencing undershooting and that risk aversion may have become too pronounced. Industrialized economies will be in a very ‘sluggish or nearly stagnant phase’ in the second half of this year, but a ‘gradual recovery’ will proceed in 2009, he said. ‘This, however, will not be able to dispel quickly the financial tensions,’ he added. Lipsky suggested that asset prices had dropped more than fundamentals warranted: ‘After years of overshooting of asset prices and of too-low risk perception, we may now be seeing a kind of overshooting of the prices and a too-strong risk aversion.’ “Still, he said, ‘We are operating on the assumption that next year we will see an end of the decline of asset prices.’ In particular, the US housing market ‘will bottom out in the course of the first half of 2009,’ he predicted. ‘The considerable decline of US housing prices is slowly resulting in the indices for the affordability of housing returning to levels that are reasonably normal.’"

Note that this match Jim Cramer’s forecast of the house price bottom in June 2009.

Conditions are very bad.

McCain got criticized sharply yesterday saying “the fundamentals” are sound, seemingly downplaying the crisis or perhaps not understanding it, and then pretending he was talking about the worker and productivity. This was a dumb ploy and confuses the issues. Are “the fundamentals” sound? Well if we define “the fundamentals” as factories still producing and people still going to work, even with terrible income inequality, yes. We say these are not the conditions of the Great Depression. The banking system is not losing 30% of capacity in a short time even if 30% will be the eventual number after the contraction is over.

Foreclosures are nowhere near 1930’s levels. We do not have deflation and we do have a wiser government and Fed. To say today is better than (say) 1933-34 may not be saying much, but honestly, can we get along without Lehman? Yes. Therefore, we are not so sure that money flooding into the dollar and Treasuries will exit just as fast. Tentatively we say the dollar trend will resume, helped mightily by crude oil. This suggests the japanese yen futures trend will last, too, and that’s harder to swallow.

But keep the fiath—the trend is your friend and the chart the best tool.

Bye for Now

Barbara Rockefeller

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