As expected, the Federal Open market Committee (FOMC) reduced the Fed Funds Rate at their December 11th meeting. The rate was reduced by ¼ % to 4 ¼ %. The Fed was criticized by some for not reducing the rate more (to ease credit, stimulate the economy and avoid a recession). The Fed was also criticized by some for reducing the rate at all (why should we help the people who created the sub-prime mortgage mess, and increase the possibility of inflation?).
In our opinion, it probably doesn’t matter what the Fed does. That slow freight train coming down the track was set in motion 3-5 years ago when the rules for issuing mortgages were thrown out the window. Hundreds of billions of dollars of adjustable-rate mortgages were issued to people who either were going to be unable to pay the mortgage someday (unqualified) or to people who had no intention of paying the mortgage (criminal fraud).
Those mortgages are now beginning to adjust upward and anything our government attempts to solve this problem appears to be the equivalent of standing in front of this slow moving train and throwing tennis balls at it. There are likely to be an increased number of foreclosures, throwing more properties for sale onto a real estate market that is already the worst in post WW II history.
We remember when “a billion” used to be a lot of something (none of us will ever live “a billion” minutes…. that’s over 1,900 years! A billion inches would stretch from NYC to LA and back and have a few thousand inches left over!). However, large, respected banks are writing off billions of dollars due to losses on their sub-prime mortgage investments. Citibank has written off over $15 billion. Merrill Lynch has written off over $14 billion. We won’t bore you with the remainder of this long list.
Meanwhile, the Consumer Price Index (our government’s measure of inflation) rose 0.8% in November. That’s an annual rate of over 9%! If you have been buying groceries lately, this probably doesn’t surprise you. Let’s see…. The dollar is very low vs. foreign currencies, oil is almost $100 per barrel and gold is trading over $800 per ounce. Should the prospect of future inflation surprise anyone?
A period where the economy is stagnant (or in a recession) and prices are rising (inflation) is known as “stagflation”. This last occurred in the 1970’s which was a bad decade for stocks AND bonds. We are not predicting a repeat of that decade but we are not ruling it out either. We continue to have higher levels of cash than usual.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.