Just what was Ben Bernanke and company was thinking that it kept cutting the interest rate (the recent being the 25 basis points on 11th Dec 2007) to satisfy the investors and economists? Didn’t the sight of cheaper dollar scare the shit out of Ben to cut it further? How about inflation? Could the word recession haunted Uncle Ben, so much so that he isn’t ready for a recession, the first ever, to hit him since he took over as the Feds Chairman?

Former Federal Reserve Chairman Alan Greenspan who ran the central bank for 18 and a half years, until early 2006, says the odds the U.S. will fall into a recession are “clearly rising” and he believes economic growth is “getting close to stall speed.” Both individuals were criticized for their policies. Greenspan was criticized for his past policy that fed the housing boom that eventually went bust by holding the interest rates too low for too long after the 2001 recession. Bernanke was criticized for waited too long to cut the Fed’s key rate.

Generally analysts are worried about U.S. economic growth. The largest economy growth might shrink to as low as 1.5% but overall a full-blown recession is discounted, at least for now. The reason for the optimism – the job markets are holding up well. Bernanke’s third cut on 11th Dec however is casting a fear over the economy and this shadow of fear is putting uncertainties to the stocks markets. Analysts summarized the following fears over Uncle Ben:

• Fears that the debt markets will stop working because banks are so busy writing off billions and billions in bad mortgages and other loans that they’ll stop lending.
• Fears that the problems in the mortgage market, the housing industry and the financial sector, compounded by the effects of rising oil and food prices on consumer spending, will send the economy into a recession.
• Fears of growth as information suggests that economic growth is slowing, reflecting housing correction and some softening in business and consumer spending.

But cutting the interest rate won’t help house sales much because despite falling prices the supply of housing is still climbing and mortgage money is tight. Lower interest isn’t the magic-bullet that could take the sub-prime problem away.

With unemployment at just 4.7% and the U.S. economy engine produced jobs at the rate of 100,000 a month as of Nov 2007, the suggestion of a recession is exaggerated. Economists’ survey showed the U.S. economy will generates 84,000 jobs a month in 2008 with unemployment rate at 5.1% in Dec 2008. This means the economy is slowing down but definitely not recession. And as long as the economy keeps creating jobs current housing problem alone will not cripple the economy generally. So who are the winners?

• Gold and natural-resource stocks are likely to perform well as inflation fears build and the dollar going down the toilet.
• Fears of lower demand from a U.S. slowdown will depress oil demands and hence you might be happy to note that oil prices might not hit $100 a barrel. However the weakening dollar will keep oil prices well above $80 a barrel. So you should know when to bargain hunt the oil stocks.
• Expect Ben Bernanke and company to continue cutting interest rate in 2008 as U.S. economy slows. This is good news for utility and dividend-paying stocks.
• Of course cash is King during bad times so keep more cash under your belt because chances are you might be able to buy really dirt cheap house(s) with lower interest rate at your disposal while the salesperson will definitely treat you like an emperor.

Remember that in time of crisis is also the time of opportunity. The Chinese term for crisis is “danger-opportunity” (危機). Without the danger there cannot be the opportunity.

Other Articles That May Interest You …

• Stocks Threw the Punches – Cut or No Cut
• Investors depending too much on Feds to Breastfeed
• Last 25 basis points cut for 2007 amid soaring oil price
• Reasons why U.S. rate cut is a Bad Idea

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December 14th, 2007 by financetwitter

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